**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, 2003**                                                                                                                                                                                                                                       |
|       |                                                                                                                                                                                                                                                                                        |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1945**                                                                                                                                                                                                |
|       |                                                                                                                                                                                                                                                                                        |
|       | **FOR THE TRANSITION  PERIOD FROM                        TO                      ** |

 

**CommissionFile Number 0-28894**

 

**AccessAnytime Bancorp, Inc.**

(Name of small business issuer in itscharter)

 
| **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 ofclass)**

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý     No   ̈

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained herein, and no disclosure will becontained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. ý

 

The issuer’s revenues for the year ended December 31, 2003, were$15,150,948.

 

The aggregate market value of the voting stock held by non-affiliatesof the issuer, computed by reference to the average of the closing bid andasked prices of such stock on the Nasdaq Small-Cap Market as ofFebruary 26, 2004 was approximately $12,719,084.  (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, 2004, the issuer had outstanding 1,342,768shares of Common Stock, par value $0.01 per share, its only class of CommonStock.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

The following document is incorporated by reference into Part III ofthis Annual Report on Form 10-KSB: Definitive Proxy Statement for the issuer’s2004 Annual Meeting of Stockholders.

 

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

 

 

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**TABLEOF 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 |   |
|       | 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, 2003 and 2002 |   |
|          |                                                                                                                  | Comparison  of Years Ended December 31, 2002 and 2001 |   |
|          |                                                                                                                  | 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-Balance Sheet Arrangements                             |   |
|          |                                                                                                                  | 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                                 |                                                       |
|          |                                                                                                                  |                                                       |   |
| Item 8A.      | Controls and Procedures                                                                                               |                                                       |
|          |                                                                                                                  |                                                       |   |
| **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                       |                                                       |
|               |                                                                                                                       |                                                            |  |  |  |

 

3

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| Item  12.                                  | Certain  Relationships and Related Transactions |   |
|--------------------------------------------|-------------------------------------------------|--------|
|                                       |                                            |   |   |
| Item  13.                                  | Exhibits  and Reports on Form 8-K               |   |
|                                       |                                            |   |   |
| Item  14.                                  | Principal  Accountant Fees and Services         |   |
|                                       |                                            |   |   |
| Signatures                                 |                                            |
|                                       |                                            |   |   |
| Index to Consolidated Financial Statements |                                            |
|                                       |                                            |   |   |
| Glossary  of Certain Terms                 |                                            |

 

4

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**PART I**

 

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

 

***Please refer to theGlossary of Certain Terms (page G-1) for definitions of various terms.***

 

**Overview**

 

Access Anytime Bancorp, Inc. (the “Company”), a Delaware corporation,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.

 

TheBank conducts full service banking operations through seven offices located inAlbuquerque, Clovis, Gallup, and Portales, New Mexico. The Company’s executiveoffices are located at 5210 Eubank, NE, Albuquerque, New Mexico.  The telephone number at that address is (505)299-0900.  In general, the Bank has anormal lending territory, as defined by federal regulations, that includes allareas within the State of New Mexico, Arizona, and a 100 mile radius from theBank’s offices in Clovis, New Mexico, which extends into the State of Texas.

 

TheCompany announced, on January 30, 2004, that the Bank reached a definitiveagreement with Matrix Capital Bank to acquire two branches located in LasCruces, New Mexico.  Deposits of the twobranches to be acquired totaled about $84 million and loans that would betransferred totaled about $25 million.

 

The Company’s and the Bank’s revenues are derived principally frominterest on loans and securities, gains on the sale of residential mortgageloans, and income from deposit account service charges.  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 deposits from thegeneral public, making loans secured by first liens on single-family homes(primarily for sale into the secondary market), commercial and consumer loans,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,gains on the sale of loans, and income from deposit account servicecharges.  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.

 

**LendingActivities**

 

*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,primarily for sale in the secondary market.

 

The Bank’s focus in lending activities is on the origination of loanssecured by first mortgages on owner-occupied, one-to-four family residences,and commercial and consumer loans.  TheBank also originates residential construction, commercial real estate andconsumer loans in its market area.  Mostresidential mortgage loans originated by the Bank are in conformity with FHLMC,FNMA and GNMA loan underwriting standards so that they may be sold in thesecondary market.  Mortgage loans madeby the Bank are generally long-term loans, amortized on a monthly basis, withprincipal and interest due each month. The initial contractual loan payment period for residential loanstypically ranges from 15 to 30 years. The Bank’s experience indicates, however, that

 

5

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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.

 

All of the Bank’s lending is subject to written underwriting standardsand to loan origination procedures. Decisions on loan applications are made on the basis of detailedapplications and property valuations (consistent with the Bank’s writtenappraisal policy) by independent appraisers. The loan applications are designed primarily to determine the borrower’sability to repay and the more significant items on the application are verifiedthrough use of credit reports, financial statements, tax returns and/orconfirmations.

 

In connection with the loan approval process, the Bank’s loan personnelanalyze the loan application and the property involved.  Consumer loans are approved by loancommittee and/or individual loan officers, in accordance with policiesestablished by the Bank’s Board of Directors.

 

Loan applicants are notified of the Bank’s decision setting forth theterms and conditions of the decision. If approved, these terms and conditions include the amount of the loan,interest rate, amortization term, a brief description of the real estate to bemortgaged to the Bank, and the requirement of fire and casualty insurancecoverage to be maintained to protect the Bank’s interest.

 

It is the general policy of the Bank to obtain a title insurance policyor title report, insuring that it has a valid lien on all property securingreal estate loans.  Hazard insurance orhomeowner’s policies should be obtained by the borrower prior to closing,naming the Bank as mortgagee.  Ifrequired by federal rules and regulations, flood insurance policies areobtained.  Upon closing, most borrowersare required to advance funds for the establishment of a mortgage escrowaccount. Thereafter, the borrower makes contributions to this account alongwith monthly principal and interest payments. Disbursements are made from thisaccount for items such as real estate taxes, hazard insurance premiums, andprivate mortgage insurance premiums.

 

During 2003, the Bank began a new mortgage program to originateone-to-four family residential mortgage loans (“one-to-four mortgage loans”)with a shortened term.  The loan programdoes not require a title policy or appraisal, but requires a 65% loan-to-valuebased on the property tax bill or an old appraisal.  The term on these loans is from five to ten years.  During 2003, the Bank originated approximately$12.6 million of these loans and included the loans in its loans receivableportfolio.

 

The Bank receives loan origination fees for originating loans and alsoreceives commitment fees for making commitments to originate construction,residential, commercial, and multi-family residential loans, as well as variousfees and charges related to existing loans, which include late charges andassumption fees.

 

As part of the loan application, the borrower pays the Bank for itsout-of-pocket costs in reviewing the application, such as the appraisal fee,whether or not the borrower closes the loan. The interest rate charged is normally the prevailing rate at the timethe loan application is approved.  Inthe case of larger construction loans, the Bank normally charges a commitmentfee, which may be included in the loan origination charge when the loan ismade.  Commitment fees and other termsof commercial and multi-family residential 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 is permitted to make underapplicable federal regulations to any one borrower, including related entities,is limited generally to the greater of 15% of unimpaired capital and surplus or$500,000.  At December 31, 2003,the maximum amount which the Bank could have lent to any one borrower and theborrower’s related entities was $3,157,348. The Bank had no loans in excess of the legal lending limit atDecember 31, 2003.

 

6

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*Loan Portfolio Composition*.  The following table shows the composition ofthe Bank’s loan portfolio in dollar amounts and in percentages as of datesindicated.

 
|                                    |   | **December 31**        |       |
|-----------------------------------------|--------|-----------------------------|------------|
|                                    |   | **2003**                    | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                    |   | **Amount**                  |       | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                    |   | **(Dollars  In Thousands)** | ** ** |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Real estate loans:                      |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage loans:             |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Construction                            |   | $                           | 2,231      |   | 1.40 | % | $ | 1,591 |   | 1.04 | % | $ | 3,363 |   | 2.32 | % |
| One-to-four family                      |   | 80,775                      |       | 50.70 |   | 88,186 |   | 57.84 |   | 79,625 |   | 55.04 |   |
| Multi-family                            |   | 3,447                       |       | 2.16 |   | 788 |   | 0.52 |   | 794 |   | 0.55 |   |
| Other dwelling units                    |   | 47                          |       | 0.03 |   | 1,254 |   | 0.82 |   | 1,322 |   | 0.91 |   |
| Commercial                              |   | 36,528                      |       | 22.92 |   | 27,999 |   | 18.36 |   | 29,422 |   | 20.33 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total real estate loans                 |   | 123,028                     |       | 77.21 |   | 119,818 |   | 78.58 |   | 114,526 |   | 79.15 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Other loans:                            |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Commercial                              |   | 8,087                       |       | 5.07 |   | 9,560 |   | 6.27 |   | 9,200 |   | 6.36 |   |
| Savings accounts                        |   | 453                         |       | 0.28 |   | 615 |   | 0.40 |   | 596 |   | 0.41 |   |
| Other consumer items (a)                |   | 27,795                      |       | 17.44 |   | 22,482 |   | 14.75 |   | 20,371 |   | 14.08 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total other loans                       |   | 36,335                      |       | 22.79 |   | 32,657 |   | 21.42 |   | 30,167 |   | 20.85 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total loans                             |   | 159,363                     |       | 100.00 | % | 152,475 |   | 100.00 | % | 144,693 |   | 100.00 | % |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Less:                                   |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Loans in process                        |   | 1,382                       |       |   |   | 702 |   |   |   | 1,391 |   |   |   |
| Discounts, deferred loan fees and other |   | 794                         |       |   |   | 1,092 |   |   |   | 1,073 |   |   |   |
| Allowance for loan losses               |   | 950                         |       |   |   | 825 |   |   |   | 745 |   |   |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable, net             |   | $                           | 156,237    |   |   |   | $ | 149,856 |   |   |   | $ | 141,484 |   |   |   |

 

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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 the Bank’s loan portfolioby fixed- and adjustable-rate categories at the dates indicated.

 
|                                    |   | **December 31**        |       |
|-----------------------------------------|--------|-----------------------------|------------|
|                                    |   | **2003**                    |       | **2002** |   | **2001** |   |
|                                    |   | **Amount**                  |       | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                    |   | **(Dollars  In Thousands)** | ** ** |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate loans:                       |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Real estate:                            |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage loans:             |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Construction                            |   | $                           | 2,231      |   | 1.40 | % | $ | 702 |   | 0.46 | % | $ | 3,363 |   | 2.32 | % |
| One-to-four family                      |   | 67,649                      |       | 41.05 |   | 77,159 |   | 50.59 |   | 66,294 |   | 45.82 |   |
| Multi-family                            |   | 800                         |       | 0.50 |   | 544 |   | 0.36 |   | 543 |   | 0.38 |   |
| Other dwelling units                    |   | 47                          |       | 0.03 |   | 265 |   | 0.17 |   | 246 |   | 0.17 |   |
| Commercial                              |   | 9,335                       |       | 5.86 |   | 9,613 |   | 6.30 |   | 9,598 |   | 6.63 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total real estate loans                 |   | 77,831                      |       | 48.84 |   | 88,283 |   | 57.88 |   | 80,044 |   | 55.32 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Other loans:                            |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Commercial                              |   | 5,120                       |       | 3.21 |   | 3,295 |   | 2.16 |   | 4,996 |   | 3.45 |   |
| Savings accounts                        |   | 453                         |       | 0.28 |   | 615 |   | 0.40 |   | 596 |   | 0.41 |   |
| Consumer (a)                            |   | 26,055                      |       | 16.36 |   | 20,993 |   | 13.78 |   | 18,641 |   | 12.89 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total other loans                       |   | 31,628                      |       | 19.85 |   | 24,903 |   | 16.34 |   | 24,233 |   | 16.75 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total fixed-rate loans                  |   | 109,459                     |       | 68.69 |   | 113,186 |   | 74.22 |   | 104,277 |   | 72.07 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Adjustable-rate loans:                  |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Real estate:                            |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage loans:             |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Construction                            |   | —                      |       | — |   | 889 |   | 0.58 |   | — |   | — |   |
| One-to-four family                      |   | 15,357                      |       | 9.64 |   | 11,027 |   | 7.24 |   | 13,331 |   | 9.22 |   |
| Multi-family                            |   | 2,647                       |       | 1.66 |   | 244 |   | 0.16 |   | 251 |   | 0.17 |   |
| Other dwelling units                    |   | —                      |       | — |   | 989 |   | 0.65 |   | 1,076 |   | 0.74 |   |
| Commercial                              |   | 27,193                      |       | 17.06 |   | 18,386 |   | 12.06 |   | 19,824 |   | 13.70 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total real estate loans                 |   | 45,197                      |       | 28.36 |   | 31,535 |   | 20.69 |   | 34,482 |   | 23.83 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Commercial                              |   | 2,967                       |       | 1.86 |   | 6,265 |   | 4.11 |   | 4,204 |   | 2.90 |   |
| Consumer (a)                            |   | 1,740                       |       | 1.09 |   | 1,489 |   | .98 |   | 1,730 |   | 1.20 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total other loans                       |   | 4,707                       |       | 2.95 |   | 7,754 |   | 5.09 |   | 5,934 |   | 4.10 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total adjustable-rate loans             |   | 49,904                      |       | 31.31 |   | 39,289 |   | 25.78 |   | 40,416 |   | 27.93 |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable                  |   | 159,363                     |       | 100.00 | % | 152,475 |   | 100.00 | % | 144,693 |   | 100.00 | % |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Less:                                   |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Loans in process                        |   | 1,382                       |       |   |   | 702 |   |   |   | 1,391 |   |   |   |
| Discounts, deferred loan fees and other |   | 794                         |       |   |   | 1,092 |   |   |   | 1,073 |   |   |   |
| Allowance for loan losses               |   | 950                         |       |   |   | 825 |   |   |   | 745 |   |   |   |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable, net             |   | $                           | 156,237    |   |   |   | $ | 149,856 |   |   |   | $ | 141,484 |   |   |   |

 

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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 types with contractualmaturity dates as of December 31, 2003. Loans which have adjustable or renegotiable rates are shown as maturingduring the period when the contract is due. This schedule does not reflect the effects of scheduled principalpayments or 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                           |   | $                           | 6,342      |                        | 5.35       | %            | $          | 2,231                       |       | 5.36 | % | $ | 2,141 |   | 9.57 | % | $ | 1,955 |   | 6.54 | % | $ | 12,669 |   | 6.25 | % |
| More than one year through two years      |   | 859                         |       | 7.41                        |       | —       |       | —                      |       | 2,128 |   | 9.46 |   | 1,161 |   | 6.19 |   | 4,148 |   | 8.12 |   |
| More than two years through three years   |   | 1,575                       |       | 7.22                        |       | —       |       | —                      |       | 4,100 |   | 8.31 |   | 1,174 |   | 5.40 |   | 6,849 |   | 7.56 |   |
| More than three years through five years  |   | 6,002                       |       | 6.77                        |       | —       |       | —                      |       | 7,651 |   | 8.17 |   | 1,832 |   | 6.48 |   | 15,485 |   | 7.43 |   |
| More than five years through ten years    |   | 35,774                      |       | 6.03                        |       | —       |       | —                      |       | 8,996 |   | 7.00 |   | 1,650 |   | 5.78 |   | 46,420 |   | 6.21 |   |
| More than ten years through fifteen years |   | 26,666                      |       | 6.14                        |       | —       |       | —                      |       | 2,225 |   | 8.45 |   | — |   | — |   | 28,891 |   | 6.32 |   |
| More than fifteen years                   |   | 43,579                      |       | 6.33                        |       | —       |       | —                      |       | 1,007 |   | 8.25 |   | 315 |   | 5.72 |   | 44,901 |   | 6.37 |   |
|                                      |   |                        |       |                        |       |         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable                    |   | $                           | 120,797    |                        | 6.19       | %            | $          | 2,231                       |       | 5.36 | % | $ | 28,248 |   | 8.05 | % | $ | 8,087 |   | 6.12 | % | $ | 159,363 |   | 6.50 | % |

 

As of December 31, 2003, the total amount of loans with maturitieslonger than one year which had fixed interest rates was approximately $104million and with floating or adjustable interest rates was approximately $43million.

 

*One-t**o-FourFamily Residential Mortgage Lending*.  The primary lending activity of the Bank has been the granting ofconventional loans to enable borrowers to purchase new or existing homes orrefinance their current home.  The Bankalso originates VA-guaranteed and FHA-insured loans.  Residential loan originations are generated by the Bank’smarketing efforts, its present customers, walk-in customers and referrals fromrealtors and builders.  The Bank hasfocused its lending efforts primarily on the origination of loans secured byfirst mortgages on owner-occupied, single-family residences in its market area.

 

Interest rates on one-to-four mortgage loans were low during 2002,which allowed the Bank to sell the lower rate mortgage loans and put the higherrate mortgage loans into loans receivable. Interest rates continued to decrease in 2003, and the Bank originated,refinanced, and sold a large volume of mortgage loans.  During 2003, the Bank sold most of thelong-term one-to-four mortgage loans it originated, and put its short-termmortgage loans originations into its loans receivable portfolio.

 

The Bank’s fixed-rate loans generally conform to secondary marketstandards (*i.e*.,FHLMC, FNMA and GNMA standards) and have been primarily originated for sale inthe secondary market.  A portion ofthese loans has been originated pursuant to forward sales commitments which aretaken under best efforts agreements.

 

9

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The Bank has offered ARM loans at rates, terms and fees determined inaccordance with market and competitive factors.  The programs currently offered are primarily designed to meet thestandards and requirements of the secondary market for residential loans.  The Bank’s current one-to-four familyresidential ARM loans are fully amortizing loans with contractual maturities ofup to 30 years.  The interest rates onthe ARM loans originated by the Bank are subject to adjustment at statedintervals and are subject to annual and lifetime adjustment limits below andabove the initial rate.  Most of theBank’s ARM loans have interest rates which adjust annually based on a marginover one of several indices.  Theseloans’ annual and lifetime caps on interest rate increases may reduce theextent to which they can help protect the Bank against interest rate risk.  The Bank has from time to time offered ARMloans at below the fully-indexed rate; however, borrowers of ARM loans arequalified at the fully-indexed rates.

 

The Bank retains ARM loans in its portfolio consistent with its ongoingasset/liability objectives.  ARM loansdecrease the risks associated with changes in interest rates but involve otherrisks, primarily because as interest rates rise, the payment by the borrowerrises to the extent permitted by the terms of the loan, thereby increasing thepotential for default.  At the sametime, the marketability of the underlying property may be adversely affected byhigher interest rates.  The Bankbelieves that these risks, which have not had a material adverse effect on theBank to date, generally are less than the risks associated with holdingfixed-rate loans in a rising interest rate environment.  In this regard, the Bank’s delinquencyexperience on its ARM loans has generally been similar to its experience onfixed-rate residential loans.

 

The Bank evaluates both the borrower’s ability to make principal,interest and escrow payments and the value of the property that will secure theloan.  The Bank originates residentialmortgage loans with loan-to-value ratios up to 95%.  On any mortgage loan exceeding an 80% loan-to-value ratio at thetime of origination, the Bank will generally require private mortgage insurancein an amount intended to reduce the Bank’s exposure to 80% or less of theappraised value of the underlying property, unless otherwise approved by the Bank’sBoard of Directors.

 

The Bank’s residential mortgage loans customarily include a due-on-saleclause giving the Bank the right to declare the loan immediately due andpayable in the event that, among other things, the borrower sells or otherwisedisposes of the property subject to the mortgage and the loan is notrepaid.  The Bank has generally enforceddue-on-sale clauses in its mortgage loan contracts.  Yield increases may be obtained through the authorization ofassumptions of existing loans at higher rates of interest, assuming the currentrates are higher than the existing note rate, and the imposition of assumptionfees.  ARM loans may be assumed providedhome buyers meet the Bank’s underwriting standards and the applicable fees arepaid.

 

*Multi-F**amily andCommercial Real Estate Lending*. The Bank’s multi-family and commercial real estate loan portfolioincludes loans secured by apartment buildings, office buildings, retail storesand other properties, most of which are located in the Bank’s normal lendingterritory.  Also, the Bank originatesmulti-family and commercial real estate loans, subject to regulatoryrestrictions.  Multi-family andcommercial real estate loans generally are originated in amounts up to 75% ofthe 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 securing multi-family and commercialreal estate loans originated by the Bank are performed by an independentappraiser subject to regulatory guidelines at the time the loan is made.  All appraisals on multi-family and commercialreal estate loans are reviewed by the Bank’s management.  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 lending affords the Bank anopportunity to receive interest at rates higher than those generally availablefrom one-to-four family residential lending or at an adjustable interest rateto decrease the interest rate risk of the Bank.  Nevertheless, loans secured by such properties are generallylarger and involve a greater degree of risk than one-to-four family residentialmortgage loans.  Because payments onloans secured by multi-family and commercial real estate properties are oftendependent on the successful operation or management of the properties,repayment of such loans may be subject to adverse conditions in the real estatemarket or the economy.  If the cash flowfrom the project is reduced (for example, if leases are not obtained or renewed),the borrower’s ability to repay the loan may be impaired.  In addition, adjustable-rate multi-familyand commercial real estate loans are subject to increased risk of delinquencyor default as interest rates increase. The Bank has attempted to minimize these risks through its underwritingstandards.

 

*Comme**rcialBusiness Lending*.  The Bankoffers 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.  The programprovides the lender a guaranteed portion (generally 50%-80%) of principal andinterest.  Since these loans areguaranteed, they generally offer lower 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 to businesses in theBank’s primary lending territory. Commercial loans include revolving credit lines and term loans, or acombination 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 to corporationsare generally personally guaranteed by the principals of the corporation.

 

*Constr**uctionLending*.  The Bank originatesloans to finance the construction of single-family residences and commercialbusinesses.  Many of these loans aremade to individuals who will ultimately be the owner-occupants of theresidence.  Such loans are generallymade, although not required, with permanent financing on the constructedproperty to be provided by the Bank. Residential construction loans are generally made with a six month termon a fixed-rate, interest-only basis. Residential construction loans to owner-occupants are generallyunderwritten using the same criteria as for one-to-four family residentialloans.  Commercial construction loansare generally made with 12 to 24 month maturities.  Loan proceeds are disbursed in increments as constructionprogresses and inspections warrant.

 

Construction loans afford the Bank the opportunity to charge loanorigination fees, to increase the frequency of repricing of its loan portfolioand to earn yields higher than those obtainable on loans secured by one-to-fourfamily residential properties.  Thehigher yields reflect the higher risks associated with construction lending,which include principally the difficulty in evaluating accurately the totalfunds 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.

 

*Consu**mer Lending*.  Management considers consumer lending to bean important component of its strategic plan. Specifically, consumer loans generally have shorter terms to maturity(thus reducing the Bank’s exposure to changes in interest rates) and carryhigher rates of interest than do residential mortgage loans. In addition,management believes that the offering of consumer loan products helps to expandand create stronger ties to its customer base by increasing the number ofcustomer relationships and providing cross-marketing opportunities.  Under applicable federal laws, the Bank isauthorized to invest up to 35% of its assets in consumer loans excluding creditcard and education loans.

 

11

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The Bank offers a variety of secured consumer loans, including homeimprovement loans, auto loans, personal lines of credit, equity lines of creditand loans secured by savings deposits. The Bank also offers unsecured and credit card loans.  The Bank currently originates all of itsconsumer loans in its market area. Consumer loan terms vary according to the type of collateral, length ofcontract and creditworthiness of the borrower. The Bank’s consumer loans generally have fixed rates of interest.

 

The Bank currently has several arrangements to originate consumerautomobile and recreational vehicle loans on an indirect basis (*i.e.,*whereloan contracts are purchased from automobile and recreational vehicle retailerswhich have extended credit to their customers).  The Bank applies the underwriting standards mentioned below inthe approval process of purchasing these contracts.  These loans have a fixed interest rate and maturities of 15 yearsor less.  As of December 31, 2003,the Bank had $10,721,000 in indirect automobile and recreational vehiclecontracts or 6.86% of its loans.

 

The underwriting standards employed by the Bank for consumer loansinclude a determination of the applicant’s payment history on other debts andan assessment of the ability to meet existing obligations and payments on theproposed 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 do residential mortgageloans, particularly in the case of consumer loans which are unsecured, orsecured by rapidly depreciable assets, such as automobiles.  In such cases, any repossessed collateralfor a defaulted consumer loan may not provide an adequate source of repaymentof the outstanding loan balance as a result of the greater likelihood ofdamage, loss or depreciation.  Inaddition, consumer loan collections are dependent on the borrower’s continuingfinancial stability, and thus are more likely to be affected by adversepersonal circumstances.  Furthermore,the application of various federal and state laws, including bankruptcy, maylimit the amount which can be recovered on such loans.  Although the level of delinquencies in theBank’s consumer loan portfolio has generally been low (at December 31,2003**,**approximately$137,000, or 0.63% of the net consumer loan portfolio, was 60 days or moredelinquent), there can be no assurance that delinquencies will not increase inthe future.

 

*Loan S**ervicing.* During 2003, the Bank sold most ofthe long-term one-to-four mortgage loans it originated, and put its short-termmortgage loans originations into its loans receivable portfolio.  Theloans that are sold to private investors are sold servicing released.

 

*Origin**ations,Purchases and 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.

 

TheBank had no outstanding commitments to purchase any loans or mortgage-backedsecurities at December 31, 2003. At December 31, 2003, the Bank held funded residential mortgageloans with commitments to sell of $1,797,209 and also had commitments to sellunfunded residential loans for $3,597,924. When a commitment is made with the borrower the loan is simultaneouslycommitted to be sold under a “best efforts” and “no recourse” contract with oneof the three loan investors used by the Bank during 2003.  The Bank and the loan investors arecomfortable with the “best efforts” contracts due to their consistenthistorical relationship.

 

12

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During2003, the general policy of the Bank was to sell one-to-four mortgage loans itoriginated or refinanced during the year with maturities over 10 years.  However, the loans with maturities of 10years or less are recorded into the loans receivable portfolio as they arefunded.

 

The following table sets forth the principal amount of the Bank’s loanorigination, purchase and sales activity for the periods indicated.

 
|                                    |   | **Year Ended  December 31** |       |
|-----------------------------------------|--------|----------------------------------|------------|
|                                    |   | **2003**                         |       | **2002** | ** ** | **2001** | ** ** |
|                                    |   | **(Dollars  In Thousands)**      | ** ** |
|                                    |   |                             |       |   |   |   |   |
| Originations by loan type:              |   |                             |       |   |   |   |   |
| Fixed-rate:                             |   |                             |       |   |   |   |   |
| Construction loans                      |   | $                                | 3,031      |   | $ | 1,145 |   | $ | 5,928 |   |
| Mortgage loans                          |   | 41,342                           |       | 27,836 |   | 16,900 |   |
| Consumer loans (2)                      |   | 11,028                           |       | 20,165 |   | 18,897 |   |
| Loans refinanced                        |   | 95,919                           |       | 42,826 |   | 22,414 |   |
| Adjustable-rate:                        |   |                             |       |   |   |   |   |
| Construction loans                      |   | —                           |       | 1,177 |   | 1,250 |   |
| Mortgage loans                          |   | 19,301                           |       | 15,342 |   | 13,684 |   |
| Consumer loans (2)                      |   | 3,516                            |       | 2,240 |   | 5,940 |   |
| Loans refinanced                        |   | —                           |       | — |   | 127 |   |
|                                    |   |                             |       |   |   |   |   |
| Total loans originated                  |   | 174,137                          |       | 110,731 |   | 85,140 |   |
|                                    |   |                             |       |   |   |   |   |
| Purchases:                              |   |                             |       |   |   |   |   |
| Loans purchased                         |   | —                           |       | — |   | 2,744 |   |
|                                    |   |                             |       |   |   |   |   |
| Sales and repayments:                   |   |                             |       |   |   |   |   |
| Sales (1)                               |   | 106,157                          |       | 41,509 |   | 24,471 |   |
| Principal repayments                    |   | 61,092                           |       | 61,440 |   | 40,274 |   |
|                                    |   |                             |       |   |   |   |   |
| Total reductions                        |   | 167,249                          |       | 102,949 |   | 64,745 |   |
|                                    |   |                             |       |   |   |   |   |
| Increase (decrease) in other items, net |   | (507                             | )          | 590 |   | (1,134 | ) |
|                                    |   |                             |       |   |   |   |   |
| Net increase (3)                        |   | $                                | 6,381      |   | $ | 8,372 |   | $ | 22,005 |   |

 

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(1)           Consistsentirely of fixed rate, one-to-four mortgage loans

(2)           Includesnon-mortgage commercial loans

(3)           Includeschanges in loans held-for-sale

 

**AssetQuality**

 

*Delin**quent Loans*.  When a borrower fails to make a requiredpayment on a loan, the Bank attempts to cure the delinquency by contacting theborrower.  In the case of residentialloans, a late notice is sent 16 days after the due date.  If the delinquency is not cured by the thirtiethday, the borrower is contacted by telephone or a letter is sent.  Additional written and verbal contacts aremade with the borrower between 35 and 70 days after the due date.

 

In the event a real estate loan payment is past due for 60 days ormore, the Bank performs an in-depth review of the loan status, the condition ofthe property and circumstances of the borrower.  Based upon the results of its review, the Bank may negotiate andaccept a repayment program with the borrower, accept a voluntary deed in lieuof foreclosure or when deemed necessary, initiate foreclosure proceedings.  If foreclosed

 

13

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on, real property is sold at a public sale and the Bank may bid on theproperty to protect its interest.  Adecision as to whether and when to initiate foreclosure proceedings is based onsuch factors 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 generally similar manner,except that contacts are made beginning when the payment is 10 days pastdue.  If these efforts fail to bring theloan current, appropriate action may be taken to collect any loan payment thatremains delinquent.  The Bank’sprocedures for repossession and sale of consumer collateral are subject tovarious 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 loan delinquencies by type,amount, and percentage of type at December 31, 2003.

 
|                   |   | **Loans  Delinquent For**   |       |                  |       |                                         |       |       |       |
|------------------------|--------|-----------------------------|------------|-----------------------|------------|----------------------------------------------|------------|------------|------------|
|                   |   | **60-89 Days**              | ** ** | **90 Days  And Over** | ** ** | **Total  Loans Delinquent  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           |   | —                      |       | $                     | —     |                                         | —     | %          | —     |   | $ | — |   | — | % | — |   | $ | — |   | — | % |
| One-to-four family     |   | 7                           |       | 276                   |       | 0.31                                         |       | 7          |       | 472 |   | 0.53 |   | 14 |   | 748 |   | 0.84 |   |
| Commercial real estate |   | 1                           |       | 66                    |       | 0.16                                         |       | 3          |       | 269 |   | 0.67 |   | 4 |   | 335 |   | 0.83 |   |
| Other Loans            |   |                        |       |                  |       |                                         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial             |   | 2                           |       | 20                    |       | 0.25                                         |       | 5          |       | 276 |   | 3.40 |   | 7 |   | 296 |   | 3.65 |   |
| Consumer               |   | 14                          |       | 100                   |       | 0.46                                         |       | 7          |       | 37 |   | 0.17 |   | 21 |   | 137 |   | 0.63 |   |
|                   |   |                        |       |                  |       |                                         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Total loans            |   | 24                          |       | $                     | 462        |                                         | 0.29       | %          | 22         |   | $ | 1,054 |   | 0.66 | % | 46 |   | $ | 1,516 |   | 0.95 | % |

 

*Non-Pe**rformingAssets*.  Non-performingassets consist of loans on which interest is no longer being accrued, troubleddebt restructurings, real estate acquired by foreclosure or deed-in-lieu offoreclosure and repossessed assets.

 

The following table sets forth the amounts and categories ofnon-performing assets in the Bank’s portfolio. Loans are generally placed on non-accrual status after 90 daysdelinquency.

 
|                                            |   | **December 31**        |       |
|-------------------------------------------------|--------|-----------------------------|------------|
|                                            |   | **2003**                    |       | **2002** | ** ** | **2001** | ** ** |
|                                            |   | **(Dollars  In Thousands)** | ** ** |
|                                            |   |                        |       |   |   |   |   |
| Non-accrual loans (1)                           |   | $                           | 1,054      |   | $ | 1,623 |   | $ | 1,407 |   |
| Past due 90 days or more and still accruing     |   | —                      |       | — |   | — |   |
| Troubled debt restructured                      |   | —                      |       | — |   | — |   |
| Real estate owned (2)                           |   | 565                         |       | 648 |   | 605 |   |
|                                            |   |                        |       |   |   |   |   |
| Total non-performing assets                     |   | $                           | 1,619      |   | $ | 2,271 |   | $ | 2,012 |   |
|                                            |   |                        |       |   |   |   |   |
| Ratio of non-performing assets to total  assets |   | 0.79                        | %          | 1.18 | % | 1.15 | % |

 

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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 recorded had thenon-accruing loans and renegotiated loans been current in accordance with theiroriginal terms amounted to $39,388 and $109,517 for the years endedDecember 31, 2003 and 2002, respectively.

 

*Critici**zed Assets*.  Federal regulations provide for theclassification of loans and other assets, such as debt and equity securitiesconsidered by the OTS to be of lesser quality, as “substandard,” “doubtful” or“loss.” An asset is considered “substandard” if it is inadequately protected bythe current net worth and paying capacity of the obligor or of the collateralpledged, if any.  “Substandard” assetsinclude those characterized by the “distinct possibility” that the insuredinstitution will sustain “some loss” if the deficiencies are not corrected.Assets classified as “doubtful” have all of the weaknesses inherent in thoseclassified “substandard,” with the added characteristic that the weaknessespresent make “collection or liquidation in full,” on the basis of currentlyexisting 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 assets as eithersubstandard 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 reports with the OTS andin accordance with its classification of assets policy, the Bank regularlyreviews the problem loans in its portfolio to determine whether any loansrequire classification in accordance with applicable regulations.  Criticized assets of the Bank at December 31,2003 were as follows:

 
|                    |   | **December 31,  2003**  |   |
|-------------------------|--------|------------------------------|--------|
|                    |   | **(Dollars  In  Thousands)** |   |
|                    |   |                         |   |
| Substandard             |   | $                            | 2,310  |   |
| Doubtful                |   | 49                           |   |
| Loss                    |   | 1                            |   |
|                    |   |                         |   |
| Total classified assets |   | 2,360                        |   |
| Special mention assets  |   | 381                          |   |
|                    |   |                         |   |
| Total criticized assets |   | $                            | 2,741  |   |

 

15

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*Allow**ance forLoan Losses*.  The allowancefor loan losses is established through a provision for loan losses based onmanagement’s quarterly asset classification review and evaluation of the riskinherent in its loan portfolio and changes in the nature and volume of its loanactivity.  Such evaluation, whichincludes a review of all loans of which full collectibility may not bereasonably assured, considers among other matters, the estimated value of the underlyingcollateral, economic conditions, cash flow analyses, historical loan lossexperience, discussions held with delinquent borrowers and other factors thatwarrant recognition in providing for an adequate loan allowance.  Although management believes it uses thebest information available to make such determinations, future adjustments toreserves may be necessary, and net income could be significantly affected, ifcircumstances differ substantially from the assumptions used in making theinitial determinations.

 

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

 
|                                                                                       |   | **Year ended  December 31** |       |
|--------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                                       |   | **2003**                         |       | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                                                                       |   | **(Dollars  In Thousands)**      | ** ** |
|                                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Balance at beginning of year                                                               |   | $                                | 825        |   | $ | 745 |   | $ | 681 |   | $ | 864 |   | $ | 601 |   |
|                                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Provision charged to operations                                                            |   | 781                              |       | 786 |   | 449 |   | 199 |   | 324 |   |
| Acquired reserve                                                                           |   | —                           |       | — |   | — |   | (250 | ) | 250 |   |
|                                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Charge-offs:                                                                               |   |                             |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Single family                                                                              |   | (16                              | )          | (53 | ) | (24 | ) | — |   | — |   |
| Commercial real estate                                                                     |   | (206                             | )          | — |   | — |   | — |   | — |   |
| Other Consumer loans                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Commercial                                                                                 |   | (83                              | )          | (319 | ) | (147 | ) | (41 | ) | (81 | ) |
| Automobile                                                                                 |   | (312                             | )          | (297 | ) | (98 | ) | (62 | ) | (123 | ) |
| Credit card                                                                                |   | (45                              | )          | (38 | ) | (45 | ) | (22 | ) | (16 | ) |
| Other consumer                                                                             |   | (82                              | )          | (40 | ) | (128 | ) | (26 | ) | (122 | ) |
| Total charge-offs                                                                          |   | (744                             | )          | (747 | ) | (442 | ) | (151 | ) | (342 | ) |
|                                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Recoveries:                                                                                |   |                             |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Single family                                                                              |   | —                           |       | — |   | — |   | — |   | — |   |
| Commercial real estate                                                                     |   | —                           |       | — |   | — |   | — |   | — |   |
| Other Consumer loans                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Commercial                                                                                 |   | 20                               |       | — |   | 35 |   | 6 |   | 2 |   |
| Automobile                                                                                 |   | 53                               |       | 40 |   | 16 |   | 11 |   | 23 |   |
| Credit card                                                                                |   | 3                                |       | 1 |   | — |   | 1 |   | 6 |   |
| Other consumer                                                                             |   | 12                               |       | — |   | 6 |   | 1 |   | — |   |
| Total recoveries                                                                           |   | 88                               |       | 41 |   | 57 |   | 19 |   | 31 |   |
|                                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Balances at end of year                                                                    |   | $                                | 950        |   | $ | 825 |   | $ | 745 |   | $ | 681 |   | $ | 864 |   |
|                                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Ratio of net charge-offs during the period  to average loans outstanding during the period |   | 0.46                             | %          | 0.49 | % | 0.30 | % | 0.12 | % | 0.32 | % |
|                                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to non-performing  assets, at the end of year                    |   | 58.63                            | %          | 36.33 | % | 37.02 | % | 156.91 | % | 276.84 | % |
|                                                                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to total loans,  at the end of year                              |   | 0.61                             | %          | 0.54 | % | 0.53 | % | 0.57 | % | 0.83 | % |

 

16

----

 

**InvestmentActivities**

 

*Gene**ral*.  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 in relationto the return on loans.  Historically,the Bank has maintained liquid assets at levels above the minimum requirementsimposed by the OTS regulations and at levels believed adequate to meet therequirements of normal operations, including repayments of maturing debt andpotential deposit outflows.  Cash flowprojections are regularly reviewed and updated to assure that adequateliquidity is maintained.

 

Federally chartered thrift institutions have the authority to invest invarious types of liquid assets, including United States Treasury obligations,securities of various federal agencies, certain certificates of deposit ofinsured banks and savings institutions, certain bankers’ acceptances,repurchase agreements and federal funds. Subject to various restrictions,federally chartered thrift institutions may also invest their assets incommercial paper, investment grade corporate debt securities and mutual fundswhose assets conform to the investments that a federally chartered thriftinstitution is otherwise authorized to make directly.

 

Generally, the investment policy of the Bank is to invest funds amongvarious categories of investments and maturities based upon the Bank’sasset/liability management policies, investment quality and marketability,liquidity needs and performance objectives.

 

The Bank has a portfolio of mortgage-backed securities.  Historically, most of the Bank’smortgage-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, 2003, approximately $7million or 91% of the Bank’s mortgage-backed securities carried adjustablerates of interest.

 

Under the OTS’ risk-based capital requirements, GNMA mortgage-backedsecurities have a zero percent risk-weighting and FNMA, FHLMC and AA- or higherrated mortgage-backed securities have a 20% risk-weighting.  None of the mortgage-backed securities heldby the Bank had a risk-weight for regulatory capital purposes above 20%.

 

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

 

GNMA and FHLMC mortgage-backed securities generally carry a yield belowthat of the corresponding type of residential loan (due to the insurance orguarantee feature of such securities and the retention of a servicing spread bythe loan servicer), and the Bank’s other mortgage-backed securities also carrylower yields (because such securities tend to have shorter actual durationsthan 30-year loans).  The Bank willcontinue to evaluate corporate bonds, trust preferred securities,mortgage-backed securities purchases and loan securitizations of its existingloans in the future based on its strategic and asset/liability objectives,market conditions and alternative investment opportunities.

 

During 2003, the Bank’s cash flow primarily generated from sellingone-to-four mortgage loans provided the Bank an opportunity to increase itssecurity portfolio to enhance yield but not increase the duration of itsassets.  The securities were primarilypurchased in the fourth quarter of 2003 and were primarily bonds backed by theUnited States Government or one of its agencies.  Most of these bond purchased were included in securitiesheld-to-maturity, and had a final maturity of two to five years.

 

17

----

 

The following table sets forth the composition of the Company’sinvestment portfolio at the dates indicated.

 
|                                                                                                                                    |   | **December 31**        |       |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                                                    |   | **2003**                    | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                                                                                    |   | **Carrying  value**         |       | **% of  total** | **%** | **Carrying  value** |   | **% of  total** | ** ** | **Carrying  value** |   | **% of  total** | ** ** |
|                                                                                                                                    |   | **(Dollars  In Thousands)** | ** ** |
|                                                                                                                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale:                                                                                                                     |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                                             |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable rate                                                                                                                    |   | $                           | 2,474      |   | 42.6 | % | $ | 3,901 |   | 58.5 | % | $ | 5,558 |   | 53.2 | % |
| GNMA fixed rate                                                                                                                         |   | 723                         |       | 12.4 |   | 1,980 |   | 29.7 |   | 4,204 |   | 40.2 |   |
| Equity securities:                                                                                                                      |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| FNMA common stock                                                                                                                       |   | 7                           |       | 0.1 |   | 6 |   | 0.1 |   | 8 |   | 0.1 |   |
| Corporate bonds                                                                                                                         |   | —                      |       | — |   | 101 |   | 1.5 |   | — |   | — |   |
| FNMA bonds                                                                                                                              |   | 1,000                       |       | 17.2 |   | — |   | — |   | — |   | — |   |
| FFCB bonds                                                                                                                              |   | 1,006                       |       | 17.3 |   | — |   | — |   | — |   | — |   |
| Trust preferred securities                                                                                                              |   | 605                         |       | 10.4 |   | 677 |   | 10.2 |   | 677 |   | 6.5 |   |
|                                                                                                                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total available-for-sale                                                                                                                |   | $                           | 5,815      |   | 100.0 | % | $ | 6,665 |   | 100.0 | % | $ | 10,447 |   | 100.0 | % |
|                                                                                                                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity:                                                                                                                       |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                                             |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| FHLMC adjustable rate                                                                                                                   |   | $                           | 287        |   | 1.7 | % | $ | 463 |   | 24.9 | % | $ | 615 |   | 38.2 | % |
| GNMA adjustable rate                                                                                                                    |   | 4,028                       |       | 24.0 |   | — |   | — |   | — |   | — |   |
| FHLB bonds                                                                                                                              |   | 4,256                       |       | 25.4 |   | — |   | — |   | — |   | — |   |
| FHLMC bonds                                                                                                                             |   | 1,002                       |       | 6.0 |   | — |   | — |   | — |   | — |   |
| US Treasury bonds                                                                                                                       |   | 6,018                       |       | 35.9 |   | — |   | — |   | — |   | — |   |
| Corporate bonds                                                                                                                         |   | 871                         |       | 5.2 |   | 1,099 |   | 59.0 |   | 696 |   | 43.2 |   |
| Trust preferred securities                                                                                                              |   | 300                         |       | 1.8 |   | 300 |   | 16.1 |   | 300 |   | 18.6 |   |
|                                                                                                                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total held-to-maturity                                                                                                                  |   | 16,762                      |       | 100.0 | % | 1,862 |   | 100.0 | % | 1,611 |   | 100.0 | % |
|                                                                                                                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| FHLB stock                                                                                                                              |   | 1,167                       |       |   |   | 1,013 |   |   |   | 984 |   |   |   |
|                                                                                                                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Other interest-earning assets:                                                                                                          |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits with banks                                                                                                    |   | 4,480                       |       |   |   | 5,993 |   |   |   | 798 |   |   |   |
|                                                                                                                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                                                                   |   | $                           | 28,224     |   |   |   | $ | 15,533 |   |   |   | $ | 13,840 |   |   |   |
|                                                                                                                                    |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Average remaining life, to maturity,  excluding other-interest-earning assets and FHLB stock (does not include  prepayment assumptions) |   | 12 years                    |       |   |   | 19 years |   |   |   | 21 years |   |   |   |

 

18

----

 

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

 
|                                |   | **December 31,  2003** |       |
|-------------------------------------|--------|-----------------------------|------------|
|                                |   |                        |       |   | ** ** |   | ** ** |   | ** ** |   | ** ** | **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                |   | $                           | —     |   | $ | — |   | $ | — |   | $ | 2,476 |   | $ | — |   | $ | 2,476 |   | $ | 2,474 |   |
| GNMA fixed rate                     |   | —                      |       | — |   | — |   | — |   | 680 |   | 680 |   | 723 |   |
| Equity securities:                  |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| FNMA common stock                   |   | —                      |       | — |   | — |   | — |   | 7 |   | 7 |   | 7 |   |
| FNMA bonds                          |   | —                      |       | 1,000 |   | — |   | — |   | — |   | 1,000 |   | 1,000 |   |
| FFCB bonds                          |   | —                      |       | 1,000 |   | — |   | — |   | — |   | 1,000 |   | 1,006 |   |
| Trust preferred securities          |   | —                      |       | — |   | — |   | — |   | 555 |   | 555 |   | 605 |   |
| Total securities available-for-sale |   | $                           | —     |   | $ | 2,000 |   | $ | — |   | $ | 2,476 |   | $ | 1,242 |   | $ | 5,718 |   | $ | 5,815 |   |
|                                |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average yield              |   | —                      | %          | 2.83 | % | — | % | 3.70 | % | 7.43 | % | 4.20 | % |   |   |

 
|                              |   | **December 31,  2003** | ** ** |
|-----------------------------------|--------|-----------------------------|------------|
|                              |   |                        |       |   | ** ** |   | ** ** |   | ** ** |   | ** ** | **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 adjustable rate             |   | $                           | —     |   | $ | — |   | $ | — |   | $ | 164 |   | $ | 123 |   | $ | 287 |   | $ | 290 |   |
| GNMA adjustable rate              |   |                        |       |   |   |   |   |   |   | 4,028 |   | 4,028 |   | 4,019 |   |
| FHLB bonds                        |   |                        |       | 3,256 |   | 1,000 |   |   |   |   |   | 4,256 |   | 4,292 |   |
| FHLMC bonds                       |   |                        |       | 1,002 |   |   |   |   |   |   |   | 1,002 |   | 1,007 |   |
| US Treasury bonds                 |   |                        |       | 6,018 |   |   |   |   |   |   |   | 6,018 |   | 6,034 |   |
| Corporate bonds                   |   | 383                         |       | 488 |   | — |   | — |   | — |   | 871 |   | 872 |   |
| Trust preferred securities        |   | —                      |       | — |   | — |   | — |   | 300 |   | 300 |   | 315 |   |
|                              |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total securities held-to-maturity |   | $                           | 383        |   | $ | 10,764 |   | $ | 1,000 |   | $ | 164 |   | $ | 4,451 |   | $ | 16,762 |   | $ | 16,829 |   |
|                              |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average yield            |   | 3.91                        | %          | 2.90 | % | 4.35 | % | 3.32 | % | 3.79 | % | 3.25 | % |   |   |

 

*Othe**rInvestments*.  AtDecember 31, 2003, the Bank’s fixed-rate interest bearing deposits withbanks were $4,480,000 or 2.18% of total assets.  As of such date, the Bank also had a $1,167,200 investment inFHLB stock.  At December 31, 2003,the Bank’s investment in stock of the FHLB was in an amount required by theFHLB.  It is the Bank’s general policyto purchase investment securities and other issues that are rated investmentgrade or have credit enhancements.

 

**Sourcesof Funds**

 

*The Co**mpany.*  The Company’s primary sources of funds aredividends from the Bank, borrowings from the Bank in the form of advances andoutside borrowings.  The Bank paiddividends to the Company of $817,500 and $652,500 in the years endedDecember 31, 2003 and 2002, respectively. The Bank had advances of $0 and $0 to the Company at December 31,2003 and 2002, respectively.

 

19

----

 

AtDecember 31, 2003 and 2002, the Company had lines of credit totaling$400,000 each year from other banks. The Company has no borrowings outstandingunder these arrangements at December 31, 2003 and December 31, 2002.  The lines of credit bear market rates ofinterest and borrowings thereunder are to be used for general purposes. One ofthe borrowing arrangements at December 31, 2003 matured onJanuary 25, 2004, which has been renewed for a year.  The other borrowing arrangement matures onOctober 1, 2005.

 

*The Ba**nk*.  The Bank’s primary sources of funds aredeposits, amortization and prepayment of loan principal, sales or maturities ofloans, investment securities, mortgage-backed securities and short-terminvestments, borrowings and funds provided from operations.

 

Borrowings, predominantly from the Federal Home Loan Bank (“FHLB”) ofDallas, may be used on a short-term basis to compensate for seasonal reductionsin deposits or deposit inflows at less than projected levels, and may be usedin the future on a longer-term basis to support lending and investingactivities.

 

The Bank offers a variety of deposit accounts having a wide range ofinterest rates and terms.  The Bank’sdeposits consist of statement savings, NOW accounts and money market accountsand CDs.  The Bank relies primarily onadvertising, competitive pricing policies and customer service to attract andretain these deposits. The Bank solicits deposits from its primary market areaonly and does not use brokers to obtain deposits.

 

The flow of deposits is significantly influenced by general economicconditions, changes in money markets and prevailing interest rates andcompetition.  The Bank enhanced itsability to increase its deposit base by opening two new in-store branches inAlbuquerque in 2002.

 

Management believes that customers continue to place a value on federalinsurance on deposit accounts and that, to the extent the Bank maintainscompetitive rates, it will be able to maintain its deposit and liquidity levels.  The Bank manages the pricing of its depositsin keeping with its asset/liability management and profitability objectives.

 

Based on its experience, the Bank believes that its savings accounts,interest-bearing and non-interest-bearing checking accounts are relativelystable sources of deposits.  However,the ability of the Bank to attract and maintain CDs, and the rates paid onthese deposits, has been and will continue to be significantly affected bymarket conditions.

 

Liquidityenables the Bank to meet withdrawals of its deposits and the needs of its loancustomers.  The Bank maintains itsliquidity position through maintenance of cash resources and a core depositbase.  A further source is the Bank’sability to borrow funds.  The Bank is amember of the FHLB which provides a source of borrowings to the Bank for assetand asset/liability matching.  FHLBborrowings were $17.07 and $8.27 million at December 31, 2003 and 2002,respectively.  The primary additionalsource of funding is provided by FHLB borrowings available to the Bank, of$69.0 and $59.8 million at December 31, 2003 and 2002, respectively.

 

Liquidityrisk results from the mismatching of assets and liability cash flows.  Management chooses asset/liabilitystrategies that promote stable earnings and reliable funding.  Interest rate risk and funding positions arekept within limits established by the Board of Directors of the Bank to ensurethat risk taking is not excessive and that liquidity is properly managed.  The Bank keeps a portion of itsinterest-bearing assets in adjustable-rate products to reduce interest ratesensitivity.  Therefore, if ratesincrease the Bank can retain its deposits by increasing rates paid on deposits,while limiting the impact on the Bank’s net interest margin.  A concentrated effort is made to retaindeposits associated with an unidentifiable intangible asset and the currentrate paid on these deposits is at a market rate for the area.  Core customer deposits have historicallyprovided the Bank with a sizeable source of stable and low-cost funds.

 

20

----

 

The following tables set forth the deposits in the various programsoffered by the Bank at the dates indicated:

 

 
|                          |   | **Balance at  December  31, 2003** |       | **% of  deposits** |   | **Increase  (decrease)** |   | **Balance at  December  31, 2002** |   | **% of  deposits** |    | **Increase  (decrease)** |   | **Balance at  December  31, 2001** |   | **% of  deposits** |   | **Increase  (decrease)** |    | **Balance at  December  31, 2000** |   |
|-------------------------------|--------|------------------------------------|------------|--------------------|--------|--------------------------|--------|------------------------------------|--------|--------------------|---------|--------------------------|--------|------------------------------------|--------|--------------------|--------|--------------------------|---------|------------------------------------|--------|
|                          |   | **(Dollars  In Thousands)**        | ** ** |
|                          |   |                               |       |               |   |                     |   |                               |   |               |    |                     |   |                               |   |               |   |                     |    |                               |   |
| Transactional accounts        |   | $                                  | 26,414     |               | 16.22  | %                        | $      | 341                                |   | $                  | 26,073  |                     | 16.38  | %                                  | $      | 7,005              |   | $                        | 19,068  |                               | 12.98  | % | $ | (592 | ) | $ | 19,660 |   |
| Jumbo CDs                     |   | 202                                |       | 0.12               |   | (535                     | )      | 737                                |   | 0.46               |    | (5,387                   | )      | 6,124                              |   | 4.17               |   | (8,621                   | )       | 14,745                             |   |
| Savings accounts              |   | 6,751                              |       | 4.15               |   | 149                      |   | 6,602                              |   | 4.15               |    | 866                      |   | 5,736                              |   | 3.90               |   | (339                     | )       | 6,075                              |   |
| Money market deposit accounts |   | 26,280                             |       | 16.14              |   | (1,149                   | )      | 27,429                             |   | 17.23              |    | 332                      |   | 27,097                             |   | 18.44              |   | 4,799                    |    | 22,298                             |   |
| IRA accounts                  |   | 10,560                             |       | 6.48               |   | (1,191                   | )      | 11,751                             |   | 7.38               |    | 604                      |   | 11,147                             |   | 7.59               |   | 479                      |    | 10,668                             |   |
| Other CDs                     |   | 92,639                             |       | 56.89              |   | 6,034                    |   | 86,605                             |   | 54.40              |    | 8,857                    |   | 77,748                             |   | 52.92              |   | 13,918                   |    | 63,830                             |   |
|                          |   |                               |       |               |   |                     |   |                               |   |               |    |                     |   |                               |   |               |   |                     |    |                               |   |
|                          |   | $                                  | 162,846    |               | 100.00 | %                        | $      | 3,649                              |   | $                  | 159,197 |                     | 100.00 | %                                  | $      | 12,277             |   | $                        | 146,920 |                               | 100.00 | % | $ | 9,644 |   | $ | 137,276 |   |

 
|                |   |                    |                              | **December 31,  2003**           |       | **December 31,  2002** |       | **December 31,  2001**        |       |
|---------------------|--------|-------------------------|-----------------------------------|---------------------------------------|------------|-----------------------------|------------|------------------------------------|------------|
| **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       | %                           | $          | 12,693                             |       | 7.79 | % | 0.00 | % | $ | 15,239 |   | 9.57 | % | 0.00 | % | $ | 10,081 |   | 6.86 | % |
| 100                 |   | Transactional  accounts |                              | 0.30                                  |       | 13,721                      |       | 8.43                               |       | 0.49 |   | 10,834 |   | 6.81 |   | 0.48 |   | 8,987 |   | 6.12 |   |
| 1,000               |   | Money  market           |                              | 1.10                                  |       | 26,280                      |       | 16.14                              |       | 1.36 |   | 27,429 |   | 17.22 |   | 2.05 |   | 27,097 |   | 18.44 |   |
| 100                 |   | Savings  accounts       |                              | 0.80                                  |       | 6,751                       |       | 4.15                               |       | 0.80 |   | 6,602 |   | 4.15 |   | 0.80 |   | 5,736 |   | 3.90 |   |
|                |   |                    |                              |                                  |       |                        |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                |   | Certificates of Deposit |                              |                                  |       |                        |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 1,000               |   | 30-60  day CDs          |                              | 0.51                                  |       | 38                          |       | 0.02                               |       | 0.86 |   | 68 |   | 0.04 |   | 1.15 |   | 50 |   | 0.03 |   |
| 1,000               |   | 91  day CDs             |                              | 0.51                                  |       | 133                         |       | 0.08                               |       | 1.05 |   | 354 |   | 0.22 |   | 1.33 |   | 205 |   | 0.14 |   |
| 1,000               |   | 6  month CDs            |                              | 1.28                                  |       | 7,728                       |       | 4.75                               |       | 2.09 |   | 13,439 |   | 8.44 |   | 3.28 |   | 12,373 |   | 8.42 |   |
| 1,000               |   | 9  month CDs            |                              | 2.08                                  |       | 322                         |       | 0.20                               |       | 2.15 |   | 1,375 |   | 0.86 |   | 4.12 |   | 2,051 |   | 1.40 |   |
| 1,000               |   | 1  year CDs             |                              | 1.73                                  |       | 17,141                      |       | 10.53                              |       | 2.46 |   | 14,829 |   | 9.31 |   | 4.36 |   | 21,583 |   | 14.70 |   |
| 1,000               |   | 14  month CDs           |                              | 1.97                                  |       | 23,869                      |       | 14.65                              |       | 2.90 |   | 11,933 |   | 7.50 |   | 3.71 |   | 21,142 |   | 14.38 |   |
| 1,000               |   | 18  month CDs           |                              | 2.49                                  |       | 7,738                       |       | 4.75                               |       | 3.20 |   | 14,021 |   | 8.81 |   | 4.22 |   | 10,613 |   | 7.22 |   |
| 1,000               |   | 2  year CDs             |                              | 3.35                                  |       | 13,970                      |       | 8.58                               |       | 3.75 |   | 11,763 |   | 7.39 |   | 5.03 |   | 2,100 |   | 1.43 |   |
| 1,000               |   | 30  month CDs           |                              | 3.77                                  |       | 7,253                       |       | 4.45                               |       | 3.90 |   | 7,406 |   | 4.65 |   | 4.26 |   | 1,125 |   | 0.77 |   |
| 1,000               |   | 3  year CDs             |                              | 3.47                                  |       | 3,222                       |       | 1.98                               |       | 4.37 |   | 2,735 |   | 1.72 |   | 5.49 |   | 2,447 |   | 1.67 |   |
| 1,000               |   | 4  year CDs             |                              | 4.01                                  |       | 1,573                       |       | 0.97                               |       | 4.20 |   | 1,429 |   | 0.90 |   | 4.90 |   | 752 |   | 0.51 |   |
| 1,000               |   | 5  year CDs             |                              | 4.45                                  |       | 8,008                       |       | 4.92                               |       | 4.82 |   | 7,252 |   | 4.56 |   | 5.41 |   | 3,307 |   | 2.25 |   |
| 90,000              |   | Jumbo  CDs              |                              | 5.22                                  |       | 202                         |       | 0.12                               |       | 4.47 |   | 737 |   | 0.46 |   | 5.07 |   | 6,124 |   | 4.17 |   |
| 100                 |   | IRA  floating rate      |                              | 1.34                                  |       | 1,644                       |       | 1.01                               |       | 1.87 |   | 1,970 |   | 1.24 |   | 2.70 |   | 2,102 |   | 1.43 |   |
| 100                 |   | 1  year IRA             |                              | 1.93                                  |       | 3,460                       |       | 2.12                               |       | 3.03 |   | 3,283 |   | 2.06 |   | 4.63 |   | 3,668 |   | 2.50 |   |
| 100                 |   | 15  month IRA           |                              | —                                |       | —                      |       | —                             |       | — |   | — |   | — |   | 5.85 |   | 2 |   | — |   |
| 100                 |   | 3  year IRA             |                              | 4.51                                  |       | 2,384                       |       | 1.46                               |       | 5.46 |   | 2,971 |   | 1.87 |   | 5.51 |   | 2,735 |   | 1.86 |   |
| 100                 |   | 4  year IRA             |                              | 3.74                                  |       | 555                         |       | 0.34                               |       | 4.23 |   | 200 |   | .13 |   | — |   | — |   | — |   |
| 100                 |   | 5  year IRA             |                              | 4.26                                  |       | 4,161                       |       | 2.56                               |       | 4.75 |   | 3,328 |   | 2.09 |   | 5.51 |   | 2,640 |   | 1.80 |   |
|                |   |                    |                              |                                  |       |                        |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                |   |                    |                              | 1.92                                  | %          | $                           | 162,846    |                               | 100.00     | % | 2.33 | % | $ | 159,197 |   | 100.00 | % | 3.16 | % | $ | 146,920 |   | 100.00 | % |
|                     |        |                         |                                   |                                       |            |                             |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

21

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The following table sets forth the savings flows of the Bank during theperiods indicated.  Net deposits(withdrawals) refer to the amount of deposits during a period less the amountof withdrawals during the same period. Deposit flows at savings institutions may also be influenced by externalfactors such as governmental credit policies and depositors’ perceptions of theadequacy of federal insurance of accounts.

 
|                                  |   | **Year Ended  December 31** |       |
|---------------------------------------|--------|----------------------------------|------------|
|                                  |   | **2003**                         |       | **2002** | ** ** | **2001** | ** ** |
|                                  |   | **(Dollars  In Thousands)**      | ** ** |
|                                  |   |                             |       |   |   |   |   |
| Net deposits before interest credited |   | $                                | 338        |   | $ | 8,027 |   | $ | 3,895 |   |
| Interest credited                     |   | 3,311                            |       | 4,250 |   | 5,749 |   |
|                                  |   |                             |       |   |   |   |   |
| Net increase in deposits              |   | $                                | 3,649      |   | $ | 12,277 |   | $ | 9,644 |   |
|                                  |   |                             |       |   |   |   |   |
| Percent increase                      |   | 2.48                             | %          | 8.36 | % | 7.26 | % |

 

The following table shows interest rate and maturity information forthe Bank’s time deposits as of December 31, 2003.

 
|                                      |   | **0.00-  1.99%**            |       | **2.00-  2.99%** |   | **3.00-  3.99%** |   | **Over  3.99%** |   | **Total** |   | **Percent  of total** |   |
|-------------------------------------------|--------|-----------------------------|------------|------------------|--------|------------------|--------|-----------------|--------|-----------|--------|-----------------------|--------|
|                                      |   | **(Dollars  In Thousands)** | ** ** |
|                                      |   |                        |       |             |   |             |   |            |   |      |   |                  |   |
| Time deposits maturing in quarter ending: |   |                        |       |             |   |             |   |            |   |      |   |                  |   |
|                                      |   |                        |       |             |   |             |   |            |   |      |   |                  |   |
| March 31, 2004                       |   | $                           | 13,382     |             | $      | 4,009            |   | $               | 3,076  |      | $      | 1,468                 |   | $ | 21,935 |   | 21.21 | % |
| June 30, 2004                        |   | 7,914                       |       | 9,873            |   | 6,072            |   | 1,894           |   | 25,753    |   | 24.90                 |   |
| September 30, 2004                   |   | 6,449                       |       | 4,459            |   | 1,853            |   | 515             |   | 13,276    |   | 12.84                 |   |
| December 31, 2004                    |   | 7,431                       |       | 1,529            |   | 4,119            |   | 1,726           |   | 14,805    |   | 14.32                 |   |
| March 31, 2005                       |   | 4,774                       |       | 1,912            |   | 356              |   | 120             |   | 7,162     |   | 6.93                  |   |
| June 30, 2005                        |   | 427                         |       | 1,181            |   | 390              |   | 542             |   | 2,540     |   | 2.46                  |   |
| September 30, 2005                   |   | —                      |       | 847              |   | 623              |   | 215             |   | 1,685     |   | 1.63                  |   |
| December 31, 2005                    |   | —                      |       | 1,162            |   | 370              |   | 126             |   | 1,658     |   | 1.60                  |   |
| March 31, 2006                       |   | —                      |       | 302              |   | 311              |   | 782             |   | 1,395     |   | 1.35                  |   |
| June 30, 2006                        |   | —                      |       | 430              |   | 275              |   | 501             |   | 1,206     |   | 1.17                  |   |
| September 30, 2006                   |   | —                      |       | 485              |   | —           |   | 318             |   | 803       |   | 0.78                  |   |
| December 31, 2006                    |   | —                      |       | 305              |   | 249              |   | 484             |   | 1,038     |   | 1.00                  |   |
| Thereafter                                |   | 21                          |       | 69               |   | 3,817            |   | 6,238           |   | 10,145    |   | 9.81                  |   |
|                                      |   |                        |       |             |   |             |   |            |   |      |   |                  |   |
| Total                                     |   | $                           | 40,398     |             | $      | 26,563           |   | $               | 21,511 |      | $      | 14,929                |   | $ | 103,401 |   | 100.00 | % |
|                                      |   |                        |       |             |   |             |   |            |   |      |   |                  |   |
| Percent of total                          |   | 39.07                       | %          | 25.69            | %      | 20.80            | %      | 14.44           | %      | 100.00    | %      |                  |   |

 

22

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The following table indicates the amount of the Bank’s time deposits bysize or from public entities, by time remaining until maturity as ofDecember 31, 2003.

 
|                              |   | **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 |   | $                           | 17,491     |   | $ | 20,196 |   | $ | 21,743 |   | $ | 21,748 |   | $ | 81,178 |   |
|                              |   |                        |       |   |   |   |   |   |   |   |   |
| Time deposits over $100,000       |   | 2,436                       |       | 3,387 |   | 6,333 |   | 5,884 |   | 18,040 |   |
|                              |   |                        |       |   |   |   |   |   |   |   |   |
| Public funds(1)                   |   | 2,008                       |       | 2,170 |   | 5 |   | — |   | 4,183 |   |
|                              |   |                        |       |   |   |   |   |   |   |   |   |
| Total time deposits               |   | $                           | 21,935     |   | $ | 25,753 |   | $ | 28,081 |   | $ | 27,632 |   | $ | 103,401 |   |

 

----

(1)           Timedeposits from government and other public entities.

 

From time to time, the Bank has had greater amounts of publicfunds.  The amount of public funds heldby the Bank at December 31, 2003 and 2002 was $4,936,437 and $6,674,657,respectively.  The Bank is required topledge collateral or a letter of credit from FHLB for such funds.

 

*Borro**wings*.  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 Dallas upon the securityof its capital stock of the FHLB of Dallas and certain of its mortgage loans,investment securities and mortgage-backed securities.  Such advances may be made pursuant to several different creditprograms, each of which has its own interest rate and range of maturities.  At December 31, 2003, the Bank had$17,066,654 in FHLB borrowings outstanding, which was an increase during theyear of $8.8 million.  The increase in FHLBborrowings allowed the Bank to increase the amount of its loans receivable by$6.4 million.

 

The following table sets forth maximum balance, average balance, andaverage rate paid on FHLB advances for the period indicated.

 
|                                             |   | **Year ended  December 31** |       |
|--------------------------------------------------|--------|----------------------------------|------------|
|                                             |   | **2003**                         |       | **2002** | ** ** | **2001** | ** ** |
|                                             |   | **(Dollars  In Thousands)**      | ** ** |
|                                             |   |                             |       |   |   |   |   |
| Maximum amount of borrowings outstanding         |   | $                                | 18,406     |   | $ | 11,500 |   | $ | 12,050 |   |
|                                             |   |                             |       |   |   |   |   |
| Approximate average borrowings outstanding       |   | $                                | 16,317     |   | $ | 9,456 |   | $ | 5,840 |   |
|                                             |   |                             |       |   |   |   |   |
| Approximate weighted average interest rate  paid |   | 2.62                             | %          | 3.47 | % | 4.54 | % |

 

23

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On June 27, 2002, the Company issued $4 million in trust preferredsecurities through a private placement of Floating Rate Trust PreferredSecurities of Access Anytime Capital Trust II with a liquidation value 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, 2003, the interest ratewas 4.80%.  The trust preferredsecurities may be redeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, the Company issued $4 million of 10.25% FixedRate Capital Trust Pass-through Securities of Access Anytime Capital Trust Iwith a liquidation value of $1,000 per share to mature 30 years from the dateof issuance.  The trust preferredsecurities may be redeemed by the Company at price of 107.6875 on July 25,2006, 106.15 on July 25, 2007, 104.6125 on July 25, 2008, 103.075 onJuly 25, 2009, 101.5375 on July 25, 2010 and may be redeemed at paron July 25, 2011 or after.  TheCompany invested approximately $2.9 million of the net proceeds in the Bank toincrease its capital levels.

 

**Subsidiaryof the Bank**

 

In 1974, the Bank incorporated First Equity Development Corporation(“FEDCO”), a New Mexico corporation, as a wholly-owned subsidiary of theBank.  The directors and officers ofFEDCO also serve as officers of the Bank. Prior to 1991, FEDCO’s primary business was real estate acquisition,development and construction, and investment in the Bank’s former dataprocessing service bureau.  FEDCO had$787 and $817 in cash at December 31, 2003 and 2002, and no other assetsor 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**

 

*Genera**l*.  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 administered by the FDIC,and it is a member of the FHLB of Dallas. The Bank must file reports with the OTS and the FDIC concerning itsactivities and financial condition, and it must obtain regulatory approvalsprior to entering into certain transactions, such as mergers with, oracquisitions of, other depository institutions.  The OTS and the FDIC conduct periodic examinations to assess theBank’s compliance with various regulatory requirements.  Such regulation and supervision establish acomprehensive framework of activities in which an institution may engage andare intended primarily for the protection of the insurance fund anddepositors.  The Company, as a unitarythrift holding company, is required to file certain reports with, and otherwisecomply with, the rules and regulations of the OTS and of the SEC under thefederal securities laws.

 

The OTS and the FDIC have significant discretion in connection withtheir supervisory and enforcement activities and examination policies,including policies with respect to the classification of assets and theestablishment 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.

 

*Regula**tion of theCompany*.  The Company, as aunitary thrift holding company, is a savings and loan holding company withinthe meaning of HOLA.  As such, theCompany is required to register with the OTS and is subject to OTS regulations,examinations, supervision and reporting requirements.  In addition, the OTS has enforcement authority over the Companyand its non-thrift subsidiaries, if any. Among other things, this authority permits the OTS to restrict orprohibit activities that are determined to be a serious risk to the financialsafety, soundness or stability of a subsidiary savings association.

 

24

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Except under limited circumstances, thrift holding companies areprohibited from acquiring, without prior approval of the OTS, control of anyother savings institutions or thrift holding company or substantially all theassets thereof or more than five percent of the voting shares of a thriftinstitution or holding company thereof which is not a subsidiary.  In evaluating an application by a holdingcompany to acquire a thrift association, the OTS must consider the financialand managerial resources and future prospects of the company and thriftassociation involved, the effect of the acquisition on the risk to theinsurance funds, the convenience and needs of the community and competitivefactors.  Acquisitions which result in athrift holding company controlling thrift associations in more than one stateare generally prohibited except in supervisory transactions involving failingsavings associations or based on specific state authorization to permit suchacquisitions.

 

Federal law also requires OTS approval prior to any change of controlof the Company or the Bank. Under OTS regulations, “control” is presumed toexist if an individual or company acquires more than twenty-five percent of anyclass of voting stock of a thrift association or holding company.  Control is also presumed to exist, subjectto being rebutted, if a person acquires more than ten percent of any class ofvoting stock (or more than twenty-five percent of any class of non-votingstock) and is subject to any of several control factors, including, among othermatters, the relative ownership position of a person, the existence of controlagreements and other factors.

 

As a unitary thrift holding company, the Company generally will not berestricted under existing laws to the types of business activities in which itmay engage, provided that the Bank continues to satisfy the QTL test. Upon anynon-supervisory acquisition by the Company of another thrift or savings bankthat meets the QTL test and is deemed to be a savings association by the OTSand that will be held as a separate subsidiary, the Company would become amultiple thrift holding company and would be subject to limitations on thetypes 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 is required to give 30days prior written notice to the OTS of any proposed appointment of a directoror senior executive officer if the institution has been chartered less than twoyears, has undergone a change in control within the preceding two years, or isnot in compliance with the minimum capital requirements or otherwise is in atroubled condition.  The OTS then hasthe opportunity to disapprove any such appointment.

 

Transactions between the Bank and the Company and the Bank’s subsidiaryare subject to various conditions and limitations.  Well run, healthy thrift institutions that satisfy certaincriteria would be permitted to file with the OTS schedules of proposed capitaldistributions over a specified period not to exceed 12 months.  The Bank being a wholly owned subsidiary ofa thrift holding company must file a notice with the OTS of anticipateddistributions of capital.

 

*Feder**alSecurities 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 not be resold withoutregistration 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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*Insuranc**e ofAccounts and Regulation by the FDIC*.  The Bank is a member of the SAIF, which is administered by theFDIC.  Deposits are insured up toapplicable limits by the FDIC and such insurance is backed by the full faithand credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and isauthorized to conduct examinations of and to require reporting by FDIC-insuredinstitutions.  It also may prohibit anyFDIC-insured institution from engaging in any activity the FDIC determines byregulation or order to pose a serious risk to the FDIC.  The FDIC also has the authority to initiateenforcement actions against thrift associations, after giving the OTS anopportunity to take such action, and may terminate the deposit insurance if itdetermines that the institution has engaged or is engaging in unsafe or unsoundpractices, or is in an unsafe or unsound condition.  The FDIC may initiate an examination for institutions graded 3,4, or 5 without approval of the other agencies.

 

The FDIC’s deposit insurance premiums are assessed through a risk-basedsystem under which all insured depository institutions are placed into one ofnine categories and assessed insurance premiums based upon their level ofcapital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., acore capital ratio of at least 5%, a ratio of Tier 1 or core capital torisk-weighted assets of at least 6% and a risk-based capital ratio of at least10%) and considered healthy pay the lowest premium, while institutions that areless than adequately capitalized (i.e., core or Tier 1 risk-based capitalratios of less than 4% or a risk-based capital ratio of less than 8%) andconsidered 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.

 

*Regu**latory CapitalRequirements*.  Federallyinsured thrift associations, such as the Bank, are required to maintain aminimum level of regulatory capital. The OTS has established capital standards, including a tangible capitalrequirement, a leverage ratio (or core capital) requirement and a risk-basedcapital 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 at least 1.5% ofadjusted total assets (as defined by regulation).  Tangible capital generally includes common stockholders’ equityand retained income, and certain noncumulative perpetual preferred stock andrelated income.  Intangible assetsincluding disallowed servicing assets and disallowed deferred tax assets arededucted from capital to calculate adjusted tangible capital.

 

The OTS regulations establish special capitalization requirements forthrift associations that own subsidiaries. Under these regulations certain subsidiaries are consolidated forcapital purposes and others are excluded from assets and capital.  In determining compliance with the capitalrequirements, all subsidiaries engaged solely in activities permissible fornational banks or engaged in certain other activities solely as agent for itscustomers are “includable” subsidiaries that are consolidated for capitalpurposes in proportion to the association’s level of ownership, including theassets of includable subsidiaries in which the association has a minorityinterest that is not consolidated for accounting principles generally acceptedin the United States of America purposes. For excludable subsidiaries, the debt and equity investments in suchsubsidiaries are deducted from assets and capital, with a five-year transitionperiod beginning on July 1, 1990, for investments made beforeApril 12, 1989.  AtDecember 31, 2003, the Bank had tangible capital of $20,224,064 or 9.99%of adjusted total assets (as defined by regulation), which was $17,188,830above the minimum requirement of 1.5% of adjusted total assets in effect onthat date.

 

The capital standards also require core capital equal to at least 3% ofadjusted total assets (as defined by regulation).  Core capital generally consists of tangible capital plus certainintangible assets, including a limited amount of purchased credit cardrelationships.  A thrift associationmust maintain a core capital ratio of at least 4% to be considered adequatelycapitalized unless its supervisory condition is such to allow it to maintain a3% ratio.  At December 31, 2003,the Bank had core capital equal to $20,224,064 or 9.99% of adjusted totalassets, which was $12,130,107 above the minimum leverage ratio requirement of4% as in effect on that date.

 

26

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The OTS risk-based requirement requires thrift associations to havetotal capital of at least 8% of risk-weighted assets (as defined byregulation).  Total capital consists ofcore capital, as defined above, and supplementary capital. Supplementarycapital consists of certain permanent and maturing capital instruments that donot qualify as core capital and general valuation loan and lease lossallowances up to a maximum of 1.25% of risk-weighted assets. Supplementarycapital may be used to satisfy the risk-based requirement only to the extent ofcore capital.  The OTS is alsoauthorized to require a thrift association to maintain an additional amount oftotal capital to account for concentration of credit risk and the risk ofnon-traditional activities.  AtDecember 31, 2003, 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 are required to be made forthe purpose of calculating total capital. Such exclusions consist of equity investment (as defined by regulation)and that portion of land loans and nonresidential construction loans in excessof an 80% loan-to-value ratio and reciprocal holdings of qualifying capitalinstruments.  The Bank had no suchexclusions from capital and assets at December 31, 2003.

 

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

 

At December 31, 2003, the Bank had total risk-based capital of$21,048,984 or 15.28% of risk-weighted assets. This amount was $10,032,024above the 8% requirement in effect on that date.

 

The OTS has adopted a rule that requires every thrift association withmore than normal interest rate risk to deduct from its total capital, forpurposes of determining compliance with such requirement, an amount equal to50% of its interest rate risk exposure multiplied by the present value of itsassets.  This exposure is a measure ofthe potential decline in the net portfolio value of a thrift association,greater than 2% of the present value of its assets, based upon a hypothetical 200basis point increase or decrease in interest rates (whichever results in agreater decline).  Net portfolio valueis the present value of expected cash flows from assets, liabilities andoff-balance sheet contracts.  The ruleprovides for a two quarter lag between calculating interest rate risk andrecognizing any deduction from capital. Any thrift association with less than $300 million in assets and a totalcapital ratio in excess of 12% is exempt from this requirement unless the OTSdetermines otherwise.

 

The OTS and the FDIC are authorized and, under certain circumstancesrequired, to take certain actions against thrift associations that fail to meettheir capital requirements.  The OTS isgenerally required to take action to restrict the activities of an“undercapitalized association” (generally defined to be one with less thaneither a 4% core capital ratio, a 4% Tier 1 risk-based capital ratio or an 8%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 capital restoration plan, anycompany controlling an undercapitalized association must agree that is willenter into a limited capital maintenance guarantee with respect to theinstitution’s achievement of its capital requirements.

 

Any thrift association that fails to comply with its capital plan or is“significantly undercapitalized” (i.e., Tier 1 risk-based or core capitalratios of less than 3% or a risk-based capital ratio of less than 6%) must bemade subject to one or more of additional specified actions and operatingrestrictions.  These actions andrestrictions include requiring the issuance of additional voting securities; limitationson asset growth; mandated asset reduction; changes in senior management;divestiture, merger or acquisition of the association; restrictions onexecutive compensation; and any other action the OTS deems appropriate.  An association that becomes “criticallyundercapitalized” (i.e., a tangible capital ratio of 2% or less) is subject tofurther mandatory restrictions on its activities in addition to thoseapplicable to significantly undercapitalized associations.  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 to other possibleenforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease-and-desistorder, civil money penalties, the establishment of restrictions on all aspectsof the Bank’s operations or the appointment of a receiver or conservator or aforced merger into another institution.

 

If the OTS determines that an association is in an unsafe or unsoundcondition or is engaged in an unsafe or unsound practice, it is authorized toreclassify a well-capitalized association as an adequately capitalizedassociation and if the association is adequately capitalized, to impose therestrictions applicable to an undercapitalized association.  If the association is undercapitalized, theOTS is authorized to impose the restrictions applicable to a significantlyundercapitalized association.

 

The imposition by the OTS or the FDIC of any of these measures on theBank may have a substantial adverse effect on the Company’s operations andprofitability.  The Company’sshareholders do not have preemptive rights, and therefore, if the Bank isdirected by the OTS or the FDIC to issue additional shares of Common Stock,such issuance may result in the dilution in the percentage of ownership of theCompany.

 

*Limitatio**ns onDividends and Other Capital Distributions*.  OTS regulations impose various restrictions on thriftassociations with respect to their ability to make distributions of capital,which include dividends, stock redemptions or repurchases, cash-out mergers andother transactions charged to the capital account.  OTS regulations also prohibit a thrift association from declaringor paying any dividends or from repurchasing any of its stock if, as a result,the regulatory capital of the association would be reduced below the amountrequired to be maintained for the liquidation account established in connectionwith its mutual to stock conversion.

 

Generally, thrift associations, such as the Bank, that before and afterthe proposed distribution meet their capital requirements, may make capitaldistributions during any calendar year equal to the greater of 100% of netincome for the year-to-date plus 50% of the amount by which the lesser of theassociation’s tangible, core or risk-based capital exceeds its capitalrequirement for such capital component, as measured at the beginning of thecalendar year, or requirement for such capital component, as measured at thebeginning of the calendar year, or 75% of its net income for the most recentfour 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 capital distributions needonly submit written notice to the OTS 30 days prior to such distribution.  Thrift associations that do not, or wouldnot meet their current minimum capital requirements following a proposedcapital distribution, however, must obtain OTS approval prior to making suchdistribution.  The OTS may object to thedistribution during that 30-day period notice based on safety and soundnessconcerns.

 

*Qual**ified ThriftLender Test*.  All thriftassociations, including the Bank, are required to meet a QTL test to avoidcertain restrictions on their operations. This test requires a savings association to have at least 65% of itsportfolio assets (as defined by regulation) in qualified thrift investments ona monthly average for nine out of every 12 months on a rolling basis.  As an alternative, the thrift associationmay maintain 60% of its assets in those assets specified inSection 7701(a)(19) of the Internal Revenue Code.  Under either test, such assets primarilyconsist of residential housing related loans and investments.  At December 31, 2003, the Bank met theQTL test and has always met the test since its inception.

 

Any thrift association that fails to meet the QTL test must convert toa national bank charter, unless it requalifies as a QTL and thereafter remainsa QTL.  Requalification as a QTL isrestricted to one time only.  If anassociation does not requalify and converts to a national bank charter, it mustremain SAIF-insured until the FDIC permits it to transfer to the BIF.  If an association that fails the test hasnot yet requalified and has not converted to a national bank, its newinvestments and activities are limited to those permissible for both a thriftassociation and a national bank, and it is limited to national bank branchingrights 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.

 

*Commun**ityReinvestment 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 andmoderate-income neighborhoods.  The CRAdoes not establish specific lending requirements or programs for financialinstitutions nor does it limit an institution’s discretion to develop the typesof products and services that it believes are best suited to its particularcommunity, consistent with the CRA.  TheCRA requires the OTS, in connection with the examination of the Bank, to assessthe institution’s record of meeting the credit needs of its community and totake such record into account in its evaluation of certain applications, suchas a merger or the establishment of a branch, by the Bank.  An unsatisfactory rating may be used as thebasis for the denial of an application by the OTS.  The most recent CRA examination as of June 28, 1999classified the Bank as satisfactory.

 

The federal banking agencies, including the OTS, revised the CRAregulations and the methodology for determining an institution’s compliancewith the CRA.  Due to the heightenedattention being given to the CRA, the Bank may be required to devote additionalfunds for investment and lending in its local communities.

 

*Transac**tions withAffiliates.*  Generally,transactions between a thrift association or its subsidiaries and itsaffiliates are required to be on terms as favorable to the association astransactions 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 Company andany 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 or controlling personsare also subject to conflict of interest regulations enforced by the OTS.  These conflict of interest regulations andother statutes also impose restrictions on loans to such persons and theirrelated interests.  Among other things,such loans must be made on terms substantially the same as for loans to unaffiliatedindividuals.  At December 31, 2003,loans to directors, executive officers, and major stockholders were $1,449,117.

 

*Federa**l Home LoanBank System*.  The Bank is amember of the FHLB of Dallas, which is one of 12 regional FHLBs that administerthe home financing credit function of thrift associations.  Each FHLB serves as a reserve or centralbank for its members within its assigned region.  It is funded primarily from proceeds derived from the sale ofconsolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policiesand procedures established by the board of directors of the FHLB.  These policies and procedures are subject tothe regulation and oversight of the Federal Housing Finance Board.  All advances from the FHLB are required tobe fully secured by sufficient collateral as determined by the FHLB.  In addition, all long-term advances arerequired to provide funds for residential home financing.

 

Under federal law, the FHLBs are required to provide funds for theresolution of troubled thrift associations and to contribute to low- andmoderately-priced housing programs through direct loans or interest subsidieson advances targeted for community investment and low- and moderate-incomehousing projects. These contributions have affected adversely the level of FHLBdividends paid and could continue to do so in the future.  These contributions could also have anadverse 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 and maintain stock in theFHLB of Dallas.  At December 31,2003, the Bank had $1,167,200 in FHLB stock. The Bank has received dividends on its FHLB stock which have averaged4.24% over the past five calendar years and were 2.24% for calendar year 2003.

 

For the year ended December 31, 2003, stock and cash dividendspaid by the FHLB of Dallas to the Bank totaled $23,600 which constitutes a$6,600 decrease from the amount of dividends received in fiscal year 2002.  The $5,855 dividend received for the quarter endedDecember 2003 reflects an annualized rate of 2.00%.

 

**Federal and State Taxation**

 

*Federal Ta**xation*.  Thrift associations such as the Bank thatmet certain definitional tests relating to the composition of assets and otherconditions prescribed by the Internal Revenue Code of 1986, as amended (the“Code”), had been permitted to establish reserves for bad debts and to makeannual additions thereto which could, within specified formula limits, be takenas a deduction in computing taxable income for federal income taxpurposes.  The amount of the bad debtreserve deduction for “non-qualifying loans” was computed under the experiencemethod.  The amount of the bad debtreserve deduction for “qualifying real property loans” (generally loans securedby improved real estate) is computed under the experience method.

 

In addition to regular income tax, corporations, including thriftinstitutions such as the Bank, generally are subject to a minimum tax.  An alternative minimum tax (“AMT”) isimposed at a minimum tax rate of 20% on alternative minimum taxable income,which is the sum of a corporation’s regular taxable income (with certainadjustments) 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.

 

To the extent earnings appropriated to a thrift institution’s bad debtreserves for “qualifying real property loans” and deducted for federal incometax purposes exceed the allowable amount of such reserves computed under theexperience method and to the extent of the thrift’s supplemental reserves forlosses on loans (“Excess”), such Excess may not, without adverse taxconsequences, be utilized for the payment of cash dividends or otherdistributions to a stockholder (including distributions on redemption, dissolutionor liquidation) or for any other purpose (except to absorb bad debtlosses).  As of December 31, 2003,the Bank had no Excess.  Under presentlaw, should the Bank cease to be a thrift institution, the Company would berequired to recapture the Bank’s bad debt reserves in its Excess.

 

As of December 31, 2003, the Company had a net deferred tax assetof $388,573 and a valuation allowance of $386,586 which was primarily relatedto New Mexico Net Operating Loss (“NOL”) carry forwards.  As of December 31, 2003, the total NewMexico NOL of $11,369,754, may not be carried back and will expire in2005.  Based on the Company’s historicaltaxable transactions, the timing of the reversal of existing temporarydifferences, and the evaluation of tax planning strategies, management believesit is more likely than not that the Company’s future taxable income will besufficient to realize the benefit of the remaining net deferred tax assets atDecember 31, 2003.

 

30

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Section 382 of the Internal Revenue Code provides that theaforementioned tax NOL carryforwards would be subjected to an annual limitationshould there be a change of over 50% in the stock ownership of the Companyduring 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 stockholdersannually to 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 regulationsoccurred through the three-year testing period ended December 31, 2003.  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 tax returns with the Bankand its subsidiary on a fiscal year basis using the accrual method ofaccounting.  The Bank’s federal incometax returns have not been examined by the Internal Revenue Service since1990.  With respect to years examined bythe IRS, either all deficiencies have been satisfied or sufficient reserveshave been established to satisfy asserted deficiencies.  In the opinion of management, anyexamination of still open returns (including returns of subsidiaries andpredecessors of, or entities merged into, the Bank) would not result in adeficiency which could have a material adverse effect on the financialcondition or results of operations of the Company and its consolidatedsubsidiary.

 

*State Taxa**tion*.  As a Delaware holding company, the Companyis exempted from Delaware corporate income tax but is required to file anannual report with and pay an annual fee to the State of Delaware.  The Bank is also subject to an annualfranchise tax imposed by the State of Delaware.

 

The State of New Mexico has a corporate tax which subjects the Bank’sNew Mexico taxable income to tax rates ranging from 4.8% to 7.65%.  New Mexico taxable income is computed byapplying 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 by stateauthorities during the past five years.

 

**Competition**

 

The Bank’s primary service area, which presently represents theprincipal operating activities of the Company, includes the New Mexico countiesof Bernalillo, Cibola, Curry, De Baca, Los Alamos, McKinley, Roosevelt,Sandoval, Santa Fe, Torrance, Valencia, Apache county in Arizona, and the Texascounties of Parmer and Bailey.  The Bankattracts all of its deposits and loans through its branch offices, primarilyfrom the communities in which those branch offices are located; therefore,competition for those deposits is principally from other thrift institutionsand commercial banks located in the same communities as well as brokerage firmsand insurance companies.

 

**Employees**

 

As of December 31, 2003, the Company and the Bank had 80 full-timeand 10 peak-time employees.  Suchemployees are not represented by any collective bargaining group.  Management considers its employee relationsto be good.

 

31

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

 

The following table sets forth information relating to each of theCompany’s current offices.  Net bookvalue and total investment figures are for land, building, furniture andfixtures.

 
| **Location**                |   | **Date acquired** |       | **Net book  value at  December 31, 2003 (1)** |       | **Branch  deposits at  December 31, 2003** |       |
|-----------------------------|--------|-------------------|------------|----------------------------------------------------|------------|-------------------------------------------------|------------|
|                        |   |              |       |                                               |       |                                            |       |
| *Main office:*              |   |              |       |                                               |       |                                            |       |
| 801 Pile Street             |   | 1966              |       | $                                                  | 994,111    |                                            | $          | 60,019,116 |   |
| Clovis, New Mexico          |   |              | ** ** |                                               | ** ** |                                            | ** ** |
|                        |   |              | ** ** |                                               | ** ** |                                            | ** ** |
| *Branch offices:*           |   |              | ** ** |                                               | ** ** |                                            | ** ** |
| Prince and Parkland Streets |   | 1978              |       | 286,897                                            |       | 13,631,059                                      |       |
| Clovis, New Mexico          |   |              | ** ** |                                               | ** ** |                                            | ** ** |
|                        |   |              | ** ** |                                               | ** ** |                                            | ** ** |
| 400 West First Street       |   | 1982              |       | 497,184                                            |       | 23,372,616                                      |       |
| Portales, New Mexico        |   |              | ** ** |                                               | ** ** |                                            | ** ** |
|                        |   |              | ** ** |                                               | ** ** |                                            | ** ** |
| 101 West Hill Street        |   | 1999              |       | 457,218                                            |       | 16,260,358                                      |       |
| Gallup, New Mexico          |   |              | ** ** |                                               | ** ** |                                            | ** ** |
|                        |   |              | ** ** |                                               | ** ** |                                            | ** ** |
| 5210 Eubank N.E.            |   | 2000              |       | 1,189,522                                          |       | 40,960,357                                      |       |
| Albuquerque, New Mexico     |   |              | ** ** |                                               | ** ** |                                            | ** ** |
|                        |   |              | ** ** |                                               | ** ** |                                            | ** ** |
| 3301 Coors Blvd NW          |   | 2002              |       | 49,081                                             | (2)        | 4,533,942                                       |       |
| Albuquerque, New Mexico     |   |              | ** ** |                                               | ** ** |                                            | ** ** |
|                        |   |              |       |                                               |       |                                            |       |
| 7101 Jefferson              |   | 2002              |       | 29,073                                             | (2)        | —                                          | (3)        |
| Albuquerque, New Mexico     |   |              |       |                                               |       |                                            |       |
|                        |   |              | ** ** |                                               | ** ** |                                            | ** ** |
| 2280-B Wyoming NE           |   | 2002              |       | 53,747                                             | (2)        | 4,068,659                                       |       |
| Albuquerque, New Mexico     |   |              |       |                                               |       |                                            |       |
|                             |        |                   |            |                                                    |            |                                                 |            |  |  |

 

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(1)           Thebook value of the Company’s investment in land, premises and equipment, lessaccumulated depreciation, totaled $3,556,833 at December 31, 2003.

 

(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 time parties to variouslegal actions arising in the normal course of business.  Management believes that there is noproceeding threatened or pending against the Company or its subsidiary which, ifdetermined adversely, would have a material adverse effect on the consolidatedfinancial position or results of operations of the Company.

 

32

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**Item4.****                    Submission of Matters to a Vote ofSecurity Holders**

 

Not applicable

 

**PART II**

 

**Item5.****                    Market for Registrant’s Common Equityand Related Stockholder Matters**

 

The Common Stock of the Bank was traded in the over-the-counter marketon the NASDAQ Small Cap Market under the symbol “FSBC” prior toOctober 21, 1996, and the Common Stock of the Company has been traded inthe over-the-counter market on the NASDAQ Small Cap Market under the symbol“AABC” since October 21, 1996. ** **Asof February 26, 2004, the Company had 1,342,768 shares of common stockoutstanding and 278 holders of record.

 

The following table sets forth the high and low sales prices of theCommon Stock of the Company as quoted on the NASDAQ Small Cap Market.

 
|           |   | **Price  range** |   |
|----------------|--------|------------------|--------|
|           |   | **High**         |   | **Low** |   | **Cash  Dividends  per share** |   |
|           |   |             |   |   |   |   |   |
| 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 |   | — |   |
|           |   |             |   |   |   |   |   |
| 2003           |   |             |   |   |   |   |   |
| First Quarter  |   | $                | 9.96   |   | $ | 9.00 |   | — |   |
| Second Quarter |   | $                | 9.95   |   | $ | 8.83 |   | — |   |
| Third Quarter  |   | $                | 16.00  |   | $ | 9.50 |   | — |   |
| Fourth Quarter |   | $                | 14.23  |   | $ | 12.50 |   | — |   |

 

For a foreseeable period of time, the principal source of cash revenuesto the Company will be dividends paid by the Bank.  There are certain statutory and regulatory limitations on thepayment of such dividends (and other capital distributions) including OTSregulatory capital requirements. In some cases, the OTS may prohibit a dividendpayment that meets these requirements on the basis that such a distributionwould be an unsafe or unsound practice. Furthermore, the Bank may not pay a dividend if it will cause theinstitution to become “undercapitalized.”

 

Under the Federal Deposit Insurance Act, an insured bank is prohibitedfrom paying dividends on its capital stock while in default in the payment ofany assessment due to the FDIC except in those cases where the amount of theassessment is in dispute and the insured bank has deposited satisfactorysecurity.  The Bank is not in default inthe payment of any such assessment.

 

The Bank paid dividends to the Company of $817,500 and $652,500 in theyears ended December 31, 2003 and 2002, respectively.

 

33

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**Item6.****                    Management’s Discussion and Analysisor Plan of Operation**

 

***Selected Co******nsolidated Financial Highlights***

 

The Company became the unitary thrift holding company for the Bank as aresult of the consummation of an Agreement and Plan of Reorganization andrelated Plan of Merger on October 21, 1996 (the “Merger”). The Company didnot have any material assets prior to the Merger.  Following the Merger, the Company’s consolidated statement offinancial condition and statement of operations are not materially differentfrom the Bank’s statement of financial condition and statement ofoperations.  The Company is thesuccessor 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 31,2003 and has been derived from and should be read in conjunction with theaudited consolidated financial statements of the Company.  The following summary financial informationis qualified in its entirety by and should be read in conjunction with thedetailed information and consolidated financial statements of the Company,including the notes thereto, which information as of December 31, 2003 and2002 and for each of the years in the three-year period ended December 31,2003, is included in this Form 10-KSB.

 
|                                                          |   | **For the  years ended December 31**        |       |
|---------------------------------------------------------------|--------|--------------------------------------------------|------------|
| **Selected consolidated operating  data:**                    |   | **2003**                                         |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                          |   | **(Dollars In Thousands Except Per Share Data)** | ** ** |
|                                                          |   |                                             |       |   |   |   |   |   |   |   |   |
| Statements of operations data:                                |   |                                             |       |   |   |   |   |   |   |   |   |
| Interest income                                               |   | $                                                | 11,416     |   | $ | 11,909 |   | $ | 12,053 |   | $ | 10,701 |   | $ | 8,887 |   |
| Interest expense                                              |   | 4,378                                            |       | 5,181 |   | 6,280 |   | 5,748 |   | 4,794 |   |
| Net interest income before provision for  loan losses         |   | 7,038                                            |       | 6,728 |   | 5,773 |   | 4,953 |   | 4,093 |   |
| Provision for loan losses                                     |   | 781                                              |       | 786 |   | 449 |   | 199 |   | 324 |   |
| Net interest income after provision for  loan losses          |   | 6,257                                            |       | 5,942 |   | 5,324 |   | 4,754 |   | 3,769 |   |
| Gains on sales of mortgage loans  held-for-sale               |   | 1,923                                            |       | 787 |   | 417 |   | 251 |   | 297 |   |
| Net realized gains on sales of  available-for-sale securities |   | 11                                               |       | 58 |   | — |   | — |   | 739 |   |
| Real estate operations, net                                   |   | (72                                              | )          | 22 |   | (6 | ) | (28 | ) | (35 |   |
| Other income, net                                             |   | 1,800                                            |       | 1,575 |   | 1,249 |   | 1,011 |   | 765 |   |
| Other expenses                                                |   | (8,155                                           | )          | (6,745 | ) | (5,535 | ) | (5,367 | ) | (4,379 |   |
| Income before income taxes                                    |   | 1,764                                            |       | 1,639 |   | 1,449 |   | 621 |   | 1,156 |   |
| Income tax expense (benefit)                                  |   | 480                                              |       | 636 |   | 70 |   | 211 |   | (242 |   |
|                                                          |   |                                             |       |   |   |   |   |   |   |   |   |
| Net income                                                    |   | $                                                | 1,284      |   | $ | 1,003 |   | $ | 1,379 |   | $ | 410 |   | $ | 1,398 |   |
|                                                          |   |                                             |       |   |   |   |   |   |   |   |   |
| Per share data:                                               |   |                                             |       |   |   |   |   |   |   |   |   |
| Earnings per common share-basic                               |   | $                                                | 1.03       |   | $ | .77 |   | $ | 1.05 |   | $ | .33 |   | $ | 1.13 |   |
| Earnings per common share-assuming dilution                   |   | $                                                | .94        |   | $ | .73 |   | $ | 1.02 |   | $ | .32 |   | $ | 1.10 |   |

 

34

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|                                                                              |   | **December 31**       |       |
|-----------------------------------------------------------------------------------|--------|----------------------------|------------|
| **Selected consolidated financial  condition data:**                              |   | **2003**                   |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                                              |   | **(Dollars In Thousands)** | ** ** |
|                                                                              |   |                       |       |   |   |   |   |   |   |   |   |
| Loans receivable, net                                                             |   | $                          | 156,237    |   | $ | 149,856 |   | $ | 141,484 |   | $ | 119,479 |   | $ | 104,177 |   |
| Loans held-for-sale                                                               |   | 1,797                      |       | 6,553 |   | 1,035 |   | 821 |   | 184 |   |
| Securities held-to-maturity                                                       |   | 16,762                     |       | 1,862 |   | 1,611 |   | 6,091 |   | 6,857 |   |
| Securities available-for-sale                                                     |   | 5,815                      |       | 6,665 |   | 10,447 |   | 7,639 |   | 9,120 |   |
| Real estate owned, net                                                            |   | 565                        |       | 648 |   | 606 |   | 154 |   | 188 |   |
| Total assets                                                                      |   | 205,427                    |       | 192,100 |   | 175,558 |   | 154,345 |   | 141,808 |   |
| Deposits                                                                          |   | 162,846                    |       | 159,197 |   | 146,920 |   | 137,276 |   | 122,480 |   |
| Federal Home Loan Bank advances                                                   |   | 17,067                     |       | 8,267 |   | 8,750 |   | 2,750 |   | 7,250 |   |
| Net unrealized appreciation (depreciation)  on available-for-sale securities, net |   | 58                         |       | 90 |   | 72 |   | (45 | ) | (73 | ) |
| Stockholders’ equity                                                         |   | 15,366                     |       | 14,817 |   | 13,502 |   | 11,736 |   | 11,313 |   |
|                                                                                   |        |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Selected financial ratios and other data:**                                     |   | **2003** |       | **2002** |       | **2001** |       | **2000** |       | **1999** |       |
|-----------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                              |   |     |       |     |       |     |       |     |       |     |       |
| **Performance ratios:**                                                           |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |
| Return on assets (ratio of net income to  average total assets)                   |   | 0.65     | %          | 0.55     | %          | 0.84     | %          | 0.28     | %          | 1.06     | %          |
| Interest rate spread information:Average  during period                           |   | 3.54     |       | 3.71     |       | 3.63     |       | 3.53     |       | 3.17     |       |
| End of period                                                                     |   | 3.61     |       | 3.70     |       | 4.05     |       | 3.46     |       | 3.55     |       |
| Net interest margin (1)                                                           |   | 3.65     |       | 3.80     |       | 3.72     |       | 3.61     |       | 3.33     |       |
| Ratio of operating expense to average total  assets                               |   | 4.14     |       | 3.66     |       | 3.36     |       | 3.64     |       | 3.35     |       |
| Return on equity (ratio of net income to  average equity)                         |   | 8.51     |       | 7.08     |       | 10.93    |       | 3.56     |       | 13.17    |       |
|                                                                              |   |     |       |     |       |     |       |     |       |     |       |
| **Quality ratios:**                                                               |   |     |       |     |       |     |       |     |       |     |       |
| Non-performing assets to total assets at  end of year                             |   | 0.79     | %          | 1.18     | %          | 1.15     | %          | 0.28     | %          | 0.22     | %          |
| Allowance for loan losses to non-performing  assets                               |   | 58.63    |       | 36.33    |       | 37.02    |       | 157.03   |       | 276.84   |       |
| Allowance for loan losses to total loans                                          |   | 0.61     |       | 0.54     |       | 0.53     |       | 0.57     |       | 0.83     |       |
|                                                                              |   |     |       |     |       |     |       |     |       |     |       |
| **Capital ratios:**                                                               |   |     |       |     |       |     |       |     |       |     |       |
| Equity to total assets at the end of year                                         |   | 7.48     | %          | 7.71     | %          | 7.69     | %          | 7.60     | %          | 7.98     | %          |
| Average equity to average assets                                                  |   | 7.59     |       | 7.70     |       | 7.65     |       | 7.78     |       | 8.06     |       |
| Ratio of average interest-earning assets to  average interest-bearing liabilities |   | 104.71   |       | 102.82   |       | 102.31   |       | 101.84   |       | 104.25   |       |
|                                                                              |   |     |       |     |       |     |       |     |       |     |       |
| Number of full service facilities                                                 |   | 7        |       | 7        |       | 5        |       | 5        |       | 4        |       |

 

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(1)           Netinterest income divided by average interest earning assets

 

35

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***Gen******eral***

 

The Company is a Delaware corporation which was organized in 1996 forthe purpose of becoming the thrift holding company of the Bank.  The Bank is a federally chartered stocksavings 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 of attracting retaildeposits from the general public and investing those funds in first mortgageloans in owner occupied, single-family residential loans and mortgage-backedsecurities.  The Bank also originatescommercial real estate loans and, to a lesser extent, residential constructionloans. 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 the operations of theBank and other financial institutions include general economic conditions,competition in the local market place and the related monetary and fiscalpolicies of agencies that regulate financial institutions.  More specifically, the cost of funds,primarily consisting of deposits, is influenced by interest rates on competinginvestments and general market rates of interest.  Lending activities are influenced by the demand for real estatefinancing and other types of loans, which in turn is affected by the interestrates at which such loans may be offered and other factors affecting loandemand and funds availability.

 

Liquidityenables the Bank to meet withdrawals of its deposits and the needs of its loancustomers.  The Bank maintains itsliquidity position through maintenance of cash resources and a core depositbase.  A further source is the Bank’sability to borrow funds.  The Bank is amember of the Federal Home Loan Bank (“FHLB”) which provides a source ofborrowings to the Bank for asset and asset/liability matching.  FHLB borrowings were $17.07 and $8.27million at December 31, 2003 and 2002, respectively.

 

TheCompany announced, on January 30, 2004, that the Bank reached a definitiveagreement with Matrix Capital Bank to acquire two branches located in LasCruces, New Mexico.  Deposits of the twobranches to be acquired totaled about $84 million and loans that would betransferred totaled about $25 million

 

Liquidityrisk results from the mismatching of assets and liability cash flows.  Management chooses asset/liabilitystrategies that promote stable earnings and reliable funding.  Interest rate risk and funding positions arekept within limits established by the Board of Directors of the Bank to ensurethat risk taking is not excessive and that liquidity is properly managed.  The Bank keeps a portion of its interest-bearingassets in adjustable-rate products to reduce interest rate sensitivity.  Therefore, if rates increase the Bank canretain its deposits by increasing rates paid on deposits, while limiting theimpact on the Bank’s net interest margin. A concentrated effort is made to retain deposits associated withunidentifiable intangible asset.  Theprimary additional source of funding is provided by FHLB borrowings availableto the Bank, of $69.0 and $59.8 million at December 31, 2003 and 2002,respectively.

 

In order to continue to meet the financial services needs of thecommunities it serves, the Bank intends to continue to grow in a reasonable,prudent manner which may include expansion of the existing branch network.  As a part of this intended growth, the Bankhas increased the portfolio allocation of single-family lending, consumerlending and commercial lending.

 

Growth of the Bank may be financed by either increasing the depositportfolio or from borrowed funds.  Theuse of borrowed funds to purchase short duration, mortgage-backed securities orsingle family mortgage loans may be considered to add to the Bank’s portfolio.

 

36

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The Company’s strategic plan will continue to be reviewed quarterly forprogress by the Board of Directors.  TheBoard will modify the plan as deemed appropriate to reflect the operationalenvironment of the Bank.

 

The Bank originated and refinanced a high volume of mortgage loansduring 2003, 2002, and 2001 of $137.2, $70.7 and $39.3 million, respectively,because of the low interest rate environment on mortgage loans.  The historically low interest rates alsoallowed the Bank to sell $106 million of one-to-four mortgage loans andincrease its loans receivable by $6.4 million during 2003.

 

Prepayment tendencies on loans and mortgage-backed securities may varyfrom historical experience and depositors’ preference for various depositproducts and maturities may also vary. The Bank’s favorable liquidity position allows some flexibility inadjusting to cash flow requirements brought on by interest rate changes.  The Bank’s one-year interest-ratesensitivity gap was a negative 11.53% of total assets at December 31,2003.  A negative gap indicates thereare more interest-bearing liabilities repricing during a stated period thaninterest-earnings assets.

 

At December 31, 2003, the Bank had unrealized gains in itsmortgage-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 are agency securities andare either guaranteed by the full faith and credit of the United StatesGovernment (GNMA) or are insured by a government sponsored enterprise(FHLMC).  None of these securities areconsidered “high risk” as defined by the OTS and none have failed to pass theFFIEC mandatory test for “high risk” securities.  The Bank does not invest in such “high risk” securities.

 

Management of the investment portfolio is not designed to be theprimary source of funds for the Company’s operations.  Rather, it is viewed as a use of funds generated by the Companyto be invested in interest-earning assets to be held-to-maturity oravailable-for-sale.  Cash flowmismatches between sources and uses of funds should not require any of thesecurities to be liquidated.  While cashflows from the securities vary depending on the prepayment speeds associatedwith each particular security, the variance in the prepayment speeds does notimpact the over-all cash flow needs of the Bank since the Bank has the abilityto borrow funds from the FHLB of Dallas. See ***Liquidity and CapitalResources*** in this Form 10-KSB.

 

***Re******gulatory Matters***

 

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 andmoderate-income neighborhoods.  The mostrecent CRA examination as of June 28, 1999 classified the Bank assatisfactory.  

 

37

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***Results******of Operations***

 

The Company’s operating results are impacted by many factors, the mostimportant factor being the interest spread between the yield on loans andinvestments and the cost of funds.  Thefollowing table presents operating results for the Company.  The table presents for the periods indicatedthe total dollar amount of interest income from average interest-earning assetsand the resultant yields, as well as the interest expense on averageinterest-bearing liabilities, expressed both in dollars and rates.  No tax equivalent adjustments were made andall average balances are monthly average balances.  Non-accruing loans have been included in the table as loanscarrying a zero yield.

 
|                                                                     |   | **Years  ended December 31,** |       |
|--------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                     |   | **(Dollars  In Thousands)**        | ** ** |
|                                                                     |   | **2003**                           | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                     |   | **Average  outstanding  balance**  |       | **Interest  earned/  paid** | ** ** | **Yield/  Rate** | ** ** | **Average  outstanding  balance** | ** ** | **Interest  earned/  paid** | ** ** | **Yield/  rate** | ** ** | **Average  outstanding  balance** | ** ** | **Interest  earned/  paid** | ** ** | **Yield/  rate** | ** ** |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                 |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable (1)                                                     |   | $                                  | 162,293    |   | $ | 10,675 |   | 6.58 | % | $ | 152,614 |   | $ | 10,985 |   | 7.20 | % | $ | 133,541 |   | $ | 10,775 |   | 8.07 | % |
| Mortgage-backed securities                                               |   | 5,589                              |       | 253 |   | 4.53 |   | 8,444 |   | 485 |   | 5.73 |   | 10,783 |   | 681 |   | 6.31 |   |
| Investment securities                                                    |   | 4,375                              |       | 188 |   | 4.30 |   | 3,042 |   | 179 |   | 5.88 |   | 3,293 |   | 208 |   | 6.32 |   |
| Other interest-earning assets                                            |   | 20,604                             |       | 300 |   | 1.45 |   | 13,107 |   | 260 |   | 1.97 |   | 7,593 |   | 389 |   | 5.11 |   |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets (1)                                        |   | $                                  | 192,861    |   | $ | 11,416 |   | 5.92 | % | $ | 177,207 |   | $ | 11,909 |   | 6.72 | % | $ | 155,210 |   | $ | 12,053 |   | 7.77 | % |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                            |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                 |   | $                                  | 159,861    |   | $ | 3,298 |   | 2.06 | % | $ | 155,803 |   | $ | 4,239 |   | 2.72 | % | $ | 142,732 |   | $ | 5,734 |   | 4.02 | % |
| Federal Home Loan Bank advances                                          |   | 16,317                             |       | 428 |   | 2.62 |   | 9,455 |   | 329 |   | 3.48 |   | 5,840 |   | 265 |   | 4.54 |   |
| Other borrowings                                                         |   | 8,000                              |       | 653 |   | 8.16 |   | 7,083 |   | 613 |   | 8.66 |   | 3,128 |   | 281 |   | 8.99 |   |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                       |   | $                                  | 184,178    |   | $ | 4,379 |   | 2.38 | % | $ | 172,341 |   | $ | 5,181 |   | 3.01 | % | $ | 151,700 |   | $ | 6,280 |   | 4.14 | % |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                      |   |                               |       | $ | 7,037 |   |   |   |   |   | $ | 6,728 |   |   |   |   |   | $ | 5,773 |   |   |   |
| Net interest rate spread                                                 |   |                               |       |   |   | 3.54 | % |   |   |   |   | 3.71 | % |   |   |   |   | 3.63 | % |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest-earning assets                                              |   | $                                  | 8,683      |   |   |   |   |   | $ | 4,866 |   |   |   |   |   | $ | 3,510 |   |   |   |   |   |
| Net yieldon average interest-earning assets                              |   |                               |       |   |   | 3.65 | % |   |   |   |   | 3.80 | % |   |   |   |   | 3.72 | % |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average interest-earning assets to average  interest-bearing liabilities |   |                               |       | 104.71 | % |   |   |   |   | 102.82 | % |   |   |   |   | 102.31 | % |   |   |

 

----

(1)           Calculatednet of loans in process

 

38

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The following table presents the dollar amount of changes in interestincome and interest expense for major components of interest-earning assets andinterest-bearing liabilities and distinguishes between the increase related tohigher or lower outstanding balances and the volatility of interest rates.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to (i) changes in volume (i.e., changes in volume multiplied byold rate) and (ii) changes in rate (i.e., changes in rate multiplied by oldvolume).  For purposes of this table,changes attributable to both rate and volume, which cannot be segregated, havebeen presented separately.

 
|                               |   | **Years  ended December 31**             |       |
|------------------------------------|--------|-----------------------------------------------|------------|
|                               |   | **2003 vs  2002  Increase (decrease) due to** |       | **2002 vs  2001  Increase (decrease) due to** |   |
|                               |   | **Volume**                                    |       | **Rate** |   | **Rate/  Volume** |   | **Total** |   | **Volume** |   | **Rate** |   | **Rate/  volume** |   | **Total** |   |
|                               |   | **(Dollars In Thousands)**                    | ** ** |
| Interest-earning assets:           |   |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loan portfolio                     |   | $                                             | 697        |   | $ | (946 | ) | $ | (61 | ) | $ | (310 | ) | $ | 1,539 |   | $ | (1,162 | ) | $ | (167 | ) | $ | 210 |   |
| Mortgage-backed securities         |   | (164                                          | )          | (101 | ) | 33 |   | (232 | ) | (148 | ) | (63 | ) | 15 |   | (196 | ) |
| Investments                        |   | 78                                            |       | (48 | ) | (21 | ) | 9 |   | (16 | ) | (14 | ) | 1 |   | (29 | ) |
| Other interest earning assets      |   | 148                                           |       | (68 | ) | (40 | ) | 40 |   | 282 |   | (238 | ) | (173 | ) | (129 | ) |
|                               |   |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets      |   | $                                             | 759        |   | $ | (1,163 | ) | $ | (89 | ) | $ | (493 | ) | $ | 1,657 |   | $ | (1,477 | ) | $ | (324 | ) | $ | (144 | ) |
|                               |   |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:      |   |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                           |   | $                                             | 110        |   | $ | (1,028 | ) | $ | (23 | ) | $ | (941 | ) | $ | 525 |   | $ | (1,856 | ) | $ | (164 | ) | $ | (1,495 | ) |
| Federal Home Loan Bank advances    |   | 239                                           |       | (81 | ) | (59 | ) | 99 |   | 164 |   | (62 | ) | (38 | ) | 64 |   |
| Other borrowings                   |   | 79                                            |       | (35 | ) | (4 | ) | 40 |   | 356 |   | (10 | ) | (14 | ) | 332 |   |
|                               |   |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities |   | $                                             | 428        |   | $ | (1,144 | ) | $ | (86 | ) | $ | (802 | ) | $ | 1,045 |   | $ | (1,928 | ) | $ | (216 | ) | $ | (1,099 | ) |
|                               |   |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in net interest income      |   | $                                             | 331        |   | $ | (19 | ) | $ | (3 | ) | $ | 309 |   | $ | 612 |   | $ | 451 |   | $ | (108 | ) | $ | 955 |   |

 

*Comparison o**f YearsEnded December 31, 2003 and 2002*

 

Net income for the year ended December 31, 2003 was $1,284,000, or$1.03 per basic share compared to $1,003,000, or $0.77 for the year endedDecember 31, 2002.  The increasewas $281,000, or 28.0% for the year.

 

*Net Interest Income*.  Net interest income before provision for loan losses increased by4.6% to $7,038,000 in 2003, compared to $6,728,000 in 2002.  The increase in 2003 was primarily due to adecrease in total interest expense of $802,000, which was due to a $941,000decrease in interest expense on deposits. The decrease in interest expense on deposits in 2003 occurred while depositsincreased by $3.6 million, and was primarily due to lower rates paid ondeposits.

 

*Provision for Loan Losses*.  The level of the allowance for loan lossesis based on such factors as the amount of non-performing assets, historicalloss experience, regulatory policies, general economic conditions, theestimated fair value of the underlying collateral and other factors which mayaffect the collectibility of the loans. During 2003, the provision for loan losses decreased to $781,000 from$786,000 in 2002, primarily due to a slight decrease in net charge-offs during2003 and the general economic conditions at December 31, 2003.

 

39

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*Noninterest Income*.  Noninterest income was $3,734,000 in 2003 compared to $2,420,000in 2002.  During 2003, gains on sales ofloans held-for-sale increased $1,136,000 and loan servicing and other feesincreased $166,000.  The increases ingains on sales of loans held-for-sale and loan servicing and other fees wereprimarily a result of the low interest rates during 2003, which resulted inhigh levels of refinancing for one-to-four mortgage loans in the year.

 

*Noninterest Expense*.  Noninterest expense was $8,227,000 in 2003 compared to $6,723,000in 2002.  The increase was primarily dueto a $1,053,000 increase in salaries and employee benefits and $337,000increase in professional fees.  Theincrease in salaries and employee benefits was primarily due to the increase insales incentives based on 2003 loan production, while the increase inprofessional fees was primarily due to a $169,498 charge for fees associatedwith the proposed merger with First National Bank Holding Company, which wassubsequently terminated.

 

*Provision for Income Taxes*.  During 2003, the Company reversed certaindeferred tax asset allowances previously recorded in accordance with SFAS109.  These allowances related to stateincome tax net operating loss carryforwards. The effect of this change in estimates was an increase in net income ofapproximately $513,545 (tax benefit). Therefore, the net income tax expense of $480,000 in 2003 was a decreaseof $156,000 from the $636,000 expense in 2002.

 

*Compariso**n of YearsEnded December 31, 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 the year endedDecember 31, 2001.  The decreasewas $376,000, or 27.27% for the year.

 

*Net Interest Income*.  Net interest income before provision for loan losses increased by16.55% to $6,728,000 in 2002, compared to $5,773,000 in 2001.  The increase in 2002 was primarily due to adecrease in total interest expense of $1,099,000, which was due to a $1,494,000decrease in interest expense on deposits. The decrease in interest expense on deposits in 2002 occurred whiledeposits increased by $12.3 million, and was primarily due to lower rates paidon deposits.

 

*Provision for Loan Losses*.  The level of the allowance for loan lossesis based on such factors as the amount of non-performing assets, historicalloss experience, regulatory policies, general economic conditions, theestimated fair value of the underlying collateral and other factors which mayaffect the collectibility of the loans. During 2002, the provision for loan losses increased to $786,000 from$449,000 in 2001, primarily due to the increase in loans receivable and anincrease in loss experience in dealer automobile and commercial loans during2002.

 

*Noninterest Income*.  Noninterest income was $2,420,000 in 2002 compared to $1,666,000in 2001.  During 2002, gains on sales ofloans increased $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.

 

*Noninterest Expense*.  Noninterest expense was $6,723,000 in 2002 compared to $5,541,000in 2001.  The increase was primarily dueto a $716,000 increase in salaries and employee benefits and $337,000 increasein other expense.

 

*Provision for Income Taxes*.  During 2001, the Company reversed certaindeferred tax asset allowances previously recorded in accordance with SFAS109.  These allowances related to stateincome tax net operating loss carryforwards and alternative minimum tax (AMT)credit carryforwards.  The effect ofthis change in estimates was an increase in net income of approximately$420,000 (tax benefit).  Therefore, thenet income tax expense of $636,000 in 2002 was an increase of $566,000 from the$69,000 expense in 2001.

 

40

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## **Asset/Liab**ility Management and Interest Rate Sensitivity

## ** **

The Bank attempts to maximize net interest income by achieving apositive interest rate spread that can be sustained during fluctuations inprevailing interest rates.  Managementmonitors the mix of earning assets on a continuous basis in order to react tofluctuating interest rate environments.

 

Risk-based capital guidelines and the corresponding asset riskweighting have resulted in an incentive to invest in mortgage-backed and U.S.agency securities, particularly those issued by government sponsored entitiessuch as FNMA, GNMA, and FHLMC.  Inaddition, the favorable risk weighting assigned to residential loans providedthe incentive to invest in these assets. This asset mix has always been the basis on which the Bank has focused.

 

TheBank assumes a high level of interest rate risk as a result of its policy tooriginate fixed-rate single family home loans. These loans generally have longer terms than the short termcharacteristics and liabilities of customer accounts and borrowed money.  Since 2001, national interest rates havedecreased on one-to-four mortgage loans which increased refinancing andoriginations of mortgage loans.  During2003 the general policy of the Bank was to sell one-to-four mortgage loans thatthe Bank originated or refinanced during the year with maturities over 10years, but include loans with maturities of 10 years or less into loansreceivable, to shorten the duration of the loan portfolio.

 

Interest rate sensitivity is the rate at which the Bank’s assets andliabilities are subject to repricing at future time periods.  Management seeks to effectively manageinterest rate sensitivity to insure that net interest income is maximized whilethe impact of change on market interest rates is minimized.  It is the objective of the Bank to reducethe sensitivity of its earnings to fluctuating interest rates by diversifyingthe sources of funds, improving its interest rate spread, and improving the ratioof earning assets to interest bearing liabilities.  Also, the Bank needs to maintain a match of maturities andinterest rate sensitivity of its assets and liabilities.

 

The differences between the volume of assets and liabilities in theBank’s current portfolio, which are subject to repricing in future timeperiods, are known as interest rate sensitivity gaps.  Certain estimates and assumptions are included in the data in thetable below which sets forth the interest rate sensitivity analysis at December 31,2003.

 

41

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The following table sets forth the assumed repricing and maturityperiods of the Bank’s interest-earning assets and interest-bearing liabilitiesat December 31, 2003 and the interest rate sensitivity gap percentages atthe dates indicated.  The interest ratesensitivity gap is defined as the amount by which assets repricing within therespective periods exceed liabilities repricing within such periods.  The effect of these assumptions is toquantify the dollar amount of items that are interest-rate sensitive and can berepriced within each of the periods specified. Such repricing can occur in oneof three ways:  (1) the rate of interestto be paid on an asset or liability may adjust periodically on the basis of anindex; (2) an asset or liability such as a mortgage loan may amortize,permitting reinvestment of cash flows at the then-prevailing interest rates; or(3) an asset or liability may mature, at which time the proceeds can bereinvested 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)                                                        |   | $                                 | 12,964  |   | $ | 1,412 |   | $ | 981 |   | $ | — |   | $ | — |   | $ | — |   | $ | 15,357 |   |
| Fixed-rate (2)                                                             |   | 22,045                            |    | 29,392 |   | 12,877 |   | 8,051 |   | 912 |   | — |   | 73,277 |   |
| Construction(6)                                                            |   | 849                               |    | — |   | — |   | — |   | — |   | — |   | 849 |   |
| Non-residential adjustable (2)                                             |   | 5,936                             |    | 22,731 |   | 1,173 |   | — |   | — |   | — |   | 29,840 |   |
| Non-residential fixed                                                      |   | 659                               |    | 3,967 |   | 1,261 |   | 4,010 |   | 65 |   | — |   | 9,962 |   |
| Non-Mortgages:                                                             |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer and Commercial adjustable                                         |   | 4,415                             |    | 291 |   | — |   | — |   | — |   | — |   | 4,706 |   |
| Consumer and Commercial fixed (2)(6)                                       |   | 7,336                             |    | 10,181 |   | 3,551 |   | 2,467 |   | 1,198 |   | — |   | 24,733 |   |
| Investments:                                                               |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities (3)                                                  |   | 5,040                             |    | 7,235 |   | 7,513 |   | 1,000 |   | — |   | 200 |   | 20,988 |   |
| Mortgage-backed (1)(2)                                                     |   | 2,980                             |    | 4,278 |   | 116 |   | 84 |   | — |   | — |   | 7,471 |   |
| Funds sold (3)                                                             |   | 4,858                             |    | — |   | — |   | — |   | — |   | — |   | 4,858 |   |
|                                                                       |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                                                      |   | $                                 | 67,082  |   | $ | 79,487 |   | $ | 27,472 |   | $ | 15,612 |   | $ | 2,188 |   | $ | 200 |   | $ | 192,041 |   |
|                                                                       |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Rate Sensitive Liabilities:                                          |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                  |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit (3)                                                |   | $                                 | 68,859  |   | $ | 15,413 |   | $ | 6,924 |   | $ | — |   | $ | — |   | $ | — |   | $ | 91,196 |   |
| IRAs                                                                       |   | 6,911                             |    | 2,075 |   | 3,219 |   | — |   | — |   | — |   | 12,205 |   |
| Money market (4)                                                           |   | 6,306                             |    | 4,643 |   | 1,928 |   | 13,403 |   | — |   | — |   | 26,280 |   |
| NOW accounts (4)                                                           |   | 1,647                             |    | 2,332 |   | 1,646 |   | 8,096 |   | — |   | — |   | 13,721 |   |
| Savings accounts (4)                                                       |   | 1,958                             |    | 1,643 |   | 720 |   | 2,430 |   | — |   | — |   | 6,751 |   |
| Advances                                                                   |   | 4,903                             |    | 10,516 |   | 1,648 |   | — |   | — |   | — |   | 17,067 |   |
|                                                                       |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                                                      |   | $                                 | 90,584  |   | $ | 36,622 |   | $ | 16,085 |   | $ | 23,929 |   | $ | — |   | $ | — |   | $ | 167,220 |   |
|                                                                       |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2003                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative interest rate sensitivity gap  (5)                              |   | $                                 | (23,502 | ) | $ | 19,363 |   | $ | 30,750 |   | $ | 22,433 |   | $ | 24,621 |   | $ | 24,821 |   |   |   |
| Cumulative interest rate sensitivity gap  (5) as a percent of total assets |   | (11.53                            | %)      | 9.50 | % | 15.09 | % | 11.01 | % | 12.08 | % | 12.18 | % |   |   |
| December 31, 2002                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 | % |   |   |

 

----

*(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.*

 

42

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As prepayment activity changes, however, the resulting gap is expectedto be affected.  An increase inprepayment speeds would be expected to move the gap toward a matched orpositive position.  The opposite wouldbe expected to occur if prepayment speeds decrease.  Prepayment speeds are influenced by fluctuation in interest ratesand may not produce the same results as reflected in the previous table.  Also, certain assets and liabilities mayhave similar maturities or repricing periods but could react differently tochanges in interest rates.  Assets whichhave adjustable-rate features may have a limitation on the periodic interestrate adjustments and could result in a rate that is still below existing marketrates.  This same feature may also limitthe downward adjustment in a declining rate environment.

 

During 2003 the general policy of the Bank was to sell one-to-fourmortgage loans that the Bank originated or refinanced during the year withmaturities over 10 years, but include loans with maturities of 10 years or lessinto loans receivable, to shorten the duration of the loan portfolio.  During 2003 the Bank lengthened the durationof its interest bearing liabilities.

 

The Asset and Liability Committee (“ALCO”) of the Bank is made ofmanagement 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, 2003, is an analysis of theBank’s interest rate risk as measured by changes in net present value forinstantaneous and sustained parallel shifts in the yield curve, in 50 or 100basis point increments, up and down 300 basis points.  As illustrated in the table, the Bank’s NPV is sensitive to bothrising rates and declining rates.  Thisoccurs principally because, as rates rise, the market value of fixed-rate loansdeclines due to both the rate increase and slowing prepayments (and the NPVfocuses on the Bank’s entire portfolio, not just assets that are subject toadjustment or maturity within one year). When rates decline, the Bank does not experience a significant rise inmarket value for these loans because borrowers repay at relatively high rates.

 

| **Change in  interest rate  (basis points)** |   | **Net  Present Value  At December 31, 2003** |   |
|----------------------------------------------|--------|---------------------------------------------------|--------|
|                                         |   | **$Change**                                       |   | **% Change** |   |
|                                         |   | **(000’s)**                                  |   |
|                                         |   | **(Dollars  in Thousands)**                       |   |
| +300                                         |   | $                                                 | (6,847 | ) | (21 | ) |
| +200                                         |   | (3,922                                            | )      | (12 | %) |
| +100                                         |   | (1,266                                            | )      | (4 | ) |
| +50                                          |   | (344                                              | )      | (1 | ) |
| 0                                            |   | —                                            |   | — |   |
| -50                                          |   | (211                                              | )      | (1 | ) |
| -100                                         |   | (598                                              | )      | (2 | ) |
| -200                                         |   | (1,110                                            | )      | (3 | ) |
| -300                                         |   | (1,171                                            | )      | (4 | ) |
|                                              |        |                                                   |        |  |  |  |

 

43

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Management, ALCO, and the board of directors of the Bank review thesemeasurements periodically.  In additionto monitoring selected measures on NPV, management also monitors effects on netinterest income resulting from increases or decreases in rates. This measure isused in conjunction with NPV measures to identify excessive interest rate risk.

 

Certain shortcomings are inherent in the method of analysis presentedin the foregoing table.  For example,although certain assets and liabilities may have similar maturities or periodsto repricing, they may react in different degrees to changes in market interestrates.  Also, the interest rates oncertain types of assets and liabilities may fluctuate in advance of changes inmarket rates.  Additionally, certainassets, such as adjustable rate mortgage loans, have features which restrictchanges in interest rates on a short-term basis and over the life of theasset.  Further, in the event of achange in interest rates, prepayment and early withdrawal levels would likelydeviate significantly from those assumed in calculating the table.  Finally, the ability of many borrowers toservice their debt may decrease in the event of an interest rate increase.

 

In addition, the previous table does not necessarily indicate theimpact of general interest rate movements on the Bank’s net interest incomebecause the repricing of certain categories of assets and liabilities issubject to competitive and other pressures beyond the Bank’s control.  As a result, certain assets and liabilitiesindicated as maturing or otherwise repricing within a stated period may in factmature or reprice at different times and at different volumes.

 

**Liquidity****and CapitalResources**

 

The Company’s current liquidity and capital resources are dependent onits ability to borrow funds from the Bank and other sources as well as receivedividends from the Bank.  The Bank’sprimary sources of funds are deposits, sales of mortgage loans, principal andinterest payments on loans and mortgage-backed securities, borrowings, andfunds provided by operations.  Whilescheduled loan and mortgage-backed securities principal repayments are arelatively 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, 2003, Federal Home Loan Bankadvances increased by $8.8 million and deposits increased $3.6 million.  The primary additional source of funding is provided by FHLB borrowingsavailable to the Bank, of $69.0 and $59.8 million at December 31, 2003 and2002, respectively.  Stockoptions were exercised with proceeds to the Company of $17,017 during2003.  The increase in funds during 2003was used to increase securities held-to-maturity by $14.9 million and loansreceivable by $6.4 million, but loans held-for-sale decreased by $4.7 million,primarily due to increased sales in 2003.

 

The Bank’s capital for regulatory purposes at December 31, 2003was $20,224,064 or 9.99% of total regulatory assets.  Regulations require savings institutions to have a minimumregulatory tangible capital ratio equal to 1.5% of adjustable tangible assets,a minimum 3% core capital ratio, and a minimum 8% risk-based capitalratio.  At December 31, 2003 and2002, the Bank was in compliance with all applicable capital standards.

 

The OTS has adopted a rule that requires every thrift association withmore than normal interest rate risk to deduct from its total capital, forpurposes of determining compliance with such requirement, an amount equal to50% of its interest rate risk exposure multiplied by the present value of itsassets.  This exposure is a measure ofthe potential decline in the net portfolio value of a thrift association,greater than 2% of the present value of its assets, based upon a hypothetical200 basis point increase or decrease in interest rates (whichever results in agreater decline).  Net portfolio valueis the present value of expected cash flows from assets, liabilities andoff-balance sheet contracts.  The ruleprovides for a two quarter lag between calculating interest rate risk andrecognizing any deduction from capital. Any thrift association with less than $300 million in assets and a totalcapital ratio in excess of 12% is exempt from this requirement unless the OTSdetermines otherwise.

 

44

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The table below presents the Bank’s capital position atDecember 31, 2003 relative to the existing regulatory requirements:

 
|                                                 |   | **Amount**                   |   | **Percent of    assets (1)** |   |
|------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                                 |   | **(Dollars  In  Thousands)** |   |                         |   |
| Tangible  capital                                    |   | $                            | 20,224 |                         | 9.99   | % |
| Tangible capital requirement                         |   | 3,035                        |   | 1.50                         |   |
|                                                 |   |                         |   |                         |   |
| Excess tangible capital                              |   | $                            | 17,189 |                         | 8.49   | % |
|                                                 |   |                         |   |                         |   |
| Core capital                                         |   | $                            | 20,224 |                         | 9.99   | % |
| Core capital requirement                             |   | 8,094                        |   | 4.00                         |   |
|                                                 |   |                         |   |                         |   |
| Excess core capital                                  |   | $                            | 12,130 |                         | 5.99   | % |
|                                                 |   |                         |   |                         |   |
| Total capital (i.e., core and supplemental  capital) |   | $                            | 21,049 |                         | 15.28  | % |
| Risk-based capital requirement                       |   | 11,017                       |   | 8.00                         |   |
|                                                 |   |                         |   |                         |   |
| Excess total capital                                 |   | $                            | 10,032 |                         | 7.28   | % |

 

----

(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 differentiates thriftinstitutions primarily by their capital levels and prescribes the amount ofcapital distributions that can be made without prior OTS approval.

 

The Bank has met its liquidity requirements with funds generated fromoperations, proceeds from repayment or sale of loans and investment securities,short-term borrowings, and the purchase of deposits during 2003.  If alternative funding is needed, the Bankcan generate additional funds from several other sources.  Currently, the FHLB system functions as asource of credit for the Bank.

 

## **Trust Pre**ferred Securities

## ** **

On June 27, 2002, the Company issued $4 million in trust preferredsecurities through a private placement of Floating Rate Trust PreferredSecurities of Access Anytime Capital Trust II with a liquidation value 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, 2003, the interest ratewas 4.80%.  The trust preferredsecurities may be redeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, the Company issued $4 million of 10.25% FixedRate Capital Trust Pass-through Securities of Access Anytime Capital Trust Iwith a liquidation value of $1,000 per share to mature 30 years from the dateof issuance.  The trust preferredsecurities may be redeemed by the Company at price of 107.6875 on July 25,2006, 106.15 on July 25, 2007, 104.6125 on July 25, 2008, 103.075 onJuly 25, 2009, 101.5375 on July 25, 2010 and may be redeemed at paron July 25, 2011 or after.  TheCompany invested approximately $2.9 million of the net proceeds in the Bank toincrease its capital levels.

 

**Asset Qua****lity**

 

*Allowance**for loanlosses.*  The allowance for loanlosses is established through a provision for loan losses based on management’squarterly asset classification review and evaluation of the risk inherent inits loan portfolio and changes in the nature and volume of its loan activity.  Such evaluation, which includes a review of

 

45

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all loans of which full collectibility may not be reasonably assured,considers among other matters, the estimated fair value of the underlyingcollateral, economic conditions, cash flow analysis, historical loan lossexperience, discussions held with delinquent borrowers and other factors thatwarrant recognition in providing for allowance for loan losses.

 

During 2003, net loans increased approximately $6.4 million or 4.26% fromDecember 31, 2002 and the allowance for loan losses increased$125,000.  Management feels that theDecember 31, 2003 allowances are adequate to address probable losses inthe loan portfolio.

 

The following presents an analysis of the allowance for loan losses foryears ended December 31, 2003, 2002, and 2001.

 
|                                                                  |   | **Year ended  December 31** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                  |   | **2003**                         |   | **2002** |   | **2001** |   |
|                                                                  |   | **(Dollars  In Thousands)**      |   |
| **Mortgage Loans:**                                                   |   |                             |   |   |   |   |   |
| Balance at beginning of year                                          |   | $                                | 210    |   | $ | 451 |   | $ | 386 |   |
| Charged off:                                                          |   |                             |   |   |   |   |   |
| Single family                                                         |   | (16                              | )      | (53 | ) | (24 | ) |
| Commercial real estate                                                |   | (206                             | )      | — |   | — |   |
| Recoveries                                                            |   | —                           |   | — |   | — |   |
| Net loans charged-off                                                 |   | (222                             | )      | (53 | ) | (24 | ) |
| Provision for loan losses charged to  operations                      |   | 66                               |   | 162 |   | 89 |   |
| Transfers                                                             |   | 143                              |   | (350 | ) | — |   |
|                                                                  |   |                             |   |   |   |   |   |
| **Balance at end of year**                                            |   | $                                | 197    |   | $ | 210 |   | $ | 451 |   |
|                                                                  |   |                             |   |   |   |   |   |
| **Consumer and Other:**                                               |   |                             |   |   |   |   |   |
| Balance at beginning of year                                          |   | $                                | 615    |   | $ | 294 |   | $ | 295 |   |
| Charged-off:                                                          |   |                             |   |   |   |   |   |
| Commercial                                                            |   | (83                              | )      | (319 | ) | (147 | ) |
| Automobile                                                            |   | (312                             | )      | (297 | ) | (98 | ) |
| Credit card                                                           |   | (45                              | )      | (38 | ) | (45 | ) |
| Other consumer                                                        |   | (82                              | )      | (40 | ) | (128 | ) |
| Recoveries:                                                           |   |                             |   |   |   |   |   |
| Commercial                                                            |   | 20                               |   | — |   | 35 |   |
| Automobile                                                            |   | 53                               |   | 40 |   | 16 |   |
| Credit card                                                           |   | 3                                |   | 1 |   | — |   |
| Other consumer                                                        |   | 12                               |   | — |   | 6 |   |
| Net loans charged-off                                                 |   | (434                             | )      | (653 | ) | (361 | ) |
| Provision for loan losses charged to  operations                      |   | 715                              |   | 624 |   | 360 |   |
| Transfers                                                             |   | (143                             | )      | 350 |   | — |   |
|                                                                  |   |                             |   |   |   |   |   |
| **Balance at end of year**                                            |   | $                                | 753    |   | $ | 615 |   | $ | 294 |   |
|                                                                  |   |                             |   |   |   |   |   |
| **Total Allowance for Loan Losses:**                                  |   |                             |   |   |   |   |   |
| Balance at beginning of year                                          |   | $                                | 825    |   | $ | 745 |   | $ | 681 |   |
|                                                                  |   |                             |   |   |   |   |   |
| Loans charged-off                                                     |   | (744                             | )      | (747 | ) | (442 | ) |
| Recoveries                                                            |   | 88                               |   | 41 |   | 57 |   |
| Net loans charged-off                                                 |   | (656                             | )      | (706 | ) | (385 | ) |
| Provision for loan losses charged to  operations                      |   | 781                              |   | 786 |   | 449 |   |
|                                                                  |   |                             |   |   |   |   |   |
| **Balance at end of year**                                            |   | $                                | 950    |   | $ | 825 |   | $ | 745 |   |
|                                                                  |   |                             |   |   |   |   |   |
| Allowance for loan losses as a percentage  of total loans outstanding |   | 0.61                             | %      | 0.54 | % | 0.53 | % |

 

46

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*Non-perfo**rming assets*.  Total non-performing assets decreased byapproximately $652,000 during 2003.  Thenon-performing assets to total assets ratio is one indicator of the exposure tocredit risk.  Non-performing assets ofthe Bank consist of non-accruing loans, troubled debt restructurings, and realestate which was acquired as a result of foreclosure. The composition of theBank’s portfolio of non-performing assets is shown in the following table:

 
|                                            |   | **2003**                    |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|-----------------------------|--------|----------|--------|----------|--------|
|                                            |   | **(Dollars  In Thousands)** |   |
|                                            |   |                        |   |     |   |     |   |
| Non-accruing loans*                             |   | $                           | 1,054  |     | $      | 1,623    |   | $ | 1,407 |   |
| Past due 90 days or more and still accruing     |   | —                      |   | —   |   | —   |   |
| Troubled debt restructured                      |   | —                      |   | —   |   | —   |   |
| Other real estate                               |   | 565                         |   | 648      |   | 605      |   |
|                                            |   |                        |   |     |   |     |   |
| Total non-performing assets                     |   | $                           | 1,619  |     | $      | 2,271    |   | $ | 2,012 |   |
|                                            |   |                        |   |     |   |     |   |
| Ratio of non-performing assets to total  assets |   | 0.79                        | %      | 1.18     | %      | 1.15     | %      |

 

----

*                 Primarily loans which are past due for90 days or more

 

Interest lost on non-performing assets amounted to $39,388 in 2003compared to $109,517 in 2002.

 

*Investmen**t securities*- The Bank’s available-for-sale securities portfolio has a $57,872 netunrealized gain at December 31, 2003, while a $90,197 net unrealized gainwas recorded at December 31, 2002. The Bank’s held-to-maturity securities portfolio has an unrealized gainof $67,206 and $17,424 at December 31, 2003 and 2002, respectively.  The Bank’s available-for-sale andheld-to-maturity portfolios did not experience significant fair market valuefluctuations during the year ended December 31, 2003.

 

**Off-Balance Shee****tArrangements**

 

The Bank may be a party to financial instruments with off-statement offinancial condition risk in the normal course of business to meet the financingneeds of its customers and to reduce its own exposure to fluctuation ininterest rates.  These financialinstruments include commitments to extend credit (including credit cards),standby letters of credit, and financial guarantees.  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.

 

47

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The following table details the amounts and expected maturities ofsignificant commitments as of December 31, 2003.

 
|                               |   | **Payments  Due In**        |   |                     |   |
|------------------------------------|--------|-----------------------------|--------|--------------------------|--------|
|                               |   | **One  Year or  Less**      |   | **One to  Three  Years** |   | **Three to  Five  Years** |   | **Over  Five  Years** |   | **Total** |   |
|                               |   | **(Dollars  in Thousands)** |   |
| Commitments to extend credit:      |   |                        |   |                     |   |   |   |   |   |   |   |
| Residential real estate loans      |   | $                           | 3,599  |                     | $      | — |   | $ | — |   | $ | — |   | $ | 3,599 |   |
| Lines of credit                    |   | 12,974                      |   | —                   |   | — |   | — |   | 12,974 |   |
| Credit cards                       |   | 2,281                       |   | —                   |   | — |   | — |   | 2,281 |   |
| Letters of credit                  |   | 80                          |   | —                   |   | — |   | — |   | 80 |   |
| Commitments to sell mortgage loans |   | 5,395                       |   | —                   |   | — |   | — |   | 5,395 |   |
|                                    |        |                             |        |                          |        |  |  |  |  |  |  |  |  |  |  |  |

 

Commitments to extend credit are agreements to lend to a customer aslong 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 cash requirements.  The Bank evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank uponextension of credit, is based on management’s credit evaluation of thecustomers.

 

Standby letters of credit and financial guarantees written areconditional commitments issued by the Bank to guarantee the performance of acustomer to a third party.  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.

 

At December 31, 2003, the Bank had no open interest rate swaps,futures, options, or forward contracts.

 

**Impact of Inflatio****n andChanging Prices**

 

The consolidated financial statements and related data have beenprepared in accordance with accounting principles generally accepted in theUnited States of America which require measurement of financial position andoperating results in terms of historical dollars, without considering changesin relative purchasing power over time due to inflation.

 

Virtually all of the assets and liabilities of a financial institutionare monetary in nature.  As a result,interest rates generally have a more significant impact on the Company’s andthe Bank’s performance than does the effect of inflation.

 

48

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# **Critical Accounti**ngPolicies

# ** **

*Allowan**ce for LoanLosses*.  The level ofallowance for loan losses is based on such factors as the amount ofnon-performing assets, historical loss experience, regulatory policies, generaleconomic conditions, the estimated fair value of the underlying collateral andother factors which may affect the collectibility of the loans.  During 2003, the provision for loan lossesdecreased to $781,000 from $786,000 in 2002, primarily due to a slight decreasein net charge-offs during 2003 and the general economic conditions atDecember 31, 2003.

 

Management of the Bank reviewed its Loan Loss Reserve Policy during2001 for compliance with SEC Staff Accounting Bulletin (SAB) 102.  In determining the Loan Loss Reserve andAllowances for Loan Loss Reserve the Bank uses the OTS and SEC guidelines,specifically the guidance outlined in OTS CEO Memo 142, SEC SAB 102, FAS 5, andFAS 114.

 

Based on recommendations by management of the Bank, the Bank’s Board ofDirectors is responsible for the accuracy and adequacy of the Loan LossCalculation and reviews and approves the Calculated Reserve and Provisions.  The Board delegates the responsibility to itsAudit Committee to oversee the process of how the Loan Loss Reserve iscalculated and the periodic validation of the calculation process.

 

The loan portfolio is segmented and historical loss percentages will beapplied to the identified segments of the portfolio in conjunction with FAS5.  In addition, certain loans will beindividually analyzed and a loss reserve amount calculated for each one ofthese loans, in conjunction with FAS 114.

 

Management of the Bank makes various assumptions and judgments aboutthe collectibility of our loan portfolio and provides an allowance forpotential losses based on a number of factors. If the assumptions are wrong, our allowance for loan losses may not besufficient to cover loan losses.  Theallowances may be increased in the future, which would decrease our net income.

 

Theallowance for loan losses is established by management of the Bank toincorporate a systematic methodology, which is applied quarterly, to determinethe elements of the allowance for loan losses and the resultant provisions forloan losses it considers 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

 

Specificreserves are provided for individual loans where ultimate collection isconsidered questionable by management after reviewing the current status ofloans that are contractually past due and considering the net realizable valueof the security and of the loan guarantees, if applicable.

 

The Bank’s exposure to commercial loans generally involves a higherdegree of credit risk than single-family residential lending.  These loans involve larger loan balances toa single borrower or groups of related borrowers.  These loans are more susceptible to a risk of loss during adownturn in the business cycle.  The

 

49

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underwriting, review and monitoring performed by our officers anddirectors cannot eliminate all of the risks related to these loans.

 

*Income Ta**xes*.  The Company’s valuation allowance wasdecreased by approximately $514,000 during the year ended December 31,2003, due to the expiration of the state net operating losses that had avaluation allowance against them.  As ofDecember 31, 2003, the Company had a total New Mexico net operating lossof $11 million.  The loss may not becarried 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 $387,000 as of December 31, 2003.  In assessing the realizability of theremaining deferred tax assets, management considered projected future taxableincome and tax planning strategies. Based on the Company’s historical taxable transactions, the timing ofthe reversal of existing temporary differences, and the evaluation of taxplanning strategies, management believes it is more likely than not that theCompany’s future taxable income will be sufficient to realize the benefit ofthe remaining deferred tax assets existing at December 31, 2003.

 

*Unidentifi**ableIntangible 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 the definitionof 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.

 

## **Contractual Cash** Obligations

## ** **

The following tables present contractual cash obligations andcommercial commitments of the Company as of December 31, 2003.

 
|                                     |   | **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          |   | $                           | 4,903  |                    | $      | 10,516 |   | $ | 1,648 |   | $ | — |   | $ | 17,067 |   |
| Trust Preferred Securities-Notes Payable |   | —                      |   | —                  |   | — |   | 8,000 |   | 8,000 |   |
| Operating leases                         |   | 43                          |   | 37                      |   | 13 |   | 5 |   | 98 |   |
| Total contractual cash obligations       |   | $                           | 4,946  |                    | $      | 10,553 |   | $ | 1,661 |   | $ | 8,005 |   | $ | 25,165 |   |

 

**Impact o****f NewAccounting Standards**

 

InJune 2001, the Financial Accounting Standards Board (FASB) issuedStatement 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 afterJune 30, 2001. The Company adopted the provisions of Statement 141 as ofJuly 1, 2001.  The adoption ofStatement 141 did not have any impact on the Company’s consolidated financialstatements.

 

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.

 

50

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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.

 

InNovember 2002, the FASB issued Interpretation No. 45 (“Interpretation45”), *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness to Others, an interpretation of FASB Statements No.5, 57, and 107 and rescission of FASB Interpretation No. 34*.  This interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual consolidatedfinancial statements about its obligations under guarantees issued.  Interpretation 45 also clarifies that aguarantor is required to recognize, at inception of a guarantee, a liabilityfor the fair value of the obligation undertaken.  The Company adopted the provisions of Interpretation 45 as ofJanuary 1, 2003 and this adoption had no impact on the Company’sconsolidated financial statements.

 

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 prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method used onreported results.  Statement 148 iseffective for fiscal years ending after December 15, 2002, and for interimperiods beginning after December 15, 2002.

 

Statement 148 allows for the fair value based method under Statement123, *Accountingfor Stock Based Compensation*, or the intrinsic value based methodunder APB Opinion No. 25 (“Opinion 25”), *Accounting for Stock Issued to Employees*.  Under the fair value based method ofaccounting, compensation cost is measured at the grant date based on the valueof the award and is recognized over the service period, which is generally thevesting period.  Under the intrinsicvalue method of accounting, compensation cost is the excess, if any, of thequoted market price of the stock at grant date or other measurement date overthe amount an employee must pay to acquire the stock.  The Company has elected to continue to use the intrinsic valuemethod of accounting under Opinion 25, and will disclose the proforma effectsof the fair value based method for the periods presented in its consolidatedfinancial statements.

 

In January 2003, the FASB issued Interpretation No. 46(“Interpretation 46”), *Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51*. This interpretation of Accounting Research Bulletin No. 51, *ConsolidatedFinancial Statements*, addresses consolidation by businessenterprises of variable interest entities (selected entities with relatedcontractual, ownership, voting or other monetary interests, including certainspecial purpose entities), and requires certain additional disclosure withrespect to these entities.  Theprovisions of Interpretation 46 are immediately applicable to variable interestentities created after January 31, 2003. In December 2003, the FASB issued a revision to Interpretation 46,commonly referred to as Interpretation No. 46R (“Interpretation 46R”).  The objective of Interpretation 46R was toprovide additional clarification to Interpretation 46 and require publicentities to identify those entities that are considered special purposeentities (SPEs) in which they have variable interests and to apply theprovisions of either Interpretation 46 of 46R at December 31, 2003.  The full provisions of Interpretation 46Rwill be required by the Company for the fiscal year end December 31, 2004.

 

51

----

 

As discussed in Note 10 of the consolidated financial statements onForm 10-KSB as of December 31, 2003, the Company has business trusts forthe purpose of issuing trust preferred securities.  We believe the continued consolidation of these trusts atDecember 31, 2003 is appropriate under Interpretation 46.  However, the application of Interpretation46R will be required by the Company for the fiscal year end December 31,2004, at which time, we believe that the Company will be required todeconsolidate the trusts.  The deconsolidationof these trusts will not have a material impact on the 2004 consolidatedfinancial statements.

 

In April 2003, the FASB issued Statement No. 149 (“Statement149”), “Amendment of Statement 133 on Derivative Instruments and HedgingActivities.” This amendment of Statement 133 “Accounting for DerivativeInstruments and Hedging Activities” amends and clarifies financial accountingand reporting for derivative instruments, including certain derivativeinstruments embedded in other contracts and for hedging activities underStatement 133. Statement 149 is effective for contracts entered into ormodified after June 30, 2003, and for hedging relationships designatedafter June 30, 2003, with all provisions applied prospectively.  The adoption of Statement 149 did not have amaterial impact on the Company’s consolidated financial statements.

 

In May 2003, the FASB issued Statement No. 150 (“Statement 150”), *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*.  Statement 150establishes standards for how a business enterprise classifies, measures anddiscloses in its financial statements certain financial instruments withcharacteristics of both liabilities and equity.  Statement 150 requires that a business enterprise classifyfinancial instruments that are within its scope as liabilities (or as assets insome circumstances).  Statement 150 iseffective for contracts entered into or modified after May 31, 2003, and isotherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  The FASB hasproposed to defer provisions related to mandatorily redeemable financialinstruments to periods beginning after December 15, 2004.  The adoption of Statement 150 onJuly 1, 2003 did not have a material impact on the Company’s consolidated financialstatements, and the adoption of deferred provisions at January 1, 2005 isnot expected to have a material impact on the Company’s consolidated financialstatements.

 

**Forward-L****ookingStatements**

 

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 Securities Litigation Reform Act of1995.  Such statements are subject tocertain risks and uncertainties which could cause actual results to differmaterially from historical or projected economic conditions, including, but notlimited to, those set forth in “Management’s Discussion and Analysis or Plan ofOperation,” changes in economic conditions in the Company’s market area,changes in policies by regulatory agencies, fluctuations in interest rates,demand for loans in the Company’s market area and competition.  **READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ONTHESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.  THE COMPANY UNDERTAKES NO OBLIGATION TOPUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKINGSTATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATEHEREOF OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS.**

 

**Item7.****                    Financial Statements**

 

Financial statements are filed as a part of this report at the end ofPart III hereof beginning at page F-1, Index to Consolidated FinancialStatements, and are incorporated herein by reference.

 

52

----

 

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

 

None

 

**Item8A.****                 Controls and Procedures**

 

As of December 31, 2003, the Company carried out an evaluation,under the supervision and with the participation of the chief executive officerand principal accounting officer of the Company, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the“Exchange Act”)).  Based on thisevaluation, the chief executive officer and principal accounting officerconcluded that the Company’s disclosure controls and procedures were effectiveas of December 31, 2003 to provide reasonable assurance that informationrequired to be disclosed by the Company in its periodic Exchange Act of 1934reports is recorded, processed, summarized and reported within the time periodsspecified by the SEC’s rules and forms, and to provide reasonable assurancethat information required to disclosed by the Company is accumulated andcommunicated to the Company’s management, including the chief executive officerand principal accounting officer, as appropriate to allow timely decisionsregarding required disclosure.

 

Changes in Internal Controls

 

There were no changes in the Company’s internal control over financialreporting that occurred during the fourth quarter, that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

### **PARTIII**

### ** **

The information required by Items 9 through 12 of Part III is omittedfrom this report because the Company will file a definitive Proxy Statement forthe Company’s 2003 Annual Meeting of Stockholders (the “Proxy Statement”)pursuant to Regulation 14A of the Securities Exchange Act of 1934 not laterthan 120 days after the end of the fiscal year covered by this Form 10-KSB andcertain information included therein is incorporated herein by reference.

 

**Item 9.****                                                           Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of theExchange Act**

 

The information required by this Item is incorporated by reference tothe Proxy Statement.

 

**Item10.****                 Executive Compensation**

 

The information required by this Item is incorporated by reference tothe Proxy Statement.

 

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

 

The information required by this Item is incorporated by reference tothe Proxy Statement.

 

**Item 12****.****                 CertainRelationships and Related Transactions**

 

The information required by this Item is incorporated by reference tothe Proxy Statement.

 

53

----

 

**Item 13****.****                 Exhibitsand 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)                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| **10.3.4        |   | Amendment Number Four to Profit Sharing and Employee Stock Ownership  Plan of FirstBank (incorporated by reference from the Company’s June 30,  2003 10-QSB)                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| *10.3.5         |   | Amendment Number Five to Profit Sharing and Employee Stock Ownership  Plan of FirstBank                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| **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 (incorporated by reference from the Company’s  December 31, 2002 10-KSB)                                                                                                                                            |

 

54

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| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                  |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                             |
| */***10.7.5     |   | Amendment to Employment Agreement with Norman R. Corzine dated  February 15, 2004                                                                                                                                           |
|            |   |                                                                                                                                                                                                                             |
| **/***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 (incorporated by reference from the Company’s  December 31, 2002 10-KSB0                                                           |
|            |   |                                                                                                                                                                                                                             |
| */***10.8.2     |   | Amendment to Employment Agreement with Don K. Padgett dated  February 15, 2004                                                                                                                                              |
|            |   |                                                                                                                                                                                                                             |
| **/***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  (incorporated by reference from the Company’s June 30, 2001 10-QSB)                                                                                       |
|            |   |                                                                                                                                                                                                                             |
| **/***10.10.2   |   | Amendment Number Two to Non-Employee Director Retainer Plan  (incorporated by reference from the Company’s June 30, 2003 10-QSB)                                                                                       |
|            |   |                                                                                                                                                                                                                             |
| **/***10.10.3   |   | Amendment Number Three to Non-Employee Director Retainer Plan  (incorporated by reference from the Company’s June 30, 2003 10-QSB)                                                                                     |
|            |   |                                                                                                                                                                                                                             |
| **/***10.11     |   | Restated and amended Access Anytime Bancorp, Inc, 1997 Stock Option  and Incentive Plan (incorporated by reference from the Company’s Registration  Statement on Form S-8, filed May 1, 2003, SEC File No. 333-104906) |
|            |   |                                                                                                                                                                                                                             |
| **/***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 (incorporated by reference from the Company’s  December 31, 2002 10-KSB)                                                                 |
|            |   |                                                                                                                                                                                                                             |
| **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             |   | Consent of Independent Auditors from KPMG LLP                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                             |
| *31.1           |   | Certification of Chief Executive Officer as adopted pursuant to  section 302 of the Sarbanes-Oxley Act of 2002                                                                                                              |
|            |   |                                                                                                                                                                                                                             |
| *31.2           |   | Certification of Chief Financial Officer as adopted pursuant to  section 302 of the Sarbanes-Oxley Act of 2002                                                                                                              |
|            |   |                                                                                                                                                                                                                             |
| *32.1           |   | Certification of Chief Executive Officer pursuant to 18 U.S.C.  section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley  Act of 2002                                                                    |
|            |   |                                                                                                                                                                                                                             |
| *32.2           |   | Certification of Chief Financial Officer pursuant to 18 U.S.C.  section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002                                                                    |

 

----

*                                         Filed herewith

**                                  Previously filed

***                           Designates each managementcontract or compensatory plan or arrangement required to be identified pursuantto Item 13(a) of Form 10-KSB.

 

55

----

 

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

 

The following subparagraph sets forth information concerning three Form8-Ks, two of which were filed or furnished after the fourth quarter endedDecember 31, 2003:

 

1.  On October 31, 2003 theCompany furnished a Form 8-K to announce its unaudited results of operationsfor the nine months ended September 30, 2003.

 

2.  On January 30, 2004 theCompany filed a Form 8-K to announce that the Bank reached an agreement toacquire two Matrix Capital Banks branches in Las Cruces, New Mexico.

 

3.  On January 30, 2004 theCompany furnished a Form 8-K to announce its unaudited results of operationsfor the twelve months ended December 31, 2003.

 

**Item 14****                  PrincipalAccountant Fees and Services**

 

The information required by this Item is incorporated by reference tothe Proxy Statement.

 

56

----

 

**SIGNATURES**

 

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

 
|                               |                                      |
|------------------------------------|-------------------------------------------|
|                               | ACCESS ANYTIME BANCORP, INC.              |
|                               |                                      |
|                               |                                      |
| Date:  February 26, 2004 | /s/ Norman R. Corzine                     |   |
|                               | Norman R. Corzine, Chairman of the Board, |
|                               | Chief Executive Officer                   |
|                               | *(Duly Authorized  Representative)*       |

 

Pursuant to the requirement of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant 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              |   | Director                           |   |
|   | Chief Executive Officer            |   |                               |   |
|   | Director                           |   |                               |   |
|   |                               |   |                               |   |
|   | Date:  February 26, 2004 |   | Date:  February 26, 2004 |   |
|   |                               |   |                               |   |
| By:    | /s/ Ken Huey, Jr.                  | By:    | /s/ Charles Guthals                |   |
|   | Ken Huey, Jr.                      |   | Charles Guthals                    |   |
|   | Chief Financial Officer            |   | Director                           |   |
|   | Principal Accounting Officer       |   |                               |   |
|   | Director                           |   |                               |   |
|   |                               |   |                               |   |
|   | Date:  February 26, 2004 |   | Date:  February 26, 2004 |   |
|   |                               |   |                               |   |
| By:    | /s/ Thomas W. Martin, III          | By:    | /s/ Allan M. Moorhead              |   |
|   | Thomas W. Martin, III              |   | Allan M. Moorhead                  |   |
|   | Director                           |   | Director                           |   |
|   |                               |   |                               |   |
|   | Date:  February 26, 2004 |   | Date:  February 26, 2004 |   |
|   |                               |   |                               |   |
| By:    | /s/ David Ottensmeyer, M.D.        | By:    | /s/ Cornelius Higgins, Ph.D.       |   |
|   | David Ottensmeyer                  |   | Cornelius Higgins                  |   |
|   | Director                           |   | Director                           |   |
|   |                               |   |                               |   |
|   | Date:  February 26, 2004 |   | Date:  February 26, 2004 |   |
|   |                               |   |                               |   |

 

57

----

 
| By:    | /s/ Richard H. Harding             | By:    | /s/ Don K. Padgett                 |   |
|--------|------------------------------------|--------|------------------------------------|--------|
|   | Richard H. Harding                 |   | Don K. Padgett                     |   |
|   | Director                           |   | President                          |   |
|   |                               |   | Director                           |   |
|   |                               |   |                               |   |
|   | Date:  February 26, 2004 |   | Date:  February 26, 2004 |   |

 

58

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**INDEX TO CONS****OLIDATEDFINANCIAL STATEMENTS**

 
| 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 Directors andStockholders

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, 2003 and 2002,and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the years in the three-year period ended December31, 2003.  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits 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, 2003 and 2002, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2003, in conformity with accounting principles generallyaccepted in the United States of America.

 

 

### **KPMG LLP**

 

Albuquerque, New Mexico

January 30, 2004

 

F-2

----

 

**ACCESS ANYTIMEBANCORP, INC. AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

 
|                                                                                                                                                                         |   | **December  31** |        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                                                                                         |   | **2003**         |        | **2002** |   |
| ASSETS                                                                                                                                                                       |   |             |        |   |   |
| Cash and cash equivalents                                                                                                                                                    |   | $                | 11,611,364  |   | $ | 12,342,444 |   |
| Certificates of deposit                                                                                                                                                      |   | 4,480,000        |        | 5,993,000 |   |
| Securities available-for-sale (amortized  cost of $5,718,248 and $6,515,011)                                                                                                 |   | 5,814,701        |        | 6,665,338 |   |
| Securities held-to-maturity (aggregate fair  value of $16,829,145 and $1,879,898)                                                                                            |   | 16,761,939       |        | 1,862,474 |   |
| Loans held-for-sale (aggregate fair value  of $1,834,564 and $6,688,146)                                                                                                     |   | 1,797,290        |        | 6,553,116 |   |
| Loans receivable, net                                                                                                                                                        |   | 156,237,317      |        | 149,856,081 |   |
| Interest receivable, loans                                                                                                                                                   |   | 732,964          |        | 771,189 |   |
| Interest receivable, securities                                                                                                                                              |   | 125,994          |        | 102,198 |   |
| Real estate owned, net                                                                                                                                                       |   | 565,159          |        | 647,917 |   |
| Federal Home Loan Bank stock                                                                                                                                                 |   | 1,167,200        |        | 1,013,200 |   |
| Premises and equipment, net                                                                                                                                                  |   | 3,556,833        |        | 3,654,169 |   |
| Unidentifiable intangible asset, net of  accumulated amortization of $606,104 and $460,444                                                                                   |   | 1,577,984        |        | 1,723,644 |   |
| Deferred tax asset                                                                                                                                                           |   | 388,573          |        | 361,368 |   |
| Other assets                                                                                                                                                                 |   | 609,834          |        | 553,997 |   |
|                                                                                                                                                                         |   |             |        |   |   |
| Total assets                                                                                                                                                                 |   | $                | 205,427,152 |   | $ | 192,100,135 |   |
|                                                                                                                                                                         |   |             |        |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                    |   |             |        |   |   |
|                                                                                                                                                                         |   |             |        |   |   |
| Liabilities:                                                                                                                                                                 |   |             |        |   |   |
| Deposits                                                                                                                                                                     |   | $                | 162,846,107 |   | $ | 159,197,158 |   |
| Federal Home Loan Bank advances                                                                                                                                              |   | 17,066,654       |        | 8,267,321 |   |
| Accrued interest and other liabilities                                                                                                                                       |   | 1,794,005        |        | 1,384,196 |   |
| Advanced payments by borrowers for taxes  and insurance                                                                                                                      |   | 354,670          |        | 434,247 |   |
| Trust Preferred Securities – Notes Payable                                                                                                                              |   | 8,000,000        |        | 8,000,000 |   |
|                                                                                                                                                                         |   |             |        |   |   |
| Total liabilities                                                                                                                                                            |   | 190,061,436      |        | 177,282,922 |   |
|                                                                                                                                                                         |   |             |        |   |   |
| 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; 1,510,744 and 1,508,012 shares issued;  1,221,070 and 1,302,161 outstanding in 2003  and 2002, respectively |   | 15,107           |        | 15,080 |   |
| Capital in excess of par value                                                                                                                                               |   | 11,643,276       |        | 11,378,222 |   |
| Retained earnings                                                                                                                                                            |   | 5,831,295        |        | 4,547,359 |   |
| Accumulated other comprehensive income, net  of tax expense of $38,581 and $60,131                                                                                           |   | 57,872           |        | 90,197 |   |
|                                                                                                                                                                         |   | 17,547,550       |        | 16,030,858 |   |
| Unallocated Employee Stock Ownership Plan  shares; 128,000 and 160,000 shares outstanding                                                                                    |   | (690,000         | )           | (870,000 | ) |
| Treasury stock, at cost; 161,674 and 45,851  shares outstanding                                                                                                              |   | (1,491,834       | )           | (343,645 | ) |
| Total stockholders’ equity                                                                                                                                              |   | 15,365,716       |        | 14,817,213 |   |
| Total liabilities and stockholders’ equity                                                                                                                              |   | $                | 205,427,152 |   | $ | 192,100,135 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-3

----

 

**ACCESS ANYTIMEBANCORP, INC. AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                                          |   | **Years  ended December 31** |       |
|---------------------------------------------------------------|--------|------------------------------|------------|
|                                                          |   | **2003**                     |       | **2002** |   | **2001** |   |
|                                                          |   |                         |       |   |   |   |   |
| Interest income:                                              |   |                         |       |   |   |   |   |
| Loans receivable                                              |   | $                            | 10,675,387 |   | $ | 10,984,706 |   | $ | 10,774,835 |   |
| Equity securities                                             |   | 188,269                      |       | 178,954 |   | 208,101 |   |
| Mortgage-backed securities                                    |   | 253,295                      |       | 485,022 |   | 680,482 |   |
| Other interest income                                         |   | 299,548                      |       | 260,723 |   | 389,431 |   |
|                                                          |   |                         |       |   |   |   |   |
| Total interest income                                         |   | 11,416,499                   |       | 11,909,405 |   | 12,052,849 |   |
|                                                          |   |                         |       |   |   |   |   |
| Interest expense:                                             |   |                         |       |   |   |   |   |
| Deposits                                                      |   | 3,298,076                    |       | 4,239,111 |   | 5,733,378 |   |
| Federal Home Loan Bank advances                               |   | 427,809                      |       | 328,484 |   | 265,283 |   |
| Other borrowings                                              |   | 652,871                      |       | 613,482 |   | 281,111 |   |
|                                                          |   |                         |       |   |   |   |   |
| Total interest expense                                        |   | 4,378,756                    |       | 5,181,077 |   | 6,279,772 |   |
|                                                          |   |                         |       |   |   |   |   |
| Net interest income before provision for  loan losses         |   | 7,037,743                    |       | 6,728,328 |   | 5,773,077 |   |
| Provision for loan losses                                     |   | 781,000                      |       | 786,000 |   | 449,354 |   |
|                                                          |   |                         |       |   |   |   |   |
| Net interest income after provision for  loan losses          |   | 6,256,743                    |       | 5,942,328 |   | 5,323,723 |   |
|                                                          |   |                         |       |   |   |   |   |
| Noninterest income:                                           |   |                         |       |   |   |   |   |
| Loan servicing and other fees                                 |   | 744,588                      |       | 578,567 |   | 354,301 |   |
| Net realized gains on sales of  available-for-sale securities |   | 10,747                       |       | 58,115 |   | — |   |
| Gains on sales of mortgage loans  held-for-sale               |   | 1,922,516                    |       | 786,825 |   | 417,066 |   |
| Other income                                                  |   | 1,056,598                    |       | 996,122 |   | 894,889 |   |
|                                                          |   |                         |       |   |   |   |   |
| Total noninterest income                                      |   | 3,734,449                    |       | 2,419,629 |   | 1,666,256 |   |
|                                                          |   |                         |       |   |   |   |   |
| Noninterest expense:                                          |   |                         |       |   |   |   |   |
| Salaries and employee benefits                                |   | 4,521,114                    |       | 3,468,295 |   | 2,752,748 |   |
| Occupancy expense                                             |   | 874,597                      |       | 842,959 |   | 768,838 |   |
| Deposit insurance premium                                     |   | 78,864                       |       | 97,224 |   | 125,794 |   |
| Advertising                                                   |   | 108,831                      |       | 84,442 |   | 73,694 |   |
| Professional fees                                             |   | 677,590                      |       | 340,927 |   | 268,393 |   |
| Other expense                                                 |   | 1,966,011                    |       | 1,889,129 |   | 1,551,977 |   |
|                                                          |   |                         |       |   |   |   |   |
| Total noninterest expense                                     |   | 8,227,007                    |       | 6,722,976 |   | 5,541,444 |   |
|                                                          |   |                         |       |   |   |   |   |
| Income before income taxes                                    |   | 1,764,185                    |       | 1,638,981 |   | 1,448,535 |   |
|                                                          |   |                         |       |   |   |   |   |
| Income tax expense                                            |   | 480,249                      |       | 635,948 |   | 69,482 |   |
|                                                          |   |                         |       |   |   |   |   |
| Net income                                                    |   | $                            | 1,283,936  |   | $ | 1,003,033 |   | $ | 1,379,053 |   |
|                                                          |   |                         |       |   |   |   |   |
| Earnings per common share-basic                               |   | $                            | 1.03       |   | $ | .77 |   | $ | 1.05 |   |
|                                                          |   |                         |       |   |   |   |   |
| Earnings per common share-assuming dilution                   |   | $                            | .94        |   | $ | .73 |   | $ | 1.02 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-4

----

 

**ACCESS ANYTIME BANCORP, INC. AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
|                                                                                     |   | **Comprehensive  Income** |                  | **Common Stock** |       | **Capital  in Excess  of Par  Value** |   | **Retained  Earnings** |      | **Accumulated  Other  Comprehensive  Income  (Loss)  Net** |      | **Unallocated  ESOP  Shares** |      | **Treasury Stock** |   | **Total** |   |
|------------------------------------------------------------------------------------------|--------|---------------------------|-----------------------|------------------|------------|---------------------------------------|--------|------------------------|-----------|------------------------------------------------------------|-----------|-------------------------------|-----------|--------------------|--------|-----------|--------|
| **Number  of shares**                                                                    |   | **Amount**                | **Number  of shares** |             | **Amount** |
| 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 |   |
|                                                                                     |   |                      |                  |             |       |                                  |   |                   |      |                                                       |      |                          |      |               |   |      |   |   |   |   |   |
| Net Income                                                                               |   | $                         | 1,283,936             |             |       |                                  |   |                   |      |                                                       | 1,283,936 |                          |      |               |   |      |   |   |   |   | 1,283.936 |   |
|                                                                                     |   |                      |                  |             |       |                                  |   |                   |      |                                                       |      |                          |      |               |   |      |   |   |   |   |   |
| Net change in unrealized appreciation  on available-for-sale securities, net of tax |   | (32,325                   | )                     | —           |       | —                                |   | —                 |      | —                                                     |      | (32,325                       | )         | —             |   | —    |   | — |   | (32,325 | ) |
| Total comprehensive income                                                               |   | $                         | 1,251,611             |             |       |                                  |   |                   |      |                                                       |      |                          |      |               |   |      |   |   |   |   |   |   |
|                                                                                     |   |                      |                  |             |       |                                  |   |                   |      |                                                       |      |                          |      |               |   |      |   |   |   |   |   |
| Common stock issued                                                                      |   |                      |                  | 2,732            |       | 27                                    |   | 16,990                 |      | —                                                     |      | —                        |      | —             |   | —    |   | — |   | 17,017 |   |
|                                                                                     |   |                      |                  |             |       |                                  |   |                   |      |                                                       |      |                          |      |               |   |      |   |   |   |   |   |
| Common stock rights awarded in lieu of directors’ cash compensation                 |   |                      |                  | —           |       | —                                |   | 71,000                 |      | —                                                     |      | —                        |      | —             |   | —    |   | — |   | 71,000 |   |
|                                                                                     |   |                      |                  |             |       |                                  |   |                   |      |                                                       |      |                          |      |               |   |      |   |   |   |   |   |
| Purchases of  treasury stock                                                        |   |                      |                  | —           |       | —                                |   | —                 |      | —                                                     |      | —                        |      | —             |   | 115,823   |   | (1,148,189 | ) | (1,148,189 | ) |
|                                                                                     |   |                      |                  |             |       |                                  |   |                   |      |                                                       |      |                          |      |               |   |      |   |   |   |   |   |
| ESOP shares allocated                                                                    |   |                      |                  | —           |       | —                                |   | 177,064                |      | —                                                     |      | —                        |      | 180,000            |   | —    |   | — |   | 357,064 |   |
| Balance at December  31, 2003                                                       |   |                      |                  | 1,510,744        |       | $                                     | 15,107 |                   | $         | 11,643,276                                                 |      | $                             | 5,831,295 |               | $      | 57,872    |   | $ | (690,000 | ) | 161,674 |   | $ | (1,491,834 | ) | $ | 15,365,716 |   |

 

F-5

----

 
|                                                                             |   | **Years  ended December 31** |    |
|----------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                             |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                             |   |                         |    |   |   |   |   |
| Disclosure of reclassification amounts:                                          |   |                         |    |   |   |   |   |
| Unrealized holding gains arising during  period                                  |   | $                            | (21,578 | ) | $ | 76,435 |   | $ | 116,561 |   |
| Reclassification adjustment for gains  included in net income                    |   | (10,747                      | )       | (58,115 | ) | — |   |
| Net unrealized appreciation on  available-for-sale securities,  net of  tax |   | $                            | (32,325 | ) | $ | 18,320 |   | $ | 116,561 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-6

----

 

**ACCESS ANYTIMEBANCORP, INC. AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

** **
|                                                                                |   | **Years  ended December 31** |       |
|-------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                |   | **2003**                     |       | **2002** |   | **2001** |   |
|                                                                                |   |                         |       |   |   |   |   |
| Cash flows from operating activities:                                               |   |                         |       |   |   |   |   |
| Net income                                                                          |   | $                            | 1,283,936  |   | $ | 1,003,033 |   | $ | 1,379,053 |   |
| Adjustments to reconcile net income to cash  fromoperating activities:              |   |                         |       |   |   |   |   |
| Depreciation                                                                        |   | 400,598                      |       | 436,141 |   | 407,664 |   |
| Deferred income taxes                                                               |   | (27,205                      | )          | 611,239 |   | 28,602 |   |
| Provision for loan losses                                                           |   | 781,000                      |       | 786,000 |   | 449,354 |   |
| Amortization of premiums on investment  securities                                  |   | 44,295                       |       | 34,420 |   | 84,789 |   |
| Amortization of loan premiums, discounts  and deferred fees, net                    |   | 462,418                      |       | 290,736 |   | 181,267 |   |
| Amortization of unidentifiable intangible  asset                                    |   | 145,660                      |       | 145,660 |   | 145,661 |   |
| Non-cash ESOP contribution                                                          |   | 357,064                      |       | 266,799 |   | 277,461 |   |
| Gains on sale of available-for-sale  securities                                     |   | (10,747                      | )          | (58,115 | ) | — |   |
| Gains on sales of mortgage loans  held-for-sale                                     |   | (1,922,516                   | )          | (786,825 | ) | (417,066 | ) |
| Proceeds from sales of mortgage loans  held-for-sale                                |   | 106,156,965                  |       | 41,508,677 |   | 24,471,091 |   |
| Originations of mortgage loans  held-for-sale                                       |   | (99,478,623                  | )          | (46,240,249 | ) | (24,267,564 | ) |
| Common stock rights awarded in lieu of  directors compensation                      |   | 71,000                       |       | 52,800 |   | 37,350 |   |
| Loss (gain) on sale of foreclosed real  estate                                      |   | 42,632                       |       | (45,440 | ) | 2,533 |   |
| Gain on disposition of assets                                                       |   | (1,877                       | )          | (100 | ) | (11,447 | ) |
| Net (increase) decrease in accrued interest  receivable and other assets            |   | (903,522                     | )          | 448,157 |   | (205,414 | ) |
| Increase (decrease) in accrued interest and  other liabilities                      |   | 409,809                      |       | (655,608 | ) | (158,079 | ) |
|                                                                                |   |                         |       |   |   |   |   |
| Net cash from operating activities                                                  |   | 7,810,887                    |       | (2,202,675 | ) | 2,405,255 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Cash flows from investing activities:                                               |   |                         |       |   |   |   |   |
| Purchases of available-for-sale securities                                          |   | (2,000,000                   | )          | (800,000 | ) | (3,555,000 | ) |
| Proceeds from maturities and principal  repayments of available-for-sale securities |   | 2,375,513                    |       | 3,429,004 |   | 2,449,393 |   |
| Purchases of held-to-maturity securities                                            |   | (15,775,000                  | )          | (780,000 | ) | — |   |
| Proceeds from maturities and principal  repayments of held-to-maturity securities   |   | 855,806                      |       | 527,390 |   | 2,867,409 |   |
| Proceeds from sales of  available-for-sale-securities                               |   | 461,305                      |       | 1,177,867 |   | — |   |
| Net decrease (increase) in certificates of  deposit                                 |   | 1,513,000                    |       | (5,195,000 | ) | 2,998,000 |   |
| Net increase in loans                                                               |   | (7,624,654                   | )          | (9,448,464 | ) | (22,716,955 | ) |
| Proceeds from sales of foreclosed real  estate                                      |   | 445,368                      |       | 659,715 |   | — |   |
| Purchases of premises and equipment                                                 |   | (30,838                      | )          | (389,881 | ) | (583,652 | ) |
|                                                                                |   |                         |       |   |   |   |   |
| Net cash from investing activities                                                  |   | (19,779,500                  | )          | (10,819,369 | ) | (18,540,805 | ) |
|                                                                                |   |                         |       |   |   |   |   |
| Cash flows from financing activities:                                               |   |                         |       |   |   |   |   |
| Net increase in deposits                                                            |   | 3,648,949                    |       | 12,277,160 |   | 9,644,032 |   |
| Net increase (decrease) in Federal Home  Loan Bank advances                         |   | 8,799,333                    |       | (482,679 | ) | 6,000,000 |   |
| Net (decrease) increase in advance payments  by borrowers for taxes and insurance   |   | (79,577                      | )          | 126,578 |   | 149,891 |   |
| Repayment of employee stock ownership  plan-note payable                            |   | —                       |       | (1,141,766 | ) | (147,973 | ) |
| Issuance of trust preferred security-note  payable                                  |   | —                       |       | 4,000,000 |   | 4,000,000 |   |
| Purchase of treasury stock                                                          |   | (1,148,189                   | )          | (106,750 | ) | (73,262 | ) |
| Proceeds from issuance of common stock                                              |   | 17,017                       |       | 80,852 |   | 28,687 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Net cash from financing activities                                                  |   | 11,237,533                   |       | 14,753,395 |   | 19,601,375 |   |
|                                                                                |   |                         |       |   |   |   |   |
| (Decrease) increase in cash and cash  equivalents                                   |   | (731,080                     | )          | 1,731,351 |   | 3,465,825 |   |
| Cash and cash equivalents at beginning of  year                                     |   | 12,342,444                   |       | 10,611,093 |   | 7,145,268 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Cash and cash equivalents at end of year                                            |   | $                            | 11,611,364 |   | $ | 12,342,444 |   | $ | 10,611,093 |   |

 

F-7

----

 
|                                                                     |   | **Years  ended December 31** |      |
|--------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                     |   | **2003**                     |      | **2002** |   | **2001** |   |
|                                                                     |   |                         |      |   |   |   |   |
| Supplemental disclosures of cash flow  information:                      |   |                         |      |   |   |   |   |
| Cash paid during the year for:                                           |   |                         |      |   |   |   |   |
| Interest                                                                 |   | $                            | 4,387,266 |   | $ | 5,243,310 |   | $ | 6,243,960 |   |
| Income taxes                                                             |   | 655,150                      |      | 26,750 |   | 150 |   |
| Supplemental disclosure of non-cash  investing and financing activities: |   |                         |      |   |   |   |   |
| Real estate acquired in settlement of loans                              |   | 626,252                      |      | 673,575 |   | 356,959 |   |
| Non-cash transfer of investment security  pursuant to FASB 133           |   | —                       |      | — |   | 1,607,997 |   |
|                                                                          |        |                              |           |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-8

----

 

**ACCESS ANYTIMEBANCORP, INC. AND SUBSIDIARY**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

***Basisof Presentation and Principles of Consolidation*** -Access Anytime Bancorp, Inc. (the “Company”) is a thrift holding company forits wholly-owned subsidiary FirstBank (the “Bank”) and the Bank’s wholly-ownedsubsidiary, First Equity Development Corporation (“FEDCO”). The consolidatedfinancial statements include the accounts and transactions of the Company, theBank and FEDCO. All significant intercompany accounts and transactions havebeen eliminated in consolidation.

 

***CriticalAccounting Policies and Estimates*** - Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Management considers the following to be critical accounting policies:

 

*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.  During2003, the provision for loan losses decreased to $781,000 from $786,000 for2002, but increased from $449,354 in 2001 due to the increase in loansreceivable and non-performing assets.

 

Management of the Bank hasreviewed its Loan Loss Reserve Policy for compliance with SEC Staff AccountingBulletin (SAB) 102.  In determining theallowance for loan losses the Bank follows the OTS and SEC guidelines,specifically the guidance outlined in OTS CEO Memo 142, SEC SAB 102, FAS 5, andFAS 114.

 

Based on recommendations bymanagement 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.

 

The allowance for loan losses incorporates asystematic methodology, which is applied quarterly, to determine the elementsof the allowance for loan losses and the resultant provisions for loan lossesit considers 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

 

F-9

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The loan portfolio is segmented andhistorical loss percentages is applied to the identified segments of theportfolio in conjunction with FAS 5.  Inaddition, certain loans are individually analyzed and a loss reserve amountcalculated for each one of these loans, in conjunction with FAS 114.  Specific reserves are provided forindividual loans where ultimate collection is considered questionable bymanagement after reviewing the current status of loans that are contractuallypast due and considering the net realizable value of the security and of theloan guarantees, if applicable.

 

The Bank’s exposure to commercial loansgenerally involves a higher degree of credit risk than single-familyresidential lending.  These loansinvolve larger loan balances to a single borrower or groups of relatedborrowers.  These loans are moresusceptible to a risk of loss during a downturn in the business cycle.  The underwriting, review and monitoringperformed by our officers and directors cannot eliminate all of the risksrelated to these loans.

 

Management of the Bank makes variousassumptions and judgments about the collectibility of the loan portfolio andprovides an allowance 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 net income.

 

*Income Taxes*.  The Company’s valuation allowance wasdecreased by $513,545 during the year ended December 31, 2003, due to are-evaluation of the realizability of the state net operating loss.  As of December 31, 2003 the Company had atotal New Mexico net operating loss of approximately $11 million.  The loss may not be carried back, and willexpire in varying amounts through 2005. Due to the uncertainty of the realization of the state net operatingloss, the Company has established a valuation allowance of approximately$387,000 as of December 31, 2003.  Inassessing the realizability of the remaining deferred tax assets, managementconsidered projected 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 net deferred tax assets existing atDecember 31, 2003.

 

*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

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***Cashand Cash Equivalents*** - Cash and cash equivalentsinclude cash, due from banks and all certificates of deposit with originalmaturities of three months or less. There are no amounts subject to withdrawal or usage restrictions.

 

***SecuritiesAvailable-For-Sale***- Securities to be held forindefinite periods of time and not intended to be held-to-maturity areclassified as available-for-sale. Assets included in this category are those assets that managementintends to use as part of its asset/liability management strategy and that maybe sold in response to changes in liquidity needs, interest rates, resultantprepayment risk, and other factors related to interest rate and resultantprepayment risk changes.  Securitiesavailable-for-sale are recorded at fair value. Both unrealized gains and losses on securities available-for-sale, netof taxes, are included as a separate component of accumulated other comprehensiveincome in the consolidated statements of financial condition until these gainsor losses are realized.  Gains andlosses are determined using the specific-identification method.  If a security has a decline in fair valuethat is other than temporary, the security is written down to its fair value byrecording a loss in the consolidated statements of operations.

 

***SecuritiesHeld-To-Maturity*** - Securities for which the Bankhas the positive intent and ability to hold to maturity are reported at cost,adjusted for premiums and discounts that are recognized in interest incomeusing the interest method over the period to maturity.  If a security has a decline in fair valuebelow its amortized cost that is other than temporary, the security is writtendown to its new cost basis by recording a loss in the consolidated statementsof operations.  The Bank has notexperienced a permanent decline on securities that would result in a charge tooperations.

 

***LoansHeld-For-Sale*** - Loans held-for-sale are carried atthe lower of aggregated cost or estimated fair market value.  Estimated fair market value is determinedusing forward commitments to sell loans to permanent investors.  Net unrealized losses, if any, arerecognized in a valuation allowance by charges to income.  Gains resulting from sales of mortgage loansare recognized at settlement date.  Loanorigination fees and direct origination costs on loans held-for-sale aredeferred until the related loan is sold.

 

***LoansReceivable*** - Loans receivable that management hasthe intent and ability to hold for the foreseeable future or until maturity orpay-off are reported at their outstanding principal adjusted for any unearneddiscount, the allowance for loan losses and any deferred fees or costs onoriginated 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.  Loanorigination fees and direct origination costs for a given loan are offset andonly the net amount is deferred and recognized as an adjustment of the yield ofthe related loan.

 

The accrual of interest onimpaired loans is discontinued when, in management’s opinion, the borrower maybe unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest isreversed.  If the ultimate collectibilityof principal, wholly or partially, is in doubt, any payment received on a loanon which the accrual of interest has been suspended is applied to reduceprincipal to the extent necessary to eliminate such doubt.  Otherwise, interest income is recognized forsuch payments.

 

F-11

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The Bank defines a loan asimpaired when, based on current information and events, it is probable that theBank 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 issubsequently recognized only to the extent cash payments are received.

 

The allowance for loan lossesis increased by charges to income and decreased by revisions in the estimate ofthe necessary allowance and by charge-offs (net of recoveries).  Management’s periodic evaluation of theadequacy of the allowance is based on the Bank’s past loan loss experience,known and inherent risks in the portfolio, adverse situations that may affectthe borrower’s ability to repay, the estimated value of any underlyingcollateral, and current economic conditions.

 

***LoanServicing***- The cost of mortgage servicing rightsis amortized in proportion to, and over the period of, estimated net servicingrevenues.  Impairment of mortgageservicing rights is assessed based on the fair value of those rights.  Fair values are estimated using discountedcash flows based on a current market interest rate.  For purposes of measuring impairment, the rights are stratifiedbased on the predominant risk characteristics of the underlying loans.  The amount of impairment recognized is theamount by which the capitalized mortgage servicing rights for a stratum exceedtheir 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.

 

***ForeclosedReal Estate***- Real estate properties acquiredthrough foreclosure, or in lieu of foreclosure, are to be sold and areinitially recorded at fair value at the date of foreclosure establishing a newcost basis.  Any excess of the loanbalance and foreclosure costs over the fair value at the date of foreclosure ischarged to the allowance for loan losses. After foreclosure, valuations are periodically performed by managementand the real estate is carried at the lower of carrying amount or fair valueless cost to sell.  Revenue and expensesfrom operations and changes in the valuation allowance are included in otherexpense.

 

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

 

***Premisesand Equipment*** - Land is carried at cost.  Premises and equipment are carried at cost,less accumulated depreciation computed by the straight-line method over theestimated useful life of the assets. Maintenance and repairs are charged to expense as incurred andimprovements are capitalized.

 

F-12

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***UnidentifiableIntangible Asset*** – The Company has anunidentifiable intangible asset that was originated in connection with theCompany’s expansion through an acquisition of two established branch operationsin target markets in 1999.  Theintangible asset did not meet the definition of a business combination inaccordance with Statement No. 141.  Assuch, the Company continues to amortize the intangible asset related to theacquisition in accordance with Statement No. 142 over a period of fifteenyears.

 

***IncomeTaxes***- The Company utilizes the asset andliability method of accounting for income taxes, whereby deferred income taxesare recognized for the tax consequences in future years of differences in thetax bases of assets and liabilities and their financial reporting amounts basedon enacted tax laws and statutory tax rates applicable to the periods in whichthe differences are expected to affect taxable income.  Valuation allowances are established, ifnecessary, to reduce deferred tax assets to the amount expected to be realized.

 

***Stock-BasedCompensation***- The Company applies AccountingPrinciples Board Opinion No. 25*, Accounting for Stock Issued to Employees*(APB 25) and related interpretations in accounting for its stock-basedcompensation plans.

 

Under Statement No. 123, theCompany may elect to recognize stock-based compensation expense based on thefair value of the awards or continue to account for stock-based compensationunder APB 25.  In December 2002,Statement No. 148 amended Statement No. 123, concerning the transition anddisclosure of stock-based compensation. The Company has elected to continue to apply the measurement provisionsof APB 25.

 

***NetIncome Per Share -***Basic earnings per share hasbeen computed on the basis of the weighted-average number of shares of commonstock outstanding during the periods. Diluted earnings per share reflects the potential dilution that wouldhave occurred if stock options and other contingently issuable shares of commonstock had been issued during the periods.

 

***Impactof New Accounting Standards*** – In June 2001, the Financial AccountingStandards 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 that goodwill andintangible assets with indefinite useful lives no longer be amortized, butinstead be tested for impairment at least annually.  The Company does not have goodwill or intangible assets withindefinite useful lives subject to the provisions of Statement 142.

 

In October 2002, the FASB issued StatementNo. 147 (“Statement 147”), *Acquisitions ofCertain 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.

 

F-13

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In November 2002, the FASB issuedInterpretation No. 45 (“Interpretation 45”), *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers, an interpretation of FASB Statements No. 5, 57, and 107 and rescissionof FASB Interpretation No. 34*. This interpretation elaborates on the disclosures to be made by aguarantor in its interim and annual consolidated financial statements about itsobligations under guarantees issued.  Interpretation45 also clarifies that a guarantor is required to recognize, at inception of aguarantee, a liability for the fair value of the obligation undertaken.  The Company adopted the provisions ofInterpretation 45 as of January 1, 2003 and this adoption had no impact on theCompany’s consolidated financial statements.

 

In December 2002, the FASB issued StatementNo. 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 thefair 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 will disclose the proforma effects of the fairvalue based method for the periods presented in its consolidated financialstatements.

 

F-14

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Had compensation cost for allgrants of stock options and the director retainer plan shares during 2003,2002, and 2001 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:

 
|                                                                                                                                          |   | **2003** |      | **2002** |   | **2001**  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                                                                                                                          |   |     |      |     |   |      |   |
| Net income, as reported                                                                                                                       |   | $        | 1,283,936 |     | $      | 1,003,033 |   | $ | 1,379,053 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                                   |   | 65,308   |      | —   |   | —    |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (147,013 | )         | (35,275  | )      | —    |   |
| Pro forma net income                                                                                                                          |   | $        | 1,202,231 |     | $      | 967,758   |   | $ | 1,379,053 |   |
|                                                                                                                                          |   |     |      |     |   |      |   |
| Earnings per share                                                                                                                            |   |     |      |     |   |      |   |
| As reported                                                                                                                                   |   | $        | 1.03      |     | $      | 0.77      |   | $ | 1.05 |   |
| Pro-forma                                                                                                                                     |   | 0.96     |      | 0.74     |   | 1.05      |   |
|                                                                                                                                          |   |     |      |     |   |      |   |
| Earnings per share-assuming dilution                                                                                                          |   |     |      |     |   |      |   |
| As reported                                                                                                                                   |   | $        | 0.94      |     | $      | 0.73      |   | $ | 1.02 |   |
| Pro-forma                                                                                                                                     |   | 0.88     |      | 0.71     |   | 1.02      |   |

 

In January 2003, the FASBissued Interpretation No. 46 (“Interpretation 46”), *Consolidation of Variable InterestEntities, an interpretation of ARB No. 51*.  This interpretation of Accounting Research Bulletin No. 51, *ConsolidatedFinancial Statements*, addresses consolidation by businessenterprises of variable interest entities (selected entities with relatedcontractual, ownership, voting or other monetary interests, including certainspecial purpose entities), and requires certain additional disclosure with respectto these entities.  The provisions ofInterpretation 46 are immediately applicable to variable interest entitiescreated after January 31, 2003.  InDecember 2003, the FASB issued a revision to Interpretation 46, commonlyreferred to as Interpretation No. 46R (“Interpretation 46R”).  The objective of Interpretation 46R was toprovide additional clarification to Interpretation 46 and require publicentities to identify those entities that are considered special purposeentities (SPEs) in which they have variable interests and to apply theprovisions of either Interpretation 46 of 46R at December 31, 2003.  The full provisions of Interpretation 46Rwill be required by the Company for the fiscal year end December 31, 2004.

 

As discussed in Note 10 of theconsolidated financial statements on Form 10-KSB as of December 31, 2003, theCompany has business trusts for the purpose of issuing trust preferredsecurities.  We believe the continuedconsolidation of these trusts at December 31, 2003 is appropriate underInterpretation 46.  However, theapplication of Interpretation 46R will be required by the Company for thefiscal year end December 31, 2004, at which time, we believe that the Companywill be required to deconsolidate the trusts. The deconsolidation of these trusts will not have a material impact onthe 2004 consolidated financial statements.

 

F-15

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In April 2003, the FASB issuedStatement No. 149 (“Statement 149”), “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” This amendment of Statement 133“Accounting for Derivative Instruments and Hedging Activities” amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under Statement 133. Statement 149 is effective forcontracts entered into or modified after June 30, 2003, and for hedgingrelationships designated after June 30, 2003, with all provisions appliedprospectively.  The adoption ofStatement 149 did not have a material impact on the Company’s consolidatedfinancial statements.

 

In May 2003, the FASB issuedStatement No. 150 (“Statement 150”), *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.  Statement 150 establishes standards for howa business enterprise classifies, measures and discloses in its financialstatements certain financial instruments with characteristics of bothliabilities and equity.  Statement 150requires that a business enterprise classify financial instruments that arewithin its scope as liabilities (or as assets in some circumstances).  Statement 150 is effective for contractsentered into or modified after May 31, 2003, and is otherwise effective at thebeginning of the first interim period beginning after June 15, 2003.  The FASB has proposed to defer provisionsrelated to mandatorily redeemable financial instruments to periods beginning afterDecember 15, 2004.  The adoption of Statement150 on July 1, 2003 did not have a material impact on the Company’sconsolidated financial statements, and the adoption of deferred provisions atJanuary 1, 2005 is not expected to have a material impact on the Company’sconsolidated financial statements.

 

 

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

 

In 1999, the Bank acquiredcertain assets of two branches of Bank of Albuquerque, N.A., a wholly-ownedsubsidiary of BOK Financial Corporation, for the assumption of deposits andrelated liabilities of the branches.  The Company has an unidentifiable intangibleasset that was originated in connection with this expansion.  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.

 

F-16

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**NOTE 3****                                                    SECURITIES**

 

Securities have been classifiedin the consolidated statements of financial condition according to management’sintent.  The carrying amounts ofsecurities and their approximate fair values at December 31 follow:

 
|                               |   | **Amortized  Cost** |      | **Gross  unrealized** |       | **Fair  Value** |   |
|------------------------------------|--------|---------------------|-----------|-----------------------|------------|-----------------|--------|
|                               |   |                | **Gains** |                  | **Losses** |            |   |
| **Available-for-sale securities:** |   |                |      |                  |       |            |   |   |   |
| December 31, 2003:                 |   |                |      |                  |       |            |   |   |   |
| Mortgage-backed securities:        |   |                |      |                  |       |            |   |   |   |
| GNMA adjustable rate               |   | $                   | 2,476,208 |                  | $          | 9,837           |   | $ | 11,704 |   | $ | 2,474,342 |   |
| GNMA fixed rate                    |   | 680,182             |      | 42,420                |       | —          |   | 722,602 |   |
| Equity securities:                 |   |                |      |                  |       |            |   |   |   |
| FNMA common stock                  |   | 6,858               |      | 410                   |       | —          |   | 7,268 |   |
| FNMA bonds                         |   | 1,000,000           |      | —                |       | —          |   | 1,000,000 |   |
| FFCB bonds                         |   | 1,000,000           |      | 5,630                 |       | —          |   | 1,005,630 |   |
| Trust preferred securities         |   | 555,000             |      | 49,860                |       | —          |   | 604,860 |   |
|                               |   | $                   | 5,718,248 |                  | $          | 108,157         |   | $ | 11,704 |   | $ | 5,814,701 |   |
| 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 |   |

 

 
|                             |   | **Amortized  Cost** |       | **Gross  unrealized** |       | **Fair  Value** |       |
|----------------------------------|--------|---------------------|------------|-----------------------|------------|-----------------|------------|
|                             |   |                | **Gains**  |                  | **Losses** |            |       |
| **Held-to-maturity securities:** |   |                |       |                  |       |            |       |   |   |
| December 31, 2003:               |   |                |       |                  |       |            |       |   |   |
| Mortgage-backed securities:      |   |                |       |                  |       |            |       |   |   |
| GNMA adjustable rate             |   | $                   | 4,027,531  |                  | $          | —          |       | $ | 8,473 |   | $ | 4,019,059 |   |
| FHLMC adjustable rate            |   | 287,414             |       | 2,227                 |       | —          |       | 289,641 |   |
| FHLB bonds                       |   | 4,256,383           |       | 35,488                |       | —          |       | 4,291,872 |   |
| FHLMC bonds                      |   | 1,002,199           |       | 4,361                 |       | —          |       | 1,006,560 |   |
| US treasury bonds                |   | 6,017,687           |       | 16,073                |       | —          |       | 6,033,760 |   |
| Corporate bonds                  |   | 870,725             |       | 3,871                 |       | 1,941           |       | 872,655 |   |
| Trust preferred securities       |   | 300,000             |       | 15,600                |       | —          |       | 315,600 |   |
|                             |   |                |       |                  |       |            |       |   |   |
|                             |   | $                   | 16,761,939 |                  | $          | 77,620          |       | $ | 10,414 |   | $ | 16,829,145 |   |
| 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 |   |

 

F-17

----

 

The scheduled maturities ofsecurities available-for-sale and held-to-maturity at December 31, 2003 were asfollows:

 
|                       |   | **Available-for-sale  securities:** |      | **Held-to-maturity  securities:** |   |
|----------------------------|--------|-------------------------------------|-----------|-----------------------------------|--------|
|                       |   | **Amortized  Cost**                 |      | **Fair  Value**                   |   | **Amortized  Cost** |   | **Fair  Value** |   |
|                       |   |                                |      |                              |   |   |   |   |   |
| Due in one year or less    |   | $                                   | —    |                              | $      | — |   | $ | 382,889 |   | $ | 386,755 |   |
| Due from one to five years |   | 2,000,000                           |      | 2,005,630                         |   | 10,764,105 |   | 10,818,092 |   |
| Due from five to ten years |   | —                              |      | —                            |   | 1,000,000 |   | 1,000,000 |   |
| Due after ten years        |   | 3,718,248                           |      | 3,809,071                         |   | 4,614,945 |   | 4,624,298 |   |
|                       |   |                                |      |                              |   |   |   |   |   |
|                       |   | $                                   | 5,718,248 |                              | $      | 5,814,701 |   | $ | 16,761,939 |   | $ | 16,829,145 |   |

 

For purposes of the maturitytable, mortgage-backed securities, which are not due at a single maturity date,have been allocated over maturity groupings based on the weighted-averagecontractual maturities of underlying collateral.  The underlying principal on mortgage-backed securities may berecovered earlier than their scheduled contractual maturities because ofprincipal prepayments.

 

Securities of $4,467,679 and$5,360,114 were pledged to secure public deposits and for other purposesrequired or permitted by law at December 31, 2003 and 2002, respectively.

 

Unrealized losses andinformation on impairment, severity, and duration were as follows:

** **
|                           |   | **Unrealized  losses on securities at December 31, 2003** |      |
|--------------------------------|--------|-----------------------------------------------------------|-----------|
|                           |   | **Less than  12 months**                                  |      | **12 months  or longer** |   | **Total** |   |
|                           |   | **Fair Value**                                            |      | **Unrealized  Losses** |   | **Fair Value** |   | **Unrealized  Losses** |   | **Fair Value** |   | **Unrealized  Losses** |   |
| Available-for-sale securities: |   |                                                      |      |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:    |   |                                                      |      |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable rate           |   | $                                                         | 714,831   |   | $ | 5,283 |   | $ | 410,294 |   | $ | 6,421 |   | $ | 1,125,125 |   | $ | 11,704 |   |
|                           |   | $                                                         | 714,831   |   | $ | 5,283 |   | $ | 410,294 |   | $ | 6,421 |   | $ | 1,125,125 |   | $ | 11,704 |   |
|                           |   |                                                      |      |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity securities:   |   |                                                      |      |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:    |   |                                                      |      |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable rate           |   | $                                                         | 4,019,059 |   | $ | 8,473 |   | $ | — |   | $ | — |   | $ | 4,019,059 |   | $ | 8,473 |   |
| Corporate bond                 |   | 485,900                                                   |      | 1,936 |   | 40,040 |   | 5 |   | 525,940 |   | 1,941 |   |
|                           |   | $                                                         | 4,504,959 |   | $ | 10,409 |   | $ | 40,040 |   | $ | 5 |   | $ | 4,544,999 |   | $ | 10,414 |   |

 

The Company’s unrealized losses at December31, 2003 were limited to $22,118.  Theunrealized losses that have been impaired for more than 12 months ($6,421) inits mortgage-backed securities are primarily temporary because the annualadjustable interest rate should keep the security from any large unrealizedlosses.

 

F-18

----

 

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

 

The carrying amount of loansheld-for-sale and their estimated fair value, as determined on an aggregatebasis, at December 31, follows:

 
|             |   |                |      | **Gross  unrealized** |   |       |   |
|------------------|--------|---------------------|-----------|-----------------------|--------|------------|--------|
| **December  31** |   | **Amortized  cost** |      | **Gains**             |   | **Losses** |   | **Fair value** |   |
|             |   |                |      |                  |   |       |   |   |   |
| 2003             |   | $                   | 1,797,290 |                  | $      | 37,274     |   | $ | — |   | $ | 1,834,564 |   |
| 2002             |   | 6,553,116           |      | 135,030               |   | —     |   | 6,688,146 |   |
|                  |        |                     |           |                       |        |            |        |  |  |  |  |  |  |

 

Proceeds from sale of loansheld-for-sale were $106,156,965, $41,508,677, and $24,471,091 for the yearsended December 31, 2003, 2002 and 2001, respectively.  Gains of $1,926,013 and losses of $3,497 were recognized in 2003,gains of $786,964 and losses of $139 were recognized in 2002, while gains of$418,205 and losses of $1,139 were recognized in 2001.

 

 

**NOTE 5****                                                    LOANSRECEIVABLE**

 

The components of loans in theconsolidated statements of financial condition were as follows:

 
|                                               |   | **December  31** |        |
|----------------------------------------------------|--------|------------------|-------------|
|                                               |   | **2003**         |        | **2002** |   |
|                                               |   |             |        |   |   |
| First mortgage loans:                              |   |             |        |   |   |
| Conventional                                       |   | $                | 75,526,322  |   | $ | 72,697,413 |   |
| FHA insured and VA guaranteed                      |   | 8,741,925        |        | 12,305,845 |   |
| Commercial real estate loans                       |   | 36,527,727       |        | 27,998,956 |   |
| Commercial loans, other than mortgage              |   | 8,087,247        |        | 9,559,696 |   |
| Consumer and installment loans                     |   | 21,723,933       |        | 23,096,720 |   |
| Construction loans                                 |   | 2,231,421        |        | 1,590,619 |   |
| Other                                              |   | 6,524,285        |        | 5,225,768 |   |
|                                               |   |             |        |   |   |
|                                               |   | 159,362,860      |        | 152,475,017 |   |
|                                               |   |             |        |   |   |
| Less:                                              |   |             |        |   |   |
| Loans in process                                   |   | 1,381,678        |        | 702,086 |   |
| Unearned discounts, deferred loan fees, and  other |   | 794,349          |        | 1,091,865 |   |
| Allowance for loan losses                          |   | 949,516          |        | 824,985 |   |
|                                               |   |             |        |   |   |
|                                               |   | $                | 156,237,317 |   | $ | 149,856,081 |   |

 

F-19

----

 

An analysis of the changes inallowance for loan losses follows:

 
|                                             |   | **Years  ended December 31** |    |
|--------------------------------------------------|--------|------------------------------|---------|
|                                             |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                             |   |                         |    |   |   |   |   |
| Balance at beginning of year                     |   | $                            | 824,985 |   | $ | 744,987 |   | $ | 681,486 |   |
|                                             |   |                         |    |   |   |   |   |
| Loans charged-off                                |   | (744,571                     | )       | (747,263 | ) | (442,827 | ) |
| Recoveries                                       |   | 88,102                       |    | 41,261 |   | 56,974 |   |
|                                             |   |                         |    |   |   |   |   |
| Net loans charged-off                            |   | (656,469                     | )       | (706,002 | ) | (385,853 | ) |
| Provision for loan losses charged to  operations |   | 781,000                      |    | 786,000 |   | 449,354 |   |
|                                             |   |                         |    |   |   |   |   |
| Balance at end of year                           |   | $                            | 949,516 |   | $ | 824,985 |   | $ | 744,987 |   |

 

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

 

An analysis of the changes ofloans to directors, executive officers, and major stockholders follows:

 
|                                          |   | **Years  ended December 31** |      |
|-----------------------------------------------|--------|------------------------------|-----------|
|                                          |   | **2003**                     |      | **2002** |   | **2001** |   |
|                                          |   |                         |      |   |   |   |   |
| Balance at beginning of year                  |   | $                            | 1,523,636 |   | $ | 1,429,690 |   | $ | 1,279,920 |   |
| Loans originated                              |   | 873,700                      |      | 648,100 |   | 474,735 |   |
| Loan principal payments and other  reductions |   | (948,219                     | )         | (554,154 | ) | (324,965 | ) |
|                                          |   |                         |      |   |   |   |   |
| Balance at end of year                        |   | $                            | 1,449,117 |   | $ | 1,523,636 |   | $ | 1,429,690 |   |

 

The Bank had outstandingcommitments to originate real estate loans at December 31, 2003 and 2002 ofapproximately $3,599,000 and $6,899,000, respectively.  The Bank has outstanding letters of creditof $80,101 and $286,633 at December 31, 2003 and 2002, respectively.  The Bank has outstanding lines of credit ofapproximately $12,974,000 and $10,516,000 at December 31, 2003 and December 31,2002, respectively.  The Bank hasoutstanding credit card lines of approximately $2,281,000 and $2,074,000 atDecember 31, 2003 and December 31, 2002, respectively.

 

The following table summarizesimpaired loan information:

 
|                                           |   | **Years  ended December 31** |    |
|------------------------------------------------|--------|------------------------------|---------|
|                                           |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                           |   |                         |    |   |   |   |   |
| Recorded investment in impaired loans          |   | $                            | 848,400 |   | $ | 1,275,423 |   | $ | 1,439,032 |   |
| Average recorded investment in impaired  loans |   | 1,061,712                    |    | 1,357,228 |   | 1,163,618 |   |
| Interest income lost on impaired loans         |   | 69,861                       |    | 91,341 |   | 10,776 |   |
| FASB 114 allowance on impaired loans           |   | 124,597                      |    | 67,131 |   | 188,333 |   |
|                                                |        |                              |         |  |  |  |  |  |  |  |

 

The Bank is not committed tolend additional funds to borrowers with non-performing or renegotiated loans.

 

F-20

----

 

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

 

Components of premises andequipment included in the consolidated statements of financial condition atDecember 31, 2003 and 2002 were as follows:

 
|                          |   | **2003**  |      | **2002**  |   |
|-------------------------------|--------|-----------|-----------|-----------|--------|
|                          |   |      |      |      |   |
| Cost:                         |   |      |      |      |   |
| Land                          |   | $         | 964,393   |      | $      | 964,393 |   |
| Bank premises                 |   | 3,351,493 |      | 3,252,095 |   |
| Furniture and equipment       |   | 2,582,782 |      | 2,455,564 |   |
| Automobiles                   |   | 140,888   |      | 159,074   |   |
|                          |   |      |      |      |   |
| Total cost                    |   | 7,039,556 |      | 6,831,126 |   |
| Less accumulated depreciation |   | 3,482,723 |      | 3,176,957 |   |
|                          |   |      |      |      |   |
| Net book value                |   | $         | 3,556,833 |      | $      | 3,654,169 |   |

 

Certain Bank facilities andequipment are leased under various operating leases.  Rental expense was $38,450 in 2003, $25,400 in 2002, and $64,235in 2001.

 

Future minimum rentalcommitments under noncancelable leases are:

 

| 2004       |   | $      | 42,848 |   |
|------------|--------|--------|--------|--------|
| 2005       |   | 21,866 |   |
| 2006       |   | 15,050 |   |
| 2007       |   | 7,050  |   |
| 2008       |   | 6,400  |   |
| After 2008 |   | 4,800  |   |
|       |   |   |   |
|       |   | $      | 98,014 |   |

 

**NOTE 7****                                                    LOANSERVICING**

 

Mortgage loans serviced forothers are not included in the accompanying consolidated statements offinancial condition.  The Bank did notretain the servicing on any loans sold during 2003 and 2002.  The unpaid balances of loans serviced forothers at December 31 are summarized as follows:

 
|                                       |   | **2003** |      | **2002** |   | **2001**  |   |
|--------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                       |   |     |      |     |   |      |   |
| Mortgage loan portfolios serviced for FNMA |   | $        | 1,821,657 |     | $      | 3,829,546 |   | $ | 5,600,379 |   |
|                                            |        |          |           |          |        |           |        |  |  |  |

 

Custodial escrow balancesmaintained in connection with loan servicing were $17,443 and $32,579 atDecember 31, 2003 and 2002, respectively.

 

All loans are sold servicingreleased, hence, no mortgage servicing rights on loans sold were capitalizedduring 2003, 2002, or 2001.

 

F-21

----

 

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

 

The Bank invests availablefunds in mortgage-backed securities and interest-bearing deposits and maintainsfunds in other depository institutions, including the FHLB of Dallas.  Generally, the Bank’s investments in equitysecurities and mortgage-backed securities are recorded in book entry form only,and the Bank does not take possession of the actual investmentcertificates.  The Bank’s investment ininterest-bearing deposits, excluding those with the FHLB of Dallas, is limitedto amounts covered by applicable Federal Deposit Insurance Corporation (FDIC)limits.

 

The Bank has seven full servicebank locations in Albuquerque, Clovis, Gallup, and Portales, New Mexico.  The Bank’s primary service area includes theNew Mexico 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’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.

 

The Bank’s collateral policy isto secure all real estate loans by mortgages, place first liens on availableassets underlying commercial loans, and perfect purchase money liens onconsumer loan products.  The Bank grantsunsecured loans to its customers.

 

F-22

----

 

**NOTE 9****                                                 DEPOSITS**

 

The composition of deposits andthe effective rates of interest at December 31 were as follows:

 
|                                                                      |   | **2003**   |        | **2002**   |   |
|---------------------------------------------------------------------------|--------|------------|-------------|------------|--------|
|                                                                      |   |       |        |       |   |
| Checking accounts - noninterest bearing                                   |   | $          | 12,692,808  |       | $      | 15,238,683 |   |
| Savings accounts (2003 - 0.51%; 2002 -  0.71%)                            |   | 6,751,265  |        | 6,602,057  |   |
| Insured Money Market accounts (2003 -  0.075%-1.15%; 2002 - 0.025%-1.93%) |   | 26,280,429 |        | 27,429,125 |   |
| Transaction accounts (2003 - .05%-0.71%;  2002 -.01%-1.25%)               |   | 13,721,058 |        | 10,834,155 |   |
| Time deposits:                                                            |   |       |        |       |   |
| 0.01% - 1.00%                                                             |   | 298,455    |        | 347,331    |   |
| 1.01% - 2.00%                                                             |   | 40,099,477 |        | 9,916,119  |   |
| 2.01% - 3.00%                                                             |   | 27,343,566 |        | 34,410,537 |   |
| 3.01% - 4.00%                                                             |   | 20,988,189 |        | 33,166,558 |   |
| 4.01% - 5.00%                                                             |   | 11,787,489 |        | 14,254,289 |   |
| 5.01% - 6.00%                                                             |   | 2,392,070  |        | 5,346,134  |   |
| 6.01% - 7.00%                                                             |   | 332,562    |        | 1,493,432  |   |
| 7.01% - 8.00%                                                             |   | 158,739    |        | 158,738    |   |
|                                                                      |   |       |        |       |   |
|                                                                      |   | $          | 162,846,107 |       | $      | 159,197,158 |   |

 

At December 31, 2003, thescheduled maturities of time deposits were as follows:

 
|   |   | **Amount** |        | **Percent of  total** |   |
|--------|--------|------------|-------------|-----------------------|--------|
|   |   |       |        |                  |   |
| 2004   |   | $          | 75,769,979  |                  | 73.3   | % |
| 2005   |   | 13,043,996 |        | 12.6                  |   |
| 2006   |   | 4,442,166  |        | 4.3                   |   |
| 2007   |   | 7,065,133  |        | 6.8                   |   |
| 2008   |   | 3,079,273  |        | 3.8                   |   |
|   |   |       |        |                  |   |
|   |   | $          | 103,400,547 |                  | 100.0  | % |

 

At December 31, 2003 and 2002,individual time deposits in excess of $100,000 amounted to $22,039,814 and$41,115,382, respectively.

 

From time to time, the Bank hashad greater amounts of public funds. The amount of public funds held by the Bank at December 31, 2003 and2002 was $4,936,437 and $6,674,657, respectively.  The Bank is required to pledge collateral or a letter of creditfrom FHLB for such funds.

 

F-23

----

 

Interest expense on depositsfor the years ended December 31 was as follows:

 
|                  |   | **2003**  |      | **2002**  |   | **2001**  |   |
|-----------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
|                  |   |      |      |      |   |      |   |
| Savings accounts      |   | $         | 39,623    |      | $      | 47,723    |   | $ | 59,100 |   |
| Money Market accounts |   | 308,213   |      | 469,622   |   | 728,846   |   |
| Transaction accounts  |   | 43,901    |      | 46,258    |   | 50,295    |   |
| Time deposits         |   | 2,906,339 |      | 3,675,508 |   | 4,895,137 |   |
|                  |   |      |      |      |   |      |   |
|                  |   | $         | 3,298,076 |      | $      | 4,239,111 |   | $ | 5,733,378 |   |

 

At December 31, 2003 and 2002,the Bank had accrued interest payable on time deposits totaling $6,455 and$23,971, respectively.  The weightedaverage interest rate on deposits was 2.06%, 2.72%, and 4.02% for the yearsended December 31, 2003, 2002 and 2001, respectively.

 

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

 

At December 31, 2003 and 2002,the Company had lines of credit totaling $400,000 each year from other banks.The Company has no borrowings outstanding under these arrangements at December31, 2003 and December 31, 2002.  Thelines of credit bear market rates of interest and borrowings thereunder are tobe used for general purposes. One of the borrowing arrangements at December 31,2003 matured on January 25, 2004, which has been renewed for a year.  The other borrowing arrangement matures onOctober 1, 2005.

 

Each FHLB is authorized to makeadvances to its members, subject to such regulations and limitations as theFHLB may prescribe.  At December 31,2003 and 2002, advances from FHLB of $17,066,654 and $8,267,321, respectively,were collateralized by mortgage loans held by the Bank.  Under the blanket bond of the FHLB, the Bank has additional advancesavailable of $69.0 and $59.8 million at December 31, 2003 and 2002,respectively.  The Bank is alsorequired to maintain stock ownership in the FHLB of at least a minimumpercentage of its loans.  At December31, 2003, the Bank’s investment in stock of the FHLB was adequate.

 

On June 27, 2002, the Companyissued $4 million in trust preferred securities through a private placement ofFloating Rate Trust Preferred Securities of Access Anytime Capital Trust IIwith a liquidation value of $1,000 per share to mature 30 years from the dateof issuance.  The trust preferredsecurities are at a variable rate of the London Interbank Offered Rate (LIBOR)plus 365 basis points, floating quarterly, with a five-year cap of 12%.  At December 31, 2003, the interest rate was4.80%.  The trust preferred securitiesmay be redeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, the Companyissued $4 million of 10.25% Fixed Rate Capital Trust Pass-through Securities ofAccess Anytime Capital Trust I with a liquidation value of $1,000 per share tomature 30 years from the date of issuance. The trust preferred securities may be redeemed by the Company at priceof 107.6875 on July 25, 2006, 106.15 on July 25, 2007, 104.6125 on July 25,2008, 103.075 on July 25, 2009, 101.5375 on July 25, 2010 and may be redeemedat par on July 25, 2011 or after.  TheCompany invested approximately $2.9 million of the net proceeds in the Bank toincrease its capital levels.

 

F-24

----

 

**NOTE 11****                                             INCOMETAXES**

 

Income tax expense consisted ofthe following:
|                     |   | **2003** |    | **2002** |   | **2001** |   |
|--------------------------|--------|----------|---------|----------|--------|----------|--------|
|                     |   |     |    |     |   |     |   |
| Federal                  |   | $        | 480,249 |     | $      | —   |   | $ | 23,340 |   |
| State                    |   | —   |    | —   |   | 250      |   |
| Deferred                 |   | —   |    | 635,948  |   | 45,892   |   |
|                     |   |     |    |     |   |     |   |
| Total income tax expense |   | $        | 480,249 |     | $      | 635,948  |   | $ | 69,482 |   |

 

Actual income tax expensediffers from the “expected” income tax expense (computed at the FederalStatutory corporate tax rate of 34 percent) as follows:

** **
|                                                  |   | **2003** |    | **2002** |   | **2001** |   |
|-------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                  |   |     |    |     |   |     |   |
| Computed “expected” income tax expense      |   | $        | 599,823 |     | $      | 557,254  |   | $ | 492,502 |   |
| Increase (reduction) in income taxes  resulting from: |   |     |    |     |   |     |   |
| Current state tax                                     |   | 117,039  |    | 65,846   |   | 57,422   |   |
| Permanent differences                                 |   | 64,967   |    | 2,540    |   | 1,313    |   |
| Change in valuation allowance                         |   | (513,545 | )       | (108,879 | )      | (481,755 | )      |
| Expiration of state deferred asset                    |   | 218,505  |    | 108,879  |   | —   |   |
| Other                                                 |   | (6,540   | )       | 10,308   |   | —   |   |
|                                                  |   |     |    |     |   |     |   |
| Total income tax expense                              |   | $        | 480,249 |     | $      | 635,948  |   | $ | 69,482 |   |

 

F-25

----

 

The significant components ofdeferred income tax expense assets and liabilities are as follows:

 
|                                 |   | **2003**  |    | **2002**  |   |
|--------------------------------------|--------|-----------|---------|-----------|--------|
| Deferred tax assets:                 |   |      |    |      |   |
| Allowance for loan losses            |   | $         | 290,218 |      | $      | 262,768 |   |
| Unearned discounts                   |   | 5,825     |    | 7,829     |   |
| Net intangibles                      |   | 3,503     |    | 3,503     |   |
| Net operating loss - federal         |   | —    |    | 191,854   |   |
| Net operating loss - state           |   | 682,194   |    | 1,049,305 |   |
| Other                                |   | 323,786   |    | 159,381   |   |
| Tax credits                          |   | —    |    | 157,069   |   |
| Gross deferred tax assets            |   | 1,305,526 |    | 1,831,709 |   |
| Net valuation allowance              |   | (386,586  | )       | (900,131  | )      |
| Net deferred tax assets              |   | 918,940   |    | 931,578   |   |
|                                 |   |      |    |      |   |
| Deferred tax liabilities:            |   |      |    |      |   |
| Investments                          |   | —    |    | (60,131   | )      |
| Depreciation                         |   | (296,477  | )       | (280,889  | )      |
| FHLB Stock                           |   | (233,020  | )       | (223,580  | )      |
| Originated mortgage servicing rights |   | (870      | )       | (5,610    | )      |
| Gross deferred tax liabilities       |   | (530,367  | )       | (570,210  | )      |
|                                 |   |      |    |      |   |
| Net deferred tax asset               |   | $         | 388,573 |      | $      | 361,368 |   |

 

The decrease in the valuationallowances during the three years ended December 31, 2003, 2002 and 2001 wasdue to the expiration of the state net operating losses that had a valuationallowance against them.  As of December31, 2003 the Company had a total New Mexico net operating loss of$11,369,754.  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 $387,000 as of December 31, 2003, $900,000 as of December 31,2002, and $1,009,000 as of December 31, 2001. In assessing the realizability of the remaining deferred tax assets,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 remaining netdeferred tax assets existing at December 31, 2003, 2002, and 2001 respectively.

 

Expiration of State NetOperating Loss Carryforwards are as follows:

 
| 2004                                          |   | $         | 6,282,431  |   |
|-----------------------------------------------|--------|-----------|------------|--------|
| 2005                                          |   | 5,087,323 |       |
|                                          |   |      |       |
| Total State Net Operating Loss  Carryforwards |   | $         | 11,369,754 |   |

 

F-26

----

 

**NOTE 12****                                             REGULATORYMATTERS**

 

The Bank is subject to variousregulatory capital requirements administered by the federal banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory,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 with Office ofThrift 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 31,2003 as reported to the OTS.
|                                                               |   | **Tier 1-  Core  Capital** |        | **Tier 1-  Risk-based  Capital** |        | **Total  Risk-based  Capital** |   |
|--------------------------------------------------------------------|--------|----------------------------|-------------|----------------------------------|-------------|--------------------------------|--------|
|                                                               |   |                       |        |                             |        |                           |   |
| Total regulatory assets                                            |   | $                          | 203,988,300 |                             |        |                           |   |   |
| Net unrealized appreciation on  available-for-sale securities, net |   | (61,393                    | )           |                             |        |                           |   |
| Less intangible assets disallowed for  regulatory purposes         |   | (1,577,984                 | )           |                             |        |                           |   |
|                                                               |   |                       |        |                             |        |                           |   |
| Adjusted regulatory total assets                                   |   | $                          | 202,348,923 |                             |        |                           |   |   |
|                                                               |   |                       |        |                             |        |                           |   |
| Risk-based assets                                                  |   |                       |        | $                                | 137,712,000 |                           | $      | 137,712,000 |   |
|                                                               |   |                       |        |                             |        |                           |   |
| Stockholder’s equity                                          |   | $                          | 21,838,884  |                             | $           | 21,838,884                     |   | $ | 21,838,884 |   |
| Net unrealized appreciation on  available-for-sale securities, net |   | (36,836                    | )           | (36,836                          | )           | (36,836                        | )      |
| General valuation allowance                                        |   | —                     |        | —                           |        | 824,920                        |   |
| Less intangible assets disallowed  forregulatory purposes          |   | (1,577,984                 | )           | (1,577,984                       | )           | (1,577,984                     | )      |
|                                                               |   |                       |        |                             |        |                           |   |
| Regulatory capital                                                 |   | 20,224,064                 |        | 20,224,064                       |        | 21,048,984                     |   |
| Regulatory capital required to be “well  capitalized”    |   | 10,117,446                 |        | 8,262,720                        |        | 13,771,200                     |   |
|                                                               |   |                       |        |                             |        |                           |   |
| Excess regulatory capital                                          |   | $                          | 10,106,618  |                             | $           | 11,961,344                     |   | $ | 7,277,784 |   |
|                                                               |   |                       |        |                             |        |                           |   |
| Bank’s capital to adjusted regulatory  assets                 |   | 9.99                       | %           |                             |        |                           |   |
|                                                               |   |                       |        |                             |        |                           |   |
| Bank’s capital to risk-based assets                           |   |                       |        | 14.69                            | %           | 15.28                          | %      |

 

F-27

----

 

The most recent notificationfrom the OTS categorized the Bank as “well capitalized” under the regulatoryframework for prompt corrective action. To remain categorized as “well capitalized”, the Bank would have tomaintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratiosas disclosed in the table below.  Thereare no conditions or events since the most recent notification that managementbelieves have changed the Bank’s prompt corrective action category.

 
|                                     |   | **Actual** |       | **For  Capital  Adequacy Purposes** |   | **To Be Well  Capitalized  Under Prompt Corrective  Action Provisions** |   |
|------------------------------------------|--------|------------|------------|-------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                     |   | **Amount** |       | **Ratio**                           |   | **Amount**                                                              |   | **Ratio** |   | **Amount** |   | **Ratio** | ** ** |
|                                     |   |       |       |                                |   |                                                                    |   |   |   |   |   |   |   |
| At December  31, 2003:                   |   |       |       |                                |   |                                                                    |   |   |   |   |   |   |   |
|                                     |   |       |       |                                |   |                                                                    |   |   |   |   |   |   |   |
| Total Capital (to risk weighted assets)  |   | $          | 21,048,984 |                                | 15.28  | %                                                                       | $      | 11,016,960 |   | 8.00 | % | $ | 13,771,200 |   | 10.00 | % |
| Tier 1 Capital (to risk weighted assets) |   | 20,224,064 |       | 14.69                               | %      | 5,508,480                                                               |   | 4.00 | % | 8,262,720 |   | 6.00 | % |
| Tier 1 Capital (to regulatory assets)    |   | 20,224,064 |       | 9.99                                | %      | 8,093,957                                                               |   | 4.00 | % | 10,117,446 |   | 5.00 | % |
|                                     |   |       |       |                                |   |                                                                    |   |   |   |   |   |   |   |
| 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 | % |

 

OTS regulations impose variousrestrictions on the Bank with respect to its ability to pay dividends to theCompany.  

 

F-28

----

 

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

 

No cashdividends were declared or paid in 2003, 2002, or 2001.

 

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 granted underthe 1997 Plan after ten years from the date of the adoption of the 1997 Plan.

 

In addition, the 1997 Planprovides for the granting of Stock Appreciation Rights (“SARs”).  No SARs have been awarded as of December 31,2003.  During 2003, an additional 100,000shares were authorized to be granted under the 1997 Plan.  At December 31, 2003, options to purchase65,520 shares of the Company’s common stock were available for issuance underthe 1997 Plan.

 

A summary of the status of theCompany’s stock options as of December 31, 2003, 2002 and 2001, and the changesfor the years then ended is presented below:

 
|                                                                   |   | **For the  year ended December** |   |
|------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                   |   | **2003**                         |   | **2002** |   | **2001** |   |
|                                                                   |   | **Shares**                       |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                                                                   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Options outstanding, beginning of year                                 |   | 141,801                          |   | $ | 7.133 |   | 149,180 |   | $ | 7.054 |   | 158,360 |   | $ | 7.042 |   |
| Granted                                                                |   | 40,000                           |   | 9.360 |   | 5,000 |   | 7.990 |   | — |   | — |   |
| Exercised                                                              |   | (2,732                           | )      | 6.229 |   | (12,379 | ) | 6.531 |   | (5,100 | ) | 5.625 |   |
| Forfeited                                                              |   | —                           |   | — |   | — |   | — |   | (4,080 | ) | 8.375 |   |
|                                                                   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Options outstanding, end of year                                       |   | 179,069                          |   | $ | 7.644 |   | 141,801 |   | $ | 7.133 |   | 149,180 |   | $ | 7.054 |   |
|                                                                   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair market value of  options granted during the year |   |                             |   | $ | 5.366 |   |   |   | $ | 5.694 |   |   |   | $ | — |   |

 

F-29

----

 

The Company has adopted theNon-Employee Director Retainer Plan (“Retainer Plan”) which provides for thepayment of all or a portion of the directors fees in shares of common stock ofthe Company.  The number of shares isdetermined based on the fair market value of the Company’s stock at the end ofthe month the fee is payable.

 

The Retainer Plan defers therecognition of compensation by the directors by deferring the issuance ofcommon stock to the director until the director leaves the board or the Plan isterminated.  A total of 50,000 shares ofcommon stock have 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.  During 2003, $71,000 of directors fees,representing 6,642 shares of common stock to be issued, were reserved under theterms of the Retainer Plan.  As ofDecember 31, 2003, 1,878 of these shares have been issued.

 

The Company accounts forcompensation costs incurred in connection with the granting of stock optionsand director retainer plan using the intrinsic value method prescribed in APBOpinion No. 25.  As such, no compensationexpense was recorded in connection with the awarding of stock options during2003, 2002, or 2001 as the exercise price was not below the market price of theCompany’s common stock at the respective dates of grant. In 1995, the FASBissued SFAS No. 123, *Accounting for Stock Based Compensation,* andin 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.

 

The following table summarizesinformation 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, 2003 |   | $                                        | 5.625 to $9.360 |   | 179,069 |   | 5.21 |   | $ | 7.644 |   |
|              |   |                                     |            |   |   |   |   |   |   |
| 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 |   |

 

F-30

----

 

No stock options were grantedin 2001.  The fair value of each stockoption granted during 2003 and 2002 was estimated on the date of grant usingthe Black-Scholes option-pricing model with the following weighted average assumptions:

 
|                      |   | **2003** |   | **2002** |   |
|---------------------------|--------|----------|--------|----------|--------|
| Dividend yield            |   | —   | %      | —   | %      |
| Expected volatility       |   | 40.00    | %      | 40.00    | %      |
| Risk-fee interest rate    |   | 3.86     | %      | 3.65     | %      |
| Expected lives (in years) |   | 8        |   | 7        |   |

 

The fair value of the directorretainer plan shares granted during 2003, 2002, and 2001 was estimated on thedate of grant using the Black-Scholes option-pricing model with the followingweighted average assumptions:
|                      |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
|                      |   |     |   |     |   |     |   |
| Dividend yield            |   | —   | %      | —   | %      | —   | %      |
| Expected volatility       |   | 32.00    | %      | 40.00    | %      | 40.00    | %      |
| Risk-fee interest rate    |   | 3.31     | %      | 3.19     | %      | 4.61     | %      |
| Expected lives (in years) |   | 7        |   | 5        |   | 5        |   |

 

F-31

----

 

**NOTE 14               EMPLOYEEBENEFIT PLANS**

 

The Company and the Bank have aprofit sharing/employee stock ownership plan (“ESOP”) for which substantiallyall employees are eligible.  Contributions,when made, may be made in the form of cash or in common stock of theCompany.  Contribution amounts are basedupon employee’s compensation, but may not exceed maximum deductible limits forfederal income tax purposes.  Employercontributions to the ESOP of $37,731, $56,000, and $41,300, were made in 2003,2002 and 2001, respectively.  The profitsharing plan also includes a 401(k) before-tax salary deferral feature.Employees may elect to contribute to the plan and such contributions may bematched by the Bank as a percentage of each employee’s contribution.  Employer contributions made to the 401(k)plan for the years ended December 31, 2003, 2002, and 2001 totaled $23,781,$19,700, and $17,500, respectively.

 

During 2000, the ESOP purchased240,000 shares of previously unissued Company common stock at $5.625 per sharefor proceeds to the Company of $1,350,000. This purchase was facilitated by a loan from an unrelated third party inthe amount of $1,350,000.  The sharespurchased initially were pledged as collateral for the loan, and were releasedat 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 allocated toemployees, the Company reports compensation expense equal to the current marketprice of the shares and the shares become outstanding for earnings-per-sharecomputations.  ESOP compensation expenserelative to this release of shares was $357,064, $266,799, and $277,461 for theyears ended December 31, 2003, 2002, and 2001, respectively.

 

Shares of the Company’s commonstock held by the ESOP at December 31, 2003 and 2002 were as follows:

 
|                           |   | **2003** |      | **2002** |   |
|--------------------------------|--------|----------|-----------|----------|--------|
|                           |   |     |      |     |   |
| Allocated shares               |   | 48,734   |      | 43,788   |   |
| Shares released for allocation |   | 112,000  |      | 80,000   |   |
| Unallocated ESOP shares        |   | 128,000  |      | 160,000  |   |
|                           |   | 288,734  |      | 283,788  |   |
|                           |   |     |      |     |   |
| Fair value of unearned shares  |   | $        | 1,818,880 |     | $      | 1,537,600 |   |
|                                |        |          |           |          |        |  |  |

 

In 1998, the Bank establishedan executive savings plan to provide additional benefits for select highlycompensated management employees of the Bank as a means for participants todefer 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, 2003, 2002, and 2001, totaled $84,900, $60,950, and$35,000, respectively.  All salarydeferral contributions are currently invested in the Company’s common stock.

 

F-32

----

 

**NOTE 15               NETINCOME PER SHARE**

 

Basic net income per share hasbeen computed by dividing net income for the years by the weighted averagenumber of common shares outstanding during the period.  Diluted net income per share has beencomputed by dividing net income for the years by the weighted average number ofcommon shares outstanding during the years adjusted for the assumed exercise ofoutstanding stock options and other contingently issuable shares of commonstock.  Net income for basic and dilutedearnings per share are the same, as there are no contingently issuable sharesof stock whose issuance would have impacted net income.

 

A reconciliation between basicand diluted weighted average common shares outstanding follows:

 
|                                                     |   | **2003**  |   | **2002**  |   | **2001**  |   |
|----------------------------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
|                                                     |   |      |   |      |   |      |   |
| Weighted average common shares – Basic*             |   | 1,252,124 |   | 1,306,352 |   | 1,316,109 |   |
|                                                     |   |      |   |      |   |      |   |
| Plus effect of dilutive securities:                      |   |      |   |      |   |      |   |
| Stock Options                                            |   | 57,471    |   | 25,502    |   | 14,394    |   |
| Shares held by Rabbi Trust                               |   | 54,040    |   | 37,277    |   | 27,120    |   |
|                                                     |   |      |   |      |   |      |   |
| Weighted average common shares – Assuming  Dilution |   | 1,363,635 |   | 1,369,131 |   | 1,357,623 |   |

 

----

*Includes shares awarded to directors underthe 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 financial guarantees.These instruments involve, to varying degrees, elements of credit and interestrate risk in excess of the amount recognized in the consolidated statements offinancial condition.  The contract ornotional amounts of these instruments reflect the extent of involvement theBank 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, 2003, unfundedcredit commitments are as follows:

 
| Commitments to extend residential loans |   | $ | 3,598,924  |   |
|-----------------------------------------|--------|---|------------|--------|
| Lines of credit                         |   | $ | 12,974,360 |   |
| Credit cards                            |   | $ | 2,280,901  |   |

 

F-33

----

 

Commitments to extend creditare agreements to lend to a customer as long as there is no violation of anycondition 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 credit andfinancial guarantees written are conditional commitments issued by the Bank toguarantee 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 $80,101 and$286,633 in standby letters of credit outstanding at December 31, 2003 and2002, respectively.

 

At December 31, 2003 and 2002,the Bank had no open interest rate swaps, futures, options, or forwardcontracts.

 

At December 31, 2003 and 2002,the Bank had $5,395,133 and $13,451,853, respectively, of commitments to sellsingle family residential loans.  Thesecommitments include loans held-for-sale and loans to be originated.

 

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 range ofpermissible valuation techniques and the numerous estimates which must be made,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:

 

***Cashand cash equivalents*** - The carrying amount forcash and cash equivalents approximates the assets’ fair value because of theshort maturity of those instruments.

 

***Securities***- The fair value of investments such as corporate bonds, trust preferredsecurities and mortgage-backed securities is estimated based on bid quotationsreceived from securities dealers and the FHLB.

 

***LoansReceivable*** - Fair values are estimated forportfolios of loans with similar financial characteristics. Mortgage loans aresegregated by type, including but not limited to residential, commercial andconstruction. Consumer loans are segregated by type, including but not limitedto home improvement loans, automobile loans, loans secured by deposits and securedand unsecured personal loans.  Each loancategory may be segmented, as appropriate, into fixed and adjustable interestrate terms, ranges of interest rates, performing and non-performing, andrepricing 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 of significantnon-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.

 

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

 

***FederalHome Loan Bank stock*** - The fair value of stock inthe FHLB is estimated to be equal to its carrying amount given it is not apublicly traded equity security, it has an adjustable dividend rate, and alltransactions in the stock are executed at the stated par value.

 

***Depositsand 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

----

 

***FederalHome Loan Bank advances****-*The estimated fair valueof the FHLB advances is normally based upon the discounted value of thedifferences between contractual interest rates and current market rates forsimilar agreements.  However, theestimated fair value is the same as the carrying value due to the short-termnature of the advances.

 

***ESOPNote*** – Effective May 1, 2000, the Company issuedand sold 240,000 shares of Common Stock for cash to its ESOP.  The ESOP transaction was facilitated by aloan in the amount of $1,350,000 to the ESOP from a third party lender.  On December 31, 2002, the Company paid off anote payable for the Employee Stock Ownership Plan. On December 31, 2003, 128,000of these shares are unallocated.

 

***TrustPreferred Securities*** –

On June 27, 2002, the Companyissued $4 million in trust preferred securities through a private placement ofFloating Rate Trust Preferred Securities of Access Anytime Capital Trust IIwith a liquidation value of $1,000 per share to mature 30 years from the dateof issuance.  The trust preferredsecurities are at a variable rate of the London Interbank Offered Rate (LIBOR)plus 365 basis points, floating quarterly, with a five-year cap of 12%.  At December 31, 2003, the interest rate was4.80%.  The trust preferred securitiesmay 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 at price of 107.6875on July 25, 2006, 106.15 on July 25, 2007, 104.6125 on July 25, 2008, 103.075on July 25, 2009, 101.5375 on July 25, 2010 and may be redeemed at par on July25, 2011 or after.  The Company investedapproximately $2.9 million of the net proceeds in the Bank to increase itscapital levels.

 

***Off-statementof financial condition financial instruments*** - Thefair 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 feescurrently charged for similar agreements or on the estimated cost to terminatethem or otherwise settle the obligations with the counterparties at thereporting date.

 

The fair value of off-statementof financial condition financial instruments is estimated to equal the carryingamount at December 31, 2003 and 2002.

 

***Non-financialinstruments*** - SFAS No. 107 does not permitfinancial institutions to take into account the value of long-termrelationships with depositors, commonly known as core deposit intangibles, whenestimating the fair value of deposit liabilities.  These intangibles are considered to be separate intangible assetsthat are not financial instruments. Nonetheless, financial institutions’ core deposits have typically tradedat premiums to their book values under both historical and current market conditions.

 

Likewise, SFAS No. 107 does notpermit financial institutions to take into account the value of the cash flowsand income stream derived from its portfolio of loans serviced for others.

 

F-36

----

 

The estimated fair values ofthe Bank’s financial instruments are shown below:

 
|                                                   |   | **December  31, 2003** |       | **December  31, 2002**     |       |
|--------------------------------------------------------|--------|------------------------|------------|----------------------------|------------|
|                                                   |   | **Carrying  amount**   |       | **Estimated  fair  value** |       | **Carrying  amount** |   | **Estimated  fair  value** |   |
|                                                   |   | **(In  Thousands)**    |       |
|                                                   |   |                   | ** ** |                       | ** ** |   | ** ** |   | ** ** |
| Financial assets:                                      |   |                   |       |                       |       |   |   |   |   |
| Cash and cash equivalents                              |   | $                      | 11,611     |                       | $          | 11,611 |   | $ | 12,342 |   | $ | 12,342 |   |
| Certificates of deposit                                |   | 4,480                  |       | 4,551                      |       | 5,993 |   | 6,025 |   |
| Securities available-for-sale                          |   | 5,815                  |       | 5,815                      |       | 6,665 |   | 6,665 |   |
| Securities held-to-maturity                            |   | 16,762                 |       | 16,829                     |       | 1,862 |   | 1,872 |   |
| Loans held-for-sale                                    |   | 1,797                  |       | 1,834                      |       | 6,553 |   | 6,688 |   |
|                                                   |   |                   |       |                       |       |   |   |   |   |
| Loans receivable                                       |   | 156,237                |       | 158,882                    |       | 149,856 |   | 152,765 |   |
| Interest receivable                                    |   | 859                    |       | 859                        |       | 873 |   | 873 |   |
| FHLB stock                                             |   | 1,167                  |       | 1,167                      |       | 1,013 |   | 1,013 |   |
|                                                   |   |                   |       |                       |       |   |   |   |   |
| Financial liabilities:                                 |   |                   |       |                       |       |   |   |   |   |
| Deposits                                               |   | 162,846                |       | 155,342                    |       | 159,197 |   | 151,737 |   |
| Accrued interest and other liabilities                 |   | 1,794                  |       | 1,794                      |       | 1,384 |   | 1,384 |   |
| Advance payments by borrowers for taxes and  insurance |   | 355                    |       | 355                        |       | 434 |   | 434 |   |
| FHLB advances                                          |   | 17,067                 |       | 17,173                     |       | 8,267 |   | 8,396 |   |
| Trust preferred securities                             |   | 8,000                  |       | 8,440                      |       | 8,000 |   | 8,448 |   |
|                                                        |        |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

**NOTE 17               COMMITMENTSAND CONTINGENCIES**

 

The Company and its subsidiaryare from time to time parties to various legal actions arising in the normalcourse of business.  Management believesthat there is no proceeding threatened or pending against the Company or itssubsidiary which, if determined adversely, would have a material adverse effecton the consolidated financial position or results of operations of the Company.

 

F-37

----

 

**NOTE 18               PARENTCOMPANY CONDENSED FINANCIAL STATEMENTS**

 

The following condensedstatements of financial condition as of December 31, 2003 and 2002, and therelated statements of operations and cash flows for each of the years in threeyear period ended December 31, 2003 for the Company should be read inconjunction with the consolidated financial statements and notes thereto.

 

**Statements ofFinancial Condition**

 
|                                              |   | **December  31** |       |
|---------------------------------------------------|--------|------------------|------------|
|                                              |   | **2003**         |       | **2002** |   |
| Assets:                                           |   |             |       |   |   |
| Cash and cash equivalents                         |   | $                | 1,403,602  |   | $ | 1,395,385 |   |
| Certificates of deposit                           |   | 100,000          |       | 1,000,000 |   |
| Investment in the Bank                            |   | 21,838,884       |       | 19,613,625 |   |
| Securities available-for-sale                     |   | 376,036          |       | 468,667 |   |
| Securities held-to-maturity                       |   | 300,000          |       | 300,000 |   |
| Premises and equipment, net                       |   | 392,218          |       | 400,611 |   |
| Other assets                                      |   | 228,312          |       | 294,246 |   |
|                                              |   |             |       |   |   |
| Total assets                                      |   | $                | 24,639,052 |   | $ | 23,472,534 |   |
|                                              |   |             |       |   |   |
| Liabilities:                                      |   |             |       |   |   |
| Accounts payable and accrued expenses             |   | $                | 1,273,336  |   | $ | 655,321 |   |
| Trust Preferred Securities – Notes Payable   |   | 8,000,000        |       | 8,000,000 |   |
|                                              |   |             |       |   |   |
| Total liabilities                                 |   | 9,273,336        |       | 8,655,321 |   |
|                                              |   |             |       |   |   |
| Stockholders’ equity:                        |   |             |       |   |   |
| Common stock                                      |   | 15,107           |       | 15,080 |   |
| Capital in excess of par value                    |   | 11,643,276       |       | 11,378,222 |   |
| Retained earnings                                 |   | 5,831,295        |       | 4,547,359 |   |
| Accumulated other comprehensive income, net       |   | 57,872           |       | 90,197 |   |
|                                              |   | 17,547,550       |       | 16,030,858 |   |
| Unallocated Employee Stock Ownership Plan  shares |   | (690,000         | )          | (870,000 | ) |
| Treasury stock, at cost                           |   | (1,491,834       | )          | (343,645 | ) |
| Total stockholders’ equity                   |   | 15,365,716       |       | 14,817,213 |   |
|                                              |   |             |       |   |   |
| Total liabilities and stockholders’ equity   |   | $                | 24,639,052 |   | $ | 23,472,534 |   |

 

F-38

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**Statements ofOperations**

 
|                                       |   | **Years  ended December 31** |      |
|--------------------------------------------|--------|------------------------------|-----------|
|                                       |   | **2003**                     |      | **2002** |   | **2001** |   |
| Dividends from the Bank                    |   | $                            | 817,500   |   | $ | 652,500 |   | $ | 608,000 |   |
| Equity in undistributed income of the Bank |   | 2,270,419                    |      | 1,554,381 |   | 1,552,925 |   |
| Other income                               |   | 131,954                      |      | 68,686 |   | 24,158 |   |
| Interest expense                           |   | (652,871                     | )         | (574,867 | ) | (281,111 | ) |
| Salaries and employee benefits             |   | (930,469                     | )         | (537,762 | ) | (446,931 | ) |
| Other expense                              |   | (352,597                     | )         | (159,905 | ) | (77,988 | ) |
|                                       |   |                         |      |   |   |   |   |
| Net income                                 |   | $                            | 1,283,936 |   | $ | 1,003,033 |   | $ | 1,379,053 |   |

 

F-39

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**Statements of Cash Flows**

 
|                                                                                                  |   | **Years ended  December 31** |      |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                                  |   | **2003**                     |      | **2002** |   | **2001** |   |
| Cash flows from operating activities:                                                                 |   |                         |      |   |   |   |   |
| Net income                                                                                            |   | $                            | 1,283,936 |   | $ | 1,003,033 |   | $ | 1,379,053 |   |
| Adjustments to reconcile net income to cash  Used by operating activities: from operating activities: |   |                         |      |   |   |   |   |
| Equity in income of the Bank                                                                          |   | (3,087,919                   | )         | (2,206,881 | ) | (2,160,925 | ) |
| Depreciation D                                                                                        |   | 8,393                        |      | 8,392 |   | 3,497 |   |
| Non-cash ESOP compensation expense                                                                    |   | 357,064                      |      | 266,799 |   | 277,461 |   |
| Common stock rights issued in lieu of  directors compensation                                         |   | 71,000                       |      | 52,800 |   | 37,350 |   |
| Gains on sale of available-for-sale  securities                                                       |   | (8,995                       | )         | — |   | — |   |
| Decrease (increase) in other assets                                                                   |   | 71,400                       |      | (149,782 | ) | (148,625 | ) |
| Increase in accounts payable and accrued  expenses                                                    |   | 618,015                      |      | 160,878 |   | 283,081 |   |
| Net cash from operating activities                                                                    |   | (687,106                     | )         | (864,761 | ) | (329,108 | ) |
|                                                                                                  |   |                         |      |   |   |   |   |
| Cash flows from investing activities:                                                                 |   |                         |      |   |   |   |   |
| Proceeds from sales of available-for-sale  securities                                                 |   | 108,995                      |      | — |   | — |   |
| Net decrease (increase) in certificates of  deposit                                                   |   | 900,000                      |      | (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                                                                                |   | 817,500                      |      | 652,500 |   | 608,000 |   |
| Net cash from investing activities                                                                    |   | 1,826,495                    |      | (922,500 | ) | (2,903,947 | ) |
|                                                                                                  |   |                         |      |   |   |   |   |
| Cash flows from financing activities:                                                                 |   |                         |      |   |   |   |   |
| Decrease in payable to Bank                                                                           |   | —                       |      | — |   | (50,718 | ) |
| Purchase of treasury stock                                                                            |   | (1,148,189                   | )         | (106,750 | ) | (73,262 | ) |
| Net proceeds from issuance of common stock                                                            |   | 17,017                       |      | 80,852 |   | 28,687 |   |
| Net decrease in other borrowed funds                                                                  |   | —                       |      | — |   | (200,000 | ) |
| Repayment of debt                                                                                     |   | —                       |      | (1,141,766 | ) | (147,973 | ) |
| Issuance of trust preferred security                                                                  |   | —                       |      | 4,000,000 |   | 4,000,000 |   |
| Net cash from financing activities                                                                    |   | (1,131,172                   | )         | 2,832,336 |   | 3,556,734 |   |
|                                                                                                  |   |                         |      |   |   |   |   |
| Increase in cash and cash equivalents                                                                 |   | 8,217                        |      | 1,045,075 |   | 323,679 |   |
| Cash and cash equivalents at beginning of  year                                                       |   | 1,395,385                    |      | 350,310 |   | 26,631 |   |
|                                                                                                  |   |                         |      |   |   |   |   |
| Cash and cash equivalents at end of year                                                              |   | $                            | 1,403,602 |   | $ | 1,395,385 |   | $ | 350,310 |   |

 

F-40

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**NOTE 19               SUBSEQUENTEVENT**

 

The Bank announced on January 30, 2004, thatit had reached a definitive agreement with Matrix Capital Bank, a wholly ownedsubsidiary of Matrix BanCorp, Inc., to acquire two branches of Matrix CapitalBank located in Las Cruces, New Mexico. The acquisition is subject to regulatory approval and other customaryconditions and is expected to be completed in the second quarter of 2004.  As of January 30, 2004, deposits of the twoLas Cruces branches to be acquired totaled about $84 million and loans thatwould be transferred totaled about $25 million.  The new branches will operate under the name AccessBank.

 

F-41

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**GLOSSARY** OF CERTAIN TERMS

 

The following are definitionsof certain terms used in this report on Form 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

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