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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



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

For the fiscal year ended December 31, 2005



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

For the transition period from  to

Commission file number: 001-12487



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FIRST STATE BANCORPORATION

(Exact name of registrant as specified in its charter)



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



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

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



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



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

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

Common Stock, no par value

(Title
of class)



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Indicate by check
mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark whether the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $274,022,000, computed by reference to the closing sale price of the stock on The Nasdaq Stock Market on
June 30, 2005, the last trading day of the registrants most recently completed second fiscal quarter.

As of March 14, 2006, there were
17,569,810 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 2006 Annual Shareholders Meeting, which will be filed with the Commission by April 19, 2006.



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TABLE OF CONTENTS



|         |  |                                                                                                              |  |                
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---------------
|         |  |                                                                                                              |  | Page           
|PART I   |  |                                                                                                              |  |                
|Item 1:  |  | Business                                                                                                     |  | 3              
|Item 1A: |  | Risk Factors                                                                                                 |  | 17             
|Item 1B: |  | Unresolved Staff Comments                                                                                    |  | 20             
|Item 2:  |  | Properties                                                                                                   |  | 20             
|Item 3:  |  | Legal Proceedings                                                                                            |  | 21             
|Item 4:  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 21             
|PART II  |  |                                                                                                              |  |                
|Item 5:  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 21             
|Item 6:  |  | Selected Financial Data                                                                                      |  | 22             
|Item 7:  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 22             
|Item 7A: |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 22             
|Item 8:  |  | Financial Statements and Supplementary Data                                                                  |  | 22             
|Item 9:  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 23             
|Item 9A: |  | Controls and Procedures                                                                                      |  | 23             
|Item 9B: |  | Other Information                                                                                            |  | 23             
|PART III |  |                                                                                                              |  |                
|Item 10: |  | Directors and Executive Officers of the Registrant                                                           |  | Proxy Statement
|Item 11: |  | Executive Compensation                                                                                       |  | Proxy Statement
|Item 12: |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | Proxy Statement
|Item 13: |  | Certain Relationships and Related Transactions                                                               |  | Proxy Statement
|Item 14: |  | Principal Accounting Fees and Services                                                                       |  | Proxy Statement
|PART IV  |  |                                                                                                              |  |                
|Item 15: |  | Exhibits, Financial Statement Schedules                                                                      |  | 25             
|         |  | Signatures                                                                                                   |  | 27             
|         |  | Financial Information                                                                                        |  | Appendix A     

Forward-Looking Statements

Certain statements in this Form 10-K are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange
Act). The discussions regarding our growth strategy, expansion of operations in our markets, acquisitions, competition, loan and deposit growth, timing of new branch openings, 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, successful integration of Access and NMFC into our operations, faster or slower than anticipated growth, economic conditions, our competitors responses to our marketing strategy or new competitive
conditions, and competition in the geographic and business areas in which we conduct our operations. We are not undertaking any obligation to update these risks to reflect events or circumstances after the date of this report to reflect the
occurrence of unanticipated events.



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PART I

Item 1: Business.

First State Bancorporation

We are a New Mexico-based bank holding company. We provide commercial banking services to businesses through our subsidiary bank, First Community Bank, formerly First State Bank N.M. (First Community Bank
or Bank). At December 31, 2005, we operated thirty-one branch offices, including twenty-three in New Mexico (three offices in Taos, nine offices in Albuquerque, four offices in Santa Fe, and one office each in Rio Rancho, Los Lunas,
Bernalillo, Pojoaque, Placitas, Moriarty, and Belen), six in Colorado (Denver, Colorado Springs, Fort Collins, Lakewood, Littleton, and Longmont), and two in Utah (Midvale and Salt Lake City). In January 2006, we closed on the acquisition of two
financial institutions which strengthened our branch network in New Mexico and gave us a presence in Arizona. See History. First Community Bank began in 1922 in Taos County as a single bank, and is currently the largest bank in that
county. At December 31, 2005, we had total assets, total deposits, and total stockholders equity of $2.158 billion, $1.510 billion, and $160 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) expand operations in
Arizona focusing on the greater Phoenix metropolitan area; (v) maintain asset quality through strict adherence to credit administration standards; (vi) manage interest rate risk; (vii) continue to improve internal operating systems;
(viii) increase non-interest income, and (ix) manage non-interest expenses.

We believe that we are well qualified to pursue an aggressive growth
strategy throughout New Mexico, Colorado, Utah, and Arizona 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, Utah, and Arizona 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, Phoenix, 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, 2005, First State Bancorporation and First Community Bank were well capitalized under regulatory capital guidelines.

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

History

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



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

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

On October 1, 2002 we entered the Colorado and Utah markets when we completed our acquisition of First Community Industrial Bank. 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 Industrial Bank into First State Bank and officially changed
the name of the Bank to First State Bank N.M.

During the third quarter of 2005, First State Bank N.M. entered into two separate purchase agreements to
acquire Access Anytime Bancorp, Inc. (Access) and New Mexico Financial Corporation (NMFC). Both acquisitions closed in January 2006. The acquisition of Access added three branches in Albuquerque in addition to six branches in
Clovis, Gallup, Las Cruces, and Portales, New Mexico, and one in Sun City, Arizona. Through the Access transaction we acquired approximately $198 million in loans and $315 million in deposits. The acquisition of NMFC added two branches each in our
existing markets of Albuquerque, Belen, and Los Lunas, New Mexico as well as one branch each in Edgewood, Grants, and Moriarty, New Mexico. NMFC had approximately $35 million in loans and $90 million in deposits on the date of acquisition. We are
still pending valuations of certain assets and liabilities for both Access and NMFC, but expect to record goodwill related to these transactions of approximately $22 million. After announcing the potential acquisitions and in an effort to provide us
with brand recognition across all the markets we serve, we elected to change the name of the Bank to First Community Bank. See Note 2 of Notes to Consolidated Financial Statements for additional information on these acquisitions.

Operating Strategy

Our operating
strategies include:



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



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



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



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



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



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



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

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

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



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

Community Involvement. First Community 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 Community Bank management also sponsors a number of community-oriented events each year, contributing over
$1 million toward these events in 2005. We believe that these activities assist First Community 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
continue to produce operational efficiencies over the next few years. Our investments in internet and telephone banking continue to provide alternative methods to enhance our ability to service both our retail and commercial customers. We continue
on an implementation path with an imaging based document management and archiving system that is providing efficiencies in managing document flow and ensuring records retention is managed correctly and efficiently. All of our locations are linked
together by a private voice and data network eliminating long distance costs for intracompany phone calls and data transmission. We have implemented VPN technology, which allows bank employees greater communication flexibility throughout the
organization as well as increasing worker productivity. We are prepared for the efficiencies that will come with Check 21 with the development of our long term check and payment strategies. We believe these investments as well as others will allow
us to expand our asset base without a commensurate increase in non-interest expenses.

We continue to evaluate and improve our branch locations and
facilities. In 2003, we began repositioning several of our facilities in Colorado and Utah to improve the future growth in these markets. Our repositioning and renovation continued into 2005 and included opening one new branch in both Colorado and
Utah and closing one facility in New Mexico. Our occupancy expenses grew slightly during 2005 and will increase modestly in 2006 with the addition of de novo branches in Colorado Springs, Colorado and Rio Rancho, New Mexico which are expected to
open in the second quarter of 2006. In addition, two de novo branches in Albuquerque, New Mexico and Ft. Collins, Colorado, are planned for the first quarter 2007. We believe our investments in facilities will facilitate future growth as well as
enable us to provide the convenience and quality of service that our customers deserve.

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

Growth Strategy

We expect to
continue pursuing a growth strategy through a combination of internal growth, de novo branching, and selective acquisitions. Our total assets have grown from $494 million at December 31,



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1998 to $2.2 billion through internal growth, de novo branching, and acquisition activity. Our acquisition of Access and
NMFC in January 2006, added approximately $400 million in total assets. 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.

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

We believe that the strategy we have employed successfully in
the New Mexico market and are currently employing in the Colorado and Utah markets can be successfully employed in other markets in the Southwest including the markets Access and NMFC operate in. The addition of these two institutions increases our
New Mexico presence into the southern part of New Mexico and will provide us with new opportunities in the Arizona market.

We intend to continue exploring
opportunities to expand into markets in the southwestern United States either through acquisition of existing institutions with a branch structure in markets with characteristics similar to those in New Mexico, or through de novo branching into
markets that display those characteristics.

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

Market Areas and Banks

Markets. First Community Bank serves three distinct market areas within New Mexico: the Albuquerque
metropolitan area (Bernalillo, Sandoval, Torrance, and Valencia counties), Taos County and Santa Fe County. In 2002, First State Bank entered into the Colorado and Utah markets with the acquisition of First Community. The Bank also operates in
two distinct market areas in Colorado and Utah: the Colorado front range market area, which includes the Denver metropolitan area, and the Salt Lake City, Utah metropolitan area. The acquisition of Access strengthens our presence in the Albuquerque
metropolitan area and adds a presence in Clovis (Curry County), Gallup (McKinley County), Portales (Roosevelt County), and Las Cruces (Dona Ana County), New Mexico, as well as Sun City, Arizona, a suburb of Phoenix, Arizona, in Maricopa County. The
NMFC acquisition also expands our branch network in the Albuquerque metropolitan area and adds a branch in southern Santa Fe County.

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, The Gap, Wal-Mart, and Eclipse Aviation have initiated or expanded operations in the area in the past several
years.

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.



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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, Lakewood, and Littleton), and the
surrounding communities of Colorado Springs, Longmont, and Fort Collins. Denver, the capital of Colorado and the states largest city, has a diverse economy including telecommunications, aerospace, financial services, computer software,
biomedical, and many other high tech sectors. Colorado Springs also plays host to a growing number of high technology industries. Many private sector leaders in their fields are located in the front range area, including Qwest Communications, Intel,
and Lockheed Martin. The Colorado front range has emerged as a premier center for high-tech and other businesses providing a blend of quality, affordable lifestyle, cultural and national sports attractions, and desirable climate.

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.

Clovis, New Mexico and nearby Portales, New Mexico are small communities in the
east-central side of the state. Clovis is home to Cannon Air Force Base, which is currently searching for a new mission in order to remain open past 2009. Portales is home to one of the states major universities, Eastern New Mexico University.
Both communities are also supported by agricultural activity.

Gallup, New Mexico, in the west-central area of the state is on Interstate 40 (the only
east-west interstate spanning New Mexico) just miles from the Arizona border. Gallup is adjacent to the Navajo Indian reservation, the largest Native American Indian reservation in land size in the United States.

Las Cruces, New Mexico, is the second largest city in New Mexico and marks the southern end of Interstate 25 at its intersection with Interstate 10 approximately 45
miles from El Paso, Texas. Las Cruces is home to New Mexico State University and has experienced strong growth over the last several years. The economy of Las Cruces also benefits from its proximity to military installations, including White Sands
Missile Range.

Sun City in Maricopa County, Arizona, is best known as a retirement community just minutes away from Phoenix, Arizona, the largest city in
the state. Phoenix has a very diverse economic base which has seen dramatic growth over the last several years.

First Community Banks operations as
of December 31, 2005 are divided into eight regions: Taos which includes Taos County; Santa Fe which includes Santa Fe County; Albuquerque metropolitan area 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.
The Access and NMFC acquisitions add two additional operating regions: Southern New Mexico which includes Roosevelt, Curry, and Dona Ana Counties, and Arizona which includes Maricopa County.



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First Community Bank. The following table sets forth certain information concerning the banking offices of First
Community Bank as of December 31, 2005:



|                                 |  |                        |  |                |           |             |   |          
|-------------------------------- |  | ---------------------- |  | -------------- | --------- | ----------- | - | ---------
|Location                         |  | Number of Facilities   |  | Total Deposits |           | Total Loans
|                                 |  | (Dollars in thousands)
|First Community Bank (by Region) |  |                        |  |                |           |             |   |          
|Taos                             |  | 3                      |  | $              | 159,585   |             | $ | 50,077   
|Santa Fe                         |  | 5                      |  |                | 169,629   |             |   | 228,178  
|Albuquerque Metropolitan         |  | 12                     |  |                | 852,602   |             |   | 688,914  
|Los Lunas                        |  | 3                      |  |                | 115,687   |             |   | 82,352   
|Northern Colorado                |  | 2                      |  |                | 24,467    |             |   | 51,225   
|Central Colorado                 |  | 3                      |  |                | 101,101   |             |   | 159,010  
|Southern Colorado                |  | 1                      |  |                | 72,710    |             |   | 172,206  
|Utah                             |  | 2                      |  |                | 14,226    |             |   | 93,965   
|                                 |  |                        |  |                |           |             |   |          
|Total                            |  | 31                     |  | $              | 1,510,007 |             | $ | 1,525,927
|                                 |  |                        |  |                |           |             |   |          

The Access and NMFC acquisitions subsequent to December 31, 2005 add two additional operating regions in
Southern New Mexico and Arizona. See Note 2 of Notes to Consolidated Financial Statements for additional information on these acquisitions.

First
Community 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.

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

The Colorado and Utah locations provide conventional commercial and real estate secured commercial lending to small to medium size businesses and individual customers in
these markets. These locations also provide a full range of banking services, including a full complement of deposit and residential construction and mortgage lending, and other loan services.



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The following is a summary of the percentage of our deposits to total deposits of FDIC insured institutions (market
share) in the counties in which we do business as of June 30, 2005:



|           |  |       |   
|---------- |  | ----- | --
|New Mexico |  |       |   
|           | 
|Taos       |  | 44.90 | % 
|Bernalillo |  | 8.55  | % 
|Santa Fe   |  | 9.17  | % 
|Sandoval   |  | 38.85 | % 
|Valencia   |  | 19.79 | % 
|Torrance   |  | 15.10 | % 
|           | 
|Colorado   |  |       |   
|           | 
|Larimer    |  | 0.16  | % 
|Boulder    |  | 0.31  | % 
|Denver     |  | 0.25  | % 
|Jefferson  |  | 0.00  | %*
|Arapahoe   |  | 0.38  | % 
|El Paso    |  | 1.41  | % 
|           | 
|Utah       |  |       |   
|           | 
|Salt Lake  |  | 0.01  | % 

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|* | We closed our branch in Jefferson County effective December 31, 2004 and the existing loans and deposits were serviced by our branches in Denver County or Arapahoe County until
the new banking location was opened in Jefferson County in the third quarter of 2005.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 Community 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 continue to believe that the Colorado and Utah markets represent a great opportunity for growth
as we continue to aggressively seek commercial banking relationships with small to medium size businesses. We expect that the continued integration of our individualized customer service will result in increased market share in Colorado and Utah.

The acquisitions of Access and NMFC increase our market share throughout New Mexico and provide significant opportunities for growth in the Phoenix,
Arizona metropolitan area.

Competition

First
Community 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 Community Bank also faces significant competition for investors funds from sellers of short-term money market securities and other corporate and government securities.



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First Community Bank competes for loans principally through the range and quality of its services, interest rates, and
loan fees. We believe that First Community Banks personal-service philosophy enables the bank to compete favorably with other financial institutions in its focus market of local businesses. First Community 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, 2005, we had 663 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. The Access and NMFC acquisitions have added approximately 180 full-time employees.

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.

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

First Community Bank.As a New Mexico-chartered state member bank of the Federal Reserve System, First Community 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 Community 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



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deposits, management practices, branching, loans, investments, and the provision of services. Various consumer protection
laws and regulations also affect the operations of First Community Bank. The deposits of First Community 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 Community Bank. Our principal asset is the outstanding capital stock of First Community
Bank. As a result, our ability to pay dividends on our common stock will depend primarily on the ability of First Community Bank to pay dividends to us in amounts sufficient to service our obligations. Dividend payments from First Community 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 Community Bank may not pay a dividend in
an amount greater than its net profits. First Community 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 Community Bank, be deemed to constitute an unsafe or unsound practice.

Under New Mexico law, First Community 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 Community 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



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

Our subsidiary, First Community 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 Community Bank are provided in the chart below.

Risk-Based Capital and Leverage Ratios



|                                 |  |                                           |   |  |               |   |  |                |  
|-------------------------------- |  | ----------------------------------------- | - |  | ------------- | - |  | -------------- | -
|                                 |  | As of December 31, 2005 Risk-Based Ratios |  
|                                 |  | Tier I Capital                            |   |  | Total Capital |   |  | Leverage Ratio |  
|First State Bancorporation       |  | 9.6                                       | % |  | 10.6          | % |  | 8.2            | %
|First Community Bank             |  | 9.4                                       | % |  | 10.4          | % |  | 8.0            | %
|Minimum required ratio           |  | 4.0                                       | % |  | 8.0           | % |  | 4.0            | %
|Well capitalized minimum ratio |  | 6.0                                       | % |  | 10.0          | % |  | 5.0            | %

The subsequent acquisition of Access, NMFC, and their respective banking subsidiaries did not materially affect
the risk-based capital and leverage ratios.

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 risk-based capital regulations also provide for the consideration of interest rate risk in the agencies determination of a banking
institutions capital adequacy. The regulations require such institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk.

Prompt Corrective Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the federal banking agencies must take prompt supervisory and regulatory actions against undercapitalized
depository institutions. Depository institutions, such as First Community 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



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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, 2005, each of First State Bancorporation and First Community Bank
exceeded the required capital ratios for classification as well capitalized.

Enforcement Powers of the Federal Banking Agencies. The
federal banking agencies have broad enforcement powers. Failure to comply with applicable laws, regulations, and supervisory agreements could subject First State Bancorporation or First Community 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



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

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

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

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



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subsidiary of a national or state bank, with the exception of insurance or annuity underwriting, insurance company
portfolio investments, real estate investment and development, and merchant banking, all of which must be conducted by the financial holding company.

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

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

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

Check 21 Act. We are subject to the Check Clearing for the 21st Century Act (the Check 21 Act), which was enacted on October 28, 2003 and became effective on October 28, 2004. The Check 21 Act authorizes a new
negotiable instrument called a substitute check to facilitate check truncation and electronic check exchange. A substitute check is a paper reproduction of the original check that contains an image of the front and back of the original
check and can be processed just like the original check. The Check 21 Act provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes. The Check 21 Act does not require any bank to create
substitute checks or to accept checks electronically. The Check 21 Act includes new warranties, an indemnity, and expedited re-credit procedures that protect substitute check recipients. We have established policies and procedures designed for
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Corporate Governance - Sarbanes-Oxley Act of 2002 and NASD Independence Rules.We are subject to the
Sarbanes-Oxley Act of 2002 (SOX), which implemented reforms intended to address securities and accounting fraud. Among other things, SOX established a new accounting oversight board to enforce auditing, quality control and independence
standards, restricts provision of both auditing and consulting services by accounting firms, and provides audit committee pre-approval of non-audit services to audit clients. To insure auditor independence, any non-audit services being provided to
an audit client requires pre-approval by a companys audit committee members. SOX requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Commission,
subject to civil and criminal penalties for knowing violations. SOX also requires audit committees to be independent, and enacts other requirements for audit committee operations and selection of auditor. SOX expands the scope and penalties of the
federal criminal code relating to securities and accounting fraud, and afford protection for employees who are whistle-blowers. We are subject to the requirements of Section 404 of SOX wherein management is required to establish and
maintain internal controls and procedures for financial reporting and to report annually on (1) managements responsibility for the internal controls and procedures for financial reporting and (2) their effectiveness. The assessment
reported by management is the subject of an attestation report by our independent external audit firm.

Our independent registered public accounting firm
has attested to, and reported on, managements evaluation of internal controls and procedures over financial reporting as of December 31, 2005, which appears in Appendix A.

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

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

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

The U.S. Congress approved deposit insurance reform at the
beginning of February 2006. Under the new program, the Bank Insurance Fund and the Savings and Loan Insurance Fund will be merged. In addition, the FDIC may from time to time adjust the minimum reserve ratio, currently fixed at 1.25%, within a range
between 1.15% and 1.50%, and may adopt a risk-based premium system. Certain retirement accounts may receive coverage up to $250,000, and the FDIC may adjust coverage levels for inflation commencing in 2010.

In November 2005, the FDIC announced that it expected the Bank Insurance Fund to fall below its statutorily mandated reserve target of 1.25% of insured deposits by early
2006. This could cause the FDIC to impose premiums on all Bank Insurance Fund  insured institutions.



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

Item 1A: Risk Factors.

Interest Rate Risk

Fluctuations in interest rates could reduce our profitability.Our net interest income may be reduced by changes in the interest rate environment. Our earnings depend to a significant extent on the interest
rate differential. The interest rate differential or spread is the difference between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing
liabilities. These rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. In particular, changes in the discount rate by the
Board of Governors of the Federal Reserve System usually lead to changes in interest rates, which affect our interest income, interest expense and securities portfolio. Net interest spreads are affected by the difference between the maturities and
repricing characteristics of interest-earning assets and interest-bearing liabilities. Loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan
originations. First State cannot assure you that it can minimize its interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of
their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect its net interest spread, asset quality, loan origination volume and overall profitability.

In addition, our net income is affected by our interest rate sensitivity. Interest rate sensitivity is the difference between our interest-earning assets and our
interest-bearing liabilities maturing or repricing within a given time period. Interest rate sensitivity is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. As of
December 31, 2005, our interest sensitivity was positive. As a result, if a decrease in rates occurs, our results of operations and financial condition may be adversely affected.

Government Policies

We operate in a highly regulated environment; changes in federal and state laws and
regulations and accounting principles may adversely affect us. We are a bank holding company. Bank holding companies and their depository institution subsidiaries operate in a highly regulated environment, subject to extensive supervision and
examination by federal and state bank regulatory agencies. We are subject to changes in federal and state law, as well as changes in regulation and governmental policies, income tax law and accounting principles. Any change in applicable
regulations, or federal or state legislation or in accounting principles could have a significant impact on us and our results of operations. Additional legislation or regulations may be enacted or adopted in the future that could significantly
affect our powers, authority and operations. If new legislation, regulations or accounting principles are enacted or adopted, our results of operations and financial condition may be adversely affected.



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In particular, we are subject to the Bank Holding Company Act of 1956, as amended, and to regulation and supervision by
the Federal Reserve Board. First Community Bank, as a state member bank of the Federal Reserve System, is subject to regulation and supervision by the Federal Reserve Board and the New Mexico Financial Institutions Division of the Regulation and
Licensing Department and, because its deposits are insured, by the Federal Deposit Insurance Corporation. Our operations in Colorado, Utah, and Arizona may also be subject to regulation and supervision by the Banking Board of the State of Colorado,
the Utah Department of Financial Institutions, and the Arizona State Banking Department, respectively. Regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding
companies in the performance of the regulators supervisory and enforcement duties. If regulators exercise these powers, our results of operations and financial condition may be adversely affected.

The Federal Reserve Board has a policy stating that a bank holding company is expected to act as a source of financial and managerial strength to a subsidiary bank and
to commit resources to support the subsidiary bank. Under this doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in
unsafe and unsound practices if it fails to commit resources to such a subsidiary bank. A capital injection may be required at times when the holding company may be required to borrow the funds or otherwise obtain the funds from external sources.

Banking regulations may restrict our ability to pay dividends.Although we hold all of the outstanding capital stock of First Community Bank, we
are a legal entity separate and distinct from First Community Bank. Our ability to pay dividends on our common stock will depend primarily on the ability of First Community Bank to pay dividends to us. The Banks ability to pay dividends and
make other capital distributions to us is governed by federal and state law. Federal and state regulatory limitations on the banks dividends generally are based on the banks capital levels and current and retained earnings. The earnings
of the Bank may not be sufficient to make capital distributions to us in an amount sufficient for us to service our obligations or to pay dividends on our common stock.

First Community Bank is prohibited under federal law from paying any dividend that would cause it to become undercapitalized. As of December 31, 2005, First Community Bank met the capital requirements
of a well capitalized institution under applicable Federal Reserve Board regulations. We cannot assure you that the bank will remain well capitalized.

It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is
consistent with the organizations expected future needs and financial condition. Federal Reserve Board policy also provides that bank holding companies should not maintain such a level of cash dividends that would undermine the bank holding
companys ability to provide financial resources as needed to its insured banking subsidiaries. Additionally, the Federal Reserve Board has the right to object to a distribution on safety and soundness grounds. Depending upon the circumstances,
the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

Credit Risk

Defaults in the repayment of loans may negatively affect our business.A borrowers default on its obligations under one or more of our
loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work out of the loan. In certain situations, where collection efforts are
unsuccessful or acceptable work-out arrangements cannot be reached, we may have to write-off the loan in whole or in part. In these situations, we may acquire real estate or other assets, if any, which secure the loan through foreclosure or other
similar available remedies. In these cases, the amount owed under the defaulted loan often exceeds the value of the assets acquired.



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We periodically make a determination of an allowance for loan losses based on available information, including the
quality of our loan portfolio, economic conditions, the value of the underlying collateral and the level of our non-accruing loans. Provisions for this allowance result in an expense for the period. If, as a result of general economic conditions or
an increase in defaulted loans, we determine that additional increases in the allowance for loan losses are necessary, we may incur additional expenses. In addition, bank regulatory agencies periodically review our allowances for loan losses and the
values we attribute to real estate acquired through foreclosure or other similar remedies. These regulatory agencies may require us to adjust our determination of the value for these items. If we are required to adjust our allowances for loan
losses, our results of operations and financial condition may be adversely affected.

Environmental liability associated with commercial lending could
result in losses.In the course of our business, we may acquire through foreclosure properties securing loans that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on
these properties. In this event, under some circumstances we might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of the affected
properties. We may not have adequate remedies against the prior owner or other responsible parties, and could find it difficult or impossible to sell the affected properties. If we experience these difficulties, our results of operations and
financial condition may be adversely affected.

Competition

Competition with other financial institutions could adversely affect our profitability. The banking business is highly competitive, and our profitability depends upon our ability to compete in our market areas.
We compete with other commercial and savings banks and savings and loan associations. We also compete with credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and
governmental organizations that may offer subsidized financing at lower rates than those we offer. Many of our competitors have significantly greater financial and other resources than we do. Although we have been able to compete effectively in the
past, we may not be able to compete effectively in the future. Our large competitors may also in the future attempt to respond directly to our marketing strategy by emphasizing similar services.

Economy

Our profitability depends significantly on local and
overall economic conditions.Our success is dependent to a significant extent upon local economic conditions in the communities we serve and the general economic conditions in the United States. The economic conditions, including real estate
values, in these areas and throughout the United States have a significant impact on loan demand, the ability of borrowers to repay these loans and the value of the collateral securing these loans. A decline in economic conditions, including a
decline in real estate values, over a prolonged period of time in any of these areas could cause significant increases in nonperforming assets, which could cause decreased operating results, liquidity and capital.

Our loan portfolio is also concentrated in New Mexico, Colorado and Utah. Adverse economic conditions in these states could affect our ability to attract deposits and
result in high rates of loss and delinquency on our loan portfolio compared to competitors who may have more geographic diversification.

Our small to
medium-sized business customers may have fewer financial resources with which to weather a downturn in the economy. One of the primary focal points of our business development and marketing strategy is serving the banking and financial services
needs of small to medium-sized businesses. Small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions become unfavorable in New Mexico,
Colorado, Utah and now Arizona, the businesses of our customers and their ability to repay outstanding loans may be negatively affected. As a consequence, our results of operations and financial condition may be adversely affected.



19



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Integration Risk

The Integration Process Could Disrupt Each Companys Ongoing Businesses.We have operated and, until the completion of the integration of the acquisitions of Access and NMFC, will continue to operate each acquired bank
independently. It is possible that the integration process could result in the loss of key employees, as well as the disruption of each banks ongoing businesses or inconsistencies in standards, controls, procedures and policies, any or all of
which could adversely affect our ability to maintain relationships with clients, customers, depositors and employees after the acquisitions or to achieve the anticipated benefits of the acquisitions. Integration efforts between the two banks and us
will also divert management attention and resources. These integration matters could have an adverse effect on our operations.

Acquisition Risk

First State May Fail To Realize the Anticipated Benefits of the Acquisitions.The success of the acquisitions of Access and NMFC will depend, in
part, on our ability to realize the anticipated growth opportunities, economies of scale and other benefits from combining the operations of Access and NMFC into ours. To realize the anticipated benefits of this combination, our management team must
develop strategies and implement a business plan that will successfully combine the businesses. If we do not realize economies of scale and other anticipated benefits as a result of the acquisitions, the value of our common stock may decline.

Disruptions

An extended disruption of our
vital infrastructure could negatively impact our operations, results and financial condition. Our operations depend upon, among other things, our infrastructure, including equipment and facilities. An extended disruption of vital infrastructure
by fire, power loss, computer hacking or viruses, terrorist activity, natural disaster, telecommunications failure or other events beyond our control could impact the financial services industry as a whole and our business. Our business recovery
plan may not work as intended or may not prevent significant interruptions of our operations.

Item 1B: Unresolved Staff Comments.

None.

Item 2: Properties.

Our principal offices are located at 7900 Jefferson NE, Albuquerque, New Mexico 87109. We provide
services to customers from a total of thirty-one branches including twenty-three in New Mexico, six in Colorado, and two in Utah. These offices are located in the cities of Taos (3), Albuquerque (9), Santa Fe (4), Rio Rancho, Belen, Bernalillo, Los
Lunas, Moriarty, Placitas, and Pojoaque, New Mexico; Colorado Springs, Denver, Lakewood, Littleton, Longmont, and Fort Collins, Colorado; and Midvale and Salt Lake City, Utah. In addition to these branch offices, we have separate loan production
offices in Denver, Colorado, and Salt Lake City, Utah, and two administrative facilities in Albuquerque. With the exception of the Main and Southside facilities in Taos, the Journal Center facility in Albuquerque, the Bernalillo facility, the
Littleton facility, and the Salt Lake City facility, which are owned by First Community Bank, we lease our banking facilities. We monitor the quality and appearance of our banking facilities and complete renovations as considered appropriate in
order to effectively serve our customers. All of the facilities in Colorado and Utah have been renovated and/or relocated to new facilities since 2002, and the majority of our New Mexico facilities have been renovated or built within the last 10
years. See Item 13: Certain Relationships and Related Transactions.

The acquisitions of Access and NMFC in January 2006, added nineteen
additional branch locations; eighteen in New Mexico and one in Arizona. These offices are located in the New Mexico cities of Albuquerque (5), Belen (2), Clovis (2), Las Cruces (2), Los Lunas (2), Edgewood, Gallup, Grants, Moriarty and Portales, and
Sun City, Arizona. We expect to close two branches acquired from NMFC,



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##### Table of Contents

one in Belen and one in Los Lunas in the first half of 2006 and consolidate our existing branch in Moriarty into the
Moriarty branch acquired from NMFC. Except for one branch in Albuquerque and the Edgewood branch, which are leased, the remaining acquired branches are owned facilities.

Item 3: Legal Proceedings.

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

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

No matters were submitted to
a vote of our security holders during the fourth quarter of 2005.

PART II

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

Price Range of Common Stock

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



|                   |  |                      |  |                |  |            |  |               |  |                |  |                  
|------------------ |  | -------------------- |  | -------------- |  | ---------- |  | ------------- |  | -------------- |  | -----------------
|                   |  | Per Share (1)       
|Quarter Ended      |  | Diluted Net Earnings |  | Dividends Paid |  | Book Value |  | Low Price (2) |  | High Price (2) |  | Quarter End Price
|December 31, 2005  |  | 0.39                 |  | 0.07           |  | 10.41      |  | 20.67         |  | 25.79          |  | 23.99            
|September 30, 2005 |  | 0.39                 |  | 0.07           |  | 10.14      |  | 18.69         |  | 23.43          |  | 21.19            
|June 30, 2005      |  | 0.32                 |  | 0.07           |  | 9.83       |  | 16.85         |  | 19.58          |  | 19.29            
|March 31, 2005     |  | 0.28                 |  | 0.07           |  | 9.51       |  | 16.95         |  | 19.22          |  | 16.98            
|December 31, 2004  |  | 0.27                 |  | 0.06           |  | 9.42       |  | 15.46         |  | 19.26          |  | 18.38            
|September 30, 2004 |  | 0.27                 |  | 0.06           |  | 9.27       |  | 14.51         |  | 15.80          |  | 15.77            
|June 30, 2004      |  | 0.22                 |  | 0.06           |  | 8.88       |  | 14.95         |  | 16.25          |  | 15.43            
|March 31, 2004     |  | 0.23                 |  | 0.06           |  | 8.93       |  | 14.98         |  | 18.12          |  | 15.39            

---

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

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

The last reported sale price of our Common Stock on March 14, 2006, was $25.19 per share. As of March 14, 2006, there were approximately 245 shareholders of record, not including shareholders who beneficially own
Common Stock held in nominee or street name.

Dividend Policy

We paid cash dividends of $4.3 million or $0.28 per share in 2005 and $3.6 million or $0.24 per share in 2004, which amounted to 20.14% and 23.63%, of net income in 2005 and 2004, respectively. The



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##### Table of Contents

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 Community Bank and our capital position. Capital distributions, including dividends, by
First Community 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.

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, 2005:



|                                                           |  |                                                                        |  |                                                        |       |                                                                                                                                           |        
|---------------------------------------------------------- |  | ---------------------------------------------------------------------- |  | ------------------------------------------------------ | ----- | ----------------------------------------------------------------------------------------------------------------------------------------- | -------
|                                                           |  | (a)                                                                    |  | (b)                                                    |       | (c)                                                                                                                                      
|Plan Category                                              |  | Number of securities to be issued upon exercise of outstanding options |  | Weighted-average exercise price of outstanding options |       | Number of securitiesremaining available forfuture issuance under equity
compensation plans (excluding securities reflected in column (a))
|Equity compensation plans approved by security holders     |  | 1,347,700                                                              |  | $                                                      | 14.58 |                                                                                                                                           | 343,624
|Equity compensation plans not approved by security holders |  |                                                                       |  |                                                        |      |                                                                                                                                           |       
|                                                           |  |                                                                        |  |                                                        |       |                                                                                                                                           |        
|Total                                                      |  | 1,347,700                                                              |  | $                                                      | 14.58 |                                                                                                                                           | 343,624
|                                                           |  |                                                                        |  |                                                        |       |                                                                                                                                           |        

Item 6: Selected Financial Data.

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

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

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

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

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

Item 8: Financial Statements and Supplementary Data.

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



22



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##### Table of Contents

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

None.

Item 9A: Controls and Procedures.

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

An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005 pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2005, 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 were no changes in our internal control over financial reporting during the quarter ended December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

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

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

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control Integrated Framework. Based on our assessment, we believe that, as of December 31, 2005, our
internal control over financial reporting is effective.

Managements assessment of the effectiveness of internal control over financial reporting as
of December 31, 2005, has been audited by KPMG, LLP, the independent registered public accounting firm who also audited our consolidated financial statements. KPMGs attestation report on managements assessment of our internal
control over financial reporting appears on page A-22 hereof.

Item 9B: Other Information.

In December 2005, we established a new nonqualified deferred compensation plan in compliance
with the American Jobs Creation Act of 2004 for certain of our highly compensated or management employees. The new plan allows employees to contribute up to 50% of the employees base pay and 100% of the employees bonus compensation. All
amounts contributed by employees vest immediately. Our 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. All amounts contributed are subject to an underlying trust and shall be subject to the claims of our general creditors. The deferred compensation plan is included in the exhibits filed herein.



23



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##### Table of Contents

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 2006 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 2006 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
2006 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 2006 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.fcbnm.com
Investor Relations.

Information regarding executive officers appearing under the caption Executive Officers of the Company in our
Proxy Statement for the 2006 Annual Meeting of Shareholders is hereby incorporated by reference.

Item 11: Executive Compensation.

Information appearing under the captions Compensation of Directors and
Executive Compensation in the 2006 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 2006 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 2006 Proxy Statement is hereby incorporated by reference.

Item 14: Principal Accounting Fees and Services.

Information regarding principal accountant fees and services appearing
under the caption Ratification of Independent Auditors in the 2006 Proxy Statement is incorporated herein by reference.



24



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##### Table of Contents

PART IV

Item 15: Exhibits, Financial Statement Schedules.

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



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



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



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



| |  |  | Managements Report on Internal Controls over Financial Reporting
| | - |  | -----------------------------------------------------------------



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



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



| |  |  | Consolidated Balance Sheets as of December 31, 2005 and 2004
| | - |  | ------------------------------------------------------------



| |  |  | Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004, and 2003
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2005, 2004, and 2003
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2005, 2004, and 2003
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003
| | - |  | -------------------------------------------------------------------------------------------

The above financial statements are incorporated by reference from pages A-23 through A-56 of the attached Appendix.



|2. | Financial Statement Schedules
|-- | -----------------------------

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



|3. | Exhibits
|-- | --------



|     |  |                                                                                                                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                                                                                                                                                                                      
|2.1  |  | 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.(6)
|     | 
|2.2  |  | Agreement and Plan of Merger, dated as of August 31, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc. and AccessBank.(9)                                                                                                                              
|     | 
|2.3  |  | Agreement and Plan of Merger, dated as of September 2, 2005, by and among First State Bancorporation, New Mexico Financial Corporation and Ranchers Banks.(10)                                                                                                                   
|     | 
|2.4  |  | Amendment Number 1 to the Agreement and Plan of Merger, dated September 29, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc. and AccessBank.(11)                                                                                                      
|     | 
|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.*                                                                                                                                                                                  
|     | 
|3.3  |  | Amended Bylaws of First State Bancorporation.(7)                                                                                                                                                                                                                                 
|     | 
|4    |  | Shareholder Protection Rights Agreement dated October 25, 1996.(3)                                                                                                                                                                                                               
|     | 
|10.1 |  | Executive Employment Agreement.(5)                                                                                                                                                                                                                                               



25



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##### Table of Contents

|     |  |                                                                                                                                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.2 |  | First State Bancorporation 2003 Equity Incentive Plan.(4)                                                                       
|     | 
|10.3 |  | Deferred Compensation Agreement.(7)(Participation and
contributions to this Plan have been frozen as of December 31, 2004.)     
|     | 
|10.4 |  | First Amendment to Executive Employment Agreement.(8)                                                                           
|     | 
|10.5 |  | Officer Employment Agreement.(8)                                                                                                
|     | 
|10.6 |  | First Amendment of Officer Employment Agreement.(8)                                                                             
|     | 
|10.7 |  | First State Bancorporation Deferred Compensation Plan.*                                                                         
|     | 
|14   |  | Code of Ethics for Executives.(7)                                                                                               
|     | 
|21   |  | Subsidiaries of Registrant.(2)                                                                                                  
|     | 
|23   |  | Consent of KPMG LLP. *                                                                                                          
|     | 
|31.1 |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                               
|     | 
|31.2 |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                               
|     | 
|32.1 |  | Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|     | 
|32.2 |  | Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

---

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

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

|(3) | Incorporated by reference from First State Bancorporations Form 8-A filed on November 21, 1996.
|--- | ------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from First State Bancorporations Current Report on Form 8-K filed June 9, 2003.
|--- | ----------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference from First State Bancorporations 10-K for the year ended December 31, 2001.
|--- | ------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from First State Bancorporations Form 8-K filed on May 31, 2002.
|--- | -------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from First State Bancorporations Form 10-Q for the quarter ended March 31, 2003.
|--- | -----------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference from First State Bancorporations Form 10-Q for the quarter ended March 31, 2005.
|--- | -----------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference from First State Bancorporations Current Report on Form 8-K filed September 2, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference from First State Bancorporations Current Report on Form 8-K filed September 6, 2005.
|---- | ---------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference from First State Bancorporations Current Report on Form 8-K filed September 30, 2005.
|---- | ----------------------------------------------------------------------------------------------------------------

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



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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:

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


Dated: March 16, 2006

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



|                                                  |  |                                                                                                                  |  |               
|------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------------
|Signatures                                        |  | Title                                                                                                            |  | Date          
|                                                  |  |                                                                                                                 
|/s/ Michael R. Stanford Michael R.
Stanford       |  | President and Chief Executive Officer and a Director (Principal Executive Officer)                               |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ H. Patrick Dee H. Patrick
Dee                 |  | Executive Vice President, Treasurer and a Director                                                               |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ Christopher C. Spencer Christopher
C. Spencer |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ Leonard J. DeLayo, Jr. Leonard J.
DeLayo, Jr. |  | Director                                                                                                         |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ Bradford M. Johnson Bradford M.
Johnson       |  | Director                                                                                                         |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ Douglas M. Smith, M.D. Douglas M.
Smith, M.D. |  | Director                                                                                                         |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ Herman N. Wisenteiner Herman N.
Wisenteiner   |  | Director                                                                                                         |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ Nedra Matteucci Nedra
Matteucci               |  | Director                                                                                                         |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ Lowell A. Hare Lowell A.
Hare                 |  | Director                                                                                                         |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ A.J. (Jim) Wells A.J. (Jim)
Wells             |  | Director                                                                                                         |  | March 16, 2006
|                                                  |  |                                                                                                                 
|/s/ Daniel H. Lopez Daniel H.
Lopez               |  | Director                                                                                                         |  | March 16, 2006



27



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##### Table of Contents

A
PPENDIX A

FIRST STATE BANCORPORATION AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                      |  |             
|----------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                      |  | Page        
|Financial Summary                                                                                     |  | A-2 to A-3  
|                                                                                                      | 
|Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | A-4 to A-19 
|                                                                                                      | 
|Managements Report on Internal Control over Financial Reporting                                      |  | A-20        
|                                                                                                      | 
|Report of Independent Registered Public Accounting Firm (Consolidated Financial Statements)           |  | A-21        
|                                                                                                      | 
|Report of Independent Registered Public Accounting Firm (Internal Control over Financial Reporting)   |  | A-22        
|                                                                                                      | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                          |  | A-23        
|                                                                                                      | 
|Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004, and 2003           |  | A-24        
|                                                                                                      | 
|Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2005, 2004, and 2003 |  | A-25        
|                                                                                                      | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2005, 2004, and 2003 |  | A-26        
|                                                                                                      | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003           |  | A-27        
|                                                                                                      | 
|Notes to Consolidated Financial Statements                                                            |  | A-28 to A-56



A-1



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##### Table of Contents

|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|--------------------------------------------------------------- |  | --------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                |  | FINANCIAL HIGHLIGHTS                          |           
|                                                                | 
|                                                                |  | Years ended December 31,                      |           
|                                                                |  | 2005                                          |            |   | 2004 |   |            | 2003 |  |   | 2002       |   |  | 2001 |           
|                                                                |  | (Dollars in thousands, except per share data) |           
|Statement of Operations Data:                                   |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Interest income                                                 |  | $                                             | 121,957    |   |      | $ | 93,442     |      |  | $ | 83,713     |   |  | $    | 59,846     |   |  | $ | 53,630     |  
|Interest expense                                                |  |                                               | 37,712     |   |      |   | 23,875     |      |  |   | 22,629     |   |  |      | 18,384     |   |  |   | 20,478     |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net interest income                                             |  |                                               | 84,245     |   |      |   | 69,567     |      |  |   | 61,084     |   |  |      | 41,462     |   |  |   | 33,152     |  
|Provision for loan losses                                       |  |                                               | (3,920     | ) |      |   | (4,500     | )    |  |   | (5,543     | ) |  |      | (2,589     | ) |  |   | (2,386     | )
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net interest income after provision for loan losses             |  |                                               | 80,325     |   |      |   | 65,067     |      |  |   | 55,541     |   |  |      | 38,873     |   |  |   | 30,766     |  
|Non-interest income                                             |  |                                               | 16,451     |   |      |   | 14,191     |      |  |   | 14,521     |   |  |      | 12,698     |   |  |   | 9,414      |  
|Non-interest expenses                                           |  |                                               | 63,590     |   |      |   | 55,478     |      |  |   | 47,242     |   |  |      | 35,982     |   |  |   | 27,517     |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Income before income taxes                                      |  |                                               | 33,186     |   |      |   | 23,780     |      |  |   | 22,820     |   |  |      | 15,589     |   |  |   | 12,663     |  
|Income tax expense                                              |  |                                               | 11,788     |   |      |   | 8,555      |      |  |   | 7,969      |   |  |      | 5,631      |   |  |   | 4,521      |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income                                                      |  | $                                             | 21,398     |   |      | $ | 15,225     |      |  | $ | 14,851     |   |  | $    | 9,958      |   |  | $ | 8,142      |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Per Share Data:                                                 |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income per diluted share                                    |  | $                                             | 1.36       |   |      | $ | 0.99       |      |  | $ | 0.98       |   |  | $    | 0.83       |   |  | $ | 0.81       |  
|Book value                                                      |  |                                               | 10.41      |   |      |   | 9.42       |      |  |   | 8.71       |   |  |      | 8.02       |   |  |   | 5.97       |  
|Tangible book value                                             |  |                                               | 7.56       |   |      |   | 6.55       |      |  |   | 5.81       |   |  |      | 4.99       |   |  |   | 5.93       |  
|Dividends paid                                                  |  |                                               | 0.28       |   |      |   | 0.24       |      |  |   | 0.22       |   |  |      | 0.20       |   |  |   | 0.17       |  
|Market price end of period                                      |  |                                               | 23.99      |   |      |   | 18.38      |      |  |   | 17.38      |   |  |      | 12.40      |   |  |   | 10.65      |  
|Weighted average diluted common shares outstanding              |  |                                               | 15,689,445 |   |      |   | 15,443,536 |      |  |   | 15,196,898 |   |  |      | 11,995,202 |   |  |   | 10,098,698 |  
|                                                                |  |                                               |            |   |     
|Average Balance Sheet Data:                                     |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total assets                                                    |  | $                                             | 1,977,615  |   |      | $ | 1,705,356  |      |  | $ | 1,466,715  |   |  | $    | 998,165    |   |  | $ | 718,178    |  
|Loans                                                           |  |                                               | 1,477,146  |   |      |   | 1,284,904  |      |  |   | 1,110,741  |   |  |      | 692,283    |   |  |   | 497,485    |  
|Investment securities                                           |  |                                               | 327,169    |   |      |   | 264,654    |      |  |   | 204,624    |   |  |      | 188,628    |   |  |   | 150,118    |  
|Interest-bearing deposits with other banks                      |  |                                               | 4,056      |   |      |   | 4,982      |      |  |   | 5,216      |   |  |      | 16,785     |   |  |   | 18,756     |  
|Federal funds sold                                              |  |                                               | 7,968      |   |      |   | 1,087      |      |  |   | 10,247     |   |  |      | 22,682     |   |  |   | 5,722      |  
|Deposits                                                        |  |                                               | 1,446,212  |   |      |   | 1,305,770  |      |  |   | 1,137,698  |   |  |      | 805,417    |   |  |   | 585,063    |  
|Borrowings                                                      |  |                                               | 285,527    |   |      |   | 190,542    |      |  |   | 136,504    |   |  |      | 41,695     |   |  |   | 1,486      |  
|Stockholders equity                                            |  |                                               | 152,695    |   |      |   | 139,122    |      |  |   | 126,328    |   |  |      | 82,053     |   |  |   | 55,623     |  
|                                                                |  |                                               |            |   |     
|Performance Ratios:                                             |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Return on average assets                                        |  |                                               | 1.08       | % |      |   | 0.89       | %    |  |   | 1.01       | % |  |      | 1.00       | % |  |   | 1.13       | %
|Return on average common equity                                 |  |                                               | 14.01      | % |      |   | 10.94      | %    |  |   | 11.76      | % |  |      | 12.14      | % |  |   | 14.64      | %
|Net interest margin                                             |  |                                               | 4.64       | % |      |   | 4.47       | %    |  |   | 4.59       | % |  |      | 4.50       | % |  |   | 4.93       | %
|Efficiency ratio                                                |  |                                               | 63.15      | % |      |   | 66.24      | %    |  |   | 62.49      | % |  |      | 66.44      | % |  |   | 64.65      | %
|Earnings to fixed charges:                                      |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Including interest on deposits                                  |  |                                               | 1.88x      |   |      |   | 2.00x      |      |  |   | 2.01x      |   |  |      | 1.85x      |   |  |   | 1.62x      |  
|Excluding interest on deposits                                  |  |                                               | 3.56x      |   |      |   | 6.11x      |      |  |   | 6.83x      |   |  |      | 8.08x      |   |  |   | 6.51x      |  
|                                                                |  |                                               |            |   |     
|Asset Quality Ratios:                                           |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Nonperforming assets to total loans and other real estate owned |  |                                               | 0.49       | % |      |   | 0.67       | %    |  |   | 1.14       | % |  |      | 1.17       | % |  |   | 0.50       | %
|Net charge-offs to average loans                                |  |                                               | 0.12       | % |      |   | 0.26       | %    |  |   | 0.29       | % |  |      | 0.16       | % |  |   | 0.30       | %
|Allowance for loan losses to total loans held for investment    |  |                                               | 1.16       | % |      |   | 1.13       | %    |  |   | 1.15       | % |  |      | 1.19       | % |  |   | 1.35       | %
|Allowance for loan losses to nonperforming loans                |  |                                               | 259        | % |      |   | 192        | %    |  |   | 113        | % |  |      | 108        | % |  |   | 290        | %
|                                                                |  |                                               |            |   |     
|Capital Ratios:                                                 |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Leverage ratio                                                  |  |                                               | 8.18       | % |      |   | 7.80       | %    |  |   | 7.93       | % |  |      | 7.82       | % |  |   | 7.76       | %
|Average stockholders equity to average total assets            |  |                                               | 7.72       | % |      |   | 8.16       | %    |  |   | 8.61       | % |  |      | 8.22       | % |  |   | 7.75       | %
|Tier I risk-based capital ratio                                 |  |                                               | 9.62       | % |      |   | 9.52       | %    |  |   | 9.52       | % |  |      | 10.42      | % |  |   | 10.59      | %
|Total risk-based capital ratio                                  |  |                                               | 10.63      | % |      |   | 10.58      | %    |  |   | 10.64      | % |  |      | 11.59      | % |  |   | 11.61      | %



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##### Table of Contents

|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | --------------------------------------------- | ---------- | - | --------- | - | ---------- | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | SELECTED QUARTERLY FINANCIAL DATA (unaudited) |           
|                                                    | 
|                                                    |  | 2005                                          |           
|                                                    |  | Fourth Qtr                                    |            |   | Third Qtr |   |            | Second Qtr |  |   | First Qtr  |  
|                                                    |  | (Dollars in thousands, except per share data) |           
|Statement of Operations Data:                       |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Interest income                                     |  | $                                             | 33,892     |   |           | $ | 31,829     |            |  | $ | 29,482     |   |  | $ | 26,754     |  
|Interest expense                                    |  |                                               | 11,399     |   |           |   | 9,963      |            |  |   | 8,937      |   |  |   | 7,413      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                                               | 22,493     |   |           |   | 21,866     |            |  |   | 20,545     |   |  |   | 19,341     |  
|Provision for loan losses                           |  |                                               | (445       | ) |           |   | (675       | )          |  |   | (1,725     | ) |  |   | (1,075     | )
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                                               | 22,048     |   |           |   | 21,191     |            |  |   | 18,820     |   |  |   | 18,266     |  
|Non-interest income                                 |  |                                               | 4,323      |   |           |   | 4,724      |            |  |   | 4,160      |   |  |   | 3,244      |  
|Non-interest expenses                               |  |                                               | 17,096     |   |           |   | 16,418     |            |  |   | 15,300     |   |  |   | 14,776     |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Income before income taxes                          |  |                                               | 9,275      |   |           |   | 9,497      |            |  |   | 7,680      |   |  |   | 6,734      |  
|Income tax expense                                  |  |                                               | 3,174      |   |           |   | 3,436      |            |  |   | 2,750      |   |  |   | 2,428      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income                                          |  | $                                             | 6,101      |   |           | $ | 6,061      |            |  | $ | 4,930      |   |  | $ | 4,306      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest margin                                 |  |                                               | 4.64       | % |           |   | 4.69       | %          |  |   | 4.60       | % |  |   | 4.61       | %
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Per Share Data:                                     |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income per diluted share                        |  | $                                             | 0.39       |   |           | $ | 0.39       |            |  | $ | 0.32       |   |  | $ | 0.28       |  
|Book value                                          |  |                                               | 10.41      |   |           |   | 10.14      |            |  |   | 9.83       |   |  |   | 9.51       |  
|Tangible book value                                 |  |                                               | 7.56       |   |           |   | 7.29       |            |  |   | 6.98       |   |  |   | 6.65       |  
|Dividends paid                                      |  |                                               | 0.07       |   |           |   | 0.07       |            |  |   | 0.07       |   |  |   | 0.07       |  
|Weighted average diluted common shares outstanding  |  |                                               | 15,793,979 |   |           |   | 15,739,605 |            |  |   | 15,606,089 |   |  |   | 15,563,534 |  
|                                                    | 
|                                                    |  | 2004                                          |           
|                                                    |  | Fourth Qtr                                    |            |   | Third Qtr |   |            | Second Qtr |  |   | First Qtr  |  
|                                                    |  | (Dollars in thousands, except per share data) |           
|Statement of Operations Data:                       |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Interest income                                     |  | $                                             | 25,356     |   |           | $ | 23,522     |            |  | $ | 22,218     |   |  | $ | 22,346     |  
|Interest expense                                    |  |                                               | 6,482      |   |           |   | 5,993      |            |  |   | 5,699      |   |  |   | 5,701      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                                               | 18,874     |   |           |   | 17,529     |            |  |   | 16,519     |   |  |   | 16,645     |  
|Provision for loan losses                           |  |                                               | (1,040     | ) |           |   | (1,190     | )          |  |   | (830       | ) |  |   | (1,440     | )
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                                               | 17,834     |   |           |   | 16,339     |            |  |   | 15,689     |   |  |   | 15,205     |  
|Non-interest income                                 |  |                                               | 3,391      |   |           |   | 3,819      |            |  |   | 3,495      |   |  |   | 3,486      |  
|Non-interest expenses                               |  |                                               | 14,587     |   |           |   | 13,900     |            |  |   | 13,919     |   |  |   | 13,072     |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Income before income taxes                          |  |                                               | 6,638      |   |           |   | 6,258      |            |  |   | 5,265      |   |  |   | 5,619      |  
|Income tax expense                                  |  |                                               | 2,427      |   |           |   | 2,139      |            |  |   | 1,944      |   |  |   | 2,045      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income                                          |  | $                                             | 4,211      |   |           | $ | 4,119      |            |  | $ | 3,321      |   |  | $ | 3,574      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest margin                                 |  |                                               | 4.57       | % |           |   | 4.45       | %          |  |   | 4.39       | % |  |   | 4.47       | %
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Per Share Data:                                     |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income per diluted share                        |  | $                                             | 0.27       |   |           | $ | 0.27       |            |  | $ | 0.22       |   |  | $ | 0.23       |  
|Book value                                          |  |                                               | 9.42       |   |           |   | 9.27       |            |  |   | 8.88       |   |  |   | 8.93       |  
|Tangible book value                                 |  |                                               | 6.55       |   |           |   | 6.40       |            |  |   | 6.01       |   |  |   | 6.05       |  
|Dividends paid                                      |  |                                               | 0.06       |   |           |   | 0.06       |            |  |   | 0.06       |   |  |   | 0.06       |  
|Weighted average diluted common shares outstanding  |  |                                               | 15,533,060 |   |           |   | 15,435,734 |            |  |   | 15,428,744 |   |  |   | 15,403,866 |  



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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, 2005, 2004, AND 2003

Basis of Presentation

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

Overview and Outlook

For the year ended December 31, 2005, we reported net income of $21.4 million, or $1.36
per diluted share, an increase of 37% over prior year earnings. Net income for 2004 was $15.2 million, or $0.99 per diluted share. Earnings growth in 2005 was driven primarily by the increase in net interest income combined with a net interest
margin that increased from 4.47% in 2004 to 4.64% in 2005.

Highlights for 2005 are as follows:



| |  |  | Loan demand throughout our system was stable and resulted in total loan growth of $148 million or 11% during the year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Total deposits grew $109 million or 8% during the year, which included a $68 million or 21% increase in non-interest-bearing deposits. The increase in deposits at a rate less than
our total loan growth for the year corresponded to an overall increase in borrowings of $39 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our net interest margin continued to increase in 2005 as a result of interest rate increases by the Federal Reserve Bank throughout 2005 and our asset sensitive position. Our net
interest margin increased from 4.47% in 2004 to 4.64% in 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our residential mortgage lending division produced a record level of income from the origination and sale of loans with an increasing percentage of activity coming from new
purchases versus refinancings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We announced the signing of definitive agreements to acquire Access Anytime Bancorp, Inc. and its subsidiary AccessBank and New Mexico Financial Corporation and its subsidiary
Ranchers Banks.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Assuming the economy remains stable and the general level of interest rates does not experience more than
modest changes in 2006, management expects modest balance sheet growth and stable loan demand similar to 2005. Based on this outlook, we are currently projecting results for 2006 in the range of $1.45 - $1.55 per diluted share.

Business Combination

During the third quarter of
2005, First State Bank N.M. entered into two separate purchase agreements to acquire Access Anytime Bancorp, Inc. (Access) and New Mexico Financial Corporation (NMFC). Both acquisitions closed in January 2006. The acquisition
of Access added three branches in Albuquerque in addition to six branches in Clovis, Gallup, Las Cruces, and Portales, New Mexico, and one in Sun City, Arizona. Through the Access transaction we acquired approximately $198 million in loans and $315
million in deposits. The acquisition of NMFC added two branches each in our existing markets of Albuquerque, Belen, and Los Lunas, New Mexico as well as one branch each in Edgewood, Grants, and Moriarty, New Mexico. NMFC had approximately $35
million in loans and $90 million in deposits on the date of acquisition. We are still pending valuations of certain assets and liabilities for both Access and NMFC, but expect to record goodwill related to these transactions of approximately $22
million. After announcing the potential acquisitions and in an effort to provide us with brand recognition across all the markets we serve, we elected to change the name of the Bank to First Community Bank.



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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. 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 2005, 2004, and 2003, and found no impairment.

Recent Accounting Pronouncements
and Developments

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS 123R is a
revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB 25. Among other provisions, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning
after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission announced that the compliance date of SFAS 123R will be suspended until January 1, 2006, for calendar year companies. Subject to a complete review
of the requirements of SFAS 123R, based on stock options granted through December 31, 2005, we expect that the adoption of SFAS 123R on January 1, 2006, is expected to reduce 2006 net earnings after tax by approximately $900,000.

Note 1 to the consolidated financial statements discusses new accounting policies we adopted during 2005 and the expected impact of other
new accounting standards recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect our financial condition, results of operations or liquidity, the impact is discussed elsewhere in
Managements Discussion and Analysis of Financial Condition and Results of Operations and in the notes to the consolidated financial statements.

Results of Operations

Earnings Performance

An analysis of the major components of net income in 2005, 2004, and 2003 is presented below. Additional data on our performance during the past five years appear in Financial Highlights.



|                           |  |                          |         |   |      |   |        |      |  |   |        |  
|-------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                           |  | Years ended December 31, |        
|                           |  | 2005                     |         |   | 2004 |   |        | 2003 | 
|                           |  | (Dollars in thousands)   |        
|Interest income            |  | $                        | 121,957 |   |      | $ | 93,442 |      |  | $ | 83,713 |  
|Interest expense           |  |                          | 37,712  |   |      |   | 23,875 |      |  |   | 22,629 |  
|                           |  |                          |         |   |      |   |        |      |  |   |        |  
|Net interest income        |  |                          | 84,245  |   |      |   | 69,567 |      |  |   | 61,084 |  
|Provision for loan losses  |  |                          | (3,920  | ) |      |   | (4,500 | )    |  |   | (5,543 | )
|Non-interest income        |  |                          | 16,451  |   |      |   | 14,191 |      |  |   | 14,521 |  
|Non-interest expense       |  |                          | 63,590  |   |      |   | 55,478 |      |  |   | 47,242 |  
|                           |  |                          |         |   |      |   |        |      |  |   |        |  
|Income before income taxes |  |                          | 33,186  |   |      |   | 23,780 |      |  |   | 22,820 |  
|Income tax expense         |  |                          | 11,788  |   |      |   | 8,555  |      |  |   | 7,969  |  
|                           |  |                          |         |   |      |   |        |      |  |   |        |  
|Net income                 |  | $                        | 21,398  |   |      | $ | 15,225 |      |  | $ | 14,851 |  
|                           |  |                          |         |   |      |   |        |      |  |   |        |  



A-5



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##### Table of Contents

Net Interest Income

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

During the years ended December 31, our
net interest income increased by $14.7 million to $84.2 million or 21.1% in 2005 from $69.6 million in 2004, which was an increase of $8.5 million or 13.9% from $61.1 million in 2003. These increases were due to a $192 million or 15.0% increase in
average loans to $1.477 billion in 2005 from $1.285 billion in 2004, and a $174 million or 15.7% increase from $1.111 billion in 2003. We experienced growth in the loan portfolio as a result of our efforts to increase market share by building around
the infrastructure we have established and taking advantage of market dislocations caused by the acquisition of local competitors and growth in the economy of our market areas. The increase in interest income was aided by an increase in yield on
loans to 7.36% in 2005 from 6.51% in 2004 and 6.82% in 2003. This increase in yield was a direct result of the Federal Reserve Bank increasing rates in 2004 and 2005, which has a direct effect on the prime rate to which a significant portion of our
loans are tied. The increase in interest income in 2004 compared to 2003 was offset by the decrease in yield on loans as indicated above as a result of reduced rates of the Federal Reserve Bank in 2003; the residual impact of the 2003 rate cuts
continued into the second quarter of 2004; the Federal Reserve Bank began to increase rates in the middle of 2004 which resulted in an increased loan yield during the second half of 2004.

During 2005, the cost of interest-bearing liabilities also increased to 2.57% from 1.86% in 2004 and 2.04% in 2003 as a result of increasing interest
rates precipitated by the Federal Reserve Banks rate increases. During 2004, the cost of interest-bearing liabilities decreased as indicated as a result of decreasing interest rates precipitated by the Federal Reserve Banks rate cuts;
the decreases in interest rates on interest-bearing liabilities also subsided during the second quarter of 2004 and steadily increased as a result of Federal Reserve Bank rate increases in 2004 and 2005. The changes in rates we pay on deposits lag
behind the increases from the Federal Reserve Bank, and are primarily market driven due to the competitive nature of deposits which impacts the rates we pay on deposits.

Our net interest margin was 4.64% in 2005, compared to 4.47% in 2004, and 4.59% in 2003. The decrease in the margin from 2003 to 2004 was due to the residual impact of the Federal Reserve Bank rate cuts in 2003 which
has the effect of reducing interest income faster than interest expense given the asset sensitive position of our balance sheet. This margin compression receded in 2005 as the Federal Reserve began to increase rates in the middle of 2004 which had
the effect of increasing our margin during the third and fourth quarters of 2004 and throughout 2005.

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



A-6



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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, |          
|                                                                                 |  | 2005                     |           |   | 2004                     |   |                     | 2003 |       
|                                                                                 |  | AverageBalance           |           |   | InterestIncome orExpense |   | AverageYield orCost |      |        | AverageBalance |  |   | InterestIncome orExpense |   | AverageYield orCost |   |        | AverageBalance |        |   | InterestIncome orExpense |   | AverageYield orCost |  
|                                                                                 |  | (Dollars in thousands)   |          
|Assets                                                                           |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Loans:                                                                           |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Commercial                                                                       |  | $                        | 182,690   |   |                          | $ | 12,763              |      | 6.99   | %              |  | $ | 160,891                  |   |                     | $ | 9,420  |                | 5.85   | % |                          | $ | 115,872             |   |  | $ | 6,995  |  | 6.04   | %
|Real estatemortgage                                                             |  |                          | 1,001,867 |   |                          |   | 71,577              |      | 7.14   |                |  |   | 927,375                  |   |                     |   | 59,867 |                | 6.46   |   |                          |   | 842,845             |   |  |   | 57,541 |  | 6.83   |  
|Real estateconstruction                                                         |  |                          | 241,417   |   |                          |   | 20,369              |      | 8.44   |                |  |   | 158,147                  |   |                     |   | 11,100 |                | 7.02   |   |                          |   | 106,205             |   |  |   | 7,273  |  | 6.85   |  
|Consumer                                                                         |  |                          | 28,092    |   |                          |   | 2,778               |      | 9.89   |                |  |   | 29,654                   |   |                     |   | 2,777  |                | 9.36   |   |                          |   | 32,673              |   |  |   | 3,219  |  | 9.85   |  
|Mortgage                                                                         |  |                          | 21,991    |   |                          |   | 1,296               |      | 5.89   |                |  |   | 8,167                    |   |                     |   | 459    |                | 5.62   |   |                          |   | 12,564              |   |  |   | 706    |  | 5.62   |  
|Other                                                                            |  |                          | 1,089     |   |                          |   |                    |      |       |                |  |   | 670                      |   |                     |   |       |                |       |   |                          |   | 582                 |   |  |   |       |  |       |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total loans                                                                      |  |                          | 1,477,146 |   |                          |   | 108,783             |      | 7.36   | %              |  |   | 1,284,904                |   |                     |   | 83,623 |                | 6.51   | % |                          |   | 1,110,741           |   |  |   | 75,734 |  | 6.82   | %
|Allowance for loan losses                                                        |  |                          | (16,948   | ) |                          |   |                     |      |        |                |  |   | (14,829                  | ) |                     |   |        |                |        |   |                          |   | (13,008             | ) |  |   |        |  |        |  
|Securities:                                                                      |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|U.S. government and mortgage-backed                                              |  |                          | 276,278   |   |                          |   | 10,272              |      | 3.72   |                |  |   | 236,582                  |   |                     |   | 8,801  |                | 3.72   |   |                          |   | 190,580             |   |  |   | 7,327  |  | 3.84   |  
|States and political subdivisions:                                               |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Non-taxable                                                                      |  |                          | 33,786    |   |                          |   | 1,824               |      | 5.40   |                |  |   | 13,879                   |   |                     |   | 573    |                | 4.13   |   |                          |   | 4,478               |   |  |   | 181    |  | 4.04   |  
|Taxable                                                                          |  |                          |          |   |                          |   |                    |      |       |                |  |   |                         |   |                     |   |       |                |       |   |                          |   | 488                 |   |  |   | 9      |  | 1.84   |  
|Other                                                                            |  |                          | 17,105    |   |                          |   | 687                 |      | 4.02   |                |  |   | 14,193                   |   |                     |   | 372    |                | 2.62   |   |                          |   | 9,078               |   |  |   | 286    |  | 3.15   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total securities                                                                 |  |                          | 327,169   |   |                          |   | 12,783              |      | 3.91   | %              |  |   | 264,654                  |   |                     |   | 9,746  |                | 3.68   | % |                          |   | 204,624             |   |  |   | 7,803  |  | 3.81   | %
|Interest-bearing deposits with other banks                                       |  |                          | 4,056     |   |                          |   | 125                 |      | 3.08   |                |  |   | 4,982                    |   |                     |   | 57     |                | 1.14   |   |                          |   | 5,216               |   |  |   | 63     |  | 1.21   |  
|Federal funds sold                                                               |  |                          | 7,968     |   |                          |   | 266                 |      | 3.34   |                |  |   | 1,087                    |   |                     |   | 16     |                | 1.47   |   |                          |   | 10,247              |   |  |   | 113    |  | 1.10   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-earning assets                                                    |  |                          | 1,816,339 |   |                          |   | 121,957             |      | 6.71   | %              |  |   | 1,555,627                |   |                     |   | 93,442 |                | 6.01   | % |                          |   | 1,330,828           |   |  |   | 83,713 |  | 6.29   | %
|Non-interest-earning assets:                                                     |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Cash and due from banks                                                          |  |                          | 51,514    |   |                          |   |                     |      |        |                |  |   | 51,424                   |   |                     |   |        |                |        |   |                          |   | 47,667              |   |  |   |        |  |        |  
|Other                                                                            |  |                          | 126,710   |   |                          |   |                     |      |        |                |  |   | 113,134                  |   |                     |   |        |                |        |   |                          |   | 101,228             |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total non-interest-earning assets                                                |  |                          | 178,224   |   |                          |   |                     |      |        |                |  |   | 164,558                  |   |                     |   |        |                |        |   |                          |   | 148,895             |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total assets                                                                     |  | $                        | 1,977,615 |   |                          |   |                     |      |        |                |  | $ | 1,705,356                |   |                     |   |        |                |        |   |                          | $ | 1,466,715           |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Liabilities and Stockholders Equity                                             |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Deposits:                                                                        |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Interest-bearing demand accounts                                                 |  | $                        | 267,027   |   |                          | $ | 2,238               |      | 0.84   | %              |  | $ | 237,144                  |   |                     | $ | 1,118  |                | 0.47   | % |                          | $ | 199,890             |   |  | $ | 907    |  | 0.45   | %
|Certificates of deposit < $100,000                                               |  |                          | 226,992   |   |                          |   | 6,973               |      | 3.07   |                |  |   | 231,686                  |   |                     |   | 6,183  |                | 2.67   |   |                          |   | 270,101             |   |  |   | 7,840  |  | 2.90   |  
|Certificates of deposit > $100,000                                               |  |                          | 322,685   |   |                          |   | 10,902              |      | 3.38   |                |  |   | 295,398                  |   |                     |   | 8,712  |                | 2.95   |   |                          |   | 238,750             |   |  |   | 7,429  |  | 3.11   |  
|Money market savings accounts                                                    |  |                          | 207,056   |   |                          |   | 3,935               |      | 1.90   |                |  |   | 194,961                  |   |                     |   | 2,636  |                | 1.35   |   |                          |   | 145,910             |   |  |   | 2,043  |  | 1.40   |  
|Regular savings accounts                                                         |  |                          | 72,882    |   |                          |   | 677                 |      | 0.93   |                |  |   | 67,480                   |   |                     |   | 573    |                | 0.85   |   |                          |   | 58,367              |   |  |   | 493    |  | 0.84   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-bearing deposits                                                  |  |                          | 1,096,642 |   |                          |   | 24,725              |      | 2.25   | %              |  |   | 1,026,669                |   |                     |   | 19,222 |                | 1.87   | % |                          |   | 913,018             |   |  |   | 18,712 |  | 2.05   | %
|Federal funds purchased and securities sold under agreements to repurchase       |  |                          | 85,435    |   |                          |   | 2,039               |      | 2.39   |                |  |   | 64,278                   |   |                     |   | 199    |                | 0.31   |   |                          |   | 61,109              |   |  |   | 302    |  | 0.49   |  
|Short-term borrowings                                                            |  |                          | 117,475   |   |                          |   | 3,972               |      | 3.38   |                |  |   | 71,235                   |   |                     |   | 993    |                | 1.39   |   |                          |   | 34,308              |   |  |   | 459    |  | 1.34   |  
|Long-term debt                                                                   |  |                          | 123,742   |   |                          |   | 4,123               |      | 3.33   |                |  |   | 84,848                   |   |                     |   | 1,728  |                | 2.04   |   |                          |   | 69,696              |   |  |   | 1,610  |  | 2.31   |  
|Junior subordinated debentures                                                   |  |                          | 44,310    |   |                          |   | 2,853               |      | 6.44   |                |  |   | 34,459                   |   |                     |   | 1,733  |                | 5.03   |   |                          |   | 32,500              |   |  |   | 1,546  |  | 4.76   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-bearing liabilities                                               |  |                          | 1,467,604 |   |                          |   | 37,712              |      | 2.57   | %              |  |   | 1,281,489                |   |                     |   | 23,875 |                | 1.86   | % |                          |   | 1,110,631           |   |  |   | 22,629 |  | 2.04   | %
|Non-interest-bearing demand accounts                                             |  |                          | 349,570   |   |                          |   |                     |      |        |                |  |   | 279,101                  |   |                     |   |        |                |        |   |                          |   | 224,680             |   |  |   |        |  |        |  
|Other non-interest-bearing liabilities                                           |  |                          | 7,746     |   |                          |   |                     |      |        |                |  |   | 5,644                    |   |                     |   |        |                |        |   |                          |   | 5,076               |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total liabilities                                                                |  |                          | 1,824,920 |   |                          |   |                     |      |        |                |  |   | 1,566,234                |   |                     |   |        |                |        |   |                          |   | 1,340,387           |   |  |   |        |  |        |  
|Stockholders equity                                                             |  |                          | 152,695   |   |                          |   |                     |      |        |                |  |   | 139,122                  |   |                     |   |        |                |        |   |                          |   | 126,328             |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total liabilities and stockholders equity                                       |  | $                        | 1,977,615 |   |                          |   |                     |      |        |                |  | $ | 1,705,356                |   |                     |   |        |                |        |   |                          | $ | 1,466,715           |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Net interest income                                                              |  |                          |           |   |                          | $ | 84,245              |      |        |                |  |   |                          |   |                     | $ | 69,567 |                |        |   |                          |   |                     |   |  | $ | 61,084 |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |        |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Net interest spread                                                              |  |                          |           |   |                          |   |                     |      | 4.14   | %              |  |   |                          |   |                     |   |        |                | 4.15   | % |                          |   |                     |   |  |   |        |  | 4.25   | %
|Net interest margin                                                              |  |                          |           |   |                          |   |                     |      | 4.64   | %              |  |   |                          |   |                     |   |        |                | 4.47   | % |                          |   |                     |   |  |   |        |  | 4.59   | %
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                          |           |   |                          |   |                     |      | 123.76 | %              |  |   |                          |   |                     |   |        |                | 121.39 | % |                          |   |                     |   |  |   |        |  | 119.83 | %



A-7



---

##### Table of Contents

Loan fees of $6.3 million, $5.7 million, and $4.7 million are included in interest income for the years
ended December 31, 2005, 2004, and 2003, respectively.

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



|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | --------------------------------------------------- | ------ | --------------------------------------------------- | ---- | - | ------ | ----- |  | ------ | ------ |  | ---- | ------ | - | ----- | - | ------ | - |  | - | ------ | -
|                                                                           |  | Years ended December 31,                            |       
|                                                                           |  | 2005 vs. 2004 Increase (decrease) due to changes
in |        | 2004 vs. 2003 Increase (decrease) due to changes
in |     
|                                                                           |  | Volume                                              |        |                                                     | Rate |   |        | Total |  | Volume |        |  | Rate |        |   | Total |  
|                                                                           |  | (Dollars in thousands)                              |       
|Interest-earning assets                                                    |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Loans:                                                                     |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Commercial                                                                 |  | $                                                   | 1,276  |                                                     |      | $ | 2,067  |       |  | $      | 3,343  |  | $    | 2,718  |   |       | $ | (293   | ) |  | $ | 2,425  |  
|Real estatemortgage                                                       |  |                                                     | 4,809  |                                                     |      |   | 6,901  |       |  |        | 11,710 |  |      | 5,771  |   |       |   | (3,445 | ) |  |   | 2,326  |  
|Real estateconstruction                                                   |  |                                                     | 5,845  |                                                     |      |   | 3,424  |       |  |        | 9,269  |  |      | 3,557  |   |       |   | 270    |   |  |   | 3,827  |  
|Consumer                                                                   |  |                                                     | (146   | )                                                   |      |   | 147    |       |  |        | 1      |  |      | (297   | ) |       |   | (145   | ) |  |   | (442   | )
|Mortgage                                                                   |  |                                                     | 777    |                                                     |      |   | 60     |       |  |        | 837    |  |      | (247   | ) |       |   |       |   |  |   | (247   | )
|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Total loans                                                                |  |                                                     | 12,561 |                                                     |      |   | 12,599 |       |  |        | 25,160 |  |      | 11,502 |   |       |   | (3,613 | ) |  |   | 7,889  |  
|Securities:                                                                |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|U.S. government and mortgage-backed                                        |  |                                                     | 1,477  |                                                     |      |   | (6     | )     |  |        | 1,471  |  |      | 1,769  |   |       |   | (295   | ) |  |   | 1,474  |  
|States and political subdivisions:                                         |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Non-taxable                                                                |  |                                                     | 822    |                                                     |      |   | 429    |       |  |        | 1,251  |  |      | 380    |   |       |   | 12     |   |  |   | 392    |  
|Taxable                                                                    |  |                                                     |       |                                                     |      |   |       |       |  |        |       |  |      | (9     | ) |       |   |       |   |  |   | (9     | )
|Other                                                                      |  |                                                     | 76     |                                                     |      |   | 239    |       |  |        | 315    |  |      | 161    |   |       |   | (75    | ) |  |   | 86     |  
|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Total securities                                                           |  |                                                     | 2,375  |                                                     |      |   | 662    |       |  |        | 3,037  |  |      | 2,301  |   |       |   | (358   | ) |  |   | 1,943  |  
|Interest-bearing deposits with other banks                                 |  |                                                     | (11    | )                                                   |      |   | 79     |       |  |        | 68     |  |      | (3     | ) |       |   | (3     | ) |  |   | (6     | )
|Federal funds sold                                                         |  |                                                     | 101    |                                                     |      |   | 149    |       |  |        | 250    |  |      | (101   | ) |       |   | 4      |   |  |   | (97    | )
|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Total interest-earning assets                                              |  |                                                     | 15,026 |                                                     |      |   | 13,489 |       |  |        | 28,515 |  |      | 13,699 |   |       |   | (3,970 | ) |  |   | 9,729  |  
|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Interest-bearing liabilities                                               |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Deposits:                                                                  |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Interest-bearing demand accounts                                           |  |                                                     | 141    |                                                     |      |   | 979    |       |  |        | 1,120  |  |      | 169    |   |       |   | 42     |   |  |   | 211    |  
|Certificates of deposit < $100,000                                         |  |                                                     | (125   | )                                                   |      |   | 915    |       |  |        | 790    |  |      | (1,115 | ) |       |   | (542   | ) |  |   | (1,657 | )
|Certificates of deposit > $100,000                                         |  |                                                     | 805    |                                                     |      |   | 1,385  |       |  |        | 2,190  |  |      | 1,763  |   |       |   | (480   | ) |  |   | 1,283  |  
|Money market savings accounts                                              |  |                                                     | 164    |                                                     |      |   | 1,135  |       |  |        | 1,299  |  |      | 687    |   |       |   | (94    | ) |  |   | 593    |  
|Regular savings accounts                                                   |  |                                                     | 46     |                                                     |      |   | 58     |       |  |        | 104    |  |      | 77     |   |       |   | 3      |   |  |   | 80     |  
|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Total interest-bearing deposits                                            |  |                                                     | 1,031  |                                                     |      |   | 4,472  |       |  |        | 5,503  |  |      | 1,581  |   |       |   | (1,071 | ) |  |   | 510    |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                                                     | 66     |                                                     |      |   | 1,774  |       |  |        | 1,840  |  |      | 16     |   |       |   | (119   | ) |  |   | (103   | )
|Short-term borrowings                                                      |  |                                                     | 645    |                                                     |      |   | 2,334  |       |  |        | 2,979  |  |      | 494    |   |       |   | 40     |   |  |   | 534    |  
|Long-term debt                                                             |  |                                                     | 792    |                                                     |      |   | 1,603  |       |  |        | 2,395  |  |      | 350    |   |       |   | (232   | ) |  |   | 118    |  
|Junior subordinated debentures                                             |  |                                                     | 495    |                                                     |      |   | 625    |       |  |        | 1,120  |  |      | 93     |   |       |   | 94     |   |  |   | 187    |  
|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Total interest-bearing liabilities                                         |  |                                                     | 3,029  |                                                     |      |   | 10,808 |       |  |        | 13,837 |  |      | 2,534  |   |       |   | (1,288 | ) |  |   | 1,246  |  
|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  
|Total increase (decrease) in net interest income                           |  | $                                                   | 11,997 |                                                     |      | $ | 2,681  |       |  | $      | 14,678 |  | $    | 11,165 |   |       | $ | (2,682 | ) |  | $ | 8,483  |  
|                                                                           |  |                                                     |        |                                                     |      |   |        |       |  |        |        |  |      |        |   |       |   |        |   |  |   |        |  



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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:



|                                       |  |                          |        |          |   |        |          |           |        |  |           |        |   |           |   |      |           |  |     |   |  |     |   
|-------------------------------------- |  | ------------------------ | ------ | -------- | - | ------ | -------- | --------- | ------ |  | --------- | ------ | - | --------- | - | ---- | --------- |  | --- | - |  | --- | --
|                                       |  | Years ended December 31, |        | $ Change |   |        | % Change |          
|                                       |  | 2005                     |        | 2004     |   | 2003   |          | 2005-2004 |        |  | 2004-2003 |        |   | 2005-2004 |   |      | 2004-2003 | 
|                                       |  | (Dollars in thousands)   |       
|Service charges on deposit accounts    |  | $                        | 5,658  |          | $ | 4,410  |          | $         | 4,225  |  | $         | 1,248  |   |           | $ | 185  |           |  | 28  | % |  | 4   | % 
|Credit and debit card transaction fees |  |                          | 2,192  |          |   | 3,991  |          |           | 3,938  |  |           | (1,799 | ) |           |   | 53   |           |  | (45 | ) |  | 1   |   
|Gain on sale of mortgage loans         |  |                          | 4,865  |          |   | 2,718  |          |           | 3,493  |  |           | 2,147  |   |           |   | (775 | )         |  | 79  |   |  | (22 | ) 
|Other                                  |  |                          | 3,736  |          |   | 3,072  |          |           | 2,865  |  |           | 664    |   |           |   | 207  |           |  | 22  |   |  | 7   |   
|                                       |  |                          |        |          |   |        |          |           |        |  |           |        |   |           |   |      |           |  |     |   |  |     |   
|Total non-interest income              |  | $                        | 16,451 |          | $ | 14,191 |          | $         | 14,521 |  | $         | 2,260  |   |           | $ | (330 | )         |  | 16  | % |  | (2  | )%
|                                       |  |                          |        |          |   |        |          |           |        |  |           |        |   |           |   |      |           |  |     |   |  |     |   

The increase in service charges on deposit accounts of $1.2 million in 2005 resulted from
increased activity related to implementation of an overdraft privilege product in April 2005. The increase was further aided by the increases in total deposits from 2003 to 2005.

Credit and debit card transaction fees decreased $1.8 million in 2005 due to the sale of the merchant portfolio in the third quarter of 2004 to an
unrelated third party for $500,000, plus contingent future amounts subject to customer retention percentages payable in 2005 and 2006. During 2005, the contingent payment received was $250,000 based on the terms of the agreement. The gain and 2005
contingent payment are being amortized over the 10-year term of the revenue sharing agreement signed with the purchaser. The sale resulted in lower fee income as well as salaries and related expenses of the operation.

Gain on sale of mortgage loans increased $2.1 million in 2005 due to the increased emphasis on mortgage lending in the Colorado and Utah markets. Loan
originations were up $171.3 million in 2005 to a record $347.8 million from $176.5 million in 2004. We generally attempt to sell all mortgage loans that we originate in the secondary market. We made a strategic decision to reorganize the residential
mortgage division of the bank and in the second quarter of 2004 began hiring additional lending officers and expanding the operation. As a result of adding new lenders and mortgage loan interest rates remaining relatively low, we experienced
increased activity throughout 2005.

In 2004, the gain on sale of mortgage loans decreased due to an overall decrease in mortgage loan
activity compared to 2003. In 2003, we originated $213 million in mortgage loans primarily as a result of refinancing activity driven by a 40-year low in mortgage loan interest rates.

Non-interest Expense

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



|                                  |  |                          |        |          |   |        |          |           |        |  |           |        |   |           |   |       |           |  |      |   |  |     |  
|--------------------------------- |  | ------------------------ | ------ | -------- | - | ------ | -------- | --------- | ------ |  | --------- | ------ | - | --------- | - | ----- | --------- |  | ---- | - |  | --- | -
|                                  |  | Years ended December 31, |        | $ Change |   |        | % Change |          
|                                  |  | 2005                     |        | 2004     |   | 2003   |          | 2005-2004 |        |  | 2004-2003 |        |   | 2005-2004 |   |       | 2004-2003 | 
|                                  |  | (Dollars in thousands)   |       
|Salaries and employee benefits    |  | $                        | 31,890 |          | $ | 24,843 |          | $         | 20,570 |  | $         | 7,047  |   |           | $ | 4,273 |           |  | 28   | % |  | 21  | %
|Occupancy                         |  |                          | 8,216  |          |   | 7,804  |          |           | 6,267  |  |           | 412    |   |           |   | 1,537 |           |  | 5    |   |  | 25  |  
|Data processing                   |  |                          | 3,518  |          |   | 2,934  |          |           | 2,412  |  |           | 584    |   |           |   | 522   |           |  | 20   |   |  | 22  |  
|Credit and debit card interchange |  |                          |       |          |   | 1,580  |          |           | 1,637  |  |           | (1,580 | ) |           |   | (57   | )         |  | (100 | ) |  | (3  | )
|Equipment                         |  |                          | 4,571  |          |   | 4,258  |          |           | 3,697  |  |           | 313    |   |           |   | 561   |           |  | 7    |   |  | 15  |  
|Legal, accounting, and consulting |  |                          | 1,668  |          |   | 1,372  |          |           | 1,128  |  |           | 296    |   |           |   | 244   |           |  | 22   |   |  | 22  |  
|Marketing                         |  |                          | 2,955  |          |   | 2,288  |          |           | 2,190  |  |           | 667    |   |           |   | 98    |           |  | 29   |   |  | 4   |  
|Telephone                         |  |                          | 1,202  |          |   | 1,219  |          |           | 1,534  |  |           | (17    | ) |           |   | (315  | )         |  | (1   | ) |  | (21 | )
|Delivery                          |  |                          | 873    |          |   | 901    |          |           | 1,007  |  |           | (28    | ) |           |   | (106  | )         |  | (3   | ) |  | (11 | )
|Loss on sale of loans             |  |                          |       |          |   | 435    |          |           |       |  |           | (435   | ) |           |   | 435   |           |  | (100 | ) |  | 100 |  
|Other                             |  |                          | 8,697  |          |   | 7,844  |          |           | 6,800  |  |           | 853    |   |           |   | 1,044 |           |  | 11   |   |  | 15  |  
|                                  |  |                          |        |          |   |        |          |           |        |  |           |        |   |           |   |       |           |  |      |   |  |     |  
|Total non-interest expense        |  | $                        | 63,590 |          | $ | 55,478 |          | $         | 47,242 |  | $         | 8,112  |   |           | $ | 8,236 |           |  | 15   | % |  | 17  | %
|                                  |  |                          |        |          |   |        |          |           |        |  |           |        |   |           |   |       |           |  |      |   |  |     |  

Salary and employee benefits increased in 2005 and 2004 by $7.0 million and $4.3 million,
respectively, directly related to the increase in full-time equivalent employees as we continue to grow and expand our operations.



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##### Table of Contents

Occupancy and equipment expense increased approximately $725,000 in 2005 primarily due to the opening of
a new branch in Lakewood, Colorado, and one in Midvale, Utah in addition to a full year of expense related to a new branch opened in 2004 and several remodeled branches. In 2004, the significant increase in occupancy was the result of continuing our
strategy to relocate and/or renovate the First Community Industrial Bank branch facilities and a full year of expense related to the addition of three new branches and the new support services facility which was completed towards the end of 2003 in
New Mexico. During 2004, we completed the relocation and/or remodel of six branches and opened one additional branch. Occupancy expenses are expected to continue increasing in 2006 primarily from the addition of two new branches scheduled to open in
the second quarter of 2006 and contractual rent increases in existing leases.

Data processing expenses continue to increase faster than
total non-interest expenses as we continue to identify and invest in new technologies for the benefit of our existing customers and to attract new customers.

Credit and debit card interchange expense decreased $1.6 million to zero in 2005 due to the sale of our merchant portfolio in the third quarter of 2004.

Legal, accounting, and consulting expenses increased by $296,000 and $244,000 in 2005 and 2004, respectively, primarily due to increased costs to comply
with the requirements of the Sarbanes-Oxley Act.

Marketing expense increased $667,000 to $3.0 million during 2005. The increase was
attributable to increased charitable contributions and the direct advertising campaign related to changing the name of our subsidiary bank to First Community Bank in 2005.

Income Tax Expense

Income tax expense increased to $11.8 million in 2005, from $8.6 million in 2004
and $8.0 million in 2003. The effective tax rate, computed by dividing income tax expense by income before taxes, was 35.5% in 2005, compared to 36.0% in 2004, and 34.9% in 2003. 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 2005 and 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 36% in 2006.

Return on Equity and Assets

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



|                                 |  |                          |   |  |       |   |  |       |  
|-------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                 |  | Years ended December 31, |  
|                                 |  | 2005                     |   |  | 2004  |   |  | 2003  |  
|Return on average assets         |  | 1.08                     | % |  | 0.89  | % |  | 1.01  | %
|Return on average equity         |  | 14.01                    |   |  | 10.94 |   |  | 11.76 |  
|Dividend payout ratio            |  | 20.14                    |   |  | 23.63 |   |  | 21.62 |  
|Average equity to average assets |  | 7.72                     |   |  | 8.16  |   |  | 8.61  |  

Financial Condition

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

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



|            |  |                        |           |          |   |           |          |           |           |           |   |         |           |   |         |           |  |    |   |  |     |  
|----------- |  | ---------------------- | --------- | -------- | - | --------- | -------- | --------- | --------- | --------- | - | ------- | --------- | - | ------- | --------- |  | -- | - |  | --- | -
|            |  | As of December 31,     |           | $ Change |   |           | % Change |          
|            |  | 2005                   |           | 2004     |   | 2003      |          | 2005-2004 |           | 2004-2003 |   |         | 2005-2004 |   |         | 2004-2003 | 
|            |  | (Dollars in thousands) |          
|Investments |  | $                      | 454,312   |          | $ | 290,925   |          | $         | 235,120   |           | $ | 163,387 |           | $ | 55,805  |           |  | 56 | % |  | 24  | %
|Loans       |  |                        | 1,525,927 |          |   | 1,377,795 |          |           | 1,231,485 |           |   | 148,132 |           |   | 146,310 |           |  | 11 |   |  | 12  |  
|Deposits    |  |                        | 1,510,007 |          |   | 1,401,303 |          |           | 1,195,875 |           |   | 108,704 |           |   | 205,428 |           |  | 8  |   |  | 17  |  
|Borrowings  |  |                        | 247,764   |          |   | 192,513   |          |           | 249,322   |           |   | 55,251  |           |   | (56,809 | )         |  | 29 |   |  | (23 | )

Asset/Liability Management

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



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##### Table of Contents

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

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

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

As of December 31, 2005, our cumulative interest rate GAP for the period up to three months was a positive $289.9 million and for the period up to one year was a positive $126.6 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.



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##### Table of Contents

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, 2005. The amounts are based upon regulatory reporting formats and, therefore, may not be consistent with financial information appearing elsewhere in this report
that has been prepared in accordance with accounting principles generally accepted in the United States of America. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of
deposits, and competition.



|                                                  |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|------------------------------------------------- |  | ---------------------- | --------- | --------------------------------- | - | -------- | ---------------- |  | --------------- | ------- | ----- | - | ------- |  | - | ---------
|                                                  |  | Less thanthreemonths   |           | Three months to less thanone
year |   |          | One to fiveyears |  | Over five years |         | Total
|                                                  |  | (Dollars in thousands)
|Interest-earning assets:                          |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Investment securities                             |  | $                      | 133,303   |                                   | $ | 29,141   |                  |  | $               | 223,559 |       | $ | 68,309  |  | $ | 454,312  
|Interest-bearing deposits with other banks        |  |                        | 102       |                                   |   |         |                  |  |                 |        |       |   |        |  |   | 102      
|Loans:                                            |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Commercial                                        |  |                        | 138,686   |                                   |   | 24,032   |                  |  |                 | 37,176  |       |   | 1,922   |  |   | 201,816  
|Real estate                                       |  |                        | 744,576   |                                   |   | 154,620  |                  |  |                 | 353,296 |       |   | 43,731  |  |   | 1,296,223
|Consumer                                          |  |                        | 8,284     |                                   |   | 7,096    |                  |  |                 | 11,972  |       |   | 536     |  |   | 27,888   
|                                                  |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Total interest-earning assets                     |  |                        | 1,024,951 |                                   |   | 214,889  |                  |  |                 | 626,003 |       |   | 114,498 |  |   | 1,980,341
|                                                  |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Interest-bearing liabilities:                     |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Deposits:                                         |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Savings and NOW accounts                          |  |                        | 108,541   |                                   |   | 127,636  |                  |  |                 | 236,175 |       |   | 70,356  |  |   | 542,708  
|Certificates of deposit of $100,000 or more       |  |                        | 128,282   |                                   |   | 110,633  |                  |  |                 | 99,291  |       |   | 2,495   |  |   | 340,701  
|Other time accounts                               |  |                        | 78,237    |                                   |   | 86,807   |                  |  |                 | 73,062  |       |   | 2,520   |  |   | 240,626  
|Federal funds purchased                           |  |                        | 6,800     |                                   |   |         |                  |  |                 |        |       |   |        |  |   | 6,800    
|Securities sold under agreements to repurchase    |  |                        | 223,195   |                                   |   |         |                  |  |                 |        |       |   |        |  |   | 223,195  
|FHLB advances and other                           |  |                        | 141,032   |                                   |   | 53,143   |                  |  |                 | 4,119   |       |   | 499     |  |   | 198,793  
|Junior subordinated debentures                    |  |                        | 48,971    |                                   |   |         |                  |  |                 |        |       |   |        |  |   | 48,971   
|                                                  |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Total interest-bearing liabilities                |  |                        | 735,058   |                                   |   | 378,219  |                  |  |                 | 412,647 |       |   | 75,870  |  |   | 1,601,794
|                                                  |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Interest rate GAP                                 |  | $                      | 289,893   |                                   | $ | (163,330 | )                |  | $               | 213,356 |       | $ | 38,628  |  | $ | 378,547  
|                                                  |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Cumulative interest rate GAP at December 31, 2005 |  | $                      | 289,893   |                                   | $ | 126,563  |                  |  | $               | 339,919 |       | $ | 378,547 |  |   |          
|                                                  |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          
|Cumulative GAP ratio at December 31, 2005         |  |                        | 1.39      |                                   |   | 1.11     |                  |  |                 | 1.22    |       |   | 1.24    |  |   |          
|                                                  |  |                        |           |                                   |   |          |                  |  |                 |         |       |   |         |  |   |          

The following table presents an analysis of the sensitivity inherent in our net interest income
and market value of portfolio equity (market value of assets, less the market value of liabilities). The interest rate scenarios presented in the table include interest rates at December 31, 2005, 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, 2005.



|                         |  |                     |  |                                 
|------------------------ |  | ------------------- |  | --------------------------------
|Change in Interest Rates |  | Net Interest Income |  | Market Value of Portfolio Equity
|+200                     |  | 2%                  |  | (3)%                            
|+100                     |  | 1%                  |  | 10%                             
|0                        |  | 0%                  |  | 24%                             
|-100                     |  | (1)%                |  | 39%                             
|-200                     |  | (2)%                |  | 55%                             



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##### Table of Contents

Investment Portfolio

The following table provides the carrying value of our investment portfolio at each of the dates indicated. At December 31, 2005, the carrying value exceeded the market value by approximately $1.3 million and at
December 31, 2004, the carrying value exceeded the market value by approximately $171,000. We do not own a 10 percent or greater position in any single issuer.



|                                                 |  |                        |         |      |   |         |  |   |        
|------------------------------------------------ |  | ---------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                 |  | As of December 31,    
|                                                 |  | 2005                   |         | 2004 |   | 2003   
|                                                 |  | (Dollars in thousands)
|U.S. Treasury securities                         |  | $                      | 1,001   |      | $ | 1,001   |  | $ | 499    
|U.S. government agency securities                |  |                        | 260,109 |      |   | 127,393 |  |   | 124,625
|Mortgage-backed securities:                      |  |                        |         |      |   |         |  |   |        
|Pass-through certificates                        |  |                        | 48,189  |      |   | 69,397  |  |   | 85,208 
|Collateralized mortgage obligations              |  |                        | 85,881  |      |   | 56,580  |  |   |       
|Obligations of states and political subdivisions |  |                        | 42,775  |      |   | 24,210  |  |   | 10,100 
|Other securities                                 |  |                        | 16,357  |      |   | 12,344  |  |   | 14,688 
|                                                 |  |                        |         |      |   |         |  |   |        
|Total investment securities                      |  | $                      | 454,312 |      | $ | 290,925 |  | $ | 235,120
|                                                 |  |                        |         |      |   |         |  |   |        

The significant increase in investment securities from 2004 to 2005 is directly related to
short-term U.S. government agency securities purchased as collateral against securities sold under agreements to repurchase.

The table
below provides the carrying values, maturities, and weighted average yield of our investment portfolio as of December 31, 2005.



|                                                   |  |                        |         |                         |       |                       |      |  
|-------------------------------------------------- |  | ---------------------- | ------- | ----------------------- | ----- | --------------------- | ---- | -
|                                                   |  | Carryingvalue          |         | Averagematurity (years) |       | Weightedaverageyields |     
|                                                   |  | (Dollars in thousands) |        
|U.S. Treasury securities                           |  |                        |         |                         |       |                       |      |  
|After one through five years                       |  | $                      | 1,001   |                         | 1.69  |                       | 4.00 | %
|U.S. government agency securities                  |  |                        |         |                         |       |                       |      |  
|One year or less                                   |  |                        | 130,806 |                         | 0.07  |                       | 3.94 |  
|After one through five years                       |  |                        | 129,303 |                         | 2.53  |                       | 3.62 |  
|                                                   |  |                        |         |                         |       |                       |      |  
|Total U.S. government agency securities            |  |                        | 260,109 |                         | 1.30  |                       | 3.78 |  
|Mortgage-backed securities                         |  |                        |         |                         |       |                       |      |  
|One year or less                                   |  |                        | 129     |                         | 0.43  |                       | 6.01 |  
|After one through five years                       |  |                        | 3,354   |                         | 3.27  |                       | 5.33 |  
|After five through ten years                       |  |                        | 20,369  |                         | 8.22  |                       | 4.80 |  
|After ten years                                    |  |                        | 110,218 |                         | 18.09 |                       | 5.10 |  
|                                                   |  |                        |         |                         |       |                       |      |  
|Total mortgage-backed securities obligations(a)    |  |                        | 134,070 |                         | 16.20 |                       | 5.06 |  
|Obligations of states and political subdivisions   |  |                        |         |                         |       |                       |      |  
|One year or less                                   |  |                        | 825     |                         | 0.52  |                       | 4.08 |  
|After one through five years                       |  |                        | 1,885   |                         | 3.46  |                       | 3.82 |  
|After five through ten years                       |  |                        | 12,583  |                         | 8.68  |                       | 3.78 |  
|After ten years                                    |  |                        | 27,482  |                         | 22.54 |                       | 6.26 |  
|                                                   |  |                        |         |                         |       |                       |      |  
|Total states and political subdivisions securities |  |                        | 42,775  |                         | 17.20 |                       | 5.38 |  
|Other securities                                   |  |                        | 16,357  |                         |      |                       | 4.37 |  
|                                                   |  |                        |         |                         |       |                       |      |  
|Total investment securities                        |  | $                      | 454,312 |                         | 7.15  |                       | 4.33 | %
|                                                   |  |                        |         |                         |       |                       |      |  

---

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

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



A-13



---

##### Table of Contents

Loan Portfolio

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



|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |           |        |       |         |  |   |         |  |       |  
|--------------------------------- |  | ---------------------- | --------- | ------- | ----- | - | ------ | ---- | --------- |  | ----- | ------ |  | ------- | --------- |  | ------ | - | ------- | - | --------- | ------ | ----- | ------- |  | - | ------- |  | ----- | -
|                                  |  | As of December 31,     |          
|                                  |  | 2005                   |           |         | 2004  |   |        | 2003 |           |  | 2002  |        |  | 2001    |          
|                                  |  | Amount                 |           | Percent |       |   | Amount |      | Percent   |  |       | Amount |  | Percent |           |  | Amount |   | Percent |   |           | Amount |       | Percent | 
|                                  |  | (Dollars in thousands) |          
|Commercial                        |  | $                      | 201,816   |         | 13.2  | % |        | $    | 174,293   |  | 12.6  | %      |  | $       | 160,261   |  | 13.0   | % |         | $ | 100,813   |        | 9.9   | %       |  | $ | 90,187  |  | 16.4  | %
|Real estate - commercial          |  |                        | 725,245   |         | 47.5  |   |        |      | 687,213   |  | 49.9  |        |  |         | 577,835   |  | 46.9   |   |         |   | 422,643   |        | 41.6  |         |  |   | 250,972 |  | 45.8  |  
|Real estate - one- to four-family |  |                        | 170,158   |         | 11.2  |   |        |      | 198,420   |  | 14.4  |        |  |         | 258,361   |  | 21.0   |   |         |   | 314,617   |        | 30.9  |         |  |   | 53,129  |  | 9.7   |  
|Real estate - construction        |  |                        | 381,888   |         | 25.1  |   |        |      | 270,303   |  | 19.6  |        |  |         | 196,636   |  | 16.0   |   |         |   | 123,082   |        | 12.1  |         |  |   | 115,897 |  | 21.1  |  
|Consumer and other                |  |                        | 27,888    |         | 1.8   |   |        |      | 28,601    |  | 2.1   |        |  |         | 30,736    |  | 2.5    |   |         |   | 35,555    |        | 3.5   |         |  |   | 25,557  |  | 4.6   |  
|Mortgage loans available for sale |  |                        | 18,932    |         | 1.2   |   |        |      | 18,965    |  | 1.4   |        |  |         | 7,656     |  | 0.6    |   |         |   | 20,315    |        | 2.0   |         |  |   | 12,980  |  | 2.4   |  
|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |           |        |       |         |  |   |         |  |       |  
|Total loans                       |  | $                      | 1,525,927 |         | 100.0 | % |        | $    | 1,377,795 |  | 100.0 | %      |  | $       | 1,231,485 |  | 100.0  | % |         | $ | 1,017,025 |        | 100.0 | %       |  | $ | 548,722 |  | 100.0 | %
|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |           |        |       |         |  |   |         |  |       |  

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

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

The following table presents the aggregate maturities of loans in each major category of our
loan portfolio at December 31, 2005. Actual maturities may differ from the contractual maturities shown as a result of renewals and prepayments.



|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|--------------------------------- |  | ---------------------- | --------- | ---------------- | - | -------------- |  | ----- | ------ |  | - | ---------
|                                  |  | Less thanone year      |           | One to fiveyears |   | Over fiveyears |  | Total
|                                  |  | (Dollars in thousands)
|Fixed-rate loans:                 |  |                        |           |                  |   |                |  |       |        |  |   |          
|Commercial                        |  | $                      | 21,582    |                  | $ | 31,032         |  | $     | 1,575  |  | $ | 54,189   
|Real estate                       |  |                        | 40,289    |                  |   | 63,408         |  |       | 35,011 |  |   | 138,708  
|Consumer                          |  |                        | 10,492    |                  |   | 11,934         |  |       | 534    |  |   | 22,960   
|Mortgage loans available for sale |  |                        | 18,932    |                  |   |               |  |       |       |  |   | 18,932   
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|Total fixed-rate loans            |  |                        | 91,295    |                  |   | 106,374        |  |       | 37,120 |  |   | 234,789  
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|Variable-rate loans:              |  |                        |           |                  |   |                |  |       |        |  |   |          
|Commercial                        |  |                        | 141,136   |                  |   | 6,144          |  |       | 347    |  |   | 147,627  
|Real estate                       |  |                        | 839,975   |                  |   | 289,888        |  |       | 8,720  |  |   | 1,138,583
|Consumer                          |  |                        | 4,888     |                  |   | 38             |  |       | 2      |  |   | 4,928    
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|Total variable-rate loans         |  |                        | 985,999   |                  |   | 296,070        |  |       | 9,069  |  |   | 1,291,138
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          
|Total loans                       |  | $                      | 1,077,294 |                  | $ | 402,444        |  | $     | 46,189 |  | $ | 1,525,927
|                                  |  |                        |           |                  |   |                |  |       |        |  |   |          



A-14



---

##### Table of Contents

Nonperforming Assets

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

Potential problem assets are defined as loans presently accruing interest, and not contractually past due 90 days or more and not restructured, but about
which management has doubt as to the future ability of the borrower to comply with present repayment terms, which may result in the reporting of the loans as nonperforming assets in the future. Management monitors the performance and value of any
collateral securing such loans monthly, and in cases where the loan balance exceeds estimated fair value of collateral, a specific portion of the allowance for loan losses is allocated to these loans. At December 31, 2005, approximately $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,     |       
|                                                                |  | 2005                   |        |   | 2004 |   |        | 2003 |  |   | 2002   |   |  | 2001 |       
|                                                                |  | (Dollars in thousands) |       
|Loans past due 90 days or more                                  |  | $                      | 21     |   |      | $ | 4      |      |  | $ | 13     |   |  | $    | 721    |   |  | $ | 3      |  
|Non-accrual loans                                               |  |                        | 6,698  |   |      |   | 7,969  |      |  |   | 12,515 |   |  |      | 10,241 |   |  |   | 2,480  |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming loans                                       |  |                        | 6,719  |   |      |   | 7,973  |      |  |   | 12,528 |   |  |      | 10,962 |   |  |   | 2,483  |  
|Other real estate owned                                         |  |                        | 778    |   |      |   | 1,255  |      |  |   | 1,557  |   |  |      | 908    |   |  |   | 272    |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                      |  | $                      | 7,497  |   |      | $ | 9,228  |      |  | $ | 14,085 |   |  | $    | 11,870 |   |  | $ | 2,755  |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses                                       |  | $                      | 17,413 |   |      | $ | 15,331 |      |  | $ | 14,121 |   |  | $    | 11,838 |   |  | $ | 7,207  |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Potential problem assets                                        |  | $                      | 17,684 |   |      | $ | 22,174 |      |  | $ | 15,115 |   |  | $    | 23,286 |   |  | $ | 13,331 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Ratio of total nonperforming assets to total assets             |  |                        | 0.35   | % |      |   | 0.51   | %    |  |   | 0.86   | % |  |      | 0.86   | % |  |   | 0.33   | %
|Ratio of total nonperforming loans to total loans               |  |                        | 0.44   | % |      |   | 0.58   | %    |  |   | 1.02   | % |  |      | 1.08   | % |  |   | 0.45   | %
|Ratio of allowance for loan losses to total nonperforming loans |  |                        | 259    | % |      |   | 192    | %    |  |   | 113    | % |  |      | 108    | % |  |   | 290    | %

Loans on which the accrual of interest has been discontinued amounted to $6.7 million, $8.0
million, and $12.5 million at December 31, 2005, 2004, and 2003, respectively. If interest on such loans had been accrued, such income would have been approximately $334,000 in 2005, $348,000 in 2004, and $495,000 in 2003. Actual interest
income on those loans, which is recorded only when received, amounted to zero in 2005, 2004, and 2003.

Analysis of the Allowance for Loan Losses

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



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



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



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



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



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



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



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



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



A-15



---

##### Table of Contents

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



|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|--------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ----- | -
|                                                                |  | Years ended December 31, |       
|                                                                |  | 2005                     |        |   | 2004 |   |        | 2003 |  |   | 2002   |   |  | 2001 |       
|                                                                |  | (Dollars in thousands)   |       
|Allowance for loan losses, beginning of period                  |  | $                        | 15,331 |   |      | $ | 14,121 |      |  | $ | 11,838 |   |  | $    | 7,207  |   |  | $ | 6,308 |  
|Charge-offs:                                                    |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Commercial and other                                            |  |                          | 798    |   |      |   | 1,038  |      |  |   | 445    |   |  |      | 598    |   |  |   | 1,034 |  
|Real estate loans                                               |  |                          | 1,000  |   |      |   | 2,067  |      |  |   | 2,349  |   |  |      | 358    |   |  |   | 338   |  
|Consumer loans                                                  |  |                          | 468    |   |      |   | 426    |      |  |   | 766    |   |  |      | 298    |   |  |   | 201   |  
|Credit cards                                                    |  |                          | 107    |   |      |   | 172    |      |  |   | 142    |   |  |      | 174    |   |  |   | 130   |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total charge-offs                                               |  |                          | 2,373  |   |      |   | 3,703  |      |  |   | 3,702  |   |  |      | 1,428  |   |  |   | 1,703 |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Recoveries:                                                     |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Commercial and other                                            |  |                          | 134    |   |      |   | 136    |      |  |   | 115    |   |  |      | 121    |   |  |   | 45    |  
|Real estate loans                                               |  |                          | 240    |   |      |   | 135    |      |  |   | 141    |   |  |      | 57     |   |  |   | 47    |  
|Consumer loans                                                  |  |                          | 136    |   |      |   | 83     |      |  |   | 146    |   |  |      | 93     |   |  |   | 100   |  
|Credit cards                                                    |  |                          | 25     |   |      |   | 59     |      |  |   | 40     |   |  |      | 34     |   |  |   | 24    |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total recoveries                                                |  |                          | 535    |   |      |   | 413    |      |  |   | 442    |   |  |      | 305    |   |  |   | 216   |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Net charge-offs                                                 |  |                          | 1,838  |   |      |   | 3,290  |      |  |   | 3,260  |   |  |      | 1,123  |   |  |   | 1,487 |  
|Provision for loan losses                                       |  |                          | 3,920  |   |      |   | 4,500  |      |  |   | 5,543  |   |  |      | 2,589  |   |  |   | 2,386 |  
|Allowance related to acquired loans                             |  |                          |       |   |      |   |       |      |  |   |       |   |  |      | 3,165  |   |  |   |      |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Allowance for loan losses, end of period                        |  | $                        | 17,413 |   |      | $ | 15,331 |      |  | $ | 14,121 |   |  | $    | 11,838 |   |  | $ | 7,207 |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|As a percentage of average total loans:                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Net charge-offs                                                 |  |                          | 0.12   | % |      |   | 0.26   | %    |  |   | 0.29   | % |  |      | 0.16   | % |  |   | 0.30  | %
|Provision for loan losses                                       |  |                          | 0.27   |   |      |   | 0.35   |      |  |   | 0.50   |   |  |      | 0.37   |   |  |   | 0.48  |  
|Allowance for loan losses                                       |  |                          | 1.18   |   |      |   | 1.19   |      |  |   | 1.27   |   |  |      | 1.71   |   |  |   | 1.45  |  
|As a percentage of total loans held for investment at year-end: |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Allowance for loan losses                                       |  |                          | 1.16   |   |      |   | 1.13   |      |  |   | 1.15   |   |  |      | 1.19   |   |  |   | 1.35  |  
|As a multiple of net charge-offs:                               |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Allowance for loan losses                                       |  |                          | 9.47   |   |      |   | 4.66   |      |  |   | 4.33   |   |  |      | 10.54  |   |  |   | 4.85  |  
|Income before income taxes and provision for loan losses        |  |                          | 20.19  |   |      |   | 8.60   |      |  |   | 8.70   |   |  |      | 16.19  |   |  |   | 10.13 |  

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

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



|                                            |  |                        |        |                               |        |   |                     |      |                               |  |        |                     |  |                               |        |  |                     |   |                               |   |        |                     |        |                               |  |   |       |  |        |  
|------------------------------------------- |  | ---------------------- | ------ | ----------------------------- | ------ | - | ------------------- | ---- | ----------------------------- |  | ------ | ------------------- |  | ----------------------------- | ------ |  | ------------------- | - | ----------------------------- | - | ------ | ------------------- | ------ | ----------------------------- |  | - | ----- |  | ------ | -
|                                            |  | As of December 31,     |       
|                                            |  | 2005                   |        |                               | 2004   |   |                     | 2003 |                               |  | 2002   |                     |  | 2001                          |       
|                                            |  | (Dollars in thousands) |       
|                                            |  | Amount of allowance    |        | Percent ofloans tototal loans |        |   | Amount of allowance |      | Percent ofloans tototal loans |  |        | Amount of allowance |  | Percent ofloans tototal loans |        |  | Amount of allowance |   | Percent ofloans tototal loans |   |        | Amount of allowance |        | Percent ofloans tototal loans | 
|Commercial and other and subjective portion |  | $                      | 9,107  |                               | 13.22  | % |                     | $    | 6,785                         |  | 12.64  | %                   |  | $                             | 6,056  |  | 13.01               | % |                               | $ | 6,368  |                     | 9.91   | %                             |  | $ | 6,376 |  | 16.40  | %
|Real estate                                 |  |                        | 7,524  |                               | 84.95  |   |                     |      | 7,642                         |  | 85.28  |                     |  |                               | 6,944  |  | 84.49               |   |                               |   | 4,981  |                     | 86.59  |                               |  |   | 607   |  | 79.00  |  
|Consumer                                    |  |                        | 782    |                               | 1.83   |   |                     |      | 904                           |  | 2.08   |                     |  |                               | 1,121  |  | 2.50                |   |                               |   | 489    |                     | 3.50   |                               |  |   | 224   |  | 4.60   |  
|                                            |  |                        |        |                               |        |   |                     |      |                               |  |        |                     |  |                               |        |  |                     |   |                               |   |        |                     |        |                               |  |   |       |  |        |  
|Total allowance for loan losses             |  | $                      | 17,413 |                               | 100.00 | % |                     | $    | 15,331                        |  | 100.00 | %                   |  | $                             | 14,121 |  | 100.00              | % |                               | $ | 11,838 |                     | 100.00 | %                             |  | $ | 7,207 |  | 100.00 | %
|                                            |  |                        |        |                               |        |   |                     |      |                               |  |        |                     |  |                               |        |  |                     |   |                               |   |        |                     |        |                               |  |   |       |  |        |  



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##### Table of Contents

The provision for loan losses decreased to $3.9 million in 2005, from $4.5 million in 2004 and $5.5
million in 2003. The provision in each year was based on managements judgment concerning the amount of allowance for loan losses necessary after its review of various factors, which we believe affect the credit quality of the loan portfolio.
Charge-offs net of recoveries of loans were $1.8 million in 2005, $3.3 million in 2004, and $3.3 million in 2003. The percentage of net charge-offs to average loans was 0.12% in 2005, 0.26% in 2004, and 0.29% in 2003. 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, |          
|                                     |  | 2005                     |           |                             | 2004 |   |                 | 2003 |                            
|                                     |  | (Dollars in thousands)   |          
|                                     |  | Average Balance          |           | WeightedAverageInterestRate |      |   | Average Balance |      | WeightedAverageInterestRate |  |      | Average Balance |  | WeightedAverageInterestRate |          
|Interest-bearing demand accounts     |  | $                        | 267,027   |                             | 0.84 | % |                 | $    | 237,144                     |  | 0.47 | %               |  | $                           | 199,890   |  | 0.45 | %
|Certificates of deposit              |  |                          | 549,677   |                             | 3.25 |   |                 |      | 527,084                     |  | 2.83 |                 |  |                             | 508,851   |  | 3.00 |  
|Money market savings accounts        |  |                          | 207,056   |                             | 1.90 |   |                 |      | 194,961                     |  | 1.35 |                 |  |                             | 145,910   |  | 1.40 |  
|Regular savings accounts             |  |                          | 72,882    |                             | 0.93 |   |                 |      | 67,480                      |  | 0.85 |                 |  |                             | 58,367    |  | 0.84 |  
|                                     |  |                          |           |                             |      |   |                 |      |                             |  |      |                 |  |                             |           |  |      |  
|Total interest-bearing deposits      |  |                          | 1,096,642 |                             | 2.25 | % |                 |      | 1,026,669                   |  | 1.87 |                 |  |                             | 913,018   |  | 2.05 |  
|Non-interest-bearing demand accounts |  |                          | 349,570   |                             |     |   |                 |      | 279,101                     |  |     |                 |  |                             | 224,680   |  |     |  
|                                     |  |                          |           |                             |      |   |                 |      |                             |  |      |                 |  |                             |           |  |      |  
|Total deposits                       |  | $                        | 1,446,212 |                             | 1.71 | % |                 | $    | 1,305,770                   |  | 1.47 | %               |  | $                           | 1,137,698 |  | 1.64 | %
|                                     |  |                          |           |                             |      |   |                 |      |                             |  |      |                 |  |                             |           |  |      |  

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,     |        
|                          |  | 2005                   |         |  | 2004   |   |  | 2003 |        
|                          |  | (Dollars in thousands) |        
|Three months or less      |  | $                      | 128,282 |  | 37.65  | % |  | $    | 69,605  |  | 21.74  | % |  | $ | 63,007  |  | 23.58  | %
|Three through six months  |  |                        | 57,243  |  | 16.80  |   |  |      | 64,530  |  | 20.16  |   |  |   | 56,613  |  | 21.18  |  
|Six through twelve months |  |                        | 53,390  |  | 15.67  |   |  |      | 75,104  |  | 23.47  |   |  |   | 61,401  |  | 22.98  |  
|Over twelve months        |  |                        | 101,786 |  | 29.88  |   |  |      | 110,862 |  | 34.63  |   |  |   | 86,235  |  | 32.26  |  
|                          |  |                        |         |  |        |   |  |      |         |  |        |   |  |   |         |  |        |  
|Totals                    |  | $                      | 340,701 |  | 100.00 | % |  | $    | 320,101 |  | 100.00 | % |  | $ | 267,256 |  | 100.00 | %
|                          |  |                        |         |  |        |   |  |      |         |  |        |   |  |   |         |  |        |  

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase totaled approximately $223.2 million, $69.7 million, and $63.7 million at December 31, 2005, 2004, and
2003, respectively. The weighted average interest rate on securities sold under agreements to repurchase was 3.54%, 0.43%, and 0.33% at December 31, 2005, 2004, and 2003, respectively.

Securities sold under agreements to repurchase are summarized as follows:



|                                                 |  |                          |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2005                     |         |   | 2004 |   |        | 2003 | 
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 223,195 |   |      | $ | 69,723 |      |  | $ | 63,686 |  
|Weighted average interest rate                   |  |                          | 3.54    | % |      |   | 0.43   | %    |  |   | 0.33   | %
|Maximum amount outstanding at any month end      |  | $                        | 223,195 |   |      | $ | 75,109 |      |  | $ | 63,686 |  
|Average balance outstanding during the period    |  | $                        | 85,367  |   |      | $ | 64,241 |      |  | $ | 54,368 |  
|Weighted average interest rate during the period |  |                          | 2.39    | % |      |   | 0.31   | %    |  |   | 0.41   | %

The significant increase in securities sold under agreements to repurchase at December 31,
2005 compared to December 31, 2004 is related to two local governmental entities that had repurchase agreements that totaled approximately $150 million at December 31, 2005. The balance in these repurchase agreements, which came primarily
from the collection of property taxes, is expected to fluctuate significantly during 2006.



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Short-term FHLB Advances

Short-term Federal Home Loan Bank (FHLB) advances (original term less than one year) totaled approximately $65 million, $91 million, and $110 million at December 31, 2005, 2004, and 2003,
respectively. The weighted average interest rate on short-term FHLB advances was 3.93%, 2.21%, and 1.04% at December 31, 2005, 2004, and 2003, respectively.

Short-term FHLB advances are summarized as follows:



|                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 65,000  |   |      | $ | 91,000  |      |  | $ | 110,000 |  
|Weighted average interest rate                   |  |                          | 3.93    | % |      |   | 2.21    | %    |  |   | 1.04    | %
|Maximum amount outstanding at any month end      |  | $                        | 150,000 |   |      | $ | 115,000 |      |  | $ | 110,000 |  
|Average balance outstanding during the period    |  | $                        | 117,475 |   |      | $ | 71,235  |      |  | $ | 34,308  |  
|Weighted average interest rate during the period |  |                          | 3.27    | % |      |   | 1.39    | %    |  |   | 1.34    | %

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 $1.510 billion at December 31, 2005, from $1.401 billion at December 31, 2004. 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 total loans increased to $1.526 billion at December 31, 2005 from $1.378 billion as of December 31, 2004. During 2005, real estate loans
increased by $121.4 million, commercial loans increased by $27.5 million, consumer loans decreased by $713,000, and mortgage loans available for sale decreased by $33,000. The increase in loans is due to our successful efforts to increase our market
share by taking advantage of market dislocations caused by the acquisition of local competitors, growth in the economy of our market area, and our continued focus on the Colorado and Utah markets.

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

During 2005, our loan growth outpaced the growth in deposits resulting in an increase in borrowings from the Federal Home Loan Bank. The repayment of the
additional borrowings in 2005 is laddered out to June 2006 and therefore, refinancing these borrowings will be subject to prevailing market rates. During 2005, we also utilized the brokered deposit market by issuing $30 million in certificates of
deposit which matured in February 2006. At December 31, 2005, we had additional borrowing capacity at the Federal Home Loan Bank of approximately $294 million as well as unused Federal Funds lines at other banks of $25.7 million. The
acquisitions of Access and NMFC increase our liquidity and we anticipate liquidating a portion of their investment portfolios to reduce FHLB borrowings.

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 issuance of additional brokered deposits, the issuance of junior subordinated debentures, private equity offerings or the sale of equity in the capital markets. We believe that our customer
deposits provide a strong source of liquidity because of the high percentage of core deposits. FHLB advances are used to compensate for reductions in other sources of funds. Borrowings may also be used on a longer-term basis to support expanded
lending activities and to match the maturity or repricing intervals of assets. The sources of such borrowings are federal funds purchased, securities sold under agreements to repurchase, and borrowings from the Federal Home Loan Bank.



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##### Table of Contents

Our principal asset is the outstanding capital stock of First Community Bank. As a result, our
liquidity and ability to pay dividends on our common stock depend primarily on the ability of First Community Bank to pay dividends to us in amounts sufficient to service our obligations.

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, 2005. See Notes 9, 10, and 13 of the notes to the consolidated financial statements.



|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       
|---------------------------------- |  | ------------------------------------------ | ------- | ----------------- | - | ----------------- |  | ----------------- | ------ | --------------- | - | ----- |  | - | ------
|                                   |  | Payments Due by Period                    
|Contractual Cash Obligations       |  | Total                                      |         | One Yearand Less  |   | One to ThreeYears |  | Four to FiveYears |        | After FiveYears
|                                   |  | (Dollars in thousands)                    
|FHLB advances                      |  | $                                          | 198,014 |                   | $ | 194,125           |  | $                 | 3,889  |                 | $ |      |  | $ |      
|Note Payable                       |  |                                            | 779     |                   |   | 50                |  |                   | 108    |                 |   | 122   |  |   | 499   
|Operating leases                   |  |                                            | 42,797  |                   |   | 4,888             |  |                   | 10,010 |                 |   | 9,135 |  |   | 18,764
|Junior subordinated debentures     |  |                                            | 48,971  |                   |   |                  |  |                   |       |                 |   |      |  |   | 48,971
|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       
|Total contractual cash obligations |  | $                                          | 290,561 |                   | $ | 199,063           |  | $                 | 14,007 |                 | $ | 9,257 |  | $ | 68,234
|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       
|                                   | 
|                                   |  | Amount of Commitment Expiration Per Period
|Commercial Commitments             |  | UnfundedCommitments                        |         | Less thanOne Year |   | One to ThreeYears |  | Four to FiveYears |        | After FiveYears
|                                   |  | (Dollars in thousands)                    
|Lines of credit                    |  | $                                          | 393,550 |                   | $ | 259,956           |  | $                 | 66,857 |                 | $ | 97    |  | $ | 66,640
|Standby letters of credit          |  |                                            | 42,377  |                   |   | 36,061            |  |                   | 6,308  |                 |   | 8     |  |   |      
|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       
|Total commercial commitments       |  | $                                          | 435,927 |                   | $ | 296,017           |  | $                 | 73,165 |                 | $ | 105   |  | $ | 66,640
|                                   |  |                                            |         |                   |   |                   |  |                   |        |                 |   |       |  |   |       

Capital Resources

Our total stockholders equity increased to $160.2 million at December 31, 2005 from $144.3 million at December 31, 2004. Of the $15.9 million increase, $21.4 million was produced by earnings, $1.0
million due to stock issuances related to stock options, restricted stock, the dividend re-investment plan, and the employee benefit plan, $189,000 was generated from the tax benefit of exercised options. These increases were offset primarily by
$2.4 million as a result of the decrease in market value of securities available for sale and dividend payments of $4.3 million.

Management currently intends to continue to retain a major portion of our earnings to support anticipated growth. As of December 31, 2005, we were considered well capitalized based on the regulatory capital requirements as further
disclosed in note 14 to the consolidated financial statements.

Impact of Inflation

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

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



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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of First State Bancorporation (the
Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Companys internal control over financial
reporting is a process designed under the supervision of the Companys Chief Executive Officer and Chief Financial Officer to provide reasonable assurance to the Companys management and board of directors regarding the reliability of
financial reporting and the preparation of the Companys financial statements for public disclosure in accordance with U.S. generally accepted accounting principles.

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

Management assessed the effectiveness of the Companys internal control over
financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated Framework.
Based on this assessment, management believes that, as of December 31, 2005, the Companys internal control over financial reporting is effective.

Managements assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2005 has been audited by KPMG, LLP, the Companys independent registered public accounting firm
who also audited the Companys consolidated financial statements.



|               |  |                                      
|-------------- |  | -------------------------------------
|March 14, 2006 |  | /S/ Michael R. Stanford              
|               |  | Michael R. Stanford                  
|               |  | President and Chief Executive Officer
|               | 
|               |  | /S/ Christopher C. Spencer           
|               |  | Christopher C. Spencer               
|               |  | Chief Financial Officer              



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and
Stockholders

First State Bancorporation:

We have audited the accompanying consolidated balance sheets of First State Bancorporation and subsidiary as of December 31, 2005 and 2004, 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, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of First State Bancorporation and subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First State Bancorporations internal control over financial reporting as of December 31, 2005, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2006 expressed an unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial reporting.

KPMG LLP

Albuquerque, New Mexico

March 14, 2006



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and
Stockholders

First State Bancorporation:

We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that First State Bancorporation maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). First State
Bancorporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.

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

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

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

In our opinion, managements assessment that First State Bancorporation maintained effective internal control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, First
State Bancorporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of First State Bancorporation and subsidiary as of December 31, 2005 and 2004, 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, 2005 and our report dated March 14, 2006 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

Albuquerque, New Mexico

March 14, 2006



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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, |          
|                                                                                                                                                                                |  | 2005               |           |   | 2004 |  
|ASSETS                                                                                                                                                                          |  |                    |           |   |      |   |           |  
|Cash and due from banks (note 3)                                                                                                                                                |  | $                  | 60,625    |   |      | $ | 42,514    |  
|Interest-bearing deposits with other banks                                                                                                                                      |  |                    | 102       |   |      |   | 1,501     |  
|Federal funds sold                                                                                                                                                              |  |                    |          |   |      |   | 1,250     |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total cash and cash equivalents                                                                                                                                                 |  |                    | 60,727    |   |      |   | 45,265    |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Investment securities (note 4):                                                                                                                                                 |  |                    |           |   |      |   |           |  
|Available for sale (at market, amortized cost of $245,706 and $204,672 at December 31, 2005 and 2004)                                                                           |  |                    | 240,434   |   |      |   | 203,174   |  
|Held to maturity (at amortized cost, market of $196,177 and $75,236 at December 31, 2005 and 2004)                                                                              |  |                    | 197,521   |   |      |   | 75,407    |  
|Federal Home Loan Bank stock and Federal Reserve Bank stock at cost                                                                                                             |  |                    | 16,357    |   |      |   | 12,344    |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total investment securities                                                                                                                                                     |  |                    | 454,312   |   |      |   | 290,925   |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Mortgage loans available for sale (note 5)                                                                                                                                      |  |                    | 18,932    |   |      |   | 18,965    |  
|Loans held for investment net of unearned interest (note 5)                                                                                                                     |  |                    | 1,506,995 |   |      |   | 1,358,830 |  
|Less allowance for loan losses (note 5)                                                                                                                                         |  |                    | (17,413   | ) |      |   | (15,331   | )
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Net loans                                                                                                                                                                       |  |                    | 1,508,514 |   |      |   | 1,362,464 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Premises and equipment, net (note 6)                                                                                                                                            |  |                    | 30,153    |   |      |   | 29,310    |  
|Accrued interest receivable                                                                                                                                                     |  |                    | 9,043     |   |      |   | 6,947     |  
|Other real estate owned                                                                                                                                                         |  |                    | 778       |   |      |   | 1,255     |  
|Goodwill (note 7)                                                                                                                                                               |  |                    | 43,223    |   |      |   | 43,223    |  
|Cash surrender value of bank owned life insurance                                                                                                                               |  |                    | 31,994    |   |      |   | 19,910    |  
|Deferred tax asset, net (note 11)                                                                                                                                               |  |                    | 3,612     |   |      |   | 2,866     |  
|Other assets, net                                                                                                                                                               |  |                    | 15,215    |   |      |   | 13,345    |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total assets                                                                                                                                                                    |  | $                  | 2,157,571 |   |      | $ | 1,815,510 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                            |  |                    |           |   |      |   |           |  
|Liabilities:                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Deposits (note 8):                                                                                                                                                              |  |                    |           |   |      |   |           |  
|Non-interest-bearing                                                                                                                                                            |  | $                  | 385,972   |   |      | $ | 317,729   |  
|Interest-bearing                                                                                                                                                                |  |                    | 1,124,035 |   |      |   | 1,083,574 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total deposits                                                                                                                                                                  |  |                    | 1,510,007 |   |      |   | 1,401,303 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Securities sold under agreements to repurchase and federal funds purchased (note 9)                                                                                             |  |                    | 229,995   |   |      |   | 69,723    |  
|Federal Home Loan Bank Advances and other (note 9)                                                                                                                              |  |                    | 198,793   |   |      |   | 153,852   |  
|Junior subordinated debentures (note 10)                                                                                                                                        |  |                    | 48,971    |   |      |   | 38,661    |  
|Other liabilities                                                                                                                                                               |  |                    | 9,626     |   |      |   | 7,662     |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total liabilities                                                                                                                                                               |  |                    | 1,997,392 |   |      |   | 1,671,201 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Stockholders equity (note 12):                                                                                                                                                 |  |                    |           |   |      |   |           |  
|Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding                                                                                          |  |                    |          |   |      |   |          |  
|Common stock, no par value, 20,000,000 shares authorized; issued, 16,211,337 and 16,141,232; outstanding, 15,394,404 and 15,324,728 at
December 31, 2005 and 2004, respectively |  |                    | 89,794    |   |      |   | 88,634    |  
|Treasury stock, at cost (816,933 shares at December 31, 2005 and 816,504 shares at December 31, 2004)                                                                           |  |                    | (6,349    | ) |      |   | (6,340    | )
|Retained earnings                                                                                                                                                               |  |                    | 80,255    |   |      |   | 63,166    |  
|Unearned compensation                                                                                                                                                           |  |                    | (147      | ) |      |   | (192      | )
|Accumulated other comprehensive income (loss) -                                                                                                                                 |  |                    |           |   |      |   |           |  
|Unrealized loss on investment securities, net of tax (notes 4 and 11)                                                                                                           |  |                    | (3,374    | ) |      |   | (959      | )
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total stockholders equity                                                                                                                                                      |  |                    | 160,179   |   |      |   | 144,309   |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Commitments and contingencies (notes 12 and 13)                                                                                                                                 |  |                    |           |   |      |   |           |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $                  | 2,157,571 |   |      | $ | 1,815,510 |  
|                                                                                                                                                                                |  |                    |           |   |      |   |           |  

See accompanying notes to consolidated financial statements.



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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, |        
|                                                              |  | 2005                     |         |   | 2004 |   |        | 2003 | 
|Interest income:                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Interest and fees on loans                                    |  | $                        | 108,783 |   |      | $ | 83,623 |      |  | $ | 75,734 |  
|Interest on marketable securities:                            |  |                          |         |   |      |   |        |      |  |   |        |  
|Taxable                                                       |  |                          | 10,959  |   |      |   | 9,173  |      |  |   | 7,622  |  
|Nontaxable                                                    |  |                          | 1,824   |   |      |   | 573    |      |  |   | 181    |  
|Federal funds sold                                            |  |                          | 266     |   |      |   | 16     |      |  |   | 113    |  
|Interest-bearing deposits with other banks                    |  |                          | 125     |   |      |   | 57     |      |  |   | 63     |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Total interest income                                         |  |                          | 121,957 |   |      |   | 93,442 |      |  |   | 83,713 |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Interest expense:                                             |  |                          |         |   |      |   |        |      |  |   |        |  
|Deposits                                                      |  |                          | 24,725  |   |      |   | 19,222 |      |  |   | 18,712 |  
|Short-term borrowings (note 9)                                |  |                          | 6,011   |   |      |   | 1,192  |      |  |   | 761    |  
|Long-term debt (note 9)                                       |  |                          | 4,123   |   |      |   | 1,728  |      |  |   | 1,610  |  
|Junior subordinated debentures (note 10)                      |  |                          | 2,853   |   |      |   | 1,733  |      |  |   | 1,546  |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Total interest expense                                        |  |                          | 37,712  |   |      |   | 23,875 |      |  |   | 22,629 |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Net interest income                                           |  |                          | 84,245  |   |      |   | 69,567 |      |  |   | 61,084 |  
|Provision for loan losses (note 5)                            |  |                          | (3,920  | ) |      |   | (4,500 | )    |  |   | (5,543 | )
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Net interest income after provision for loan losses           |  |                          | 80,325  |   |      |   | 65,067 |      |  |   | 55,541 |  
|Non-interest income:                                          |  |                          |         |   |      |   |        |      |  |   |        |  
|Service charges on deposit accounts                           |  |                          | 5,658   |   |      |   | 4,410  |      |  |   | 4,225  |  
|Other banking service fees                                    |  |                          | 760     |   |      |   | 756    |      |  |   | 1,116  |  
|Credit and debit card transaction fees                        |  |                          | 2,192   |   |      |   | 3,991  |      |  |   | 3,938  |  
|Gain (loss) on sale or call of investment securities (note 4) |  |                          | (179    | ) |      |   | 359    |      |  |   | 46     |  
|Check imprint income                                          |  |                          | 589     |   |      |   | 584    |      |  |   | 590    |  
|Gain on sale of mortgage loans                                |  |                          | 4,865   |   |      |   | 2,718  |      |  |   | 3,493  |  
|Other                                                         |  |                          | 2,566   |   |      |   | 1,373  |      |  |   | 1,113  |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Total non-interest income                                     |  |                          | 16,451  |   |      |   | 14,191 |      |  |   | 14,521 |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Non-interest expenses:                                        |  |                          |         |   |      |   |        |      |  |   |        |  
|Salaries and employee benefits (notes 12 and 13)              |  |                          | 31,890  |   |      |   | 24,843 |      |  |   | 20,570 |  
|Occupancy                                                     |  |                          | 8,216   |   |      |   | 7,804  |      |  |   | 6,267  |  
|Data processing                                               |  |                          | 3,518   |   |      |   | 2,934  |      |  |   | 2,412  |  
|Credit and debit card interchange                             |  |                          |        |   |      |   | 1,580  |      |  |   | 1,637  |  
|Equipment                                                     |  |                          | 4,571   |   |      |   | 4,258  |      |  |   | 3,697  |  
|Legal, accounting, and consulting                             |  |                          | 1,668   |   |      |   | 1,372  |      |  |   | 1,128  |  
|Marketing                                                     |  |                          | 2,955   |   |      |   | 2,288  |      |  |   | 2,190  |  
|Telephone expense                                             |  |                          | 1,202   |   |      |   | 1,219  |      |  |   | 1,534  |  
|Supplies                                                      |  |                          | 915     |   |      |   | 922    |      |  |   | 744    |  
|Delivery expenses                                             |  |                          | 873     |   |      |   | 901    |      |  |   | 1,007  |  
|Other real estate owned                                       |  |                          | 334     |   |      |   | 366    |      |  |   | 354    |  
|FDIC insurance premiums                                       |  |                          | 193     |   |      |   | 181    |      |  |   | 173    |  
|Amortization of intangibles                                   |  |                          | 108     |   |      |   | 111    |      |  |   | 114    |  
|Check imprint expense                                         |  |                          | 638     |   |      |   | 537    |      |  |   | 528    |  
|Loss on sale of loans                                         |  |                          |        |   |      |   | 435    |      |  |   |       |  
|Other                                                         |  |                          | 6,509   |   |      |   | 5,727  |      |  |   | 4,887  |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Total non-interest expenses                                   |  |                          | 63,590  |   |      |   | 55,478 |      |  |   | 47,242 |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Income before income taxes                                    |  |                          | 33,186  |   |      |   | 23,780 |      |  |   | 22,820 |  
|Income tax expense (note 11)                                  |  |                          | 11,788  |   |      |   | 8,555  |      |  |   | 7,969  |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Net income                                                    |  | $                        | 21,398  |   |      | $ | 15,225 |      |  | $ | 14,851 |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Earnings per share (note 1):                                  |  |                          |         |   |      |   |        |      |  |   |        |  
|Basic earnings per share                                      |  | $                        | 1.39    |   |      | $ | 0.99   |      |  | $ | 0.99   |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  
|Diluted earnings per share                                    |  | $                        | 1.36    |   |      | $ | 0.99   |      |  | $ | 0.98   |  
|                                                              |  |                          |         |   |      |   |        |      |  |   |        |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)



|                                                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                        |  | Years ended December 31, |       
|                                                                                                                        |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|Net income                                                                                                              |  | $                        | 21,398 |   |      | $ | 15,225 |      |  | $ | 14,851 |  
|Other comprehensive loss, net of tax - unrealized holding losses on securities available for sale arising during period |  |                          | (2,530 | ) |      |   | (1,065 | )    |  |   | (357   | )
|Reclassification adjustment for (gains) losses included in net income                                                   |  |                          | 115    |   |      |   | (230   | )    |  |   | (29    | )
|                                                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Total comprehensive income                                                                                              |  | $                        | 18,983 |   |      | $ | 13,930 |      |  | $ | 14,465 |  
|                                                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  

See accompanying notes to consolidated financial statements.



A-25



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

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



|                                                            |  |                                               |   |  |                     |        |                |   |        |                   |  |   |                       |   |  |                                               |      |   |                            |   |        |   |  |   |         |  
|----------------------------------------------------------- |  | --------------------------------------------- | - |  | ------------------- | ------ | -------------- | - | ------ | ----------------- |  | - | --------------------- | - |  | --------------------------------------------- | ---- | - | -------------------------- | - | ------ | - |  | - | ------- | -
|                                                            |  | Years ended December 31, 2005, 2004, and 2003 |  
|                                                            |  | Common Stock Shares                           |   |  | Common Stock Amount |        | Treasury Stock |   |        | Retained Earnings |  |   | Unearned Compensation |   |  | Accumulated Other Comprehensive Income (Loss) |      |   | Total Stockholders Equity |  
|Balance at December 31, 2002                                |  | 14,655,668                                    |   |  | $                   | 82,294 |                | $ | (5,447 | )                 |  | $ | 39,899                |   |  | $                                             |     |   |                            | $ | 722    |   |  | $ | 117,468 |  
|                                                            |  |                                               |   |  |                     |        |                |   |        |                   |  |   |                       |   |  |                                               |      |   |                            |   |        |   |  |   |         |  
|Net income                                                  |  |                                              |   |  |                     |       |                |   |       |                   |  |   | 14,851                |   |  |                                               |     |   |                            |   |       |   |  |   | 14,851  |  
|Dividends ($0.22) per share                                 |  |                                              |   |  |                     |       |                |   |       |                   |  |   | (3,211                | ) |  |                                               |     |   |                            |   |       |   |  |   | (3,211  | )
|Common shares issued from exercise of options (note 12)     |  | 552,398                                       |   |  |                     | 2,256  |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 2,256   |  
|Income tax benefit from exercise of options (note 12)       |  |                                              |   |  |                     | 1,843  |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 1,843   |  
|Purchase of Treasury stock                                  |  | (30,000                                       | ) |  |                     |       |                |   | (331   | )                 |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | (331    | )
|Common shares issued in employee benefit plan               |  | 28,176                                        |   |  |                     | 366    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 366     |  
|Common shares issued pursuant to dividend reinvestment plan |  | 6,802                                         |   |  |                     | 98     |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 98      |  
|Restricted stock awards (note 12)                           |  | 29,000                                        |   |  |                     | 447    |                |   |       |                   |  |   |                      |   |  |                                               | (403 | ) |                            |   |       |   |  |   | 44      |  
|Deferred compensation (note 13)                             |  | (32,060                                       | ) |  |                     |       |                |   | (557   | )                 |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | (557    | )
|Net change in market value, net of tax                      |  |                                              |   |  |                     |       |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   | (386   | ) |  |   | (386    | )
|                                                            |  |                                               |   |  |                     |        |                |   |        |                   |  |   |                       |   |  |                                               |      |   |                            |   |        |   |  |   |         |  
|Balance at December 31, 2003                                |  | 15,209,984                                    |   |  |                     | 87,304 |                |   | (6,335 | )                 |  |   | 51,539                |   |  |                                               | (403 | ) |                            |   | 336    |   |  |   | 132,441 |  
|                                                            |  |                                               |   |  |                     |        |                |   |        |                   |  |   |                       |   |  |                                               |      |   |                            |   |        |   |  |   |         |  
|Net income                                                  |  |                                              |   |  |                     |       |                |   |       |                   |  |   | 15,225                |   |  |                                               |     |   |                            |   |       |   |  |   | 15,225  |  
|Dividends ($0.24) per share                                 |  |                                              |   |  |                     |       |                |   |       |                   |  |   | (3,598                | ) |  |                                               |     |   |                            |   |       |   |  |   | (3,598  | )
|Common shares issued from exercise of options (note 12)     |  | 86,728                                        |   |  |                     | 513    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 513     |  
|Income tax benefit from exercise of options (note 12)       |  |                                              |   |  |                     | 363    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 363     |  
|Common shares issued in employee benefit plan               |  | 21,380                                        |   |  |                     | 337    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 337     |  
|Common shares issued pursuant to dividend reinvestment plan |  | 6,980                                         |   |  |                     | 117    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 117     |  
|Restricted stock awards (note 12)                           |  |                                              |   |  |                     |       |                |   |       |                   |  |   |                      |   |  |                                               | 211  |   |                            |   |       |   |  |   | 211     |  
|Deferred compensation (note 13)                             |  | (344                                          | ) |  |                     |       |                |   | (5     | )                 |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | (5      | )
|Net change in market value, net of tax                      |  |                                              |   |  |                     |       |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   | (1,295 | ) |  |   | (1,295  | )
|                                                            |  |                                               |   |  |                     |        |                |   |        |                   |  |   |                       |   |  |                                               |      |   |                            |   |        |   |  |   |         |  
|Balance at December 31, 2004                                |  | 15,324,728                                    |   |  |                     | 88,634 |                |   | (6,340 | )                 |  |   | 63,166                |   |  |                                               | (192 | ) |                            |   | (959   | ) |  |   | 144,309 |  
|                                                            |  |                                               |   |  |                     |        |                |   |        |                   |  |   |                       |   |  |                                               |      |   |                            |   |        |   |  |   |         |  
|Net income                                                  |  |                                              |   |  |                     |       |                |   |       |                   |  |   | 21,398                |   |  |                                               |     |   |                            |   |       |   |  |   | 21,398  |  
|Dividends ($0.28) per share                                 |  |                                              |   |  |                     |       |                |   |       |                   |  |   | (4,309                | ) |  |                                               |     |   |                            |   |       |   |  |   | (4,309  | )
|Common shares issued from exercise of options (note 12)     |  | 26,590                                        |   |  |                     | 126    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 126     |  
|Income tax benefit from exercise of options (note 12)       |  |                                              |   |  |                     | 189    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 189     |  
|Common shares issued in employee benefit plan               |  | 31,656                                        |   |  |                     | 623    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 623     |  
|Common shares issued pursuant to dividend reinvestment plan |  | 5,483                                         |   |  |                     | 111    |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | 111     |  
|Restricted stock awards (note 12)                           |  | 6,376                                         |   |  |                     | 111    |                |   |       |                   |  |   |                      |   |  |                                               | 45   |   |                            |   |       |   |  |   | 156     |  
|Deferred compensation (note 13)                             |  | (429                                          | ) |  |                     |       |                |   | (9     | )                 |  |   |                      |   |  |                                               |     |   |                            |   |       |   |  |   | (9      | )
|Net change in market value, net of tax                      |  |                                              |   |  |                     |       |                |   |       |                   |  |   |                      |   |  |                                               |     |   |                            |   | (2,415 | ) |  |   | (2,415  | )
|                                                            |  |                                               |   |  |                     |        |                |   |        |                   |  |   |                       |   |  |                                               |      |   |                            |   |        |   |  |   |         |  
|Balance at December 31, 2005                                |  | 15,394,404                                    |   |  | $                   | 89,794 |                | $ | (6,349 | )                 |  | $ | 80,255                |   |  | $                                             | (147 | ) |                            | $ | (3,374 | ) |  | $ | 160,179 |  
|                                                            |  |                                               |   |  |                     |        |                |   |        |                   |  |   |                       |   |  |                                               |      |   |                            |   |        |   |  |   |         |  

See accompanying notes to consolidated financial statements.



A-26



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share amounts)



|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                      |  | Years ended December 31, |         
|                                                                                                      |  | 2005                     |          |   | 2004 |   |          | 2003 | 
|Operating activities:                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                                            |  | $                        | 21,398   |   |      | $ | 15,225   |      |  | $ | 14,851   |  
|Adjustments to reconcile net income to cash provided by operating activities:                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                                             |  |                          | 3,920    |   |      |   | 4,500    |      |  |   | 5,543    |  
|Provision for decline in value of other real estate owned                                             |  |                          |         |   |      |   | 56       |      |  |   | 187      |  
|Depreciation and amortization                                                                         |  |                          | 5,508    |   |      |   | 4,997    |      |  |   | 3,960    |  
|Income tax benefit of stock options exercised                                                         |  |                          | 189      |   |      |   | 363      |      |  |   | 1,843    |  
|Increase in bank owned life insurance cash surrender value                                            |  |                          | (1,194   | ) |      |   | (799     | )    |  |   | (958     | )
|Amortization of securities, net                                                                       |  |                          | 800      |   |      |   | 858      |      |  |   | (1,003   | )
|(Gain) loss on sale of investment securities available for sale                                       |  |                          | 179      |   |      |   | (359     | )    |  |   |         |  
|Net gain on sales of other real estate owned                                                          |  |                          | (183     | ) |      |   | (177     | )    |  |   | (68      | )
|(Gain) loss on sale of loans                                                                          |  |                          | (206     | ) |      |   | 435      |      |  |   |         |  
|(Gain) loss on disposal of fixed assets                                                               |  |                          | (24      | ) |      |   | 174      |      |  |   |         |  
|Compensation expense                                                                                  |  |                          | 156      |   |      |   | 211      |      |  |   | 44       |  
|Mortgage loans originated for sale                                                                    |  |                          | (347,814 | ) |      |   | (177,169 | )    |  |   | (213,330 | )
|Proceeds from sale of mortgage loans originated for sale                                              |  |                          | 351,281  |   |      |   | 167,006  |      |  |   | 230,673  |  
|(Increase) decrease in accrued interest receivable                                                    |  |                          | (2,096   | ) |      |   | (1,365   | )    |  |   | (198     | )
|Deferred tax asset                                                                                    |  |                          | 342      |   |      |   | 512      |      |  |   | 77       |  
|Increase in other assets, net                                                                         |  |                          | (3,046   | ) |      |   | (349     | )    |  |   | (2,004   | )
|Increase (decrease) in other liabilities, net                                                         |  |                          | 2,225    |   |      |   | 2,242    |      |  |   | (922     | )
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Total adjustments                                                                                     |  |                          | 10,037   |   |      |   | 1,136    |      |  |   | 23,844   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                             |  |                          | 31,435   |   |      |   | 16,361   |      |  |   | 38,695   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in loans                                                                                 |  |                          | (158,180 | ) |      |   | (179,941 | )    |  |   | (237,428 | )
|Purchases of investment securities carried at amortized cost                                          |  |                          | (337,541 | ) |      |   | (9,996   | )    |  |   | (55,276  | )
|Maturities of investment securities carried at amortized cost                                         |  |                          | 215,818  |   |      |   | 19,183   |      |  |   | 38,597   |  
|Purchases of investment securities carried at market                                                  |  |                          | (136,926 | ) |      |   | (140,370 | )    |  |   | (137,406 | )
|Maturities of investment securities carried at market                                                 |  |                          | 80,205   |   |      |   | 37,992   |      |  |   | 113,493  |  
|Sale of investment securities available for sale                                                      |  |                          | 10,305   |   |      |   | 34,863   |      |  |   |         |  
|Purchases of premises and equipment                                                                   |  |                          | (5,488   | ) |      |   | (10,488  | )    |  |   | (9,621   | )
|Proceeds from the sale of fixed assets                                                                |  |                          | 337      |   |      |   |         |      |  |   |         |  
|Goodwill adjustment                                                                                   |  |                          |         |   |      |   |         |      |  |   | 189      |  
|Proceeds from sale of and payments on other real estate owned                                         |  |                          | 2,054    |   |      |   | 2,843    |      |  |   | 1,597    |  
|Proceeds from the sale of loans                                                                       |  |                          | 3,555    |   |      |   | 37,649   |      |  |   |         |  
|Purchase of bank owned life insurance                                                                 |  |                          | (10,890  | ) |      |   |         |      |  |   |         |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                                                 |  |                          | (336,751 | ) |      |   | (208,265 | )    |  |   | (285,855 | )
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in interest-bearing deposits                                                             |  |                          | 40,461   |   |      |   | 157,268  |      |  |   | 35,685   |  
|Net increase in non-interest-bearing deposits                                                         |  |                          | 68,243   |   |      |   | 48,160   |      |  |   | 80,506   |  
|Net (decrease) increase in securities sold under agreements to repurchase and federal funds purchased |  |                          | 160,272  |   |      |   | 6,037    |      |  |   | (7,078   | )
|Common shares issued                                                                                  |  |                          | 860      |   |      |   | 967      |      |  |   | 2,720    |  
|Proceeds from Federal Home Loan Bank advances                                                         |  |                          | 300,000  |   |      |   | 91,000   |      |  |   | 180,000  |  
|Payments on Federal Home Loan Bank advances and other                                                 |  |                          | (255,059 | ) |      |   | (153,970 | )    |  |   | (43,852  | )
|Proceeds from issuance of junior subordinated debentures                                              |  |                          | 10,310   |   |      |   | 5,155    |      |  |   |         |  
|Dividends paid                                                                                        |  |                          | (4,309   | ) |      |   | (3,598   | )    |  |   | (3,211   | )
|Purchase of treasury stock                                                                            |  |                          |         |   |      |   |         |      |  |   | (331     | )
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                             |  |                          | 320,778  |   |      |   | 151,019  |      |  |   | 244,439  |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|(Decrease) increase in cash and cash equivalents                                                      |  |                          | 15,462   |   |      |   | (40,885  | )    |  |   | (2,721   | )
|Cash and cash equivalents at beginning of year                                                        |  |                          | 45,265   |   |      |   | 86,150   |      |  |   | 88,871   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                              |  | $                        | 60,727   |   |      | $ | 45,265   |      |  | $ | 86,150   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of additional noncash investing and financing activities:                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Additions to other real estate owned in settlement of loans                                           |  | $                        | 1,394    |   |      | $ | 2,420    |      |  | $ | 2,429    |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Additions to loans in settlement of other real estate owned                                           |  | $                        |         |   |      | $ |         |      |  | $ | 64       |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of cash flow information:                                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                                                |  | $                        | 37,109   |   |      | $ | 23,873   |      |  | $ | 23,709   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid for income taxes                                                                            |  | $                        | 11,646   |   |      | $ | 6,344    |      |  | $ | 5,408    |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

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 Community Bank, formerly First State Bank N.M. (First Community Bank or Bank). First Community 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, Belen, and Moriarty, New Mexico; Denver, Cherry Creek, Littleton, Lakewood, Colorado Springs, Fort Collins,
and Longmont, Colorado; and Midvale and Salt Lake City, Utah. First State Bancorporation and First Community 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 allowance 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
allowance for losses on loans and the valuation of real estate owned, are adequate. However, future additions to the allowance may be necessary based on changes in economic conditions. Further, regulatory agencies, as an integral part of their
examination process, periodically review the allowance for losses on loans and real estate owned, and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their
examinations.

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

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

(b) Investment Securities

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



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
Companys investment in Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank Stock are restricted securities and not readily marketable, therefore these investments are carried at cost, which approximates fair value. As a
member of the FHLB and FRB systems, the Company is required to maintain a minimum level of investment in stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2005 and 2004, the
Company met its minimum required investments.

(c) Loans, and Allowance for Loan Losses

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

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

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

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

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

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

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

(d) Premises and Equipment

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



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(e) Goodwill
and Intangible Assets

The excess of cost over the fair value of the net assets of acquired banks is recorded as goodwill. 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 2005, 2004,
and 2003, 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 impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows. Any impairment losses
are reported in the consolidated statements of operations.

(f) Other Real Estate Owned

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

(g) Bank Owned Life Insurance

The Company owns life insurance policies on certain of its officers. The cash surrender value of these policies was approximately $32.0 million and $19.9
million at December 31, 2005 and 2004, respectively. During 2005, the Company purchased additional policies on officers with a value of $10.9 million. The increase in the cash surrender value is included in non-interest income in the
consolidated statements of operations and amounted to approximately $1.2 million, $799,000, and $958,000 in 2005, 2004, and 2003, 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 statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(i) Statements of Cash Flows

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



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(j) Earnings
per Common Share

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



|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     
|------------------------------------- |  | ------------------------------------------------ | ------ | ------------------- | ---------- | --------------- | - | --------------------- |  | ------------------- | ------ | --------------- | ---------- | --------------------- | - | ------------------- |  | --------------- | ------ |  | ---------- |  | - | ----
|                                      |  | Years ended December 31,                        
|                                      |  | 2005                                             |        | 2004                |            | 2003           
|                                      |  | Net Income(Numerator)                            |        | Shares(Denominator) |            | Per ShareAmount |   | Net Income(Numerator) |  | Shares(Denominator) |        | Per ShareAmount |            | Net Income(Numerator) |   | Shares(Denominator) |  | Per ShareAmount
|                                      |  | (Dollars in thousands, except per share amounts)
|Basic EPS:                            |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     
|Net income                            |  | $                                                | 21,398 |                     | 15,391,863 |                 | $ | 1.39                  |  | $                   | 15,225 |                 | 15,312,068 |                       | $ | 0.99                |  | $               | 14,851 |  | 14,951,972 |  | $ | 0.99
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     
|Effect of dilutive securities options |  |                                                  |       |                     | 297,582    |                 |   |                       |  |                     |       |                 | 131,468    |                       |   |                     |  |                 |       |  | 244,926    |  |   |     
|Diluted EPS:                          |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     
|Net income                            |  | $                                                | 21,398 |                     | 15,689,445 |                 | $ | 1.36                  |  | $                   | 15,225 |                 | 15,443,536 |                       | $ | 0.99                |  | $               | 14,851 |  | 15,196,898 |  | $ | 0.98
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     

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

(k) Stock-Based Compensation

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



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Compensation
expense of approximately $156,000, $211,000, and $61,000 was recognized in 2005, 2004, and 2003, respectively, pursuant to the grant of options and restricted stock. Compensation expense is recorded over the service period. Had compensation costs
been determined consistent with the fair value method of SFAS 123 at the grant dates for awards, net income and earnings per common share would have changed to the pro forma amounts indicated below.



|                                                                                                                                        |  |                                                  |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                        |  | Years Ended December 31,                         |       
|                                                                                                                                        |  | 2005                                             |        |   | 2004 |   |        | 2003 | 
|                                                                                                                                        |  | (Dollars in thousands, except per share amounts) |       
|Net income as reported:                                                                                                                 |  | $                                                | 21,398 |   |      | $ | 15,225 |      |  | $ | 14,851 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                              |  |                                                  | 100    |   |      |   | 135    |      |  |   | 39     |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for awards, net of related tax
effects |  |                                                  | (1,100 | ) |      |   | (1,288 | )    |  |   | (100   | )
|                                                                                                                                        |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Pro forma net income                                                                                                                    |  | $                                                | 20,398 |   |      | $ | 14,072 |      |  | $ | 14,790 |  
|                                                                                                                                        |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Earnings per share:                                                                                                                     |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Basic  as reported                                                                                                                     |  | $                                                | 1.39   |   |      | $ | 0.99   |      |  | $ | 0.99   |  
|Basic  pro forma                                                                                                                       |  | $                                                | 1.33   |   |      | $ | 0.92   |      |  | $ | 0.99   |  
|                                                                                                                                        |  |                                                  |       
|Diluted  as reported                                                                                                                   |  | $                                                | 1.36   |   |      | $ | 0.99   |      |  | $ | 0.98   |  
|Diluted  pro forma                                                                                                                     |  | $                                                | 1.30   |   |      | $ | 0.91   |      |  | $ | 0.97   |  

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

(l) Reclassifications

Certain previous period balances have been reclassified to conform to the 2005 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 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 deferred 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 Companys consolidated financial statements, and the adoption of the deferred provisions on January 1, 2005, did not have a material impact on the Companys consolidated
financial statements.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

In
December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB 25. Among other provisions, SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards,
in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005, although early adoption is allowed. However, on April 14, 2005, the Securities and Exchange Commission announced that
the compliance date of SFAS 123R will be suspended until January 1, 2006, for calendar year companies. SFAS 123R permits companies to adopt its requirements using either a modified prospective method, or a modified
retrospective method. Under the modified prospective method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted
after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the modified retrospective method, the requirements are the same as under the modified
prospective method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 148.

The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model,
the standard also permits the use of a lattice model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS 123R. Subject to a complete review of the
requirements of SFAS 123R, based on stock options granted through December 31, 2005, the Company expects that the adoption of SFAS 123R on January 1, 2006, is expected to reduce 2006 net earnings by approximately $900,000. See Note 12 for
information related to outstanding stock options.

SFAS 123R also requires that the benefits associated with the tax deductions in excess
of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods
after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options. However, the amount of operating cash flows recognized in prior periods for such excess tax
deductions, as shown in the Companys consolidated statements of cash flows, were approximately $189,000, $363,000, and $1.8 million, respectively, for 2005, 2004, and 2003.

In December 2004, the AICPA issued Statement of Position (SOP) No. 03-3, Accounting for Certain Loans or Debt Securities Acquired
in a Transfer. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or loans accounted for as debt securities acquired in a
transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or
valuation allowance. It includes loans with evidence of deterioration of credit quality since origination, acquired by completion of a transfer, including such loans acquired in purchase business combinations. SOP 03-3 does not apply to loans
originated by the entity or acquired loans that have not deteriorated in credit quality since origination. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 on January 1,
2005 did not have a material impact on the Companys consolidated financial statements.

On November 3, 2005, the FASB issued
FASB Staff Position (FSP) FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments (FSP 115-1).FSP 115-1 provides accounting guidance regarding the
determination of when an investment is considered impaired (i.e., fair value is less than amortized cost), whether that impairment is other-than-temporary, and the measurement of an impairment loss recognized in earnings if the impairment is
other-than-temporary. FSP 115-1 includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures of quantitative and qualitative factors of debt and marketable equity securities
classified as available-for-sale or held-to-maturity that are in an unrealized loss position at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The guidance in FSP 115-1 is applicable for investments
in debt and equity securities that are within the scope of SFAS 115 and SFAS 124. FSP 115-1 is effective for reporting periods beginning after December 15, 2005. The Company does not expect FSP 115-1 to have a material impact on its
consolidated financial statements.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

2. Subsequent Events
(unaudited)

On January 3, 2006, the Company acquired 100 percent of the outstanding common shares of Access Anytime Bancorp, Inc.
(Access). Subsequent to the acquisition, Access and its wholly owned subsidiary AccessBank were merged with and into the Company and the Bank, respectively. Access was the thrift holding company of AccessBank (formerly FirstBank).
AccessBank was a federally chartered stock savings bank conducting business from nine-full service banking locations in Albuquerque, Clovis, Gallup, Portales, and Las Cruces, New Mexico and one branch location in Sun City, Arizona. As a result of
the acquisition, the Company gains the opportunity to expand its footprint to attractive markets with the expectation that the increased scale and scope resulting from the acquisition will strengthen the Banks market position. The Company also
expects to reduce costs through economies of scale. The results of Access operations were not included in the results of the Company during 2005, but will be included in the consolidated financial statements subsequent to the acquisition date
of January 3, 2006.

The aggregate purchase price of Access was approximately $32.6 million, including approximately $31.7 million of
common stock and approximately $937,000 related to outstanding options at the date of acquisition. As a result of the acquisition, the Company issued 1,416,940 shares of common stock valued at $22.37 per share determined based on the average market
price of the Companys common shares over the 2-day period before and after the terms of the acquisition were agreed to and announced on August 31, 2005. In addition, the Company assumed 74,196 options with a weighted average fair value of
approximately $12.63 determined based on the market price of the Companys common stock on the date of acquisition of $24.29.

The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands). The Company is in the process of obtaining third-party valuations of certain assets, intangible assets,
and liabilities; thus, the allocation of the purchase price is subject to changes.



|                               |  |   |        
|------------------------------ |  | - | -------
|At January 3, 2006             |  |   |        
|                               | 
|Cash and cash equivalents      |  | $ | 15,915 
|Investments                    |  |   | 112,481
|Loans                          |  |   | 198,060
|Premises and equipment         |  |   | 12,967 
|Intangible assets              |  |   | 5,378  
|Goodwill                       |  |   | 17,738 
|Other assets                   |  |   | 2,763  
|                               |  |   |        
|Total assets acquired          |  |   | 365,302
|                               | 
|Deposits                       |  |   | 315,266
|Borrowings                     |  |   | 6,808  
|Junior subordinated debentures |  |   | 9,171  
|Other liabilities              |  |   | 1,423  
|                               |  |   |        
|Total liabilities              |  |   | 332,668
|                               |  |   |        
|                               | 
|Net assets acquired            |  | $ | 32,634 
|                               |  |   |        

The goodwill recognized in the acquisition of approximately $17.7 million is not expected to be
deductible for tax purposes.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

On January 10,
2006, the Company acquired 100 percent of the outstanding common shares of New Mexico Financial Corporation (NMFC). Subsequent to the acquisition, NMFC and its wholly owned subsidiary Ranchers Banks were merged with and into the Company
and the Bank, respectively. NMFC was a New Mexico bank holding company that operated through its wholly owned subsidiary, Ranchers Banks. Ranchers Banks conducted business from nine branches serving communities in central New Mexico. As a result of
the acquisition, the Company anticipates that the increased scale and scope resulting from the acquisition will strengthen the Banks current market position. The Company also expects to reduce costs through economies of scale. The results of
NMFCs operations were not included in the results of the Company during 2005, but will be included in the consolidated financial statements subsequent to the acquisition date of January 10, 2006.

The purchase price of $17.3 million was determined based on 9,783 outstanding shares of NMFC common stock and a purchase price of $2,044.36 per share
less the purchase of $2.7 million in treasury shares. As a result of the acquisition, the Company issued 717,812 shares of common stock valued at $24.10 per share determined based on the minimum exchange ratio of 84.83 pursuant to the terms of the
purchase agreement.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of
acquisition (in thousands). The Company is in the process of obtaining third-party valuations of certain assets, intangible assets, and liabilities; thus, the allocation of the purchase price is subject to changes.



|                          |  |   |        
|------------------------- |  | - | -------
|At January 10, 2006       |  |   |        
|                          | 
|Cash and cash equivalents |  | $ | 669    
|Investments               |  |   | 57,829 
|Loans                     |  |   | 34,695 
|Premises and equipment    |  |   | 9,297  
|Intangible assets         |  |   | 2,192  
|Goodwill                  |  |   | 4,552  
|Other assets              |  |   | 1,496  
|                          |  |   |        
|Total assets acquired     |  |   | 110,730
|                          | 
|Deposits                  |  |   | 89,513 
|Other liabilities         |  |   | 3,918  
|                          |  |   |        
|Total liabilities         |  |   | 93,431 
|                          |  |   |        
|                          | 
|Net assets acquired       |  | $ | 17,299 
|                          |  |   |        

The goodwill recognized in the acquisition of approximately $4.6 million is not expected to be
deductible for tax purposes.

3. Cash and Due from Banks

First Community Bank is required to maintain certain daily reserve balances in the form of vault cash or on deposit with the Federal Reserve Bank in accordance with Federal Reserve Board requirements. The consolidated
reserve balances maintained in accordance with these requirements were approximately $12.1 million and $10.9 million at December 31, 2005 and 2004, respectively.



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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:



|                                                  |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|------------------------------------------------- |  | ---------------------- | ------- | -------------------- | - | ----------------------- |  | -------------------- | ----- |  | - | -------
|                                                  |  | Amortized cost         |         | Grossunrealizedgains |   | Gross unrealized losses |  | Estimatedmarketvalue
|                                                  |  | (Dollars in thousands)
|As of December 31, 2005                           |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Obligations of the U.S. Treasury                 |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Held to maturity                                  |  | $                      | 1,001   |                      | $ |                        |  | $                    | 8     |  | $ | 993    
|Obligations of U.S. government agencies:          |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Available for sale                                |  |                        | 138,561 |                      |   |                        |  |                      | 4,284 |  |   | 134,277
|Held to maturity                                  |  |                        | 125,832 |                      |   | 27                      |  |                      | 5     |  |   | 125,854
|Mortgage-backed securities:                       |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Pass-through certificates:                        |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Available for sale                                |  |                        | 3,505   |                      |   | 2                       |  |                      | 97    |  |   | 3,410  
|Held to maturity                                  |  |                        | 44,779  |                      |   | 110                     |  |                      | 1,435 |  |   | 43,454 
|Collateralized mortgage obligations              |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Available for sale                                |  |                        | 86,741  |                      |   | 19                      |  |                      | 879   |  |   | 85,881 
|Obligations of states and political subdivisions: |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Available for sale                                |  |                        | 16,899  |                      |   | 121                     |  |                      | 154   |  |   | 16,866 
|Held to maturity                                  |  |                        | 25,909  |                      |   | 351                     |  |                      | 384   |  |   | 25,876 
|Federal Home Loan Bank stock                      |  |                        | 13,349  |                      |   |                        |  |                      |      |  |   | 13,349 
|Federal Reserve Bank stock                        |  |                        | 3,008   |                      |   |                        |  |                      |      |  |   | 3,008  
|                                                  |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|                                                  |  | $                      | 459,584 |                      | $ | 630                     |  | $                    | 7,246 |  | $ | 452,968
|                                                  |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|As of December 31, 2004                           |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Obligations of the U.S. Treasury                 |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Held to maturity                                  |  | $                      | 1,001   |                      | $ |                        |  | $                    | 5     |  | $ | 996    
|Obligations of U.S. government agencies          |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Available for sale                                |  |                        | 128,684 |                      |   | 151                     |  |                      | 1,442 |  |   | 127,393
|Mortgage-backed securities:                       |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Available for sale                                |  |                        | 12,200  |                      |   | 8                       |  |                      | 98    |  |   | 12,110 
|Held to maturity                                  |  |                        | 57,287  |                      |   | 482                     |  |                      | 686   |  |   | 57,083 
|Collateralized mortgage obligations              |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Available for sale                                |  |                        | 56,764  |                      |   | 110                     |  |                      | 294   |  |   | 56,580 
|Obligations of states and political subdivisions: |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|Available for sale                                |  |                        | 7,024   |                      |   | 83                      |  |                      | 16    |  |   | 7,091  
|Held to maturity                                  |  |                        | 17,119  |                      |   | 101                     |  |                      | 63    |  |   | 17,157 
|Federal Home Loan Bank stock                      |  |                        | 9,546   |                      |   |                        |  |                      |      |  |   | 9,546  
|Federal Reserve Bank stock                        |  |                        | 2,798   |                      |   |                        |  |                      |      |  |   | 2,798  
|                                                  |  |                        |         |                      |   |                         |  |                      |       |  |   |        
|                                                  |  | $                      | 292,423 |                      | $ | 935                     |  | $                    | 2,604 |  | $ | 290,754
|                                                  |  |                        |         |                      |   |                         |  |                      |       |  |   |        



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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, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.



|                              |  |                        |         |                       |   |        
|----------------------------- |  | ---------------------- | ------- | --------------------- | - | -------
|                              |  | AmortizedCost          |         | EstimatedMarket Value
|                              |  | (Dollars in thousands)
|Within one year:              |  |                        |         |                       |   |        
|Available for sale            |  | $                      | 5,004   |                       | $ | 4,974  
|Held to maturity              |  |                        | 126,658 |                       |   | 126,682
|One through five years:       |  |                        |         |                       |   |        
|Available for sale            |  |                        | 133,556 |                       |   | 129,303
|Held to maturity              |  |                        | 2,886   |                       |   | 2,855  
|Five through ten years:       |  |                        |         |                       |   |        
|Available for sale            |  |                        | 5,944   |                       |   | 5,900  
|Held to maturity              |  |                        | 6,683   |                       |   | 6,365  
|After ten years:              |  |                        |         |                       |   |        
|Available for sale            |  |                        | 10,956  |                       |   | 10,966 
|Held to maturity              |  |                        | 16,515  |                       |   | 16,821 
|Mortgage-backed securities(a) |  |                        | 135,025 |                       |   | 132,745
|Federal Home Loan Bank stock  |  |                        | 13,349  |                       |   | 13,349 
|Federal Reserve Bank stock    |  |                        | 3,008   |                       |   | 3,008  
|                              |  |                        |         |                       |   |        
|Total                         |  | $                      | 459,584 |                       | $ | 452,968
|                              |  |                        |         |                       |   |        

---

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

Marketable securities available for sale with a market value of approximately $229.6 million and marketable securities held to maturity with an amortized cost of approximately $165.9 million were pledged to
collateralize deposits as required by law and for other purposes at December 31, 2005.

Proceeds from sales of investments in debt
securities for the years ended December 31 were $10.3 million in 2005, $34.9 million in 2004, and zero in 2003. Gross losses realized were $186,000 in 2005, $22,000 in 2004, and zero in 2003. Gross gains realized were zero in 2005, $381,000 in
2004, and zero in 2003. The Company calculates gain or loss on sale of securities based on the specific identification method.

The
unrealized losses on investment securities are caused by fluctuations in market interest rates. The majority of the gross unrealized losses have been in an unrealized loss position for more than 12 months. The underlying cash obligations of the
securities are guaranteed by the U.S. government agency, Freddie Mac, Fannie Mae, Ginnie 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, Ginnie
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 intent and ability to hold these investments until a market price recovery, or maturity of the securities, the Company has concluded that the investments are not considered
other-than temporarily impaired.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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



|                                                 |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|------------------------------------------------ |  | ----------------------- | ------- | -------------------------- | - | ---------- |  | -------------- | ------- | ---------- | - | -------------- |  | - | ------- |  | - | -----
|                                                 |  | Less than twelve months |         | Greater than twelve months |   | Total     
|                                                 |  | Fair Value              |         | UnrealizedLoss             |   | Fair Value |  | UnrealizedLoss |         | Fair Value |   | UnrealizedLoss
|                                                 |  | (Dollars in thousands) 
|As of December 31, 2005                          |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|Obligations of the U.S. Treasury                 |  | $                       | 993     |                            | $ | 8          |  | $              |        |            | $ |               |  | $ | 993     |  | $ | 8    
|Obligations of U.S. government agencies          |  |                         | 36,440  |                            |   | 387        |  |                | 107,805 |            |   | 3,902          |  |   | 144,245 |  |   | 4,289
|Mortgage-backed securities                       |  |                         | 61,072  |                            |   | 609        |  |                | 53,469  |            |   | 1,802          |  |   | 114,541 |  |   | 2,411
|Obligations of states and political subdivisions |  |                         | 23,255  |                            |   | 443        |  |                | 1,951   |            |   | 95             |  |   | 25,206  |  |   | 538  
|                                                 |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|Total                                            |  | $                       | 121,760 |                            | $ | 1,447      |  | $              | 163,225 |            | $ | 5,799          |  | $ | 284,985 |  | $ | 7,246
|                                                 |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|As of December 31, 2004                          |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|                                                 |  |                         |         |                            |   |           
|Obligations of the U.S. Treasury                 |  | $                       | 996     |                            | $ | 5          |  | $              |        |            | $ |               |  | $ | 996     |  | $ | 5    
|Obligations of U.S. government agencies          |  |                         | 100,104 |                            |   | 1,177      |  |                | 10,319  |            |   | 265            |  |   | 110,423 |  |   | 1,442
|Mortgage-backed securities                       |  |                         | 64,888  |                            |   | 582        |  |                | 14,784  |            |   | 496            |  |   | 79,672  |  |   | 1,078
|Obligations of states and political subdivisions |  |                         | 3,489   |                            |   | 22         |  |                | 1,010   |            |   | 57             |  |   | 4,499   |  |   | 79   
|                                                 |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|Total                                            |  | $                       | 169,477 |                            | $ | 1,786      |  | $              | 26,113  |            | $ | 818            |  | $ | 195,590 |  | $ | 2,604
|                                                 |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      

5. Loans

Following is a summary of loans by major categories:



|                                  |  |                        |           |      |   |          
|--------------------------------- |  | ---------------------- | --------- | ---- | - | ---------
|                                  |  | As of December 31,    
|                                  |  | 2005                   |           | 2004
|                                  |  | (Dollars in thousands)
|Commercial                        |  | $                      | 201,816   |      | $ | 174,293  
|Consumer and other                |  |                        | 27,888    |      |   | 28,601   
|Real estate - commercial          |  |                        | 725,245   |      |   | 687,213  
|Real estate - one- to four-family |  |                        | 170,158   |      |   | 198,420  
|Real estate - construction        |  |                        | 381,888   |      |   | 270,303  
|Mortgage loans available for sale |  |                        | 18,932    |      |   | 18,965   
|                                  |  |                        |           |      |   |          
|Total                             |  | $                      | 1,525,927 |      | $ | 1,377,795
|                                  |  |                        |           |      |   |          

Included in the above balances are net deferred fees of approximately $5.7 million and $5.8
million, at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, approximately $212 million and $153 million in loans were pledged as collateral for FHLB advances.

At December 31, 2005, loans are comprised of fixed and variable rate instruments as follows:



|                        |  |                        |          
|----------------------- |  | ---------------------- | ---------
|                        |  | (Dollars in thousands)
|Loans at fixed rates    |  | $                      | 234,789  
|Loans at variable rates |  | $                      | 1,291,138
|                        |  |                        |          
|Total                   |  | $                      | 1,525,927
|                        |  |                        |          

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



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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, 2005 are as follows:



|                                  |  |                        |           |              |   |               |  |       |        |  |   |          
|--------------------------------- |  | ---------------------- | --------- | ------------ | - | ------------- |  | ----- | ------ |  | - | ---------
|                                  |  | Within 1 year          |           | 1 to 5 Years |   | After 5 Years |  | Total
|                                  |  | (Dollars in thousands)
|Commercial                        |  | $                      | 162,718   |              | $ | 37,176        |  | $     | 1,922  |  | $ | 201,816  
|Real estate                       |  |                        | 880,264   |              |   | 353,296       |  |       | 43,731 |  |   | 1,277,291
|Consumer                          |  |                        | 15,380    |              |   | 11,972        |  |       | 536    |  |   | 27,888   
|Mortgage loans available for sale |  |                        | 18,932    |              |   |              |  |       |       |  |   | 18,932   
|                                  |  |                        |           |              |   |               |  |       |        |  |   |          
|Total                             |  | $                      | 1,077,294 |              | $ | 402,444       |  | $     | 46,189 |  | $ | 1,525,927
|                                  |  |                        |           |              |   |               |  |       |        |  |   |          

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



|                                |  |                          |        |   |      |   |        |      |  |   |        |  
|------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                |  | Years ended December 31, |       
|                                |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|                                |  | (Dollars in thousands)   |       
|Balance at beginning of year    |  | $                        | 15,331 |   |      | $ | 14,121 |      |  | $ | 11,838 |  
|Provision charged to operations |  |                          | 3,920  |   |      |   | 4,500  |      |  |   | 5,543  |  
|Loans charged-off               |  |                          | (2,373 | ) |      |   | (3,703 | )    |  |   | (3,702 | )
|Recoveries                      |  |                          | 535    |   |      |   | 413    |      |  |   | 442    |  
|                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Balance at end of year          |  | $                        | 17,413 |   |      | $ | 15,331 |      |  | $ | 14,121 |  
|                                |  |                          |        |   |      |   |        |      |  |   |        |  

The recorded investment in loans which are considered impaired was approximately $6.7 million at
December 31, 2005, $8.0 million at December 31, 2004, and $12.5 million at December 31, 2003. The average investment in loans for which impairment has been recognized was approximately $6.0 million in 2005, $8.6 million in 2004, and
$10.7 million in 2003. The allowance for loan losses related to these loans was approximately $1.2 million at December 31, 2005, $829,000 at December 31, 2004, and $1.2 million at December 31, 2003. The allowance for impaired loans is
included in the allowance for loan losses. Interest income recognized on impaired loans was zero in 2005, 2004, and 2003.

Loans on which
the accrual of interest has been discontinued amounted to approximately $6.7 million, $8.0 million, and $12.5 million at December 31, 2005, 2004, and 2003, respectively. If interest on such loans had been accrued, such income would have been
approximately $334,000 in 2005, $348,000 in 2004, and $495,000 in 2003. Actual interest income on those loans, which is recorded only when received, amounted to zero in 2005, 2004, and 2003.

Activity during 2005 and 2004 regarding outstanding loans to certain related-party loan customers of the subsidiary bank (executive officers, directors,
and principal shareholders of the Company, including their families and companies in which they are principal owners) was as follows:



|                             |  |                          |        |   |      |   |        |  
|---------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                             |  | Years ended December 31, |       
|                             |  | 2005                     |        |   | 2004 |  
|                             |  | (Dollars in thousands)   |       
|Balance at beginning of year |  | $                        | 12,305 |   |      | $ | 17,031 |  
|Advances                     |  |                          | 2,857  |   |      |   | 4,485  |  
|Repayments                   |  |                          | (4,917 | ) |      |   | (2,045 | )
|Other reductions             |  |                          |       |   |      |   | (7,166 | )
|                             |  |                          |        |   |      |   |        |  
|Balance at end of year       |  | $                        | 10,245 |   |      | $ | 12,305 |  
|                             |  |                          |        |   |      |   |        |  

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



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##### Table of Contents

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:



|                                               |  |                               |      |                        |         |      |  |   |         |  
|---------------------------------------------- |  | ----------------------------- | ---- | ---------------------- | ------- | ---- |  | - | ------- | -
|                                               |  | Estimated Useful Life (years) |      | As of December 31,     |        
|                                               |  |                               | 2005 |                        |         | 2004 | 
|                                               |  |                               |      | (Dollars in thousands) |        
|Land                                           |  |                              |      | $                      | 2,930   |      |  | $ | 3,112   |  
|Building and leasehold improvements            |  | 10-30                         |      |                        | 23,905  |      |  |   | 24,150  |  
|Equipment                                      |  | 3-5                           |      |                        | 22,463  |      |  |   | 20,216  |  
|                                               |  |                               |      |                        |         |      |  |   |         |  
|                                               |  |                               |      |                        | 49,298  |      |  |   | 47,478  |  
|Less accumulated depreciation and amortization |  |                               |      |                        | (19,145 | )    |  |   | (18,168 | )
|                                               |  |                               |      |                        |         |      |  |   |         |  
|                                               |  |                               |      | $                      | 30,153  |      |  | $ | 29,310  |  
|                                               |  |                               |      |                        |         |      |  |   |         |  

Depreciation and amortization expense on premises and equipment in 2005, 2004, and 2003 was
approximately $4.3 million, $4.0 million, and $3.1 million, respectively.

7. Goodwill and Intangible Assets

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

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



|                             |  |                          |        |      |   |       
|---------------------------- |  | ------------------------ | ------ | ---- | - | ------
|                             |  | Years ended December 31,
|                             |  | 2005                     |        | 2004
|                             |  | (Dollars in thousands)  
|Balance at beginning of year |  | $                        | 43,223 |      | $ | 43,223
|Impairment losses            |  |                          |       |      |   |      
|                             |  |                          |        |      |   |       
|Balance at end of year       |  | $                        | 43,223 |      | $ | 43,223
|                             |  |                          |        |      |   |       

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



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Following is a
summary of intangible assets:



|                             |  |                        |      |   |      |   |      |  
|---------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | -
|                             |  | As of December 31,     |     
|                             |  | 2005                   |      |   | 2004 |  
|                             |  | (Dollars in thousands) |     
|Core deposit intangibles     |  | $                      | 947  |   |      | $ | 947  |  
|Accumulated amortization     |  |                        | (364 | ) |      |   | (256 | )
|                             |  |                        |      |   |      |   |      |  
|Net core deposit intangibles |  | $                      | 583  |   |      | $ | 691  |  
|                             |  |                        |      |   |      |   |      |  

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



|                                           |  |                           |    
|------------------------------------------ |  | ------------------------- | ---
|                                           |  | Years ending December 31,
|                                           |  | (Dollars in thousands)   
|2006                                       |  | $                         | 104
|2007                                       |  |                           | 100
|2008                                       |  |                           | 92 
|2009                                       |  |                           | 85 
|2010                                       |  |                           | 76 
|Thereafter                                 |  |                           | 126
|                                           |  |                           |    
|Total expected annual amortization expense |  | $                         | 583
|                                           |  |                           |    

8. Deposits

Following is a summary of interest-bearing deposits:



|                                   |  |                        |           |      |   |          
|---------------------------------- |  | ---------------------- | --------- | ---- | - | ---------
|                                   |  | As of December 31,    
|                                   |  | 2005                   |           | 2004
|                                   |  | (Dollars in thousands)
|Interest-bearing checking accounts |  | $                      | 276,947   |      | $ | 254,140  
|Money market savings               |  |                        | 190,930   |      |   | 216,769  
|Regular savings                    |  |                        | 74,831    |      |   | 68,671   
|Time:                              |  |                        |           |      |   |          
|Denominations $100,000 and over    |  |                        | 340,701   |      |   | 320,101  
|Denominations under $100,000       |  |                        | 240,626   |      |   | 223,893  
|                                   |  |                        |           |      |   |          
|                                   |  | $                      | 1,124,035 |      | $ | 1,083,574
|                                   |  |                        |           |      |   |          

At December 31, 2005, the scheduled maturities of all time deposits are as follows:



|           |  |                           |        
|---------- |  | ------------------------- | -------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2006       |  | $                         | 403,959
|2007       |  |                           | 82,009 
|2008       |  |                           | 32,197 
|2009       |  |                           | 26,210 
|2010       |  |                           | 31,937 
|Thereafter |  |                           | 5,015  
|           |  |                           |        
|           |  | $                         | 581,327
|           |  |                           |        



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

9. Borrowings

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are comprised of customer deposit agreements with overnight maturities. The obligations are not federally insured but are collateralized 102% by a security interest in
U.S. Treasury, U.S. government agencies, or U.S. government agency issued mortgage-backed securities. These securities are segregated and held in safekeeping by third-party banks. These securities had a market value of approximately $227.7 million
and $71.1 million, at December 31, 2005 and 2004, respectively. Interest expense included in the consolidated statements of operations was approximately $2.0 million, $198,000, and $222,000 for the years ended December 31, 2005, 2004, and
2003, respectively.

Securities sold under agreements to repurchase are summarized as follows:



|                                                 |  |                          |         |   |      |   |        |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------ | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2005                     |         |   | 2004 |  
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 223,195 |   |      | $ | 69,723 |  
|Weighted average interest rate                   |  |                          | 3.54    | % |      |   | 0.43   | %
|Maximum amount outstanding at any month end      |  | $                        | 223,195 |   |      | $ | 75,109 |  
|Average balance outstanding during the period    |  | $                        | 85,367  |   |      | $ | 64,241 |  
|Weighted average interest rate during the period |  |                          | 2.39    | % |      |   | 0.31   | %

Federal Funds Purchased

Federal funds purchased generally mature within one to four days from the transaction date. As of December 31, 2005 and 2004, federal funds purchased
totaled $6.8 million and zero, respectively. Interest expense included in the consolidated statements of operations was approximately $3,000, $1,000, and zero for the years ended December 31, 2005, 2004, and 2003, respectively. As of
December 31, 2005, the Company had available unused federal funds borrowing capacity of approximately $25.7 million.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Federal Home
Loan Bank Advances and Other

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



|                                                                                                                                                               |  |                        |         |      |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                                                                                                                                               |  | As of December 31,    
|                                                                                                                                                               |  | 2005                   |         | 2004
|                                                                                                                                                               |  | (Dollars in thousands)
|$14 million note payable to FHLB, interest at 2.33%, due on January 4, 2005                                                                                    |  | $                      |        |      | $ | 14,000 
|$60 million note payable to FHLB, interest at 2.24%, due on January 5, 2005                                                                                    |  |                        |        |      |   | 60,000 
|$17 million note payable to FHLB, interest at 2.03%, due on January 7, 2005                                                                                    |  |                        |        |      |   | 17,000 
|$250,000 note payable to FHLB, interest at 8.26%, payable in monthly principal and interest installments of approximately $3,000 through
February 1, 2005      |  |                        |        |      |   | 6      
|$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 
|$40 million note payable to FHLB, interest at 3.74%, due on January 6, 2006                                                                                    |  |                        | 40,000  |      |   |       
|$25 million note payable to FHLB, interest only at 3.22% payable monthly, due on January 12, 2006                                                              |  |                        | 25,000  |      |   |       
|$25 million note payable to FHLB, interest only at 4.24% payable monthly, due on January 17, 2006                                                              |  |                        | 25,000  |      |   |       
|$25 million note payable to FHLB, interest only at 3.32% payable monthly, due on February 8, 2006                                                              |  |                        | 25,000  |      |   |       
|$25 million note payable to FHLB, interest only at 3.71% payable monthly, due on March 16, 2006                                                                |  |                        | 25,000  |      |   |       
|$25 million note payable to FHLB, interest only at 3.61% payable monthly, due on April 20, 2006                                                                |  |                        | 25,000  |      |   |       
|$25 million note payable to FHLB, interest only at 3.86% payable monthly, due on June 19, 2006                                                                 |  |                        | 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 |  |                        | 8,014   |      |   | 12,020 
|Other note payable                                                                                                                                             |  |                        | 779     |      |   | 826    
|                                                                                                                                                               |  |                        |         |      |   |        
|Total FHLB Advances and Other                                                                                                                                  |  | $                      | 198,793 |      | $ | 153,852
|                                                                                                                                                               |  |                        |         |      |   |        



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

All outstanding
borrowings with the FHLB are collateralized by a blanket pledge agreement on the Companys one- to four-family residential mortgage loans, commercial real estate loans on deposit with the FHLB, and investment securities available for sale. As
of December 31, 2005, the Company had available unused borrowing capacity from the FHLB for advances of approximately $294 million.

Included in the above FHLB advances are short-term FHLB advances (original term less than one year) that totaled approximately $65 million and $91 million at December 31, 2005 and 2004, respectively. The weighted average interest rate
on short-term FHLB advances was 3.93% and 2.21% at December 31, 2005 and 2004, respectively.

Short-term FHLB advances are summarized
as follows:



|                                                 |  |                          |         |   |      |   |         |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2005                     |         |   | 2004 |  
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 65,000  |   |      | $ | 91,000  |  
|Weighted average interest rate                   |  |                          | 3.93    | % |      |   | 2.21    | %
|Maximum amount outstanding at any month end      |  | $                        | 150,000 |   |      | $ | 115,000 |  
|Average balance outstanding during the period    |  | $                        | 117,475 |   |      | $ | 71,235  |  
|Weighted average interest rate during the period |  |                          | 3.27    | % |      |   | 1.39    | %

Other Note Payable

On April 30, 1997, the Company purchased its main banking facility in Taos, New Mexico, subject to a real estate contract with an original
balance of $1,050,000 which bears interest at 6.00% adjustable every five years through 2017, payable approximately $8,000 monthly. The balances at December 31, 2005 and 2004 were approximately $779,000 and $826,000, respectively.

As of December 31, 2005, the contractual maturities of FHLB advances and other are as follows:



|           |  |                           |        
|---------- |  | ------------------------- | -------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2006       |  | $                         | 194,175
|2007       |  |                           | 3,941  
|2008       |  |                           | 56     
|2009       |  |                           | 59     
|2010       |  |                           | 63     
|Thereafter |  |                           | 499    
|           |  |                           |        
|           |  | $                         | 198,793
|           |  |                           |        

10. Junior Subordinated Debentures

On November 14, 2001, the Company formed First State NM Statutory Trust I (Trust I) for the purpose of issuing trust preferred securities
(Securities) in a pooled transaction to unrelated investors. Trust I issued $7,500,000 of Securities that qualify as Tier I capital for regulatory purposes that bear interest at an annual rate equal to the three-month LIBOR plus 3.60%
and invested the proceeds thereof in $7,732,000 of junior subordinated deferrable interest debentures of the Company (Debentures) that also bear interest at an annual rate equal to the three-month LIBOR plus 3.60%. The Securities and
Debentures provide interest only payments payable at three-month intervals with the rate adjusted quarterly on March 18, June 18, September 18, and December 18 provided however, that prior to December 18, 2006, the
annual rate will not exceed 12.50% (8.10% at December 31, 2005). Both the Securities and the Debentures will mature on December 18, 2031; however, they are callable at par beginning December 18, 2006. So long as there are no events of
default, the Company may defer payments of interest for up to twenty consecutive interest payment periods. As of December 31, 2005, the Company has not deferred any payments of interest.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

On June 7,
2002, the Company formed First State NM Statutory Trust II (Trust II) for the purpose of issuing trust preferred securities (Trust II Securities) in a pooled transaction to unrelated investors. Trust II issued $25,000,000 of
Trust II Securities that qualify as Tier I capital for regulatory purposes that bear interest at an annual rate equal to the three-month LIBOR plus 3.45% and invested the proceeds thereof in $25,774,000 of junior subordinated deferrable interest
debentures of the Company (Trust II Debentures) that also bear interest at an annual rate equal to the three-month LIBOR plus 3.45%. The Trust II Securities and Trust II Debentures provide interest only payments payable at three-month
intervals with the rate adjusted quarterly on March 26, June 26, September 26, and December 26 provided however, that prior to June 26, 2007, the annual rate will not exceed 11.95% (7.97% at December 31,
2005). Both the Trust II Securities and the Trust II Debentures will mature on June 26, 2032; however, they are callable at par beginning June 26, 2007. So long as there are no events of default, the Company may defer payments of interest
for up to twenty consecutive interest payment periods. As of December 31, 2005, the Company has not deferred any payments of interest.

On August 20, 2004, the Company formed First State NM Statutory Trust III (Trust III) for the purpose of issuing trust preferred securities (Trust III Securities) in a pooled transaction to unrelated investors.
Trust III issued $5,000,000 of Trust III Securities that qualify as Tier I capital for regulatory purposes that bear interest at an annual rate equal to the three-month LIBOR plus 2.25% and invested the proceeds thereof in $5,155,000 of junior
subordinated deferrable interest debentures of the Company (Trust III Debentures) that also bear interest at an annual rate equal to the three-month LIBOR plus 2.25%. The Trust III Securities and Trust III Debentures provide interest
only payments payable at three-month intervals with the rate adjusted quarterly on March 20, June 20, September 20, and December 20 (6.75% at December 31, 2005). Both the Trust III Securities and the Trust III
Debentures will mature on September 20, 2034; however, they are callable at par beginning September 20, 2009. So long as there are no events of default, the Company may defer payments of interest for up to twenty consecutive interest
payment periods. As of December 31, 2005, the Company has not deferred any payments of interest.

On May 26, 2005, the Company
formed First State NM Statutory Trust IV (Trust IV) for the purpose of issuing trust preferred securities (Trust IV Securities) in a pooled transaction to unrelated investors. Trust IV issued $10,000,000 of Trust IV
Securities that qualify as Tier I capital for regulatory purposes that bear interest at an annual rate equal to the three-month LIBOR plus 1.75% and invested the proceeds thereof in $10,310,000 of junior subordinated deferrable interest debentures
of the Company (Trust IV Debentures) that also bear interest at an annual rate equal to the three-month LIBOR plus 1.75%. The Trust IV Securities and the Trust IV Debentures provide interest only payments payable at three-month intervals
with the rate adjusted quarterly on March 15, June 15, September 15, and December 15 (6.24% at December 31, 2005). Both the Trust IV Securities and the Trust IV Debentures will mature on June 15, 2035;
however, they are callable at par beginning June 15, 2010. 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, 2005, the Company
has not deferred any payments of interest.

In 2005, the Federal Reserve Board released a final rule related to the inclusion of trust
preferred securities in Tier 1 capital of bank holding companies beginning in 2009. Based on the Companys current amount of trust preferred securities, the final rule will not impact its capital calculations.

Junior Subordinated Debentures are summarized as follows:



|                                           |  |                        |        |      |   |       
|------------------------------------------ |  | ---------------------- | ------ | ---- | - | ------
|                                           |  | As of December 31,    
|                                           |  | 2005                   |        | 2004
|                                           |  | (Dollars in thousands)
|Junior Subordinated Debentures  Trust I   |  | $                      | 7,732  |      | $ | 7,732 
|Junior Subordinated Debentures  Trust II  |  |                        | 25,774 |      |   | 25,774
|Junior Subordinated Debentures  Trust III |  |                        | 5,155  |      |   | 5,155 
|Junior Subordinated Debentures  Trust IV  |  |                        | 10,310 |      |   |      
|                                           |  |                        |        |      |   |       
|Total Junior Subordinated Debentures       |  | $                      | 48,971 |      | $ | 38,661
|                                           |  |                        |        |      |   |       



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

11. Income Taxes

Income tax expense consisted of the following:



|              |  |                          |        |      |   |       |  |   |      
|------------- |  | ------------------------ | ------ | ---- | - | ----- |  | - | -----
|              |  | Years ended December 31,
|              |  | 2005                     |        | 2004 |   | 2003 
|              |  | (Dollars in thousands)  
|Federal       |  | $                        | 9,895  |      | $ | 7,152 |  | $ | 6,766
|State         |  |                          | 1,551  |      |   | 891   |  |   | 1,126
|Deferred      |  |                          | 342    |      |   | 512   |  |   | 77   
|              |  |                          |        |      |   |       |  |   |      
|Total expense |  | $                        | 11,788 |      | $ | 8,555 |  | $ | 7,969
|              |  |                          |        |      |   |       |  |   |      

Actual income tax expense from continuing operations differs from the expected tax
expense for 2005, 2004, and 2003 (computed by applying the U.S. federal corporate tax rate of 35% to income before income taxes) as follows:



|                                                     |  |                          |        |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | Years ended December 31, |       
|                                                     |  | 2005                     |        |   | 2004 |   |       | 2003 | 
|                                                     |  | (Dollars in thousands)   |       
|Computed expected tax expense                      |  | $                        | 11,615 |   |      | $ | 8,323 |      |  | $ | 7,987 |  
|Increase (reduction) in income taxes resulting from: |  |                          |        |   |      |   |       |      |  |   |       |  
|Tax-exempt interest                                  |  |                          | (596   | ) |      |   | (188  | )    |  |   | (59   | )
|State tax, net                                       |  |                          | 1,037  |   |      |   | 719   |      |  |   | 763   |  
|Deferred tax rate change                             |  |                          | (88    | ) |      |   |      |      |  |   | (216  | )
|Bank owned life insurance                            |  |                          | (418   | ) |      |   | (269  | )    |  |   | (335  | )
|Other                                                |  |                          | 238    |   |      |   | (30   | )    |  |   | (171  | )
|                                                     |  |                          |        |   |      |   |       |      |  |   |       |  
|Total income tax expense                             |  | $                        | 11,788 |   |      | $ | 8,555 |      |  | $ | 7,969 |  
|                                                     |  |                          |        |   |      |   |       |      |  |   |       |  

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



|                                                       |  |                        |       |      |   |      
|------------------------------------------------------ |  | ---------------------- | ----- | ---- | - | -----
|                                                       |  | As of December 31,    
|                                                       |  | 2005                   |       | 2004
|                                                       |  | (Dollars in thousands)
|Deferred tax assets:                                   |  |                        |       |      |   |      
|Allowance for loan losses                              |  | $                      | 6,170 |      | $ | 5,197
|Allowance for other real estate owned                  |  |                        | 9     |      |   | 42   
|Depreciation                                           |  |                        |      |      |   | 209  
|Deferred compensation expense                          |  |                        | 197   |      |   | 183  
|Tax effect of unrealized loss on investment securities |  |                        | 1,898 |      |   | 539  
|Core deposit intangible                                |  |                        | 138   |      |   | 92   
|Deferred gain on sale                                  |  |                        | 245   |      |   |     
|Other                                                  |  |                        | 45    |      |   | 58   
|                                                       |  |                        |       |      |   |      
|Total gross deferred tax assets                        |  |                        | 8,702 |      |   | 6,320
|                                                       |  |                        |       |      |   |      
|Deferred tax liabilities:                              |  |                        |       |      |   |      
|Goodwill                                               |  |                        | 4,239 |      |   | 3,045
|Prepaid expenses                                       |  |                        | 469   |      |   | 363  
|Depreciation                                           |  |                        | 283   |      |   |     
|Other                                                  |  |                        | 99    |      |   | 46   
|                                                       |  |                        |       |      |   |      
|Total gross deferred tax liabilities                   |  |                        | 5,090 |      |   | 3,454
|                                                       |  |                        |       |      |   |      
|Net deferred tax asset                                 |  | $                      | 3,612 |      | $ | 2,866
|                                                       |  |                        |       |      |   |      



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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 2005, the Company increased the rate at which management
believes, primarily based upon the Companys current enacted tax rate, that deferred income taxes will be recognized from 36% to 38%.

In order to fully realize the deferred tax asset on the Companys consolidated balance sheet at December 31, 2005 of approximately $8.7 million, the Company will need to generate future taxable income of approximately $24.9
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.

12. Stockholders Equity

The Board of Directors has authorized management to purchase up to 1,050,000 shares of its common stock in the open market. As of December 31, 2005,
the Company has purchased 784,100 shares. The Company did not purchase any additional shares during the year ended December 31, 2005. The Company may purchase additional shares, the amount of which will be determined by market conditions. The
Company sponsors a deferred compensation plan, which is included in the consolidated financial statements. At December 31, 2005 and 2004, the assets of the deferred compensation plan included 32,833 shares and 32,404 shares of Company common
stock, respectively.

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



|                                 |  |                          |   |      |                                 |       |        |           |   |                                 |   |        |  |          |                                 |  |   |      
|-------------------------------- |  | ------------------------ | - | ---- | ------------------------------- | ----- | ------ | --------- | - | ------------------------------- | - | ------ |  | -------- | ------------------------------- |  | - | -----
|                                 |  | Years ended December 31,
|                                 |  | 2005                     |   | 2004 |                                 | 2003 
|                                 |  | Shares                   |   |      | Weighted average exercise price |       | Shares |           |   | Weighted average exercise price |   | Shares |  |          | Weighted average exercise price
|Outstanding at beginning of year |  | 1,279,290                |   |      | $                               | 13.77 |        | 486,010   |   |                                 | $ | 8.82   |  | 893,708  |                                 |  | $ | 4.64 
|Granted                          |  | 115,000                  |   |      |                                 | 21.62 |        | 940,000   |   |                                 |   | 15.69  |  | 146,000  |                                 |  |   | 15.71
|Exercised                        |  | (26,590                  | ) |      |                                 | 4.74  |        | (86,728   | ) |                                 |   | 5.92   |  | (552,398 | )                               |  |   | 3.90 
|Forfeited                        |  | (20,000                  | ) |      |                                 | 16.85 |        | (59,992   | ) |                                 |   | 14.98  |  | (1,300   | )                               |  |   | 2.80 
|                                 |  |                          |   |      |                                 |       |        |           |   |                                 |   |        |  |          |                                 |  |   |      
|Outstanding at year end          |  | 1,347,700                |   |      | $                               | 14.58 |        | 1,279,290 |   |                                 | $ | 13.77  |  | 486,010  |                                 |  | $ | 8.82 
|                                 |  |                          |   |      |                                 |       |        |           |   |                                 |   |        |  |          |                                 |  |   |      
|Options exercisable at year end  |  | 393,700                  |   |      | $                               | 10.10 |        | 289,790   |   |                                 | $ | 7.08   |  | 340,010  |                                 |  | $ | 5.86 
|                                 |  |                          |   |      |                                 |       |        |           |   |                                 |   |        |  |          |                                 |  |   |      

For the years ended December 31, 2005, 2004, and 2003, the Company received income tax
benefits of $189,000, $363,000, and $1.8 million, 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.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Outstanding
options at December 31, 2005 are as follows:



|            |       |                     |           |                                 |      |                                 |   |                     |  |                                 |  |   |      
|----------- | ----- | ------------------- | --------- | ------------------------------- | ---- | ------------------------------- | - | ------------------- |  | ------------------------------- |  | - | -----
|Grant Price |       | Options Outstanding |           | Weighted average remaining life |      | Weighted average exercise price |   | Options exercisable |  | Weighted average exercise price
|$           | 3.00  |                     | 25,500    |                                 | 3.31 |                                 | $ | 3.00                |  | 25,500                          |  | $ | 3.00 
|            | 5.75  |                     | 148,700   |                                 | 1.56 |                                 |   | 5.75                |  | 148,700                         |  |   | 5.75 
|            | 8.04  |                     | 52,500    |                                 | 3.56 |                                 |   | 8.04                |  | 52,500                          |  |   | 8.04 
|            | 14.98 |                     | 270,000   |                                 | 8.24 |                                 |   | 14.98               |  | 33,000                          |  |   | 14.98
|            | 15.71 |                     | 146,000   |                                 | 7.84 |                                 |   | 15.71               |  | 73,000                          |  |   | 15.71
|            | 16.07 |                     | 610,000   |                                 | 8.19 |                                 |   | 16.07               |  | 61,000                          |  |   | 16.07
|            | 16.85 |                     | 20,000    |                                 | 9.29 |                                 |   | 16.85               |  |                                |  |   |     
|            | 24.17 |                     | 75,000    |                                 | 9.88 |                                 |   | 24.17               |  |                                |  |   |     
|            |       |                     |           |                                 |      |                                 |   |                     |  |                                 |  |   |      
|            |       |                     | 1,347,700 |                                 | 7.27 |                                 | $ | 14.58               |  | 393,700                         |  | $ | 10.10
|            |       |                     |           |                                 |      |                                 |   |                     |  |                                 |  |   |      

On October 31, 2003, the Company granted 146,000 options at $15.71 per share, on
March 10, 2004, the Company granted 610,000 options at $16.07 per share, on March 25, 2004, the Company granted 330,000 options at $14.98 per share, on April 15, 2005, the Company granted 40,000 options at $16.85 per share, and on
November 14, 2005, the Company granted 75,000 options at $24.17 per share.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The Company
applies the intrinsic value-based method of accounting prescribed by APB 25 and related interpretations in accounting for its fixed plan stock options. As such, compensation expense is recorded on the date of grant only if the current market price
of the underlying stock exceeds the exercise price. The Company estimated the weighted average fair value of options granted in 2005, 2004, and 2003 to be approximately $7.26, $4.91, and $5.12, respectively using the Black-Scholes options pricing
model prescribed by SFAS 123. The fair value of each stock option grant is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:



|                        |  |                          |   |  |       |   |  |       |  
|----------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                        |  | Years Ended December 31, |  
|                        |  | 2005                     |   |  | 2004  |   |  | 2003  |  
|Risk-free interest rate |  | 4.32                     | % |  | 2.79  | % |  | 3.19  | %
|Expected dividend yield |  | 1.33                     | % |  | 1.40  | % |  | 1.37  | %
|Expected life (years)   |  | 6                        |   |  | 6     |   |  | 6     |  
|Expected volatility     |  | 31.02                    | % |  | 32.77 | % |  | 33.19 | %

In June 2003, the Company granted 3,000 shares of restricted stock at a fair value of $13.02 per
share, in October 2003, the Company granted 26,000 shares of restricted stock at a fair value of $15.71 per share, and in January 2005, the company granted 6,376 shares of restricted stock at a fair value of $17.38 per share pursuant to the 2003
plan. The June 2003 and January 2005 restricted stock vests over a five-year period from the date of grant and the October 2003 restricted stock vests over a four-year period from the date of grant.

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

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

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

13. Commitments and Contingencies

Employee
Benefit Plans

First Community Bank sponsors an employee tax-sheltered savings plan for substantially all full-time employees which
provides a mandatory 50% match by First Community 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 $529,000 in 2005, $402,000 in 2004,
and $361,000 in 2003.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

In 2003, the
Company established a nonqualified deferred compensation plan for certain of its executive employees and non-employee directors. The deferred compensation plan allows employees to contribute up to 50% of the employees base pay and 100% of the
employees bonus compensation. Directors of the Company are allowed to contribute up to 100% of their compensation as a director. In addition, an employee with a vested unexercised stock award may elect to defer all or any portion of the stock
award. All amounts contributed by employees or directors vest immediately. The Companys obligation to the participants in the deferred compensation plan is limited to the balance in the deferred compensation plan. The deferred compensation
plan is an unfunded, unsecured promise to pay compensation in the future. At December 31, 2005 and 2004, the total assets of the plan were $874,000 and $854,000, which included an investment of $571,000 and $562,000 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 $874,000 and
$854,000. The Companys compensation expense for this plan for the years ended December 31, 2005, 2004, and 2003, totaled approximately zero, $65,000, and $65,000, respectively. All amounts contributed are subject to an underlying trust
and shall be subject to the claims of the general creditors of the Company. Because certain provisions of the plan were not in compliance with the American Jobs Creation Act of 2004 (Act), the plan was frozen effective December 31,
2004.

In 2005, the Company established a new nonqualified deferred compensation plan in compliance with the Act for certain of its highly
compensated or management employees. The new plan allows employees to contribute up to 50% of the employees base pay and 100% of the employees bonus compensation. All amounts contributed by employees vest immediately. The Companys
obligation to the participants in the deferred compensation plan is limited to the balance in the deferred compensation plan. All amounts payable by the Company are in cash only. The deferred compensation plan is an unfunded, unsecured promise to
pay compensation in the future. At December 31, 2005, the plan had not been funded, however, the Companys expense for this plan totaled $65,000 in 2005. All amounts contributed are subject to an underlying trust and shall be subject to
the claims of the general creditors of the Company.

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, 2005, 2004, and 2003, totaled approximately $4.7 million, $4.5 million, and $3.8 million, respectively. Minimum future payments under these leases at December 31, 2005, are as follows:



|           |  |                           |       
|---------- |  | ------------------------- | ------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2006       |  | $                         | 4,888 
|2007       |  |                           | 5,012 
|2008       |  |                           | 4,998 
|2009       |  |                           | 4,754 
|2010       |  |                           | 4,381 
|Thereafter |  |                           | 18,764
|           |  |                           |       
|           |  | $                         | 42,797
|           |  |                           |       

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 $79,000 in 2005, $76,000 in 2004, and $74,000 in 2003, respectively. Management believes the lease is on terms similar to other third-party
commercial transactions in the ordinary course of business.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Financial
Instruments with Off-balance Sheet Risk

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



|                             |  |                        |         |      |   |        
|---------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                             |  | As of December 31,    
|                             |  | 2005                   |         | 2004
|                             |  | (Dollars in thousands)
|Commitments to extend credit |  | $                      | 393,550 |      | $ | 290,490
|Standby letters of credit    |  |                        | 42,377  |      |   | 32,836 

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

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

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

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

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

Outstanding Letter of Credit

The Company has an outstanding letter of credit from the FHLB in
the amount of $13.5 million that is used to secure certain governmental deposits over and above FDIC limits. The letter of credit has an initial term of one year that will expire in June 2006 if not renewed. The letter of credit is fully
collateralized by the Companys Blanket Lien Collateral status with the FHLB as if it were a funded FHLB advance.

Employment Agreements

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

Legal Matters

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



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

14. Regulatory Matters

Bank regulations specify the level of dividends that can be paid by First Community Bank. During the year ended December 31, 2005,
First Community Bank paid no dividends to First State Bancorporation. As of December 31, 2005, First Community Bank had approximately $41.0 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 Community Bank and/or regulatory restrictions, if any.

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

Quantitative measures established by regulation to ensure capital adequacy require the
Company to maintain minimum amounts and ratios of total and Tier I capital (as defined in regulations and set forth in the following table) to risk-weighted assets, and of Tier I capital to average total assets (leverage ratio). Management believes,
as of December 31, 2005, that the Company and subsidiary bank meet all capital adequacy requirements to which they are subject.



|                                        |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|--------------------------------------- |  | ----------------------- | ------- | ----- | ----------------------------- | - | ------ | --------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                        |  | As of December 31, 2005 |        
|                                        |  | Actual                  |         |       | For capital adequacy purposes |   |        | To be considered well capitalized |        
|                                        |  | Amount                  |         | Ratio |                               |   | Amount |                                   | Ratio   |  |     | Amount |  | Ratio |        
|                                        |  | (Dollars in thousands)  |        
|Total capital to risk weighted assets:  |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  | $                       | 184,659 |       | 10.6                          | % |        | $                                 | 139,036 |  | 8.0 | %      |  | $     | 173,795 |  | 10.0 | %
|Bank subsidiary                         |  |                         | 179,818 |       | 10.4                          | % |        |                                   | 138,847 |  | 8.0 | %      |  |       | 173,559 |  | 10.0 | %
|Tier I capital to risk weighted assets: |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 167,246 |       | 9.6                           | % |        |                                   | 69,518  |  | 4.0 | %      |  |       | 104,277 |  | 6.0  | %
|Bank subsidiary                         |  |                         | 162,405 |       | 9.4                           | % |        |                                   | 69,423  |  | 4.0 | %      |  |       | 104,135 |  | 6.0  | %
|Tier I capital to average total assets: |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 167,246 |       | 8.2                           | % |        |                                   | 81,825  |  | 4.0 | %      |  |       | 102,281 |  | 5.0  | %
|Bank subsidiary                         |  |                         | 162,405 |       | 8.0                           | % |        |                                   | 81,740  |  | 4.0 | %      |  |       | 102,175 |  | 5.0  | %
|                                        | 
|                                        |  | As of December 31, 2004 |        
|                                        |  | Actual                  |         |       | For capital adequacy purposes |   |        | To be considered well capitalized |        
|                                        |  | Amount                  |         | Ratio |                               |   | Amount |                                   | Ratio   |  |     | Amount |  | Ratio |        
|                                        |  | (Dollars in thousands)  |        
|Total capital to risk weighted assets:  |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  | $                       | 153,277 |       | 10.6                          | % |        | $                                 | 115,953 |  | 8.0 | %      |  | $     | 144,942 |  | 10.0 | %
|Bank subsidiary                         |  |                         | 147,158 |       | 10.2                          | % |        |                                   | 115,746 |  | 8.0 | %      |  |       | 144,682 |  | 10.0 | %
|Tier I capital to risk weighted assets: |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 137,946 |       | 9.5                           | % |        |                                   | 57,976  |  | 4.0 | %      |  |       | 86,965  |  | 6.0  | %
|Bank subsidiary                         |  |                         | 131,827 |       | 9.1                           | % |        |                                   | 57,873  |  | 4.0 | %      |  |       | 86,809  |  | 6.0  | %
|Tier I capital to average total assets: |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 137,946 |       | 7.8                           | % |        |                                   | 70,730  |  | 4.0 | %      |  |       | 88,412  |  | 5.0  | %
|Bank subsidiary                         |  |                         | 131,827 |       | 7.5                           | % |        |                                   | 70,226  |  | 4.0 | %      |  |       | 87,783  |  | 5.0  | %



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

15. Condensed Financial
Information of Parent Company

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

Condensed Statements of Condition



|                                      |  |                        |         |      |   |        
|------------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                      |  | As of December 31,    
|                                      |  | 2005                   |         | 2004
|                                      |  | (Dollars in thousands)
|Assets                                |  |                        |         |      |   |        
|Cash and due from banks               |  | $                      | 3,724   |      | $ | 6,132  
|Investment in subsidiary              |  |                        | 202,613 |      |   | 174,558
|Goodwill                              |  |                        | 223     |      |   | 223    
|Deferred tax asset                    |  |                        | 230     |      |   | 214    
|Other assets                          |  |                        | 3,336   |      |   | 2,753  
|                                      |  |                        |         |      |   |        
|Total assets                          |  | $                      | 210,126 |      | $ | 183,880
|                                      |  |                        |         |      |   |        
|Liabilities and equity capital        |  |                        |         |      |   |        
|Accounts payable and accrued expenses |  | $                      | 976     |      | $ | 910    
|Junior subordinated debentures        |  |                        | 48,971  |      |   | 38,661 
|                                      |  |                        |         |      |   |        
|Total liabilities                     |  |                        | 49,947  |      |   | 39,571 
|                                      |  |                        |         |      |   |        
|Equity capital                        |  |                        | 160,179 |      |   | 144,309
|                                      |  |                        |         |      |   |        
|Total liabilities and equity capital  |  | $                      | 210,126 |      | $ | 183,880
|                                      |  |                        |         |      |   |        

Condensed Statements of Operations



|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Years ended December 31, |       
|                                                                     |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|                                                                     |  | (Dollars in thousands)   |       
|Income:                                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash dividends from subsidiary                                       |  | $                        |       |   |      | $ |       |      |  | $ |       |  
|Other income                                                         |  |                          | 130    |   |      |   | 90     |      |  |   | 182    |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total income                                                         |  |                          | 130    |   |      |   | 90     |      |  |   | 182    |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Expenses:                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Interest expense                                                     |  |                          | 2,820  |   |      |   | 1,700  |      |  |   | 1,546  |  
|Compensation expense                                                 |  |                          | 156    |   |      |   | 211    |      |  |   | 61     |  
|Legal                                                                |  |                          | 32     |   |      |   | 29     |      |  |   | 74     |  
|Other                                                                |  |                          | 563    |   |      |   | 473    |      |  |   | 485    |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total expenses                                                       |  |                          | 3,571  |   |      |   | 2,413  |      |  |   | 2,166  |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Loss before income taxes and undistributed income of bank subsidiary |  |                          | (3,441 | ) |      |   | (2,323 | )    |  |   | (1,984 | )
|Income tax benefit                                                   |  |                          | 1,369  |   |      |   | 916    |      |  |   | 911    |  
|Undistributed income of bank subsidiary                              |  |                          | 23,470 |   |      |   | 16,632 |      |  |   | 15,924 |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                                           |  | $                        | 21,398 |   |      | $ | 15,225 |      |  | $ | 14,851 |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Condensed
Statements of Cash Flows



|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                     |  | Years ended December 31, |        
|                                                                                     |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                                                                     |  | (Dollars in thousands)   |        
|Cash flows from operating activities:                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                           |  | $                        | 21,398  |   |      | $ | 15,225  |      |  | $ | 14,851  |  
|Adjustments to reconcile net income to cash provided (used) by operating activities: |  |                          |         |   |      |   |         |      |  |   |         |  
|Compensation expense                                                                 |  |                          | 156     |   |      |   | 211     |      |  |   | 44      |  
|Undistributed income of bank subsidiary                                              |  |                          | (23,470 | ) |      |   | (16,632 | )    |  |   | (15,924 | )
|Income tax benefit from exercise of options                                          |  |                          | 189     |   |      |   | 363     |      |  |   | 1,843   |  
|Decrease (increase) in other assets                                                  |  |                          | (599    | ) |      |   | (81     | )    |  |   | 104     |  
|(Decrease) increase in other liabilities, net                                        |  |                          | 57      |   |      |   | 84      |      |  |   | (159    | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Total adjustments                                                                    |  |                          | (23,667 | ) |      |   | (16,055 | )    |  |   | (14,092 | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by operating activities                                     |  |                          | (2,269  | ) |      |   | (830    | )    |  |   | 759     |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Common stock issued                                                                  |  |                          | 860     |   |      |   | 967     |      |  |   | 2,720   |  
|Payment to repurchase common stock                                                   |  |                          |        |   |      |   |        |      |  |   | (331    | )
|Capital contributions to subsidiary bank                                             |  |                          | (7,000  | ) |      |   | (2,000  | )    |  |   | (6,500  | )
|Issuance of junior subordinated debentures                                           |  |                          | 10,310  |   |      |   | 5,155   |      |  |   |        |  
|Dividends paid                                                                       |  |                          | (4,309  | ) |      |   | (3,598  | )    |  |   | (3,211  | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by financing activities                                     |  |                          | (139    | ) |      |   | 524     |      |  |   | (7,322  | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and due from banks                                       |  |                          | (2,408  | ) |      |   | (306    | )    |  |   | (6,563  | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and due from banks at beginning of year                                         |  |                          | 6,132   |   |      |   | 6,438   |      |  |   | 13,001  |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and due from banks at end of year                                               |  | $                        | 3,724   |   |      | $ | 6,132   |      |  | $ | 6,438   |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  

16. Fair Value of Financial Instruments

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

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

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



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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:



|                                                                           |  |                        |           |            |   |                 |  |            |           |  |   |          
|-------------------------------------------------------------------------- |  | ---------------------- | --------- | ---------- | - | --------------- |  | ---------- | --------- |  | - | ---------
|                                                                           |  | 2005                   |           | 2004      
|                                                                           |  | Carrying Amount        |           | Fair Value |   | Carrying Amount |  | Fair Value
|                                                                           |  | (Dollars in thousands)
|Financial assets:                                                          |  |                        |           |            |   |                 |  |            |           |  |   |          
|Cash and cash equivalents                                                  |  | $                      | 60,727    |            | $ | 60,727          |  | $          | 45,265    |  | $ | 45,265   
|Marketable securities available for sale                                   |  |                        | 240,434   |            |   | 240,434         |  |            | 203,174   |  |   | 203,174  
|Marketable securities held to maturity                                     |  |                        | 197,521   |            |   | 196,177         |  |            | 75,407    |  |   | 75,236   
|Federal Home Loan Bank and Federal Reserve Bank stock                      |  |                        | 16,357    |            |   | 16,357          |  |            | 12,344    |  |   | 12,344   
|Loans, net                                                                 |  |                        | 1,508,514 |            |   | 1,498,006       |  |            | 1,362,464 |  |   | 1,362,389
|Accrued interest receivable                                                |  |                        | 9,043     |            |   | 9,043           |  |            | 6,947     |  |   | 6,947    
|Cash surrender value of bank owned life insurance                          |  |                        | 31,994    |            |   | 31,994          |  |            | 19,910    |  |   | 19,910   
|Financial liabilities:                                                     |  |                        |           |            |   |                 |  |            |           |  |   |          
|Deposits                                                                   |  |                        | 1,510,007 |            |   | 1,453,548       |  |            | 1,401,303 |  |   | 1,379,681
|Securities sold under agreements to repurchase and federal funds purchased |  |                        | 229,995   |            |   | 229,995         |  |            | 69,723    |  |   | 69,723   
|FHLB advances and other                                                    |  |                        | 198,793   |            |   | 198,688         |  |            | 153,852   |  |   | 153,527  
|Junior subordinated debentures                                             |  |                        | 48,971    |            |   | 48,971          |  |            | 38,661    |  |   | 38,661   

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, 2005 and 2004.

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, 2005 and 2004. 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 and federal funds purchased.The carrying value of securities sold under agreements to repurchase and federal funds purchased, which reset frequently to market interest rates,
approximates fair value.

FHLB advances and other.Fair values for FHLB advances and other are estimated based on the current rates
offered for similar borrowing arrangements at December 31, 2005 and 2004.

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



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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.



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