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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended          December 31, 2003 o
    
    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 FIRST STATE BANCORPORATION 
 (Exact name of registrant as specified in its charter)
 NEW MEXICO
    
    85-0366665(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)7900 JEFFERSON NEALBUQUERQUE, NEW MEXICO
    
    87109(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:     (505) 241-7500 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredNONE
    
    NONE
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value 
 (Title of class)
 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 o 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. o 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 o The aggregate market value of the Common Stock as of June 30, 2003 (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, 2003 as
reported by The Nasdaq Stock Market, held by non-affiliates was approximately
$188,965,000. 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, 2004,
there were 7,630,311 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 2004 Annual Shareholders Meeting, which will be filed with the
Commission by April 29, 2004.    1




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TABLE OF CONTENTS PagePART IItem 1:
    
    Business.
    
    
    3Item 2:
    
    Properties.
    
    
    16Item 3:
    
    Legal Proceedings.
    
    
    17Item 4:
    
    Submission of
Matters to a Vote of Security Holders.
    
    
    17PART IIItem 5:
    
    Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
    
    
    18Item 6:
    
    Selected Financial Data.
    
    
    19Item 7:
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations.
    
    
    19Item 7A:
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    19Item 8:
    
    Financial Statements and Supplementary Data.
    
    
    19Item 9:
    
    Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
    
    
    19Item 9A:
    
    Controls and Procedures.
    
    
    20PART IIIItem 10:
    
    Directors and Executive Officers of the Registrant.
    
    Proxy StatementItem 11:
    
    Executive Compensation.
    
    Proxy StatementItem 12:
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
    
    Proxy StatementItem 13:
    
    Certain Relationships and Related Transactions.
    
    Proxy StatementItem 14:
    
    Principal Accountant Fees and Services.
    
    Proxy StatementPART IVItem 15:
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
    
    
    21Consent of KPMG LLPCertification of CEO - Section 302Certification of CFO - Section 302Certification of CEO - Section 906Certification of CFO - Section 906
  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, competition, loan and deposit growth, timing of
new branch openings, expansion opportunities, 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 that 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. 2




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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-three in New Mexico (three offices in Taos, nine offices in Albuquerque,
three offices in Santa Fe, and one office each in Rio Rancho, Los Lunas,
Bernalillo, Questa, Pojoaque, Placitas, Moriarty, and Belen), six in Colorado
(Denver, Colorado Springs, Fort Collins, Lakewood, Littleton, and Longmont),
and one in Utah (Salt Lake City). We have one new branch under building
renovation in Santa Fe scheduled for completion in March 2004 and four branch
offices in Colorado and Utah that are in the process of re-location and
renovation or construction, which are expected to be operational in the second
quarter of 2004. First State Banks branches in Colorado and Utah operate
under the name First Community Bank. 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, 2003, we had total assets, total deposits, and total stockholders
equity of $1.647 billion, $1.196 billion, and $132 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; and (vii) 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, 2003, 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 3




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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. 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. On March 1, 2000, we closed the sale of the assets of First State Banks
commercial leasing division. Our sale of the leasing division resulted in the
sale of approximately $64 million of leases. Our gain on the sale amounted to
approximately $879,000, net of transaction costs. We used proceeds from the
sale to fund loan demand, purchase investment securities, and reduce
borrowings. 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. 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 4




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provided each region with local decision making ability which allows us to best
serve and attract small to medium size businesses. 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. Over
the last several years a significant investment has been made in the area of
internet and telephone banking to provide alternative methods to enhance our
ability to service both our retail and commercial customers. For our
commercial customers, we also offer an internet based cash management product.
We are currently implementing an imaging based document management and
archiving system which will provide efficiencies in managing document flow and
ensure 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 intralocation phone calls and data transmission. 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. These expenses will continue to
grow during 2004 before they stabilize; however, we believe our investments in
facilities will 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 earning
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 $1.6 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. 5




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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 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 next five years 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, Littleton and Lakewood), 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, Lockheed Martin, Merrill Lynch, and Sun Microsystems.
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. 6




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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. Effective as of November 30, 2003, we closed the Ogden,
Utah branch and one branch in Salt Lake City. The total loans and deposits of
the Utah operations did not justify maintaining three separate banking
facilities and therefore the Utah operations were consolidated into one branch
in Salt Lake City to enhance the efficiency of the Utah operations and allow
management to target small to medium size businesses in a more focused manner. 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,
Jefferson, 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, 2003: Number of
    
    Total
    
    TotalLocation
    
    Facilities
    
    Deposits
    
    Loans(Dollars in thousands)First State Bank (by Region)Taos
    
    
    4
    
    
    $
    137,513
    
    
    $
    51,306Santa Fe
    
    
    4
    
    
    
    154,201
    
    
    
    213,963Albuquerque Metropolitan
    
    
    12
    
    
    
    617,325
    
    
    
    512,261Los Lunas
    
    
    3
    
    
    
    82,796
    
    
    
    82,774Northern Colorado
    
    
    2
    
    
    
    28,835
    
    
    
    35,276Central Colorado
    
    
    3
    
    
    
    89,587
    
    
    
    105,733Southern Colorado
    
    
    1
    
    
    
    65,362
    
    
    
    186,252Utah
    
    
    1
    
    
    
    20,256
    
    
    
    43,920Total
    
    
    30
    
    
    $
    1,195,875
    
    
    $
    1,231,485
 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. 7




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The Santa Fe locations primarily serve a diverse group of small to medium size
business 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 business 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, 2003: New MexicoTaos
    
    
    42.97
    %Bernalillo
    
    
    6.81
    %Santa Fe
    
    
    8.46
    %Sandoval
    
    
    36.33
    %Valencia
    
    
    16.84
    %Torrance
    
    
    12.22
    %ColoradoLarimer
    
    
    0.27
    %Boulder
    
    
    0.56
    %Denver
    
    
    0.24
    %Jefferson
    
    
    0.47
    %Arapahoe
    
    
    0.56
    %El Paso
    
    
    1.60
    %UtahSalt Lake
    
    
    0.02
    %Weber
    
    
    0.67
    %*
 * We closed our branch in Weber County in November of 2003 and the existing
loans and deposits were transferred to our branch in Salt Lake County
subsequent to that date. 8




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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. We also believe that the Colorado and Utah markets represent a great
opportunity for growth as the acquired First Community branches have the
ability to accept demand deposits 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, 2003, we had 499 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. 9




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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 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. 10




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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 3% 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, 2003Risk-Based RatiosTier I
    
    Total
    
    LeverageCapital
    
    Capital
    
    RatioFirst State Bancorporation
    
    
    9.5
    %
    
    
    10.6
    %
    
    
    7.9
    %First State Bank
    
    
    8.9
    %
    
    
    10.1
    %
    
    
    7.4
    %Minimum required ratio
    
    
    4.00
    %
    
    
    8.00
    %
    
    
    3.00
    %Well capitalized minimum ratio
    
    
    6.00
    %
    
    
    10.00
    %
    
    
    5.00
    %
 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 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 agencies have also
adopted an adjustment to the risk-based capital calculations to cover market
risk in trading accounts of certain institutions. 11




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##### Table of Contents



The federal bank regulatory agencies recently adopted amendments to their
risk-based capital regulations to provide for the consideration of interest
rate risk in the agencies determination of a banking institutions capital
adequacy. The amendments 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, 2003, each of First State Bancorporation and First State Bank exceeded the
required capital ratios for classification as well capitalized. 12




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##### Table of Contents



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;
    
    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
us, 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 13




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##### Table of Contents



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 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 under the financial holding
company. 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 New
Mexico Unfair Practices Act and the 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 supply are open market operations in U.S. Government securities,
changes in the discount rate on member 14




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##### Table of Contents



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. 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. 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
will require pre-approval by a companys audit committee members. SOX also
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 also 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. 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, executives 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. 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. 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 15




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##### Table of Contents



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. With the exception of the Main and Southside facilities in Taos, the Journal
Center facility in Albuquerque, and the Bernalillo facility, which are owned by
First State Bank, we lease our banking facilities. See Item 13: Certain
Relationships and Related Transactions. The following table shows the size
and age of each of the banking facilities and the building area owned or leased by us: Approximatebuilding areaApproximate
    
    Approximate
    
    owned orland area
    
    building area
    
    leased
    
    Year constructed or(sq. ft.)
    
    (sq. ft.)
    
    (sq. ft.)
    
    last renovatedFacilities (by Region):TaosMain
    
    
    19,800
    
    
    
    8,940
    
    
    
    8,940
    
    
    Renovated 6-93Northside
    
    
    45,215
    
    
    
    2,239
    
    
    
    2,239
    
    
    Renovated 9-95Questa
    
    
    17,947
    
    
    
    1,050
    
    
    
    1,050
    
    
    Renovated 8-93Southside
    
    
    36,590
    
    
    
    5,550
    
    
    
    5,550
    
    
    Renovated 9-92Santa FeSan Mateo
    
    
    62,334
    
    
    
    6,955
    
    
    
    6,955
    
    
    Renovated 11-95Downtown
    
    
    5,100
    
    
    
    2,116
    
    
    
    2,116
    
    
    Constructed 12-95Pojoaque
    
    
    150,000
    
    
    
    30,000
    
    
    
    1,000
    
    
    Constructed 1-02Cerrillos
    
    
    20,000
    
    
    
    4,450
    
    
    
    4,450
    
    
    Constructed 3-03Albuquerque MetropolitanLomas
    
    
    9,199
    
    
    
    9,199
    
    
    
    9,199
    
    
    Renovated 3-95Carlisle
    
    
    16,256
    
    
    
    1,880
    
    
    
    1,880
    
    
    Constructed 9-95Montgomery
    
    
    14,514
    
    
    
    3,742
    
    
    
    3,742
    
    
    Renovated 11-93Sycamore
    
    
    45,834
    
    
    
    5,164
    
    
    
    4,173
    
    
    Constructed 9-94Journal Center
    
    
    158,384
    
    
    
    18,390
    
    
    
    18,390
    
    
    Renovated 3-98Petroglyph
    
    
    26,125
    
    
    
    2,134
    
    
    
    2,134
    
    
    Constructed 4-99Lang  Operations Center
    
    
    69,755
    
    
    
    27,567
    
    
    
    23,118
    
    
    Constructed 8-99Juan Tabo
    
    
    57,534
    
    
    
    5,515
    
    
    
    5,515
    
    
    Constructed 6-01Snowheights
    
    
    32,000
    
    
    
    4,683
    
    
    
    4,683
    
    
    Constructed 4-01Pan Am  Operations Center
    
    
    108,900
    
    
    
    50,340
    
    
    
    30,000
    
    
    Constructed 9-03Nob Hill
    
    
    18,692
    
    
    
    1,776
    
    
    
    1,776
    
    
    Renovated 6-03Headline Point
    
    
    130,680
    
    
    
    56,825
    
    
    
    3,223
    
    
    Renovated 7-02Rio Rancho
    
    
    50,214
    
    
    
    5,500
    
    
    
    4,000
    
    
    Constructed 3-95Placitas
    
    
    807
    
    
    
    807
    
    
    
    807
    
    
    Constructed 9-94Bernalillo
    
    
    43,539
    
    
    
    4,610
    
    
    
    4,610
    
    
    Constructed 8-96Los LunasLos Lunas
    
    
    57,243
    
    
    
    6,647
    
    
    
    6,647
    
    
    Renovated 6-02Moriarty
    
    
    1,900
    
    
    
    1,900
    
    
    
    1,900
    
    
    Constructed 12-97Belen
    
    
    53,997
    
    
    
    4,636
    
    
    
    4,636
    
    
    Constructed 2-00Northern ColoradoFort Collins
    
    
    200,000
    
    
    
    100,000
    
    
    
    3,190
    
    
    Constructed 1-75Longmont
    
    
    9,375
    
    
    
    3,676
    
    
    
    3,676
    
    
    Constructed 1-64Longmont Mortgage
    
    
    87,120
    
    
    
    1,650
    
    
    
    1,650
    
    
    Renovated 10-03Central ColoradoCherry Creek
    
    
    43,000
    
    
    
    20,000
    
    
    
    4,000
    
    
    Constructed 1-85Lakewood
    
    
    80,000
    
    
    
    40,000
    
    
    
    3,222
    
    
    Constructed 1-85Littleton
    
    
    25,000
    
    
    
    3,500
    
    
    
    3,500
    
    
    Constructed 1-85Denver Tech Center
    
    
    217,800
    
    
    
    10,511
    
    
    
    5,256
    
    
    Renovated 10-02, 3-03Southern ColoradoColorado Springs
    
    
    217,000
    
    
    
    530,000
    
    
    
    7,527
    
    
    Renovated 5-03UtahHolladay
    
    
    20,000
    
    
    
    2,250
    
    
    
    2,250
    
    
    Constructed 1-80
 16




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##### Table of Contents



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 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 2003. Executive Officers of the Registrant First State Bancorporations executive officers, their positions, and their
respective ages (as of January 1, 2004) are as follows: Name
    
    Position
    
    AgeMichael R. Stanford
    
    President, Chief Executive Officer, and
Director
    
    
    51H. Patrick Dee
    
    Executive Vice President, Chief Operating
Officer, Secretary, Treasurer, and
Director
    
    
    48Christopher C. Spencer
    
    Senior Vice President and Chief Financial
Officer
    
    
    45Thomas E. Bajusz
    
    Senior Vice President and Chief Credit
Officer
    
    
    50Theresa A. Gabel
    
    Senior Vice President of Human Resources
and Communications
    
    
    55James E. Warden
    
    Senior Vice President of Branch
Administration and Retail Services
    
    
    45Marshall G. Martin
    
    Executive Vice President and
Corporate Counsel
    
    
    65
 17




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##### Table of Contents



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 ShareDiluted
    
    Dividends
    
    
    
    
    
    Low
    
    High
    
    QuarterQuarter Ended
    
    Net Earnings
    
    Paid
    
    Book Value
    
    Price(1)
    
    Price(1)
    
    End PriceDecember 31, 2003
    
    
    .47
    
    
    
    .11
    
    
    
    17.42
    
    
    
    29.40
    
    
    
    35.98
    
    
    
    34.75September 30, 2003
    
    
    .53
    
    
    
    .11
    
    
    
    17.15
    
    
    
    26.82
    
    
    
    31.47
    
    
    
    29.61June 30, 2003
    
    
    .49
    
    
    
    .11
    
    
    
    16.84
    
    
    
    21.39
    
    
    
    27.35
    
    
    
    27.33March 31, 2003
    
    
    .46
    
    
    
    .10
    
    
    
    16.40
    
    
    
    21.39
    
    
    
    26.09
    
    
    
    21.39December 31, 2002
    
    
    .44
    
    
    
    .10
    
    
    
    16.03
    
    
    
    22.75
    
    
    
    25.76
    
    
    
    24.80September 30, 2002
    
    
    .36
    
    
    
    .10
    
    
    
    15.74
    
    
    
    18.45
    
    
    
    26.19
    
    
    
    24.65June 30, 2002
    
    
    .44
    
    
    
    .10
    
    
    
    12.66
    
    
    
    22.25
    
    
    
    27.80
    
    
    
    26.00March 31, 2002
    
    
    .41
    
    
    
    .09
    
    
    
    12.11
    
    
    
    19.50
    
    
    
    23.89
    
    
    
    23.24
   (1)
    
    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, 2004, was $31.85 per share. As
of March 10, 2004, 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 $3.2 million or $0.43 per share in 2003 and $2.2
million or $0.39 per share in 2002, which amounted to 21.62% and 21.61%, of net
income in 2003 and 2002, 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. 18




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##### Table of Contents



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, 2003: (a)
    
    (b)
    
    (c)Number of securitiesNumber of
    
    
    
    
    
    remaining available forsecurities to be
    
    Weighted-
    
    future issuance underissued upon
    
    average
    
    equity compensationexercise of
    
    exercise price of
    
    plans (excludingoutstanding
    
    of outstanding
    
    securities reflected inPlan Category
    
    options
    
    options
    
    column (a))Equity compensation
plans approved by
security holders
    
    
    243,005
    
    
    $
    17.64
    
    
    
    662,500Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    243,005
    
    
    $
    17.64
    
    
    
    662,500
 
 Item 6: Selected Financial Data. Selected Financial Data are filed as part of this report and appear immediately
following the signature page. 
 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 immediately following
Selected Financial Data. 
 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. 
 Item 8: Financial Statements and Supplementary Data. Our consolidated financial statements are filed as a part of this report and
appear 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. 19




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##### Table of Contents



Item 9A: Controls and Procedures. 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, 2003 pursuant to Exchange act rule 13a-14. 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, 2003, 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, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. 
 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 2004 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 2004 Annual Meeting of
Shareholders. 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 2004 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 2004 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 is included in Part I of this Form
10-K as permitted by General Instruction G (3). 
 Item 11: Executive Compensation. Information appearing under the captions Compensation of Directors and
Executive Compensation in the 2004 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 2004 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 2004 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 2004 Proxy Statement
is incorporated herein by reference. 20




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##### Table of Contents



PART IV 
 Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this annual report on Form
10-K:  1.
    
    Financial Statements:  
    
    Selected Quarterly Financial Data
    
    Independent Auditors Report
    
    Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    Consolidated Statements of Operations for the Years Ended December 31,
2003, 2002, and 2001
    
    Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2003, 2002, and 2001
    
    Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2003, 2002, and 2001
    
    Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002, and 2001  2.
    
    Financial Statement Schedules None  3.
    
    Exhibits No.
    
    Description2.1
    
    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)4.1
    
    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)10.3
    
    Code of Ethics for Executives.(8)21.1
    
    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.
 21




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##### Table of Contents



(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. (b) Reports on Form 8-K. On October 22, 2003, we filed a current report on Form 8-K announcing our third
quarter 2003 financial results. 22




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##### Table of Contents



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 andDated: March 12, 2004
    
    Chief Executive Officer 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
    
    DateMichael R. Stanford
Michael R. Stanford
    
    President and Chief Executive
Officer and a Director (Principal
Executive Officer)
    
    March 12, 2004
March 12, 2004H. Patrick Dee
H. Patrick Dee
    
    Executive Vice President,
Secretary, Treasurer and a Director
    
    March 12, 2004
March 12, 2004Christopher C. Spencer
Christopher C. Spencer
    
    Senior Vice President and Chief
Financial Officer (Principal
Accounting Officer)
    
    March 12, 2004
March 12, 2004Leonard J. DeLayo, Jr.
Leonard J. DeLayo, Jr.
    
    Director
    
    March 12, 2004
March 12, 2004Bradford M. Johnson
Bradford M. Johnson
    
    Director
    
    March 12, 2004
March 12, 2004Douglas M. Smith, M.D.
Douglas M. Smith, M.D.
    
    Director
    
    March 12, 2004
March 12, 2004Herman N. Wisenteiner
Herman N. Wisenteiner
    
    Director
    
    March 12, 2004
March 12, 2004Nedra Matteucci
Nedra Matteucci
    
    Director
    
    March 12, 2004
March 12, 2004Lowell A. Hare
Lowell A. Hare
    
    Director
    
    March 12, 2004
March 12, 2004A.J. (Jim) Wells
A.J. (Jim) Wells
    
    Director
    
    March 12, 2004
March 12, 2004
 23




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageFinancial Highlights
    
    
    2Selected Quarterly Financial Data
    
    
    3Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    4Independent Auditors Report
    
    
    20Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    21Consolidated Statements of Operations for the Years Ended December
31, 2003, 2002, and 2001
    
    
    22Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2003, 2002, and 2001
    
    
    23Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2003, 2002, and 2001
    
    
    24Consolidated Statements of Cash Flows for the Years Ended December
31, 2003, 2002, and 2001
    
    
    25Notes to Consolidated Financial Statements
    
    
    26
 -1-




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##### Table of Contents



FINANCIAL HIGHLIGHTSYears ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands, except per share data)Statement of Operations Data:Interest income
    
    $
    83,713
    
    
    $
    59,846
    
    
    $
    53,630
    
    
    $
    50,739
    
    
    $
    42,250Interest expense
    
    
    22,629
    
    
    
    18,384
    
    
    
    20,478
    
    
    
    20,198
    
    
    
    14,686Net interest income
    
    
    61,084
    
    
    
    41,462
    
    
    
    33,152
    
    
    
    30,541
    
    
    
    27,564Provision for loan and lease losses
    
    
    (5,543
    )
    
    
    (2,589
    )
    
    
    (2,386
    )
    
    
    (2,475
    )
    
    
    (3,075
    )Net interest income after provision for
loan and lease losses
    
    
    55,541
    
    
    
    38,873
    
    
    
    30,766
    
    
    
    28,066
    
    
    
    24,489Non-interest income
    
    
    14,521
    
    
    
    12,698
    
    
    
    9,414
    
    
    
    7,782
    
    
    
    5,874Non-interest expenses
    
    
    47,242
    
    
    
    35,982
    
    
    
    27,517
    
    
    
    24,767
    
    
    
    22,312Income before income taxes
    
    
    22,820
    
    
    
    15,589
    
    
    
    12,663
    
    
    
    11,081
    
    
    
    8,051Income tax expense
    
    
    7,969
    
    
    
    5,631
    
    
    
    4,521
    
    
    
    3,849
    
    
    
    2,845Net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142
    
    
    $
    7,232
    
    
    $
    5,206Per Share Data:Net income per diluted share
    
    $
    1.95
    
    
    $
    1.66
    
    
    $
    1.61
    
    
    $
    1.45
    
    
    $
    1.01Book value
    
    
    17.42
    
    
    
    16.03
    
    
    
    11.94
    
    
    
    10.49
    
    
    
    9.03Tangible book value
    
    
    11.63
    
    
    
    9.98
    
    
    
    11.87
    
    
    
    10.39
    
    
    
    9.18Dividends paid
    
    
    0.43
    
    
    
    0.39
    
    
    
    0.34
    
    
    
    0.27
    
    
    
    0.23Market price end of period
    
    
    34.75
    
    
    
    24.80
    
    
    
    21.30
    
    
    
    13.98
    
    
    
    13.75Weighted average diluted common shares
outstanding
    
    
    7,598,449
    
    
    
    5,997,601
    
    
    
    5,049,349
    
    
    
    4,996,992
    
    
    
    5,142,543Average Balance Sheet Data:Total assets
    
    $
    1,466,715
    
    
    $
    998,165
    
    
    $
    718,178
    
    
    $
    598,365
    
    
    $
    534,770Loans and leases
    
    
    1,110,741
    
    
    
    692,283
    
    
    
    497,485
    
    
    
    425,507
    
    
    
    387,878Investment securities
    
    
    204,624
    
    
    
    188,628
    
    
    
    150,118
    
    
    
    120,601
    
    
    
    102,281Interest-bearing deposits with banks
    
    
    5,216
    
    
    
    16,785
    
    
    
    18,756
    
    
    
    6,173
    
    
    
    150Federal funds sold
    
    
    10,247
    
    
    
    22,682
    
    
    
    5,722
    
    
    
    5,129
    
    
    
    3,455Deposits
    
    
    1,137,698
    
    
    
    805,417
    
    
    
    585,063
    
    
    
    484,128
    
    
    
    431,392Stockholders equity
    
    
    126,328
    
    
    
    82,053
    
    
    
    55,623
    
    
    
    47,475
    
    
    
    44,446Performance Ratios:Return on average assets
    
    
    1.01
    %
    
    
    1.00
    %
    
    
    1.13
    %
    
    
    1.21
    %
    
    
    0.97
    %Return on average common equity
    
    
    11.76
    %
    
    
    12.14
    %
    
    
    14.64
    %
    
    
    15.23
    %
    
    
    11.71
    %Net interest margin
    
    
    4.59
    %
    
    
    4.50
    %
    
    
    4.93
    %
    
    
    5.48
    %
    
    
    5.58
    %Efficiency ratio
    
    
    62.49
    %
    
    
    66.44
    %
    
    
    64.65
    %
    
    
    64.63
    %
    
    
    66.72
    %Earnings to fixed charges:Including interest on deposits
    
    
    2.01
    x
    
    
    1.85
    x
    
    
    1.62
    x
    
    
    1.55
    x
    
    
    1.55
    xExcluding interest on deposits
    
    
    6.83
    x
    
    
    8.08
    x
    
    
    6.51
    x
    
    
    4.21
    x
    
    
    4.54
    xAsset Quality Ratios:Nonperforming assets to total loans, leases,
and other real estate owned
    
    
    1.14
    %
    
    
    1.17
    %
    
    
    0.50
    %
    
    
    0.86
    %
    
    
    1.10
    %Net charge-offs to average loans and leases.
    
    
    0.29
    %
    
    
    0.16
    %
    
    
    0.30
    %
    
    
    0.37
    %
    
    
    0.40
    %Allowance for loan and lease losses to
total loans
    
    
    1.15
    %
    
    
    1.16
    %
    
    
    1.31
    %
    
    
    1.37
    %
    
    
    1.26
    %Allowance for loan and lease losses to
nonperforming loans
    
    
    113
    %
    
    
    108
    %
    
    
    290
    %
    
    
    325
    %
    
    
    192
    %Capital Ratios:Leverage ratio
    
    
    7.93
    %
    
    
    7.82
    %
    
    
    7.76
    %
    
    
    7.72
    %
    
    
    7.86
    %Average stockholders equity to average
total assets
    
    
    8.61
    %
    
    
    8.22
    %
    
    
    7.75
    %
    
    
    7.93
    %
    
    
    8.31
    %Tier I risk-based capital ratio
    
    
    9.52
    %
    
    
    10.42
    %
    
    
    10.59
    %
    
    
    10.15
    %
    
    
    9.53
    %Total risk-based capital ratio
    
    
    10.64
    %
    
    
    11.59
    %
    
    
    11.61
    %
    
    
    11.36
    %
    
    
    10.55
    %
 -2-




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##### Table of Contents



SELECTED QUARTERLY FINANCIAL DATA(unaudited)2003Fourth 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
    
    
    $
    20,007Interest expense
    
    
    5,573
    
    
    
    5,498
    
    
    
    5,690
    
    
    
    5,868Net interest income
    
    
    16,275
    
    
    
    15,639
    
    
    
    15,031
    
    
    
    14,139Provision 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
    
    
    
    13,092Non-interest income
    
    
    3,220
    
    
    
    3,736
    
    
    
    4,000
    
    
    
    3,565Non-interest expenses
    
    
    12,356
    
    
    
    12,060
    
    
    
    11,714
    
    
    
    11,112Income tax expense
    
    
    1,938
    
    
    
    1,637
    
    
    
    2,315
    
    
    
    2,079Net income
    
    $
    3,621
    
    
    $
    4,033
    
    
    $
    3,731
    
    
    $
    3,466Net interest margin
    
    
    4.54
    %
    
    
    4.61
    %
    
    
    4.66
    %
    
    
    4.55
    %Per Share Data:Net income per diluted share
    
    $
    0.47
    
    
    $
    0.53
    
    
    $
    0.49
    
    
    $
    0.46Book value
    
    
    17.42
    
    
    
    17.15
    
    
    
    16.84
    
    
    
    16.40Tangible book value
    
    
    11.63
    
    
    
    11.32
    
    
    
    10.94
    
    
    
    10.46Dividends paid
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.10Weighted average diluted common shares outstanding.
    
    
    7,663,780
    
    
    
    7,619,755
    
    
    
    7,565,276
    
    
    
    7,539,776
 2002Fourth Qtr
    
    Third Qtr
    
    Second Qtr
    
    First Qtr(Dollars in thousands, except per share data)Statement of Operations Data:Interest income
    
    $
    20,802
    
    
    $
    13,404
    
    
    $
    12,968
    
    
    $
    12,672Interest expense
    
    
    6,478
    
    
    
    4,202
    
    
    
    3,787
    
    
    
    3,917Net interest income
    
    
    14,324
    
    
    
    9,202
    
    
    
    9,181
    
    
    
    8,755Provision for loan losses
    
    
    (932
    )
    
    
    (469
    )
    
    
    (519
    )
    
    
    (669
    )Net interest income after provision for loan losses
    
    
    13,392
    
    
    
    8,733
    
    
    
    8,662
    
    
    
    8,086Non-interest income
    
    
    3,564
    
    
    
    3,264
    
    
    
    3,012
    
    
    
    2,857Non-interest expenses
    
    
    11,811
    
    
    
    8,552
    
    
    
    8,042
    
    
    
    7,577Income tax expense
    
    
    1,804
    
    
    
    1,159
    
    
    
    1,388
    
    
    
    1,279Net income
    
    $
    3,341
    
    
    $
    2,286
    
    
    $
    2,244
    
    
    $
    2,087Net interest margin
    
    
    4.56
    %
    
    
    4.15
    %
    
    
    4.68
    %
    
    
    4.63
    %Per Share Data:Net income per diluted share
    
    $
    0.44
    
    
    $
    0.36
    
    
    $
    0.44
    
    
    $
    0.41Book value
    
    
    16.03
    
    
    
    15.74
    
    
    
    12.66
    
    
    
    12.11Tangible book value
    
    
    9.98
    
    
    
    15.69
    
    
    
    12.58
    
    
    
    12.04Dividends paid
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.09Weighted average diluted common shares outstanding.
    
    
    7,515,590
    
    
    
    6,277,164
    
    
    
    5,092,180
    
    
    
    5,073,987
 -3-




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 Basis of Presentation The following represents managements discussion and analysis of First
State Bancorporations consolidated financial condition as of December
31, 2003 and 2002, and our results of consolidated operations for the years
ended December 31, 2003, 2002, and 2001. This discussion should be read in
conjunction with the consolidated financial statements and related footnotes
and the five-year summary of selected financial data. Overview and Outlook For the year ended December 31, 2003, we reported net income of $14.9
million, or $1.95 per diluted share in 2003, an increase of 49.1% over prior
year earnings. Net income for 2002 was $10.0 million, or $1.66 per diluted
share. Earnings growth in 2003 was driven primarily by the increase in net
interest income combined with a fairly stable net interest margin. Highlights for 2003 are as follows:  
    
    We benefited for the entire year from the acquisition of First
Community Industrial Bank (First Community) in late 2002.
    
    Strong loan demand throughout our system resulted in total loans
growing at a 21.1% rate in 2003. The allowance for loan losses as a
percentage of total loans ended the year at 1.15% and loans charged-off
as a percentage of total loans was a modest 0.29%.
    
    Total deposits grew 10.8% during the year which included an $81
million increase (42.6%) in non-interest-bearing deposits.
    
    Mortgage loans originated by us were a record $213 million in
response to an increase in refinancing activity, as long-term interest
rates fell to 40-year lows in 2003.
    
    Two of the six First Community branches in Colorado were relocated or
renovated to better serve our customers, the three Utah branches of
First Community were consolidated into one branch in Salt Lake City to
provide operating efficiencies, and two new branches were added in Santa
Fe and Albuquerque, New Mexico as a result of continued growth in those
markets. During 2003, we also established a new 50,000 square foot
operations center.
    
    Our efficiency ratio decreased to 62.49% in 2003 from 66.44% in the
prior year in spite of significant increases in non-interest expenses
resulting from investments in new personnel and facilities. The
decrease was driven primarily by the growth in total loans during 2003
and the resulting increase in interest income. Assuming the economy remains stable and the yield curve remains relatively
unchanged in 2004, management expects modest balance sheet growth and strong
loan demand. Based on this outlook, we are currently projecting results for
2004 in the range of $2.05  $2.15 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. -4-




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##### Table of Contents



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 2003 and 2002, and found no impairment. Recent Accounting Pronouncements and Developments Note 1 to the consolidated financial statements discusses new accounting
policies we adopted during 2003 and the expected impact of accounting policies
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 2003, 2002 and 2001
is presented below. Additional data on our performance during the past five
years appear in Financial Highlights. Year ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Interest Income
    
    $
    83,713
    
    
    $
    59,846
    
    
    $
    53,630Interest expense
    
    
    22,629
    
    
    
    18,384
    
    
    
    20,478Net interest income
    
    
    61,084
    
    
    
    41,462
    
    
    
    33,152Provision for loan losses
    
    
    (5,543
    )
    
    
    (2,589
    )
    
    
    (2,386
    )Non-interest income
    
    
    14,521
    
    
    
    12,698
    
    
    
    9,414Non-interest expense
    
    
    47,242
    
    
    
    35,982
    
    
    
    27,517Income tax
expense
    
    
    7,969
    
    
    
    5,631
    
    
    
    4,521Net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142
 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. -5-




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##### Table of Contents



During the years ended December 31, our net interest income increased by
$19.6 million to $61.1 million or 47.3% in 2003 from $41.5 million in 2002,
which was an increase of $8.3 million or 25.1% from $33.2 million in 2001.
These increases were due to a $418.5 million or 60.5% increase in average loans
to $1.111 billion in 2003 from $692 million in 2002, and a $194.8 million or
39.2% increase from $497 million in 2001. 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 taking advantage of market dislocations caused by the
acquisition of local competitors and growth in the economy of our market areas.
The increase was offset by a decrease in yield on loans to 6.8% in 2003 from
7.3% in 2002 and 9.0% in 2001. This decrease was a direct result of the
Federal Reserve Bank cutting rates, which has a like effect on the prime rate
to which a significant portion of our loans are tied. During 2003, the cost of interest-bearing liabilities decreased to 2.04%
from 2.44% in 2002 and 3.76% in 2001 as a result of decreasing interest rates
precipitated by the Federal Reserve Banks rate cuts. During 2001, a significant competitor in our New Mexico market area was
acquired by another institution in the market requiring the purchaser to divest
of significant deposits to another institution owned by an out-of-state
company. We geared many of our activities, including marketing efforts, to
capturing market share disrupted by this acquisition. Management believes that
a significant amount of its deposit growth in 2001 was a result of this
transaction and our efforts to capitalize on it. While management believes
that we will continue to increase our market share as a result of this
acquisition, we do not expect our market share growth from this acquisition to
continue at the same rate as that experienced in 2002 and 2001. The decline in interest rates in 2001, 2002, and 2003 had the impact of
compressing our net interest margin because of our asset sensitive position.
If the decline in rates were to halt, this compression should be abated and any
increase in rates by the Federal Reserve would be expected to have the effect
of increasing our net interest margin. The decline in rates also had the
effect of stimulating demand for one- to four-family residential real estate.
That increased demand contributed to the growth in real estate construction
loans and originations of mortgage loans available for sale. With interest
rates at historically low levels, management expects that increases in rates
will occur that will slow the pace of demand for one- to four-family
residential real estate, which would have the effect of reducing the rate of
growth in construction loans and mortgage loans originated for sale. Our net interest margin was 4.59% in 2003, compared in 4.50% in 2002 and
4.93% in 2001. The decrease in the margin from 2001 to 2002 was due to the
Federal Reserve Bank rate cuts which has the effect of reducing interest income
faster than interest expense given the asset sensitive position of our balance
sheet and the significant liquidity maintained in the third quarter of 2002
prior to the acquisition of First Community. The net margin rose from 2002 to
2003 in spite of a Federal Reserve Bank rate cut in the second quarter due to
the 2002 margin having been compressed abnormally by the liquidity maintained
prior to the acquisition, 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. In addition, the 2003 margin benefited from an increased
level of short-term borrowings from the Federal Home Loan Bank at an average
rate less than the average cost of deposits. The net interest margin includes
a reclassification reducing fees associated with originating loans and reducing
non-interest expenses. The reclassification represents direct costs incurred
to originate successful loans. Management believes that any additional interest rate cuts by the Federal
Reserve Bank would reduce our net interest margin. The extent of any reduction
in net interest margin will depend on the amount and timing of any further
Federal Reserve Bank reductions and our ability to manage the cost of
interest-bearing liabilities given our competitive position in the markets we
serve. -6-




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##### Table of Contents



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 31,2003
    
    2002
    
    2001Interest
    
    Average
    
    
    
    
    
    Interest
    
    Average
    
    
    
    
    
    Interest
    
    AverageAverage
    
    Income or
    
    Yield or
    
    Average
    
    Income or
    
    Yield or
    
    Average
    
    Income or
    
    Yield orBalance
    
    Expense
    
    Cost
    
    Balance
    
    Expense
    
    Cost
    
    Balance
    
    Expense
    
    Cost(Dollars in thousands)AssetsLoans and leases:Commercial
    
    $
    115,872
    
    
    $
    6,995
    
    
    
    6.04
    %
    
    $
    91,710
    
    
    $
    6,142
    
    
    
    6.70
    %
    
    $
    83,486
    
    
    $
    7,105
    
    
    
    8.51
    %Real
estate  mortgage
    
    
    842,845
    
    
    
    57,541
    
    
    
    6.83
    
    
    
    467,340
    
    
    
    33,932
    
    
    
    7.26
    
    
    
    303,614
    
    
    
    27,227
    
    
    
    8.97Real estate  construction
    
    
    106,205
    
    
    
    7,273
    
    
    
    6.85
    
    
    
    97,486
    
    
    
    6,847
    
    
    
    7.02
    
    
    
    78,761
    
    
    
    7,035
    
    
    
    8.93Consumer
    
    
    32,673
    
    
    
    3,219
    
    
    
    9.85
    
    
    
    28,435
    
    
    
    2,947
    
    
    
    10.36
    
    
    
    25,077
    
    
    
    2,752
    
    
    
    10.97Mortgage
    
    
    12,564
    
    
    
    706
    
    
    
    5.62
    
    
    
    6,728
    
    
    
    452
    
    
    
    6.72
    
    
    
    5,992
    
    
    
    446
    
    
    
    7.44Other
    
    
    582
    
    
    
    
    
    
    
    
    
    
    
    584
    
    
    
    
    
    
    
    
    
    
    
    555
    
    
    
    
    
    
    
    Total loans and leases
    
    
    1,110,741
    
    
    
    75,734
    
    
    
    6.82
    %
    
    
    692,283
    
    
    
    50,320
    
    
    
    7.27
    %
    
    
    497,485
    
    
    
    44,565
    
    
    
    8.96
    %Allowance for loan and lease losses
    
    
    (13,008
    )
    
    
    
    
    
    
    
    
    
    
    (8,900
    )
    
    
    
    
    
    
    
    
    
    
    (6,924
    )Securities:U.S. government and mortgage-backed
    
    
    190,580
    
    
    
    7,327
    
    
    
    3.84
    
    
    
    182,187
    
    
    
    8,656
    
    
    
    4.75
    
    
    
    144,040
    
    
    
    7,988
    
    
    
    5.55States and political subdivisions:Nontaxable
    
    
    4,478
    
    
    
    181
    
    
    
    4.04
    
    
    
    3,319
    
    
    
    148
    
    
    
    4.47
    
    
    
    3,826
    
    
    
    175
    
    
    
    4.57Taxable
    
    
    488
    
    
    
    9
    
    
    
    1.84
    
    
    
    132
    
    
    
    2
    
    
    
    1.89
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    9,078
    
    
    
    286
    
    
    
    3.15
    
    
    
    2,990
    
    
    
    100
    
    
    
    3.34
    
    
    
    2,252
    
    
    
    104
    
    
    
    4.62Total securities
    
    
    204,624
    
    
    
    7,803
    
    
    
    3.81
    %
    
    
    188,628
    
    
    
    8,906
    
    
    
    4.72
    %
    
    
    150,118
    
    
    
    8,267
    
    
    
    5.51
    %Interest-bearing deposits with other banks
    
    
    5,216
    
    
    
    63
    
    
    
    1.21
    
    
    
    16,785
    
    
    
    261
    
    
    
    1.55
    
    
    
    18,756
    
    
    
    628
    
    
    
    3.35Federal funds sold
    
    
    10,247
    
    
    
    113
    
    
    
    1.10
    
    
    
    22,682
    
    
    
    359
    
    
    
    1.58
    
    
    
    5,722
    
    
    
    170
    
    
    
    2.97Total interest-earning assets
    
    
    1,330,828
    
    
    
    83,713
    
    
    
    6.29
    %
    
    
    920,378
    
    
    
    59,846
    
    
    
    6.50
    %
    
    
    672,081
    
    
    
    53,630
    
    
    
    7.98
    %Non-interest-earning assets:Cash and due from banks
    
    
    47,667
    
    
    
    
    
    
    
    
    
    
    
    36,734
    
    
    
    
    
    
    
    
    
    
    
    25,849Other
    
    
    101,228
    
    
    
    
    
    
    
    
    
    
    
    49,953
    
    
    
    
    
    
    
    
    
    
    
    27,172Total non-interest-earning assets
    
    
    148,895
    
    
    
    
    
    
    
    
    
    
    
    86,687
    
    
    
    
    
    
    
    
    
    
    
    53,021Total assets
    
    $
    1,466,715
    
    
    
    
    
    
    
    
    
    
    $
    998,165
    
    
    
    
    
    
    
    
    
    
    $
    718,178Liabilities and Stockholders EquityDeposits:Interest-bearing demand accounts
    
    $
    199,890
    
    
    $
    907
    
    
    
    0.45
    %
    
    $
    165,716
    
    
    $
    1,260
    
    
    
    0.76
    %
    
    $
    115,773
    
    
    $
    1,564
    
    
    
    1.35
    %Certificates of deposit < $100,000
    
    
    270,101
    
    
    
    7,840
    
    
    
    2.90
    
    
    
    165,482
    
    
    
    5,977
    
    
    
    3.61
    
    
    
    117,985
    
    
    
    6,469
    
    
    
    5.48Certificates of deposit > $100,000
    
    
    238,750
    
    
    
    7,429
    
    
    
    3.11
    
    
    
    181,307
    
    
    
    6,852
    
    
    
    3.78
    
    
    
    146,191
    
    
    
    7,775
    
    
    
    5.32Money market savings accounts
    
    
    145,910
    
    
    
    2,043
    
    
    
    1.40
    
    
    
    84,729
    
    
    
    1,489
    
    
    
    1.76
    
    
    
    51,737
    
    
    
    1,466
    
    
    
    2.83Regular savings accounts
    
    
    58,367
    
    
    
    493
    
    
    
    0.84
    
    
    
    48,964
    
    
    
    605
    
    
    
    1.23
    
    
    
    39,975
    
    
    
    906
    
    
    
    2.27Total interest-bearing deposits
    
    
    913,018
    
    
    
    18,712
    
    
    
    2.05
    %
    
    
    646,198
    
    
    
    16,183
    
    
    
    2.50
    %
    
    
    471,661
    
    
    
    18,180
    
    
    
    3.85
    %Federal funds purchased and securities
sold under agreements to repurchase
    
    
    61,109
    
    
    
    302
    
    
    
    0.49
    
    
    
    65,467
    
    
    
    585
    
    
    
    0.89
    
    
    
    71,997
    
    
    
    2,153
    
    
    
    2.99Short-term FHLB borrowings
    
    
    34,308
    
    
    
    459
    
    
    
    1.34
    
    
    
    5,027
    
    
    
    104
    
    
    
    2.07
    
    
    
    115
    
    
    
    7
    
    
    
    6.09Other borrowings
    
    
    69,696
    
    
    
    1,610
    
    
    
    2.31
    
    
    
    16,225
    
    
    
    421
    
    
    
    2.59
    
    
    
    1,075
    
    
    
    101
    
    
    
    9.40Trust preferred securities
    
    
    32,500
    
    
    
    1,546
    
    
    
    4.76
    
    
    
    20,443
    
    
    
    1,091
    
    
    
    5.34
    
    
    
    296
    
    
    
    37
    
    
    
    12.50Total interest-bearing liabilities
    
    
    1,110,631
    
    
    
    22,629
    
    
    
    2.04
    %
    
    
    753,360
    
    
    
    18,384
    
    
    
    2.44
    %
    
    
    545,144
    
    
    
    20,478
    
    
    
    3.76
    %Non-interest-bearing demand accounts
    
    
    224,680
    
    
    
    
    
    
    
    
    
    
    
    159,219
    
    
    
    
    
    
    
    
    
    
    
    113,402Other non-interest-bearing liabilities
    
    
    5,076
    
    
    
    
    
    
    
    
    
    
    
    3,533
    
    
    
    
    
    
    
    
    
    
    
    4,009Total liabilities
    
    
    1,340,387
    
    
    
    
    
    
    
    
    
    
    
    916,112
    
    
    
    
    
    
    
    
    
    
    
    662,555Stockholders equity
    
    
    126,328
    
    
    
    
    
    
    
    
    
    
    
    82,053
    
    
    
    
    
    
    
    
    
    
    
    55,623Total liabilities and stockholders
equity
    
    $
    1,466,715
    
    
    
    
    
    
    
    
    
    
    $
    998,165
    
    
    
    
    
    
    
    
    
    
    $
    718,178Net interest income
    
    
    
    
    
    $
    61,084
    
    
    
    
    
    
    
    
    
    
    $
    41,462
    
    
    
    
    
    
    
    
    
    
    $
    33,152Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.25
    %
    
    
    
    
    
    
    
    
    
    
    4.06
    %
    
    
    
    
    
    
    
    
    
    
    4.22
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.59
    %
    
    
    
    
    
    
    
    
    
    
    4.50
    %
    
    
    
    
    
    
    
    
    
    
    4.93
    %Ratio of average interest-earning assets to
average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    119.83
    %
    
    
    
    
    
    
    
    
    
    
    122.17
    %
    
    
    
    
    
    
    
    
    
    
    123.29
    %
 -7-




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##### Table of Contents



Loan fees of $4.7 million, $2.5 million, and $1.8 million are included in
interest income for the years ended December 31, 2003, 2002, and 2001,
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. Year ended December 31,2003 vs. 2002
    
    2002 vs. 2001increase (decrease)
    
    increase (decrease)due to changes in
    
    due to changes inVolume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    Total(Dollars in thousands)Interest-earning assetsLoans and leases:Commercial
    
    $
    1,618
    
    
    $
    (765
    )
    
    $
    853
    
    
    $
    700
    
    
    $
    (1,663
    )
    
    $
    (963
    )Real estate-mortgage
    
    
    27,264
    
    
    
    (3,655
    )
    
    
    23,609
    
    
    
    14,682
    
    
    
    (7,977
    )
    
    
    6,705Real estate-construction
    
    
    612
    
    
    
    (186
    )
    
    
    426
    
    
    
    1,673
    
    
    
    (1,861
    )
    
    
    (188
    )Consumer
    
    
    439
    
    
    
    (167
    )
    
    
    272
    
    
    
    369
    
    
    
    (174
    )
    
    
    195Mortgage
    
    
    392
    
    
    
    (138
    )
    
    
    254
    
    
    
    55
    
    
    
    (49
    )
    
    
    6Total loans and leases
    
    
    30,325
    
    
    
    (4,911
    )
    
    
    25,414
    
    
    
    17,479
    
    
    
    (11,724
    )
    
    
    5,755Securities:U.S. government
    
    
    399
    
    
    
    (1,728
    )
    
    
    (1,329
    )
    
    
    2,116
    
    
    
    (1,448
    )
    
    
    668States and political subdivisions:Non-taxable
    
    
    52
    
    
    
    (19
    )
    
    
    33
    
    
    
    (23
    )
    
    
    (4
    )
    
    
    (27
    )Taxable
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    2
    
    
    
    
    
    
    
    2Other
    
    
    204
    
    
    
    (18
    )
    
    
    186
    
    
    
    34
    
    
    
    (38
    )
    
    
    (4
    )Total securities
    
    
    662
    
    
    
    (1,765
    )
    
    
    (1,103
    )
    
    
    2,129
    
    
    
    (1,490
    )
    
    
    639Interest-bearing deposits with other banks
    
    
    (180
    )
    
    
    (18
    )
    
    
    (198
    )
    
    
    (66
    )
    
    
    (301
    )
    
    
    (367
    )Federal funds sold
    
    
    (196
    )
    
    
    (50
    )
    
    
    (246
    )
    
    
    504
    
    
    
    (315
    )
    
    
    189Total interest-earning assets
    
    
    30,611
    
    
    
    (6,744
    )
    
    
    23,867
    
    
    
    20,046
    
    
    
    (13,830
    )
    
    
    6,216Interest-bearing liabilitiesDeposits:Interest-bearing demand accounts
    
    
    260
    
    
    
    (613
    )
    
    
    (353
    )
    
    
    675
    
    
    
    (979
    )
    
    
    (304
    )Certificates of deposit < $100,000
    
    
    3,779
    
    
    
    (1,916
    )
    
    
    1,863
    
    
    
    2,604
    
    
    
    (3,096
    )
    
    
    (492
    )Certificates of deposit > $100,000
    
    
    2,171
    
    
    
    (1,594
    )
    
    
    577
    
    
    
    1,868
    
    
    
    (2,791
    )
    
    
    (923
    )Money market savings accounts
    
    
    1,075
    
    
    
    (521
    )
    
    
    554
    
    
    
    935
    
    
    
    (912
    )
    
    
    23Regular savings accounts
    
    
    116
    
    
    
    (228
    )
    
    
    (112
    )
    
    
    204
    
    
    
    (505
    )
    
    
    (301
    )Total interest-bearing deposits
    
    
    7,401
    
    
    
    (4,872
    )
    
    
    2,529
    
    
    
    6,286
    
    
    
    (8,283
    )
    
    
    (1,997
    )Federal funds purchased and securities sold
under agreements to repurchase
    
    
    (39
    )
    
    
    (244
    )
    
    
    (283
    )
    
    
    (195
    )
    
    
    (1,373
    )
    
    
    (1,568
    )Short-term FHLB borrowings
    
    
    606
    
    
    
    (251
    )
    
    
    355
    
    
    
    299
    
    
    
    (202
    )
    
    
    97Other borrowings
    
    
    1,387
    
    
    
    (198
    )
    
    
    1,189
    
    
    
    1,423
    
    
    
    (1,103
    )
    
    
    320Trust preferred securities
    
    
    643
    
    
    
    (188
    )
    
    
    455
    
    
    
    2,518
    
    
    
    (1,464
    )
    
    
    1,054Total interest-bearing liabilities
    
    
    9,998
    
    
    
    (5,753
    )
    
    
    4,245
    
    
    
    10,331
    
    
    
    (12,425
    )
    
    
    (2,094
    )Total increase (decrease) in net interest income
    
    $
    20,613
    
    
    $
    (991
    )
    
    $
    19,622
    
    
    $
    9,715
    
    
    $
    (1,405
    )
    
    $
    8,310
 -8-




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##### Table of Contents



Non-interest Income An analysis of the components of non-interest income is presented in the
table below: Year Ended December 31
    
    $ Change
    
    % Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001
    
    2003-2002
    
    2002-2001(Dollars in thousands)Service charges on deposit accounts
    
    $
    4,225
    
    
    $
    3,439
    
    
    $
    2,916
    
    
    $
    786
    
    
    $
    523
    
    
    
    23
    %
    
    
    18
    %Credit card transaction fees
    
    
    3,938
    
    
    
    4,195
    
    
    
    3,209
    
    
    
    (257
    )
    
    
    986
    
    
    
    (6
    )
    
    
    31Gain on sale of mortgage loans
    
    
    3,493
    
    
    
    2,768
    
    
    
    1,815
    
    
    
    725
    
    
    
    953
    
    
    
    26
    
    
    
    53Other
    
    
    2,865
    
    
    
    2,296
    
    
    
    1,474
    
    
    
    569
    
    
    
    822
    
    
    
    25
    
    
    
    56Total non-interest income
    
    $
    14,521
    
    
    $
    12,698
    
    
    $
    9,414
    
    
    $
    1,823
    
    
    $
    3,284
    
    
    
    14
    %
    
    
    35
    %
 The increases in service charges on deposit accounts are directly related
to the increases in total deposits from 2001 to 2003. The increase in 2003 was
also driven by the 43% increase in non-interest-bearing deposits over 2002. Credit card transaction volumes decreased in 2003 from 2002 levels
resulting in lower fee income. We originated a record $213 million in mortgage loans during 2003 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. We expect new originations to increase in 2004 from the levels in
the last half of 2003 due to a new emphasis on mortgage lending in the Colorado
markets; 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: Year Ended December 31
    
    $ Change
    
    % Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001
    
    2003-2002
    
    2002-2001(Dollars in thousands)Salaries and employee benefits
    
    $
    20,570
    
    
    $
    15,421
    
    
    $
    11,559
    
    
    $
    5,149
    
    
    $
    3,862
    
    
    
    33
    %
    
    
    33
    %Occupancy
    
    
    6,267
    
    
    
    4,353
    
    
    
    3,445
    
    
    
    1,914
    
    
    
    908
    
    
    
    44
    
    
    
    26Data processing
    
    
    2,412
    
    
    
    2,011
    
    
    
    1,369
    
    
    
    401
    
    
    
    642
    
    
    
    20
    
    
    
    47Credit card interchange
    
    
    1,637
    
    
    
    2,004
    
    
    
    1,650
    
    
    
    (367
    )
    
    
    354
    
    
    
    (18
    )
    
    
    21Equipment
    
    
    3,697
    
    
    
    2,781
    
    
    
    2,113
    
    
    
    916
    
    
    
    668
    
    
    
    33
    
    
    
    32Legal, accounting, and consulting
    
    
    1,128
    
    
    
    816
    
    
    
    583
    
    
    
    312
    
    
    
    233
    
    
    
    38
    
    
    
    40Marketing
    
    
    2,190
    
    
    
    2,109
    
    
    
    1,496
    
    
    
    81
    
    
    
    613
    
    
    
    4
    
    
    
    41Telephone
    
    
    1,534
    
    
    
    887
    
    
    
    706
    
    
    
    647
    
    
    
    181
    
    
    
    73
    
    
    
    26Delivery
    
    
    1,007
    
    
    
    432
    
    
    
    306
    
    
    
    575
    
    
    
    126
    
    
    
    133
    
    
    
    41Other
    
    
    6,800
    
    
    
    5,168
    
    
    
    4,290
    
    
    
    1,632
    
    
    
    878
    
    
    
    32
    
    
    
    20Total non-interest expense.
    
    $
    47,242
    
    
    $
    35,982
    
    
    $
    27,517
    
    
    $
    11,260
    
    
    $
    8,465
    
    
    
    31
    %
    
    
    31
    %
 The increases in non-interest expenses are due to our overall growth and a
full year of impact of the First Community acquisition in 2002. The increase
in 2003 in salaries and employee benefits includes additional personnel hired
in Colorado to support our focus on commercial business customers and higher
commissions related to the increased mortgage loan production during the year. Occupancy and equipment expense increased in 2003 over and above the full
year impact from First Community as a result of implementing a strategy to
relocate and/or renovate the First Community branch facilities and the addition
of three new facilities 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. At December 31, 2003, construction was in
progress to relocate and/or remodel three of the remaining branches in Colorado
and a second new branch in Santa Fe, New Mexico. These projects are expected
to be completed in the second quarter of 2004. A new building has been
acquired in Salt Lake City for the relocation of that branch with a planned
completion date in the second quarter of 2004. -9-




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##### Table of Contents



Income Tax Expense. Income tax expense increased to $8.0 million in 2003, from $5.6 million in
2002 and $4.5 million in 2001. The effective tax rate, computed by dividing
income tax expense by income before taxes, was 34.9% in 2003, compared to 36.1%
in 2002 and 35.7% in 2001. 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 2004. 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. For the years ended December 31,2003
    
    2002
    
    2001Return on average assets
    
    
    1.01
    %
    
    
    1.00
    %
    
    
    1.13
    %Return on average equity
    
    
    11.76
    
    
    
    12.14
    
    
    
    14.64Dividend payout ratio
    
    
    21.62
    
    
    
    21.61
    
    
    
    20.47Average equity to average assets
    
    
    8.61
    
    
    
    8.22
    
    
    
    7.75
 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: Year Ended December 31
    
    $ Change
    
    % Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001
    
    2003-2002
    
    2002-2001(Dollars in thousands)Investments
    
    $
    235,120
    
    
    $
    194,094
    
    
    $
    187,422
    
    
    $
    41,026
    
    
    $
    6,672
    
    
    
    21
    %
    
    
    4
    %Loans
    
    
    1,231,485
    
    
    
    1,017,025
    
    
    
    548,722
    
    
    
    214,460
    
    
    
    468,303
    
    
    
    21
    
    
    
    85Deposits
    
    
    1,195,875
    
    
    
    1,079,684
    
    
    
    685,022
    
    
    
    116,191
    
    
    
    394,662
    
    
    
    11
    
    
    
    58Borrowings
    
    
    249,322
    
    
    
    113,174
    
    
    
    8,781
    
    
    
    136,148
    
    
    
    104,393
    
    
    
    120
    
    
    
    1,189
 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. 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. -10-




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##### Table of Contents



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, 2003, our cumulative interest rate GAP for the period
up to three months was a positive $277.4 million and for the period up to one
year was a positive $290.6 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 2003, we experienced a modest increase in deposits as a result of
our strategy to capture market. However, our loan growth significantly
exceeded our deposit growth and as a result, our loan to deposit ratio
increased to 103% at December 31, 2003, from 94% at December 31, 2002, during a
period of declining interest rates. Management intends to maintain or slightly
reduce the current loan to deposit ratio, which should keep our exposure to
declining interest rates at a minimum. 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, 2003. 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. ThreeLess than
    
    months tothree
    
    less than
    
    One to five
    
    Over fivemonths
    
    one year
    
    years
    
    years
    
    Total(Dollars in thousands)Interest-earning assets:Investment securities
    
    $
    36,878
    
    
    $
    63,980
    
    
    $
    87,166
    
    
    $
    47,096
    
    
    $
    235,120Interest-bearing deposits with other banks
    
    
    33,524
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,524Loans:Commercial
    
    
    114,869
    
    
    
    21,982
    
    
    
    22,098
    
    
    
    1,801
    
    
    
    160,750Real estate
    
    
    531,601
    
    
    
    199,579
    
    
    
    271,079
    
    
    
    37,740
    
    
    
    1,039,999Consumer
    
    
    9,998
    
    
    
    6,632
    
    
    
    13,305
    
    
    
    801
    
    
    
    30,736Total interest-earning assets
    
    
    726,870
    
    
    
    292,173
    
    
    
    393,648
    
    
    
    87,438
    
    
    
    1,500,129Interest-bearing liabilities:Savings and NOW accounts
    
    
    138,818
    
    
    
    
    
    
    
    
    
    
    
    281,842
    
    
    
    420,660Certificates of deposit of $100,000 or more
    
    
    63,007
    
    
    
    118,014
    
    
    
    84,351
    
    
    
    1,884
    
    
    
    267,256Other time accounts
    
    
    60,536
    
    
    
    97,978
    
    
    
    77,936
    
    
    
    1,940
    
    
    
    238,390Other interest-bearing liabilities
    
    
    187,155
    
    
    
    62,907
    
    
    
    62,946
    
    
    
    
    
    
    
    313,008Total interest-bearing liabilities
    
    
    449,516
    
    
    
    278,899
    
    
    
    225,233
    
    
    
    285,666
    
    
    
    1,239,314Interest rate GAP
    
    $
    277,354
    
    
    $
    13,274
    
    
    $
    168,415
    
    
    $
    (198,228
    )
    
    $
    260,815Cumulative interest rate GAP at December 31, 2003
    
    $
    277,354
    
    
    $
    290,628
    
    
    $
    459,043
    
    
    $
    260,815Cumulative GAP ratio at December 31, 2003
    
    
    1.62
    
    
    
    1.40
    
    
    
    1.48
    
    
    
    1.21
 -11-




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##### Table of Contents



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, 2003, 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, 2003. Change in Interest Rates
    
    Net Interest Income
    
    Market Value of Portfolio Equity+200
    
    
    1
    %
    
    
    (23
    )%+100
    
    
    -
    %
    
    
    (13
    )%0
    
    
    (2
    )%
    
    
    6
    %-100
    
    
    (2
    )%
    
    
    33
    %-200
    
    
    (3
    )%
    
    
    68
    %
 Investment Portfolio The following table provides the carrying value of our investment
portfolio at each of the dates indicated. At December 31, 2003, the market
value exceeded the carrying value by approximately $245,000 and at December 31,
2002, the market value exceeded the carrying value by approximately $2.3
million. We do not own a 10 percent or greater position in any single issuer. As of December 31,2003
    
    2002
    
    2001(Dollars in thousands)U.S. Treasury securities
    
    $
    499
    
    
    $
    499
    
    
    $
    498U.S. government agency securities
    
    
    124,625
    
    
    
    121,227
    
    
    
    161,603Mortgage-backed securities
    
    
    85,208
    
    
    
    64,139
    
    
    
    19,539Obligations of states and political subdivisions
    
    
    10,100
    
    
    
    3,665
    
    
    
    3,503Other securities
    
    
    14,688
    
    
    
    4,564
    
    
    
    2,279Total investment securities
    
    $
    235,120
    
    
    $
    194,094
    
    
    $
    187,422
 The table below provides the carrying values, maturities, and weighted
average yield of our investment portfolio as of December 31, 2003. Average
    
    WeightedCarrying
    
    maturity
    
    averagevalue
    
    (years)
    
    yields(Dollars in thousands)U.S. Treasury securities
    
    $
    499
    
    
    
    0.14
    
    
    
    0.98
    %U.S. government agency securitiesOne year or less
    
    
    10,143
    
    
    
    0.41
    
    
    
    4.22After one through five years
    
    
    112,476
    
    
    
    4.26
    
    
    
    3.59After five through ten years
    
    
    2,006
    
    
    
    5.22
    
    
    
    3.99Total U.S. government agency securities
    
    
    124,625
    
    
    
    3.96
    
    
    
    3.65Mortgage-backed securitiesAfter one through five years
    
    
    837
    
    
    
    3.19
    
    
    
    6.54After five through ten years
    
    
    28,906
    
    
    
    8.41
    
    
    
    4.76After ten years
    
    
    55,465
    
    
    
    15.95
    
    
    
    4.94Total mortgage-backed securities
    
    
    85,208
    
    
    
    13.26
    
    
    
    4.90Obligations of states and political subdivisionsOne year or less
    
    
    245
    
    
    
    0.65
    
    
    
    4.82After one through five years
    
    
    3,083
    
    
    
    3.42
    
    
    
    4.08After five through ten years
    
    
    4,034
    
    
    
    8.44
    
    
    
    3.61After ten years
    
    
    2,738
    
    
    
    13.34
    
    
    
    3.89Total states and political subdivisions securities
    
    
    10,100
    
    
    
    8.05
    
    
    
    3.86Other securities
    
    
    14,688
    
    
    
    
    
    
    
    1.95Total investment securities
    
    $
    235,120
    
    
    
    7.73
    
    
    
    4.00
    %
 The yields shown above have not been computed on a tax equivalent basis for tax exempt obligations. -12-




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##### Table of Contents



Loan and Lease Portfolio The following table presents the amount of our loans and leases, by
category, at the dates indicated. As of December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Commercial
    
    $
    160,261
    
    
    
    13.0
    %
    
    $
    100,813
    
    
    
    9.9
    %
    
    $
    90,187
    
    
    
    16.4
    %
    
    $
    82,901
    
    
    
    18.0
    %
    
    $
    65,702
    
    
    
    15.3
    %Real estate  commercial
    
    
    577,835
    
    
    
    46.9
    
    
    
    422,643
    
    
    
    41.6
    
    
    
    250,972
    
    
    
    45.8
    
    
    
    215,934
    
    
    
    46.9
    
    
    
    181,324
    
    
    
    42.3Real estate  one- to four-family
    
    
    338,272
    
    
    
    27.5
    
    
    
    337,241
    
    
    
    33.1
    
    
    
    70,940
    
    
    
    12.9
    
    
    
    63,536
    
    
    
    13.8
    
    
    
    33,520
    
    
    
    7.8Real estate  construction
    
    
    116,725
    
    
    
    9.5
    
    
    
    100,458
    
    
    
    9.9
    
    
    
    98,086
    
    
    
    17.9
    
    
    
    68,282
    
    
    
    14.9
    
    
    
    65,844
    
    
    
    15.4Consumer and other
    
    
    30,736
    
    
    
    2.5
    
    
    
    35,555
    
    
    
    3.5
    
    
    
    25,557
    
    
    
    4.6
    
    
    
    24,451
    
    
    
    5.3
    
    
    
    20,203
    
    
    
    4.7Mortgage loans available for sale
    
    
    7,656
    
    
    
    0.6
    
    
    
    20,315
    
    
    
    2.0
    
    
    
    12,980
    
    
    
    2.4
    
    
    
    4,980
    
    
    
    1.1
    
    
    
    995
    
    
    
    0.3Leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,050
    
    
    
    14.2Total loans and leases
    
    $
    1,231,485
    
    
    
    100.0
    %
    
    $
    1,017,025
    
    
    
    100.0
    %
    
    $
    548,722
    
    
    
    100.0
    %
    
    $
    460,084
    
    
    
    100.0
    %
    
    $
    428,638
    
    
    
    100.0
    %
 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. In light of the strong loan
growth in 2003 and the loan to deposit ratio of 103% at December 31, 2003,
management may consider additional loan sales to increase our liquidity
position. On March 1, 2000, we closed the sale of the assets of our subsidiary
banks commercial leasing division. The sale resulted in $64.4 million of
leases being sold. The gain on the sale was approximately $879,000, net of
transaction costs. The proceeds from the sale were used to purchase investment
securities, fund loan demand, and reduce short-term borrowings. The following table presents the aggregate maturities of loans in each
major category of our loan portfolio at December 31, 2003. Actual maturities
may differ from the contractual maturities shown as a result of renewals and
prepayments. Less than
    
    One to five
    
    Over fiveone year
    
    years
    
    years
    
    Total(Dollars in thousands)Fixed-rate loans:Commercial
    
    $
    20,742
    
    
    $
    18,786
    
    
    $
    817
    
    
    $
    40,345Real estate
    
    
    35,700
    
    
    
    43,862
    
    
    
    26,103
    
    
    
    105,665Consumer
    
    
    12,596
    
    
    
    13,257
    
    
    
    769
    
    
    
    26,622Mortgage loans available for sale
    
    
    7,656
    
    
    
    
    
    
    
    
    
    
    
    7,656Total fixed-rate loans
    
    
    76,694
    
    
    
    75,905
    
    
    
    27,689
    
    
    
    180,288Variable-rate loans:Commercial
    
    
    116,109
    
    
    
    3,312
    
    
    
    495
    
    
    
    119,916Real estate
    
    
    687,824
    
    
    
    227,217
    
    
    
    12,126
    
    
    
    927,167Consumer
    
    
    4,034
    
    
    
    48
    
    
    
    32
    
    
    
    4,114Total variable-rate loans
    
    
    807,967
    
    
    
    230,577
    
    
    
    12,653
    
    
    
    1,051,197Total loans
    
    $
    884,661
    
    
    $
    306,482
    
    
    $
    40,342
    
    
    $
    1,231,485
 -13-




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##### Table of Contents



Nonperforming Assets Nonperforming assets consist of loans and leases past due 90 days or more,
non-accrual loans and leases, restructured loans and leases, 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,
2003, $1.2 million 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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Loans and leases past due 90 days or more
    
    $
    13
    
    
    $
    721
    
    
    $
    3
    
    
    $
    6
    
    
    $
    84Non-accrual loans and leases
    
    
    12,515
    
    
    
    10,241
    
    
    
    2,480
    
    
    
    1,937
    
    
    
    2,725Total nonperforming loans and leases
    
    
    12,528
    
    
    
    10,962
    
    
    
    2,483
    
    
    
    1,943
    
    
    
    2,809Other real estate owned
    
    
    1,557
    
    
    
    908
    
    
    
    272
    
    
    
    2,016
    
    
    
    1,917Total nonperforming assets
    
    $
    14,085
    
    
    $
    11,870
    
    
    $
    2,755
    
    
    $
    3,959
    
    
    $
    4,726Allowance for loan and lease losses
    
    $
    14,121
    
    
    $
    11,838
    
    
    $
    7,207
    
    
    $
    6,308
    
    
    $
    5,387Potential problem assets
    
    $
    15,115
    
    
    $
    23,286
    
    
    $
    13,331
    
    
    $
    5,053
    
    
    $
    5,133Ratio of total nonperforming assets to total assets
    
    
    0.86
    %
    
    
    0.86
    %
    
    
    0.33
    %
    
    
    0.61
    %
    
    
    0.83
    %Ratio of total nonperforming loans and leases to total loans
and leases
    
    
    1.02
    %
    
    
    1.08
    %
    
    
    0.45
    %
    
    
    0.42
    %
    
    
    0.66
    %Ratio of allowance for loan and lease losses to total
nonperforming loans and leases
    
    
    113
    %
    
    
    108
    %
    
    
    290
    %
    
    
    325
    %
    
    
    192
    %
 Loans on which the accrual of interest has been discontinued amounted to
$12.5 million, $10.2 million, and $2.5 million at December 31, 2003, 2002, and
2001, respectively. If interest on such loans had been accrued, such income
would have been approximately $495,000 in 2003, $203,000 in 2002, and $70,000 in
2001. Actual interest income on those loans, which is recorded only when
received, amounted to zero in 2003, 2002, and 2001. 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 -14-




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##### Table of Contents



The following table sets forth information regarding changes in our
allowance for loan and lease losses for the periods indicated. As of December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Allowance for loan and lease losses, beginning of period
    
    $
    11,838
    
    
    $
    7,207
    
    
    $
    6,308
    
    
    $
    5,387
    
    
    $
    3,875Charge-offs:Commercial and other
    
    
    445
    
    
    
    598
    
    
    
    1,034
    
    
    
    1,153
    
    
    
    1,315Real estate loans
    
    
    2,349
    
    
    
    358
    
    
    
    338
    
    
    
    664
    
    
    
    256Consumer loans
    
    
    766
    
    
    
    298
    
    
    
    201
    
    
    
    112
    
    
    
    101Credit cards
    
    
    142
    
    
    
    174
    
    
    
    130
    
    
    
    23
    
    
    
    129Leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    191Total charge-offs
    
    
    3,702
    
    
    
    1,428
    
    
    
    1,703
    
    
    
    2,056
    
    
    
    1,992Recoveries:Commercial and other
    
    
    115
    
    
    
    121
    
    
    
    45
    
    
    
    367
    
    
    
    255Real estate loans
    
    
    141
    
    
    
    57
    
    
    
    47
    
    
    
    27
    
    
    
    50Consumer loans
    
    
    146
    
    
    
    93
    
    
    
    100
    
    
    
    70
    
    
    
    55Credit cards
    
    
    40
    
    
    
    34
    
    
    
    24
    
    
    
    36
    
    
    
    31Leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    38Total recoveries
    
    
    442
    
    
    
    305
    
    
    
    216
    
    
    
    502
    
    
    
    429Net charge-offs
    
    
    3,260
    
    
    
    1,123
    
    
    
    1,487
    
    
    
    1,554
    
    
    
    1,563Provision for loan and lease losses
    
    
    5,543
    
    
    
    2,589
    
    
    
    2,386
    
    
    
    2,475
    
    
    
    3,075Allowance related to acquired loans
    
    
    
    
    
    
    3,165
    
    
    
    
    
    
    
    
    
    
    
    Allowance for loan and lease losses, end of period
    
    $
    14,121
    
    
    $
    11,838
    
    
    $
    7,207
    
    
    $
    6,308
    
    
    $
    5,387As a percentage of average total loans and leases:Net charge-offs
    
    
    0.29
    %
    
    
    0.16
    %
    
    
    0.30
    %
    
    
    0.37
    %
    
    
    0.40
    %Provision for loan and lease losses
    
    
    0.50
    
    
    
    0.37
    
    
    
    0.48
    
    
    
    0.58
    
    
    
    0.79Allowance for loan and lease losses
    
    
    1.27
    
    
    
    1.71
    
    
    
    1.45
    
    
    
    1.48
    
    
    
    1.39As a percentage of total loans and leases at year-end:Allowance for loan and lease losses
    
    
    1.15
    
    
    
    1.16
    
    
    
    1.31
    
    
    
    1.37
    
    
    
    1.26As a multiple of net charge-offs:Allowance for loan and lease losses
    
    
    4.33
    
    
    
    10.54
    
    
    
    4.85
    
    
    
    4.06
    
    
    
    3.45Income before income taxes and provision for loan
and lease losses
    
    
    8.70
    
    
    
    16.19
    
    
    
    10.13
    
    
    
    8.72
    
    
    
    7.12
 Specific allowances are provided for individual loans and leases where
ultimate collection is considered questionable by management after reviewing
the current status of loans and leases 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 and lease 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 and leases in each category as a percentage of
total loans and leases. 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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofloans and
    
    
    
    
    
    loans and
    
    
    
    
    
    loans and
    
    
    
    
    
    loans and
    
    
    
    
    
    loans andleases to
    
    
    
    
    
    leases to
    
    
    
    
    
    leases to
    
    
    
    
    
    leases to
    
    
    
    
    
    leases toAmount of
    
    total loans
    
    Amount of
    
    total loans
    
    Amount of
    
    total loans
    
    Amount of
    
    total loans
    
    Amount of
    
    total loansallowance
    
    and leases
    
    allowance
    
    and leases
    
    allowance
    
    and leases
    
    allowance
    
    and leases
    
    allowance
    
    and leasesCommercial and unallocated
portion
    
    $
    10,332
    
    
    
    13.01
    %
    
    $
    10,679
    
    
    
    9.91
    %
    
    $
    6,376
    
    
    
    16.40
    %
    
    $
    3,604
    
    
    
    18.02
    %
    
    $
    3,876
    
    
    
    15.30
    %Real estate
    
    
    3,028
    
    
    
    84.49
    
    
    
    614
    
    
    
    86.59
    
    
    
    607
    
    
    
    79.00
    
    
    
    2,586
    
    
    
    61.83
    
    
    
    710
    
    
    
    65.80Leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.84
    
    
    
    305
    
    
    
    14.20Consumer
    
    
    761
    
    
    
    2.50
    
    
    
    545
    
    
    
    3.50
    
    
    
    224
    
    
    
    4.60
    
    
    
    118
    
    
    
    5.31
    
    
    
    496
    
    
    
    4.70Total allowance for loan
and lease losses
    
    $
    14,121
    
    
    
    100.00
    %
    
    $
    11,838
    
    
    
    100.00
    %
    
    $
    7,207
    
    
    
    100.00
    %
    
    $
    6,308
    
    
    
    100.00
    %
    
    $
    5,387
    
    
    
    100.00
    %
 -15-




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##### Table of Contents



The provision for loan losses increased to $5.5 million in 2003, from $2.6
million in 2002 and $2.4 million in 2001. 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
and leases were $3.3 million in 2003, $1.1 million in 2002, and $1.5 million in
2001. The percentage of net charge-offs to average loans was 0.29% in 2003,
0.16% in 2002, and 0.30% in 2001. 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 31,2003
    
    2002
    
    2001(Dollars in thousands)Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageAverage
    
    Interest
    
    Average
    
    Interest
    
    Average
    
    InterestBalance
    
    Rate
    
    Balance
    
    Rate
    
    Balance
    
    RateInterest-bearing demand accounts
    
    $
    199,890
    
    
    
    0.45
    %
    
    $
    165,716
    
    
    
    0.76
    %
    
    $
    115,773
    
    
    
    1.35
    %Certificates of deposit
    
    
    508,851
    
    
    
    3.00
    
    
    
    346,789
    
    
    
    3.70
    
    
    
    264,176
    
    
    
    5.39Money market savings accounts
    
    
    145,910
    
    
    
    1.40
    
    
    
    84,729
    
    
    
    1.76
    
    
    
    51,737
    
    
    
    2.83Regular savings accounts
    
    
    58,367
    
    
    
    0.84
    
    
    
    48,964
    
    
    
    1.23
    
    
    
    39,975
    
    
    
    2.27Non-interest-bearing demand
accounts
    
    
    224,680
    
    
    
    
    
    
    
    159,219
    
    
    
    
    
    
    
    113,402
    
    
    
    Totals
    
    $
    1,137,698
    
    
    
    2.05
    %
    
    $
    805,417
    
    
    
    2.50
    %
    
    $
    585,063
    
    
    
    3.85
    %
 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 31,2003
    
    2002
    
    2001(Dollars in thousands)Three months or less
    
    $
    63,007
    
    
    
    23.58
    %
    
    $
    52,584
    
    
    
    23.75
    %
    
    $
    68,615
    
    
    
    38.96
    %Three through twelve months
    
    
    118,014
    
    
    
    44.16
    
    
    
    107,629
    
    
    
    48.61
    
    
    
    81,535
    
    
    
    46.30Over twelve months
    
    
    86,235
    
    
    
    32.26
    
    
    
    61,189
    
    
    
    27.64
    
    
    
    25,955
    
    
    
    14.74Totals
    
    $
    267,256
    
    
    
    100.00
    %
    
    $
    221,402
    
    
    
    100.00
    %
    
    $
    176,105
    
    
    
    100.00
    %
 Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase totaled approximately $63.7
million, $70.8 million, and $72.3 million at December 31, 2003, 2002, and 2001,
respectively. The weighted average interest rate on securities sold under
agreements to repurchase was 0.33%, 0.49%, and 1.15% at December 31, 2003,
2002, and 2001, respectively. Securities sold under agreements to repurchase are summarized as follows: Years ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Balance
    
    $
    63,686
    
    
    $
    70,764
    
    
    $
    72,258Weighted average interest rate
    
    
    0.33
    %
    
    
    0.49
    %
    
    
    1.15
    %Maximum amount outstanding at any month end
    
    $
    63,686
    
    
    $
    70,764
    
    
    $
    85,832Average balance outstanding during the period
    
    $
    54,368
    
    
    $
    65,339
    
    
    $
    71,833Weighted average interest rate during the period
    
    
    0.41
    %
    
    
    0.89
    %
    
    
    2.68
    %
 -16-




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##### Table of Contents



Short-term FHLB Borrowings Short-term FHLB borrowings totaled approximately $110 million, $20
million, and zero at December 31, 2003, 2002, and 2001, respectively. The
weighted average interest rate on short-term FHLB borrowings was 1.04%, 1.77%,
and zero at December 31, 2003, 2002, and 2001, respectively. Short-term FHLB borrowings are summarized as follows: Years ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Balance
    
    $
    110,000
    
    
    $
    20,000
    
    
    $
    Weighted average interest rate
    
    
    1.04
    %
    
    
    1.77
    %
    
    
    Maximum amount outstanding at any month end
    
    $
    110,000
    
    
    $
    20,000
    
    
    
    Average balance outstanding during the period
    
    $
    34,308
    
    
    $
    5,027
    
    
    $
    115Weighted average interest rate during the period
    
    
    1.34
    %
    
    
    2.07
    %
    
    
    6.09
    %
 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
$1.196 billion at December 31, 2003, from 1.080 billion at December 31, 2002.
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 $1.217 billion at December 31, 2003 from $1.005
billion as of December 31, 2002. During 2003, real estate loans increased by
$172.5 million, commercial loans increased by $59.4 million, consumer loans
decreased by $4.8 million, and mortgage loans available for sale decreased by
$12.7 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 and growth in the economy of our market
area. We maintain an investment securities portfolio made up of U.S. Treasury,
U.S. agency, 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 2003, our loan growth significantly outpaced the growth in deposits
resulting in a significant increase in borrowings from the Federal Home Loan
Bank. The repayment of the additional borrowings in 2003 is laddered out to
April 2005 and therefore refinancing these borrowings will be subject to
prevailing market rates. At December 31, 2003, we had additional borrowing
capacity at the Federal Home Loan Bank of $57 million as well as unused Federal
Funds lines at other banks of $75 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 trust preferred securities, 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.
Borrowings 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. -17-




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##### Table of Contents



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, 2003. See notes 8,
9, and 13 of the notes to the consolidated financial statements. Payments Due by Period(Dollars in thousands)One Year
    
    One to
    
    Four to Five
    
    AfterContractual Cash Obligations
    
    Total
    
    and Less
    
    Three Years
    
    Years
    
    Five YearsFHLB advances
    
    $
    215,952
    
    
    $
    153,926
    
    
    $
    58,137
    
    
    $
    3,889
    
    
    $
    Note Payable
    
    
    870
    
    
    
    44
    
    
    
    97
    
    
    
    108
    
    
    
    621Operating leases
    
    
    37,723
    
    
    
    4,137
    
    
    
    7,667
    
    
    
    6,905
    
    
    
    19,014Capital expenditures
    
    
    5,646
    
    
    
    5,646
    
    
    
    
    
    
    
    
    
    
    
    Trust preferred securities
    
    
    32,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,500Total contractual cash obligations
    
    $
    292,691
    
    
    $
    163,753
    
    
    $
    65,901
    
    
    $
    10,902
    
    
    $
    52,135
 Amount of Commitment Expiration Per Period(Dollars in thousands)Unfunded
    
    Less than
    
    One to
    
    Four to Five
    
    AfterCommercial Commitments
    
    Commitments
    
    One Year
    
    Three Years
    
    Years
    
    Five YearsLines of credit
    
    $
    239,937
    
    
    $
    139,584
    
    
    $
    50,359
    
    
    $
    6,966
    
    
    $
    43,028Standby letters of credit
    
    
    20,247
    
    
    
    16,162
    
    
    
    3,678
    
    
    
    407
    
    
    
    Total commercial commitments
    
    $
    260,184
    
    
    $
    155,746
    
    
    $
    54,037
    
    
    $
    7,373
    
    
    $
    43,028
 Capital Resources Our total stockholders equity increased to $132.4 million at December 31,
2003 from $117.5 million at December 31, 2002. Of the $14.9 million increase,
$14.9 million was produced by earnings, $2.8 million due to stock issuances
related to stock options, restricted stock, the dividend re-investment plan,
and the employee benefit plan, $1.8 million was generated from the tax benefit
of exercised options, these increases were offset by stock repurchases of
$331,000, stock held in the deferred compensation plan of $557,000, $386,000 as
a result of the decrease in market value of securities available for sale, and
dividend payments of $3.2 million. Management currently intends to continue to retain a major portion of our
earnings to support anticipated growth. As of December 31, 2003, we were
considered well capitalized based on the regulatory capital requirements as
further disclosed in note 11 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. -18-




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##### Table of Contents



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, competition, loan and deposit growth, timing of
new branch openings, expansion opportunities, 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 that 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. -19-




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##### Table of Contents



INDEPENDENT AUDITORS REPORT 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, 2003 and 2002, 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, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. As discussed in Note 1(e) to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, effective January 1, 2002. KPMG LLP Albuquerque, New Mexico
January 19, 2004 -20-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts) As of December 31,2003
    
    2002ASSETSCash and due from banks (note 3)
    
    $
    52,626
    
    
    $
    51,902Interest-bearing deposits with other banks
    
    
    33,524
    
    
    
    22,828Federal funds sold
    
    
    
    
    
    
    14,141Total cash and cash equivalents
    
    
    86,150
    
    
    
    88,871Investment securities (note 4):Available for sale (at market, amortized cost of $135,005 and
$120,617 at December 31, 2003 and 2002)
    
    
    135,530
    
    
    
    121,711Held to maturity (at amortized cost, market of $85,147 and
$70,127 at December 31, 2003 and 2002)
    
    
    84,902
    
    
    
    67,819Federal Home Loan Bank stock and Federal Reserve Bank stock at cost
    
    
    14,688
    
    
    
    4,564Total investment securities
    
    
    235,120
    
    
    
    194,094Mortgage loans available for sale (note 5)
    
    
    7,656
    
    
    
    20,315Loans held for investment net of unearned interest (note 5)
    
    
    1,223,829
    
    
    
    996,710Less allowance for loan losses (note 5)
    
    
    (14,121
    )
    
    
    (11,838
    )Net loans
    
    
    1,217,364
    
    
    
    1,005,187Premises and equipment, net (note 6)
    
    
    22,993
    
    
    
    16,503Accrued interest receivable
    
    
    5,582
    
    
    
    5,384Other real estate owned
    
    
    1,557
    
    
    
    908Goodwill (note 2)
    
    
    43,223
    
    
    
    43,412Cash surrender value of bank owned life insurance
    
    
    19,111
    
    
    
    18,153Deferred tax asset, net (note 10)
    
    
    3,479
    
    
    
    3,373Other assets, net
    
    
    12,160
    
    
    
    10,985Total assets
    
    $
    1,646,739
    
    
    $
    1,386,870LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits (note 7):Non-interest-bearing
    
    $
    269,569
    
    
    $
    189,063Interest-bearing
    
    
    926,306
    
    
    
    890,621Total deposits
    
    
    1,195,875
    
    
    
    1,079,684Securities sold under agreements to repurchase (note 8)
    
    
    63,686
    
    
    
    70,764Borrowings (note 8)
    
    
    249,322
    
    
    
    113,174Other liabilities
    
    
    5,415
    
    
    
    5,780Total liabilities
    
    
    1,514,298
    
    
    
    1,269,402Stockholders equity (note 11):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, 8,013,072
and 7,704,884; outstanding, 7,604,992 and 7,327,834 at December 31, 2003
and 2002, respectively
    
    
    87,304
    
    
    
    82,294Treasury stock, at cost (408,080 shares at December 31, 2003 and 377,050
shares at December 31, 2002)
    
    
    (6,335
    )
    
    
    (5,447
    )Retained earnings
    
    
    51,539
    
    
    
    39,899Unearned compensation
    
    
    (403
    )
    
    
    Accumulated other comprehensive income -
Unrealized gain on investment securities, net of tax (notes 4 and 10)
    
    
    336
    
    
    
    722Total stockholders equity
    
    
    132,441
    
    
    
    117,468Commitments and contingencies (notes 9, 12, and 13)
    
    
    
    
    
    
    Total liabilities and stockholders equity
    
    $
    1,646,739
    
    
    $
    1,386,870
 See accompanying notes to consolidated financial statements. -21-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts) Years ended December 31,2003
    
    2002
    
    2001Interest income:Interest and fees on loans
    
    $
    75,734
    
    
    $
    50,320
    
    
    $
    44,565Interest on marketable securities:Taxable
    
    
    7,622
    
    
    
    8,758
    
    
    
    8,092Nontaxable
    
    
    181
    
    
    
    148
    
    
    
    175Federal funds sold
    
    
    113
    
    
    
    359
    
    
    
    170Interest-bearing deposits other banks
    
    
    63
    
    
    
    261
    
    
    
    628Total interest income
    
    
    83,713
    
    
    
    59,846
    
    
    
    53,630Interest expense:Deposits
    
    
    18,712
    
    
    
    16,183
    
    
    
    18,181Short-term borrowings (note 8)
    
    
    761
    
    
    
    689
    
    
    
    2,160Long-term debt (note 8)
    
    
    3,156
    
    
    
    1,512
    
    
    
    137Total interest expense
    
    
    22,629
    
    
    
    18,384
    
    
    
    20,478Net interest income
    
    
    61,084
    
    
    
    41,462
    
    
    
    33,152Provision for loan losses (note 5)
    
    
    (5,543
    )
    
    
    (2,589
    )
    
    
    (2,386
    )Net interest income after provision for loan losses
    
    
    55,541
    
    
    
    38,873
    
    
    
    30,766Non-interest income:Service charges on deposit accounts
    
    
    4,225
    
    
    
    3,439
    
    
    
    2,916Other banking service fees
    
    
    1,116
    
    
    
    1,083
    
    
    
    489Credit card transaction fees
    
    
    3,938
    
    
    
    4,195
    
    
    
    3,209Gain (loss) on sale or call of investment securities
    
    
    46
    
    
    
    (8
    )
    
    
    48Check imprint income
    
    
    590
    
    
    
    529
    
    
    
    502Gain on sale of mortgage loans
    
    
    3,493
    
    
    
    2,768
    
    
    
    1,815Other
    
    
    1,113
    
    
    
    692
    
    
    
    435Total non-interest income
    
    
    14,521
    
    
    
    12,698
    
    
    
    9,414Non-interest expenses:Salaries and employee benefits (notes 11 and 12)
    
    
    20,570
    
    
    
    15,421
    
    
    
    11,559Occupancy
    
    
    6,267
    
    
    
    4,353
    
    
    
    3,445Data processing
    
    
    2,412
    
    
    
    2,011
    
    
    
    1,369Credit card interchange
    
    
    1,637
    
    
    
    2,004
    
    
    
    1,650Equipment
    
    
    3,697
    
    
    
    2,781
    
    
    
    2,113Legal, accounting, and consulting
    
    
    1,128
    
    
    
    816
    
    
    
    583Marketing
    
    
    2,190
    
    
    
    2,109
    
    
    
    1,496Telephone expense
    
    
    1,534
    
    
    
    887
    
    
    
    706Supplies
    
    
    744
    
    
    
    755
    
    
    
    588Delivery expenses
    
    
    1,007
    
    
    
    432
    
    
    
    306Other real estate owned
    
    
    354
    
    
    
    132
    
    
    
    286FDIC insurance premiums
    
    
    173
    
    
    
    129
    
    
    
    101Amortization of intangibles
    
    
    114
    
    
    
    53
    
    
    
    104Check imprint expense
    
    
    528
    
    
    
    495
    
    
    
    449Other
    
    
    4,887
    
    
    
    3,604
    
    
    
    2,762Total non-interest expenses
    
    
    47,242
    
    
    
    35,982
    
    
    
    27,517Income before income taxes
    
    
    22,820
    
    
    
    15,589
    
    
    
    12,663Income tax expense (note 10)
    
    
    7,969
    
    
    
    5,631
    
    
    
    4,521Net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142Earnings per share (note 1):Basic earnings per share
    
    $
    1.99
    
    
    $
    1.72
    
    
    $
    1.66Diluted earnings per share
    
    $
    1.95
    
    
    $
    1.66
    
    
    $
    1.61
 See accompanying notes to consolidated financial statements. -22-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) Years ended December 31,2003
    
    2002
    
    2001Net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142Other comprehensive (loss) income, net of tax  unrealized holding
(losses) gains on securities available for sale arising during period
    
    
    (357
    )
    
    
    25
    
    
    
    741Reclassification adjustment for (gains) losses included in net
income
    
    
    (29
    )
    
    
    6
    
    
    
    (48
    )Total comprehensive income
    
    $
    14,465
    
    
    $
    9,989
    
    
    $
    8,835
 See accompanying notes to consolidated financial statements. -23-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousand, except share and per share amounts) Years ended December 31, 2003, 2002, and 2001AccumulatedCommon
    
    Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    Order
    
    TotalStock
    
    Stock
    
    Treasury
    
    Retained
    
    Unearned
    
    Comprehensive
    
    Stockholders'Shares
    
    Amount
    
    Stock
    
    Earnings
    
    Compensation
    
    Income (Loss)
    
    EquityBalance at December 31, 2000
    
    
    4,893,080
    
    
    $
    29,903
    
    
    $
    (4,077
    )
    
    $
    25,494
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    51,318Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,142
    
    
    
    
    
    
    
    
    
    
    
    8,142Dividends $(0.34) per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,667
    )
    
    
    
    
    
    
    
    
    
    
    (1,667
    )Common shares issued from
exercise of options (note 11)
    
    
    13,295
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117Purchase of Treasury stock
    
    
    (40,000
    )
    
    
    
    
    
    
    (710
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (710
    )Common shares issued in
employee benefit plan
    
    
    16,560
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279Common shares issued pursuant to
dividend reinvestment plan
    
    
    2,649
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Amortization of stock option plan
grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    124Net change in market value, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    693
    
    
    
    693Balance at December 31, 2001
    
    
    4,885,584
    
    
    
    30,348
    
    
    
    (4,787
    )
    
    
    32,093
    
    
    
    
    
    
    
    691
    
    
    
    58,345Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,958
    
    
    
    
    
    
    
    
    
    
    
    9,958Dividends $(0.39) per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,152
    )
    
    
    
    
    
    
    
    
    
    
    (2,152
    )Common shares issued from
exercise of options (note 11)
    
    
    38,467
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216Income tax benefit from exercise
of options
    
    
    
    
    
    
    406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406Purchase of Treasury stock
    
    
    (27,500
    )
    
    
    
    
    
    
    (660
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (660
    )Common shares issued in
employee benefit plan
    
    
    12,982
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306Common shares issued pursuant to
dividend reinvestment plan
    
    
    3,301
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Common shares issued pursuant to
public offering
    
    
    2,415,000
    
    
    
    50,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,961Net change in market value, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    31Balance at December 31, 2002
    
    
    7,327,834
    
    
    
    82,294
    
    
    
    (5,447
    )
    
    
    39,899
    
    
    
    
    
    
    
    722
    
    
    
    117,468Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,851
    
    
    
    
    
    
    
    
    
    
    
    14,851Dividends $(0.43) per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,211
    )
    
    
    
    
    
    
    
    
    
    
    (3,211
    )Common shares issued from
exercise of options (note 11)
    
    
    276,199
    
    
    
    2,256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,256Income tax benefit from exercise
of options (note 11)
    
    
    
    
    
    
    1,843
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,843Purchase of Treasury stock
    
    
    (15,000
    )
    
    
    
    
    
    
    (331
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (331
    )Common shares issued in
employee benefit plan
    
    
    14,088
    
    
    
    366
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    366Common shares issued pursuant to
dividend reinvestment plan
    
    
    3,401
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98Restricted stock awards (note 11)
    
    
    14,500
    
    
    
    447
    
    
    
    
    
    
    
    
    
    
    
    (403
    )
    
    
    
    
    
    
    44Deferred compensation (note 12)
    
    
    (16,030
    )
    
    
    
    
    
    
    (557
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (557
    )Net change in market value, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (386
    )
    
    
    (386
    )Balance at December 31, 2003
    
    
    7,604,992
    
    
    $
    87,304
    
    
    $
    (6,335
    )
    
    $
    51,539
    
    
    $
    (403
    )
    
    $
    336
    
    
    $
    132,441
 See accompanying notes to consolidated financial statements. -24-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousand, except per share amounts) Years ended December 31,2003
    
    2002
    
    2001Operating activities:Net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142Adjustments to reconcile net income to cash provided (used) by operating
activities:Provision for loan losses
    
    
    5,543
    
    
    
    2,589
    
    
    
    2,386Provision for decline in value of other real estate owned
    
    
    187
    
    
    
    51
    
    
    
    95Depreciation and amortization
    
    
    3,960
    
    
    
    2,430
    
    
    
    2,086Income tax benefit of stock options exercised
    
    
    1,843
    
    
    
    406
    
    
    
    Increase in bank owned life insurance cash surrender value
    
    
    (958
    )
    
    
    (555
    )
    
    
    (98
    )Amortization of securities, net
    
    
    (1,003
    )
    
    
    (1,590
    )
    
    
    (128
    )Loss on sale of investment securities available for sale
    
    
    
    
    
    
    94
    
    
    
    Net gain on sales of other real estate owned
    
    
    (68
    )
    
    
    
    
    
    
    (23
    )Mortgage loans originated for sale
    
    
    (213,330
    )
    
    
    (185,773
    )
    
    
    (140,200
    )Proceeds from sale of mortgage loans originated for sale
    
    
    230,673
    
    
    
    189,555
    
    
    
    134,015(Increase) decrease in accrued interest receivable
    
    
    (198
    )
    
    
    801
    
    
    
    346Deferred tax asset
    
    
    77
    
    
    
    (712
    )
    
    
    (543
    )Increase in other assets, net
    
    
    (2,004
    )
    
    
    (4,657
    )
    
    
    (1,254
    )(Decrease) increase in other liabilities, net
    
    
    (922
    )
    
    
    456
    
    
    
    (493
    )Total adjustments
    
    
    23,800
    
    
    
    3,095
    
    
    
    (3,811
    )Net cash provided by operating activities
    
    
    38,651
    
    
    
    13,053
    
    
    
    4,331Cash flows from investing activities:Net increase in loans
    
    
    (237,428
    )
    
    
    (130,638
    )
    
    
    (84,880
    )Purchases of investment securities carried at amortized cost
    
    
    (55,276
    )
    
    
    (76,067
    )
    
    
    (298,626
    )Maturities of investment securities carried at amortized cost
    
    
    38,597
    
    
    
    69,212
    
    
    
    283,399Purchases of investment securities carried at market
    
    
    (137,406
    )
    
    
    (238,629
    )
    
    
    (156,605
    )Maturities of investment securities carried at market
    
    
    113,493
    
    
    
    249,034
    
    
    
    119,997Sale of investment securities available for sale
    
    
    
    
    
    
    9,985
    
    
    
    Purchases of premises and equipment
    
    
    (9,621
    )
    
    
    (4,430
    )
    
    
    (3,555
    )Goodwill adjustment
    
    
    189
    
    
    
    
    
    
    
    Proceeds from sale of and payments on other real estate owned
    
    
    1,597
    
    
    
    103
    
    
    
    2,612Acquisition, net of cash acquired (note 2)
    
    
    
    
    
    
    (59,917
    )
    
    
    Purchase of bank owned life insurance
    
    
    
    
    
    
    (10,000
    )
    
    
    (7,500
    )Net cash used in investing activities
    
    
    (285,855
    )
    
    
    (191,347
    )
    
    
    (145,158
    )Cash flows from financing activities:Net increase in interest-bearing deposits
    
    
    35,685
    
    
    
    99,410
    
    
    
    119,445Net increase in non-interest-bearing deposits
    
    
    80,506
    
    
    
    53,194
    
    
    
    37,170Net (decrease) increase in securities sold under agreements to repurchase
    
    
    (7,078
    )
    
    
    (1,494
    )
    
    
    4,489Common shares issued
    
    
    2,764
    
    
    
    51,540
    
    
    
    445Proceeds from Federal Home Loan Bank advances
    
    
    180,000
    
    
    
    80,000
    
    
    
    Payments on borrowings
    
    
    (43,852
    )
    
    
    (102,564
    )
    
    
    (53
    )Proceeds from issuance of trust preferred securities
    
    
    
    
    
    
    25,000
    
    
    
    7,732Dividends paid
    
    
    (3,211
    )
    
    
    (2,152
    )
    
    
    (1,667
    )Purchase of treasury stock
    
    
    (331
    )
    
    
    (660
    )
    
    
    (710
    )Net cash provided by financing activities
    
    
    244,483
    
    
    
    202,274
    
    
    
    166,851(Decrease) increase in cash and cash equivalents
    
    
    (2,721
    )
    
    
    23,980
    
    
    
    26,024Cash and cash equivalents at beginning of year
    
    
    88,871
    
    
    
    64,891
    
    
    
    38,867Cash and cash equivalents at end of year
    
    $
    86,150
    
    
    $
    88,871
    
    
    $
    64,891Supplemental disclosure of additional noncash investing and financing activities:Additions to other real estate owned in settlement of loans
    
    $
    2,429
    
    
    $
    790
    
    
    $
    1,515Additions to loans in settlement of other real estate owned
    
    $
    64
    
    
    $
    
    
    
    
    575Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    23,709
    
    
    $
    17,600
    
    
    $
    20,534Cash paid for income taxes
    
    $
    5,408
    
    
    $
    5,260
    
    
    $
    6,175
 See accompanying notes to consolidated financial statements. -25-




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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, Lakewood,
Littleton, Colorado Springs, Fort Collins, and Longmont, Colorado, and in Salt
Lake City, Utah. 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. The Company does not maintain a trading portfolio. -26-




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FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Companys investment in Federal Home Loan Bank (FHLB) stock is
carried at cost, which approximates fair value. As a member of the FHLB
system, the Company is required to maintain a minimum level of investment in
FHLB stock based on specific percentages of its outstanding mortgages, total
assets, or FHLB advances. At December 31, 2003 and 2002, the Company met its
minimum required investment. The Company may request redemption at par value
of any FHLB stock in excess of the minimum required investment. Stock
redemptions are at the discretion of the FHLB. (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 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 periodic 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. (e) Intangible Assets The excess of cost over the fair value of the net assets of acquired banks
is recorded as goodwill. The Company adopted Statement of Financial Accounting
Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets, as
of January 1, 2002, and therefore, no longer amortizes goodwill. As of the
date of adoption, the Company had unamortized goodwill in the amount of
approximately $361,000, which was subject to the transition provisions of SFAS
No. 142. The Company determined there was no transitional impairment loss at
January 1, 2002. Goodwill amortization for the year ended December 31, 2001
was $104,206. -27-




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FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Companys reported net income and basic and diluted earnings per share
adjusted for excluding the effects of goodwill amortization in fiscal periods
prior to 2002 would have been as follows: Years Ended December 31,2003
    
    2002
    
    2001(Dollars in thousands, except per share data)Reported net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142Addback: Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    104Adjusted net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,246Basic earnings per share:Reported net income
    
    $
    1.99
    
    
    $
    1.72
    
    
    $
    1.66Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.03Adjusted net income
    
    $
    1.99
    
    
    $
    1.72
    
    
    $
    1.69Diluted earnings per share:Reported net income
    
    $
    1.95
    
    
    $
    1.66
    
    
    $
    1.61Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.02Adjusted net income
    
    $
    1.95
    
    
    $
    1.66
    
    
    $
    1.63
 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 2003 and 2002, and found no impairment. 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 other-than-temporary impairment. If
such impairment is indicated, recoverability of the asset is assessed based on
expected undiscounted net cash flows. (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 $19.1 million and
$18.2 million at December 31, 2003 and 2002, respectively. The increase in the
cash surrender value is included in non-interest income in the consolidated
statements of operations and amounted to approximately $958,000, $555,000, and
$98,000 in 2003, 2002, and 2001, 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. -28-




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FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (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. (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 is 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 31,2003
    
    2002
    
    2001(Dollars in thousands, except per share amounts)Net Income
    
    Shares
    
    Per Share
    
    Net Income
    
    Shares
    
    Per Share
    
    Net Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS:Net income
    
    $
    14,851
    
    
    
    7,475,986
    
    
    $
    1.99
    
    
    $
    9,958
    
    
    
    5,801,332
    
    
    $
    1.72
    
    
    $
    8,142
    
    
    
    4,892,657
    
    
    $
    1.66Effect of dilutive securities
options
    
    
    
    
    
    
    122,463
    
    
    
    
    
    
    
    
    
    
    
    196,269
    
    
    
    
    
    
    
    
    
    
    
    156,692Diluted EPS:Net income
    
    $
    14,851
    
    
    
    7,598,449
    
    
    $
    1.95
    
    
    $
    9,958
    
    
    
    5,997,601
    
    
    $
    1.66
    
    
    $
    8,142
    
    
    
    5,049,349
    
    
    $
    1.61
 (k) Stock Options 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 No. 123, the
Company has elected to continue to apply the intrinsic value-based method and
has adopted the disclosure requirements of SFAS No. 148. Compensation expense of approximately $61,000, $14,000, and $49,000 was
recognized in 2003, 2002, and 2001, 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 No. 123 at the grant dates for awards, net income and earnings
per common share would have changed to the pro forma amounts indicated below. In October 2003, the Company granted 73,000 options at $31.41 per share.
In determining the following pro forma disclosures, the fair value of options
granted were estimated as of the grant date using the Black-Scholes
option-pricing model assuming a risk-free interest rate of 3.19%, a dividend
yield of 1.37%, expected lives of 5 years, and a volatility of 25.95%. -29-




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FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Years Ended December 31,2003
    
    2002
    
    2001(Dollars in thousands, except per share amounts)Net income as reported:
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142Add: Stock-based
employee compensation
expense included in
reported net income, net
of related tax effects
    
    
    39
    
    
    
    8
    
    
    
    31Deduct: Total
stock-based employee
compensation expense
determined under fair
value-based method for
awards, net of related
tax effects
    
    
    (100
    )
    
    
    (28
    )
    
    
    (107
    )Pro forma net income
    
    $
    14,790
    
    
    $
    9,938
    
    
    $
    8,066Earnings per share:Basic  as reported
    
    $
    1.99
    
    
    $
    1.72
    
    
    $
    1.66Basic  pro forma
    
    $
    1.98
    
    
    $
    1.71
    
    
    $
    1.65Diluted  as reported
    
    $
    1.95
    
    
    $
    1.66
    
    
    $
    1.61Diluted  pro forma
    
    $
    1.95
    
    
    $
    1.66
    
    
    $
    1.60
 In June 2003, the Company granted 1,500 shares of restricted stock at a
fair value of $26.03 per share and in October 2003, the Company granted 13,000
shares of restricted stock at a fair value of $31.41 per share. (l) Reclassifications Certain previous period balances have been reclassified to conform to the
2003 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. FIN 46R is required to be adopted no later than the end of
the first reporting period that ends after March 15, 2004 and therefore, the
Companys trust preferred securities issued by Trust I and Trust II which are
currently consolidated in the Companys consolidated financial statements will
be deconsolidated beginning in the first quarter of 2004. The Company does not
expect the requirements of FIN 46R to have a material impact on the
consolidated financial statements. The Federal Reserve Board may in the future
disallow inclusion of the trust preferred securities in Tier 1 capital for
regulatory capital purposes. In July 2003, the Federal Reserve Board issued a
supervisory letter instructing bank holding companies to continue to include
the trust preferred securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The
Federal Reserve Board intends to review the regulatory implications of the
change in accounting treatment of subsidiary trusts that issue trust preferred
securities and, if necessary or warranted, provide further appropriate
guidance. -30-




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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 the consolidated financial statements, and the adoption of
deferred provisions at January 1, 2005 is not expected to have a material
impact on the 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. -31-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Pro Forma Financial Information The pro forma financial information below presents the condensed
consolidated financial results of the Company assuming that First Community,
acquired October 1, 2002, had been acquired at the beginning of 2001 and
includes the effect of amortization of other acquired identifiable intangible
assets from that date. This pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
future operations that would have been achieved had the acquisition taken place
at the beginning of 2001. Pro forma information follows: Years ended December 31,2002
    
    2001Dollars in thousands, except per share amounts)Interest income:Interest and fees on loans
    
    $
    73,639
    
    
    $
    81,602Interest and dividends on securities:Taxable securities
    
    
    8,856
    
    
    
    8,619Non-taxable securities
    
    
    148
    
    
    
    174Total interest and dividends on securities
    
    
    9,004
    
    
    
    8,793Federal funds sold and interest-bearing bank balances
    
    
    808
    
    
    
    955Total interest income
    
    
    83,451
    
    
    
    91,350Interest expense:Interest on deposits
    
    
    22,691
    
    
    
    29,908Short-term borrowings
    
    
    689
    
    
    
    2,160Long-term borrowings
    
    
    3,848
    
    
    
    5,490Total interest expense
    
    
    27,228
    
    
    
    37,558Net interest
income before provision for loan losses
    
    
    56,223
    
    
    
    53,792Provision for loan losses
    
    
    (4,359
    )
    
    
    (3,510
    )Net interest
income after provision for loan losses
    
    
    51,864
    
    
    
    50,282Non-interest income
    
    
    12,736
    
    
    
    9,506Non-interest expenses
    
    
    41,272
    
    
    
    35,452Income
before income taxes
    
    
    23,328
    
    
    
    24,336Income tax expense
    
    
    8,776
    
    
    
    8,992Net income
    
    $
    14,552
    
    
    $
    15,344Average common shares outstanding, basic
    
    
    7,308,729
    
    
    
    7,307,657Average common shares outstanding, diluted
    
    
    7,504,998
    
    
    
    7,464,349Basic earnings per share
    
    $
    1.99
    
    
    $
    2.10Diluted earnings per share
    
    $
    1.94
    
    
    $
    2.06
 -32-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Goodwill and Other Acquisition  Related Intangibles The changes in the carrying amount of goodwill for the years ended
December 31, 2003 and 2002 are as follows: Years ended December 31,2003
    
    2002(Dollars in thousands)Balance at beginning of year
    
    $
    43,412
    
    
    $
    361Goodwill acquired during year
    
    
    
    
    
    
    43,051Goodwill adjustment
    
    
    (189
    )
    
    
    Impairment losses
    
    
    
    
    
    
    Balance at end of year
    
    $
    43,223
    
    
    $
    43,412
 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 has subsequently been offset by $88,000 of additional items related to
the acquisition. Goodwill recognized in the acquisition totaled approximately $42.9 million
and is expected to be fully deductible for tax purposes. The carrying amount of amortizable core deposit intangible assets
recognized in the acquisition net of accumulated amortization is recorded in
other assets, net and amounted to approximately $750,000 and $855,000 at
December 31, 2003 and 2002, respectively. Expected annual amortization expense related to the acquired core deposit
intangible is as follows: Years endingDecember 31,(Dollars in thousands)2004
    
    
    
    
    $
    1022005
    
    
    
    
    
    982006
    
    
    
    
    
    952007
    
    
    
    
    
    902008
    
    
    
    
    
    83Thereafter
    
    
    
    
    
    282Total expected annual amortization expense
    

    
    
     $
    750
 3. Cash and Due from Banks First State Bank is required to maintain certain daily reserve balances on
hand in accordance with Federal Reserve Board requirements. The consolidated
reserve balances maintained in accordance with these requirements were
approximately $3.4 million and $882,000 at December 31, 2003 and 2002,
respectively. -33-




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##### Table of Contents



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: Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    marketcost
    
    gains
    
    losses
    
    value(Dollars in thousands)As of December 31, 2003Obligations of the U.S. Treasury
Held to maturity
    
    $
    499
    
    
    $
    
    
    
    $
    
    
    
    $
    499Obligations of U.S. government agencies
Available for sale
    
    
    124,112
    
    
    
    769
    
    
    
    256
    
    
    
    124,625Mortgage-backed securities:Available for sale
    
    
    10,250
    
    
    
    12
    
    
    
    
    
    
    
    10,262Held to maturity
    
    
    74,946
    
    
    
    873
    
    
    
    668
    
    
    
    75,151Obligations
of states and political subdivisions:
Available for sale
    
    
    643
    
    
    
    
    
    
    
    
    
    
    
    643Held to maturity
    
    
    9,457
    
    
    
    125
    
    
    
    85
    
    
    
    9,497Federal Home Loan Bank stock
    
    
    12,010
    
    
    
    
    
    
    
    
    
    
    
    12,010Federal Reserve Bank stock
    
    
    2,678
    
    
    
    
    
    
    
    
    
    
    
    2,678$
    234,595
    
    
    $
    1,779
    
    
    $
    1,009
    
    
    $
    235,365As of December 31, 2002Obligations of the U.S. Treasury
Held to maturity
    
    $
    499
    
    
    $
    
    
    
    $
    
    
    
    $
    499Obligations of U.S. government agencies
Available for sale
    
    
    120,162
    
    
    
    1,067
    
    
    
    2
    
    
    
    121,227Mortgage-backed securities:Available for sale
    
    
    455
    
    
    
    29
    
    
    
    
    
    
    
    484Held to maturity
    
    
    63,655
    
    
    
    2,171
    
    
    
    
    
    
    
    65,826Obligations of states and political subdivisions
Held to maturity
    
    
    3,665
    
    
    
    137
    
    
    
    
    
    
    
    3,802Federal Home Loan Bank stock
    
    
    4,031
    
    
    
    
    
    
    
    
    
    
    
    4,031Federal Reserve Bank stock
    
    
    533
    
    
    
    
    
    
    
    
    
    
    
    533$
    193,000
    
    
    $
    3,404
    
    
    $
    2
    
    
    $
    196,402
 The unrealized losses on investment securities are caused by fluctuations
in market interest rates. 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, maturity of the securities, or a modification of the Companys
investment strategy, it is the conclusion of the Company that the investments
are not considered other-than temporarily impaired. -34-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) The amortized cost and estimated market value of investment securities at
December 31, 2003, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations. EstimatedAmortized Cost
    
    Market Value(Dollars in thousands)Within one year:Available for sale
    
    $
    10,054
    
    
    $
    10,143Held to maturity
    
    
    745
    
    
    
    750One through five years:Available for sale
    
    
    112,063
    
    
    
    112,477Held to maturity
    
    
    2,907
    
    
    
    3,062Five through ten years:Available for sale
    
    
    2,191
    
    
    
    2,213Held to maturity
    
    
    33,743
    
    
    
    33,833After ten years:Available for sale
    
    
    10,697
    
    
    
    10,697Held to maturity
    
    
    47,507
    
    
    
    47,502Federal Home Loan Bank stock
    
    
    12,010
    
    
    
    12,010Federal Reserve Bank stock
    
    
    2,678
    
    
    
    2,678Total
    
    $
    234,595
    
    
    $
    235,365
 Marketable securities available for sale with an amortized cost of
approximately $131.8 million and marketable securities held to maturity with an
amortized cost of approximately $77.6 million were pledged to collateralize
deposits as required by law and for other purposes at December 31, 2003. Proceeds from sales of investments in debt securities for the years ended
December 31 were zero in 2003, $10.0 million in 2002, and zero in 2001. Gross
losses realized were zero in 2003, $94,000 in 2002, and zero in 2001. Gross
gains realized were zero in 2003, 2002, and 2001. The Company calculates gain
or loss on sale of securities based on the specific identification method. 5. Loans Following is a summary of loans by major categories: As of December 31,2003
    
    2002(Dollars in thousands)Commercial
    
    $
    160,261
    
    
    $
    100,813Consumer and other
    
    
    30,736
    
    
    
    35,555Real estate  commercial
    
    
    577,835
    
    
    
    422,643Real estate  one- to four-family
    
    
    338,272
    
    
    
    337,241Real estate  construction
    
    
    116,725
    
    
    
    100,458Mortgage loans available for sale
    
    
    7,656
    
    
    
    20,315Total
    
    $
    1,231,485
    
    
    $
    1,017,025
 Included in the above balances are net deferred fees of approximately $6.3
million and $5.9 million, at December 31, 2003 and 2002, respectively. At
December 31, 2003 and 2002, approximately $216 million and $80 million in loans
were pledged as collateral for FHLB advances. At December 31, 2003, loans are comprised of fixed and variable rate
instruments as follows: (Dollars in thousands)Loans at fixed rates
    
    $
    180,288Loans at variable rates
    
    
    1,051,197Total
    
    $
    1,231,485
 Loans at variable rates include loans that reprice immediately, as well as
loans that reprice any time prior to maturity. -35-




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##### Table of Contents



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, 2003 are as follows: Within 1 year
    
    1 to 5 Years
    
    After 5 Years
    
    Total(Dollars in thousands)Commercial
    
    $
    136,851
    
    
    $
    22,098
    
    
    $
    1,312
    
    
    $
    160,261Real estate
    
    
    723,524
    
    
    
    271,079
    
    
    
    38,229
    
    
    
    1,032,832Consumer
    
    
    16,630
    
    
    
    13,305
    
    
    
    801
    
    
    
    30,736Mortgage loans available for sale
    
    
    7,656
    
    
    
    
    
    
    
    
    
    
    
    7,656Total
    
    $
    884,661
    
    
    $
    306,482
    
    
    $
    40,342
    
    
    $
    1,231,485
 Following is a summary of changes to the allowance for loan losses: Years ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Balance at beginning of year
    
    $
    11,838
    
    
    $
    7,207
    
    
    $
    6,308Provision charged to operations
    
    
    5,543
    
    
    
    2,589
    
    
    
    2,386Loans and leases charged-off
    
    
    (3,702
    )
    
    
    (1,428
    )
    
    
    (1,703
    )Recoveries
    
    
    442
    
    
    
    305
    
    
    
    216Allowance related to acquired loans
    
    
    
    
    
    
    3,165
    
    
    
    Balance at end of year
    
    $
    14,121
    
    
    $
    11,838
    
    
    $
    7,207
 The recorded investment in loans which are considered impaired was
approximately $12.5 million at December 31, 2003, $10.2 million at December 31,
2002, and $2.5 million at December 31, 2001. The average investment in loans
for which impairment has been recognized was approximately $10.7 million in
2003, $3.8 million in 2002, and $2.2 million in 2001. The allowance for loan
losses related to these loans was approximately $1.2 million at December 31,
2003, $568,000 at December 31, 2002, and $262,000 at December 31, 2001. The
allowance for impaired loans is included in the allowance for loan losses. Interest income recognized on impaired loans was zero in 2003, 2002,
and 2001. Loans on which the accrual of interest has been discontinued amounted to
approximately $12.5 million, $10.2 million, and $2.5 million at December 31,
2003, 2002, and 2001, respectively. If interest on such loans had been accrued,
such income would have been approximately $495,000 in 2003, $203,000 in 2002,
and $70,000 in 2001. Actual interest income on those loans, which is recorded
only when received, amounted to zero in 2003, 2002, and 2001. Activity during 2003 and 2002 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: 2003
    
    2002(Dollars in thousands)Balance at beginning of year
    
    $
    9,919
    
    
    $
    8,911Advances
    
    
    14,113
    
    
    
    2,453Repayments
    
    
    (7,001
    )
    
    
    (1,445
    )Balance at end of year
    
    $
    17,031
    
    
    $
    9,919
 -36-




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##### Table of Contents



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: EstimatedUseful
    
    As of December 31,Life (years)
    
    2003
    
    2002(Dollars in thousands)Land
    
    
    
    
    
    $
    2,386
    
    
    $
    1,960Building and leasehold improvements
    
    
    10-30
    
    
    
    16,514
    
    
    
    13,838Equipment
    
    
    3-5
    
    
    
    18,713
    
    
    
    12,57337,613

    
    
    28,371Less accumulated depreciation and amortization
    
    
    
    
    
    
    (14,620)
    )
    
    
   (11,868
    )$
    22,993
    
    
    $
    16,503
 Depreciation and amortization expense on premises and equipment in 2003,
2002, and 2001 was approximately $3.1 million, $2.4 million, and $2.0 million,
respectively. 7. Deposits Following is a summary of interest-bearing deposits: As of December 31,2003
    
    2002(Dollars in thousands)Interest-bearing checking accounts
    
    $
    199,792
    
    
    $
    192,067Money market savings
    
    
    157,887
    
    
    
    125,616Regular savings
    
    
    62,981
    
    
    
    52,636Time:Denominations $100,000 and over
    
    
    267,256
    
    
    
    221,402Denominations under $100,000
    
    
    238,390
    
    
    
    298,900$
    926,306
    
    
    $
    890,621
 At December 31, 2003, the scheduled maturities of all time deposits are as follows: Years endingDecember 31,(Dollars in thousands)2004
    
    $
    339,5352005
    
    
    76,5672006
    
    
    20,0512007
    
    
    44,1812008
    
    
    21,489Thereafter
    
    
    3,823$
    505,646
 -37-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 8. 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 by a security interest in U.S. Treasury, U.S.
government agency, or U.S. government agency issued mortgage-backed securities.
These securities are segregated and safekept by third-party banks. These
securities had a market value of approximately $63.7 million and $70.8 million,
at December 31, 2003 and 2002, respectively. Interest expense included in the
consolidated statements of operations was approximately $222,000, $582,000, and
$1.9 million for the years ended December 31, 2003, 2002, and 2001,
respectively. Securities sold under agreements to repurchase are summarized as follows: Years ended December 31,2003
    
    2002(Dollars in thousands)Balance
    
    $
    63,686
    
    
    $
    70,764Weighted average interest rate
    
    
    0.33
    %
    
    
    0.49
    %Maximum amount outstanding at any month end
    
    $
    63,686
    
    
    $
    70,764Average balance outstanding during the period
    
    $
    54,368
    
    
    $
    65,339Weighted average interest rate during the period
    
    
    0.41
    %
    
    
    0.89
    %
 Trust Preferred Securities 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 bear interest at an annual rate equal to the
three-month LIBOR plus 3.60% (4.77% at December 31, 2003), interest only
payable at three-month intervals (the Payment Date). The annual rate is
adjusted at each Payment Date beginning with the first interest payment date of
March 18, 2002, provided however, that prior to December 18, 2006, the annual
rate will not exceed 12.50%. The proceeds were up streamed to the Company as
Junior Subordinated Deferrable Interest Debentures (Debentures) under the
same terms and conditions. The Company has, through various contractual
arrangements, fully and unconditionally guaranteed all of Trust Is obligations
with respect to the Securities. The Securities qualify as Tier I capital and
are presented in the consolidated balance sheets as Borrowings. The sole
asset of Trust I is $7,732,000 of Debentures issued by the Company. Both the
Securities of Trust I and the Debentures issued by the Company 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, 2003, the Company has not deferred
any payments of interest. 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 bear interest at an annual rate equal
to the three-month LIBOR plus 3.45% (4.62% at December 31, 2003), interest only
payable at three-month intervals (the Trust II Payment Date). The annual
rate is adjusted at each Trust II Payment Date beginning with the first
interest payment date of September 26, 2002, provided however, that prior to
June 26, 2007, the annual rate will not exceed 11.95%. The proceeds were up
streamed to the Company as Junior Subordinated Deferrable Interest Debentures
(Trust II Debentures) under the same terms and conditions. The Company has,
through various contractual arrangements, fully and unconditionally guaranteed
all of Trust IIs obligations with respect to the Trust II Securities. The
Trust II Securities qualify as Tier I capital and are presented in the
consolidated balance sheets as Borrowings. The sole asset of Trust II is
$25,774,000 of Debentures issued by the Company. Both the Trust II Securities
and the Trust II Debentures issued by the Company 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, 2003, the Company has not deferred
any payments of interest. See note 1(n) Other New Accounting Standardsrelated to FIN 46R. -38-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Federal Home Loan Bank Advances First State Bank has notes payable to the Federal Home Loan Bank of Dallas
included in borrowings as follows: Years ended December 31,2003
    
    2002(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
    
    
    
    20,000$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
    
    
    
    20,000$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
    
    
    41
    
    
    
    73$25 million note payable to FHLB, interest only at 1.52% payable monthly,
due on March 16, 2005
    
    
    25,000
    
    
    
    $25 million note payable to FHLB, interest only at 1.86% payable monthly,
due on April 22, 2005
    
    
    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
    
    
    15,911
    
    
    
    19,690$20 million note payable to FHLB, interest only at 1.77% payable monthly,
paid on April 2, 2003
    
    
    
    
    
    
    20,000Total FHLB Advances
    
    $
    215,952
    
    
    $
    79,763
 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, 2003, the Company had
available unused borrowing capacity from the FHLB for advances of approximately
$57 million. Included in the above FHLB advances are short-term FHLB borrowings that
totaled approximately $110 million and $20 million at December 31, 2003 and
2002, respectively. The weighted average interest rate on short-term FHLB
borrowings was 1.04% and 1.77% at December 31, 2003 and 2002, respectively. Short-term FHLB borrowings are summarized as follows: Years ended December 31,2003
    
    2002(Dollars in thousands)Balance
    
    $
    110,000
    
    
    $
    20,000Weighted average interest rate
    
    
    1.04
    %
    
    
    1.77
    %Maximum amount outstanding at any month end
    
    $
    110,000
    
    
    $
    20,000Average balance outstanding during the period
    
    $
    34,308
    
    
    $
    5,027Weighted average interest rate during the period
    
    
    1.34
    %
    
    
    2.07
    %
 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, 2003
and 2002 were approximately $870,000 and $911,000, respectively. -39-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Borrowings are summarized as follows: Years ended December 31,2003
    
    2002(Dollars in thousands)Trust preferred securities  Trust I
    
    $
    7,500
    
    
    $
    7,500Trust preferred securities  Trust II
    
    
    25,000
    
    
    
    25,000FHLB advances
    
    
    215,952
    
    
    
    79,763Note payable
    
    
    870
    
    
    
    911Total borrowings
    
    $
    249,322
    
    
    $
    113,174
 As of December 31, 2003, the contractual maturities of borrowings are as follows: Years endingDecember 31,(in thousands)2004
    
    $
    153,9702005
    
    
    54,0592006
    
    
    4,1752007
    
    
    3,9412008
    
    
    56Thereafter
    
    
    33,121$
    249,322
 9. 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, 2003, 2002, and 2001, totaled
approximately $3.8 million, $2.5 million, and $1.8 million, respectively.
Minimum future payments under these leases at December 31, 2003, are as
follows: Years endingDecember 31,(in thousands)2004
    
    $
    4,1372005
    
    
    4,0322006
    
    
    3,6352007
    
    
    3,4862008
    
    
    3,419Thereafter
    
    
    19,014$
    37,723
 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 $74,000 in 2003, $72,000 in
2002, and $70,000 in 2001, 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 $502,000 in 2003, $492,000 in 2002, and $467,000 in 2001.
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. 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. -40-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 10. Income Taxes Income tax expense (benefit) consisted of the following: Years ended December 31,2003
    
    2002
    
    2001(in thousands)Federal
    
    $
    6,766
    
    
    $
    4,604
    
    
    $
    4,534State
    
    
    1,126
    
    
    
    706
    
    
    
    530Deferred
    
    
    77
    
    
    
    321
    
    
    
    (543
    )Total expense
    
    $
    7,969
    
    
    $
    5,631
    
    
    $
    4,521
 Actual income tax expense from continuing operations differs from the
expected tax expense for 2003, 2002, and 2001 (computed by applying the U.S.
federal corporate tax rate of 35% in 2003 and 34% in 2002 and 2001 to income
before income taxes) as follows: Years ended December 31,2003
    
    2002
    
    2001(in thousands)Computed expected tax expense
    
    $
    7,987
    
    
    $
    5,300
    
    
    $
    4,305Increase (reduction) in income taxes resulting from:Tax-exempt interest
    
    
    (59
    )
    
    
    (46
    )
    
    
    (52
    )State tax, net
    
    
    763
    
    
    
    390
    
    
    
    185Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    35Deferred tax rate change
    
    
    (216
    )
    
    
    
    
    
    
    Bank owned life insurance
    
    
    (335
    )
    
    
    (189
    )
    
    
    (33
    )Other
    
    
    (171
    )
    
    
    176
    
    
    
    81Total income tax expense
    
    $
    7,969
    
    
    $
    5,631
    
    
    $
    4,521
 Components of deferred income tax assets and liabilities are as follows: As of December 31,2003
    
    2002(in thousands)Deferred tax assets:Allowance for loan losses
    
    $
    5,084
    
    
    $
    3,853Allowance for other real estate owned
    
    
    36
    
    
    
    60Depreciation
    
    
    313
    
    
    
    488Deferred compensation expense
    
    
    175
    
    
    
    259Separation agreement
    
    
    61
    
    
    
    125Other
    
    
    72
    
    
    
    3Total gross deferred tax assets
    
    
    5,741
    
    
    
    4,788Deferred tax liabilities:Goodwill
    
    
    2,073
    
    
    
    1,043Tax effect of unrealized gain on investment securities
    
    
    189
    
    
    
    372Total gross deferred tax liabilities
    
    
    2,262
    
    
    
    1,415Net deferred tax asset
    
    $
    3,479
    
    
    $
    3,373
 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, 2003 of approximately $5.7 million,
the Company will need to generate future taxable income of approximately $15.9
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. -41-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 11. Stockholders Equity The Board of Directors has authorized management to purchase up to 525,000
shares of its common stock in the open market. During 2003, the Company
purchased 15,000 shares. The funds for these purchases came from excess funds
held by the parent company. Currently, management has not determined the timing
of additional purchases, if any. As of December 31, 2003, the Company had
repurchased 392,050 shares. 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 750,000
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: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseShares
    
    price
    
    Shares
    
    price
    
    Shares
    
    priceOutstanding at beginning of
year
    
    
    446,854
    
    
    $
    9.28
    
    
    
    489,521
    
    
    $
    9.05
    
    
    
    506,566
    
    
    $
    9.10Granted
    
    
    73,000
    
    
    
    31.41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (276,199
    )
    
    
    7.79
    
    
    
    (38,467
    )
    
    
    5.60
    
    
    
    (13,295
    )
    
    
    8.80Forfeited
    
    
    (650
    )
    
    
    5.60
    
    
    
    (4,200
    )
    
    
    16.08
    
    
    
    (3,750
    )
    
    
    16.08Outstanding at year end
    
    
    243,005
    
    
    
    17.64
    
    
    
    446,854
    
    
    
    9.28
    
    
    
    489,521
    
    
    
    9.05Options exercisable at year
end
    
    
    170,005
    
    
    $
    11.72
    
    
    
    432,154
    
    
    $
    9.11
    
    
    
    451,721
    
    
    $
    8.58
 For the years ended December 31, 2003, 2002 and 2001, the Company received
income tax benefits of $1.8 million, $406,000, and zero, 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, 2003 are as follows: Options
    
    Weighted average
    
    Weighted average
    
    Option
    
    Weighted averageGrant Price
    
    Outstanding
    
    remaining life
    
    exercise price
    
    exercisable
    
    exercise price$

5.60
    
    
    
    14,905
    
    
    
    1.80
    
    
    $
    5.60
    
    
    
    14,905
    
    
    $
    5.606.00
    
    
    
    12,750
    
    
    
    5.31
    
    
    
    6.00
    
    
    
    12,750
    
    
    
    6.0011.50
    
    
    
    99,600
    
    
    
    3.56
    
    
    
    11.50
    
    
    
    99,600
    
    
    
    11.5016.08
    
    
    
    42,750
    
    
    
    5.56
    
    
    
    16.08
    
    
    
    42,750
    
    
    
    16.0831.41
    
    
    
    73,000
    
    
    
    9.83
    
    
    
    31.41
    
    
    
    
    
    
    
    243,005
    
    
    
    5.78
    
    
    $
    17.64
    
    
    
    170,005
    
    
    $
    11.72
 In June 2003, the Company granted 1,500 shares of restricted stock at a
fair value of $26.03 per share and in October 2003, the Company granted 13,000
shares of restricted stock at a fair value of $31.41 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. 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 $0.01 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. -42-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Bank regulations specify the level of dividends that can be paid by First
State Bank. During the year ended December 31, 2003, First State Bank paid no
dividends to First State Bancorporation. As of December 31, 2003, First State
Bank had approximately $26.0 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, and of Tier I capital to average
total assets (leverage ratio). Management believes, as of December 31, 2003,
that the Company and subsidiary bank meet all capital adequacy requirements to
which they are subject. In connection with the Companys acquisition and merger of First Community
into the Company, the Company issued 2.4 million shares of common stock. The
Company offered these shares to the public at a price of $22.50 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. As of December 31, 2003For capital
    
    To be consideredActual
    
    adequacy purposes
    
    well capitalizedAmount
    
    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
    %
 As of December 31, 2002For capital
    
    To be consideredActual
    
    adequacy purposes
    
    well capitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total capital to risk weighted assets:Consolidated
    
    $
    116,755
    
    
    
    11.6
    %
    
    $
    80,586
    
    
    
    8.0
    %
    
    $
    100,733
    
    
    
    10.0
    %Bank subsidiary
    
    
    101,904
    
    
    
    10.1
    %
    
    
    80,491
    
    
    
    8.0
    %
    
    
    100,614
    
    
    
    10.0
    %Tier I capital to risk weighted assets:Consolidated
    
    
    104,917
    
    
    
    10.4
    %
    
    
    40,293
    
    
    
    4.0
    %
    
    
    60,440
    
    
    
    6.0
    %Bank subsidiary
    
    
    90,066
    
    
    
    9.0
    %
    
    
    40,246
    
    
    
    4.0
    %
    
    
    60,368
    
    
    
    6.0
    %Tier I capital to average total assets:Consolidated
    
    
    104,917
    
    
    
    7.8
    %
    
    
    40,255
    
    
    
    3.0
    %
    
    
    67,091
    
    
    
    5.0
    %Bank subsidiary
    
    
    90,066
    
    
    
    6.7
    %
    
    
    40,219
    
    
    
    3.0
    %
    
    
    67,032
    
    
    
    5.0
    %
 -43-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 12. 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 $361,000 in 2003, $273,000 in 2002 and $212,000 in 2001. 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, 2003, the
total assets of the plan were $764,000, which included an investment of
$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 $764,000. The Companys expense for this plan
totaled $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. 13. Commitments and Contingencies 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 31,2003
    
    2002(Dollars in thousands)Commitments to extend credit
    
    $
    239,937
    
    
    $
    148,181Standby letters of credit
    
    
    20,247
    
    
    
    10,040
 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 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. -44-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 14. Condensed Financial Information of Parent Company The assets of the Company, as parent company, consist primarily of the
investment in its subsidiary bank, a money market savings account, and
certificates of deposit 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 and certificates of
deposit. Following are condensed financial statements of the parent company: Condensed Statements of Condition As of December 31,2003
    
    2002(Dollars in thousands)AssetsCash and due from banks
    
    $
    6,438
    
    
    $
    13,001Investment in subsidiary
    
    
    157,221
    
    
    
    134,893Goodwill
    
    
    223
    
    
    
    223Deferred tax asset
    
    
    195
    
    
    
    259Other assets
    
    
    2,691
    
    
    
    2,814Total assets
    
    $
    166,768
    
    
    $
    151,190Liabilities and equity capitalAccounts payable and accrued expenses
    
    
    821
    
    
    
    216Long-term debt
    
    
    33,506
    
    
    
    33,506Total liabilities
    
    
    34,327
    
    
    
    33,722Equity capital
    
    
    132,441
    
    
    
    117,468Total liabilities and equity capital
    
    $
    166,768
    
    
    $
    151,190
 Condensed Statements of Operations Years ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Income:Cash dividends from subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    2,058Other income
    
    
    182
    
    
    
    403
    
    
    
    33Total income
    
    
    182
    
    
    
    403
    
    
    
    2,091Expenses:Interest expense
    
    
    1,546
    
    
    
    1,091
    
    
    
    37Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    32Legal
    
    
    74
    
    
    
    75
    
    
    
    32Other
    
    
    546
    
    
    
    615
    
    
    
    300Total expenses
    
    
    2,166
    
    
    
    1,781
    
    
    
    401Income (loss) before income taxes and
undistributed income of bank
subsidiary
    
    
    (1,984
    )
    
    
    (1,378
    )
    
    
    1,690Income tax benefit
    
    
    911
    
    
    
    763
    
    
    
    132Undistributed income of bank subsidiary
    
    
    15,924
    
    
    
    10,573
    
    
    
    6,320Net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142
 -45-




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##### Table of Contents



FIRST STATE BANCORPORATION AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Condensed Statements of Cash Flows Years ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    14,851
    
    
    $
    9,958
    
    
    $
    8,142Adjustments to reconcile net income to cash provided (used)
by operating activities:Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    32Undistributed income of bank subsidiary
    
    
    (15,924
    )
    
    
    (10,573
    )
    
    
    (6,320
    )Income tax benefit from exercise of options
    
    
    1,843
    
    
    
    406
    
    
    
    Decrease (increase) in other assets
    
    
    104
    
    
    
    (2,298
    )
    
    
    (529
    )(Decrease) increase in other liabilities, net
    
    
    (159
    )
    
    
    37
    
    
    
    (130
    )Total adjustments
    
    
    (14,136
    )
    
    
    (12,428
    )
    
    
    (6,947
    )Net cash provided (used) by operating activities
    
    
    715
    
    
    
    (2,470
    )
    
    
    1,195Cash flows from financing activities:Common stock issued
    
    
    2,764
    
    
    
    51,540
    
    
    
    445Payment to repurchase common stock
    
    
    (331
    )
    
    
    (660
    )
    
    
    (710
    )Amortization of stock option plan grants
    
    
    
    
    
    
    
    
    
    
    124Capital contributions to subsidiary bank
    
    
    (6,500
    )
    
    
    (67,000
    )
    
    
    Issuance of long-term debt
    
    
    
    
    
    
    25,774
    
    
    
    7,732Dividends paid
    
    
    (3,211
    )
    
    
    (2,152
    )
    
    
    (1,667
    )Net cash provided (used) by financing activities
    
    
    (7,278
    )
    
    
    7,502
    
    
    
    5,924Increase (decrease) in cash and due from banks
    
    
    (6,563
    )
    
    
    5,032
    
    
    
    7,119Cash and due from banks at beginning of year
    
    
    13,001
    
    
    
    7,969
    
    
    
    850Cash and due from banks at end of year
    
    $
    6,438
    
    
    $
    13,001
    
    
    $
    7,969
 15. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments (SFAS No. 107), 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 No. 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. -46-




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##### Table of Contents



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: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(Dollars in thousands)Financial assets:Cash and cash equivalents
    
    $
    86,150
    
    
    $
    86,150
    
    
    $
    88,871
    
    
    $
    88,871Marketable securities available for sale
    
    
    135,530
    
    
    
    135,530
    
    
    
    121,711
    
    
    
    121,711Marketable securities held to maturity
    
    
    84,902
    
    
    
    85,147
    
    
    
    67,819
    
    
    
    70,127Federal Home Loan Bank and Federal Reserve Bank stock
    
    
    14,688
    
    
    
    14,688
    
    
    
    4,564
    
    
    
    4,564Loans, net
    
    
    1,217,364
    
    
    
    1,233,443
    
    
    
    1,005,187
    
    
    
    1,007,448Accrued interest receivable
    
    
    5,582
    
    
    
    5,582
    
    
    
    5,384
    
    
    
    5,384Cash surrender value of bank owned life insurance
    
    
    19,111
    
    
    
    19,111
    
    
    
    18,153
    
    
    
    18,153Financial liabilities:Deposits
    
    
    1,195,875
    
    
    
    1,205,379
    
    
    
    1,079,684
    
    
    
    1,093,730Securities sold under agreements to repurchase
    
    
    63,686
    
    
    
    63,686
    
    
    
    70,764
    
    
    
    70,764Borrowings
    
    
    249,322
    
    
    
    249,450
    
    
    
    113,174
    
    
    
    113,174
 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, 2003 and 2002. 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, 2003 and 2002. 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. Borrowings.Borrowings consist of Trust Preferred Securities, Federal
Home Loan Bank advances, and a note payable. Fair values are estimated based
on the current rates offered for similar borrowing arrangements at December 31,
2003, and 2002. 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. -47-