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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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



|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number: 001-12487



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FIRST STATE BANCORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|NEW MEXICO                                                     |  | 85-0366665                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                          |  |           
|----------------------------------------- |  | ----------
|7900 JEFFERSON NE ALBUQUERQUE, NEW MEXICO |  | 87109     
|(Address of principal executive offices)  |  | (Zip Code)



Registrants
telephone number, including area code: (505) 241-7500



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Securities registered pursuant to Section 12(b) of the Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|NONE                |  | NONE                                     



Securities
registered pursuant to Section 12(g) of the Act:



Common
Stock, no par value

(Title of class)



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



Indicate by check mark if disclosure of the
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment of this Form 10-K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of
1934).    Yes  x    No ̈



The aggregate market value of the Common Stock as of June 30, 2004 (the last business day of
the registrants most recently completed second quarter), based upon the last sale price of the Common Stock at June 30, 2004 as reported by The Nasdaq Stock Market, held by non-affiliates was approximately $218,655,000. Determination of stock
ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.



As of March 10, 2005, there were 15,372,333 shares of common stock issued and outstanding.



Documents Incorporated By Reference



Certain Part III information is incorporated herein by reference, pursuant to Instruction
G of Form 10-K, from First State Bancorporations Proxy Statement for its 2005 Annual Shareholders Meeting, which will be filed with the Commission by April 29, 2005.



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TABLE OF CONTENTS



|         |  |                                                                                                              |  |                
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---------------
|         |  |                                                                                                              |  | Page           
|PART I   |  |                                                                                                              |  |                
|Item 1:  |  | Business                                                                                                     |  | 3              
|Item 2:  |  | Properties                                                                                                   |  | 16             
|Item 3:  |  | Legal Proceedings                                                                                            |  | 16             
|Item 4:  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 16             
|         |  |                                                                                                             
|PART II  |  |                                                                                                              |  |                
|Item 5:  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17             
|Item 6:  |  | Selected Financial Data                                                                                      |  | 18             
|Item 7:  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 18             
|Item 7A: |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 18             
|Item 8:  |  | Financial Statements and Supplementary Data                                                                  |  | 18             
|Item 9:  |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 18             
|Item 9A: |  | Controls and Procedures                                                                                      |  | 19             
|Item 9B: |  | Other Information                                                                                            |  | 19             
|         |  |                                                                                                             
|PART III |  |                                                                                                              |  |                
|Item 10: |  | Directors and Executive Officers of the Registrant                                                           |  | Proxy Statement
|Item 11: |  | Executive Compensation                                                                                       |  | Proxy Statement
|Item 12: |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | Proxy Statement
|Item 13: |  | Certain Relationships and Related Transactions                                                               |  | Proxy Statement
|Item 14: |  | Principal Accountant Fees and Services                                                                       |  | Proxy Statement
|         |  |                                                                                                             
|PART IV  |  |                                                                                                              |  |                
|Item 15: |  | Exhibits and Financial Statement Schedules                                                                   |  | 20             
|         |  | Signatures                                                                                                   |  | 22             
|         |  | Financial Information                                                                                        |  | Appendix A     



Forward-Looking Statements



Certain statements in this Form 10-K are forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). The discussions regarding our growth strategy, expansion of operations in our markets,
competition, loan and deposit growth, timing of new branch openings, expansion opportunities including expanding our mortgage division market share, and response to consolidation in the banking industry include forward-looking statements. Other
forward-looking statements can be identified by the use of forward-looking words such as believe, expect, may, will, should, seek, approximately, intend,
plan, estimate, or anticipate or the negative of those words or other comparable terminology. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual
results to differ materially from those in the forward-looking statement. Some factors include changes in interest rates, local business conditions, government regulations, loss of key personnel or inability to hire suitable personnel, faster or
slower than anticipated growth, economic conditions, our competitors responses to our marketing strategy or new competitive conditions, and competition in the geographic and business areas in which we conduct our operations. We are not
undertaking any obligation to update these risks to reflect events or circumstances after the date of this report to reflect the occurrence of unanticipated events.



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PART I



Item 1: Business.



First State Bancorporation



We are a New Mexico-based bank holding company. We provide commercial
banking services to businesses through our subsidiary bank, First State Bank N.M. (First State Bank or Bank). We operate thirty branch offices, including twenty-four in New Mexico (three offices in Taos, nine offices in
Albuquerque, four offices in Santa Fe, and one office each in Rio Rancho, Los Lunas, Bernalillo, Questa, Pojoaque, Placitas, Moriarty, and Belen), five in Colorado (Denver, Colorado Springs, Fort Collins, Littleton, and Longmont), and one in Utah
(Salt Lake City). First State Banks branches in Colorado and Utah operate under the name First Community Bank. In addition, the Banks residential mortgage origination division operates in all three states as First Community Mortgage.
First State Bank began in 1922 in Taos County as a single bank, and is currently the largest bank in that county. At December 31, 2004, we had total assets, total deposits, and total stockholders equity of $1.816 billion, $1.401 billion, and
$144 million, respectively.



Our management strategy is to provide a business
culture in which customers are provided individualized customer service. As part of our operating and growth strategies, we are working to (i) place greater emphasis on attracting core deposits from, and providing financial services to, local
businesses and governments; (ii) expand operations in the Albuquerque metropolitan area (which consists of Albuquerque and Rio Rancho), Belen, Los Lunas, Santa Fe, and other strategic areas in New Mexico; (iii) expand operations in the Colorado and
Utah markets including the Denver metropolitan area, Colorado Springs, Salt Lake City, and the surrounding areas; (iv) maintain asset quality through strict adherence to credit administration standards; (v) manage interest rate risk; (vi) continue
to improve internal operating systems; (vii) increase non-interest income, and (viii) manage non-interest expenses.



We believe that we are well qualified to pursue an aggressive growth strategy throughout New Mexico, Colorado, and Utah due to our responsive customer service, our
streamlined management structure, managements and employees strong community involvement in our business locations, and our recent expansion into the Colorado and Utah markets. We believe that expansion opportunities are centered
primarily in the Albuquerque metropolitan area, Santa Fe, the Denver metropolitan area, Colorado Springs, Salt Lake City, and the surrounding markets. We continue to add staff to service the additional volume of loans and deposits obtained as a
result of expansion in and into these marketplaces. The level of any additional staffing and related expenses will depend on the magnitude of continued growth. In addition, we will consider potential market acquisition targets that complement our
existing operations and provide economies of scale when combined with our existing locations. See Growth Strategy.



At December 31, 2004, First State Bancorporation and First State Bank were well capitalized under regulatory capital guidelines.



Our executive offices are located at 7900 Jefferson NE, Albuquerque, New Mexico 87109, and
our telephone number is (505) 241-7500.



History



First State Bank began operations in 1922 in Taos County, New Mexico. First State
Bancorporation and an affiliated company, New Mexico Bank Corporation, were organized under the laws of New Mexico in 1988 to acquire banking institutions in New Mexico. In December 1988, we acquired First State Bank, and New Mexico Bank Corporation
acquired National Bank of Albuquerque (NBA). After a change in New Mexico banking laws in 1991, First State Bancorporation and New Mexico Bank Corporation merged, and the operations of NBA were merged into First State Bank in December
1991.



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On December 1, 1993, we purchased 94.5% of the outstanding shares of common stock of First State Bank of Santa Fe
(Santa Fe Bank). Certain members of our current management, our board of directors, and two officers of First State Bank sold their shares of Santa Fe Bank to us. Santa Fe Bank was merged into First State Bank as of June 5, 1994.



During the fourth quarter of 1999, First State Bank opened a mortgage
origination division. The mortgage division allows the Bank to generate fee income from our branch network and construction lending activities as well as attract additional customers. In 2004, the mortgage origination division was reorganized and
began operating in New Mexico, Colorado, and Utah as First Community Mortgage.



On October 1, 2002 we entered the Colorado and Utah markets when we completed our acquisition of First Community Industrial Bank (First Community) for approximately $67 million. We financed this acquisition through a public
offering of our common stock in August 2002, which netted approximately $51 million and through the issuance of approximately $25 million in trust preferred securities in June of 2002. We acquired approximately $343 million in loans and
approximately $242 million in deposits, and recognized goodwill of approximately $43 million related to the transaction. We merged First Community into First State Bank and officially changed the name of the Bank to First State Bank N.M. However,
the branches in Colorado and Utah operate under the name of First Community Bank.



Since our initial public offering in 1993, we have made significant investments in expansion and technology. Since 1993, First State Bank has opened sixteen new branches and acquired nine branches. During 2003, we began to strategically
reposition the acquired branches and closed two of the branches. The repositioning continued into 2004 with the remodeling/relocation of the remaining First Community branches, the opening of two mortgage offices, and closing one branch in Colorado.



Operating Strategy



Our operating strategies include:



| |  |  | Providing responsive, personal customer service
| | - |  | -----------------------------------------------



| |  |  | Fostering a culture in which employees are valued and respected
| | - |  | ---------------------------------------------------------------



| |  |  | Attracting new account relationships
| | - |  | ------------------------------------



| |  |  | Emphasizing community involvement
| | - |  | ---------------------------------



| |  |  | Developing new business opportunities
| | - |  | -------------------------------------



| |  |  | Increasing efficiency
| | - |  | ---------------------



| |  |  | Optimizing asset/liability management
| | - |  | -------------------------------------



Customer Service. Our objective is to increase market share in both lending volume and deposits by providing responsive customer service that is tailored to our
customers needs. By maximizing personal contact with customers, maintaining low employee turnover, and endeavoring to understand the needs and preferences of our customers, we are working to maintain and further enhance our reputation of
providing excellent customer service. We have developed a streamlined management structure that allows us to make credit and other banking decisions rapidly. We believe that this structure, when compared to other competing institutions, enables us
to provide a higher degree of service and increased flexibility to creditworthy customers.



Employees. We recognize that our individual employees are the core of our overall business strategy. We are committed to providing a workplace environment in which the individual employee is valued and
respected. We have strategically hired and promoted within the Bank many talented bankers and have provided each region with local decision making ability which allows us to best serve and attract small to medium size businesses.



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New Account Relationships. We emphasize relationship banking with local businesses, local governments, and
individual customers across all product lines. We intend to continue to target our marketing efforts to those businesses, governments, and individuals who prefer our personalized customer service, combined with our emphasis on local decision making
and the delivery of a state-of-the-art array of products and services.



Community Involvement. First State Banks management and other employees participate actively in a wide variety of civic and community activities and organizations in New Mexico, Colorado, and Utah. First State Bank management
also sponsors a number of community-oriented events each year. We believe that these activities assist First State Bank through increased visibility and through development and maintenance of customer relationships.



New Business Opportunities. We have and will continue to consider a variety of new
banking opportunities, whether through the opening of de novo branches, acquisition of existing commercial banks or bank holding companies, or other opportunities permissible under state and federal banking regulations. We will focus our expansion
efforts in areas or markets that are complementary to our existing customer base and areas of operation. See Growth Strategy.



Increasing Efficiency. We believe that our investments in technology will allow us to grow revenues faster than expenses over the next few years. Our investments
in internet and telephone banking continue to provide alternative methods to enhance our ability to service both our retail and commercial customers. We continue on an implementation path with an imaging based document management and archiving
system that is providing efficiencies in managing document flow and ensuring records retention is managed correctly and efficiently. All of our locations are linked together by a private voice and data network eliminating long distance costs for
intracompany phone calls and data transmission. We have implemented VPN technology, which allows bank employees greater communication flexibility throughout the organization as well as increasing worker productivity. We are prepared for the
efficiencies that will come with Check 21 with the development of our long term check and payment strategies. We believe these investments as well as others will allow us to expand our asset base without a commensurate increase in non-interest
expenses.



We continue to evaluate and improve our branch locations and
facilities. In 2003, we began repositioning several of our facilities in Colorado and Utah to improve the future growth in these markets. Our repositioning and renovation continued throughout 2004 and included several facilities in New Mexico as
well. Occupancy expenses grew during 2004 and should stabilize in 2005 absent any de novo or acquired branches. We believe our investments in facilities will facilitate future growth as well as enable us to provide the convenience and quality of
service that our customers deserve.



Asset/Liability Management. Our
asset/liability management policy is designed to provide stable net interest income growth by protecting our earnings from undue interest rate risk. We maintain a strategy of keeping the rate adjustment period on the majority of both assets and
liabilities to an earnings neutral position, with a substantial amount of these assets and liabilities adjustable in 90 days or less. See Item 7: Managements Discussion and Analysis of Financial Condition and Results of
Operations-Asset/Liability Management.



Growth Strategy



We expect to continue pursuing a growth strategy through a combination of
internal growth, de novo branching, and selective acquisitions. Our total assets have grown from $494 million at December 31, 1998 to $1.8 billion through internal growth, de novo branching, and acquisition activity. Since 1993, large out of state
financial institutions have acquired several banks that compete with us. These institutions concentrate on the mass retail customer base and extremely large customers. They also reduce service levels to small to medium size businesses. These
institutions method of doing business affords us a continuing opportunity to gain profitable new account relationships and to expand existing relationships.



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In addition, we believe that there continues to be attractive opportunities to open new branches. Consolidation in the
banking industry and increased regulatory burdens on existing institutions provide a favorable environment for such openings. We consider a variety of criteria when evaluating potential branch expansion, including (i) the short and long term growth
prospects for the location, (ii) the management and other resources required to integrate the operations, if desirable, (iii) the degree to which the branch would enhance our geographic diversification, (iv) the degree to which the branch would
enhance our presence in an existing market, and (v) the costs of operating the branch.



We believe that the strategy we have employed successfully in the New Mexico market and are currently employing in the Colorado and Utah markets can be successfully employed in other markets in the Southwest. We, therefore, intend to
continue exploring opportunities to expand into markets in the southwestern United States either through acquisition of existing institutions with a branch structure in markets with characteristics similar to those in New Mexico, or through de novo
branching into markets that display those characteristics.



Our goal over the
near term is to continue creating a broad-based, well capitalized, customer-focused regional financial institution. To accommodate our anticipated growth, we intend to further develop our existing management and further develop management
information systems and other appropriate internal management systems. However, there can be no assurance that we will be able to achieve our growth objectives.



Market Areas and Banks



Markets. First State Bank serves three distinct market areas within New Mexico: Taos County, the Albuquerque metropolitan area (Bernalillo, Sandoval, Torrance, and
Valencia counties), and Santa Fe. In 2002, First State Bank entered into the Colorado and Utah markets with the acquisition of First Community. First Community operates in two distinct market areas: the Colorado front range market area, which
includes the Denver metropolitan area, and the Salt Lake City, Utah metropolitan area.



Taos County is a popular year-round recreation and tourist area. Ski and golf resorts in the area attract visitors from throughout the southwestern and western United States. Taos also has an active art community catering to the tourist
trade.



The Albuquerque metropolitan area is the largest metropolitan area in
New Mexico and is the financial center of the state. It has a diverse economy centered around federal and state government, military, service, and technology industries. Military facilities include Kirtland Air Force Base and Sandia National
Laboratories. A number of companies, including Intel, General Mills, America Online, and The Gap have initiated or expanded operations in the area in the past several years.



Santa Fe is the state capital of New Mexico. Its principal industries are government and tourism. Santa Fe is widely known for its
southwestern art galleries and amenities, including the Santa Fe Opera. Santa Fe is one of the largest art markets in the United States, attracting visitors from all parts of the United States and many foreign countries.



The Colorado front range market area includes the Denver metropolitan area (with branches in
Denver and Littleton), and the surrounding communities of Colorado Springs, Longmont, and Fort Collins. Denver, the capital of Colorado and the states largest city, has a diverse economy including telecommunications, aerospace, financial
services, computer software, biomedical, and many other high tech sectors. Colorado Springs also plays host to a growing number of high technology industries. Many private sector leaders in their fields are located in the front range area, including
Qwest Communications, Intel, and Lockheed Martin. The Colorado front range has emerged as a premier center for high-tech and other businesses providing a blend of quality, affordable lifestyle, cultural and national sports attractions, and desirable
climate. Effective as of December 31, 2004, we closed the Lakewood, Colorado branch until a more suitable banking location can be found. The Lakewood deposit and loan accounts will be serviced by either the Denver or Littleton branches during the
interim. We anticipate that a new Lakewood branch will be opened in the second quarter of 2005.





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Salt Lake City is the state capital of Utah and the financial center of the state. The Salt Lake City area has a diverse
economy driven by technology companies, telemarketing, engineering, management services, universities, and state and local governments. Many major companies as well as small businesses operate throughout the area. The state of Utah is a recreation
minded and livable community catering to year-round recreation with both mountain and desert areas nearby.



First State Banks operations are divided into eight regions: Taos which includes Taos county; Santa Fe which includes Santa Fe county; Albuquerque Metropolitan which includes Bernalillo and Sandoval counties;
Los Lunas which includes Valencia and Torrance counties; Northern Colorado which includes Larimer and Boulder counties; Central Colorado which includes Denver and Arapahoe counties; Southern Colorado which includes El Paso county; and Utah which
includes Salt Lake county.



First State Bank. The following table sets
forth certain information concerning the banking offices of First State Bank as of December 31, 2004:



|                             |  |                     |  |                        |           |             |   |          
|---------------------------- |  | ------------------- |  | ---------------------- | --------- | ----------- | - | ---------
|Location                     |  | Number ofFacilities |  | TotalDeposits          |           | Total Loans
|                             |  |                     |  | (Dollars in thousands)
|First State Bank (by Region) |  |                     |  |                        |           |             |   |          
|Taos                         |  | 4                   |  | $                      | 150,327   |             | $ | 48,804   
|Santa Fe                     |  | 5                   |  |                        | 167,121   |             |   | 210,531  
|Albuquerque Metropolitan     |  | 12                  |  |                        | 781,093   |             |   | 607,250  
|Los Lunas                    |  | 3                   |  |                        | 100,306   |             |   | 83,647   
|Northern Colorado            |  | 2                   |  |                        | 24,700    |             |   | 32,721   
|Central Colorado             |  | 2                   |  |                        | 88,612    |             |   | 131,183  
|Southern Colorado            |  | 1                   |  |                        | 73,319    |             |   | 220,095  
|Utah                         |  | 1                   |  |                        | 15,825    |             |   | 43,564   
|                             |  |                     |  |                        |           |             |   |          
|Total                        |  | 30                  |  | $                      | 1,401,303 |             | $ | 1,377,795
|                             |  |                     |  |                        |           |             |   |          



First State Bank offers a full range
of financial services to commercial and individual customers, including checking accounts, short and medium term loans, revolving credit facilities, inventory and accounts receivable financing, equipment financing, residential and small commercial
construction lending, residential mortgage loans, various savings programs, installment and personal loans, safe deposit services, and credit cards.



The Taos locations provide conventional commercial loans to established commercial businesses and businesses that support the tourism and skiing industries. The Taos
branches also provide a broad range of consumer banking services, including a full complement of deposit and residential construction and mortgage lending, and other loan services.



The Albuquerque metropolitan area locations primarily serve established commercial businesses and individuals who may require a full range
of banking services. In addition to an emphasis on conventional commercial and real estate secured commercial lending, these locations are active in residential construction lending and mortgage lending in the Albuquerque metropolitan area.



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The Santa Fe locations primarily serve a diverse group of small to medium size businesses and individual customers,
including commercial businesses that support the tourism industry, and residential construction and mortgage lending.



The Colorado and Utah locations provide conventional commercial and real estate secured commercial lending to small to medium size businesses and individual customers in
these markets. These locations also provide a full range of banking services, including a full complement of deposit and residential construction and mortgage lending, and other loan services. Prior to its acquisition by First State Bank, First
Community primarily made residential mortgage and retail installment loans and was prohibited from accepting transaction deposit accounts (i.e. checking accounts) due to its charter as an industrial bank.



The following is a summary of the percentage of our deposits to total deposits of FDIC
insured institutions in the counties in which we do business as of June 30, 2004:



|           |  |       |   
|---------- |  | ----- | --
|New Mexico |  |       |   
|           | 
|Taos       |  | 44.37 | % 
|Bernalillo |  | 7.80  | % 
|Santa Fe   |  | 8.87  | % 
|Sandoval   |  | 37.52 | % 
|Valencia   |  | 18.89 | % 
|Torrance   |  | 13.72 | % 
|           | 
|Colorado   |  |       |   
|           | 
|Larimer    |  | 0.20  | % 
|Boulder    |  | 0.40  | % 
|Denver     |  | 0.25  | % 
|Jefferson  |  | 0.30  | %*
|Arapahoe   |  | 0.35  | % 
|El Paso    |  | 1.32  | % 
|           | 
|Utah       |  |       |   
|           | 
|Salt Lake  |  | 0.02  | % 

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|* | We closed our branch in Jefferson County effective December 31, 2004 and the existing loans and deposits will be serviced by branches in Denver County or Arapahoe County until a new
banking location is established in Jefferson County.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe
that our greatest opportunity for growth in our current market area in New Mexico is in increasing our market share in Bernalillo, Sandoval, Valencia, and Santa Fe counties. First State Bank is the largest bank in Taos County, and growth in that
market is expected to come from economic growth and not as a result of increased market share.





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We continue to believe that the Colorado and Utah markets represent a great opportunity for growth as the acquired First
Community branches have the ability to accept transaction deposit accounts and we continue to aggressively seek commercial banking relationships with small to medium size businesses. We expect that the change in deposit and loan products combined
with the integration of our individualized customer service will result in increased market share in Colorado and Utah.



Competition



First State Bank competes for loans and deposits with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment
banking firms, asset-based non-bank lenders, governmental organizations, and other institutions with respect to the scope and type of services offered, interest rates paid on deposits, and pricing of loans, among other things. Many of our
competitors have significantly greater financial and other resources than we do. First State Bank also faces significant competition for investors funds from sellers of short-term money market securities and other corporate and government
securities.



First State Bank competes for loans principally through the range
and quality of its services, interest rates, and loan fees. We believe that First State Banks personal-service philosophy enables the bank to compete favorably with other financial institutions in its focus market of local businesses. First
State Bank actively solicits deposit-related clients and competes for deposits by offering customers competitive interest rates, personal attention, and professional service.



Employees



As of December 31, 2004, we had 552 full-time equivalent employees. We place a high priority on staff development, training, and selective hiring. We select new employees
on the basis of both technical skills and customer-service capabilities. Our staff development involves training in marketing, customer service, and regulatory compliance. Our employees are not covered by a collective bargaining agreement. We
believe that our relationship with our employees is good.



Supervision and
Regulation



First State Bancorporation. We are a bank holding
company subject to the supervision, examination, and regulation of the Board of Governors of the Federal Reserve System (the Federal Reserve Board) under the Bank Holding Company Act (the BHCA). The BHCA and other federal
laws subject bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and
regulations. As a bank holding company, our activities and those of our banking subsidiary are limited to the business of banking and activities closely related or incidental to banking, and we may not directly or indirectly acquire the ownership or
control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board.



Supervision and regulation of bank holding companies and their subsidiaries are intended primarily for the protection of depositors, the
deposit insurance funds of the Federal Deposit Insurance Corporation (the FDIC) and the banking system as a whole, not for the protection of bank holding company stockholders or creditors. The banking agencies have broad enforcement
power over bank holding companies and banks, including the power to impose substantial fines and other penalties for violation of laws and regulations.



During 2004, the Federal Reserve Board revised the bank holding company rating system. The revised system more closely aligns the Federal Reserves rating process
with the focus of its current supervisory



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practices by placing an increased emphasis on risk management, providing a more flexible and comprehensive framework for evaluating financial condition, and
requiring an explicit determination of the likelihood that the non-depository entities of a bank holding company will have a significant negative impact on the depository subsidiaries. Under the revised rating system, each bank holding company is
assigned a composite rating based on an evaluation and rating of three essential components of an institutions financial condition and operations. These three components are: Risk Management; Financial Condition; and potential impact of the
parent company and non-depository subsidiaries on the subsidiary depository institutions. A fourth rating, Depository Institution, mirrors the primary regulators assessment of the subsidiary depository institutions. The revised rating system
became effective January 1, 2005.



First State Bank N.M. As a New
Mexico-chartered state member bank of the Federal Reserve System, First State Bank is subject to regulation and supervision by the Federal Reserve Board and the New Mexico Financial Institutions Division and, as a result of the insurance of its
deposits, by the FDIC. Almost every aspect of the operations and financial condition of First State Bank is subject to extensive regulation and supervision and to various requirements and restrictions under federal and state law, including
requirements governing capital adequacy, liquidity, earnings, dividends, reserves against deposits, management practices, branching, loans, investments, and the provision of services. Various consumer protection laws and regulations also affect the
operations of First State Bank. The deposits of First State Bank are insured up to applicable limits by the FDIC.



Holding Company Liability. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to its banking
subsidiaries and commit resources to their support. This support may be required by the Federal Reserve Board at times when, absent this Federal Reserve policy, we may not be inclined to provide it. As discussed below under Prompt Corrective
Action, a bank holding company in certain circumstances also could be required to guarantee the capital plan of an undercapitalized banking subsidiary. In addition, any capital loans by a bank holding company to any of its depository
institution subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the banks.



In the event of a bank holding companys bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required to cure
immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority
over most other unsecured claims.



Payment of Dividends. The Federal
Reserve Board has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash
dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding companys capital needs, asset quality,
and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding companys financial health, such as by borrowing.



In addition, as noted above, bank holding companies are expected under Federal
Reserve Board policy to serve as a source of financial strength for their depository institution subsidiaries. This requirement, and the capital adequacy requirements applicable to bank holding companies, described below under Capital Adequacy
Requirements, may also limit our ability to pay dividends.



As a bank
holding company, we are a legal entity separate and distinct from First State Bank. Our principal asset is the outstanding capital stock of First State Bank. As a result, our ability to pay dividends on our common stock will depend primarily on the
ability of First State Bank to pay dividends to us in amounts sufficient to service our obligations. Dividend payments from First State Bank are subject to federal and state limitations, generally based on the capital level and current and retained
earnings of the bank. Approval of the Federal Reserve Board is required, for example, for payment of any dividend if the



10



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##### Table of Contents

##### Index to Financial Statements

total of all dividends declared by the bank in any calendar year would exceed the total of its net profits (as defined by regulatory agencies) for that year
combined with its retained net profits for the preceding two years. First State Bank may not pay a dividend in an amount greater than its net profits. First State Bank is also prohibited under federal law from paying any dividend that would cause it
to become undercapitalized. In addition, the Federal regulatory agencies are authorized to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of dividends could, depending on the financial
condition of First State Bank, be deemed to constitute an unsafe or unsound practice.



Under New Mexico law, First State Bank may not pay a dividend on its common stock unless its remaining surplus after payment of such dividend is equal to at least 20% of its minimum common capital requirement. First State Bank is also
prohibited from paying dividends from undivided profits if its reserves against deposits are impaired or will become impaired as a result of such payment.



Capital Adequacy Requirements. We are subject to the Federal Reserve Boards risk-based capital and leverage guidelines for bank holding companies. The
minimum ratio of total capital to risk-weighted assets (which are the credit risk equivalents of balance sheet assets and certain off balance sheet items such as standby letters of credit) is 8%. At least half of the total capital must be composed
of common stockholders equity (including retained earnings), trust preferred securities, qualifying non-cumulative perpetual preferred stock (and, for bank holding companies only, a limited amount of qualifying cumulative perpetual preferred
stock), and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, other disallowed intangibles and disallowed deferred tax assets, among other items (Tier 1 Capital). The remainder may consist of a
limited amount of subordinated debt, other perpetual preferred stock, hybrid capital instruments, mandatory convertible debt securities that meet certain requirements, as well as a limited amount of reserves for loan losses (Tier 2
Capital). The maximum amount of Tier 2 Capital that may be included in an organizations qualifying total capital is limited to 100% of Tier 1 Capital. The Federal Reserve Board has also adopted a minimum leverage ratio for bank holding
companies, requiring Tier 1 Capital of at least 4% of average total consolidated assets.



Our subsidiary, First State Bank, also is subject to risk-based and leverage capital guidelines of the Federal Reserve Board which are similar to those established by the Federal Reserve Board for bank holding
companies. As discussed below under Enforcement Powers of the Federal Regulatory Agencies, failure to meet the minimum regulatory capital requirements could subject a banking institution to a variety of enforcement remedies available to
federal regulatory authorities, including, in most severe cases, the termination of deposit insurance by the FDIC and the placement of the institution into conservatorship or receivership. The capital ratios for First State Bancorporation and First
State Bank are provided in the chart below.



Risk-Based Capital and Leverage
Ratios



|                                 |  |                                           |   |  |               |   |  |                |  
|-------------------------------- |  | ----------------------------------------- | - |  | ------------- | - |  | -------------- | -
|                                 |  | As of December 31, 2004 Risk-Based Ratios |  
|                                 |  | Tier I Capital                            |   |  | Total Capital |   |  | Leverage Ratio |  
|First State Bancorporation       |  | 9.5                                       | % |  | 10.6          | % |  | 7.8            | %
|First State Bank                 |  | 9.1                                       | % |  | 10.2          | % |  | 7.5            | %
|Minimum required ratio           |  | 4.0                                       | % |  | 8.0           | % |  | 4.0            | %
|Well capitalized minimum ratio |  | 6.0                                       | % |  | 10.0          | % |  | 5.0            | %



The federal bank regulatory
agencies risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting
these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when
circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions



11



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##### Table of Contents

##### Index to Financial Statements

substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the regulations of the Federal Reserve
Board provide that concentration of credit risk, interest rate risk and certain risks arising from nontraditional activities, as well as an institutions ability to manage these risks, are important factors to be taken into account by
regulatory agencies in assessing an organizations overall capital adequacy. The risk-based capital regulations also provide for the consideration of interest rate risk in the agencies determination of a banking institutions capital
adequacy. The regulations require such institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk.



Prompt Corrective Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the federal banking agencies must take prompt supervisory and
regulatory actions against undercapitalized depository institutions. Depository institutions, such as First State Bank, are assigned one of five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, and are subjected to differential regulation corresponding to the capital category within which the institution falls. Under
certain circumstances, a well capitalized, adequately capitalized, or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital
distributions (including paying dividends) or paying management fees to a holding company if the institution would thereafter be undercapitalized. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a
waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits.



The banking regulatory agencies are permitted or, in certain cases, required to take certain
actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institutions capital, the agencys corrective powers include, among other things:



| |  |  | prohibiting the payment of principal and interest on subordinated debt;
| | - |  | -----------------------------------------------------------------------



| |  |  | prohibiting the holding company from making distributions without prior regulatory approval;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | placing limits on asset growth and restrictions on activities;
| | - |  | --------------------------------------------------------------



| |  |  | placing additional restrictions on transactions with affiliates;
| | - |  | ----------------------------------------------------------------



| |  |  | restricting the interest rate the institution may pay on deposits;
| | - |  | ------------------------------------------------------------------



| |  |  | prohibiting the institution from accepting deposits from correspondent banks; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | in the most severe cases, appointing a conservator or receiver for the institution.
| | - |  | -----------------------------------------------------------------------------------



A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted
unless, among other things, the banking institutions holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institutions holding company is entitled to a priority of payment in
bankruptcy. Failure to meet capital guidelines could subject the bank to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, and to certain restrictions on business. As of
December 31, 2004, each of First State Bancorporation and First State Bank exceeded the required capital ratios for classification as well capitalized.



Enforcement Powers of the Federal Banking Agencies. The federal banking agencies have broad enforcement powers. Failure to comply
with applicable laws, regulations, and supervisory agreements could subject First State Bancorporation or First State Bank, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions
and potentially substantial civil money penalties. In addition to the grounds discussed under Prompt Corrective Action, the appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or
the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation:



| |  |  | the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



12



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##### Table of Contents

##### Index to Financial Statements

| |  |  | fails to become adequately capitalized when required to do so;
| | - |  | --------------------------------------------------------------



| |  |  | fails to submit a timely and acceptable capital restoration plan;
| | - |  | -----------------------------------------------------------------



| |  |  | or materially fails to implement an accepted capital restoration plan.
| | - |  | ----------------------------------------------------------------------



Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring control of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the Securities Exchange Act of 1934, such as First State Bancorporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of First State Bancorporation.



In addition, any company is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of the outstanding common stock of First State Bancorporation, or otherwise obtaining control or a controlling
influence over First State Bancorporation.



Restrictions on
Transactions with Affiliates and Insiders. First State Bank is subject to restrictions under federal law that limit certain transactions with affiliates, including loans, other extensions of credit, investments, or asset purchases. Such
transactions by a banking subsidiary with any one affiliate are limited in amount to 10% of the banks capital and surplus and, with all affiliates together, to an aggregate of 20% of the banks capital and surplus. Furthermore, such loans
and extensions of credit, as well as certain other transactions, are required to be secured in specified amounts. These and certain other transactions, including any payment of money to us, must be on terms and conditions that are or in good faith
would be offered to nonaffiliated companies.



The restrictions on loans to
directors, executive officers, principal stockholders and their related interests (collectively referred to herein as insiders) contained in the Federal Reserve Act and Regulation O apply to all federally insured institutions and their
subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related
interests. These loans cannot exceed the institutions total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation
of applicable restrictions. Regulation O institutions are not subject to the prohibitions of the Sarbanes-Oxley Act of 2002 on certain loans to insiders.



Anti-Terrorism Legislation. We are subject to the USA Patriot Act of 2001 which contains the International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001. That Act contains anti-money laundering measures affecting insured depository institutions, broker-dealers, and certain financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat
money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions operations. We have established policies and procedures to ensure
compliance with the Act and the related regulations.



Interstate Banking and
Branching. The Riegle-Neal Act enacted in 1994 permits an adequately capitalized and adequately managed bank holding company, with Federal Reserve Board approval, to acquire banking institutions located in states other than the bank holding
companys home state without



13



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##### Table of Contents

##### Index to Financial Statements

regard to whether the transaction is prohibited under state law. In addition, national banks and state banks with
different home states are permitted to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating banking institution has passed legislation prior to that date that expressly
prohibits interstate mergers. De novo interstate branching is permitted if the laws of the host state so authorizes.



The Gramm-Leach-Bliley Act. The GLBA became law on November 12, 1999, and key provisions affecting bank holding companies became effective March 11, 2000. The GLBA
enables bank holding companies to acquire insurance companies and securities firms and effectively repeals depression-era laws which prohibited the affiliation of banks and these other financial services entities under a single holding company.
Certain qualified bank holding companies and other types of financial service entities may elect to become financial holding companies under the new law. Financial holding companies are permitted to engage in activities considered financial in
nature, as defined in the GLBA, and may engage in a broader range of activities than bank holding companies or banks. The GLBA will enable financial holding companies to offer a wide variety of financial services, or services incident to financial
services, including banking, securities underwriting, merchant banking, and insurance (both underwriting and agency services). The financial services authorized by the GLBA also may be engaged in by a financial subsidiary of a national
or state bank, with the exception of insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, all of which must be conducted by the financial holding company.



The GLBA also modified laws related to financial privacy and community
reinvestment. The new financial privacy provisions generally prohibit financial institutions, including us, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to opt out of the
disclosure. Financial institutions are also required to establish and maintain policies and procedures to safeguard their customers records and information. We have established policies and procedures regarding the GLBA financial privacy
requirements and the related regulations.



Community Reinvestment Act.First State Bank is subject to the CRA. The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe
and sound operations of the banks. These regulations also provide for regulatory assessment of a banks record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to
acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) requires federal banking agencies to make public a rating of a banks performance under
the CRA. In the case of a bank holding company, the CRA performance record of its bank subsidiaries are reviewed by federal banking agencies in connection with the filing of an application to acquire ownership or control of shares or assets of a
bank or thrift or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. First State Bank received an outstanding CRA rating from the Federal Reserve at its most recent
CRA examination.



Consumer Laws and Regulations.In addition to the laws
and regulations discussed herein, First State Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and
regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Unfair
Practices Acts of states, and the Real Estate Settlement Procedures Act among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking
deposits, making loans to or engaging in other types of transactions with such customers.



Effect on Economic Environment.The policies of regulatory authorities, especially the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies
and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money



14



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##### Table of Contents

##### Index to Financial Statements

supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings,
and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the
effect of such policies on our business and earnings cannot be predicted.



Check 21 Act. We are subject to the Check Clearing for the 21st Century Act (the Check 21 Act), which was enacted on October 28, 2003 and became effective on October 28, 2004. The Check 21 Act authorizes a new negotiable
instrument called a substitute check to facilitate check truncation and electronic check exchange. A substitute check is a paper reproduction of the original check that contains an image of the front and back of the original check and
can be processed just like the original check. The Check 21 Act provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes. The Check 21 Act does not require any bank to create substitute checks
or to accept checks electronically. The Check 21 Act includes new warranties, an indemnity, and expedited re-credit procedures that protect substitute check recipients. We have established policies and procedures designed for compliance with the
Check 21 Act.



Corporate GovernanceSarbanes-Oxley Act of 2002 and NASD
Independence Rules.We are subject to the Sarbanes-Oxley Act of 2002 (SOX), which implemented reforms intended to address securities and accounting fraud. Among other things, SOX established a new accounting oversight board to
enforce auditing, quality control and independence standards, restricts provision of both auditing and consulting services by accounting firms, and provides audit committee pre-approval of non-audit services to audit clients. To insure auditor
independence, any non-audit services being provided to an audit client requires pre-approval by a companys audit committee members. SOX requires chief executive officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the Commission, subject to civil and criminal penalties for knowing violations. SOX also requires audit committees to be independent and have at least one financial expert, and enacts other requirements for
audit committee operations and selection of auditor. SOX expands the scope and penalties of the federal criminal code relating to securities and accounting fraud, and afford protection for employees who are whistle-blowers. Effective for
the year ended December 31, 2004, we are subject to the requirements of Section 404 of SOX wherein management is required to establish and maintain internal controls and procedures for financial reporting and to report annually on (1)
managements responsibility for the internal controls and procedures for financial reporting and (2) their effectiveness. The assessment reported by management is the subject of an attestation report by our independent external audit firm.



Our independent registered public accounting firm has attested to, and
reported on, managements evaluation of internal controls and procedures over financial reporting as of December 31, 2004, which appears in Appendix A.



We are listed on the Nasdaq Stock Market (Nasdaq), a subsidiary of the National Association of Securities Dealers (NASD). On November 2, 2003, the
SEC approved NASD rules for companies listed on Nasdaq as part of their qualitative listing requirements for listing or continued listing relating to audit committee composition, audit committee charters, nominating committee charters, executive
sessions of independent directors, and code of conduct requirements. Under the NASD rules, the audit committee must be composed of independent directors without recent affiliation with auditors of the company, must have an audit committee charter,
directors must have executive sessions of independent directors, must have a nominating committee charter, and must have a code of conduct applying to all employees, officers, and directors meeting certain minimum standards. As required by the NASD
rules, we have certified that we comply with the new rules. In addition, the NASD also requires audit committee approval of all related party transactions and that a majority of the board of directors be independent under the NASD definition of
independence.



15



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##### Table of Contents

##### Index to Financial Statements

The board is committed to maintaining a corporate governance structure that meets or exceeds the requirements for the
Sarbanes-Oxley Act and the recent NASD rules.



Future
Legislation. Various legislation is from time to time introduced in Congress and state legislatures with respect to the regulation of financial institutions. Such legislation may change the banking statutes and our operating environment in
substantial and unpredictable ways. We cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations, would have upon our financial condition or our results of operations.



Other



For a discussion of asset/liability management, the investment portfolio, loan portfolio, nonperforming assets, allowance for loan losses,
and deposits see Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations.



Available Information



Our Internet address is www.fsbnm.com. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Information contained on the web site is
not part of this report.



Item 2: Properties.



Our principal offices are
located at 7900 Jefferson NE, Albuquerque, New Mexico 87109. We provide services to customers from a total of thirty branches including twenty-four in New Mexico, five in Colorado, and one in Utah. These offices are located in the cities of Taos
(3), Albuquerque (9), Santa Fe (4), Rio Rancho, Belen, Bernalillo, Los Lunas, Moriarty, Placitas, Pojoaque, and Questa, New Mexico; Colorado Springs, Denver, Littleton, Longmont, and Fort Collins, Colorado; and Salt Lake City, Utah. In addition to
these branch offices, we have separate loan production offices in Denver, Colorado, and Salt Lake City, Utah, and two administrative facilities in Albuquerque. With the exception of the Main and Southside facilities in Taos, the Journal Center
facility in Albuquerque, the Bernalillo facility, the Littleton facility, and the Salt Lake City facility, which are owned by First State Bank, we lease our banking facilities. We monitor the quality and appearance of our banking facilities and
complete renovations as considered appropriate in order to effectively serve our customers. All of the facilities acquired from First Community have been renovated and/or relocated to new facilities since the acquisition, and the majority of our New
Mexico facilities have been renovated or built within the last 10 years. See Item 13: Certain Relationships and Related Transactions.



Item 3: Legal Proceedings.



From time to time we
are involved in legal proceedings. In the ordinary course of our business, claims and lawsuits are filed against us or raised by counterclaims. These legal actions arise out of claims to enforce liens, in condemnation or quiet title proceedings on
properties in which we hold security interests, and by claims involving the making and servicing of real property loans, and other issues incident to our business. In the opinion of management, the ultimate liability, if any, resulting from known
claims or lawsuits will not have a material adverse effect on our consolidated financial position or results of operations.



Item 4: Submission of Matters to a Vote of Security Holders.



No matters were submitted to a vote of our security holders during the fourth quarter of 2004.



16



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##### Table of Contents

##### Index to Financial Statements

PART II



Item 5: Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.



Price Range of Common Stock



Our Common Stock is traded on The NASDAQ Stock Markets National Market under the symbol FSNM. Our Common Stock commenced trading on November 3, 1993.
The quotations in the over-the-counter market reflect inter-dealer prices, without retail markup, markdown, or commissions and may not necessarily represent actual transactions.



|                   |  |                     |  |               |  |           |  |              |  |              |  |                 
|------------------ |  | ------------------- |  | ------------- |  | --------- |  | ------------ |  | ------------ |  | ----------------
|                   |  | Per Share (1)      
|Quarter Ended      |  | Diluted NetEarnings |  | DividendsPaid |  | BookValue |  | LowPrice (2) |  | HighPrice(2) |  | QuarterEnd Price
|December 31, 2004  |  | 0.27                |  | 0.060         |  | 9.42      |  | 15.46        |  | 19.26        |  | 18.38           
|September 30, 2004 |  | 0.27                |  | 0.060         |  | 9.27      |  | 14.51        |  | 15.80        |  | 15.77           
|June 30, 2004      |  | 0.22                |  | 0.060         |  | 8.88      |  | 14.95        |  | 16.25        |  | 15.43           
|March 31, 2004     |  | 0.23                |  | 0.055         |  | 8.93      |  | 14.98        |  | 18.12        |  | 15.39           
|December 31, 2003  |  | 0.24                |  | 0.055         |  | 8.71      |  | 14.70        |  | 17.99        |  | 17.38           
|September 30, 2003 |  | 0.26                |  | 0.055         |  | 8.58      |  | 13.41        |  | 15.74        |  | 14.81           
|June 30, 2003      |  | 0.25                |  | 0.055         |  | 8.42      |  | 10.70        |  | 13.68        |  | 13.67           
|March 31, 2003     |  | 0.23                |  | 0.050         |  | 8.20      |  | 10.70        |  | 13.05        |  | 10.70           

---

|(1) | All amounts reflect a 2-for-1 stock split which was effective February 9, 2005.
|--- | -------------------------------------------------------------------------------

|(2) | The prices shown represent the high and low closing sales prices for the quarter.
|--- | ---------------------------------------------------------------------------------



The last
reported sale price of our Common Stock on March 10, 2005, was $17.10 per share. As of March 10, 2005, there were approximately 103 shareholders of record, not including shareholders who beneficially own Common Stock held in nominee or street name.



Dividend Policy



We paid cash dividends of $3.6 million or $0.24 per share in 2004 and $3.2 million or $0.22
per share in 2003, which amounted to 23.63% and 21.62%, of net income in 2004 and 2003, respectively. The declaration and payment of cash dividends are determined by the Board of Directors in light of the earnings, capital requirements, our
financial condition, and other relevant factors. Our ability to pay cash dividends depends on the amount of cash dividends paid to us by First State Bank and our capital position. Capital distributions, including dividends, by First State Bank are
subject to federal and state regulatory restrictions tied to its earnings and capital. Information regarding dividend restrictions on our banking subsidiary is incorporated herein by reference to Item 1. BusinessSupervision and
Regulation/Payment of Dividends.





17



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##### Table of Contents

##### Index to Financial Statements

Securities Authorized for Issuance Under Equity Compensation Plans



The following table provides information regarding compensation plans under which shares of
Common Stock may be issued upon the exercise of option, warrants and rights under the First State Bancorporation 1993 Stock Option Plan and the 2003 Equity Incentive Plan as of December 31, 2004:



|                                                           |  |                                                                   |  |                                                     |       |                                                                                                                                       |        
|---------------------------------------------------------- |  | ----------------------------------------------------------------- |  | --------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------- | -------
|                                                           |  | (a)                                                               |  | (b)                                                 |       | (c)                                                                                                                                  
|Plan Category                                              |  | Number ofsecurities to beissued uponexercise ofoutstandingoptions |  | Weighted-averageexercise priceof outstandingoptions |       | Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected
incolumn (a))
|Equity compensation plans approved by security holders     |  | 1,279,290                                                         |  | $                                                   | 13.77 |                                                                                                                                       | 445,000
|Equity compensation plans not approved by security holders |  |                                                                  |  |                                                     |      |                                                                                                                                       |       
|                                                           |  |                                                                   |  |                                                     |       |                                                                                                                                       |        
|Total                                                      |  | 1,279,290                                                         |  | $                                                   | 13.77 |                                                                                                                                       | 445,000
|                                                           |  |                                                                   |  |                                                     |       |                                                                                                                                       |        



Item 6: Selected Financial Data.



Selected
Financial Data are filed as part of this report and appear in Financial Summary in the attached Appendix A.



Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations.



Managements Discussion and Analysis of Financial Condition and Results of Operations are filed as part of this report and appear in the attached Appendix A.



Item 7A: Quantitative and Qualitative Disclosures About Market Risk.



Quantitative and Qualitative Disclosures About Market Risk are filed as part of this report and appear within Managements Discussion and Analysis of Financial Condition and Results of Operations under the
caption Asset/Liability Management in the attached Appendix A.



Item 8: Financial Statements and Supplementary Data.



Our consolidated financial statements are filed as a part of this report and appear in Appendix A immediately following the Managements Discussion and Analysis of Financial Condition and Results of Operations.



Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.



None.



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##### Table of Contents

##### Index to Financial Statements

Item 9A: Controls and Procedures.



Managements Evaluation of Disclosure Controls and Procedures. We maintain controls and procedures designed to ensure that we are able to collect the information required to be disclosed in the reports we file with the SEC, and
to process, summarize and disclose this information within the time periods specified in the rules of the SEC.



An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2004 pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2004, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized, and reported as and when
required. There was no change in our internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Managements Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to
provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for public disclosure in accordance with U.S. generally accepted accounting
principles.



Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.



Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control Integrated Framework. Based on our
assessment, we believe that, as of December 31, 2004, our internal control over financial reporting is effective.



Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, has been audited by KPMG, LLP, the independent
registered public accounting firm who also audited our consolidated financial statements. KPMGs attestation report on managements assessment of our internal control over financial reporting appears on page A-21 hereof.



Item 9B: Other Information.



None.



PART III



Item 10: Directors and Executive Officers of the Registrant.



Information regarding directors appearing under the caption Election of Directors in our Proxy Statement for the 2005 Annual Meeting of Shareholders is hereby incorporated by reference. Information
relating to disclosure of delinquent Form 3, 4, and 5 filers is incorporated by reference to the information appearing under the caption Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for the 2005 Annual
Meeting of Shareholders.



19



---

##### Table of Contents

##### Index to Financial Statements

Information regarding our audit committee financial experts appearing under the caption Information with Respect to
Standing Committees of the Board of Directors and Meetings in our Proxy Statement for the 2005 Annual Meeting of Shareholders is hereby incorporated by reference.



Information regarding our Code of Ethics appearing under the caption Corporate Governance in our Proxy Statement for the 2005
Annual Meeting of Shareholders is hereby incorporated by reference. The Code of Ethics has been filed with the Commission and is posted on our website at www.fsbnm.com Investor Relations.



Information regarding executive officers appearing under the caption Executive Officers
of the Company in our Proxy Statement for the 2005 Annual Meeting of Shareholders is hereby incorporated by reference.



Item 11: Executive Compensation.



Information
appearing under the captions Compensation of Directors and Executive Compensation in the 2005 Proxy Statement is hereby incorporated by reference.



Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



Information setting forth the security ownership of certain beneficial owners and management appearing under the caption Voting Securities and Principal
Holders in the 2005 Proxy Statement is hereby incorporated by reference.



Item 13: Certain Relationships and Related Transactions.



Information regarding certain related transactions appearing under the caption Certain Business Relationships in the 2005 Proxy Statement is hereby incorporated by reference.



Item 14: Principal Accountant Fees and Services.



Information regarding principal accountant fees and services appearing under the caption Ratification of Independent Auditors in the 2005 Proxy Statement is incorporated herein by reference.



PART IV



Item 15: Exhibits and Financial Statement Schedules.



The following documents are filed as part of this annual report on Form 10-K:



|1. | Financial Statements:
|-- | ---------------------



| |  |  | Financial Highlights
| | - |  | --------------------



| |  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Report of Independent Registered Public Accounting Firm (Consolidated Financial Statements)
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Report of Independent Registered Public Accounting Firm (Internal Controls over Financial Reporting)
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Consolidated Balance Sheets as of December 31, 2004 and 2003
| | - |  | ------------------------------------------------------------



| |  |  | Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003, and 2002
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004, 2003, and 2002
| | - |  | -----------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

##### Index to Financial Statements

| |  |  | Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2004, 2003, and 2002
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002
| | - |  | -------------------------------------------------------------------------------------------



The above financial statements are incorporated by reference from pages A-22 through A-51 of the attached Appendix.



2. Financial Statement Schedules



All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.



3. Exhibits



|     |  |                                                                                                                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                                                                                                                                                                                      
|2    |  | Agreement and Plan of Merger, dated as of May 22, 2002, by and among First State Bancorporation, First State Bank N.M. (formerly known as First State Bank of Taos), First Community Industrial
Bank, Blazer Financial Corporation, and Washington Mutual Finance Corporation.(7)
|     | 
|3.1  |  | Restated Articles of Incorporation of First State Bancorporation.(1)                                                                                                                                                                                                             
|     | 
|3.2  |  | Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation.(4)                                                                                                                                                                                
|     | 
|3.3  |  | Amended Bylaws of First State Bancorporation.(8)                                                                                                                                                                                                                                 
|     | 
|4    |  | Shareholder Protection Rights Agreement dated October 25, 1996.(3)                                                                                                                                                                                                               
|     | 
|10.1 |  | Executive Employment Agreement.(6)                                                                                                                                                                                                                                               
|     | 
|10.2 |  | First State Bancorporation 2003 Equity Incentive Plan.(5)                                                                                                                                                                                                                        
|     | 
|14   |  | Code of Ethics for Executives.(8)                                                                                                                                                                                                                                                
|     | 
|21   |  | Subsidiaries of Registrant.(2)                                                                                                                                                                                                                                                   
|     | 
|23   |  | Consent of KPMG LLP. *                                                                                                                                                                                                                                                           
|     | 
|31.1 |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                
|     | 
|31.2 |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                
|     | 
|32.1 |  | Certification of CEO 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 CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                 

---

|(1) | Incorporated by reference from First State Bancorporations Registration Statement on Form S-2, Commission File No. 333-24417, declared effective April 25, 1997.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from First State Bancorporations Registration Statement on Form SB-2, Commission File No. 33-68166, declared effective November 3, 1993.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from First State Bancorporations Form 10-QSB for the quarter ended September 30, 1996.
|--- | -----------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from First State Bancorporations 10-KSB for the year ended December 31, 1997.
|--- | --------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference from First State Bancorporations Current Report on Form 8-K filed June 9, 2003.
|--- | ----------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from First State Bancorporations 10-K for the year ended December 31, 2001.
|--- | ------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from First State Bancorporations Form 8-K filed on May 31, 2002.
|--- | -------------------------------------------------------------------------------------------

|(8) | Incorporated by reference from First State Bancorporations Form 10-Q for the quarter ended March 31, 2003.
|--- | -----------------------------------------------------------------------------------------------------------

|* | Filed herewith.
|- | ---------------



21



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##### Table of Contents

##### Index to Financial Statements

SIGNATURES



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



FIRST STATE BANCORPORATIONBy:

Michael R. StanfordMichael R. Stanford, President andChief Executive Officer




Dated: March 14, 2005



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



|                                             |  |                                                                                    |  |                             
|-------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ----------------------------
|Signatures                                   |  | Title                                                                              |  | Date                        
|Michael R. StanfordMichael R. Stanford       |  | President and Chief Executive Officer and a Director (Principal Executive Officer) |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|H. Patrick DeeH. Patrick Dee                 |  | Executive Vice President, Treasurer and a Director                                 |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|Christopher C. SpencerChristopher C. Spencer |  | Senior Vice President and Chief Financial Officer (Principal Accounting Officer)   |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|Leonard J. DeLayo, Jr.Leonard J. DeLayo, Jr. |  | Director                                                                           |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|Bradford M. JohnsonBradford M. Johnson       |  | Director                                                                           |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|Douglas M. Smith, M.D.Douglas M. Smith, M.D. |  | Director                                                                           |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|Herman N. WisenteinerHerman N. Wisenteiner   |  | Director                                                                           |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|Nedra MatteucciNedra Matteucci               |  | Director                                                                           |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|Lowell A. HareLowell A. Hare                 |  | Director                                                                           |  | March 14, 2005March 14, 2005
|                                             |  |                                                                                   
|A.J. (Jim) WellsA.J. (Jim) Wells             |  | Director                                                                           |  | March 14, 2005March 14, 2005





22



---

##### Table of Contents

##### Index to Financial Statements

APPENDIX A



FIRST STATE BANCORPORATION AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                      |  |             
|----------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                      |  | Page        
|Financial Summary                                                                                     |  | A-2 to A-3  
|                                                                                                      | 
|Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | A-4 to A-19 
|                                                                                                      | 
|Report of Independent Registered Public Accounting Firm (Consolidated Financial Statements)           |  | A-20        
|                                                                                                      | 
|Report of Independent Registered Public Accounting Firm (Internal Control over Financial Reporting)   |  | A-21        
|                                                                                                      | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                          |  | A-22        
|                                                                                                      | 
|Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003, and 2002           |  | A-23        
|                                                                                                      | 
|Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004, 2003, and 2002 |  | A-24        
|                                                                                                      | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2004, 2003, and 2002 |  | A-25        
|                                                                                                      | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002           |  | A-26        
|                                                                                                      | 
|Notes to Consolidated Financial Statements                                                            |  | A-27 to A-51



A-1



---

##### Table of Contents

##### Index to Financial Statements

FINANCIAL HIGHLIGHTS



|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|--------------------------------------------------------------- |  | --------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | --------- | -
|                                                                |  | Years ended December 31,                      |           
|                                                                |  | 2004                                          |            |   | 2003 |   |            | 2002 |  |   | 2001       |   |  | 2000 |           
|                                                                |  | (Dollars in thousands, except per share data) |           
|Statement of Operations Data:                                   |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Interest income                                                 |  | $                                             | 93,442     |   |      | $ | 83,713     |      |  | $ | 59,846     |   |  | $    | 53,630     |   |  | $ | 50,739    |  
|Interest expense                                                |  |                                               | 23,875     |   |      |   | 22,629     |      |  |   | 18,384     |   |  |      | 20,478     |   |  |   | 20,198    |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Net interest income                                             |  |                                               | 69,567     |   |      |   | 61,084     |      |  |   | 41,462     |   |  |      | 33,152     |   |  |   | 30,541    |  
|Provision for loan losses                                       |  |                                               | (4,500     | ) |      |   | (5,543     | )    |  |   | (2,589     | ) |  |      | (2,386     | ) |  |   | (2,475    | )
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Net interest income after provision for loan losses             |  |                                               | 65,067     |   |      |   | 55,541     |      |  |   | 38,873     |   |  |      | 30,766     |   |  |   | 28,066    |  
|Non-interest income                                             |  |                                               | 14,191     |   |      |   | 14,521     |      |  |   | 12,698     |   |  |      | 9,414      |   |  |   | 7,782     |  
|Non-interest expenses                                           |  |                                               | 55,478     |   |      |   | 47,242     |      |  |   | 35,982     |   |  |      | 27,517     |   |  |   | 24,767    |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Income before income taxes                                      |  |                                               | 23,780     |   |      |   | 22,820     |      |  |   | 15,589     |   |  |      | 12,663     |   |  |   | 11,081    |  
|Income tax expense                                              |  |                                               | 8,555      |   |      |   | 7,969      |      |  |   | 5,631      |   |  |      | 4,521      |   |  |   | 3,849     |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Net income                                                      |  | $                                             | 15,225     |   |      | $ | 14,851     |      |  | $ | 9,958      |   |  | $    | 8,142      |   |  | $ | 7,232     |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Per Share Data:                                                 |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Net income per diluted share                                    |  | $                                             | 0.99       |   |      | $ | 0.98       |      |  | $ | 0.83       |   |  | $    | 0.81       |   |  | $ | 0.72      |  
|Book value                                                      |  |                                               | 9.42       |   |      |   | 8.71       |      |  |   | 8.02       |   |  |      | 5.97       |   |  |   | 5.24      |  
|Tangible book value                                             |  |                                               | 6.55       |   |      |   | 5.81       |      |  |   | 4.99       |   |  |      | 5.93       |   |  |   | 5.20      |  
|Dividends paid                                                  |  |                                               | 0.24       |   |      |   | 0.22       |      |  |   | 0.20       |   |  |      | 0.17       |   |  |   | 0.14      |  
|Market price end of period                                      |  |                                               | 18.38      |   |      |   | 17.38      |      |  |   | 12.40      |   |  |      | 10.65      |   |  |   | 6.99      |  
|Weighted average diluted common shares outstanding              |  |                                               | 15,443,536 |   |      |   | 15,196,898 |      |  |   | 11,995,202 |   |  |      | 10,098,698 |   |  |   | 9,993,984 |  
|                                                                |  |                                               |            |   |     
|Average Balance Sheet Data:                                     |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Total assets                                                    |  | $                                             | 1,705,356  |   |      | $ | 1,466,715  |      |  | $ | 998,165    |   |  | $    | 718,178    |   |  | $ | 598,365   |  
|Loans                                                           |  |                                               | 1,284,904  |   |      |   | 1,110,741  |      |  |   | 692,283    |   |  |      | 497,485    |   |  |   | 425,507   |  
|Investment securities                                           |  |                                               | 264,654    |   |      |   | 204,624    |      |  |   | 188,628    |   |  |      | 150,118    |   |  |   | 120,601   |  
|Interest-bearing deposits with other banks                      |  |                                               | 4,982      |   |      |   | 5,216      |      |  |   | 16,785     |   |  |      | 18,756     |   |  |   | 6,173     |  
|Federal funds sold                                              |  |                                               | 1,087      |   |      |   | 10,247     |      |  |   | 22,682     |   |  |      | 5,722      |   |  |   | 5,129     |  
|Deposits                                                        |  |                                               | 1,305,770  |   |      |   | 1,137,698  |      |  |   | 805,417    |   |  |      | 585,063    |   |  |   | 484,128   |  
|Borrowings                                                      |  |                                               | 190,542    |   |      |   | 136,504    |      |  |   | 41,695     |   |  |      | 1,486      |   |  |   | 5,224     |  
|Stockholders equity                                            |  |                                               | 139,122    |   |      |   | 126,328    |      |  |   | 82,053     |   |  |      | 55,623     |   |  |   | 47,475    |  
|                                                                |  |                                               |            |   |     
|Performance Ratios:                                             |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Return on average assets                                        |  |                                               | 0.89       | % |      |   | 1.01       | %    |  |   | 1.00       | % |  |      | 1.13       | % |  |   | 1.21      | %
|Return on average common equity                                 |  |                                               | 10.94      | % |      |   | 11.76      | %    |  |   | 12.14      | % |  |      | 14.64      | % |  |   | 15.23     | %
|Net interest margin                                             |  |                                               | 4.47       | % |      |   | 4.59       | %    |  |   | 4.50       | % |  |      | 4.93       | % |  |   | 5.48      | %
|Efficiency ratio                                                |  |                                               | 66.24      | % |      |   | 62.49      | %    |  |   | 66.44      | % |  |      | 64.65      | % |  |   | 64.63     | %
|Earnings to fixed charges:                                      |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Including interest on deposits                                  |  |                                               | 2.00x      |   |      |   | 2.01x      |      |  |   | 1.85x      |   |  |      | 1.62x      |   |  |   | 1.55x     |  
|Excluding interest on deposits                                  |  |                                               | 6.11x      |   |      |   | 6.83x      |      |  |   | 8.08x      |   |  |      | 6.51x      |   |  |   | 4.21x     |  
|                                                                |  |                                               |            |   |     
|Asset Quality Ratios:                                           |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Nonperforming assets to total loans and other real estate owned |  |                                               | 0.67       | % |      |   | 1.14       | %    |  |   | 1.17       | % |  |      | 0.50       | % |  |   | 0.86      | %
|Net charge-offs to average loans                                |  |                                               | 0.26       | % |      |   | 0.29       | %    |  |   | 0.16       | % |  |      | 0.30       | % |  |   | 0.37      | %
|Allowance for loan losses to total loans                        |  |                                               | 1.11       | % |      |   | 1.15       | %    |  |   | 1.16       | % |  |      | 1.31       | % |  |   | 1.37      | %
|Allowance for loan losses to nonperforming loans                |  |                                               | 192        | % |      |   | 113        | %    |  |   | 108        | % |  |      | 290        | % |  |   | 325       | %
|                                                                |  |                                               |            |   |     
|Capital Ratios:                                                 |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Leverage ratio                                                  |  |                                               | 7.80       | % |      |   | 7.93       | %    |  |   | 7.82       | % |  |      | 7.76       | % |  |   | 7.72      | %
|Average stockholders equity to average total assets            |  |                                               | 8.16       | % |      |   | 8.61       | %    |  |   | 8.22       | % |  |      | 7.75       | % |  |   | 7.93      | %
|Tier I risk-based capital ratio                                 |  |                                               | 9.52       | % |      |   | 9.52       | %    |  |   | 10.42      | % |  |      | 10.59      | % |  |   | 10.15     | %
|Total risk-based capital ratio                                  |  |                                               | 10.58      | % |      |   | 10.64      | %    |  |   | 11.59      | % |  |      | 11.61      | % |  |   | 11.36     | %



A-2



---

##### Table of Contents

##### Index to Financial Statements

SELECTED QUARTERLY FINANCIAL DATA

(unaudited)



|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | --------------------------------------------- | ---------- | - | --------- | - | ---------- | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | 2004                                          |           
|                                                    |  | Fourth Qtr                                    |            |   | Third Qtr |   |            | Second Qtr |  |   | First Qtr  |  
|                                                    |  | (Dollars in thousands, except per share data) |           
|Statement of Operations Data:                       |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Interest income                                     |  | $                                             | 25,356     |   |           | $ | 23,522     |            |  | $ | 22,218     |   |  | $ | 22,346     |  
|Interest expense                                    |  |                                               | 6,482      |   |           |   | 5,993      |            |  |   | 5,699      |   |  |   | 5,701      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                                               | 18,874     |   |           |   | 17,529     |            |  |   | 16,519     |   |  |   | 16,645     |  
|Provision for loan losses                           |  |                                               | (1,040     | ) |           |   | (1,190     | )          |  |   | (830       | ) |  |   | (1,440     | )
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                                               | 17,834     |   |           |   | 16,339     |            |  |   | 15,689     |   |  |   | 15,205     |  
|Non-interest income                                 |  |                                               | 3,391      |   |           |   | 3,819      |            |  |   | 3,495      |   |  |   | 3,486      |  
|Non-interest expenses                               |  |                                               | 14,587     |   |           |   | 13,900     |            |  |   | 13,919     |   |  |   | 13,072     |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Income before income taxes                          |  |                                               | 6,638      |   |           |   | 6,258      |            |  |   | 5,265      |   |  |   | 5,619      |  
|Income tax expense                                  |  |                                               | 2,427      |   |           |   | 2,139      |            |  |   | 1,944      |   |  |   | 2,045      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income                                          |  | $                                             | 4,211      |   |           | $ | 4,119      |            |  | $ | 3,321      |   |  | $ | 3,574      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest margin                                 |  |                                               | 4.57       | % |           |   | 4.45       | %          |  |   | 4.39       | % |  |   | 4.47       | %
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Per Share Data:                                     |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income per diluted share                        |  | $                                             | 0.27       |   |           | $ | 0.27       |            |  | $ | 0.22       |   |  | $ | 0.23       |  
|Book value                                          |  |                                               | 9.42       |   |           |   | 9.27       |            |  |   | 8.88       |   |  |   | 8.93       |  
|Tangible book value                                 |  |                                               | 6.55       |   |           |   | 6.40       |            |  |   | 6.01       |   |  |   | 6.05       |  
|Dividends paid                                      |  |                                               | 0.060      |   |           |   | 0.060      |            |  |   | 0.060      |   |  |   | 0.055      |  
|Weighted average diluted common shares outstanding  |  |                                               | 15,533,060 |   |           |   | 15,435,734 |            |  |   | 15,428,744 |   |  |   | 15,403,866 |  
|                                                    | 
|                                                    |  | 2003                                          |           
|                                                    |  | Fourth Qtr                                    |            |   | Third Qtr |   |            | Second Qtr |  |   | First Qtr  |  
|                                                    |  | (Dollars in thousands, except per share data) |           
|Statement of Operations Data:                       |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Interest income                                     |  | $                                             | 21,848     |   |           | $ | 21,137     |            |  | $ | 20,721     |   |  | $ | 20,007     |  
|Interest expense                                    |  |                                               | 5,573      |   |           |   | 5,498      |            |  |   | 5,690      |   |  |   | 5,868      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                                               | 16,275     |   |           |   | 15,639     |            |  |   | 15,031     |   |  |   | 14,139     |  
|Provision for loan losses                           |  |                                               | (1,580     | ) |           |   | (1,645     | )          |  |   | (1,271     | ) |  |   | (1,047     | )
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                                               | 14,695     |   |           |   | 13,994     |            |  |   | 13,760     |   |  |   | 13,092     |  
|Non-interest income                                 |  |                                               | 3,220      |   |           |   | 3,736      |            |  |   | 4,000      |   |  |   | 3,565      |  
|Non-interest expenses                               |  |                                               | 12,356     |   |           |   | 12,060     |            |  |   | 11,714     |   |  |   | 11,112     |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Income before income taxes                          |  |                                               | 5,559      |   |           |   | 5,670      |            |  |   | 6,046      |   |  |   | 5,545      |  
|Income tax expense                                  |  |                                               | 1,938      |   |           |   | 1,637      |            |  |   | 2,315      |   |  |   | 2,079      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income                                          |  | $                                             | 3,621      |   |           | $ | 4,033      |            |  | $ | 3,731      |   |  | $ | 3,466      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest margin                                 |  |                                               | 4.54       | % |           |   | 4.61       | %          |  |   | 4.66       | % |  |   | 4.55       | %
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Per Share Data:                                     |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income per diluted share                        |  | $                                             | 0.24       |   |           | $ | 0.26       |            |  | $ | 0.25       |   |  | $ | 0.23       |  
|Book value                                          |  |                                               | 8.71       |   |           |   | 8.58       |            |  |   | 8.42       |   |  |   | 8.20       |  
|Tangible book value                                 |  |                                               | 5.81       |   |           |   | 5.66       |            |  |   | 5.47       |   |  |   | 5.23       |  
|Dividends paid                                      |  |                                               | 0.055      |   |           |   | 0.055      |            |  |   | 0.055      |   |  |   | 0.050      |  
|Weighted average diluted common shares outstanding  |  |                                               | 15,327,560 |   |           |   | 15,239,510 |            |  |   | 15,130,552 |   |  |   | 15,079,552 |  



A-3



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##### Table of Contents

##### Index to Financial Statements

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF

OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002



Basis of Presentation



The following represents managements discussion and analysis of First State Bancorporations consolidated financial condition as of December
31, 2004 and 2003, and our results of consolidated operations for the years ended December 31, 2004, 2003, and 2002. This discussion should be read in conjunction with the consolidated financial statements and related footnotes and the five-year
summary of selected financial data. On February 9, 2005, we effected a two-for-one split of its common stock. All references to number of shares and per share computations have been retroactively adjusted to reflect the increased number of shares
due to the effect of the common stock split.



Overview and Outlook



For the year ended December 31, 2004, we reported net
income of $15.2 million, or $0.99 per diluted share in 2004, an increase of 2.5% over prior year earnings. Net income for 2003 was $14.9 million, or $0.98 per diluted share. Earnings growth in 2004 was driven primarily by the increase in net
interest income combined with a net interest margin that increased modestly in the second half of the year.



Highlights for 2004 are as follows:



| |  |  | Loan demand throughout our system was stable and resulted in total loan growth of $145.1 million or 11.9% during the year. This total growth rate includes the impact of selling
approximately $38 million in mortgage loans acquired in the acquisition of First Community in 2002 during the first quarter of 2004. Had we retained those loans, loan growth would have increased to approximately 15.0% for the year. The allowance for
loan losses as a percentage of total loans ended the year at 1.11% and loans charged-off as a percentage of total loans were 0.26% in 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total deposits grew $205.4 million or 17.2% during the year, which included a $48 million or 17.9% increase in non-interest-bearing deposits. The increase in deposits in excess of
our total loan growth for the year corresponded to an overall decrease in borrowings of $56.8 million or 22.8%.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our net interest margin compression continued in 2004; however, as the Federal Reserve Board began to increase interest rates during the year, our asset sensitive position caused
this compression to cease. Our net interest margin fell to 4.39% during the second quarter of 2004 and subsequently began to increase in the last two quarters of 2004 ending the fourth quarter at 4.57%.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our residential mortgage lending division was reorganized which included hiring new senior management and embarking on an aggressive growth strategy. During 2004, two new
residential mortgage loan production offices were opened in Colorado Springs, Colorado, and Salt Lake City, Utah.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continued our strategy to relocate and/or renovate our facilities in the Colorado markets and expanded our investment in personnel by hiring key lending individuals within the
Colorado markets who are established and familiar with their respective markets. Due to these increases in non-interest expenses resulting from our investments in new personnel and facilities, our efficiency ratio increased to 66.24% in 2004 from
62.49% in the prior year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Assuming the economy
remains stable and the general level of interest rates does not experience more than modest changes in 2005, management expects modest balance sheet growth and stable loan demand similar to 2004. Based on this outlook, we are currently projecting
results for 2005 in the range of $1.15 - $1.20 per diluted share.



Business
Combination



We completed the acquisition and merger of
First Community on October 1, 2002 for approximately $67 million. We financed this acquisition through a public offering of our common stock in August 2002, which netted approximately $51 million, and through the issuance of approximately $25
million in trust preferred securities in June of 2002. The acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of First Community were recorded at their respective fair values on October
1, 2002. First State acquired approximately $343 million in loans and approximately $242 million in deposits, and recognized goodwill of approximately $43 million related to the transaction. The First Community account balances acquired on October
1, 2002 and the results of operations since October 1, 2002 are included in our results.



A-4



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##### Table of Contents

##### Index to Financial Statements

Critical Accounting Estimates and Judgments



Allowance for Loan Loss



Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. Estimating the allowance is a critical accounting policy. Management uses a systematic methodology with subjective elements that require material estimates which are subject to revision as facts and circumstances warrant. In
assessing the adequacy of the allowance, management reviews the size, quality, and risks of loans in the portfolio, and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets, and economic
conditions. A specific percentage is allocated to total loans in good standing and not specifically allowed for, while additional amounts are added for individual loans considered to have specific loss potential. Loans identified as losses are
charged off. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management based on probable losses in the loan portfolio.



Goodwill



The excess of cost over fair value of the net assets of acquired banks is recorded as goodwill. Prior to 2002, goodwill was amortized over its estimated
useful life on a straight-line basis and the recoverability of goodwill assessed by determining whether the amortization can be recovered through projected undiscounted future results of operations. Beginning in 2002, goodwill is no longer
amortized. We test goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We completed our annual goodwill impairment tests during the fourth quarter in 2004,
2003, and 2002, and found no impairment.



Recent Accounting
Pronouncements and Developments



In December 2004, the
FASB issued SFAS No. 123R, Share-Based Payment. SFAS 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB 25. Among other provisions, SFAS 123R eliminates the use of APB 25 and the
intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The
effective date of SFAS 123R is the first reporting period beginning after June 15, 2005, which is third quarter 2005 for calendar year companies. Subject to a complete review of the requirements of SFAS 123R, based on stock options granted through
December 31, 2004, we expect that the adoption of SFAS 123R on July 1, 2005, would reduce both third quarter 2005 and fourth quarter 2005 net earnings by approximately $250,000 ($0.02 per share, diluted) each.



Note 1 to the consolidated financial statements discusses new accounting
policies we adopted during 2004 and the expected impact of other new accounting standards recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect our financial condition, results
of operations or liquidity, the impact is discussed elsewhere in Managements Discussion and Analysis of Financial Condition and Results of Operations and in the notes to the consolidated financial statements.



Results of Operations



Earnings Performance



An analysis of the major components of net income in 2004, 2003, and 2002 is presented below. Additional data on our
performance during the past five years appear in Financial Highlights.



|                           |  |                         |        |   |      |   |        |      |  |   |        |  
|-------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                           |  | Year ended December 31, |       
|                           |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|                           |  | (Dollars in thousands)  |       
|Interest income            |  | $                       | 93,442 |   |      | $ | 83,713 |      |  | $ | 59,846 |  
|Interest expense           |  |                         | 23,875 |   |      |   | 22,629 |      |  |   | 18,384 |  
|                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Net interest income        |  |                         | 69,567 |   |      |   | 61,084 |      |  |   | 41,462 |  
|Provision for loan losses  |  |                         | (4,500 | ) |      |   | (5,543 | )    |  |   | (2,589 | )
|Non-interest income        |  |                         | 14,191 |   |      |   | 14,521 |      |  |   | 12,698 |  
|Non-interest expense       |  |                         | 55,478 |   |      |   | 47,242 |      |  |   | 35,982 |  
|                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Income before income taxes |  |                         | 23,780 |   |      |   | 22,820 |      |  |   | 15,589 |  
|Income tax expense         |  |                         | 8,555  |   |      |   | 7,969  |      |  |   | 5,631  |  
|                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                 |  | $                       | 15,225 |   |      | $ | 14,851 |      |  | $ | 9,958  |  
|                           |  |                         |        |   |      |   |        |      |  |   |        |  



A-5



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##### Table of Contents

##### Index to Financial Statements

Net Interest Income



The primary component of earnings for most financial institutions is net interest income. Net interest income is the difference between interest income,
principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread, and margin. Volume refers to the average dollar
level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.



During the years ended December 31, our net interest income increased by $8.5 million to $69.6 million or 13.9% in 2004 from $61.1 million in 2003, which
was an increase of $19.6 million or 47.3% from $41.5 million in 2002. These increases were due to a $174.2 million or 15.7% increase in average loans to $1.285 billion in 2004 from $1.111 billion in 2003, and a $418.5 million or 60.5% increase from
$692 million in 2002. A significant factor in the increase in average loans in 2003 was due to the $343 million of loans acquired on October 1, 2002, in the First Community acquisition. In addition, we experienced growth in the loan portfolio as a
result of our efforts to increase market share by building around the infrastructure we have established and taking advantage of market dislocations caused by the acquisition of local competitors and growth in the economy of our market areas. The
increase in interest income was offset by a decrease in yield on loans to 6.5% in 2004 from 6.8% in 2003 and 7.3% in 2002. This decrease in yield was a direct result of the Federal Reserve Bank reducing rates in 2002 and 2003, which has a direct
effect on the prime rate to which a significant portion of our loans are tied. The residual impact of the 2003 rate cuts continued into the second quarter of 2004; however, the Federal Reserve Bank began to increase rates in the middle of 2004 which
has resulted in an increased loan yield during the second half of the year.



During 2004, the cost of interest-bearing liabilities also decreased to 1.86% from 2.04% in 2003 and 2.44% in 2002 as a result of decreasing interest rates precipitated by the Federal Reserve Banks rate cuts.
The decreases in interest rates on interest-bearing liabilities also subsided during the second quarter of 2004 and have steadily increased as the result of the Federal Reserve Banks rate increases in 2004. The changes in rates we pay on
deposits lag behind the increases from the Federal Reserve Bank, and are primarily market driven due to the competitive nature of deposits which impacts the rates we pay on deposits.



The decline in interest rates in 2002 and 2003 had the impact of compressing our net interest margin in 2004, 2003, and 2002
because of our asset sensitive position. This margin compression continued into 2004; however, the Federal Reserve began to increase rates in the middle of 2004 which had the effect of increasing our margin during the third and fourth quarters of
2004.



Our net interest margin was 4.47% in 2004, compared to
4.59% in 2003 and 4.50% in 2002. The net interest margin rose from 2002 to 2003 in spite of a Federal Reserve Bank rate cut in 2003 due to the 2002 margin having been compressed abnormally by the liquidity maintained prior to the acquisition of
First Community, the 42.6% growth in non-interest-bearing deposits in 2003, and the run off of higher yielding certificates of deposit in the First Community branches. The decrease in the margin from 2003 to 2004 was due to the residual impact of
the Federal Reserve Bank rate cuts in 2003 which has the effect of reducing interest income faster than interest expense given the asset sensitive position of our balance sheet.



Management believes that any additional interest rate increases by the Federal Reserve Bank would increase our net interest
margin. The extent of any increase in net interest margin will depend on the amount and timing of any further Federal Reserve Bank increases and our ability to manage the cost of interest-bearing liabilities given our competitive position in the
markets we serve.



A-6



---

##### Table of Contents

##### Index to Financial Statements

The following tables set forth, for the periods indicated, information with respect to average balances
of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense from interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest
margin, and the ratio of average interest-earning assets to average interest-bearing liabilities. No tax equivalent adjustments were made and all average balances are daily average balances. Non-accruing loans have been included in the table as
loans carrying a zero yield.



|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|-------------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ------------------------ | - | ------------------- | ---- | ------ | -------------- |  | - | ------------------------ | - | ------------------- | - | ------ | -------------- | ------ | - | ------------------------ | - | ------------------- | - |  | - | ------ |  | ------ | -
|                                                                                 |  | Years ended December 31, |          
|                                                                                 |  | 2004                     |           |   | 2003                     |   |                     | 2002 |       
|                                                                                 |  | AverageBalance           |           |   | InterestIncome orExpense |   | AverageYield orCost |      |        | AverageBalance |  |   | InterestIncome orExpense |   | AverageYield orCost |   |        | AverageBalance |        |   | InterestIncome orExpense |   | AverageYield orCost |  
|                                                                                 |  | (Dollars in thousands)   |          
|Assets                                                                           |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Loans:                                                                           |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Commercial                                                                       |  | $                        | 160,891   |   |                          | $ | 9,420               |      | 5.85   | %              |  | $ | 115,872                  |   |                     | $ | 6,995  |                | 6.04   | % |                          | $ | 91,710              |   |  | $ | 6,142  |  | 6.70   | %
|Real estatemortgage                                                             |  |                          | 927,375   |   |                          |   | 59,867              |      | 6.46   |                |  |   | 842,845                  |   |                     |   | 57,541 |                | 6.83   |   |                          |   | 467,340             |   |  |   | 33,932 |  | 7.26   |  
|Real estateconstruction                                                         |  |                          | 158,147   |   |                          |   | 11,100              |      | 7.02   |                |  |   | 106,205                  |   |                     |   | 7,273  |                | 6.85   |   |                          |   | 97,486              |   |  |   | 6,847  |  | 7.02   |  
|Consumer                                                                         |  |                          | 29,654    |   |                          |   | 2,777               |      | 9.36   |                |  |   | 32,673                   |   |                     |   | 3,219  |                | 9.85   |   |                          |   | 28,435              |   |  |   | 2,947  |  | 10.36  |  
|Mortgage                                                                         |  |                          | 8,167     |   |                          |   | 459                 |      | 5.62   |                |  |   | 12,564                   |   |                     |   | 706    |                | 5.62   |   |                          |   | 6,728               |   |  |   | 452    |  | 6.72   |  
|Other                                                                            |  |                          | 670       |   |                          |   |                    |      |       |                |  |   | 582                      |   |                     |   |       |                |       |   |                          |   | 584                 |   |  |   |       |  |       |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total loans                                                                      |  |                          | 1,284,904 |   |                          |   | 83,623              |      | 6.51   | %              |  |   | 1,110,741                |   |                     |   | 75,734 |                | 6.82   | % |                          |   | 692,283             |   |  |   | 50,320 |  | 7.27   | %
|Allowance for loan losses                                                        |  |                          | (14,829   | ) |                          |   |                     |      |        |                |  |   | (13,008                  | ) |                     |   |        |                |        |   |                          |   | (8,900              | ) |  |   |        |  |        |  
|Securities:                                                                      |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|U.S. government and mortgage-backed                                              |  |                          | 236,582   |   |                          |   | 8,801               |      | 3.72   |                |  |   | 190,580                  |   |                     |   | 7,327  |                | 3.84   |   |                          |   | 182,187             |   |  |   | 8,656  |  | 4.75   |  
|States and political subdivisions:                                               |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Non-taxable                                                                      |  |                          | 13,879    |   |                          |   | 573                 |      | 4.13   |                |  |   | 4,478                    |   |                     |   | 181    |                | 4.04   |   |                          |   | 3,319               |   |  |   | 148    |  | 4.47   |  
|Taxable                                                                          |  |                          |          |   |                          |   |                    |      |       |                |  |   | 488                      |   |                     |   | 9      |                | 1.84   |   |                          |   | 132                 |   |  |   | 2      |  | 1.89   |  
|Other                                                                            |  |                          | 14,193    |   |                          |   | 372                 |      | 2.62   |                |  |   | 9,078                    |   |                     |   | 286    |                | 3.15   |   |                          |   | 2,990               |   |  |   | 100    |  | 3.34   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total securities                                                                 |  |                          | 264,654   |   |                          |   | 9,746               |      | 3.68   | %              |  |   | 204,624                  |   |                     |   | 7,803  |                | 3.81   | % |                          |   | 188,628             |   |  |   | 8,906  |  | 4.72   | %
|Interest-bearing deposits with other banks                                       |  |                          | 4,982     |   |                          |   | 57                  |      | 1.14   |                |  |   | 5,216                    |   |                     |   | 63     |                | 1.21   |   |                          |   | 16,785              |   |  |   | 261    |  | 1.55   |  
|Federal funds sold                                                               |  |                          | 1,087     |   |                          |   | 16                  |      | 1.47   |                |  |   | 10,247                   |   |                     |   | 113    |                | 1.10   |   |                          |   | 22,682              |   |  |   | 359    |  | 1.58   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-earning assets                                                    |  |                          | 1,555,627 |   |                          |   | 93,442              |      | 6.01   | %              |  |   | 1,330,828                |   |                     |   | 83,713 |                | 6.29   | % |                          |   | 920,378             |   |  |   | 59,846 |  | 6.50   | %
|Non-interest-earning assets:                                                     |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Cash and due from banks                                                          |  |                          | 51,424    |   |                          |   |                     |      |        |                |  |   | 47,667                   |   |                     |   |        |                |        |   |                          |   | 36,734              |   |  |   |        |  |        |  
|Other                                                                            |  |                          | 113,134   |   |                          |   |                     |      |        |                |  |   | 101,228                  |   |                     |   |        |                |        |   |                          |   | 49,953              |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total non-interest-earning assets                                                |  |                          | 164,558   |   |                          |   |                     |      |        |                |  |   | 148,895                  |   |                     |   |        |                |        |   |                          |   | 86,687              |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total assets                                                                     |  | $                        | 1,705,356 |   |                          |   |                     |      |        |                |  | $ | 1,466,715                |   |                     |   |        |                |        |   |                          | $ | 998,165             |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Liabilities and Stockholders Equity                                             |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Deposits:                                                                        |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Interest-bearing demand accounts                                                 |  | $                        | 237,144   |   |                          | $ | 1,118               |      | 0.47   | %              |  | $ | 199,890                  |   |                     | $ | 907    |                | 0.45   | % |                          | $ | 165,716             |   |  | $ | 1,260  |  | 0.76   | %
|Certificates of deposit < $100,000                                               |  |                          | 231,686   |   |                          |   | 6,183               |      | 2.67   |                |  |   | 270,101                  |   |                     |   | 7,840  |                | 2.90   |   |                          |   | 165,482             |   |  |   | 5,977  |  | 3.61   |  
|Certificates of deposit > $100,000                                               |  |                          | 295,398   |   |                          |   | 8,712               |      | 2.95   |                |  |   | 238,750                  |   |                     |   | 7,429  |                | 3.11   |   |                          |   | 181,307             |   |  |   | 6,852  |  | 3.78   |  
|Money market savings accounts                                                    |  |                          | 194,961   |   |                          |   | 2,636               |      | 1.35   |                |  |   | 145,910                  |   |                     |   | 2,043  |                | 1.40   |   |                          |   | 84,729              |   |  |   | 1,489  |  | 1.76   |  
|Regular savings accounts                                                         |  |                          | 67,480    |   |                          |   | 573                 |      | 0.85   |                |  |   | 58,367                   |   |                     |   | 493    |                | 0.84   |   |                          |   | 48,964              |   |  |   | 605    |  | 1.23   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-bearing deposits                                                  |  |                          | 1,026,669 |   |                          |   | 19,222              |      | 1.87   | %              |  |   | 913,018                  |   |                     |   | 18,712 |                | 2.05   | % |                          |   | 646,198             |   |  |   | 16,183 |  | 2.50   | %
|Federal funds purchased and securities sold under agreements to repurchase       |  |                          | 64,278    |   |                          |   | 199                 |      | 0.31   |                |  |   | 61,109                   |   |                     |   | 302    |                | 0.49   |   |                          |   | 65,467              |   |  |   | 585    |  | 0.89   |  
|Short-term borrowings                                                            |  |                          | 71,235    |   |                          |   | 993                 |      | 1.39   |                |  |   | 34,308                   |   |                     |   | 459    |                | 1.34   |   |                          |   | 5,027               |   |  |   | 104    |  | 2.07   |  
|Long-term debt                                                                   |  |                          | 84,848    |   |                          |   | 1,728               |      | 2.04   |                |  |   | 69,696                   |   |                     |   | 1,610  |                | 2.31   |   |                          |   | 16,225              |   |  |   | 421    |  | 2.59   |  
|Junior subordinated debentures                                                   |  |                          | 34,459    |   |                          |   | 1,733               |      | 5.03   |                |  |   | 32,500                   |   |                     |   | 1,546  |                | 4.76   |   |                          |   | 20,443              |   |  |   | 1,091  |  | 5.34   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-bearing liabilities                                               |  |                          | 1,281,489 |   |                          |   | 23,875              |      | 1.86   | %              |  |   | 1,110,631                |   |                     |   | 22,629 |                | 2.04   | % |                          |   | 753,360             |   |  |   | 18,384 |  | 2.44   | %
|Non-interest-bearing demand accounts                                             |  |                          | 279,101   |   |                          |   |                     |      |        |                |  |   | 224,680                  |   |                     |   |        |                |        |   |                          |   | 159,219             |   |  |   |        |  |        |  
|Other non-interest-bearing liabilities                                           |  |                          | 5,644     |   |                          |   |                     |      |        |                |  |   | 5,076                    |   |                     |   |        |                |        |   |                          |   | 3,533               |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total liabilities                                                                |  |                          | 1,566,234 |   |                          |   |                     |      |        |                |  |   | 1,340,387                |   |                     |   |        |                |        |   |                          |   | 916,112             |   |  |   |        |  |        |  
|Stockholders equity                                                             |  |                          | 139,122   |   |                          |   |                     |      |        |                |  |   | 126,328                  |   |                     |   |        |                |        |   |                          |   | 82,053              |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total liabilities and stockholders equity                                       |  | $                        | 1,705,356 |   |                          |   |                     |      |        |                |  | $ | 1,466,715                |   |                     |   |        |                |        |   |                          | $ | 998,165             |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Net interest income                                                              |  |                          |           |   |                          | $ | 69,567              |      |        |                |  |   |                          |   |                     | $ | 61,084 |                |        |   |                          |   |                     |   |  | $ | 41,462 |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Net interest spread                                                              |  |                          |           |   |                          |   |                     |      | 4.15   | %              |  |   |                          |   |                     |   |        |                | 4.25   | % |                          |   |                     |   |  |   |        |  | 4.06   | %
|Net interest margin                                                              |  |                          |           |   |                          |   |                     |      | 4.47   | %              |  |   |                          |   |                     |   |        |                | 4.59   | % |                          |   |                     |   |  |   |        |  | 4.50   | %
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                          |           |   |                          |   |                     |      | 121.39 | %              |  |   |                          |   |                     |   |        |                | 119.83 | % |                          |   |                     |   |  |   |        |  | 122.17 | %



A-7



---

##### Table of Contents

##### Index to Financial Statements

Loan fees of $5.7 million, $4.7 million, and $2.5 million are included in interest income for the years
ended December 31, 2004, 2003, and 2002, respectively.





The following table illustrates the changes in our net interest income due to changes in volume and changes in interest rate. Changes attributable to the
combined effect of volume and interest rates have been included in the changes due to volume.



|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | --------------------------------------------------- | ------ | - | --------------------------------------------------- | - | ------ | ----- |  | - | ------ | - |  | ---- | ------ | - | ----- | - | ------ | - |  | - | ------ | -
|                                                                           |  | Years ended December 31,                            |       
|                                                                           |  | 2004 vs. 2003 Increase (decrease) due to changes in |        |   | 2003 vs. 2002 Increase (decrease) due to changes in |  
|                                                                           |  | Volume                                              |        |   | Rate                                                |   |        | Total |  |   | Volume |   |  | Rate |        |   | Total |  
|                                                                           |  | (Dollars in thousands)                              |       
|Interest-earning assets                                                    |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Loans:                                                                     |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Commercial                                                                 |  | $                                                   | 2,718  |   |                                                     | $ | (293   | )     |  | $ | 2,425  |   |  | $    | 1,618  |   |       | $ | (765   | ) |  | $ | 853    |  
|Real estatemortgage                                                       |  |                                                     | 5,771  |   |                                                     |   | (3,445 | )     |  |   | 2,326  |   |  |      | 27,264 |   |       |   | (3,655 | ) |  |   | 23,609 |  
|Real estateconstruction                                                   |  |                                                     | 3,557  |   |                                                     |   | 270    |       |  |   | 3,827  |   |  |      | 612    |   |       |   | (186   | ) |  |   | 426    |  
|Consumer                                                                   |  |                                                     | (297   | ) |                                                     |   | (145   | )     |  |   | (442   | ) |  |      | 439    |   |       |   | (167   | ) |  |   | 272    |  
|Mortgage                                                                   |  |                                                     | (247   | ) |                                                     |   |       |       |  |   | (247   | ) |  |      | 392    |   |       |   | (138   | ) |  |   | 254    |  
|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Total loans                                                                |  |                                                     | 11,502 |   |                                                     |   | (3,613 | )     |  |   | 7,889  |   |  |      | 30,325 |   |       |   | (4,911 | ) |  |   | 25,414 |  
|Securities:                                                                |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|U.S. government and mortgage-backed                                        |  |                                                     | 1,769  |   |                                                     |   | (295   | )     |  |   | 1,474  |   |  |      | 399    |   |       |   | (1,728 | ) |  |   | (1,329 | )
|States and political subdivisions:                                         |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Non-taxable                                                                |  |                                                     | 380    |   |                                                     |   | 12     |       |  |   | 392    |   |  |      | 52     |   |       |   | (19    | ) |  |   | 33     |  
|Taxable                                                                    |  |                                                     | (9     | ) |                                                     |   |       |       |  |   | (9     | ) |  |      | 7      |   |       |   |       |   |  |   | 7      |  
|Other                                                                      |  |                                                     | 161    |   |                                                     |   | (75    | )     |  |   | 86     |   |  |      | 204    |   |       |   | (18    | ) |  |   | 186    |  
|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Total securities                                                           |  |                                                     | 2,301  |   |                                                     |   | (358   | )     |  |   | 1,943  |   |  |      | 662    |   |       |   | (1,765 | ) |  |   | (1,103 | )
|Interest-bearing deposits with other banks                                 |  |                                                     | (3     | ) |                                                     |   | (3     | )     |  |   | (6     | ) |  |      | (180   | ) |       |   | (18    | ) |  |   | (198   | )
|Federal funds sold                                                         |  |                                                     | (101   | ) |                                                     |   | 4      |       |  |   | (97    | ) |  |      | (196   | ) |       |   | (50    | ) |  |   | (246   | )
|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Total interest-earning assets                                              |  |                                                     | 13,699 |   |                                                     |   | (3,970 | )     |  |   | 9,729  |   |  |      | 30,611 |   |       |   | (6,744 | ) |  |   | 23,867 |  
|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Interest-bearing liabilities                                               |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Deposits:                                                                  |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Interest-bearing demand accounts                                           |  |                                                     | 169    |   |                                                     |   | 42     |       |  |   | 211    |   |  |      | 260    |   |       |   | (613   | ) |  |   | (353   | )
|Certificates of deposit < $100,000                                         |  |                                                     | (1,115 | ) |                                                     |   | (542   | )     |  |   | (1,657 | ) |  |      | 3,779  |   |       |   | (1,916 | ) |  |   | 1,863  |  
|Certificates of deposit > $100,000                                         |  |                                                     | 1,763  |   |                                                     |   | (480   | )     |  |   | 1,283  |   |  |      | 2,171  |   |       |   | (1,594 | ) |  |   | 577    |  
|Money market savings accounts                                              |  |                                                     | 687    |   |                                                     |   | (94    | )     |  |   | 593    |   |  |      | 1,075  |   |       |   | (521   | ) |  |   | 554    |  
|Regular savings accounts                                                   |  |                                                     | 77     |   |                                                     |   | 3      |       |  |   | 80     |   |  |      | 116    |   |       |   | (228   | ) |  |   | (112   | )
|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Total interest-bearing deposits                                            |  |                                                     | 1,581  |   |                                                     |   | (1,071 | )     |  |   | 510    |   |  |      | 7,401  |   |       |   | (4,872 | ) |  |   | 2,529  |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                                                     | 16     |   |                                                     |   | (119   | )     |  |   | (103   | ) |  |      | (39    | ) |       |   | (244   | ) |  |   | (283   | )
|Short-term borrowings                                                      |  |                                                     | 494    |   |                                                     |   | 40     |       |  |   | 534    |   |  |      | 606    |   |       |   | (251   | ) |  |   | 355    |  
|Long-term debt                                                             |  |                                                     | 350    |   |                                                     |   | (232   | )     |  |   | 118    |   |  |      | 1,387  |   |       |   | (198   | ) |  |   | 1,189  |  
|Junior subordinated debentures                                             |  |                                                     | 93     |   |                                                     |   | 94     |       |  |   | 187    |   |  |      | 643    |   |       |   | (188   | ) |  |   | 455    |  
|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Total interest-bearing liabilities                                         |  |                                                     | 2,534  |   |                                                     |   | (1,288 | )     |  |   | 1,246  |   |  |      | 9,998  |   |       |   | (5,753 | ) |  |   | 4,245  |  
|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  
|Total increase (decrease) in net interest income                           |  | $                                                   | 11,165 |   |                                                     | $ | (2,682 | )     |  | $ | 8,483  |   |  | $    | 20,613 |   |       | $ | (991   | ) |  | $ | 19,622 |  
|                                                                           |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |        |  



A-8



---

##### Table of Contents

##### Index to Financial Statements

Non-interest Income



An analysis of the components of non-interest income is presented in the table below:



|                                       |  |                          |        |          |   |        |          |           |        |  |           |      |   |           |   |       |           |  |     |    |  |    |  
|-------------------------------------- |  | ------------------------ | ------ | -------- | - | ------ | -------- | --------- | ------ |  | --------- | ---- | - | --------- | - | ----- | --------- |  | --- | -- |  | -- | -
|                                       |  | Years ended December 31, |        | $ Change |   |        | % Change |          
|                                       |  | 2004                     |        | 2003     |   | 2002   |          | 2004-2003 |        |  | 2003-2002 |      |   | 2004-2003 |   |       | 2003-2002 | 
|                                       |  | (Dollars in thousands)   |       
|Service charges on deposit accounts    |  | $                        | 4,410  |          | $ | 4,225  |          | $         | 3,439  |  | $         | 185  |   |           | $ | 786   |           |  | 4   | %  |  | 23 | %
|Credit and debit card transaction fees |  |                          | 3,991  |          |   | 3,938  |          |           | 4,195  |  |           | 53   |   |           |   | (257  | )         |  | 1   |    |  | (6 | )
|Gain on sale of mortgage loans         |  |                          | 2,718  |          |   | 3,493  |          |           | 2,768  |  |           | (775 | ) |           |   | 725   |           |  | (22 | )  |  | 26 |  
|Other                                  |  |                          | 3,072  |          |   | 2,865  |          |           | 2,296  |  |           | 207  |   |           |   | 569   |           |  | 7   |    |  | 25 |  
|                                       |  |                          |        |          |   |        |          |           |        |  |           |      |   |           |   |       |           |  |     |    |  |    |  
|Total non-interest income              |  | $                        | 14,191 |          | $ | 14,521 |          | $         | 12,698 |  | $         | (330 | ) |           | $ | 1,823 |           |  | (2  | )% |  | 14 | %
|                                       |  |                          |        |          |   |        |          |           |        |  |           |      |   |           |   |       |           |  |     |    |  |    |  



The increases in
service charges on deposit accounts are directly related to the increases in total deposits from 2002 to 2004. The increase in 2003 was also driven by the 43% increase in non-interest-bearing deposits over 2002.



Credit and debit card transaction volumes decreased in 2003 from 2002 levels
resulting in lower fee income; however, in 2004 credit and debit card transaction volumes increased slightly. During the third quarter of 2004, the merchant card portfolio was sold to an unrelated third party for $500,000, plus contingent future
amounts subject to customer retention percentages payable in 2005 and 2006. The resulting gain on the sale of the merchant card business of approximately $500,000 is being amortized over the 10-year term of a revenue sharing agreement signed with
the purchaser. Credit and debit card transaction fees will decrease significantly in 2005 due to the sale of the merchant portfolio which will result in lower fee income as well as salaries and related expenses of the operation. Income received
pursuant to the revenue sharing agreement is expected to result in substantially the same operating results in 2005.



Gain on sale of mortgage loans decreased in 2004 due to an overall decrease in mortgage loan activity compared to 2003. In 2003, we originated a record
$213 million in mortgage loans primarily as a result of refinancing activity driven by a 40-year low in mortgage loan interest rates. We generally attempt to sell all mortgage loans that we originate in the secondary market. The refinancing activity
peaked in the second quarter of 2003 and dropped off dramatically in the third and fourth quarters of 2003. We experienced a continued decline in mortgage loan activity during the first half of 2004. We made a strategic decision to reorganize the
residential mortgage division of the bank and in the second quarter of 2004 began hiring additional lending officers and expanding the operation. As a result of adding new lenders and mortgage loan interest rates remaining relatively low we
experienced increased activity in the third and fourth quarters of 2004. In addition, due to the increased emphasis on mortgage lending in the Colorado and Utah markets, we expect new originations to increase in 2005 from the levels in 2004;
however, they may not return to the overall level experienced in 2003.



Non-interest Expense



An analysis of the
components of non-interest expense is presented in the table below:



|                                  |  |                          |        |          |   |        |          |           |        |  |           |       |   |           |   |        |           |  |     |   |  |     |  
|--------------------------------- |  | ------------------------ | ------ | -------- | - | ------ | -------- | --------- | ------ |  | --------- | ----- | - | --------- | - | ------ | --------- |  | --- | - |  | --- | -
|                                  |  | Years ended December 31, |        | $ Change |   |        | % Change |          
|                                  |  | 2004                     |        | 2003     |   | 2002   |          | 2004-2003 |        |  | 2003-2002 |       |   | 2004-2003 |   |        | 2003-2002 | 
|                                  |  | (Dollars in thousands)   |       
|Salaries and employee benefits    |  | $                        | 24,843 |          | $ | 20,570 |          | $         | 15,421 |  | $         | 4,273 |   |           | $ | 5,149  |           |  | 21  | % |  | 33  | %
|Occupancy                         |  |                          | 7,804  |          |   | 6,267  |          |           | 4,353  |  |           | 1,537 |   |           |   | 1,914  |           |  | 25  |   |  | 44  |  
|Data processing                   |  |                          | 2,934  |          |   | 2,412  |          |           | 2,011  |  |           | 522   |   |           |   | 401    |           |  | 22  |   |  | 20  |  
|Credit and debit card interchange |  |                          | 1,580  |          |   | 1,637  |          |           | 2,004  |  |           | (57   | ) |           |   | (367   | )         |  | (3  | ) |  | (18 | )
|Equipment                         |  |                          | 4,258  |          |   | 3,697  |          |           | 2,781  |  |           | 561   |   |           |   | 916    |           |  | 15  |   |  | 33  |  
|Legal, accounting, and consulting |  |                          | 1,372  |          |   | 1,128  |          |           | 816    |  |           | 244   |   |           |   | 312    |           |  | 22  |   |  | 38  |  
|Marketing                         |  |                          | 2,288  |          |   | 2,190  |          |           | 2,109  |  |           | 98    |   |           |   | 81     |           |  | 4   |   |  | 4   |  
|Telephone                         |  |                          | 1,219  |          |   | 1,534  |          |           | 887    |  |           | (315  | ) |           |   | 647    |           |  | (21 | ) |  | 73  |  
|Delivery                          |  |                          | 901    |          |   | 1,007  |          |           | 432    |  |           | (106  | ) |           |   | 575    |           |  | (11 | ) |  | 133 |  
|Loss on sale of loans             |  |                          | 435    |          |   |       |          |           |       |  |           | 435   |   |           |   |       |           |  | 100 |   |  |    |  
|Other                             |  |                          | 7,844  |          |   | 6,800  |          |           | 5,168  |  |           | 1,044 |   |           |   | 1,632  |           |  | 15  |   |  | 32  |  
|                                  |  |                          |        |          |   |        |          |           |        |  |           |       |   |           |   |        |           |  |     |   |  |     |  
|Total non-interest expense        |  | $                        | 55,478 |          | $ | 47,242 |          | $         | 35,982 |  | $         | 8,236 |   |           | $ | 11,260 |           |  | 17  | % |  | 31  | %
|                                  |  |                          |        |          |   |        |          |           |        |  |           |       |   |           |   |        |           |  |     |   |  |     |  



A-9



---

##### Table of Contents

##### Index to Financial Statements

The increases in non-interest expenses are due to our overall growth and the continued impact of our
repositioning in the Colorado markets. The increase in salaries and employee benefits in 2004 includes additional personnel hired in Colorado to support our focus on commercial business customers, as well as additional personnel throughout the
organization in order to have the personnel to service and grow the commercial lending platform.



Occupancy and equipment expense increased in 2004 as a result of continuing our strategy to relocate and/or renovate the First Community branch facilities
and a full year of expense related to the addition of three new branches and the new support services facility which was completed towards the end of 2003 in New Mexico. The Colorado Springs, Colorado branch was relocated in May 2003, and the
Longmont, Colorado branch was remodeled in October 2003. New branches were added in Santa Fe and Albuquerque, New Mexico in March and July 2003 in addition to a new operations building in Albuquerque, New Mexico in September 2003. During 2004, we
completed the relocation and/or remodel of three of the remaining branches in Colorado, the relocation of our Salt Lake City branch, and the addition of one branch and the renovation of two additional branches in New Mexico. The Cherry Creek branch
was remodeled in May 2004 and the Littleton and Fort Collins branches were remodeled in June 2004. We completed the relocation of the Salt Lake City branch in November 2004. The Journal Center facility in Albuquerque, New Mexico was renovated to
enable us to better serve our commercial business customers in May 2004, we completed the addition of a second new branch in Santa Fe, New Mexico in May 2004, and completed the remodel of our Rio Rancho, New Mexico branch in December 2004.



Income Tax Expense



Income tax expense increased to $8.6 million in 2004, from $8.0 million in
2003 and $5.6 million in 2002. The effective tax rate, computed by dividing income tax expense by income before taxes, was 36.0% in 2004, compared to 34.9% in 2003 and 36.1% in 2002. The effective tax rate is lower than the statutory tax rate
primarily due to bank owned life insurance and tax-exempt interest income. The effective tax rate in 2003 also benefited from an increase in the rate at which net deferred taxes are expected to be realized. Management anticipates that our effective
tax rate will be approximately 37% in 2005.



Return on Equity and Assets



The following table shows the return on average assets,
return on average equity, dividend payout ratio, and ratio of average equity to average assets for the periods indicated.



|                                 |  |                          |   |  |       |   |  |       |  
|-------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                 |  | Years ended December 31, |  
|                                 |  | 2004                     |   |  | 2003  |   |  | 2002  |  
|Return on average assets         |  | 0.89                     | % |  | 1.01  | % |  | 1.00  | %
|Return on average equity         |  | 10.94                    |   |  | 11.76 |   |  | 12.14 |  
|Dividend payout ratio            |  | 23.63                    |   |  | 21.62 |   |  | 21.61 |  
|Average equity to average assets |  | 8.16                     |   |  | 8.61  |   |  | 8.22  |  



Financial Condition



Summary of Changes in Investments, Loans, Deposits, and Borrowings



The following table summarizes the change in our
investment, loan, deposit, and borrowing balances compared to the previous year:



|            |  |                        |           |          |   |           |  |           |           |  |           |         |           |  |   |           |  |     |   |  |     |  
|----------- |  | ---------------------- | --------- | -------- | - | --------- |  | --------- | --------- |  | --------- | ------- | --------- |  | - | --------- |  | --- | - |  | --- | -
|            |  | As of December 31,     |           | $ Change |   | % Change  | 
|            |  | 2004                   |           | 2003     |   | 2002      |  | 2004-2003 |           |  | 2003-2002 |         | 2004-2003 |  |   | 2003-2002 | 
|            |  | (Dollars in thousands) |          
|Investments |  | $                      | 290,925   |          | $ | 235,120   |  | $         | 194,094   |  | $         | 55,805  |           |  | $ | 41,026    |  | 24  | % |  | 21  | %
|Loans       |  |                        | 1,377,795 |          |   | 1,231,485 |  |           | 1,017,025 |  |           | 146,310 |           |  |   | 214,460   |  | 12  |   |  | 21  |  
|Deposits    |  |                        | 1,401,303 |          |   | 1,195,875 |  |           | 1,079,684 |  |           | 205,428 |           |  |   | 116,191   |  | 17  |   |  | 11  |  
|Borrowings  |  |                        | 192,513   |          |   | 249,322   |  |           | 113,174   |  |           | (56,809 | )         |  |   | 136,148   |  | (23 | ) |  | 120 |  



Asset/Liability Management



Our results of operations depend substantially on our net
interest income. Like most financial institutions, our interest income and cost of funds are affected by general economic conditions and by competition in the marketplace.



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##### Table of Contents

##### Index to Financial Statements

The purpose of asset/liability management is to provide stable net interest income growth by protecting
our earnings from undue interest rate risk. Exposure to interest rate risk arises from volatile interest rates and changes in the balance sheet mix. Our policy is to maintain an asset/liability management policy that provides guidelines for
controlling exposure to interest rate risk. Our policy is to control the exposure of our earnings to changing interest rates by generally maintaining a position within a narrow range around an earnings neutral position, which is defined
as the mix of assets and liabilities that generates a net interest margin that is least affected by interest rate changes.



The interest rate sensitivity (GAP) is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A GAP is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A GAP is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative GAP would tend to adversely affect net interest income, while a positive GAP would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. While the interest rate sensitivity GAP is a useful measurement
and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure. Because different types of assets and liabilities with the same or similar maturities may react
differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.



To effectively measure and manage interest rate risk, we use GAP analysis and
simulation analysis to determine the impact on net interest income under various interest rate scenarios, balance sheet trends, and strategies. From these analyses, interest rate risk is quantified and appropriate strategies are developed and
implemented. Additionally, duration and market value sensitivity measures are utilized when they provide added value to the overall interest rate risk management process. The overall interest rate risk position and strategies are reviewed by
management and the banks Board of Directors on an ongoing basis.



As of December 31, 2004, our cumulative interest rate GAP for the period up to three months was a positive $359.9 million and for the period up to one year was a positive $178.2 million. Based solely on our interest rate GAP of twelve
months or less, our net income could be unfavorably impacted by a decrease in interest rates or favorably impacted by an increase in interest rates.



During 2004, we experienced an increase in deposits of 17% as a result of our strategy to capture market share as well as our continued focus in the
Colorado market. The overall increase in deposits exceeded our loan growth of 12% and as a result, our loan to deposit ratio decreased to 98% at December 31, 2004, from 103% at December 31, 2003, during a period of increasing interest rates.
Management intends to maintain or slightly reduce the current loan to deposit ratio during 2005.



A-11



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##### Table of Contents

##### Index to Financial Statements

The following table sets forth the estimated maturity or repricing, and the resulting interest rate GAP
of our interest-earning assets and interest-bearing liabilities at December 31, 2004. The amounts are based upon regulatory reporting formats and, therefore, may not be consistent with financial information appearing elsewhere in this report that
has been prepared in accordance with accounting principles generally accepted in the United States of America. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits,
and competition.



|                                                  |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|------------------------------------------------- |  | ---------------------- | ------- | --------------------------------- | - | -------- | ---------------- |  | --------------- | ------- | ----- | - | ------- |  | - | ---------
|                                                  |  | Less thanthreemonths   |         | Three months to less thanone year |   |          | One to fiveyears |  | Over five years |         | Total
|                                                  |  | (Dollars in thousands)
|Interest-earning assets:                          |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Investment securities                             |  | $                      | 5,813   |                                   | $ | 20,137   |                  |  | $               | 209,558 |       | $ | 55,417  |  | $ | 290,925  
|Interest-bearing deposits with other banks        |  |                        | 1,501   |                                   |   |         |                  |  |                 |        |       |   |        |  |   | 1,501    
|Federal funds sold                                |  |                        | 1,250   |                                   |   |         |                  |  |                 |        |       |   |        |  |   | 1,250    
|Loans:                                            |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Commercial                                        |  |                        | 121,881 |                                   |   | 21,471   |                  |  |                 | 29,178  |       |   | 1,763   |  |   | 174,293  
|Real estate                                       |  |                        | 679,047 |                                   |   | 160,935  |                  |  |                 | 308,762 |       |   | 26,157  |  |   | 1,174,901
|Consumer                                          |  |                        | 10,508  |                                   |   | 6,661    |                  |  |                 | 10,849  |       |   | 583     |  |   | 28,601   
|                                                  |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Total interest-earning assets                     |  |                        | 820,000 |                                   |   | 209,204  |                  |  |                 | 558,347 |       |   | 83,920  |  |   | 1,671,471
|                                                  |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Interest-bearing liabilities:                     |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Savings and NOW accounts                          |  |                        | 107,915 |                                   |   | 129,592  |                  |  |                 | 237,512 |       |   | 64,561  |  |   | 539,580  
|Certificates of deposit of $100,000 or more       |  |                        | 69,605  |                                   |   | 139,634  |                  |  |                 | 108,820 |       |   | 2,042   |  |   | 320,101  
|Other time accounts                               |  |                        | 57,208  |                                   |   | 93,639   |                  |  |                 | 70,715  |       |   | 2,331   |  |   | 223,893  
|Other interest-bearing liabilities                |  |                        | 225,391 |                                   |   | 28,052   |                  |  |                 | 8,231   |       |   | 562     |  |   | 262,236  
|                                                  |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Total interest-bearing liabilities                |  |                        | 460,119 |                                   |   | 390,917  |                  |  |                 | 425,278 |       |   | 69,496  |  |   | 1,345,810
|                                                  |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Interest rate GAP                                 |  | $                      | 359,881 |                                   | $ | (181,713 | )                |  | $               | 133,069 |       | $ | 14,424  |  | $ | 325,661  
|                                                  |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Cumulative interest rate GAP at December 31, 2004 |  | $                      | 359,881 |                                   | $ | 178,168  |                  |  | $               | 311,237 |       | $ | 325,661 |  |   |          
|                                                  |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Cumulative GAP ratio at December 31, 2004         |  |                        | 1.78    |                                   |   | 1.21     |                  |  |                 | 1.24    |       |   | 1.24    |  |   |          
|                                                  |  |                        |         |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          



The following table
presents an analysis of the sensitivity inherent in our net interest income and market value of portfolio equity (market value of assets, less the market value of liabilities). The interest rate scenarios presented in the table include interest
rates at December 31, 2004, and as adjusted by instantaneous parallel rate changes upward and downward of up to 200 basis points. Each rate scenario reflects unique prepayment and repricing assumptions.



Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, this analysis is not intended to be a forecast of the actual effect of a change in market interest rates. This analysis is based on the earlier of repricing or contractual final maturity of our assets
and liabilities at December 31, 2004.



|                         |  |                     |  |                                 
|------------------------ |  | ------------------- |  | --------------------------------
|Change in Interest Rates |  | Net Interest Income |  | Market Value of Portfolio Equity
|+200                     |  | 4%                  |  | (21)%                           
|+100                     |  | 2%                  |  | (6)%                            
|0                        |  | 0%                  |  | 14%                             
|-100                     |  | (2)%                |  | 39%                             
|-200                     |  | (3)%                |  | 68%                             



A-12



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##### Table of Contents

##### Index to Financial Statements

Investment Portfolio



The following table provides the carrying value of our investment portfolio at each of the dates indicated. At December 31, 2004, the carrying value
exceeded the market value by approximately $171,000 and at December 31, 2003, the market value exceeded the carrying value by approximately $245,000. We do not own a 10 percent or greater position in any single issuer.



|                                                 |  |                        |         |      |   |         |  |   |        
|------------------------------------------------ |  | ---------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                 |  | As of December 31,    
|                                                 |  | 2004                   |         | 2003 |   | 2002   
|                                                 |  | (Dollars in thousands)
|U.S. Treasury securities                         |  | $                      | 1,001   |      | $ | 499     |  | $ | 499    
|U.S. government agency securities                |  |                        | 127,393 |      |   | 124,625 |  |   | 121,227
|Mortgage-backed securities:                      |  |                        |         |      |   |         |  |   |        
|Pass-through certificates                        |  |                        | 69,397  |      |   | 85,208  |  |   | 64,139 
|Collateralized mortgage obligations              |  |                        | 56,580  |      |   |        |  |   |       
|Obligations of states and political subdivisions |  |                        | 24,210  |      |   | 10,100  |  |   | 3,665  
|Other securities                                 |  |                        | 12,344  |      |   | 14,688  |  |   | 4,564  
|                                                 |  |                        |         |      |   |         |  |   |        
|Total investment securities                      |  | $                      | 290,925 |      | $ | 235,120 |  | $ | 194,094
|                                                 |  |                        |         |      |   |         |  |   |        



The table below
provides the carrying values, maturities, and weighted average yield of our investment portfolio as of December 31, 2004.



|                                                   |  |                        |         |                        |       |                         |      |  
|-------------------------------------------------- |  | ---------------------- | ------- | ---------------------- | ----- | ----------------------- | ---- | -
|                                                   |  | Carryingvalue          |         | Averagematurity(years) |       | Weighted average yields |     
|                                                   |  | (Dollars in thousands) |        
|U.S. Treasury securities                           |  |                        |         |                        |       |                         |      |  
|One year or less                                   |  | $                      | 1,001   |                        | 0.68  |                         | 2.00 | %
|U.S. government agency securities                  |  |                        |         |                        |       |                         |      |  
|After one through five years                       |  |                        | 127,393 |                        | 3.59  |                         | 3.52 |  
|Mortgage-backed securities                         |  |                        |         |                        |       |                         |      |  
|After one through five years                       |  |                        | 5,444   |                        | 4.17  |                         | 5.37 |  
|After five through ten years                       |  |                        | 20,489  |                        | 8.92  |                         | 4.54 |  
|After ten years                                    |  |                        | 100,044 |                        | 18.42 |                         | 4.78 |  
|                                                   |  |                        |         |                        |       |                         |      |  
|Total mortgage-backed securities obligations(a)    |  |                        | 125,977 |                        | 16.26 |                         | 4.76 |  
|Obligations of states and political subdivisions   |  |                        |         |                        |       |                         |      |  
|One year or less                                   |  |                        | 845     |                        | 0.51  |                         | 4.30 |  
|After one through five years                       |  |                        | 2,220   |                        | 3.11  |                         | 4.02 |  
|After five through ten years                       |  |                        | 6,415   |                        | 8.25  |                         | 3.57 |  
|After ten years                                    |  |                        | 14,730  |                        | 21.87 |                         | 6.16 |  
|                                                   |  |                        |         |                        |       |                         |      |  
|Total states and political subdivisions securities |  |                        | 24,210  |                        | 15.80 |                         | 5.22 |  
|Other securities                                   |  |                        | 12,344  |                        |      |                         | 3.31 |  
|                                                   |  |                        |         |                        |       |                         |      |  
|Total investment securities                        |  | $                      | 290,925 |                        | 9.93  |                         | 4.19 | %
|                                                   |  |                        |         |                        |       |                         |      |  

---

|(a) | Substantially all of our mortgage-backed securities are due in 10 years or more based on contractual maturity. The estimated weighted average life, which reflects anticipated future
prepayments is approximately four years for pass-through certificates and three years for collateralized mortgage obligations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The yields shown above have not been computed on a tax equivalent basis for tax-exempt obligations.



A-13



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##### Table of Contents

##### Index to Financial Statements

Loan Portfolio



The following table presents the amount of our loans, by category, at the dates indicated.



|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |         |        |       |         |  |   |         |  |       |  
|--------------------------------- |  | ---------------------- | --------- | ------- | ----- | - | ------ | ---- | --------- |  | ----- | ------ |  | ------- | --------- |  | ------ | - | ------- | - | ------- | ------ | ----- | ------- |  | - | ------- |  | ----- | -
|                                  |  | As of December 31,     |          
|                                  |  | 2004                   |           |         | 2003  |   |        | 2002 |           |  | 2001  |        |  | 2000    |          
|                                  |  | Amount                 |           | Percent |       |   | Amount |      | Percent   |  |       | Amount |  | Percent |           |  | Amount |   | Percent |   |         | Amount |       | Percent | 
|                                  |  | (Dollars in thousands) |          
|Commercial                        |  | $                      | 174,293   |         | 12.6  | % |        | $    | 160,261   |  | 13.0  | %      |  | $       | 100,813   |  | 9.9    | % |         | $ | 90,187  |        | 16.4  | %       |  | $ | 82,901  |  | 18.0  | %
|Real estate - commercial          |  |                        | 683,638   |         | 49.6  |   |        |      | 577,835   |  | 46.9  |        |  |         | 422,643   |  | 41.6   |   |         |   | 250,972 |        | 45.8  |         |  |   | 215,934 |  | 46.9  |  
|Real estate - one- to four-family |  |                        | 280,570   |         | 20.4  |   |        |      | 338,272   |  | 27.5  |        |  |         | 337,241   |  | 33.1   |   |         |   | 70,940  |        | 12.9  |         |  |   | 63,536  |  | 13.8  |  
|Real estate - construction        |  |                        | 191,728   |         | 13.9  |   |        |      | 116,725   |  | 9.5   |        |  |         | 100,458   |  | 9.9    |   |         |   | 98,086  |        | 17.9  |         |  |   | 68,282  |  | 14.9  |  
|Consumer and other                |  |                        | 28,601    |         | 2.1   |   |        |      | 30,736    |  | 2.5   |        |  |         | 35,555    |  | 3.5    |   |         |   | 25,557  |        | 4.6   |         |  |   | 24,451  |  | 5.3   |  
|Mortgage loans available for sale |  |                        | 18,965    |         | 1.4   |   |        |      | 7,656     |  | 0.6   |        |  |         | 20,315    |  | 2.0    |   |         |   | 12,980  |        | 2.4   |         |  |   | 4,980   |  | 1.1   |  
|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |         |        |       |         |  |   |         |  |       |  
|Total loans                       |  | $                      | 1,377,795 |         | 100.0 | % |        | $    | 1,231,485 |  | 100.0 | %      |  | $       | 1,017,025 |  | 100.0  | % |         | $ | 548,722 |        | 100.0 | %       |  | $ | 460,084 |  | 100.0 | %
|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |         |        |       |         |  |   |         |  |       |  





During the first quarter of 2004, we completed the sale of 194 mortgage loans with a carrying value of approximately $38 million obtained in the
acquisition of First Community in 2002. These loans were sold at a discount resulting in a loss of $435,000, net of deferred loan fees.



During the first quarter of 2003, we completed the sale of certain mortgage loans available for sale obtained in the acquisition of First Community in
2002. The sale to unrelated third parties included 227 loans with a carrying value of approximately $8.5 million. These loans were marked to market in the acquisition accounting for First Community and therefore no gain or loss was recognized from
the sale.



The following table presents the aggregate
maturities of loans in each major category of our loan portfolio at December 31, 2004. Actual maturities may differ from the contractual maturities shown as a result of renewals and prepayments.



|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|--------------------------------- |  | ---------------------- | --------- | ---------------- | - | -------------- |  | ----- | ------ |  | - | ---------
|                                  |  | Less than oneyear      |           | One to fiveyears |   | Over fiveyears |  | Total
|                                  |  | (Dollars in thousands)
|Fixed-rate loans:                 |  |                        |           |                  |   |                |  |       |        |  |   |          
|Commercial                        |  | $                      | 22,764    |                  | $ | 23,584         |  | $     | 1,554  |  | $ | 47,902   
|Real estate                       |  |                        | 38,439    |                  |   | 62,480         |  |       | 17,092 |  |   | 118,011  
|Consumer                          |  |                        | 12,491    |                  |   | 10,806         |  |       | 557    |  |   | 23,854   
|Mortgage loans available for sale |  |                        | 18,965    |                  |   |               |  |       |       |  |   | 18,965   
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|Total fixed-rate loans            |  |                        | 92,659    |                  |   | 96,870         |  |       | 19,203 |  |   | 208,732  
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|Variable-rate loans:              |  |                        |           |                  |   |                |  |       |        |  |   |          
|Commercial                        |  |                        | 120,588   |                  |   | 5,594          |  |       | 209    |  |   | 126,391  
|Real estate                       |  |                        | 782,578   |                  |   | 246,282        |  |       | 9,065  |  |   | 1,037,925
|Consumer                          |  |                        | 4,678     |                  |   | 43             |  |       | 26     |  |   | 4,747    
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|Total variable-rate loans         |  |                        | 907,844   |                  |   | 251,919        |  |       | 9,300  |  |   | 1,169,063
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|Total loans                       |  | $                      | 1,000,503 |                  | $ | 348,789        |  | $     | 28,503 |  | $ | 1,377,795
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          



A-14



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##### Table of Contents

##### Index to Financial Statements

Nonperforming Assets



Nonperforming assets consist of loans past due 90 days or more, non-accrual loans, restructured loans, and other real estate owned. We generally place a
loan on non-accrual status and cease accruing interest when loan payment performance is deemed unsatisfactory or we become aware that adverse factors have occurred that create substantial doubt about the collectability of the loan. All loans past
due 90 days, however, are placed on non-accrual status, unless the loan is both well collateralized and in the process of collection. Cash payments received, while a loan is classified as non-accrual, are recorded as a reduction of principal as long
as doubt exists as to collection.



Potential problem assets are
defined as loans presently accruing interest, and not contractually past due 90 days or more and not restructured, but about which management has doubt as to the future ability of the borrower to comply with present repayment terms, which may result
in the reporting of the loans as nonperforming assets in the future. Management monitors the performance and value of any collateral securing such loans monthly, and in cases where the loan balance exceeds estimated fair value of collateral, a
specific portion of the allowance for loan losses is allocated to these loans. At December 31, 2004, $829,000 of the allowance for loan losses was allocated specifically to such loans.



The following table sets forth information with respect to these assets at the dates indicated.



|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|--------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ----- | -
|                                                                |  | As of December 31,     |       
|                                                                |  | 2004                   |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                                |  | (Dollars in thousands) |       
|Loans past due 90 days or more                                  |  | $                      | 4      |   |      | $ | 13     |      |  | $ | 721    |   |  | $    | 3      |   |  | $ | 6     |  
|Non-accrual loans                                               |  |                        | 7,969  |   |      |   | 12,515 |      |  |   | 10,241 |   |  |      | 2,480  |   |  |   | 1,937 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total nonperforming loans                                       |  |                        | 7,973  |   |      |   | 12,528 |      |  |   | 10,962 |   |  |      | 2,483  |   |  |   | 1,943 |  
|Other real estate owned                                         |  |                        | 1,255  |   |      |   | 1,557  |      |  |   | 908    |   |  |      | 272    |   |  |   | 2,016 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total nonperforming assets                                      |  | $                      | 9,228  |   |      | $ | 14,085 |      |  | $ | 11,870 |   |  | $    | 2,755  |   |  | $ | 3,959 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Allowance for loan losses                                       |  | $                      | 15,331 |   |      | $ | 14,121 |      |  | $ | 11,838 |   |  | $    | 7,207  |   |  | $ | 6,308 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Potential problem assets                                        |  | $                      | 22,174 |   |      | $ | 15,115 |      |  | $ | 23,286 |   |  | $    | 13,331 |   |  | $ | 5,053 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Ratio of total nonperforming assets to total assets             |  |                        | 0.51   | % |      |   | 0.86   | %    |  |   | 0.86   | % |  |      | 0.33   | % |  |   | 0.61  | %
|Ratio of total nonperforming loans to total loans               |  |                        | 0.58   | % |      |   | 1.02   | %    |  |   | 1.08   | % |  |      | 0.45   | % |  |   | 0.42  | %
|Ratio of allowance for loan losses to total nonperforming loans |  |                        | 192    | % |      |   | 113    | %    |  |   | 108    | % |  |      | 290    | % |  |   | 325   | %



Loans on which the
accrual of interest has been discontinued amounted to $8.0 million, $12.5 million, and $10.2 million at December 31, 2004, 2003, and 2002, respectively. If interest on such loans had been accrued, such income would have been approximately $348,000
in 2004, $495,000 in 2003, and $203,000 in 2002. Actual interest income on those loans, which is recorded only when received, amounted to zero in 2004, 2003, and 2002.



Analysis of the Allowance for Loan Losses



Management uses a systematic methodology, which is applied monthly, to evaluate the amount of allowance for loan losses and the resultant provisions
for loan losses it considers adequate to provide for anticipated loan losses. This methodology includes the following elements:



| |  |  | A periodic detailed analysis of the loan portfolio
| | - |  | --------------------------------------------------



| |  |  | A systematic loan grading system
| | - |  | --------------------------------



| |  |  | A periodic review of the summary of the allowance for loan loss balance
| | - |  | -----------------------------------------------------------------------



| |  |  | Identification of loans to be evaluated on an individual basis for impairment under SFAS No. 114
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Consideration of internal factors such as our size, organizational structure, loan portfolio structure, loan administration procedures, past due and delinquency trends, and loss
experience
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consideration of risks inherent in different kinds of lending
| | - |  | -------------------------------------------------------------



| |  |  | Consideration of external factors such as local, regional, and national economic factors
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | An overall evaluation of the quality of the underlying collateral, and holding and disposition costs
| | - |  | ----------------------------------------------------------------------------------------------------



A-15



---

##### Table of Contents

##### Index to Financial Statements

The following table sets forth information regarding changes in our allowance for loan losses for the
periods indicated.



|                                                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|-------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - |  | - | ----- | -
|                                                         |  | Years ended December 31, |       
|                                                         |  | 2004                     |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |      
|                                                         |  | (Dollars in thousands)   |       
|Allowance for loan losses, beginning of period           |  | $                        | 14,121 |   |      | $ | 11,838 |      |  | $ | 7,207  |   |  | $    | 6,308 |   |  | $ | 5,387 |  
|Charge-offs:                                             |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Commercial and other                                     |  |                          | 1,038  |   |      |   | 445    |      |  |   | 598    |   |  |      | 1,034 |   |  |   | 1,257 |  
|Real estate loans                                        |  |                          | 2,067  |   |      |   | 2,349  |      |  |   | 358    |   |  |      | 338   |   |  |   | 664   |  
|Consumer loans                                           |  |                          | 426    |   |      |   | 766    |      |  |   | 298    |   |  |      | 201   |   |  |   | 112   |  
|Credit cards                                             |  |                          | 172    |   |      |   | 142    |      |  |   | 174    |   |  |      | 130   |   |  |   | 23    |  
|                                                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Total charge-offs                                        |  |                          | 3,703  |   |      |   | 3,702  |      |  |   | 1,428  |   |  |      | 1,703 |   |  |   | 2,056 |  
|                                                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Recoveries:                                              |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Commercial and other                                     |  |                          | 136    |   |      |   | 115    |      |  |   | 121    |   |  |      | 45    |   |  |   | 369   |  
|Real estate loans                                        |  |                          | 135    |   |      |   | 141    |      |  |   | 57     |   |  |      | 47    |   |  |   | 27    |  
|Consumer loans                                           |  |                          | 83     |   |      |   | 146    |      |  |   | 93     |   |  |      | 100   |   |  |   | 70    |  
|Credit cards                                             |  |                          | 59     |   |      |   | 40     |      |  |   | 34     |   |  |      | 24    |   |  |   | 36    |  
|                                                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Total recoveries                                         |  |                          | 413    |   |      |   | 442    |      |  |   | 305    |   |  |      | 216   |   |  |   | 502   |  
|                                                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Net charge-offs                                          |  |                          | 3,290  |   |      |   | 3,260  |      |  |   | 1,123  |   |  |      | 1,487 |   |  |   | 1,554 |  
|Provision for loan losses                                |  |                          | 4,500  |   |      |   | 5,543  |      |  |   | 2,589  |   |  |      | 2,386 |   |  |   | 2,475 |  
|Allowance related to acquired loans                      |  |                          |       |   |      |   |       |      |  |   | 3,165  |   |  |      |      |   |  |   |      |  
|                                                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Allowance for loan losses, end of period                 |  | $                        | 15,331 |   |      | $ | 14,121 |      |  | $ | 11,838 |   |  | $    | 7,207 |   |  | $ | 6,308 |  
|                                                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|As a percentage of average total loans:                  |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Net charge-offs                                          |  |                          | 0.26   | % |      |   | 0.29   | %    |  |   | 0.16   | % |  |      | 0.30  | % |  |   | 0.37  | %
|Provision for loan losses                                |  |                          | 0.35   |   |      |   | 0.50   |      |  |   | 0.37   |   |  |      | 0.48  |   |  |   | 0.58  |  
|Allowance for loan losses                                |  |                          | 1.19   |   |      |   | 1.27   |      |  |   | 1.71   |   |  |      | 1.45  |   |  |   | 1.48  |  
|As a percentage of total loans at year-end:              |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Allowance for loan losses                                |  |                          | 1.11   |   |      |   | 1.15   |      |  |   | 1.16   |   |  |      | 1.31  |   |  |   | 1.37  |  
|As a multiple of net charge-offs:                        |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Allowance for loan losses                                |  |                          | 4.66   |   |      |   | 4.33   |      |  |   | 10.54  |   |  |      | 4.85  |   |  |   | 4.06  |  
|Income before income taxes and provision for loan losses |  |                          | 8.60   |   |      |   | 8.70   |      |  |   | 16.19  |   |  |      | 10.13 |   |  |   | 8.72  |  



Specific allowances
are provided for individual loans where ultimate collection is considered questionable by management after reviewing the current status of loans that are contractually past due and considering the net realizable value of the security and of the loan
guarantees, if applicable. The following table sets forth the allowance for loan losses by category, based upon managements assessment of the risk associated with these categories at the dates indicated, and summarizes the percentage of gross
loans in each category as a percentage of total loans.



Our
loan portfolio is concentrated in New Mexico, Colorado, and Utah. A significant portion of our loan portfolio is secured by real estate in those communities. Accordingly, the ultimate collectibility of our loan portfolio is dependent upon the
economy and real estate values in those markets.



|                                            |  |                        |        |                               |        |   |                     |      |                               |  |        |                     |  |                               |        |  |                     |   |                               |   |       |                     |        |                               |  |   |       |  |        |  
|------------------------------------------- |  | ---------------------- | ------ | ----------------------------- | ------ | - | ------------------- | ---- | ----------------------------- |  | ------ | ------------------- |  | ----------------------------- | ------ |  | ------------------- | - | ----------------------------- | - | ----- | ------------------- | ------ | ----------------------------- |  | - | ----- |  | ------ | -
|                                            |  | As of December 31,     |       
|                                            |  | 2004                   |        |                               | 2003   |   |                     | 2002 |                               |  | 2001   |                     |  | 2000                          |       
|                                            |  | (Dollars in thousands) |       
|                                            |  | Amount of allowance    |        | Percent ofloans tototal loans |        |   | Amount of allowance |      | Percent ofloans tototal loans |  |        | Amount of allowance |  | Percent ofloans tototal loans |        |  | Amount of allowance |   | Percent ofloans tototal loans |   |       | Amount of allowance |        | Percent ofloans tototal loans | 
|Commercial and other and subjective portion |  | $                      | 6,785  |                               | 12.64  | % |                     | $    | 6,056                         |  | 13.01  | %                   |  | $                             | 6,368  |  | 9.91                | % |                               | $ | 6,376 |                     | 16.40  | %                             |  | $ | 3,604 |  | 32.86  | %
|Real estate                                 |  |                        | 7,642  |                               | 85.28  |   |                     |      | 6,944                         |  | 84.49  |                     |  |                               | 4,981  |  | 86.59               |   |                               |   | 607   |                     | 79.00  |                               |  |   | 2,586 |  | 61.83  |  
|Consumer                                    |  |                        | 904    |                               | 2.08   |   |                     |      | 1,121                         |  | 2.50   |                     |  |                               | 489    |  | 3.50                |   |                               |   | 224   |                     | 4.60   |                               |  |   | 118   |  | 5.31   |  
|                                            |  |                        |        |                               |        |   |                     |      |                               |  |        |                     |  |                               |        |  |                     |   |                               |   |       |                     |        |                               |  |   |       |  |        |  
|Total allowance for loan losses             |  | $                      | 15,331 |                               | 100.00 | % |                     | $    | 14,121                        |  | 100.00 | %                   |  | $                             | 11,838 |  | 100.00              | % |                               | $ | 7,207 |                     | 100.00 | %                             |  | $ | 6,308 |  | 100.00 | %
|                                            |  |                        |        |                               |        |   |                     |      |                               |  |        |                     |  |                               |        |  |                     |   |                               |   |       |                     |        |                               |  |   |       |  |        |  



A-16



---

##### Table of Contents

##### Index to Financial Statements

The provision for loan losses decreased to $4.5 million in 2004, from $5.5 million in 2003 and $2.6
million in 2002. The provision in each year was based on managements judgment concerning the amount of allowance for loan losses necessary after its review of various factors, which we believe affect the credit quality of the loan portfolio.
Charge-offs net of recoveries of loans were $3.3 million in 2004, $3.3 million in 2003, and $1.1 million in 2002. The percentage of net charge-offs to average loans was 0.26% in 2004, 0.29% in 2003, and 0.16% in 2002. Management intends to continue
to provide for potential loan losses based upon growth in the portfolio, trends in delinquencies, charge-off experience, and local and national economic conditions.



Deposits



The following table presents the average balances outstanding for each major category of our deposits and weighted average interest rate paid for
interest-bearing deposits for the periods indicated.



|                                     |  |                          |           |                             |      |   |                 |      |                             |  |      |                |  |                               |         |  |      |  
|------------------------------------ |  | ------------------------ | --------- | --------------------------- | ---- | - | --------------- | ---- | --------------------------- |  | ---- | -------------- |  | ----------------------------- | ------- |  | ---- | -
|                                     |  | Years ended December 31, |          
|                                     |  | 2004                     |           |                             | 2003 |   |                 | 2002 |                            
|                                     |  | (Dollars in thousands)   |          
|                                     |  | Average Balance          |           | WeightedAverageInterestRate |      |   | Average Balance |      | WeightedAverageInterestRate |  |      | AverageBalance |  | Weighted Average InterestRate |        
|Interest-bearing demand accounts     |  | $                        | 237,144   |                             | 0.47 | % |                 | $    | 199,890                     |  | 0.45 | %              |  | $                             | 165,716 |  | 0.76 | %
|Certificates of deposit              |  |                          | 527,084   |                             | 2.83 |   |                 |      | 508,851                     |  | 3.00 |                |  |                               | 346,789 |  | 3.70 |  
|Money market savings accounts        |  |                          | 194,961   |                             | 1.35 |   |                 |      | 145,910                     |  | 1.40 |                |  |                               | 84,729  |  | 1.76 |  
|Regular savings accounts             |  |                          | 67,480    |                             | 0.85 |   |                 |      | 58,367                      |  | 0.84 |                |  |                               | 48,964  |  | 1.23 |  
|Non-interest-bearing demand accounts |  |                          | 279,101   |                             |     |   |                 |      | 224,680                     |  |     |                |  |                               | 159,219 |  |     |  
|                                     |  |                          |           |                             |      |   |                 |      |                             |  |      |                |  |                               |         |  |      |  
|Totals                               |  | $                        | 1,305,770 |                             | 1.87 | % |                 | $    | 1,137,698                   |  | 2.05 | %              |  | $                             | 805,417 |  | 2.50 | %
|                                     |  |                          |           |                             |      |   |                 |      |                             |  |      |                |  |                               |         |  |      |  



The following table shows the amount
and maturity of certificates of deposit that had balances of $100,000 or more and the percentage of the total for each maturity.



|                          |  |                        |         |  |        |   |  |      |         |  |        |   |  |   |         |  |        |  
|------------------------- |  | ---------------------- | ------- |  | ------ | - |  | ---- | ------- |  | ------ | - |  | - | ------- |  | ------ | -
|                          |  | As of December 31,     |        
|                          |  | 2004                   |         |  | 2003   |   |  | 2002 |        
|                          |  | (Dollars in thousands) |        
|Three months or less      |  | $                      | 69,605  |  | 21.74  | % |  | $    | 63,007  |  | 23.58  | % |  | $ | 52,584  |  | 23.75  | %
|Three through six months  |  |                        | 64,530  |  | 20.16  |   |  |      | 56,613  |  | 21.18  |   |  |   | 48,372  |  | 21.85  |  
|Six through twelve months |  |                        | 75,104  |  | 23.47  |   |  |      | 61,401  |  | 22.98  |   |  |   | 59,257  |  | 26.76  |  
|Over twelve months        |  |                        | 110,862 |  | 34.63  |   |  |      | 86,235  |  | 32.26  |   |  |   | 61,189  |  | 27.64  |  
|                          |  |                        |         |  |        |   |  |      |         |  |        |   |  |   |         |  |        |  
|Totals                    |  | $                      | 320,101 |  | 100.00 | % |  | $    | 267,256 |  | 100.00 | % |  | $ | 221,402 |  | 100.00 | %
|                          |  |                        |         |  |        |   |  |      |         |  |        |   |  |   |         |  |        |  



Securities Sold Under Agreements to
Repurchase



Securities sold under agreements to repurchase
totaled approximately $69.7 million, $63.7 million, and $70.8 million at December 31, 2004, 2003, and 2002, respectively. The weighted average interest rate on securities sold under agreements to repurchase was 0.43%, 0.33%, and 0.49% at December
31, 2004, 2003, and 2002, respectively.



Securities sold under agreements to
repurchase are summarized as follows:



|                                                 |  |                          |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  | Years ended December 31, |       
|                                                 |  | 2004                     |        |   | 2003 |   |        | 2002 | 
|                                                 |  | (Dollars in thousands)   |       
|Balance                                          |  | $                        | 69,723 |   |      | $ | 63,686 |      |  | $ | 70,764 |  
|Weighted average interest rate                   |  |                          | 0.43   | % |      |   | 0.33   | %    |  |   | 0.49   | %
|Maximum amount outstanding at any month end      |  | $                        | 75,109 |   |      | $ | 63,686 |      |  | $ | 70,764 |  
|Average balance outstanding during the period    |  | $                        | 64,241 |   |      | $ | 54,368 |      |  | $ | 65,339 |  
|Weighted average interest rate during the period |  |                          | 0.31   | % |      |   | 0.41   | %    |  |   | 0.89   | %



A-17



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##### Table of Contents

##### Index to Financial Statements

Short-term FHLB Advances



Short-term Federal Home Loan Bank (FHLB) advances totaled approximately $91 million, $110 million, and $20 million at December 31, 2004,
2003, and 2002, respectively. The weighted average interest rate on short-term FHLB advances was 2.21%, 1.04%, and 1.77% at December 31, 2004, 2003, and 2002, respectively.



Short-term FHLB advances are summarized as follows:



|                                                 |  |                          |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2004                     |         |   | 2003 |   |         | 2002 | 
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 91,000  |   |      | $ | 110,000 |      |  | $ | 20,000 |  
|Weighted average interest rate                   |  |                          | 2.21    | % |      |   | 1.04    | %    |  |   | 1.77   | %
|Maximum amount outstanding at any month end      |  | $                        | 115,000 |   |      | $ | 110,000 |      |  | $ | 20,000 |  
|Average balance outstanding during the period    |  | $                        | 71,235  |   |      | $ | 34,308  |      |  | $ | 5,027  |  
|Weighted average interest rate during the period |  |                          | 1.39    | % |      |   | 1.34    | %    |  |   | 2.07   | %



Liquidity and Sources of Funds



Our primary sources of funds are customer deposits, loan
repayments, and borrowings. These funds are used to make loans, acquire investment securities and other assets, and fund continuing operations. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled
loan prepayments, which are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions, and other factors, are not stable sources of funds. Our deposits increased to $1.401 billion at
December 31, 2004, from $1.196 billion at December 31, 2003. Growth in deposits has occurred primarily as a result of our efforts to increase market share by taking advantage of market dislocations caused by the acquisition of local competitors and
growth in the economy of our market areas.



Our net loans
increased to $1.362 billion at December 31, 2004 from $1.217 billion as of December 31, 2003. During 2004, real estate loans increased by $123.1 million, commercial loans increased by $14.0 million, consumer loans decreased by $2.1 million, and
mortgage loans available for sale increased by $11.3 million. The increase in loans is due to our successful efforts to increase our market share by taking advantage of market dislocations caused by the acquisition of local competitors, growth in
the economy of our market area, and our continued focus on the Colorado markets.



We maintain an investment securities portfolio made up of U.S. Treasury, U.S. agencies, mortgage-backed securities issued by U.S. agencies, municipal bonds, and other securities. These securities may be used as a
source of liquidity either through sale of securities available for sale or pledging for qualified deposits, or as collateral for Federal Home Loan Bank borrowings.



During 2004, our deposit growth outpaced the growth in loans resulting in a decrease in borrowings from the Federal Home
Loan Bank. The repayment of the additional borrowings in 2004 is laddered out to April 2005 and therefore refinancing these borrowings will be subject to prevailing market rates. At December 31, 2004, we had additional borrowing capacity at the
Federal Home Loan Bank of approximately $302 million as well as unused Federal Funds lines at other banks of $57.5 million.



While management anticipates that we will continue to rely primarily on customer deposits and loan repayments, as well as retained earnings, to provide
liquidity, to make loans and to purchase securities, we may also consider secondary sources of liquidity such as the sale of additional blocks of mortgage loans from the acquired First Community portfolio, the issuance of brokered deposits, the
issuance of junior subordinated debentures, private equity offerings or the sale of equity in the capital markets. We believe that our customer deposits provide a strong source of liquidity because of the high percentage of core deposits. FHLB
advances are used to compensate for reductions in other sources of funds. Borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets. The sources of such
borrowings are federal funds sold, securities sold under agreements to repurchase, and borrowings from the Federal Home Loan Bank.



A-18



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##### Table of Contents

##### Index to Financial Statements

Contractual Obligations and Commercial Commitments



The following tables present contractual cash obligations, defined as principal of non-deposit obligations with maturities
in excess of one year, and property and equipment operating lease obligations, and commercial commitments, defined as commitments to extend credit as of December 31, 2004. See Notes 9, 10, and 13 of the notes to the consolidated financial
statements.



|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       
|---------------------------------- |  | ------------------------------------------ | ------- | ----------------- | - | ----------------- |  | ----------------- | ------ | --------------- | - | ----- |  | - | ------
|                                   |  | Payments Due by Period                    
|Contractual Cash Obligations       |  | Total                                      |         | One Yearand Less  |   | One to ThreeYears |  | Four to FiveYears |        | After FiveYears
|                                   |  | (Dollars in thousands)                    
|FHLB advances                      |  | $                                          | 153,026 |                   | $ | 145,012           |  | $                 | 8,014  |                 | $ |      |  | $ |      
|Note Payable                       |  |                                            | 826     |                   |   | 47                |  |                   | 102    |                 |   | 115   |  |   | 562   
|Operating leases                   |  |                                            | 36,770  |                   |   | 4,463             |  |                   | 7,797  |                 |   | 7,207 |  |   | 17,303
|Junior subordinated debentures     |  |                                            | 38,661  |                   |   |                  |  |                   |       |                 |   |      |  |   | 38,661
|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       
|Total contractual cash obligations |  | $                                          | 229,283 |                   | $ | 149,522           |  | $                 | 15,913 |                 | $ | 7,322 |  | $ | 56,626
|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       
|                                   | 
|                                   |  | Amount of Commitment Expiration Per Period
|Commercial Commitments             |  | UnfundedCommitments                        |         | Less thanOne Year |   | One to ThreeYears |  | Four to FiveYears |        | After FiveYears
|                                   |  | (Dollars in thousands)                    
|Lines of credit                    |  | $                                          | 290,490 |                   | $ | 196,900           |  | $                 | 47,996 |                 | $ | 902   |  | $ | 44,692
|Standby letters of credit          |  |                                            | 32,836  |                   |   | 25,836            |  |                   | 7,000  |                 |   |      |  |   |      
|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       
|Total commercial commitments       |  | $                                          | 323,326 |                   | $ | 222,736           |  | $                 | 54,996 |                 | $ | 902   |  | $ | 44,692
|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       



Capital Resources



Our total stockholders equity increased to $144.3 million at
December 31, 2004 from $132.4 million at December 31, 2003. Of the $11.9 million increase, $15.2 million was produced by earnings, $1.2 million due to stock issuances related to stock options, restricted stock, the dividend re-investment plan, and
the employee benefit plan, $363,000 was generated from the tax benefit of exercised options. These increases were offset primarily by $1.3 million as a result of the decrease in market value of securities available for sale and dividend payments of
$3.6 million.



Management currently intends to continue to
retain a major portion of our earnings to support anticipated growth. As of December 31, 2004, we were considered well capitalized based on the regulatory capital requirements as further disclosed in note 14 to the consolidated financial statements.



Impact of Inflation



The consolidated financial statements and related financial data and notes
presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to inflation.



Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general price
levels.



A-19



---

##### Table of Contents

##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

First State Bancorporation:



We have audited the accompanying consolidated balance sheets of First State Bancorporation and subsidiary as of December 31, 2004 and 2003,
and the related consolidated statements of operations, comprehensive income, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First State Bancorporation and subsidiary as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First State Bancorporations internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 2, 2005 expressed an unqualified
opinion on managements assessment of, and the effective operation of, internal control over financial reporting.



KPMG LLP



Albuquerque, New Mexico

March 2, 2005



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##### Table of Contents

##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

First State Bancorporation:



We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial
Reporting, that First State Bancorporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). First State Bancorporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.



In our opinion, managements assessment
that First State Bancorporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, First State Bancorporation maintained, in all material respects, effective internal control over financial reporting as of December
31, 2004, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of First State Bancorporation and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive income, stockholders equity, and cash flows for each of the years in the
three-year period ended December 31, 2004 and our report dated March 2, 2005 expressed an unqualified opinion on those consolidated financial statements.



KPMG LLP



Albuquerque, New Mexico

March 2, 2005



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)



|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                |  | As of December 31, |          
|                                                                                                                                                                                |  | 2004               |           |   | 2003 |  
|ASSETS                                                                                                                                                                          |  |                    |           |   |      |   |           |  
|Cash and due from banks (note 3)                                                                                                                                                |  | $                  | 42,514    |   |      | $ | 52,626    |  
|Interest-bearing deposits with other banks                                                                                                                                      |  |                    | 1,501     |   |      |   | 33,524    |  
|Federal funds sold                                                                                                                                                              |  |                    | 1,250     |   |      |   |          |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total cash and cash equivalents                                                                                                                                                 |  |                    | 45,265    |   |      |   | 86,150    |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Investment securities (note 4):                                                                                                                                                 |  |                    |           |   |      |   |           |  
|Available for sale (at market, amortized cost of $204,672 and $135,005 at December 31, 2004 and 2003)                                                                           |  |                    | 203,174   |   |      |   | 135,530   |  
|Held to maturity (at amortized cost, market of $75,236 and $85,147 at December 31, 2004 and 2003)                                                                               |  |                    | 75,407    |   |      |   | 84,902    |  
|Federal Home Loan Bank stock and Federal Reserve Bank stock at cost                                                                                                             |  |                    | 12,344    |   |      |   | 14,688    |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total investment securities                                                                                                                                                     |  |                    | 290,925   |   |      |   | 235,120   |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Mortgage loans available for sale (note 5)                                                                                                                                      |  |                    | 18,965    |   |      |   | 7,656     |  
|Loans held for investment net of unearned interest (note 5)                                                                                                                     |  |                    | 1,358,830 |   |      |   | 1,223,829 |  
|Less allowance for loan losses (note 5)                                                                                                                                         |  |                    | (15,331   | ) |      |   | (14,121   | )
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Net loans                                                                                                                                                                       |  |                    | 1,362,464 |   |      |   | 1,217,364 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Premises and equipment, net (note 6)                                                                                                                                            |  |                    | 29,310    |   |      |   | 22,993    |  
|Accrued interest receivable                                                                                                                                                     |  |                    | 6,947     |   |      |   | 5,582     |  
|Other real estate owned                                                                                                                                                         |  |                    | 1,255     |   |      |   | 1,557     |  
|Goodwill (note 7)                                                                                                                                                               |  |                    | 43,223    |   |      |   | 43,223    |  
|Cash surrender value of bank owned life insurance                                                                                                                               |  |                    | 19,910    |   |      |   | 19,111    |  
|Deferred tax asset, net (note 11)                                                                                                                                               |  |                    | 2,866     |   |      |   | 3,479     |  
|Other assets, net                                                                                                                                                               |  |                    | 13,345    |   |      |   | 12,160    |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total assets                                                                                                                                                                    |  | $                  | 1,815,510 |   |      | $ | 1,646,739 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                            |  |                    |           |   |      |   |           |  
|Liabilities:                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Deposits (note 8):                                                                                                                                                              |  |                    |           |   |      |   |           |  
|Non-interest-bearing                                                                                                                                                            |  | $                  | 317,729   |   |      | $ | 269,569   |  
|Interest-bearing                                                                                                                                                                |  |                    | 1,083,574 |   |      |   | 926,306   |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total deposits                                                                                                                                                                  |  |                    | 1,401,303 |   |      |   | 1,195,875 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Securities sold under agreements to repurchase (note 9)                                                                                                                         |  |                    | 69,723    |   |      |   | 63,686    |  
|Federal Home Loan Bank Advances and other (note 9)                                                                                                                              |  |                    | 153,852   |   |      |   | 216,822   |  
|Junior subordinated debentures (note 10)                                                                                                                                        |  |                    | 38,661    |   |      |   | 32,500    |  
|Other liabilities                                                                                                                                                               |  |                    | 7,662     |   |      |   | 5,415     |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total liabilities                                                                                                                                                               |  |                    | 1,671,201 |   |      |   | 1,514,298 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Stockholders equity (note 12):                                                                                                                                                 |  |                    |           |   |      |   |           |  
|Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding                                                                                          |  |                    |          |   |      |   |          |  
|Common stock, no par value, 20,000,000 shares authorized; issued, 16,141,232 and 16,026,144; outstanding, 15,324,728 and 15,209,984 at
December 31, 2004 and 2003, respectively |  |                    | 88,634    |   |      |   | 87,304    |  
|Treasury stock, at cost (816,504 shares at December 31, 2004 and 816,160 shares at December 31, 2003)                                                                           |  |                    | (6,340    | ) |      |   | (6,335    | )
|Retained earnings                                                                                                                                                               |  |                    | 63,166    |   |      |   | 51,539    |  
|Unearned compensation                                                                                                                                                           |  |                    | (192      | ) |      |   | (403      | )
|Accumulated other comprehensive income (loss) -                                                                                                                                 |  |                    |           |   |      |   |           |  
|Unrealized (loss) gain on investment securities, net of tax (notes 4 and 11)                                                                                                    |  |                    | (959      | ) |      |   | 336       |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total stockholders equity                                                                                                                                                      |  |                    | 144,309   |   |      |   | 132,441   |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Commitments and contingencies (notes 12 and 13)                                                                                                                                 |  |                    |           |   |      |   |           |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $                  | 1,815,510 |   |      | $ | 1,646,739 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  



See accompanying notes
to consolidated financial statements.



A-22



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)



|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                     |  | Years ended December 31, |       
|                                                     |  | 2004                     |        |   | 2003 |   |        | 2002 | 
|Interest income:                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Interest and fees on loans                           |  | $                        | 83,623 |   |      | $ | 75,734 |      |  | $ | 50,320 |  
|Interest on marketable securities:                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Taxable                                              |  |                          | 9,173  |   |      |   | 7,622  |      |  |   | 8,758  |  
|Nontaxable                                           |  |                          | 573    |   |      |   | 181    |      |  |   | 148    |  
|Federal funds sold                                   |  |                          | 16     |   |      |   | 113    |      |  |   | 359    |  
|Interest-bearing deposits with other banks           |  |                          | 57     |   |      |   | 63     |      |  |   | 261    |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total interest income                                |  |                          | 93,442 |   |      |   | 83,713 |      |  |   | 59,846 |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Interest expense:                                    |  |                          |        |   |      |   |        |      |  |   |        |  
|Deposits                                             |  |                          | 19,222 |   |      |   | 18,712 |      |  |   | 16,183 |  
|Short-term borrowings (note 9)                       |  |                          | 1,192  |   |      |   | 761    |      |  |   | 689    |  
|Long-term debt (note 9)                              |  |                          | 1,728  |   |      |   | 1,610  |      |  |   | 421    |  
|Junior subordinated debentures (note 10)             |  |                          | 1,733  |   |      |   | 1,546  |      |  |   | 1,091  |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total interest expense                               |  |                          | 23,875 |   |      |   | 22,629 |      |  |   | 18,384 |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Net interest income                                  |  |                          | 69,567 |   |      |   | 61,084 |      |  |   | 41,462 |  
|Provision for loan losses (note 5)                   |  |                          | (4,500 | ) |      |   | (5,543 | )    |  |   | (2,589 | )
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Net interest income after provision for loan losses  |  |                          | 65,067 |   |      |   | 55,541 |      |  |   | 38,873 |  
|Non-interest income:                                 |  |                          |        |   |      |   |        |      |  |   |        |  
|Service charges on deposit accounts                  |  |                          | 4,410  |   |      |   | 4,225  |      |  |   | 3,439  |  
|Other banking service fees                           |  |                          | 756    |   |      |   | 1,116  |      |  |   | 1,083  |  
|Credit and debit card transaction fees               |  |                          | 3,991  |   |      |   | 3,938  |      |  |   | 4,195  |  
|Gain (loss) on sale or call of investment securities |  |                          | 359    |   |      |   | 46     |      |  |   | (8     | )
|Check imprint income                                 |  |                          | 584    |   |      |   | 590    |      |  |   | 529    |  
|Gain on sale of mortgage loans                       |  |                          | 2,718  |   |      |   | 3,493  |      |  |   | 2,768  |  
|Other                                                |  |                          | 1,373  |   |      |   | 1,113  |      |  |   | 692    |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total non-interest income                            |  |                          | 14,191 |   |      |   | 14,521 |      |  |   | 12,698 |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Non-interest expenses:                               |  |                          |        |   |      |   |        |      |  |   |        |  
|Salaries and employee benefits (notes 12 and 13)     |  |                          | 24,843 |   |      |   | 20,570 |      |  |   | 15,421 |  
|Occupancy                                            |  |                          | 7,804  |   |      |   | 6,267  |      |  |   | 4,353  |  
|Data processing                                      |  |                          | 2,934  |   |      |   | 2,412  |      |  |   | 2,011  |  
|Credit and debit card interchange                    |  |                          | 1,580  |   |      |   | 1,637  |      |  |   | 2,004  |  
|Equipment                                            |  |                          | 4,258  |   |      |   | 3,697  |      |  |   | 2,781  |  
|Legal, accounting, and consulting                    |  |                          | 1,372  |   |      |   | 1,128  |      |  |   | 816    |  
|Marketing                                            |  |                          | 2,288  |   |      |   | 2,190  |      |  |   | 2,109  |  
|Telephone expense                                    |  |                          | 1,219  |   |      |   | 1,534  |      |  |   | 887    |  
|Supplies                                             |  |                          | 922    |   |      |   | 744    |      |  |   | 755    |  
|Delivery expenses                                    |  |                          | 901    |   |      |   | 1,007  |      |  |   | 432    |  
|Other real estate owned                              |  |                          | 366    |   |      |   | 354    |      |  |   | 132    |  
|FDIC insurance premiums                              |  |                          | 181    |   |      |   | 173    |      |  |   | 129    |  
|Amortization of intangibles                          |  |                          | 111    |   |      |   | 114    |      |  |   | 53     |  
|Check imprint expense                                |  |                          | 537    |   |      |   | 528    |      |  |   | 495    |  
|Loss on sale of loans                                |  |                          | 435    |   |      |   |       |      |  |   |       |  
|Other                                                |  |                          | 5,727  |   |      |   | 4,887  |      |  |   | 3,604  |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total non-interest expenses                          |  |                          | 55,478 |   |      |   | 47,242 |      |  |   | 35,982 |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Income before income taxes                           |  |                          | 23,780 |   |      |   | 22,820 |      |  |   | 15,589 |  
|Income tax expense (note 11)                         |  |                          | 8,555  |   |      |   | 7,969  |      |  |   | 5,631  |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                           |  | $                        | 15,225 |   |      | $ | 14,851 |      |  | $ | 9,958  |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Earnings per share (note 1):                         |  |                          |        |   |      |   |        |      |  |   |        |  
|Basic earnings per share                             |  | $                        | 0.99   |   |      | $ | 0.99   |      |  | $ | 0.86   |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Diluted earnings per share                           |  | $                        | 0.99   |   |      | $ | 0.98   |      |  | $ | 0.83   |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |        |  



See accompanying notes
to consolidated financial statements.



A-23



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)



|                                                                                                                                         |  |                          |        |   |      |   |        |      |  |   |      
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | -----
|                                                                                                                                         |  | Years ended December 31,
|                                                                                                                                         |  | 2004                     |        |   | 2003 |   |        | 2002
|Net income                                                                                                                               |  | $                        | 15,225 |   |      | $ | 14,851 |      |  | $ | 9,958
|Other comprehensive (loss) income, net of tax - unrealized holding (losses) gains on securities available for sale arising during
period |  |                          | (1,065 | ) |      |   | (357   | )    |  |   | 25   
|Reclassification adjustment for (gains) losses included in net income                                                                    |  |                          | (230   | ) |      |   | (29    | )    |  |   | 6    
|                                                                                                                                         |  |                          |        |   |      |   |        |      |  |   |      
|Total comprehensive income                                                                                                               |  | $                        | 13,930 |   |      | $ | 14,465 |      |  | $ | 9,989
|                                                                                                                                         |  |                          |        |   |      |   |        |      |  |   |      



See accompanying notes
to consolidated financial statements.



A-24



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(Dollars in thousands, except share and per share amounts)



|                                                            |  |                                               |   |  |                   |        |                |   |        |                  |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|----------------------------------------------------------- |  | --------------------------------------------- | - |  | ----------------- | ------ | -------------- | - | ------ | ---------------- |  | - | -------------------- | - |  | ------------------------------------------ | ---- | - | ------------------------- | - | ------ | - |  | - | ------- | -
|                                                            |  | Years ended December 31, 2004, 2003, and 2002 |  
|                                                            |  | Common Stock Shares                           |   |  | CommonStockAmount |        | Treasury Stock |   |        | RetainedEarnings |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome (Loss) |      |   | Total StockholdersEquity |  
|Balance at December 31, 2001                                |  | 9,771,168                                     |   |  | $                 | 30,348 |                | $ | (4,787 | )                |  | $ | 32,093               |   |  | $                                          |     |   |                           | $ | 691    |   |  | $ | 58,345  |  
|                                                            |  |                                               |   |  |                   |        |                |   |        |                  |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|Net income                                                  |  |                                              |   |  |                   |       |                |   |       |                  |  |   | 9,958                |   |  |                                            |     |   |                           |   |       |   |  |   | 9,958   |  
|Dividends ($0.20) per share                                 |  |                                              |   |  |                   |       |                |   |       |                  |  |   | (2,152               | ) |  |                                            |     |   |                           |   |       |   |  |   | (2,152  | )
|Common shares issued from exercise of options (note 12)     |  | 76,934                                        |   |  |                   | 216    |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 216     |  
|Income tax benefit from exercise of options                 |  |                                              |   |  |                   | 406    |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 406     |  
|Purchase of Treasury stock                                  |  | (55,000                                       | ) |  |                   |       |                |   | (660   | )                |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | (660    | )
|Common shares issued in employee benefit plan               |  | 25,964                                        |   |  |                   | 306    |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 306     |  
|Common shares issued pursuant to dividend reinvestment plan |  | 6,602                                         |   |  |                   | 57     |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 57      |  
|Common shares issues pursuant to public offering            |  | 4,830,000                                     |   |  |                   | 50,961 |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 50,961  |  
|Net change in market value, net of tax                      |  |                                              |   |  |                   |       |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   | 31     |   |  |   | 31      |  
|                                                            |  |                                               |   |  |                   |        |                |   |        |                  |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|Balance at December 31, 2002                                |  | 14,655,668                                    |   |  |                   | 82,294 |                |   | (5,447 | )                |  |   | 39,899               |   |  |                                            |     |   |                           |   | 722    |   |  |   | 117,468 |  
|                                                            |  |                                               |   |  |                   |        |                |   |        |                  |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|Net income                                                  |  |                                              |   |  |                   |       |                |   |       |                  |  |   | 14,851               |   |  |                                            |     |   |                           |   |       |   |  |   | 14,851  |  
|Dividends ($0.22) per share                                 |  |                                              |   |  |                   |       |                |   |       |                  |  |   | (3,211               | ) |  |                                            |     |   |                           |   |       |   |  |   | (3,211  | )
|Common shares issued from exercise of options (note 12)     |  | 552,398                                       |   |  |                   | 2,256  |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 2,256   |  
|Income tax benefit from exercise of options                 |  |                                              |   |  |                   | 1,843  |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 1,843   |  
|Purchase of Treasury stock                                  |  | (30,000                                       | ) |  |                   |       |                |   | (331   | )                |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | (331    | )
|Common shares issued in employee benefit plan               |  | 28,176                                        |   |  |                   | 366    |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 366     |  
|Common shares issued pursuant to dividend reinvestment plan |  | 6,802                                         |   |  |                   | 98     |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 98      |  
|Restricted stock awards (note 12)                           |  | 29,000                                        |   |  |                   | 447    |                |   |       |                  |  |   |                     |   |  |                                            | (403 | ) |                           |   |       |   |  |   | 44      |  
|Deferred compensation (note 13)                             |  | (32,060                                       | ) |  |                   |       |                |   | (557   | )                |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | (557    | )
|Net change in market value, net of tax                      |  |                                              |   |  |                   |       |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   | (386   | ) |  |   | (386    | )
|                                                            |  |                                               |   |  |                   |        |                |   |        |                  |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|Balance at December 31, 2003                                |  | 15,209,984                                    |   |  |                   | 87,304 |                |   | (6,335 | )                |  |   | 51,539               |   |  |                                            | (403 | ) |                           |   | 336    |   |  |   | 132,441 |  
|                                                            |  |                                               |   |  |                   |        |                |   |        |                  |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|Net income                                                  |  |                                              |   |  |                   |       |                |   |       |                  |  |   | 15,225               |   |  |                                            |     |   |                           |   |       |   |  |   | 15,225  |  
|Dividends ($0.24) per share                                 |  |                                              |   |  |                   |       |                |   |       |                  |  |   | (3,598               | ) |  |                                            |     |   |                           |   |       |   |  |   | (3,598  | )
|Common shares issued from exercise of options (note 12)     |  | 86,728                                        |   |  |                   | 513    |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 513     |  
|Income tax benefit from exercise of options (note 12)       |  |                                              |   |  |                   | 363    |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 363     |  
|Common shares issued in employee benefit plan               |  | 21,380                                        |   |  |                   | 337    |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 337     |  
|Common shares issued pursuant to dividend reinvestment plan |  | 6,980                                         |   |  |                   | 117    |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 117     |  
|Restricted stock awards (note 12)                           |  |                                              |   |  |                   |       |                |   |       |                  |  |   |                     |   |  |                                            | 211  |   |                           |   |       |   |  |   | 211     |  
|Deferred compensation (note 13)                             |  | (344                                          | ) |  |                   |       |                |   | (5     | )                |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | (5      | )
|Net change in market value, net of tax                      |  |                                              |   |  |                   |       |                |   |       |                  |  |   |                     |   |  |                                            |     |   |                           |   | (1,295 | ) |  |   | (1,295  | )
|                                                            |  |                                               |   |  |                   |        |                |   |        |                  |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|Balance at December 31, 2004                                |  | 15,324,728                                    |   |  | $                 | 88,634 |                | $ | (6,340 | )                |  | $ | 63,166               |   |  | $                                          | (192 | ) |                           | $ | (959   | ) |  | $ | 144,309 |  
|                                                            |  |                                               |   |  |                   |        |                |   |        |                  |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



A-25



---

##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share amounts)



|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Years ended December 31, |         
|                                                                                  |  | 2004                     |          |   | 2003 |   |          | 2002 | 
|Operating activities:                                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                        | 15,225   |   |      | $ | 14,851   |      |  | $ | 9,958    |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Adjustments to reconcile net income to cash provided by operating activities:     |  |                          |          |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                         |  |                          | 4,500    |   |      |   | 5,543    |      |  |   | 2,589    |  
|Provision for decline in value of other real estate owned                         |  |                          | 56       |   |      |   | 187      |      |  |   | 51       |  
|Depreciation and amortization                                                     |  |                          | 4,997    |   |      |   | 3,960    |      |  |   | 2,430    |  
|Income tax benefit of stock options exercised                                     |  |                          | 363      |   |      |   | 1,843    |      |  |   | 406      |  
|Increase in bank owned life insurance cash surrender value                        |  |                          | (799     | ) |      |   | (958     | )    |  |   | (555     | )
|Amortization of securities, net                                                   |  |                          | 858      |   |      |   | (1,003   | )    |  |   | (1,590   | )
|(Gain) loss on sale of investment securities available for sale                   |  |                          | (359     | ) |      |   |         |      |  |   | 94       |  
|Net gain on sales of other real estate owned                                      |  |                          | (177     | ) |      |   | (68      | )    |  |   |         |  
|Loss on sale of loans                                                             |  |                          | 435      |   |      |   |         |      |  |   |         |  
|Loss on disposal of fixed assets                                                  |  |                          | 174      |   |      |   |         |      |  |   |         |  
|Compensation expense                                                              |  |                          | 211      |   |      |   | 44       |      |  |   |         |  
|Mortgage loans originated for sale                                                |  |                          | (177,169 | ) |      |   | (213,330 | )    |  |   | (185,773 | )
|Proceeds from sale of mortgage loans originated for sale                          |  |                          | 167,006  |   |      |   | 230,673  |      |  |   | 189,555  |  
|(Increase) decrease in accrued interest receivable                                |  |                          | (1,365   | ) |      |   | (198     | )    |  |   | 801      |  
|Deferred tax asset                                                                |  |                          | 512      |   |      |   | 77       |      |  |   | (712     | )
|Increase in other assets, net                                                     |  |                          | (349     | ) |      |   | (2,004   | )    |  |   | (4,657   | )
|Increase (decrease) in other liabilities, net                                     |  |                          | 2,242    |   |      |   | (922     | )    |  |   | 456      |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Total adjustments                                                                 |  |                          | 1,136    |   |      |   | 23,844   |      |  |   | 3,095    |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                          | 16,361   |   |      |   | 38,695   |      |  |   | 13,053   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in loans                                                             |  |                          | (179,941 | ) |      |   | (237,428 | )    |  |   | (130,638 | )
|Purchases of investment securities carried at amortized cost                      |  |                          | (9,996   | ) |      |   | (55,276  | )    |  |   | (76,067  | )
|Maturities of investment securities carried at amortized cost                     |  |                          | 19,183   |   |      |   | 38,597   |      |  |   | 69,212   |  
|Purchases of investment securities carried at market                              |  |                          | (140,370 | ) |      |   | (137,406 | )    |  |   | (238,629 | )
|Maturities of investment securities carried at market                             |  |                          | 37,992   |   |      |   | 113,493  |      |  |   | 249,034  |  
|Sale of investment securities available for sale                                  |  |                          | 34,863   |   |      |   |         |      |  |   | 9,985    |  
|Purchases of premises and equipment                                               |  |                          | (10,488  | ) |      |   | (9,621   | )    |  |   | (4,430   | )
|Goodwill adjustment                                                               |  |                          |         |   |      |   | 189      |      |  |   |         |  
|Proceeds from sale of and payments on other real estate owned                     |  |                          | 2,843    |   |      |   | 1,597    |      |  |   | 103      |  
|Proceeds from the sale of loans                                                   |  |                          | 37,649   |   |      |   |         |      |  |   |         |  
|Acquisition, net of cash acquired                                                 |  |                          |         |   |      |   |         |      |  |   | (59,917  | )
|Purchase of bank owned life insurance                                             |  |                          |         |   |      |   |         |      |  |   | (10,000  | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                             |  |                          | (208,265 | ) |      |   | (285,855 | )    |  |   | (191,347 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in interest-bearing deposits                                         |  |                          | 157,268  |   |      |   | 35,685   |      |  |   | 99,410   |  
|Net increase in non-interest-bearing deposits                                     |  |                          | 48,160   |   |      |   | 80,506   |      |  |   | 53,194   |  
|Net (decrease) increase in securities sold under agreements to repurchase         |  |                          | 6,037    |   |      |   | (7,078   | )    |  |   | (1,494   | )
|Common shares issued                                                              |  |                          | 967      |   |      |   | 2,720    |      |  |   | 51,540   |  
|Proceeds from Federal Home Loan Bank advances                                     |  |                          | 91,000   |   |      |   | 180,000  |      |  |   | 80,000   |  
|Payments on Federal Home Loan Bank advances and other                             |  |                          | (153,970 | ) |      |   | (43,852  | )    |  |   | (102,564 | )
|Proceeds from issuance of junior subordinated debentures                          |  |                          | 5,155    |   |      |   |         |      |  |   | 25,000   |  
|Dividends paid                                                                    |  |                          | (3,598   | ) |      |   | (3,211   | )    |  |   | (2,152   | )
|Purchase of treasury stock                                                        |  |                          |         |   |      |   | (331     | )    |  |   | (660     | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                         |  |                          | 151,019  |   |      |   | 244,439  |      |  |   | 202,274  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|(Decrease) increase in cash and cash equivalents                                  |  |                          | (40,885  | ) |      |   | (2,721   | )    |  |   | 23,980   |  
|Cash and cash equivalents at beginning of year                                    |  |                          | 86,150   |   |      |   | 88,871   |      |  |   | 64,891   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                          |  | $                        | 45,265   |   |      | $ | 86,150   |      |  | $ | 88,871   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of additional noncash investing and financing activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Additions to other real estate owned in settlement of loans                       |  | $                        | 2,420    |   |      | $ | 2,429    |      |  | $ | 790      |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Additions to loans in settlement of other real estate owned                       |  | $                        |         |   |      | $ | 64       |      |  | $ |         |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of cash flow information:                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                            |  | $                        | 23,873   |   |      | $ | 23,709   |      |  | $ | 17,600   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid for income taxes                                                        |  | $                        | 6,344    |   |      | $ | 5,408    |      |  | $ | 5,260    |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  



See accompanying notes
to consolidated financial statements.



A-26



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Summary of Significant Accounting Policies



(a) Organization, Basis of Presentation, and Principles of Consolidation



First State Bancorporation is a New Mexico-based holding company that serves communities in New Mexico, Colorado, and Utah through its wholly owned subsidiary First State Bank N.M. (First State Bank or
Bank). First State Bank is a state chartered bank providing a full range of commercial banking services in Taos, Albuquerque, Santa Fe, Rio Rancho, Los Lunas, Bernalillo, Placitas, Pojoaque, Questa, Belen, and Moriarty, New Mexico. First
State Bank operates as First Community Bank in Colorado and Utah. First Community Bank provides a full range of commercial banking services in Denver, Cherry Creek, Littleton, Colorado Springs, Fort Collins, and Longmont, Colorado, and in Salt Lake
City, Utah. The Banks residential mortgage origination division operates in all three states as First Community Mortgage. First State Bancorporation and First State Bank are collectively referred to as the Company.



All significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.



In preparing the
financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.



Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in satisfaction of loans. In connection with the determination of the allowances for loan losses and real estate owned, management obtains independent appraisals for significant properties.



Management believes that the estimates and assumptions it uses to prepare the
consolidated financial statements, particularly as they relate to the allowances for losses on loans and real estate owned, are adequate. However, future additions to these allowances may be necessary based on changes in economic conditions.
Further, regulatory agencies, as an integral part of their examination process, periodically review the allowances for losses on loans and real estate owned, and may require the Company to recognize additions to these allowances based on their
judgments about information available to them at the time of their examinations.



The Companys results of operations depend on its net interest income. The components of net interest income, interest income and interest expense, are affected by general economic conditions and by competition
in the marketplace.



Interest rate risk arises from volatile
interest rates and changes in the balance sheet mix. The Company maintains an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk. The Companys policy is to control the exposure of its
earnings to changing interest rates by generally maintaining a position within a narrow range around an earnings neutral position, which is defined as the mix of assets and liabilities that generates a net interest margin that is least
affected by interest rate changes.



(b) Investment
Securities



The Company classifies investment securities
in one of three categories and accounts for them as follows: (i) debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost; (ii) debt and equity
securities that are bought and held primarily for the purpose of selling them in the near term are classified as trading securities and carried at fair value, with unrealized gains and losses included in earnings; and (iii) debt and equity
securities not classified as either held to maturity securities or trading securities are classified as available for sale securities. These are securities that the Company will hold for an indefinite period of time and may be used as a part of the
Companys asset/liability management strategy and may be sold in response to changes in interest rates, prepayments, or similar factors. Available for sale securities are carried at estimated market value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders equity, net of related deferred income taxes. Upon purchase of investment securities, management designates securities as either held to maturity or available for
sale. Amortization of premiums and accretion of discounts are calculated using a method that approximates the effective interest method. Declines in the fair value of individual investment securities held to maturity and available for sale below
their cost that are other-than temporary are recorded as write-downs of the individual securities to their fair value and the related write-downs are included in earnings as realized losses. The Company does not maintain a trading portfolio.



A-27



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Companys investment in Federal Home Loan Bank
(FHLB) stock and Federal Reserve Bank Stock are restricted securities and not readily marketable, therefore these investments are carried at cost, which approximates fair value. As a member of the FHLB and FRB systems, the Company is
required to maintain a minimum level of investment in stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2004 and 2003, the Company met its minimum required investments.



(c) Loans, and Allowance for Loan Losses



Interest on loans is recognized as income based upon the daily principal
amount outstanding. Interest accrued on loans is discontinued in most instances when a loan becomes 90 days past due and/or management believes the borrowers financial condition is such that collection of future principal and interest payments
is doubtful. Loans are removed from non-accrual status when they become current as to both principal and interest, and concern no longer exists as to the collectibility of principal or interest. Interest on non-accrual loans is recognized as income
when the loan is returned to accrual status. When a loan is placed on non-accrual, any uncollected interest accrued in the current year is charged against income, with prior years accruals charged to the allowance for loan losses unless in
managements opinion the loan is well secured and in the process of collection.



The allowance for loan losses is established through a provision for loan losses charged to operations as losses are estimated. Loan amounts determined to be uncollectible are charged-off to the allowance and
recoveries of amounts previously charged-off, if any, are credited to the allowance.



The allowance for loan losses is that amount which, in managements judgment, is considered adequate to provide for potential losses in the loan portfolio. In analyzing the adequacy of the allowance for loan
losses, management uses a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of internal and external loan reviews. Historical loss experience factors and specific allowances for impaired loans,
combined with other considerations, such as delinquency, non-accrual, criticized and classified loan trends, economic conditions, concentrations of credit risk, and experience and abilities of lending personnel, are also considered in analyzing the
adequacy of the allowance.



Loans are considered impaired when,
based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including contractual interest payments. When a loan has been identified as
impaired, the amount of impairment is measured using cash flow of expected repayments discounted using the loans contractual interest rate or at the fair value of the underlying collateral less estimated selling costs when it is determined
that the source of repayment is the liquidation of the underlying collateral.



The Companys loan portfolio is concentrated in New Mexico, Colorado, and Utah. A significant portion of the loan portfolio is secured by real estate in those communities. Accordingly, the ultimate collectibility
of the Companys loan portfolio is dependent upon real estate values in those markets.



Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the loan using the interest method. Any unamortized balance of the deferred fees is
recognized as income if the loans are sold, participated, or repaid prior to maturity.



Mortgage loans available for sale are carried at the lower of aggregate cost or estimated fair market value. Estimated fair market value is determined using forward commitments to sell loans to permanent investors or
current market rates for loans of similar quality and type. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income. Gains resulting from sales of mortgage loans are recognized at settlement date. The loans are
primarily secured by one- to four-family residential real estate.



(d) Premises and Equipment



Premises and
equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the related assets. Routine repairs and maintenance are charged
to expense as incurred.



A-28



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(e) Goodwill and Intangible Assets



The excess of cost over the fair value of the net assets of acquired banks
is recorded as goodwill. Subsequent to the adoption of SFAS 142 in January 2002, the Company no longer amortizes goodwill. The Company tests goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The Company completed its annual goodwill impairment tests during the fourth quarter in 2004, 2003, and 2002, and found no impairment. Any impairment losses are reported in the consolidated statements of
operations.



Core deposit intangibles are amortized on an
accelerated basis based on an estimated useful life of approximately 10 years. The Company reviews its core deposit intangible assets periodically for impairment. If such impairment is indicated, recoverability of the asset is assessed based on
expected undiscounted net cash flows. Any impairment losses are reported in the consolidated statements of operations.



(f) Other Real Estate Owned



Other real estate owned consists of loan-related properties acquired through foreclosure and by deed-in-lieu of foreclosure. Other real estate owned is
carried at the lower of the investment in the related loan or fair value of the assets received. Fair value of such assets is determined based on independent appraisals minus estimated costs of disposition. Declines in value subsequent to
acquisition are accounted for within the allowance for other real estate owned. Provisions for losses subsequent to acquisition, operating expenses, and gains or losses from sales of other real estate owned, are charged or credited to other
operating income or costs.



(g) Bank Owned Life Insurance



The Company owns life insurance policies on certain of
its officers. The cash surrender value of these policies was approximately $19.9 million and $19.1 million at December 31, 2004 and 2003, respectively. The increase in the cash surrender value is included in non-interest income in the consolidated
statements of operations and amounted to approximately $799,000, $958,000, and $555,000 in 2004, 2003, and 2002, respectively.



(h) Income Taxes



The Company files a consolidated tax return with its wholly owned subsidiary. The Company uses the asset and liability method to account for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.



(i) Statements of Cash Flows



For the purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits with other banks, and
federal funds sold.



A-29



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(j) Earnings per Common Share



Basic earnings per share are computed by dividing net income (the numerator)
by the weighted-average number of common shares outstanding during the period (the denominator). Diluted earnings per share are calculated by increasing the basic earnings per share denominator by the number of additional common shares that would
have been outstanding if dilutive potential common shares for options had been issued. The following is a reconciliation of the numerators and denominators of basic and diluted earnings per share.



|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |       |  |            |  |   |     
|------------------------------------- |  | ------------------------------------------------ | ------ | ------------------- | ---------- | --------------- | - | --------------------- |  | ------------------- | ------ | --------------- | ---------- | --------------------- | - | ------------------- |  | --------------- | ----- |  | ---------- |  | - | ----
|                                      |  | Years ended December 31,                        
|                                      |  | 2004                                             |        | 2003                |            | 2002           
|                                      |  | Net Income(Numerator)                            |        | Shares(Denominator) |            | Per ShareAmount |   | Net Income(Numerator) |  | Shares(Denominator) |        | Per ShareAmount |            | Net Income(Numerator) |   | Shares(Denominator) |  | Per ShareAmount
|                                      |  | (Dollars in thousands, except per share amounts)
|Basic EPS:                            |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |       |  |            |  |   |     
|Net income                            |  | $                                                | 15,225 |                     | 15,312,068 |                 | $ | 0.99                  |  | $                   | 14,851 |                 | 14,951,972 |                       | $ | 0.99                |  | $               | 9,958 |  | 11,602,664 |  | $ | 0.86
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |       |  |            |  |   |     
|Effect of dilutive securities options |  |                                                  |       |                     | 131,468    |                 |   |                       |  |                     |       |                 | 244,926    |                       |   |                     |  |                 |      |  | 392,538    |  |   |     
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |       |  |            |  |   |     
|Diluted EPS:                          |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |       |  |            |  |   |     
|Net income                            |  | $                                                | 15,225 |                     | 15,443,536 |                 | $ | 0.99                  |  | $                   | 14,851 |                 | 15,196,898 |                       | $ | 0.98                |  | $               | 9,958 |  | 11,995,202 |  | $ | 0.83
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |       |  |            |  |   |     



On February 9, 2005,
the Company effected a two-for-one split of its common stock. All references to number of shares and per share computations in the consolidated financial statements and notes have been retroactively adjusted to reflect the increased number of shares
due to the effect of the common stock split.



(k)
Stock-Based Compensation



The Company applies the
intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its fixed plan stock options.
As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, the Company has elected to continue to apply the
intrinsic value-based method and has adopted the disclosure requirements of SFAS 148.



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Compensation expense of approximately $211,000, $61,000,
and $14,000 was recognized in 2004, 2003, and 2002, respectively, pursuant to the grant of options and restricted stock. Compensation expense is recorded over the service period. Had compensation costs been determined consistent with the fair value
method of SFAS 123 at the grant dates for awards, net income and earnings per common share would have changed to the pro forma amounts indicated below.



|                                                                                                                                        |  |                                                  |        |   |      |   |        |      |  |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                                                                                        |  | Years Ended December 31,                         |       
|                                                                                                                                        |  | 2004                                             |        |   | 2003 |   |        | 2002 | 
|                                                                                                                                        |  | (Dollars in thousands, except per share amounts) |       
|Net income as reported:                                                                                                                 |  | $                                                | 15,225 |   |      | $ | 14,851 |      |  | $ | 9,958 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                              |  |                                                  | 135    |   |      |   | 39     |      |  |   | 8     |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for awards, net of related tax
effects |  |                                                  | (1,288 | ) |      |   | (100   | )    |  |   | (28   | )
|                                                                                                                                        |  |                                                  |        |   |      |   |        |      |  |   |       |  
|Pro forma net income                                                                                                                    |  | $                                                | 14,072 |   |      | $ | 14,790 |      |  | $ | 9,938 |  
|                                                                                                                                        |  |                                                  |        |   |      |   |        |      |  |   |       |  
|Earnings per share:                                                                                                                     |  |                                                  |        |   |      |   |        |      |  |   |       |  
|Basic  as reported                                                                                                                     |  | $                                                | 0.99   |   |      | $ | 0.99   |      |  | $ | 0.86  |  
|Basic  pro forma                                                                                                                       |  | $                                                | 0.92   |   |      | $ | 0.99   |      |  | $ | 0.86  |  
|                                                                                                                                        |  |                                                  |       
|Diluted  as reported                                                                                                                   |  | $                                                | 0.99   |   |      | $ | 0.98   |      |  | $ | 0.83  |  
|Diluted  pro forma                                                                                                                     |  | $                                                | 0.91   |   |      | $ | 0.97   |      |  | $ | 0.83  |  



See Note 12 for
further discussion of the Companys stock-based employee compensation in addition to Note 1(n) regarding the impact SFAS 123R is expected to have on the Company.



(l) Reclassifications



Certain previous period balances have been reclassified to conform to the 2004 presentation.



(m) Reporting Comprehensive Income



SFAS No. 130, Reporting Comprehensive Income, requires disclosure in the financial statements of comprehensive
income that encompasses earnings and those items currently required to be reported directly in the equity section of the balance sheet, such as unrealized gains and losses on available for sale securities.



(n) Other New Accounting Standards



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN
46), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of
variable interest entities (selected entities with related contractual, ownership, voting or other monetary interests, including certain special purpose entities), and requires certain additional disclosure with respect to these entities. The
provisions of FIN 46 are immediately applicable to variable interest entities created after January 31, 2003. Initially, FIN 46 was to apply in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before February 1, 2003. In December 2003, the FASB issued FASB Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities, which specifically
addresses trust preferred securities and determined that these types of trusts should not be consolidated as a variable interest entity. The Company adopted FIN 46R as of January 1, 2004 which resulted in the deconsolidation of the subsidiary trusts
and the recognition of the junior subordinated deferrable interest debentures issued by the Company and owned by the trusts that were previously eliminated in consolidation and are now reported as liabilities on the balance sheet. The adoption of
FIN 46R did not have any impact on stockholders equity or net income.



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On May 6, 2004, the Federal Reserve Board released a final
rule (FR) changing the continued inclusion of trust preferred securities in the Tier 1 capital of bank holding companies. The FR proposes two substantive changes in the capital treatment of trust preferred securities that would impact bank holding
companies and a number of clarifications of existing policies and guidelines. The substantive changes included in the FR that affect bank holding companies provide that: (1) As of March 31, 2009, the amount of trust preferred securities that a bank
holding company may include as Tier 1 capital will be limited to 25% of the sum of all core capital elements including trust preferred securities, net of goodwill less any associated deferred tax liability, and (2) After March 31, 2009, amounts of
trust preferred securities in excess of the 25% limit will be included in Tier 2 capital, limited to 50% of Tier 1 capital.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how a business enterprise classifies, measures and discloses in its financial statements certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that a business
enterprise classify financial instruments that are within its scope as liabilities (or as assets in some circumstances). SFAS 150 is effective for contracts entered into or modified after May 31, 2003, and is otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. The FASB has proposed to defer provisions related to mandatorily redeemable financial instruments to periods beginning after December 15, 2004. The adoption of SFAS 150 on July 1, 2003 did not
have a material impact on our consolidated financial statements, and the adoption of deferred provisions at January 1, 2005 is not expected to have a material impact on our consolidated financial statements.



On March 9, 2004, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to Loan Commitments. SAB 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative
instruments. SAB 105 indicates that the expected future cash flows related to the associated servicing of the loan and any other internally-developed intangible assets should not be considered when recognizing a loan commitment at inception or
through its life. SAB 105 also discusses disclosure requirements for loan commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The adoption of SAB 105 on April 1, 2004 did not
have a material impact on our consolidated financial statements.



In March 2004, the FASBs Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments (EITF 03-1).EITF 03-1 provides accounting guidance regarding the determination of when an impairment (i.e., fair value is less than amortized cost) of debt and marketable equity securities and investments accounted for under the cost method should be
considered other-than-temporary and recognized in earnings. EITF 03-1 also requires annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities classified as available-for-sale or held-to-maturity that
are in an unrealized loss position at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The Financial Accounting Standards Board has decided to delay the effective date for the measurement and
recognition guidance until new implementation guidance can be issued. The Proposed Staff Position EITF 03-1-a is expected to be issued in final form in 2005.



In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS 123R is a revision of SFAS No. 123, Accounting for Stock
Based Compensation, and supersedes APB 25. Among other provisions, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005, which is third quarter 2005 for calendar year
companies, although early adoption is allowed. SFAS 123R permits companies to adopt its requirements using either a modified prospective method, or a modified retrospective method. Under the modified prospective
method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all
unvested awards granted prior to the effective date of SFAS 123R. Under the modified retrospective method, the requirements are the same as under the modified prospective method, but also permits entities to restate financial
statements of previous periods based on proforma disclosures made in accordance with SFAS 148.



A-32



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company currently utilizes a standard option pricing
model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of a lattice model. The Company has not yet
determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS 123R. Subject to a complete review of the requirements of SFAS 123R, based on stock options granted through December 31, 2004, the
Company expects that the adoption of SFAS 123R on July 1, 2005, would reduce both third quarter 2005 and fourth quarter 2005 net earnings by approximately $250,000 ($0.02 per share, diluted) each. See Note 12 for information related to outstanding
stock options.



SFAS 123R also requires that the benefits
associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options. However, the amount of operating cash flows
recognized in prior periods for such excess tax deductions, as shown in the Companys consolidated statements of cash flows, were approximately $363,000, $1.8 million, and $406,000, respectively, for 2004, 2003, and 2002.



In December 2004, the AICPA issued Statement of Position (SOP)
No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial
investment in loans or loans accounted for as debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to
be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance. It includes loans with evidence of deterioration of credit quality since origination, acquired by completion of a transfer, including such loans acquired
in purchase business combinations. SOP 03-3 does not apply to loans originated by the entity or acquired loans that have not deteriorated in credit quality since origination. SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 15, 2004. The Company does not expect SOP 03-3 to have a material impact on its consolidated financial statements.



2. Acquisition of First Community



The Company completed its acquisition of First Community Industrial Bank (First Community) on October 1, 2002 for approximately $67 million.
The Company financed this acquisition through a public offering of its common stock in August 2002, which netted approximately $51 million and through the issuance of approximately $25 million in trust preferred securities in June of 2002. The
acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of First Community were recorded at their respective fair values on October 1, 2002. The Company acquired approximately $343 million
in loans and approximately $242 million in deposits and recognized goodwill of approximately $43 million related to the transaction. The First Community account balances acquired on October 1, 2002 and the results of operations since October 1, 2002
are included in the results of the Bank, which operates under the name First Community Bank in the Colorado and Utah markets.



3. Cash and Due from Banks



First State Bank is required to maintain certain daily reserve balances in the form of vault cash or on deposit with the Federal Reserve Bank in
accordance with Federal Reserve Board requirements. The consolidated reserve balances maintained in accordance with these requirements were approximately $10.9 million and $7.4 million at December 31, 2004 and 2003, respectively.



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##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



4. Investment Securities



Following is a summary of amortized costs and approximate market values of
investment securities:



|                                                  |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|------------------------------------------------- |  | ---------------------- | ------- | -------------------- | - | --------------------- |  | ---------------------- | ----- |  | - | -------
|                                                  |  | Amortized cost         |         | Grossunrealizedgains |   | Grossunrealizedlosses |  | Estimated market value
|                                                  |  | (Dollars in thousands)
|As of December 31, 2004                           |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Obligations of the U.S. Treasury                 |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Held to maturity                                  |  | $                      | 1,001   |                      | $ |                      |  | $                      | 5     |  | $ | 996    
|Obligations of U.S. government agencies          |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Available for sale                                |  |                        | 128,684 |                      |   | 151                   |  |                        | 1,442 |  |   | 127,393
|Mortgage-backed securities:                       |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Pass-through certificates:                        |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Available for sale                                |  |                        | 12,200  |                      |   | 8                     |  |                        | 98    |  |   | 12,110 
|Held to maturity                                  |  |                        | 57,287  |                      |   | 482                   |  |                        | 686   |  |   | 57,083 
|Collateralized mortgage obligations              |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Available for sale                                |  |                        | 56,764  |                      |   | 110                   |  |                        | 294   |  |   | 56,580 
|Obligations of states and political subdivisions: |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Available for sale                                |  |                        | 7,024   |                      |   | 83                    |  |                        | 16    |  |   | 7,091  
|Held to maturity                                  |  |                        | 17,119  |                      |   | 101                   |  |                        | 63    |  |   | 17,157 
|Federal Home Loan Bank stock                      |  |                        | 9,546   |                      |   |                      |  |                        |      |  |   | 9,546  
|Federal Reserve Bank stock                        |  |                        | 2,798   |                      |   |                      |  |                        |      |  |   | 2,798  
|                                                  |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|                                                  |  | $                      | 292,423 |                      | $ | 935                   |  | $                      | 2,604 |  | $ | 290,754
|                                                  |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|As of December 31, 2003                           |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Obligations of the U.S. Treasury                 |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Held to maturity                                  |  | $                      | 499     |                      | $ |                      |  | $                      |      |  | $ | 499    
|Obligations of U.S. government agencies          |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Available for sale                                |  |                        | 124,112 |                      |   | 769                   |  |                        | 256   |  |   | 124,625
|Mortgage-backed securities:                       |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Available for sale                                |  |                        | 10,250  |                      |   | 12                    |  |                        |      |  |   | 10,262 
|Held to maturity                                  |  |                        | 74,946  |                      |   | 873                   |  |                        | 668   |  |   | 75,151 
|Obligations of states and political subdivisions: |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|Available for sale                                |  |                        | 643     |                      |   |                      |  |                        |      |  |   | 643    
|Held to maturity                                  |  |                        | 9,457   |                      |   | 125                   |  |                        | 85    |  |   | 9,497  
|Federal Home Loan Bank stock                      |  |                        | 12,010  |                      |   |                      |  |                        |      |  |   | 12,010 
|Federal Reserve Bank stock                        |  |                        | 2,678   |                      |   |                      |  |                        |      |  |   | 2,678  
|                                                  |  |                        |         |                      |   |                       |  |                        |       |  |   |        
|                                                  |  | $                      | 234,595 |                      | $ | 1,779                 |  | $                      | 1,009 |  | $ | 235,365
|                                                  |  |                        |         |                      |   |                       |  |                        |       |  |   |        



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The amortized cost and estimated market value of
investment securities at December 31, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.



|                              |  |                        |         |                       |   |        
|----------------------------- |  | ---------------------- | ------- | --------------------- | - | -------
|                              |  | AmortizedCost          |         | Estimated MarketValue
|                              |  | (Dollars in thousands)
|Within one year:              |  |                        |         |                       |   |        
|Available for sale            |  | $                      |        |                       | $ |       
|Held to maturity              |  |                        | 1,846   |                       |   | 1,856  
|One through five years:       |  |                        |         |                       |   |        
|Available for sale            |  |                        | 128,684 |                       |   | 127,392
|Held to maturity              |  |                        | 2,220   |                       |   | 2,265  
|Five through ten years:       |  |                        |         |                       |   |        
|Available for sale            |  |                        | 1,450   |                       |   | 1,470  
|Held to maturity              |  |                        | 4,945   |                       |   | 4,913  
|After ten years:              |  |                        |         |                       |   |        
|Available for sale            |  |                        | 5,574   |                       |   | 5,622  
|Held to maturity              |  |                        | 9,109   |                       |   | 9,119  
|Mortgage-backed securities(a) |  |                        | 126,251 |                       |   | 125,773
|Federal Home Loan Bank stock  |  |                        | 9,546   |                       |   | 9,546  
|Federal Reserve Bank stock    |  |                        | 2,798   |                       |   | 2,798  
|                              |  |                        |         |                       |   |        
|Total                         |  | $                      | 292,423 |                       | $ | 290,754
|                              |  |                        |         |                       |   |        

---

|(a) | Substantially all of the Companys mortgage-backed securities are due in 10 years or more based on contractual maturity. The estimated weighted average life, which reflects
anticipated future prepayments is approximately four years for pass-through certificates and three years for collateralized mortgage obligations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Marketable securities available for sale with a market value of approximately $193.0 million and marketable securities held to maturity with an
amortized cost of approximately $61.4 million were pledged to collateralize deposits as required by law and for other purposes at December 31, 2004.



Proceeds from sales of investments in debt securities for the years ended December 31 were $34.9 million in 2004, zero in 2003, and $10.0 million in 2002.
Gross losses realized were $22,000 in 2004, zero in 2003, and $94,000 in 2002. Gross gains realized were $381,000 in 2004, zero in 2003 and 2002. The Company calculates gain or loss on sale of securities based on the specific identification
method.



The unrealized losses on investment securities
are caused by fluctuations in market interest rates. The majority of the gross unrealized losses have been in an unrealized loss position for less than 12 months. The underlying cash obligations of the securities are guaranteed by the U.S.
government agency, Freddie Mac, Fannie Mae, Gennie Mae, and/or the municipality underwriting the debt instrument. It is the belief of the Company that the U.S. government agency, Freddie Mac, Fannie Mae, Gennie Mae, and /or the municipality issuing
the debt will honor its interest payment schedule, as well as the full debt at maturity. The securities are purchased by the Company for their economic value. Because the decrease in fair value is due to market interest rates and not other factors,
and because the Company has the ability to hold these investments until a market price recovery, or maturity of the securities, it is the conclusion of the Company that the investments are not considered other-than temporarily impaired.



A-35



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has determined that there were no other-than
temporary impairments associated with the unrealized losses in the investment portfolio securities noted below:



|                                                 |  |                         |         |                            |   |            |  |                |        |            |   |                |  |   |         |  |   |      
|------------------------------------------------ |  | ----------------------- | ------- | -------------------------- | - | ---------- |  | -------------- | ------ | ---------- | - | -------------- |  | - | ------- |  | - | -----
|                                                 |  | Less than twelve months |         | Greater than twelve months |   | Total     
|                                                 |  | Fair Value              |         | UnrealizedLoss             |   | Fair Value |  | UnrealizedLoss |        | Fair Value |   | UnrealizedLoss
|                                                 |  | (Dollars in thousands) 
|As of December 31, 2004                          |  |                         |         |                            |   |            |  |                |        |            |   |                |  |   |         |  |   |      
|                                                 |  |                         |         |                            |   |           
|Obligations of the U.S. Treasury                 |  | $                       | 996     |                            | $ | 5          |  | $              |       |            | $ |               |  | $ | 996     |  | $ | 5    
|Obligations of U.S. government agencies          |  |                         | 100,104 |                            |   | 1,177      |  |                | 10,319 |            |   | 265            |  |   | 110,423 |  |   | 1,442
|Mortgage-backed securities                       |  |                         | 64,888  |                            |   | 582        |  |                | 14,784 |            |   | 496            |  |   | 79,672  |  |   | 1,078
|Obligations of states and political subdivisions |  |                         | 3,489   |                            |   | 22         |  |                | 1,010  |            |   | 57             |  |   | 4,499   |  |   | 79   
|                                                 |  |                         |         |                            |   |            |  |                |        |            |   |                |  |   |         |  |   |      
|Total                                            |  | $                       | 169,477 |                            | $ | 1,786      |  | $              | 26,113 |            | $ | 818            |  | $ | 195,590 |  | $ | 2,604
|                                                 |  |                         |         |                            |   |            |  |                |        |            |   |                |  |   |         |  |   |      
|                                                 |  |                         |         |                            |   |           
|As of December 31, 2003                          |  |                         |         |                            |   |            |  |                |        |            |   |                |  |   |         |  |   |      
|                                                 |  |                         |         |                            |   |           
|Obligations of U.S. government agencies          |  | $                       | 10,330  |                            | $ | 256        |  | $              |       |            | $ |               |  | $ | 10,330  |  | $ | 256  
|Mortgage-backed securities                       |  |                         | 39,099  |                            |   | 668        |  |                |       |            |   |               |  |   | 39,099  |  |   | 668  
|Obligations of states and political subdivisions |  |                         | 2,813   |                            |   | 85         |  |                |       |            |   |               |  |   | 2,813   |  |   | 85   
|                                                 |  |                         |         |                            |   |            |  |                |        |            |   |                |  |   |         |  |   |      
|Total                                            |  | $                       | 52,242  |                            | $ | 1,009      |  | $              |       |            | $ |               |  | $ | 52,242  |  | $ | 1,009
|                                                 |  |                         |         |                            |   |            |  |                |        |            |   |                |  |   |         |  |   |      



5. Loans



Following is a summary of loans by major categories:



|                                   |  |                        |           |      |   |          
|---------------------------------- |  | ---------------------- | --------- | ---- | - | ---------
|                                   |  | As of December 31,    
|                                   |  | 2004                   |           | 2003
|                                   |  | (Dollars in thousands)
|Commercial                         |  | $                      | 174,293   |      | $ | 160,261  
|Consumer and other                 |  |                        | 28,601    |      |   | 30,736   
|Real estate - commercial           |  |                        | 683,638   |      |   | 577,835  
|Real estate - one - to four-family |  |                        | 280,570   |      |   | 338,272  
|Real estate - construction         |  |                        | 191,728   |      |   | 116,725  
|Mortgage loans available for sale  |  |                        | 18,965    |      |   | 7,656    
|                                   |  |                        |           |      |   |          
|Total                              |  | $                      | 1,377,795 |      | $ | 1,231,485
|                                   |  |                        |           |      |   |          



Included in the above
balances are net deferred fees of approximately $5.8 million and $6.3 million, at December 31, 2004 and 2003, respectively. At December 31, 2004 and 2003, approximately $153 million and $216 million in loans were pledged as collateral for FHLB
advances.



At December 31, 2004, loans are comprised of fixed
and variable rate instruments as follows:



|                        |  |                        |          
|----------------------- |  | ---------------------- | ---------
|                        |  | (Dollars in thousands)
|Loans at fixed rates    |  | $                      | 208,732  
|Loans at variable rates |  | $                      | 1,169,063
|                        |  |                        |          
|Total                   |  | $                      | 1,377,795
|                        |  |                        |          



Loans at variable
rates include loans that reprice immediately, as well as loans that reprice any time prior to maturity.



A-36



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Approximate loan portfolio maturities on fixed-rate loans
and repricings on variable-rate loans at December 31, 2004 are as follows:



|                                  |  |                        |           |              |   |               |  |       |        |  |   |          
|--------------------------------- |  | ---------------------- | --------- | ------------ | - | ------------- |  | ----- | ------ |  | - | ---------
|                                  |  | Within 1 year          |           | 1 to 5 Years |   | After 5 Years |  | Total
|                                  |  | (Dollars in thousands)
|Commercial                        |  | $                      | 143,352   |              | $ | 29,178        |  | $     | 1,763  |  | $ | 174,293  
|Real estate                       |  |                        | 821,017   |              |   | 308,762       |  |       | 26,157 |  |   | 1,155,936
|Consumer                          |  |                        | 17,169    |              |   | 10,849        |  |       | 583    |  |   | 28,601   
|Mortgage loans available for sale |  |                        | 18,965    |              |   |              |  |       |       |  |   | 18,965   
|                                  |  |                        |           |              |   |               |  |       |        |  |   |          
|Total                             |  | $                      | 1,000,503 |              | $ | 348,789       |  | $     | 28,503 |  | $ | 1,377,795
|                                  |  |                        |           |              |   |               |  |       |        |  |   |          



Following is a summary
of changes to the allowance for loan losses:



|                                    |  |                          |        |   |      |   |        |      |  |   |        |  
|----------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                    |  | Years ended December 31, |       
|                                    |  | 2004                     |        |   | 2003 |   |        | 2002 | 
|                                    |  | (Dollars in thousands)   |       
|Balance at beginning of year        |  | $                        | 14,121 |   |      | $ | 11,838 |      |  | $ | 7,207  |  
|Provision charged to operations     |  |                          | 4,500  |   |      |   | 5,543  |      |  |   | 2,589  |  
|Loans charged-off                   |  |                          | (3,703 | ) |      |   | (3,702 | )    |  |   | (1,428 | )
|Recoveries                          |  |                          | 413    |   |      |   | 442    |      |  |   | 305    |  
|Allowance related to acquired loans |  |                          |       |   |      |   |       |      |  |   | 3,165  |  
|                                    |  |                          |        |   |      |   |        |      |  |   |        |  
|Balance at end of year              |  | $                        | 15,331 |   |      | $ | 14,121 |      |  | $ | 11,838 |  
|                                    |  |                          |        |   |      |   |        |      |  |   |        |  



The recorded
investment in loans which are considered impaired was approximately $8.0 million at December 31, 2004, $12.5 million at December 31, 2003, and $10.2 million at December 31, 2002. The average investment in loans for which impairment has been
recognized was approximately $8.6 million in 2004, $10.7 million in 2003, and $3.8 million in 2002. The allowance for loan losses related to these loans was approximately $829,000 at December 31, 2004, $1.2 million at December 31, 2003, and $568,000
at December 31, 2002. The allowance for impaired loans is included in the allowance for loan losses. Interest income recognized on impaired loans was zero in 2004, 2003, and 2002.



Loans on which the accrual of interest has been discontinued amounted to approximately $8.0 million, $12.5 million, and
$10.2 million at December 31, 2004, 2003, and 2002, respectively. If interest on such loans had been accrued, such income would have been approximately $348,000 in 2004, $495,000 in 2003, and $203,000 in 2002. Actual interest income on those loans,
which is recorded only when received, amounted to zero in 2004, 2003, and 2002.



Activity during 2004 and 2003 regarding outstanding loans to certain related-party loan customers of the subsidiary bank (executive officers, directors, and principal shareholders of the Company, including their
families and companies in which they are principal owners) was as follows:



|                             |  |                          |        |   |      |   |        |  
|---------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                             |  | Years ended December 31, |       
|                             |  | 2004                     |        |   | 2003 |  
|                             |  | (Dollars in thousands)   |       
|Balance at beginning of year |  | $                        | 17,031 |   |      | $ | 9,919  |  
|Advances                     |  |                          | 4,485  |   |      |   | 14,113 |  
|Repayments                   |  |                          | (2,045 | ) |      |   | (7,001 | )
|Other reductions             |  |                          | (7,166 | ) |      |   |       |  
|                             |  |                          |        |   |      |   |        |  
|Balance at end of year       |  | $                        | 12,305 |   |      | $ | 17,031 |  
|                             |  |                          |        |   |      |   |        |  



Other reductions
include amounts owed by customers in prior year no longer considered to be related parties in the current year.



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6. Premises and Equipment



Following is a summary of premises and equipment, at cost:



|                                               |  |                             |      |                        |         |      |  |   |         |  
|---------------------------------------------- |  | --------------------------- | ---- | ---------------------- | ------- | ---- |  | - | ------- | -
|                                               |  | EstimatedUsefulLife (years) |      | As of December 31,     |        
|                                               |  |                             | 2004 |                        |         | 2003 | 
|                                               |  |                             |      | (Dollars in thousands) |        
|Land                                           |  |                            |      | $                      | 3,112   |      |  | $ | 2,386   |  
|Building and leasehold improvements            |  | 10-30                       |      |                        | 24,150  |      |  |   | 16,514  |  
|Equipment                                      |  | 3-5                         |      |                        | 20,216  |      |  |   | 18,713  |  
|                                               |  |                             |      |                        |         |      |  |   |         |  
|                                               |  |                             |      |                        | 47,478  |      |  |   | 37,613  |  
|Less accumulated depreciation and amortization |  |                             |      |                        | (18,168 | )    |  |   | (14,620 | )
|                                               |  |                             |      |                        |         |      |  |   |         |  
|                                               |  |                             |      | $                      | 29,310  |      |  | $ | 22,993  |  
|                                               |  |                             |      |                        |         |      |  |   |         |  



Depreciation and
amortization expense on premises and equipment in 2004, 2003, and 2002 was approximately $4.0 million, $3.1 million, and $2.4 million, respectively.



7. Goodwill and Intangible Assets



Goodwill primarily relates to the Companys acquisition of First Community in October of 2002. The goodwill recognized in the acquisition totaled
approximately $42.9 million and is expected to be fully deductible for tax purposes.



Following is a summary of the changes in the carrying amount of goodwill:



|                             |  |                          |        |      |   |        |  
|---------------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                             |  | Years ended December 31, |       
|                             |  | 2004                     |        | 2003 |  
|                             |  | (Dollars in thousands)   |       
|Balance at beginning of year |  | $                        | 43,223 |      | $ | 43,412 |  
|Goodwill adjustment          |  |                          |       |      |   | (189   | )
|Impairment losses            |  |                          |       |      |   |       |  
|                             |  |                          |        |      |   |        |  
|Balance at end of year       |  | $                        | 43,223 |      | $ | 43,223 |  
|                             |  |                          |        |      |   |        |  



During the first
quarter of 2003, the Company completed the sale of certain mortgage loans available for sale obtained in the acquisition of First Community in 2002. The sale to unrelated third parties included 227 loans with a carrying value of approximately $8.5
million. The subsequent sale of the mortgage loans, which had been recorded at their estimated fair value on the date of acquisition, resulted in an additional discount of approximately $277,000 that was recorded as a reduction of goodwill. This
reduction of goodwill was subsequently offset by $88,000 of additional items related to the acquisition.



The Companys core deposit intangibles primarily relate to the acquisition of First Community in October of 2002. Core deposit intangibles recognized
in the acquisition totaled approximately $881,000. The carrying amount of amortizable core deposit intangible assets net of accumulated amortization is recorded in other assets, net.



A-38



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Following is a summary of intangible assets:



|                             |  |                        |      |   |      |   |      |  
|---------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | -
|                             |  | As of December 31,     |     
|                             |  | 2004                   |      |   | 2003 |  
|                             |  | (Dollars in thousands) |     
|Core deposit intangibles     |  | $                      | 947  |   |      | $ | 947  |  
|Accumulated amortization     |  |                        | (256 | ) |      |   | (145 | )
|                             |  |                        |      |   |      |   |      |  
|Net core deposit intangibles |  | $                      | 691  |   |      | $ | 802  |  
|                             |  |                        |      |   |      |   |      |  



Expected annual
amortization expense related to core deposit intangibles is as follows:



|                                           |  |                           |    
|------------------------------------------ |  | ------------------------- | ---
|                                           |  | Years ending December 31,
|                                           |  | (Dollars in thousands)   
|2005                                       |  | $                         | 108
|2006                                       |  |                           | 104
|2007                                       |  |                           | 100
|2008                                       |  |                           | 92 
|2009                                       |  |                           | 85 
|Thereafter                                 |  |                           | 202
|                                           |  |                           |    
|Total expected annual amortization expense |  | $                         | 691
|                                           |  |                           |    



8. Deposits



Following is a summary of interest-bearing deposits:



|                                   |  |                        |           |      |   |        
|---------------------------------- |  | ---------------------- | --------- | ---- | - | -------
|                                   |  | As of December 31,    
|                                   |  | 2004                   |           | 2003
|                                   |  | (Dollars in thousands)
|Interest-bearing checking accounts |  | $                      | 254,140   |      | $ | 199,792
|Money market savings               |  |                        | 216,769   |      |   | 157,887
|Regular savings                    |  |                        | 68,671    |      |   | 62,981 
|Time:                              |  |                        |           |      |   |        
|Denominations $100,000 and over    |  |                        | 320,101   |      |   | 267,256
|Denominations under $100,000       |  |                        | 223,893   |      |   | 238,390
|                                   |  |                        |           |      |   |        
|                                   |  | $                      | 1,083,574 |      | $ | 926,306
|                                   |  |                        |           |      |   |        



At December 31, 2004,
the scheduled maturities of all time deposits are as follows:



|           |  |                           |        
|---------- |  | ------------------------- | -------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2005       |  | $                         | 360,086
|2006       |  |                           | 73,863 
|2007       |  |                           | 55,364 
|2008       |  |                           | 25,063 
|2009       |  |                           | 25,245 
|Thereafter |  |                           | 4,373  
|           |  |                           |        
|           |  | $                         | 543,994
|           |  |                           |        



A-39



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

9. Borrowings



Securities Sold Under Agreements to Repurchase



Securities sold under agreements to repurchase are comprised of customer deposit agreements with overnight maturities. The
obligations are not federally insured but are collateralized 102% by a security interest in U.S. Treasury, U.S. government agencies, or U.S. government agency issued mortgage-backed securities. These securities are segregated and held in safekeeping
by third-party banks. These securities had a market value of approximately $71.1 million and $65.0 million, at December 31, 2004 and 2003, respectively. Interest expense included in the consolidated statements of operations was approximately
$198,000, $222,000, and $582,000 for the years ended December 31, 2004, 2003, and 2002, respectively.



Securities sold under agreements to repurchase are summarized as follows:



|                                                 |  |                          |        |   |      |   |        |  
|------------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                 |  | Years ended December 31, |       
|                                                 |  | 2004                     |        |   | 2003 |  
|                                                 |  | (Dollars in thousands)   |       
|Balance                                          |  | $                        | 69,723 |   |      | $ | 63,686 |  
|Weighted average interest rate                   |  |                          | 0.43   | % |      |   | 0.33   | %
|Maximum amount outstanding at any month end      |  | $                        | 75,109 |   |      | $ | 63,686 |  
|Average balance outstanding during the period    |  | $                        | 64,241 |   |      | $ | 54,368 |  
|Weighted average interest rate during the period |  |                          | 0.31   | % |      |   | 0.41   | %



Federal Home Loan
Bank Advances and Other



First State Bank
has FHLB advances and notes payable as follows:



|                                                                                                                                                               |  |                        |         |      |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                                                                                                                                               |  | As of December 31,    
|                                                                                                                                                               |  | 2004                   |         | 2003
|                                                                                                                                                               |  | (Dollars in thousands)
|$90 million note payable to FHLB, interest at 0.95%, due on January 7, 2004                                                                                    |  | $                      |        |      | $ | 90,000 
|$20 million note payable to FHLB, interest only at 1.94% payable monthly, due on April 2, 2004                                                                 |  |                        |        |      |   | 20,000 
|$20 million note payable to FHLB, interest only at 1.45% payable monthly, due on July 19, 2004                                                                 |  |                        |        |      |   | 20,000 
|$20 million note payable to FHLB, interest only at 2.16% payable monthly, due on October 4, 2004                                                               |  |                        |        |      |   | 20,000 
|$14 million note payable to FHLB, interest at 2.33%, due on January 4, 2005                                                                                    |  |                        | 14,000  |      |   |       
|$60 million note payable to FHLB, interest at 2.24%, due on January 5, 2005                                                                                    |  |                        | 60,000  |      |   |       
|$17 million note payable to FHLB, interest at 2.03%, due on January 7, 2005                                                                                    |  |                        | 17,000  |      |   |       
|$250,000 note payable to FHLB, interest at 8.26%, payable in monthly principal and interest installments of approximately $3,000 through
February 1, 2005      |  |                        | 6       |      |   | 41     
|$25 million note payable to FHLB, interest only at 1.52% payable monthly, due on March 16, 2005                                                                |  |                        | 25,000  |      |   | 25,000 
|$25 million note payable to FHLB, interest only at 1.86% payable monthly, due on April 22, 2005                                                                |  |                        | 25,000  |      |   | 25,000 
|$20 million note payable to FHLB, interest at 2.93%, payable in monthly principal and interest installments of approximately $359,000 through
November 1, 2007 |  |                        | 12,020  |      |   | 15,911 
|Other note payable                                                                                                                                             |  |                        | 826     |      |   | 870    
|                                                                                                                                                               |  |                        |         |      |   |        
|Total FHLB Advances and Other                                                                                                                                  |  | $                      | 153,852 |      | $ | 216,822
|                                                                                                                                                               |  |                        |         |      |   |        



A-40



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



All outstanding borrowings with the FHLB are
collateralized by a blanket pledge agreement on the Companys one- to four-family residential mortgage loans, commercial real estate loans on deposit with the FHLB, and investment securities available for sale. As of December 31, 2004, the
Company had available unused borrowing capacity from the FHLB for advances of approximately $302 million.



Included in the above FHLB advances are short-term FHLB advances that totaled approximately $91 million and $110 million at December 31, 2004 and 2003,
respectively. The weighted average interest rate on short-term FHLB advances was 2.21% and 1.04% at December 31, 2004 and 2003, respectively.



Short-term FHLB advances are summarized as follows:



|                                                 |  |                          |         |   |      |   |         |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2004                     |         |   | 2003 |  
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 91,000  |   |      | $ | 110,000 |  
|Weighted average interest rate                   |  |                          | 2.21    | % |      |   | 1.04    | %
|Maximum amount outstanding at any month end      |  | $                        | 115,000 |   |      | $ | 110,000 |  
|Average balance outstanding during the period    |  | $                        | 71,235  |   |      | $ | 34,308  |  
|Weighted average interest rate during the period |  |                          | 1.39    | % |      |   | 1.34    | %



Other Note Payable



On April 30, 1997, the Company purchased its main
banking facility in Taos, New Mexico, subject to a real estate contract with an original balance of $1,050,000 which bears interest at 6.00% adjustable every five years through 2017, payable approximately $8,000 monthly. The balances at December 31,
2004 and 2003 were approximately $826,000 and $870,000, respectively.



As of December 31, 2004, the contractual maturities of FHLB advances and other are as follows:



|           |  |                           |        
|---------- |  | ------------------------- | -------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2005       |  | $                         | 145,059
|2006       |  |                           | 4,175  
|2007       |  |                           | 3,941  
|2008       |  |                           | 56     
|2009       |  |                           | 59     
|Thereafter |  |                           | 562    
|           |  |                           |        
|           |  | $                         | 153,852
|           |  |                           |        



10. Junior Subordinated Debentures



On November 14, 2001, the Company formed First State NM
Statutory Trust I (Trust I) for the purpose of issuing trust preferred securities (Securities) in a pooled transaction to unrelated investors. Trust I issued $7,500,000 of Securities that qualify as Tier I capital for
regulatory purposes that bear interest at an annual rate equal to the three-month LIBOR plus 3.60% and invested the proceeds thereof in $7,732,000 of junior subordinated deferrable interest debentures of the Company (Debentures) that
also bear interest at an annual rate equal to the three-month LIBOR plus 3.60%. The Securities and Debentures provide interest only payments payable at three-month intervals with the rate adjusted quarterly on March 18, June 18, September 18, and
December 18 provided however, that prior to December 18, 2006, the annual rate will not exceed 12.50% (6.11% at December 31, 2004). Both the Securities and the Debentures will mature on December 18, 2031; however, they are callable at par beginning
December 18, 2006. So long as there are no events of default, the Company may defer payments of interest for up to twenty consecutive interest payment periods. As of December 31, 2004, the Company has not deferred any payments of interest.



A-41



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On June 7, 2002, the Company formed First State NM
Statutory Trust II (Trust II) for the purpose of issuing trust preferred securities (Trust II Securities) in a pooled transaction to unrelated investors. Trust II issued $25,000,000 of Trust II Securities that qualify as Tier
I capital for regulatory purposes that bear interest at an annual rate equal to the three-month LIBOR plus 3.45% and invested the proceeds thereof in $25,774,000 of junior subordinated deferrable interest debentures of the Company (Trust II
Debentures) that also bear interest at an annual rate equal to the three-month LIBOR plus 3.45%. The Trust II Securities and Trust II Debentures provide interest only payments payable at three-month intervals with the rate adjusted quarterly
on March 26, June 26, September 26, and December 26 provided however, that prior to June 26, 2007, the annual rate will not exceed 11.95% (6.00% at December 31, 2004). Both the Trust II Securities and the Trust II Debentures will mature on June 26,
2032; however, they are callable at par beginning June 26, 2007. So long as there are no events of default, the Company may defer payments of interest for up to twenty consecutive interest payment periods. As of December 31, 2004, the Company has
not deferred any payments of interest.



As previously stated in
Note 1(n), the Company adopted the provisions of FIN 46R as of January 1, 2004, which resulted in the deconsolidation of Trust I and Trust II that were previously included in the consolidated financial statements. As a result of the deconsolidation,
the trust preferred securities issued by the trusts, the Securities and the Trust II Securities, are no longer reported as a liability of the Company. Instead, the junior subordinated deferrable interest debentures issued by the Company that are
held by the trusts, the Debentures and the Trust II Debentures, are now reported as an outstanding liability in the consolidated financial statements. The impact to the consolidated balance sheets of removing the trust preferred securities and
adding the junior subordinated deferrable interest debentures as of January 1, 2004, was an increase of $1,006,000 in additional debt, with a corresponding increase of $1,006,000 in Other assets, net, representing the Companys equity ownership
of the trusts. The deconsolidation did not have an impact on stockholders equity or net income.



On August 20, 2004, the Company formed First State NM Statutory Trust III (Trust III) for the purpose of issuing trust preferred securities
(Trust III Securities) in a pooled transaction to unrelated investors. Trust III issued $5,000,000 of Trust III Securities that qualify as Tier I capital for regulatory purposes that bear interest at an annual rate equal to the
three-month LIBOR plus 2.25% and invested the proceeds thereof in $5,155,000 of junior subordinated deferrable interest debentures of the Company (Trust III Debentures) that also bear interest at an annual rate equal to the three-month
LIBOR plus 2.25%. The Trust III Securities and Trust III Debentures provide interest only payments payable at three-month intervals with the rate adjusted quarterly on March 20, June 20, September 20, and December 20 (4.76% at December 31, 2004).
Both the Trust III Securities and the Trust III Debentures will mature on September 20, 2034; however, they are callable at par beginning in 2009. So long as there are no events of default, the Company may defer payments of interest for up to twenty
consecutive interest payment periods. As of December 31, 2004, the Company has not deferred any payments of interest. Trust III has been accounted for under the guidance of FIN 46R since inception.



Junior Subordinated Debentures are summarized as follows:



|                                           |  |                        |        |      |   |       
|------------------------------------------ |  | ---------------------- | ------ | ---- | - | ------
|                                           |  | As of December 31,    
|                                           |  | 2004                   |        | 2003
|                                           |  | (Dollars in thousands)
|Junior Subordinated Debentures  Trust I   |  | $                      | 7,732  |      | $ | 7,500 
|Junior Subordinated Debentures  Trust II  |  |                        | 25,774 |      |   | 25,000
|Junior Subordinated Debentures  Trust III |  |                        | 5,155  |      |   |      
|                                           |  |                        |        |      |   |       
|Total Junior Subordinated Debentures       |  | $                      | 38,661 |      | $ | 32,500
|                                           |  |                        |        |      |   |       



11. Income Taxes



Income tax expense consisted of the following:



|              |  |                          |       |      |   |       |  |   |      
|------------- |  | ------------------------ | ----- | ---- | - | ----- |  | - | -----
|              |  | Years ended December 31,
|              |  | 2004                     |       | 2003 |   | 2002 
|              |  | (Dollars in thousands)  
|Federal       |  | $                        | 7,152 |      | $ | 6,766 |  | $ | 4,604
|State         |  |                          | 891   |      |   | 1,126 |  |   | 706  
|Deferred      |  |                          | 512   |      |   | 77    |  |   | 321  
|              |  |                          |       |      |   |       |  |   |      
|Total expense |  | $                        | 8,555 |      | $ | 7,969 |  | $ | 5,631
|              |  |                          |       |      |   |       |  |   |      



A-42



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Actual income tax expense from continuing operations
differs from the expected tax expense for 2004, 2003, and 2002 (computed by applying the U.S. federal corporate tax rate of 35% in 2004 and 2003 and 34% in 2002 to income before income taxes) as follows:



|                                                     |  |                          |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | Years ended December 31, |      
|                                                     |  | 2004                     |       |   | 2003 |   |       | 2002 | 
|                                                     |  | (Dollars in thousands)   |      
|Computed expected tax expense                      |  | $                        | 8,323 |   |      | $ | 7,987 |      |  | $ | 5,300 |  
|Increase (reduction) in income taxes resulting from: |  |                          |       |   |      |   |       |      |  |   |       |  
|Tax-exempt interest                                  |  |                          | (188  | ) |      |   | (59   | )    |  |   | (46   | )
|State tax, net                                       |  |                          | 719   |   |      |   | 763   |      |  |   | 390   |  
|Deferred tax rate change                             |  |                          |      |   |      |   | (216  | )    |  |   |      |  
|Bank owned life insurance                            |  |                          | (269  | ) |      |   | (335  | )    |  |   | (189  | )
|Other                                                |  |                          | (30   | ) |      |   | (171  | )    |  |   | 176   |  
|                                                     |  |                          |       |   |      |   |       |      |  |   |       |  
|Total income tax expense                             |  | $                        | 8,555 |   |      | $ | 7,969 |      |  | $ | 5,631 |  
|                                                     |  |                          |       |   |      |   |       |      |  |   |       |  



Components of deferred income tax
assets and liabilities are as follows:



|                                                       |  |                        |       |      |   |      
|------------------------------------------------------ |  | ---------------------- | ----- | ---- | - | -----
|                                                       |  | As of December 31,    
|                                                       |  | 2004                   |       | 2003
|                                                       |  | (Dollars in thousands)
|Deferred tax assets:                                   |  |                        |       |      |   |      
|Allowance for loan losses                              |  | $                      | 5,197 |      | $ | 5,084
|Allowance for other real estate owned                  |  |                        | 42    |      |   | 36   
|Depreciation                                           |  |                        | 209   |      |   | 313  
|Deferred compensation expense                          |  |                        | 183   |      |   | 175  
|Tax effect of unrealized loss on investment securities |  |                        | 539   |      |   |     
|Core deposit intangible                                |  |                        | 92    |      |   | 52   
|Other                                                  |  |                        | 58    |      |   | 81   
|                                                       |  |                        |       |      |   |      
|Total gross deferred tax assets                        |  |                        | 6,320 |      |   | 5,741
|                                                       |  |                        |       |      |   |      
|Deferred tax liabilities:                              |  |                        |       |      |   |      
|Goodwill                                               |  |                        | 3,045 |      |   | 2,073
|Prepaid expenses                                       |  |                        | 363   |      |   |     
|Tax effect of unrealized gain on investment securities |  |                        |      |      |   | 189  
|Other                                                  |  |                        | 46    |      |   |     
|                                                       |  |                        |       |      |   |      
|Total gross deferred tax liabilities                   |  |                        | 3,454 |      |   | 2,262
|                                                       |  |                        |       |      |   |      
|Net deferred tax asset                                 |  | $                      | 2,866 |      | $ | 3,479
|                                                       |  |                        |       |      |   |      



Deferred income
taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. During 2003, the Company increased the rate at which management
believes, primarily based upon the Companys current tax rate, that deferred income taxes will be recognized from 34% to 36%.



In order to fully realize the deferred tax asset on the Companys consolidated balance sheet at December 31, 2004 of approximately $6.3 million, the
Company will need to generate future taxable income of approximately $17.6 million. Based on the Companys historical and current pre-tax income, management believes it is more likely than not that the Company will realize the benefit of the
temporary differences prior to the expiration of the carry-forward period and further believes that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. There can be no
assurance, however, that the Company will generate taxable income or any specific level of continuing taxable income.



A-43



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



12. Stockholders Equity



The Board of Directors has authorized management to purchase up to 1,050,000
shares of its common stock in the open market. As of December 31, 2004, the Company has purchased 784,100 shares. The Company did not purchase any additional shares during the year ended December 31, 2004. The Company may purchase additional shares,
the amount of which will be determined by market conditions. The Company sponsors a deferred compensation plan, which is included in the consolidated financial statements. At December 31, 2004 and 2003, the assets of the deferred compensation plan
included 32,404 shares and 32,060 shares of Company common stock, respectively.



Effective June 6, 2003, the stockholders of the Company approved and the Company adopted the First State Bancorporation 2003 Equity Incentive Plan (2003 Plan), which provides for the granting of options to purchase up
to 1,500,000 shares of the Companys common stock. Exercise dates and prices for the options are set by a committee of the Board of Directors. The 2003 Plan also provides that stock options (which may be incentive stock options or non-qualified
stock options), restricted stock, stock appreciation rights, and other awards that are valued by reference to Company common stock may be issued. These options vest over a five-year period from the date of grant unless otherwise stated. The 2003
Plan replaced the First State Bancorporation 1993 Stock Option Plan (1993 Plan), and all unissued options from the 1993 Plan are included in the total number of shares available for grant under the 2003 Plan. Options under the plans are as follows:



|                                 |  |                          |   |      |                              |       |        |          |   |                              |   |        |  |         |                               |  |   |     
|-------------------------------- |  | ------------------------ | - | ---- | ---------------------------- | ----- | ------ | -------- | - | ---------------------------- | - | ------ |  | ------- | ----------------------------- |  | - | ----
|                                 |  | Years ended December 31,
|                                 |  | 2004                     |   | 2003 |                              | 2002 
|                                 |  | Shares                   |   |      | Weightedaverageexerciseprice |       | Shares |          |   | Weightedaverageexerciseprice |   | Shares |  |         | Weightedaverage exerciseprice
|Outstanding at beginning of year |  | 486,010                  |   |      | $                            | 8.82  |        | 893,708  |   |                              | $ | 4.64   |  | 979,042 |                               |  | $ | 4.53
|Granted                          |  | 940,000                  |   |      |                              | 15.69 |        | 146,000  |   |                              |   | 15.71  |  |        |                               |  |   |    
|Exercised                        |  | (86,728                  | ) |      |                              | 5.92  |        | (552,398 | ) |                              |   | 3.90   |  | (76,934 | )                             |  |   | 2.80
|Forfeited                        |  | (59,992                  | ) |      |                              | 14.98 |        | (1,300   | ) |                              |   | 2.80   |  | (8,400  | )                             |  |   | 8.04
|                                 |  |                          |   |      |                              |       |        |          |   |                              |   |        |  |         |                               |  |   |     
|Outstanding at year end          |  | 1,279,290                |   |      | $                            | 13.77 |        | 486,010  |   |                              | $ | 8.82   |  | 893,708 |                               |  | $ | 4.64
|                                 |  |                          |   |      |                              |       |        |          |   |                              |   |        |  |         |                               |  |   |     
|Options exercisable at year end  |  | 289,790                  |   |      | $                            | 7.08  |        | 340,010  |   |                              | $ | 5.86   |  | 864,308 |                               |  | $ | 4.56
|                                 |  |                          |   |      |                              |       |        |          |   |                              |   |        |  |         |                               |  |   |     



For the years ended
December 31, 2004, 2003, and 2002, the Company received income tax benefits of $363,000, $1.8 million, and $406,000, respectively, related to the exercise of nonqualifying employee stock options. These benefits are included in cash flows from
operating activities in the consolidated statements of cash flows.



Outstanding options at December 31, 2004 are as follows:



|            |       |                    |           |                              |      |                              |   |                    |  |                              |  |   |      
|----------- | ----- | ------------------ | --------- | ---------------------------- | ---- | ---------------------------- | - | ------------------ |  | ---------------------------- |  | - | -----
|Grant Price |       | OptionsOutstanding |           | Weightedaverageremaininglife |      | Weightedaverageexerciseprice |   | Optionsexercisable |  | Weightedaverageexerciseprice
|$           | 2.80  |                    | 10,690    |                              | 0.99 |                              | $ | 2.80               |  | 10,690                       |  | $ | 2.80 
|            | 3.00  |                    | 25,500    |                              | 4.31 |                              |   | 3.00               |  | 25,500                       |  |   | 3.00 
|            | 5.75  |                    | 162,600   |                              | 2.56 |                              |   | 5.75               |  | 162,600                      |  |   | 5.75 
|            | 8.04  |                    | 54,500    |                              | 4.56 |                              |   | 8.04               |  | 54,500                       |  |   | 8.04 
|            | 15.71 |                    | 146,000   |                              | 8.84 |                              |   | 15.71              |  | 36,500                       |  |   | 15.71
|            | 16.07 |                    | 610,000   |                              | 9.19 |                              |   | 16.07              |  |                             |  |   |     
|            | 14.98 |                    | 270,000   |                              | 9.24 |                              |   | 14.98              |  |                             |  |   |     
|            |       |                    |           |                              |      |                              |   |                    |  |                              |  |   |      
|            |       |                    | 1,279,290 |                              | 7.96 |                              | $ | 13.77              |  | 289,790                      |  | $ | 7.08 
|            |       |                    |           |                              |      |                              |   |                    |  |                              |  |   |      



On October 31, 2003,
the Company granted 146,000 options at $15.71 per share, on March 10, 2004, the Company granted 610,000 options at $16.07 per share, and on March 25, 2004, the Company granted 330,000 options at $14.98 per share.





A-44



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company applies the intrinsic value-based method of
accounting prescribed by APB 25 and related interpretations in accounting for its fixed plan stock options. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise
price. The Company estimated the weighted average fair value of options granted in 2004 and 2003 to be approximately $4.91 and $5.12, respectively using the Black-Scholes options pricing model prescribed by SFAS 123. The fair value of each stock
option grant is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:



|                        |  |                          |   |  |       |  
|----------------------- |  | ------------------------ | - |  | ----- | -
|                        |  | Years Ended December 31, |  
|                        |  | 2004                     |   |  | 2003  |  
|Risk-free interest rate |  | 2.79                     | % |  | 3.19  | %
|Expected dividend yield |  | 1.40                     | % |  | 1.37  | %
|Expected life (years)   |  | 6                        |   |  | 6     |  
|Expected volatility     |  | 32.77                    | % |  | 33.19 | %



In June 2003, the
Company granted 3,000 shares of restricted stock at a fair value of $13.02 per share and in October 2003, the Company granted 26,000 shares of restricted stock at a fair value of $15.71 per share pursuant to the 2003 Plan. The June 2003 restricted
stock vests over a five-year period from the date of grant and the October 2003 restricted stock vests over a four-year period from the date of grant.



See Notes 1(k) Stock-Based Compensation and 1(n) Other New Accounting Standards related to SFAS 123R.



In connection with the Companys acquisition and merger of First
Community into the Company in 2002, the Company issued 4.8 million shares of common stock. The Company offered these shares to the public at a price of $11.25 per share. In connection with this offering, the Company paid a 5% commission to the
underwriters, and certain legal, accounting, and printing expenses, resulting in net proceeds to the Company of approximately $51.0 million. The net proceeds were used to pay a portion of the purchase price for First Community.



The Company has a stockholder protection rights agreement to protect the
stockholders of the Company from abusive or unfair take-over practices. The terms of the agreement provide one right for each share of common stock held. The rights become exercisable only if a person or a group accumulates ten percent or more of
the Companys common shares. The Company would be entitled to redeem the rights for $0.0033 per right until the tenth day following a public announcement of an acquisition of 10% of its common shares. The rights expire on October 25, 2006.



The Company offers a dividend reinvestment plan that allows
any stockholder of record of 300 shares or more of common stock to reinvest dividends on those shares in common shares issued by the Company pursuant to the plan. Holders of 300 or more shares may also acquire shares from the Company through the
plan in an amount not to exceed $30,000 quarterly.



13. Commitments and
Contingencies



Employee Benefit Plans



First State Bank sponsors an employee tax-sheltered savings plan for
substantially all full-time employees which provides a mandatory 50% matching by First State Bank of employee contributions up to a maximum of 6% of gross annual wages. Full vesting occurs after three years. Contributions to the plan totaled
approximately $402,000 in 2004, $361,000 in 2003, and $273,000 in 2002.



A-45



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2003, the Company established a nonqualified deferred
compensation plan for certain of its executive employees and non-employee directors. The deferred compensation plan allows employees to contribute up to 50% of the employees base pay and 100% of the employees bonus compensation.
Directors of the Company are allowed to contribute up to 100% of their compensation as a director. In addition, an employee with a vested unexercised stock award may elect to defer all or any portion of the stock award. All amounts contributed by
employees or directors vest immediately. The Companys obligation to the participants in the deferred compensation plan is limited to the balance in the deferred compensation plan. The deferred compensation plan is an unfunded, unsecured
promise to pay compensation in the future. At December 31, 2004 and 2003, the total assets of the plan were $854,000 and $764,000, which included an investment of $562,000 and $557,000 in the Companys common stock. The investment in the
Companys common stock is recorded as treasury stock in the consolidated statement of stockholders equity. An offsetting liability is recorded in the consolidated financial statements totaling $854,000 and $764,000. The Companys
expense for this plan totaled $65,000 in 2004 and $65,000 in 2003. All amounts contributed are subject to an underlying trust and shall be subject to the claims of the general creditors of the Company. Because certain provisions of the plan were not
in compliance with the American Jobs Creation Act of 2004, the plan was frozen effective December 31, 2004. It is managements intention to establish a new plan in 2005 that is in full compliance with the Act.



Leases



The Company leases certain of its premises and equipment under noncancellable operating leases from certain related and
unrelated parties. Rent expense for the years ended December 31, 2004, 2003, and 2002, totaled approximately $4.5 million, $3.8 million, and $2.5 million, respectively. Minimum future payments under these leases at December 31, 2004, are as follows:



|           |  |                           |       
|---------- |  | ------------------------- | ------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2005       |  | $                         | 4,463 
|2006       |  |                           | 3,995 
|2007       |  |                           | 3,802 
|2008       |  |                           | 3,660 
|2009       |  |                           | 3,547 
|Thereafter |  |                           | 17,303
|           |  |                           |       
|           |  | $                         | 36,770
|           |  |                           |       



One of the
Companys branch locations was constructed on land owned by a Director of the Company. The Company is leasing the site for an initial term of 15 years. Lease payments were approximately $76,000 in 2004, $74,000 in 2003, and $72,000 in 2002,
respectively. In the opinion of management, the lease is on terms similar to other third-party commercial transactions in the ordinary course of business.



The Company leases space for part of its operations from a limited liability company controlled by certain Directors of the Company and certain officers
of First State Bank with an initial term of 15 years. Lease payments were approximately $426,000 in 2004, $502,000 in 2003, and $492,000 in 2002. Effective November 2004, the building was sold by the related party to an outside third-party and is no
longer considered a related party transaction. During 2003, the Company entered into a lease agreement for a new operations building from a limited liability company controlled by a Director of the Company with an initial term of 10 years. Lease
payments were approximately $192,000 in 2003. Effective January 2004, the Director resigned from the board of the Company and therefore the lease of the operations building is no longer considered to be a related party transaction. In the opinion of
management, these transactions and the related leases are on terms similar to other third-party transactions in the ordinary course of business.



A-46



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Financial Instruments with Off-balance Sheet Risk



In the normal course of business, various commitments and
contingent liabilities are outstanding, such as standby letters of credit and commitments to extend credit. These financial instruments with off-balance sheet risk are not reflected in the consolidated financial statements. Financial instruments
with off-balance sheet risk involve elements of credit risk, interest rate risk, liquidity risk, and market risk. Management does not anticipate any significant losses as a result of these transactions. The following table summarizes these financial
instruments:



|                             |  |                        |         |      |   |        
|---------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                             |  | As of December 31,    
|                             |  | 2004                   |         | 2003
|                             |  | (Dollars in thousands)
|Commitments to extend credit |  | $                      | 290,490 |      | $ | 239,937
|Standby letters of credit    |  |                        | 32,836  |      |   | 20,247 



The Banks
exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank
controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.



Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.



Standby letters of credit are
written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities to customers.



The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit
evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.



In connection with mortgage loans originated and sold, the Company typically makes representations and warranties about the
underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Company may have an obligation to repurchase the assets or indemnify the purchaser against any loss. The Company believes that
the potential for loss under these arrangements is remote. Accordingly, the fair value of such obligations is not material.



Employment Agreements



Certain officers and employees of the Company have entered into employment agreements providing for salaries and benefits. The agreements provide
severance for an employee in the event of termination for cause, termination other than for cause, and following a change in control.



Legal Matters



In the normal course of business, the Company is involved in various legal matters. After consultation with legal counsel, management does not believe the
outcome of these legal matters will have an adverse impact on the Companys consolidated financial position or results of operations.



A-47



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



14. Regulatory Matters



Bank regulations specify the level of dividends that can be paid by First
State Bank. During the year ended December 31, 2004, First State Bank paid no dividends to First State Bancorporation. As of December 31, 2004, First State Bank had approximately $31.4 million in retained earnings, which were available for the
payment of dividends to First State Bancorporation subject to regulatory capital requirements. Future dividend payments will be dependent upon the level of earnings generated by First State Bank and/or regulatory restrictions, if any.



The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatoryand possibly discretionaryactions by regulators that, if undertaken, could have a direct material effect on
the Companys consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary bank must meet specific capital guidelines that involve quantitative
measures of the Companys and subsidiary banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys and subsidiary banks capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier I
capital (as defined in regulations and set forth in the following table) to risk-weighted assets, and of Tier I capital to average total assets (leverage ratio). Management believes, as of December 31, 2004, that the Company and subsidiary bank meet
all capital adequacy requirements to which they are subject.



|                                        |  |                         |         |       |                              |   |        |                                  |         |  |     |        |  |       |         |  |      |  
|--------------------------------------- |  | ----------------------- | ------- | ----- | ---------------------------- | - | ------ | -------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                        |  | As of December 31, 2004 |        
|                                        |  | Actual                  |         |       | For capitaladequacy purposes |   |        | To be consideredwell capitalized |        
|                                        |  | Amount                  |         | Ratio |                              |   | Amount |                                  | Ratio   |  |     | Amount |  | Ratio |        
|                                        |  | (Dollars in thousands)  |        
|Total capital to risk weighted assets:  |  |                         |         |       |                              |   |        |                                  |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  | $                       | 153,277 |       | 10.6                         | % |        | $                                | 115,953 |  | 8.0 | %      |  | $     | 144,942 |  | 10.0 | %
|Bank subsidiary                         |  |                         | 147,158 |       | 10.2                         | % |        |                                  | 115,746 |  | 8.0 | %      |  |       | 144,682 |  | 10.0 | %
|Tier I capital to risk weighted assets: |  |                         |         |       |                              |   |        |                                  |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 137,946 |       | 9.5                          | % |        |                                  | 57,976  |  | 4.0 | %      |  |       | 86,965  |  | 6.0  | %
|Bank subsidiary                         |  |                         | 131,827 |       | 9.1                          | % |        |                                  | 57,873  |  | 4.0 | %      |  |       | 86,809  |  | 6.0  | %
|Tier I capital to average total assets: |  |                         |         |       |                              |   |        |                                  |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 137,946 |       | 7.8                          | % |        |                                  | 70,730  |  | 4.0 | %      |  |       | 88,412  |  | 5.0  | %
|Bank subsidiary                         |  |                         | 131,827 |       | 7.5                          | % |        |                                  | 70,226  |  | 4.0 | %      |  |       | 87,783  |  | 5.0  | %



|                                        |  |                         |         |       |                              |   |        |                                  |         |  |     |        |  |       |         |  |      |  
|--------------------------------------- |  | ----------------------- | ------- | ----- | ---------------------------- | - | ------ | -------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                        |  | As of December 31, 2003 |        
|                                        |  | Actual                  |         |       | For capitaladequacy purposes |   |        | To be consideredwell capitalized |        
|                                        |  | Amount                  |         | Ratio |                              |   | Amount |                                  | Ratio   |  |     | Amount |  | Ratio |        
|                                        |  | (Dollars in thousands)  |        
|Total capital to risk weighted assets:  |  |                         |         |       |                              |   |        |                                  |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  | $                       | 134,702 |       | 10.6                         | % |        | $                                | 101,276 |  | 8.0 | %      |  | $     | 126,595 |  | 10.0 | %
|Bank subsidiary                         |  |                         | 127,205 |       | 10.1                         | % |        |                                  | 101,167 |  | 8.0 | %      |  |       | 126,458 |  | 10.0 | %
|Tier I capital to risk weighted assets: |  |                         |         |       |                              |   |        |                                  |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 120,581 |       | 9.5                          | % |        |                                  | 50,638  |  | 4.0 | %      |  |       | 75,957  |  | 6.0  | %
|Bank subsidiary                         |  |                         | 113,084 |       | 8.9                          | % |        |                                  | 50,583  |  | 4.0 | %      |  |       | 75,875  |  | 6.0  | %
|Tier I capital to average total assets: |  |                         |         |       |                              |   |        |                                  |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 120,581 |       | 7.9                          | % |        |                                  | 45,748  |  | 3.0 | %      |  |       | 76,246  |  | 5.0  | %
|Bank subsidiary                         |  |                         | 113,084 |       | 7.4                          | % |        |                                  | 45,698  |  | 3.0 | %      |  |       | 76,163  |  | 5.0  | %



A-48



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



15. Condensed Financial Information of Parent Company



The assets of the Company, as parent company, consist primarily of the
investment in its subsidiary bank and a money market savings account held in the subsidiary bank. The primary sources of the parent companys cash revenues are dividends from its subsidiary bank along with interest received from the money
market account. Following are condensed financial statements of the parent company:



Condensed Statements of Condition



|                                      |  |                        |         |      |   |        
|------------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                      |  | As of December 31,    
|                                      |  | 2004                   |         | 2003
|                                      |  | (Dollars in thousands)
|Assets                                |  |                        |         |      |   |        
|Cash and due from banks               |  | $                      | 6,132   |      | $ | 6,438  
|Investment in subsidiary              |  |                        | 174,558 |      |   | 157,221
|Goodwill                              |  |                        | 223     |      |   | 223    
|Deferred tax asset                    |  |                        | 214     |      |   | 195    
|Other assets                          |  |                        | 2,753   |      |   | 2,691  
|                                      |  |                        |         |      |   |        
|Total assets                          |  | $                      | 183,880 |      | $ | 166,768
|                                      |  |                        |         |      |   |        
|Liabilities and equity capital        |  |                        |         |      |   |        
|Accounts payable and accrued expenses |  | $                      | 910     |      | $ | 821    
|Junior subordinated debentures        |  |                        | 38,661  |      |   | 33,506 
|                                      |  |                        |         |      |   |        
|Total liabilities                     |  |                        | 39,571  |      |   | 34,327 
|                                      |  |                        |         |      |   |        
|Equity capital                        |  |                        | 144,309 |      |   | 132,441
|                                      |  |                        |         |      |   |        
|Total liabilities and equity capital  |  | $                      | 183,880 |      | $ | 166,768
|                                      |  |                        |         |      |   |        



Condensed Statements
of Operations



|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Years ended December 31, |       
|                                                                     |  | 2004                     |        |   | 2003 |   |        | 2002 | 
|                                                                     |  | (Dollars in thousands)   |       
|Income:                                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash dividends from subsidiary                                       |  | $                        |       |   |      | $ |       |      |  | $ |       |  
|Other income                                                         |  |                          | 90     |   |      |   | 182    |      |  |   | 403    |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total income                                                         |  |                          | 90     |   |      |   | 182    |      |  |   | 403    |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Expenses:                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Interest expense                                                     |  |                          | 1,700  |   |      |   | 1,546  |      |  |   | 1,091  |  
|Compensation expense                                                 |  |                          | 211    |   |      |   | 61     |      |  |   | 14     |  
|Legal                                                                |  |                          | 29     |   |      |   | 74     |      |  |   | 75     |  
|Other                                                                |  |                          | 473    |   |      |   | 485    |      |  |   | 601    |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total expenses                                                       |  |                          | 2,413  |   |      |   | 2,166  |      |  |   | 1,781  |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Loss before income taxes and undistributed income of bank subsidiary |  |                          | (2,323 | ) |      |   | (1,984 | )    |  |   | (1,378 | )
|Income tax benefit                                                   |  |                          | 916    |   |      |   | 911    |      |  |   | 763    |  
|Undistributed income of bank subsidiary                              |  |                          | 16,632 |   |      |   | 15,924 |      |  |   | 10,573 |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                                           |  | $                        | 15,225 |   |      | $ | 14,851 |      |  | $ | 9,958  |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  



A-49



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##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Condensed Statements of Cash Flows



|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                     |  | Years ended December 31, |        
|                                                                                     |  | 2004                     |         |   | 2003 |   |         | 2002 | 
|                                                                                     |  | (Dollars in thousands)   |        
|Cash flows from operating activities:                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                           |  | $                        | 15,225  |   |      | $ | 14,851  |      |  | $ | 9,958   |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Adjustments to reconcile net income to cash provided (used) by operating activities: |  |                          |         |   |      |   |         |      |  |   |         |  
|Compensation expense                                                                 |  |                          | 211     |   |      |   | 44      |      |  |   |        |  
|Undistributed income of bank subsidiary                                              |  |                          | (16,632 | ) |      |   | (15,924 | )    |  |   | (10,573 | )
|Income tax benefit from exercise of options                                          |  |                          | 363     |   |      |   | 1,843   |      |  |   | 406     |  
|Decrease (increase) in other assets                                                  |  |                          | (81     | ) |      |   | 104     |      |  |   | (2,298  | )
|(Decrease) increase in other liabilities, net                                        |  |                          | 84      |   |      |   | (159    | )    |  |   | 37      |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Total adjustments                                                                    |  |                          | (16,055 | ) |      |   | (14,092 | )    |  |   | (12,428 | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by operating activities                                     |  |                          | (830    | ) |      |   | 759     |      |  |   | (2,470  | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Common stock issued                                                                  |  |                          | 967     |   |      |   | 2,720   |      |  |   | 51,540  |  
|Payment to repurchase common stock                                                   |  |                          |        |   |      |   | (331    | )    |  |   | (660    | )
|Capital contributions to subsidiary bank                                             |  |                          | (2,000  | ) |      |   | (6,500  | )    |  |   | (67,000 | )
|Issuance of junior subordinated debentures                                           |  |                          | 5,155   |   |      |   |        |      |  |   | 25,774  |  
|Dividends paid                                                                       |  |                          | (3,598  | ) |      |   | (3,211  | )    |  |   | (2,152  | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by financing activities                                     |  |                          | 524     |   |      |   | (7,322  | )    |  |   | 7,502   |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and due from banks                                       |  |                          | (306    | ) |      |   | (6,563  | )    |  |   | 5,032   |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and due from banks at beginning of year                                         |  |                          | 6,438   |   |      |   | 13,001  |      |  |   | 7,969   |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and due from banks at end of year                                               |  | $                        | 6,132   |   |      | $ | 6,438   |      |  | $ | 13,001  |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  



16. Fair Value of Financial
Instruments



SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of current fair value of all financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. SFAS
107 defines fair value as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale.



Financial instruments are defined as cash, evidence of ownership in an entity, or a contract that both imposes on one entity
a contractual obligation: (1) to deliver cash or another financial instrument to a second entity, or (2) to exchange other financial instruments on potentially unfavorable terms with a second entity, and conveys to the second entity a contractual
right: (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity.



Fair value estimates are made at a specific point in time based on available relevant market information about the financial
instrument. However, a significant portion of the Companys financial instruments, such as commercial real estate loans, do not currently have an active marketplace in which they can be readily sold or purchased to determine fair value.
Consequently, fair value estimates for those financial instruments are based on assumptions made by management regarding the financial instruments credit risk characteristics, prevailing interest rates, future estimated cash flows, expected
loss experience, current and future economic conditions, and other factors which affect fair value. As a result, these fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot
be determined with precision. Accordingly, changes in managements assumptions could cause the fair value estimates to deviate substantially. Further, these estimates do not reflect any additional premium or discount that could result from
offering for sale, at one time, the Companys entire holdings of a particular financial instrument or any estimated transaction costs. Finally, the tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on the fair value estimates and have not been considered in the estimates.



A-50



---

##### Table of Contents

##### Index to Financial Statements

FIRST STATE BANCORPORATION AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The carrying values and estimated fair values of the
Companys financial instruments at December 31 are as follows:



|                                                      |  |                        |           |            |   |                |  |            |           |  |   |          
|----------------------------------------------------- |  | ---------------------- | --------- | ---------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                                                      |  | 2004                   |           | 2003      
|                                                      |  | Carrying Amount        |           | Fair Value |   | CarryingAmount |  | Fair Value
|                                                      |  | (Dollars in thousands)
|Financial assets:                                     |  |                        |           |            |   |                |  |            |           |  |   |          
|Cash and cash equivalents                             |  | $                      | 45,265    |            | $ | 45,265         |  | $          | 86,150    |  | $ | 86,150   
|Marketable securities available for sale              |  |                        | 203,174   |            |   | 203,174        |  |            | 135,530   |  |   | 135,530  
|Marketable securities held to maturity                |  |                        | 75,407    |            |   | 75,236         |  |            | 84,902    |  |   | 85,147   
|Federal Home Loan Bank and Federal Reserve Bank stock |  |                        | 12,344    |            |   | 12,344         |  |            | 14,688    |  |   | 14,688   
|Loans, net                                            |  |                        | 1,362,464 |            |   | 1,362,389      |  |            | 1,217,364 |  |   | 1,233,443
|Accrued interest receivable                           |  |                        | 6,947     |            |   | 6,947          |  |            | 5,582     |  |   | 5,582    
|Cash surrender value of bank owned life insurance     |  |                        | 19,910    |            |   | 19,910         |  |            | 19,111    |  |   | 19,111   
|Financial liabilities:                                |  |                        |           |            |   |                |  |            |           |  |   |          
|Deposits                                              |  |                        | 1,401,303 |            |   | 1,379,681      |  |            | 1,195,875 |  |   | 1,205,379
|Securities sold under agreements to repurchase        |  |                        | 69,723    |            |   | 69,723         |  |            | 63,686    |  |   | 63,686   
|FHLB advances and other                               |  |                        | 153,852   |            |   | 153,527        |  |            | 216,822   |  |   | 216,950  
|Junior subordinated debentures                        |  |                        | 38,661    |            |   | 38,661         |  |            | 32,500    |  |   | 32,500   



The following methods
and assumptions were used to estimate the fair value of each class of financial instruments:



Cash and cash equivalents.Carrying value approximates fair value since these instruments are payable on demand and do not present credit
concerns.



Federal Home Loan Bank and Federal Reserve
Bank Stock. The stock is carried at cost, which approximates market at December 31, 2004 and 2003.



Marketable securities available for sale and held to maturity.The estimated fair value of securities available for sale and held to maturity is
based on independent dealer quotations or published market price bid quotes.



Loans, net.The estimated fair value of the loan portfolio is calculated by discounting scheduled cash flows over the estimated maturity of loans using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities or repricing terms. Credit risk is accounted for through a reduction of contractual cash flows by loss estimates of classified loans and as a component of the discount
rate.



Accrued interest receivable.Carrying
value of interest receivable approximates fair value, since these instruments have short-term maturities.



Cash surrender value of bank owned life insurance. The carrying value of cash surrender value of bank owned life insurance is the amount realizable
by the Company if it were to surrender the policy to the issuing company. Because the carrying value is equal to the amount the Company could realize in cash, the carrying value is considered its fair value.



Deposits.The estimated fair value of deposits with no stated
maturity, such as demand deposits, savings accounts, and money market deposits, approximates the amounts payable on demand at December 31, 2004 and 2003. The fair value of fixed maturity certificates of deposit is estimated by discounting the future
contractual cash flows using the rates currently offered for deposits of similar remaining maturities.



Securities sold under agreements to repurchase.The estimated fair value of securities sold under agreements to repurchase, which reset frequently
to market interest rates, approximates fair value.



FHLB
advances and other.Fair values for FHLB advances and other are estimated based on the current rates offered for similar borrowing arrangements at December 31, 2004 and 2003.



Junior subordinate debentures. The estimated fair value of junior subordinated debentures, which reset quarterly to
market interest rates, approximates fair value.



Off-
balance sheet items.The estimated fair values of the Companys off-balance sheet items are not material to the fair value of financial instruments included in the consolidated balance sheets.



A-51