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

For the fiscal year ended December 31, 2006



| ̈ | 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

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



|                           |  |                                          
|-------------------------- |  | -----------------------------------------
|Title of each class        |  | Name of each exchange on which registered
|Common Stock, no par value |  | NASDAQ Stock Market LLC                  

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

None

(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  þ

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  þ

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  þ    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.  þ

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  þ    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  þ

The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $383,798,000, computed by reference to the closing sale price of the stock on The Nasdaq Stock Market on
June 30, 2006, the last trading day of the registrants most recently completed second fiscal quarter.

As of February 27, 2007, there were
20,822,400 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 2007 Annual Shareholders Meeting to be filed with the Commission within 120 days after December 31, 2006.



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TABLE OF CONTENTS



|         |  |                                                                                                |  |                
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ---------------
|         |  |                                                                                                |  | Page           
|PART I   |  |                                                                                                |  |                
|         |  |                                                                                               
|Item 1:  |  | Business                                                                                       |  | 3              
|         |  |                                                                                               
|Item 1A: |  | Risk Factors                                                                                   |  | 18             
|         |  |                                                                                               
|Item 1B: |  | Unresolved Staff Comments                                                                      |  | 24             
|         |  |                                                                                               
|Item 2:  |  | Properties                                                                                     |  | 24             
|         |  |                                                                                               
|Item 3:  |  | Legal Proceedings                                                                              |  | 24             
|         |  |                                                                                               
|Item 4:  |  | Submission of Matters to a Vote of Security Holders                                            |  | 25             
|         |  |                                                                                               
|PART II  |  |                                                                                                |  |                
|         |  |                                                                                               
|Item 5:  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 25             
|         |  |                                                                                               
|Item 6:  |  | Selected Financial Data                                                                        |  | 27             
|         |  |                                                                                               
|Item 7:  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 27             
|         |  |                                                                                               
|Item 7A: |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 27             
|         |  |                                                                                               
|Item 8:  |  | Financial Statements and Supplementary Data                                                    |  | 27             
|         |  |                                                                                               
|Item 9:  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 27             
|         |  |                                                                                               
|Item 9A: |  | Controls and Procedures                                                                        |  | 28             
|         |  |                                                                                               
|Item 9B: |  | Other Information                                                                              |  | 28             
|         |  |                                                                                               
|PART III |  |                                                                                                |  |                
|         |  |                                                                                               
|Item 10: |  | Directors, Executive Officers, and Corporate Governance                                        |  | 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, and Director Independence                      |  | Proxy Statement
|         |  |                                                                                               
|Item 14: |  | Principal Accounting Fees and Services                                                         |  | Proxy Statement
|         |  |                                                                                               
|PART IV  |  |                                                                                                |  |                
|         |  |                                                                                               
|Item 15: |  | Exhibits and Financial Statement Schedules                                                     |  | 29             
|         |  |                                                                                               
|         |  | Signatures                                                                                     |  | 32             
|         |  |                                                                                               
|         |  | 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 consummation of the Front Range transaction and the integration of Front Range into our business, 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, (First
Community Bank or Bank). At December 31, 2006, we operated forty-nine branch offices, including thirty-nine in New Mexico (three offices in Taos, fourteen offices in Albuquerque, four offices in Santa Fe, two offices each in
Rio Rancho, Belen, Los Lunas, Las Cruces, and Clovis, and one office each in Gallup, Portales, Grants, Edgewood, Bernalillo, Pojoaque, Placitas, and Moriarty), seven in Colorado (two offices in Colorado Springs, and one office each in Denver, Fort
Collins, Lakewood, Littleton, and Longmont), two in Utah (Midvale and Salt Lake City), and one in Sun City, Arizona. In January 2007, we closed our Edgewood location and one branch location in Albuquerque, and in February 2007, we opened a new
branch location in Phoenix, Arizona. At December 31, 2006, we had total assets, total deposits, and total stockholders equity of $2.802 billion, $2.121 billion, and $304.9 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), Las Cruces, 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, Denver, Salt Lake City, and Phoenix metropolitan areas, as well as
Santa Fe, Las Cruces, Colorado Springs, 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. See Growth Strategy.

At December 31, 2006, 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 Community Bank, originally organized as 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 to attract additional customers. In 2004, the mortgage origination division was reorganized and began operating 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.

On
January 3, 2006, we completed the acquisition of Access Anytime Bancorp, Inc. and its wholly owned subsidiary, AccessBank (Access) and on January 10, 2006, we completed the acquisition of New Mexico Financial Corporation and
its wholly owned subsidiary, Ranchers Banks (NMFC). 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 $195 million in loans and $314 million in deposits, and recognized goodwill of approximately $19 million related to the transaction. 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. Through the NMFC transaction, we acquired approximately $34 million in loans and $96 million in deposits, and
recognized goodwill of approximately $4 million related to the transaction. During 2006, we closed two branches acquired from NMFC, one in Belen, New Mexico, and one in Los Lunas, New Mexico, and consolidated our existing branch in Moriarty, New
Mexico with the Moriarty branch acquired from NMFC. Subsequent to year end, we also closed one Albuquerque location that was acquired as part of the Access transaction and closed the Edgewood, New Mexico location that was acquired as part of the
NMFC transaction. See Note 2 of Notes to Consolidated Financial Statements for additional information on these acquisitions.

On October 4, 2006, we
announced the execution of a definitive agreement to acquire Front Range Capital Corporation (Front Range) and its subsidiary, Heritage Bank, for $72 million in cash (the Merger Agreement). Under the terms of the Merger
Agreement, each issued and outstanding share of Front Range common stock, the 1987 voting preferred stock and the 1988 non-voting preferred stock will be converted into the right to receive $35.904 (rounded to the nearest full cent) per share in
cash, and each issued and outstanding share of Front Range 2000 non-voting preferred stock will be converted into the right to receive $1,000 per share in cash. In the event of a termination of the Merger Agreement under certain circumstances, First
State or Front Range may be required to pay the other a termination fee as set forth in the Merger Agreement. This acquisition will add approximately $450 million in assets and thirteen branches to our franchise in the Denver-Boulder-Longmont
triangle along Colorados front range. The transaction has received all necessary approvals, including the Front Range shareholders, the Federal Reserve Bank of Kansas City, the Colorado Division of Banking, and the Financial Institutions
Division for the State of New Mexico. The acquisition is anticipated to close in early March 2007. Additional information regarding the Front Range transaction may be found in our Current Report on Form 8-K filed with the Commission on
October 5, 2006.

Operating Strategy

Our
operating strategies include:



| |  |  | Pursuing an aggressive growth strategy
| | - |  | --------------------------------------



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



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



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



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



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



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

Pursuing an
Aggressive Growth Strategy.We intend to continue the aggressive growth strategy that has been successful for us over the years in New Mexico and which we are currently employing in our new markets of Colorado, Utah, and Arizona. Our markets are
characterized by numerous acquisitions of local community banks by out of state institutions. We believe that our high touch personalized approach to banking provides us with a competitive advantage in this environment. Furthermore, Colorado, Utah,
and Arizona, markets that are relatively new to us are much larger than our home market of New Mexico and therefore, should provide us with significant growth prospects. We will focus our growth over the next two to three years on a combination of
internal growth and de novo branch openings within the existing four state footprint. We will consider strategic acquisitions as opportunities arise. See Growth Strategy.

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.

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, Utah, and Arizona. First Community Banks management also sponsors a
number of community-oriented programs and events each year, contributing approximately $1.4 million to these organizations in 2006. We believe that these activities assist First Community Bank through increased visibility and through development and
maintenance of customer relationships.

Maintaining Asset Quality.We believe that we can mitigate our credit risk by adhering to strict
underwriting criteria and carefully monitoring our loan portfolio. We aggressively manage our past due and classified loans to limit our net charge-offs. While our lenders are primarily responsible for identifying potential problem loans, we also
have an experienced internal loan review staff which assists in that process. In addition, this group reviews our overall credit administration. We believe that we can further mitigate our credit risk by maintaining a loan portfolio that has a small
average loan size and that is geographically diverse.

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



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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 are in the process of implementing Thin Client desktops and IP Telephony, and have implemented VPN technology, all of which will allow bank employees greater communication flexibility throughout the
organization as well as increasing worker productivity, while reducing support and maintenance costs. 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 have increased substantially in 2006 with the acquisitions of Access and NMFC and the addition of de novo
branches in Colorado Springs, Colorado and Rio Rancho, New Mexico in the third quarter of 2006. During 2006, we closed two branches acquired from NMFC, one in Belen, New Mexico and one in Los Lunas, New Mexico and consolidated our existing Moriarty,
New Mexico branch with the Moriarty branch acquired as part of the NMFC transaction. In January 2007, we closed one branch acquired from NMFC in Edgewood, New Mexico and one branch acquired from Access, located on Albuquerques westside, and in
February 2007, we opened a new branch in Phoenix, Arizona. We intend to add two additional de novo branches in the Phoenix, Arizona market in 2007, one of which is scheduled to open late in the first quarter and the other in the second quarter. In
addition, de novo branches in Denver and Ft. Collins, Colorado, are planned for late second quarter or early third quarter of 2007. A de novo branch in Albuquerque is also scheduled to open in the fourth quarter of 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, by opening de novo branches throughout our markets in strategic locations, by
attracting employees and management teams who are not satisfied by working at larger organizations, and by selectively entering into new markets that are significantly larger than our New Mexico markets primarily through de novo branching strategy.
We will also consider strategic acquisitions; however, our emphasis will be on organic growth over the next two to three years. Our total assets have grown from $494 million at December 31, 1998, to $2.802 billion at December 31, 2006. Our
acquisition of Access and NMFC in January 2006 added approximately $482 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 by positioning ourselves as a local responsive alternative to the impersonal service of the larger banks.

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.



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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 the Arizona market. Our goal is to continue building a broad-based, well capitalized, diversified, customer-focused regional financial institution while continuing to pursue the high growth
strategy we have been successful with to date.

Market Areas and Banks

Markets. First Community Bank has historically served three distinct market areas within New Mexico: the Albuquerque metropolitan area (Bernalillo, Sandoval, Torrance, and Valencia counties), Taos County, and
Santa Fe County. The acquisition of Access strengthened our presence in the Albuquerque metropolitan area and added a presence in Clovis (Curry County), Gallup (McKinley County), Portales (Roosevelt County), and Las Cruces (Dona Ana County),
New Mexico. The NMFC acquisition also expanded our branch network in the Albuquerque metropolitan area and added a branch in southern Santa Fe County and a branch in Cibola County. 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 also provided an entrance into Arizona with a branch in Sun City, a suburb of Phoenix,
Arizona, in Maricopa 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, 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.

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.

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 recently
found 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.

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



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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, telemarketing, and engineering companies, 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.

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. We believe our business
model, which is designed to attract disenfranchised customers of the very large banks, should work well in Maricopa County, where the three largest banks currently have approximately 65% of the almost $55 billion deposit market. We intend to
increase our market share through an aggressive de novo branching strategy. The Phoenix metropolitan area has a fairly diverse economy, including financial services, professional services, health care, leisure, hospitality, and government.

First Community Banks operations as of December 31, 2006, are divided into eight regions: Northern New Mexico, which includes Taos and Santa Fe
County; Central New Mexico, which includes Cibola County, McKinley County, and the Albuquerque metropolitan area counties of Bernalillo and Sandoval; Southern New Mexico, which includes Valencia, Torrance, Roosevelt, Curry, and Dona Ana 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; Utah, which includes Salt Lake County; and Arizona, which
includes Maricopa County.

First Community Bank. The following table sets forth certain information concerning the banking offices of First
Community Bank as of December 31, 2006:



|                                           |  |                        |  |               |           |             |   |          
|------------------------------------------ |  | ---------------------- |  | ------------- | --------- | ----------- | - | ---------
|First Community Bank Locations (by Region) |  | Number ofFacilities    |  | TotalDeposits |           | Total Loans
|                                           |  | (Dollars in thousands)
|                                           |  |                        | 
|Northern New Mexico                        |  | 8                      |  | $             | 390,399   |             | $ | 274,428  
|                                           |  |                        | 
|Central New Mexico                         |  | 20                     |  |               | 1,035,463 |             |   | 944,260  
|                                           |  |                        | 
|Southern New Mexico                        |  | 11                     |  |               | 343,609   |             |   | 206,775  
|                                           |  |                        | 
|Northern Colorado                          |  | 2                      |  |               | 32,421    |             |   | 72,263   
|                                           |  |                        | 
|Central Colorado                           |  | 3                      |  |               | 125,925   |             |   | 210,586  
|                                           |  |                        | 
|Southern Colorado                          |  | 2                      |  |               | 80,438    |             |   | 113,523  
|                                           |  |                        | 
|Utah                                       |  | 2                      |  |               | 22,200    |             |   | 194,335  
|                                           |  |                        | 
|Arizona                                    |  | 1                      |  |               | 90,469    |             |   | 25,437   
|                                           |  |                        |  |               |           |             |   |          
|Total                                      |  | 49                     |  | $             | 2,120,924 |             | $ | 2,041,607
|                                           |  |                        |  |               |           |             |   |          

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.



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The Southern and Northern New Mexico locations serve a diverse group of small to medium size businesses and individual
customers and provide conventional commercial loans to established commercial businesses. These 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 in the Santa Fe and Taos areas.

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 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.

The Sun City, Arizona location provides conventional commercial and real estate secured commercial lending to established businesses and
individual customers in these markets. This location also provides a full range of banking services, including a full complement of deposit and residential construction and mortgage lending, and other loan services in the Phoenix metropolitan area.
The new Phoenix location, which opened in February 2007, provides similar 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, 2006:



|           |  |       
|---------- |  | ------
|           | 
|New Mexico |  |       
|           | 
|Taos       |  | 40.94%
|           | 
|Bernalillo |  | 10.12%
|           | 
|Santa Fe   |  | 8.88% 
|           | 
|Sandoval   |  | 40.42%
|           | 
|Valencia   |  | 31.67%
|           | 
|Torrance   |  | 29.32%
|           | 
|Dona Ana   |  | 5.38% 
|           | 
|Cibola     |  | 10.82%
|           | 
|Curry      |  | 12.54%
|           | 
|Roosevelt  |  | 14.34%
|           | 
|McKinley   |  | 5.00% 
|           | 
|Colorado   |  |       
|           | 
|Larimer    |  | 0.26% 
|           | 
|Boulder    |  | 0.33% 
|           | 
|Denver     |  | 0.27% 
|           | 
|Jefferson  |  | 0.17% 
|           | 
|Arapahoe   |  | 0.36% 
|           | 
|El Paso    |  | 1.63% 
|           | 
|Utah       |  |       
|           | 
|Salt Lake  |  | 0.02% 
|           | 
|Arizona    |  |       
|           | 
|Maricopa   |  | 0.16% 

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

We continue to believe that the Colorado, Utah, and Arizona 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, Utah, and Arizona.



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The pending acquisition of Front Range will significantly increase our presence along the Colorado front range and enhance our ability to grow. When the
Front Range acquisition closes, which is anticipated to be in early March 2007, we will have 20 branches in Colorado.

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.

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, 2006, we had 864 full-time equivalent employees. We place a high priority on staff development, training,
and selective hiring. We select new employees on the basis of both technical skills and customer-service capabilities. Our staff development involves training in marketing, customer service, and regulatory compliance. Our employees are not covered
by a collective bargaining agreement. We believe that our relationship with our employees is good.

Supervision and Regulation

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

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

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



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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 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.



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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 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, 2006 Risk-Based Ratios |  
|                                 |  | Tier I Capital                            |   |  | Total Capital |   |  | Leverage Ratio |  
|First State Bancorporation       |  | 12.5                                      | % |  | 13.5          | % |  | 11.0           | %
|First Community Bank             |  | 9.2                                       | % |  | 10.2          | % |  | 8.1            | %
|Minimum required ratio           |  | 4.0                                       | % |  | 8.0           | % |  | 4.0            | %
|"Well capitalized" minimum ratio |  | 6.0                                       | % |  | 10.0          | % |  | 5.0            | %

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



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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
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 agencies 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, 2006, both 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 monetary 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, where the banking institution:



| |  |  | is undercapitalized and has no reasonable prospect of becoming adequately capitalized;
| | - |  | --------------------------------------------------------------------------------------



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



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



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

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

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

Restrictions on Transactions with Affiliates and Insiders. First 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. The 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 authorize.

The Gramm-Leach-Bliley Act. The GLBA enables qualified 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



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qualified bank holding companies and other types of financial service entities may elect to become financial holding companies under the GLBA. Financial
holding companies may engage in a wide range of activities and may affiliate with a wider range of companies than may bank holding companies that are not financial holding companies. The GLBA enables financial holding companies and their non-bank
subsidiaries to engage in activities that are financial in nature, incidental to financial activities, or complementary to financial activities, including banking, securities underwriting, merchant banking, and insurance (both underwriting and
agency services). Qualification as a financial holding company depends on subsidiary depository institutions remaining well capitalized and well managed, as defined in Federal Reserve Board regulations, and receiving at least satisfactory ratings
under the Community Reinvestment Act. We currently qualify, and have elected with the Federal Reserve Board, to be a financial holding company under the GLBA, but do not engage in activities, or affiliate with any company, in reliance on our
financial holding company status.

The financial activities authorized by the GLBA also may be engaged in by a "financial subsidiary" of a national or
state bank, with the exception of insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, all of which must be conducted by the financial holding company.

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

Community Reinvestment Act.First 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, 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



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Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future.
The nature of future monetary policies and the effect of such policies on our business and earnings cannot be predicted.

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

Corporate Governance - Sarbanes-Oxley Act of 2002 and NASDAQ 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 affords 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, 2006, which appears in Appendix A.

We are listed on the NASDAQ as a member of their Global Select Market (NASDAQ). On November 2, 2003, the SEC approved NASDAQ 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 NASDAQ 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 NASDAQ rules, we have certified that we comply with the new
rules. In addition, the NASDAQ also requires audit committee approval of all related party transactions and that a majority of the board of directors be independent under the NASDAQ definition of independence.

The board is committed to maintaining a corporate governance structure that meets or exceeds the requirements under the securities laws and the NASDAQ rules.

Deposit Insurance Reform. The deposits of First Community Bank are insured up to applicable limits by the FDIC. The Federal Deposit Insurance Reform Act of
2005 made several changes in the structure of deposit insurance. Among these, the Bank Insurance Fund and the Savings Association Fund were merged into a new fund, the Deposit Insurance Fund, effective March 31, 2006. The Act also increases



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deposit coverage for certain retirement accounts and provides the FDIC with greater flexibility in assessing insurance premiums on insured banks, including
First Community Bank. In November 2006, the FDIC adopted a new rule on the risk-based assessment system that will enable the FDIC to more closely tie each banks premiums to the risk it poses to the deposit insurance fund. In addition, the FDIC
has new flexibility to manage the deposit insurance funds reserve ratio within a range, which in turn will help prevent sharp swings in assessment rates that were possible under the design of the former system. Under the new risk-based
assessment system, the FDIC will evaluate each institutions risk based on three primary sources of information: supervisory ratings for all insured institutions, financial ratios for most institutions, and long-term debt issuer ratings for
large institutions that have them. As a result of the foregoing, the FDIC set the assessment rates that took effect at the beginning of 2007. The new rates will vary between five and seven cents for every $100 of domestic deposits. Under the new
rule, First Community Banks assessment rate, beginning on January 1, 2007, will be approximately 5.45 cents for every $100 of domestic deposits. The previous assessment system was under the guidance of the Financing Corporation
(FICO), established by the Competitive Equality Banking Act of 1987. The FICO assessment rate was adjusted quarterly. First Community Banks most recent rate was 1.22 cents for every $100 of domestic deposits. The new rulemaking
also allows eligible insured depository institutions to share a one-time assessment credit pool of approximately $4.7 billion, which will offset the increase in premiums for a period of time. First Community Bank expects its share of the one-time
credit to be used up in the third quarter of 2007.

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

Other

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

Available Information

Our Internet address is www.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.
|-------- | -------------

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 and could
affect our ability to recover on defaulted loans by foreclosing and selling the real estate collateral, which could cause decreased operating results, liquidity, and capital. As of December 31, 2006, approximately 83% of the book value of our
loan portfolio consisted of loans collateralized by various types of real estate.

Our loan portfolio is also concentrated in New Mexico, Colorado, and
Utah, with growing exposure in Arizona. Adverse economic conditions in these states could have a greater effect on 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.



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Our small to medium-sized business customers may have less 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, or 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.

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. We cannot assure you that we can minimize our 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 our 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, 2006, 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.

Our loans are concentrated in New Mexico, Colorado, Utah, and Arizona and adverse conditions in those markets could adversely affect
operations.

Because our loans and deposits are in only a few concentrated geographic areas, our business may be more affected by local economic
conditions and could be more vulnerable than banks whose lending and deposit activities are in larger, more geographically diversified markets. A prolonged or more extreme downturn in the local economies in New Mexico, Colorado, Utah, or Arizona
could have an adverse effect on business activity, employment, and collateral values, with a corresponding adverse effect on loan growth, income, and on borrowers' abilities to repay loans.

Recent supervisory guidance on commercial real estate concentrations could restrict our activities and impose financial requirements or limitations on the conduct of
our business.

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance
Corporation recently finalized joint supervisory guidance on sound risk management practices for concentrations in commercial real estate lending. The guidance is intended to help ensure that institutions pursuing a significant commercial real
estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. The agencies are



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concerned that rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of
adverse changes in commercial real estate markets. The guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical indicators to assist
in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance does not limit banks commercial real estate lending, but rather guides institutions
in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. The lending and risk management practices will be taken into account in supervisory
evaluation of capital adequacy. Our commercial real estate portfolio as of December 31, 2006 meets the definition of commercial real estate concentration as set forth in the final guidelines. If our risk management practices are found to be
deficient, it could result in increased reserves and capital costs.

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 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.

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 State of Colorado Division of Banking, 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.

We currently qualify, and have elected with the Federal Reserve Board, to be a financial holding company under the Gramm-Leach-Bliley Act. Financial holding companies
may engage in a wider range of activities and may affiliate with a wider range of companies than may bank holding companies that are not financial holding companies. If we were to engage in activities or affiliate with companies permissible only for
financial holding companies, and we were to lose our status as a financial holding company, we could be required to cease those activities or divest those companies. This could adversely affect our results of operations and financial condition.
However, we do not currently engage in activities, and are not currently affiliated with any companies, in reliance on our financial holding company status.

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.



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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. First Community 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 a banks dividends generally are based on the banks capital levels and current and retained earnings. The earnings of First Community 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, 2006, 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 from 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.

The terms of our trust preferred securities may restrict our ability to pay dividends.

If we suspend payments on our trust preferred securities, we will not be able to pay dividends to holders of our common stock. The terms of our trust preferred securities
allow us to suspend payments of interest, at our option, for up to five years. We expect that similar provisions will exist in any future offerings of trust preferred securities. However, if we exercise our option to suspend those payments, we will
be prohibited from paying any dividends on any class of capital stock for as long as the trust preferred interest payments remain suspended. We are currently paying interest on our trust preferred securities and have no plans to suspend those
payments. However, we cannot assure you that we will not suspend payments in the future.

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.

We regularly make a determination of an allowance for loan losses based on available
information, including the quality of and trends in our loan portfolio, economic conditions, the value of the underlying collateral, historical charge-offs, 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



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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.

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.

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.

We are dependent on key personnel.

Our success has been and continues to be largely dependent on the services of Michael R. Stanford, our
President and Chief Executive Officer, H. Patrick Dee, our Executive Vice President and Treasurer, Christopher C. Spencer, our Senior Vice President and Chief Financial Officer, and other members of management who have significant relationships with
our customers. The prolonged unavailability or the unexpected loss of any of these officers could have an adverse effect on our growth and profitability.

Our Restated Articles of Incorporation, our Bylaws, and New Mexico law may delay or prevent an acquisition of us by a third party.

Our
Restated Articles of Incorporation, our Bylaws, and New Mexico law contain provisions that make it more difficult for a third party to acquire us without the consent of our Board of Directors. These provisions also could discourage proxy contests
and may make it more difficult for you and other shareholders to elect your own representatives as directors and take other corporate actions.

Our
Restated Articles of Incorporation do not permit cumulative voting of shareholders in the election of directors. As a result, the holders of a majority of our outstanding shares control the election of all our directors. We also have a staggered
board, which means that only one-third of our board can be replaced by shareholders at any annual meeting. Directors may not be removed without cause except with the affirmative vote of at least two-thirds of our shareholders.

Our Restated Articles of Incorporation also prohibit business combinations with a person who acquires 10% or more of any class of our equity securities, including our
common stock, unless the acquiror receives prior approval for the business combination from at least 66.6% of the votes entitled to vote at a meeting of our shareholders held to vote on the proposed business combination. This provision in our
Restated Articles of Incorporation is in addition to the limitations that New Mexico law provides that may discourage potential acquirors from purchasing shares of our common stock. Under New Mexico law,



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our directors may consider the interest of persons other than our shareholders when faced with unsolicited offers for control of us. For example, our
directors may consider the interest of our employees, suppliers, creditors, the communities we serve, and the State of New Mexico generally in evaluating any change of control offer.

These and other provisions of New Mexico law and our governing documents may have the effect of delaying, deferring, or preventing a transaction or a change in control that might be in the best interest of our
shareholders.

If we do not complete the acquisition of Front Range, our management will have broad discretion over the use of the proceeds from the
recent public stock offering.

We received net proceeds from our offering in December 2006 of approximately $74.4 million. We intend to use
significantly all of the net proceeds from the offering to pay the $72 million purchase price for the Front Range acquisition. Any remaining proceeds from the offering will be used to pay the fees and expenses related to the Front Range acquisition
and for working capital and other general corporate purposes. If the Front Range acquisition is not completed for any reason, we will use the net proceeds for working capital and other general corporate purposes, which may include other acquisitions
that we have not yet identified. Our management will retain broad discretion as to the use and allocation of the net proceeds from the offering in the event that we do not acquire Front Range.

We may have difficulty integrating our operations with those of Front Range.

We have operated independently from Front Range. It is possible that the integration process could result in the loss of key employees, as well as the disruption of our or Front Range'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 acquisition or to achieve the anticipated benefits of the acquisition.
Integration efforts will also divert management attention and resources. These integration matters could have an adverse effect on our operations.

We
may fail to realize the anticipated benefits of the acquisition.

The success of the acquisition of Front Range will depend, in part, on our ability to
realize the anticipated growth opportunities, economies of scale, and other benefits from combining the operations of Front Range 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.

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, information and telecommunications technologies, 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.

Rapid technological
changes may adversely affect the value of our current or future technologies to us and our customers, which could cause us to increase expenditures to upgrade and protect our technology or develop and protect competing technologies for delivering
our services.

Technology in our industry is evolving rapidly. Our ability to compete and our future results depend in part on our ability to make
timely and cost-effective enhancements and additions to our technology, to



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introduce new products and services that meet customer demands and to keep pace with rapid advancements in technology. Maintaining flexibility to respond to
technological and market dynamics may require substantial expenditures and lead-time. We cannot assure you that we will successfully identify and develop new products or services in a timely manner, that offerings, technologies or services developed
by others will not render our offerings obsolete or noncompetitive, or that the technologies in which we focus our investments will achieve acceptance in the marketplace and provide a return on our investment.

Material breaches of our systems may have a significant effect on our business.

We collect, process, and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both us and third party service providers. We have security, backup and recovery systems
in place, as well as a business continuity plan to ensure the system will not be inoperable. We also have security to prevent unauthorized access to the system. In addition, we require our third party service providers to maintain similar controls.
However, we cannot be certain that the measures will be successful. A security breach in the system and loss of confidential information such as credit card numbers and related information could result in losing the customers confidence and
thus the loss of their business.



|Item 1B: | Unresolved Staff Comments.
|-------- | --------------------------

None.



|Item 2: | Properties.
|------- | -----------

Our principal offices are located at 7900 Jefferson
NE, Albuquerque, New Mexico 87109. At December 31, 2006, we operated forty-nine branch offices, including thirty-nine in New Mexico (three offices in Taos, fourteen offices in Albuquerque, four offices in Santa Fe, two offices each in Rio
Rancho, Belen, Los Lunas, Las Cruces, and Clovis, and one office each in Gallup, Portales, Grants, Edgewood, Bernalillo, Pojoaque, Placitas, and Moriarty), seven in Colorado (two offices in Colorado Springs, and one office each in Denver, Fort
Collins, Lakewood, Littleton, and Longmont), two in Utah (Midvale and Salt Lake City), and one in Sun City, Arizona. In addition to these branch offices, we have separate loan production offices in Denver, Colorado, and Phoenix, Arizona, two
administrative facilities in Albuquerque, and one vacant parcel of land in Albuquerque for future expansion. We own the following locations: the Main and Southside facilities in Taos, the Journal Center facility, the Eubank facility, the Isleta
facility, and the Fourth Street facility in Albuquerque, the Pile and Prince locations in Clovis, the Gallup location, the Portales location, the Moriarty location, the Grants location, the Belen Reinken location, the Los Lunas West location, the
Bernalillo facility, the Littleton facility, the Salt Lake City facility, and the Sun City facility; we lease the remaining 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.

In January 2007, we closed our Edgewood, New Mexico location and one branch location in Albuquerque, and in February 2007, we opened a
new branch location in Phoenix, Arizona and acquired a vacant parcel of land in Las Cruces, New Mexico for future expansion.



|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.



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|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 2006.

PART II



|Item 5: | Market for Registrants Common Equity and Related Stockholder Matters.
|------- | ----------------------------------------------------------------------

Performance Graph

The graph below compares the cumulative shareholder return on the Companys Common Stock
since December 31, 2001, with the cumulative total return on the NASDAQ Total US Index and the SNL $1B-$5B Bank Index. The table below compares the cumulative total return of the Common Stock as of December 31, 2001, 2002, 2003, 2004,
2005, and 2006 assuming a $100 investment on December 31, 2001, and assuming reinvestment of all dividends. This data was furnished by SNL Securities LLC.

LOGO



|                           |  |          |  |               |  |          |  |          |  |          |  |         
|-------------------------- |  | -------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | --------
|                           |  |          |  | Period Ending |  |         
|Index                      |  | 12/31/01 |  | 12/31/02      |  | 12/31/03 |  | 12/31/04 |  | 12/31/05 |  | 12/31/06
|First State Bancorporation |  | 100.00   |  | 118.38        |  | 168.57   |  | 180.95   |  | 239.45   |  | 250.15  
|NASDAQ Composite           |  | 100.00   |  | 68.76         |  | 103.67   |  | 113.16   |  | 115.57   |  | 127.58  
|SNL Bank $1B-$5B           |  | 100.00   |  | 115.44        |  | 156.98   |  | 193.74   |  | 190.43   |  | 220.36  

The preceding information under the caption Performance Graph shall be deemed to be
furnished but not filed with the Securities and Exchange Commission.



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Price Range of Common Stock

Our Common Stock is traded on The NASDAQ Stock Market as a member of their Global Select 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          
|Quarter Ended      |  | Diluted NetEarnings |  | Dividends Paid |  | BookValue |  | Low Price (1) |  | High Price (1) |  | QuarterEnd Price
|December 31, 2006  |  | 0.31                |  | 0.08           |  | 14.67     |  | 24.73         |  | 26.38          |  | 24.75           
|September 30, 2006 |  | 0.37                |  | 0.08           |  | 12.81     |  | 22.50         |  | 26.93          |  | 25.97           
|June 30, 2006      |  | 0.33                |  | 0.08           |  | 12.34     |  | 22.84         |  | 27.31          |  | 23.78           
|March 31, 2006     |  | 0.24                |  | 0.08           |  | 12.11     |  | 23.05         |  | 27.23          |  | 26.56           
|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           
|                   |  |                     |  |                |  |           |  |               |  |                |  |                 

---

|(1) | The prices shown represent the
high and low closing sales prices for the quarter.
|--- | ---------------------------------------------------------------------------------

The last reported sale price of our Common Stock on February 27, 2007, was
$22.63 per share. As of February 27, 2007, there were approximately 282 shareholders of record, not including shareholders who beneficially own Common Stock held in nominee or street name.

Dividend Policy

We paid cash dividends of $5.6 million or $0.32 per
share in 2006 and $4.3 million or $0.28 per share in 2005, which amounted to 24.75% and 20.14% of net income in 2006 and 2005, respectively. The declaration and payment of cash dividends are determined by the Board of Directors in light of the
earnings, capital requirements, our financial condition, and other relevant factors. Our ability to pay cash dividends depends on the amount of cash dividends paid to us by First 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. During the year ended December 31, 2006, First Community Bank paid a $2 million dividend to First State
Bancorporation. Information regarding dividend restrictions on our banking subsidiary is incorporated herein by reference to Item 1. BusinessSupervision and Regulation/Payment of Dividends.



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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 options, warrants, and rights
under the First State Bancorporation 1993 Stock Option Plan and the 2003 Equity Incentive Plan as of December 31, 2006:



|                                                           |  |                                                                   |  |                                                     |       |                                                                                                                                       |        
|---------------------------------------------------------- |  | ----------------------------------------------------------------- |  | --------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------- | -------
|                                                           |  | (a)                                                               |  | (b)                                                 |       | (c)                                                                                                                                  
|Plan Category                                              |  | Number ofsecurities to beissued uponexercise ofoutstandingoptions |  | Weighted-averageexercise priceof outstandingoptions |       | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn (a))
|Equity compensation plans approved by security holders     |  | 1,423,396                                                         |  | $                                                   | 15.39 |                                                                                                                                       | 793,353
|Equity compensation plans not approved by security holders |  |                                                                  |  |                                                     |      |                                                                                                                                       |       
|                                                           |  |                                                                   |  |                                                     |       |                                                                                                                                       |        
|Total                                                      |  | 1,423,396                                                         |  | $                                                   | 15.39 |                                                                                                                                       | 793,353
|                                                           |  |                                                                   |  |                                                     |       |                                                                                                                                       |        



|Item 6: | Selected Financial Data.
|------- | ------------------------

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



|Item 7: | Management's Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

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



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

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



|Item 8: | Financial Statements and Supplementary Data.
|------- | --------------------------------------------

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



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

None.



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|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, 2006, pursuant to Exchange Act Rules 13(a)-15(e) and
15(d)-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, 2006, 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, 2006, 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, 2006. 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, 2006, our internal control over financial reporting was effective.

Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, 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-23 hereof.



|Item 9B: | Other Information.
|-------- | ------------------

None.

PART III



|Item 10: | Directors, Executive Officers, and Corporate Governance.
|-------- | --------------------------------------------------------

Information regarding directors appearing under the caption Election of Directors in our Proxy Statement for the 2007 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 2007 Annual Meeting of Shareholders.



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##### Table of Contents

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 2007 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 2007 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 2007 Annual Meeting of Shareholders is hereby incorporated by reference.



|Item 11: | Executive Compensation.
|-------- | -----------------------

Information appearing under the captions
Compensation of Directors, Executive Compensation, and Compensation Discussion and Analysis in the 2007 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 2007 Proxy Statement is hereby
incorporated by reference.



|Item 13: | Certain Relationships and Related Transactions, and Director Independence.
|-------- | --------------------------------------------------------------------------

Information regarding certain related transactions appearing under the caption Certain Business Relationships in the 2007 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 2007 Proxy Statement is hereby incorporated by reference.

PART IV



|Item 15: | Exhibits and Financial Statement Schedules.
|-------- | -------------------------------------------

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

1. Financial Statements:



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



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



| |  |  | 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, 2006 and 2005
| | - |  | ------------------------------------------------------------



29



---

##### Table of Contents

| |  |  | Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005, and 2004
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006, 2005, and 2004
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2006, 2005, and 2004
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004
| | - |  | -------------------------------------------------------------------------------------------

The above financial statements are incorporated by reference from pages A-24 through A-60 of the attached Appendix.

2. Financial Statement Schedules

All 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)                                                                                                     
|      | 
|2.5   |  | Agreement and Plan of Merger, dated as of October 4, 2006, by and among First State Bancorporation, MSUB, Inc., Front Range Capital Corporation, and Heritage Bank.(15)                                                                                                          
|      | 
|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.(14)                                                                                                                                                                               
|      | 
|3.3   |  | Amended Bylaws of First State Bancorporation.(7)                                                                                                                                                                                                                                 
|      | 
|10.1  |  | Executive Employment Agreement.(5)                                                                                                                                                                                                                                               
|      | 
|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 to Officer Employment Agreement.(8)                                                                                                                                                                                                                              
|      | 
|10.7  |  | First State Bancorporation Deferred Compensation Plan.(3)                                                                                                                                                                                                                        
|      | 
|10.8  |  | First State Bancorporation Compensation and Bonus Philosophy and Plan.(17)                                                                                                                                                                                                       
|      | 
|10.9  |  | First Amendment to the First State Bancorporation 2003 Equity Incentive Plan.(13)                                                                                                                                                                                                
|      | 
|10.10 |  | Second Amendment to the First State Bancorporation 2003 Equity Incentive Plan.(13)                                                                                                                                                                                               
|      | 
|10.11 |  | Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan.(18)                                                                                                                                                                                                           
|      | 
|10.12 |  | Restated and Amended Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan.(12)                                                                                                                                                                                      
|      | 
|10.13 |  | Third Amendment to First State Bancorporation 2003 Equity Incentive Plan.(14)                                                                                                                                                                                                    
|      | 
|10.14 |  | Compensation Committee Approval and Board Ratification of Certain Executive Salaries.(16)                                                                                                                                                                                        
|      | 
|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. *                                                                                                                                                                                                



30



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##### Table of Contents

|     |  |                                                                                                                                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------
|     | 
|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. *
|     | 
|99.1 |  | First State Bancorporation Charter of the Audit Committee of the Board of Directors. *                                          
|     | 
|99.2 |  | First State Bancorporation Compensation Committee Charter. *                                                                    

| | 
| | 

---

|(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 10-K for the year ended December 31, 2005.
|--- | ------------------------------------------------------------------------------------------------------

|(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.
|---- | ----------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference from Access Anytime Bancorp, Inc.s Registration Statement on Form S-8, filed May 1, 2003, SEC file No. 333-104906.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference from First State Bancorporations 10-Q for the quarter ended March 31, 2006.
|---- | ------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference from First State Bancorporations 10-Q for the quarter ended June 30, 2006.
|---- | -----------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference from First State Bancorporations Current Report on Form 8-K filed October 5, 2006.
|---- | -------------------------------------------------------------------------------------------------------------

|(16) | Incorporated by reference from First State Bancorporations Current Report on Form 8-K filed November 2, 2006.
|---- | --------------------------------------------------------------------------------------------------------------

|(17) | Incorporated by reference from First State Bancorporations Form 8-K filed on January 20, 2006.
|---- | -----------------------------------------------------------------------------------------------

|(18) | Incorporated by reference from Access Anytime Bancorp, Inc.s Registration Statement on Form S-8, filed June 2, 1997, SEC file No. 333-28217.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------



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



31



---

##### 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: February 28, 2007

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    |  |                                                                                                                  |  | February 28, 2007
|Michael R. Stanford        |  | President and Chief Executive Officer and a Director (Principal Executive Officer)                               |  |                  
|                           |  |                                                                                                                 
|/s/ H. Patrick Dee         |  |                                                                                                                  |  | February 28, 2007
|H. Patrick Dee             |  | Executive Vice President, Treasurer and a Director                                                               |  |                  
|                           |  |                                                                                                                 
|/s/ Christopher C. Spencer |  |                                                                                                                  |  | February 28, 2007
|Christopher C. Spencer     |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  |                  
|                           |  |                                                                                                                 
|/s/ Leonard J. DeLayo, Jr. |  |                                                                                                                  |  | February 28, 2007
|Leonard J. DeLayo, Jr.     |  | Director                                                                                                         |  |                  
|                           |  |                                                                                                                 
|/s/ Douglas M. Smith, M.D. |  |                                                                                                                  |  | February 28, 2007
|Douglas M. Smith, M.D.     |  | Director                                                                                                         |  |                  
|                           |  |                                                                                                                 
|/s/ Herman N. Wisenteiner  |  |                                                                                                                  |  | February 28, 2007
|Herman N. Wisenteiner      |  | Director                                                                                                         |  |                  
|                           |  |                                                                                                                 
|/s/ Nedra Matteucci        |  |                                                                                                                  |  | February 28, 2007
|Nedra Matteucci            |  | Director                                                                                                         |  |                  
|                           |  |                                                                                                                 
|/s/ Lowell A. Hare         |  |                                                                                                                  |  | February 28, 2007
|Lowell A. Hare             |  | Director                                                                                                         |  |                  
|                           |  |                                                                                                                 
|/s/ A.J. (Jim) Wells       |  |                                                                                                                  |  | February 28, 2007
|A.J. (Jim) Wells           |  | Director                                                                                                         |  |                  
|                           |  |                                                                                                                 
|/s/ Daniel H. Lopez, Ph.D. |  |                                                                                                                  |  | February 28, 2007
|Daniel H. Lopez, Ph.D.     |  | Director                                                                                                         |  |                  



32



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##### Table of Contents

APPENDIX A

FIRST STATE BANCORPORATION AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                      |  |             
|----------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                      |  | Page        
|                                                                                                      | 
|Financial Summary                                                                                     |  | A-2 to A-3  
|                                                                                                      | 
|Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | A-4 to A-20 
|                                                                                                      | 
|Managements Report on Internal Control over Financial Reporting                                      |  | A-21        
|                                                                                                      | 
|Report of Independent Registered Public Accounting Firm (Consolidated Financial Statements)           |  | A-22        
|                                                                                                      | 
|Report of Independent Registered Public Accounting Firm (Internal Control over Financial Reporting)   |  | A-23        
|                                                                                                      | 
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                          |  | A-24        
|                                                                                                      | 
|Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005, and 2004           |  | A-25        
|                                                                                                      | 
|Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006, 2005, and 2004 |  | A-26        
|                                                                                                      | 
|Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2006, 2005, and 2004 |  | A-27        
|                                                                                                      | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004           |  | A-28 to A-29
|                                                                                                      | 
|Notes to Consolidated Financial Statements                                                            |  | A-30 to A-60



A-1



---

##### Table of Contents

FINANCIAL HIGHLIGHTS



|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|--------------------------------------------------------------- |  | --------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                |  | Years ended December 31,                      |           
|                                                                |  | 2006                                          |            |   | 2005 |   |            | 2004 |  |   | 2003       |   |  | 2002 |           
|                                                                |  | (Dollars in thousands, except per share data) |           
|Statement of Operations Data:                                   |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Interest income                                                 |  | $                                             | 181,852    |   |      | $ | 121,957    |      |  | $ | 93,442     |   |  | $    | 83,713     |   |  | $ | 59,846     |  
|Interest expense                                                |  |                                               | 67,051     |   |      |   | 37,712     |      |  |   | 23,875     |   |  |      | 22,629     |   |  |   | 18,384     |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net interest income                                             |  |                                               | 114,801    |   |      |   | 84,245     |      |  |   | 69,567     |   |  |      | 61,084     |   |  |   | 41,462     |  
|Provision for loan losses                                       |  |                                               | (6,993     | ) |      |   | (3,920     | )    |  |   | (4,500     | ) |  |      | (5,543     | ) |  |   | (2,589     | )
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net interest income after provision for loan losses             |  |                                               | 107,808    |   |      |   | 80,325     |      |  |   | 65,067     |   |  |      | 55,541     |   |  |   | 38,873     |  
|Non-interest income                                             |  |                                               | 19,472     |   |      |   | 16,451     |      |  |   | 14,191     |   |  |      | 14,521     |   |  |   | 12,698     |  
|Non-interest expenses                                           |  |                                               | 92,008     |   |      |   | 63,590     |      |  |   | 55,478     |   |  |      | 47,242     |   |  |   | 35,982     |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Income before income taxes                                      |  |                                               | 35,272     |   |      |   | 33,186     |      |  |   | 23,780     |   |  |      | 22,820     |   |  |   | 15,589     |  
|Income tax expense                                              |  |                                               | 12,497     |   |      |   | 11,788     |      |  |   | 8,555      |   |  |      | 7,969      |   |  |   | 5,631      |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income                                                      |  | $                                             | 22,775     |   |      | $ | 21,398     |      |  | $ | 15,225     |   |  | $    | 14,851     |   |  | $ | 9,958      |  
|                                                                |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|                                                                |  |                                               |            |   |     
|Per Share Data:                                                 |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income per diluted share                                    |  | $                                             | 1.26       |   |      | $ | 1.36       |      |  | $ | 0.99       |   |  | $    | 0.98       |   |  | $ | 0.83       |  
|Book value                                                      |  |                                               | 14.67      |   |      |   | 10.41      |      |  |   | 9.42       |   |  |      | 8.71       |   |  |   | 8.02       |  
|Tangible book value                                             |  |                                               | 11.04      |   |      |   | 7.56       |      |  |   | 6.55       |   |  |      | 5.81       |   |  |   | 4.99       |  
|Dividends paid                                                  |  |                                               | 0.32       |   |      |   | 0.28       |      |  |   | 0.24       |   |  |      | 0.22       |   |  |   | 0.20       |  
|Market price end of period                                      |  |                                               | 24.75      |   |      |   | 23.99      |      |  |   | 18.38      |   |  |      | 17.38      |   |  |   | 12.40      |  
|Weighted average diluted common shares outstanding              |  |                                               | 18,061,931 |   |      |   | 15,689,445 |      |  |   | 15,443,536 |   |  |      | 15,196,898 |   |  |   | 11,995,202 |  
|                                                                |  |                                               |            |   |     
|Average Balance Sheet Data:                                     |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total assets                                                    |  | $                                             | 2,592,464  |   |      | $ | 1,977,615  |      |  | $ | 1,705,356  |   |  | $    | 1,466,715  |   |  | $ | 998,165    |  
|Loans                                                           |  |                                               | 1,903,414  |   |      |   | 1,477,146  |      |  |   | 1,284,904  |   |  |      | 1,110,741  |   |  |   | 692,283    |  
|Investment securities                                           |  |                                               | 427,693    |   |      |   | 327,169    |      |  |   | 264,654    |   |  |      | 204,624    |   |  |   | 188,628    |  
|Interest-bearing deposits with other banks                      |  |                                               | 7,206      |   |      |   | 4,056      |      |  |   | 4,982      |   |  |      | 5,216      |   |  |   | 16,785     |  
|Federal funds sold                                              |  |                                               | 10,792     |   |      |   | 7,968      |      |  |   | 1,087      |   |  |      | 10,247     |   |  |   | 22,682     |  
|Deposits                                                        |  |                                               | 2,027,378  |   |      |   | 1,446,212  |      |  |   | 1,305,770  |   |  |      | 1,137,698  |   |  |   | 805,417    |  
|Borrowings                                                      |  |                                               | 179,718    |   |      |   | 285,527    |      |  |   | 190,542    |   |  |      | 136,504    |   |  |   | 41,695     |  
|Stockholders equity                                            |  |                                               | 224,481    |   |      |   | 152,695    |      |  |   | 139,122    |   |  |      | 126,328    |   |  |   | 82,053     |  
|                                                                |  |                                               |            |   |     
|Performance Ratios:                                             |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Return on average assets                                        |  |                                               | 0.88       | % |      |   | 1.08       | %    |  |   | 0.89       | % |  |      | 1.01       | % |  |   | 1.00       | %
|Return on average common equity                                 |  |                                               | 10.15      | % |      |   | 14.01      | %    |  |   | 10.94      | % |  |      | 11.76      | % |  |   | 12.14      | %
|Net interest margin                                             |  |                                               | 4.89       | % |      |   | 4.64       | %    |  |   | 4.47       | % |  |      | 4.59       | % |  |   | 4.50       | %
|Efficiency ratio                                                |  |                                               | 68.52      | % |      |   | 63.15      | %    |  |   | 66.24      | % |  |      | 62.49      | % |  |   | 66.44      | %
|Earnings to fixed charges:                                      |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Including interest on deposits                                  |  |                                               | 1.53x      |   |      |   | 1.88x      |      |  |   | 2.00x      |   |  |      | 2.01x      |   |  |   | 1.85x      |  
|Excluding interest on deposits                                  |  |                                               | 3.12x      |   |      |   | 3.56x      |      |  |   | 6.11x      |   |  |      | 6.83x      |   |  |   | 8.08x      |  
|                                                                |  |                                               |            |   |     
|Asset Quality Ratios:                                           |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Nonperforming assets to total loans and other real estate owned |  |                                               | 0.99       | % |      |   | 0.49       | %    |  |   | 0.67       | % |  |      | 1.14       | % |  |   | 1.17       | %
|Net charge-offs to average loans                                |  |                                               | 0.18       | % |      |   | 0.12       | %    |  |   | 0.26       | % |  |      | 0.29       | % |  |   | 0.16       | %
|Allowance for loan losses to total loans held for investment    |  |                                               | 1.15       | % |      |   | 1.16       | %    |  |   | 1.13       | % |  |      | 1.15       | % |  |   | 1.19       | %
|Allowance for loan losses to nonperforming loans                |  |                                               | 166        | % |      |   | 259        | %    |  |   | 192        | % |  |      | 113        | % |  |   | 108        | %
|                                                                |  |                                               |            |   |     
|Capital Ratios:                                                 |  |                                               |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Leverage ratio                                                  |  |                                               | 10.96      | % |      |   | 8.18       | %    |  |   | 7.80       | % |  |      | 7.93       | % |  |   | 7.82       | %
|Average stockholders equity to average total assets            |  |                                               | 8.66       | % |      |   | 7.72       | %    |  |   | 8.16       | % |  |      | 8.61       | % |  |   | 8.22       | %
|Tier I risk-based capital ratio                                 |  |                                               | 12.47      | % |      |   | 9.62       | %    |  |   | 9.52       | % |  |      | 9.52       | % |  |   | 10.42      | %
|Total risk-based capital ratio                                  |  |                                               | 13.48      | % |      |   | 10.63      | %    |  |   | 10.58      | % |  |      | 10.64      | % |  |   | 11.59      | %



A-2



---

##### Table of Contents

SELECTED QUARTERLY FINANCIAL DATA

(unaudited)



|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | --------------------------------------------- | ---------- | - | --------- | - | ---------- | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | 2006                                          |           
|                                                    |  | Fourth Qtr                                    |            |   | Third Qtr |   |            | Second Qtr |  |   | First Qtr  |  
|                                                    |  | (Dollars in thousands, except per share data) |           
|Statement of Operations Data:                       |  |                                               |            |  
|Interest income                                     |  | $                                             | 48,825     |   |           | $ | 46,944     |            |  | $ | 44,671     |   |  | $ | 41,412     |  
|Interest expense                                    |  |                                               | 19,346     |   |           |   | 17,722     |            |  |   | 15,821     |   |  |   | 14,162     |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                                               | 29,479     |   |           |   | 29,222     |            |  |   | 28,850     |   |  |   | 27,250     |  
|Provision for loan losses                           |  |                                               | (1,505     | ) |           |   | (1,379     | )          |  |   | (1,380     | ) |  |   | (2,729     | )
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                                               | 27,974     |   |           |   | 27,843     |            |  |   | 27,470     |   |  |   | 24,521     |  
|Non-interest income                                 |  |                                               | 5,286      |   |           |   | 4,972      |            |  |   | 4,874      |   |  |   | 4,340      |  
|Non-interest expenses                               |  |                                               | 24,079     |   |           |   | 22,907     |            |  |   | 22,933     |   |  |   | 22,089     |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Income before income taxes                          |  |                                               | 9,181      |   |           |   | 9,908      |            |  |   | 9,411      |   |  |   | 6,772      |  
|Income tax expense                                  |  |                                               | 3,376      |   |           |   | 3,248      |            |  |   | 3,423      |   |  |   | 2,450      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income                                          |  | $                                             | 5,805      |   |           | $ | 6,660      |            |  | $ | 5,988      |   |  | $ | 4,322      |  
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net interest margin                                 |  |                                               | 4.76       | % |           |   | 4.94       | %          |  |   | 5.00       | % |  |   | 4.85       | %
|                                                    |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|                                                    |  |                                               |            |  
|Per Share Data:                                     |  |                                               |            |   |           |   |            |            |  |   |            |   |  |   |            |  
|Net income per diluted share                        |  | $                                             | 0.31       |   |           | $ | 0.37       |            |  | $ | 0.33       |   |  | $ | 0.24       |  
|Book value                                          |  |                                               | 14.67      |   |           |   | 12.81      |            |  |   | 12.34      |   |  |   | 12.11      |  
|Tangible book value                                 |  |                                               | 11.04      |   |           |   | 8.57       |            |  |   | 7.97       |   |  |   | 7.73       |  
|Dividends paid                                      |  |                                               | 0.08       |   |           |   | 0.08       |            |  |   | 0.08       |   |  |   | 0.08       |  
|Weighted average diluted common shares outstanding  |  |                                               | 18,580,868 |   |           |   | 17,936,122 |            |  |   | 17,910,041 |   |  |   | 17,802,209 |  
|                                                    | 
|                                                    |  | 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 |  



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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, 2006, 2005, AND 2004

Basis of Presentation

The following represents managements discussion and analysis of First State Bancorporations consolidated financial condition as of December 31, 2006 and 2005, and our results of consolidated
operations for the years ended December 31, 2006, 2005, and 2004. This discussion should be read in conjunction with the consolidated financial statements and related footnotes and the five-year summary of selected financial data.

Overview and Outlook

For the year ended
December 31, 2006, we reported net income of $22.8 million, or $1.26 per diluted share, a decrease of 7% over prior year earnings per diluted share. Net income for 2005 was $21.4 million, or $1.36 per diluted share. Net earnings for the year
were reduced by higher non-interest expenses associated with the acquisitions of Access and NMFC in January of 2006 and a compressed net interest margin in the second half of the year.

Highlights for 2006 are as follows:



| |  |  | We completed the acquisitions and mergers of Access and NMFC on January 3, 2006 and January 10, 2006, respectively. We acquired approximately $229 million
in loans, approximately $410 million in deposits, and recognized goodwill of approximately $23 million for the two acquisitions combined.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Loan demand throughout our system was strong and resulted in total loan growth of $281 million, or 19%, excluding the loans acquired in January.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Excluding the deposits acquired in January, total deposits grew $201 million or 13%.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Our net interest margin increased from 4.64% in 2005 to 4.89% in 2006 as a result of interest rate increases by the Federal Reserve Bank over the last two years and
our asset sensitive position. The net interest margin decreased during the second half of the year, due primarily to the repricing of existing deposits, the higher cost of new deposits, and the need to utilize borrowings to fund the loan growth
which has outpaced deposit growth.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We announced the signing of a definitive agreement to acquire Front Range Capital Corporation and its wholly owned subsidiary, Heritage Bank.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

Business Combinations

On January 3, 2006, we completed the acquisition of Access Anytime Bancorp, Inc. and its wholly owned subsidiary, AccessBank (Access) and on January 10, 2006, we completed the acquisition of New Mexico Financial
Corporation and its wholly owned subsidiary, Ranchers Banks (NMFC). 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 $195 million in loans and $314 million in deposits, and recognized goodwill of approximately $19 million related to the transaction. 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. Through the NMFC transaction, we acquired approximately $34 million in loans and $96 million in
deposits, and recognized goodwill of approximately $4 million related to the transaction. See Note 2 of Notes to Consolidated Financial Statements for additional information on these acquisitions.

During the third quarter of 2006, the Company announced the signing of a definitive agreement to acquire Front Range Capital Corporation (Front
Range) and its wholly owned subsidiary, Heritage Bank, for $72 million in cash. Front Range is a bank holding company headquartered in Broomfield, Colorado and Heritage Bank is a Colorado state chartered bank with approximately $450 million in
assets operating thirteen offices in the Denver-Boulder-Longmont triangle of northern Colorado. The Company expects to acquire approximately $314 million in gross loans and $361 million in deposits in conjunction with the acquisition. In December
2006, the Company completed the sale, in a public offering, of approximately 3.2 million shares of its common stock and intends to use significantly all of the $74.4 million in net proceeds from the offering to pay the purchase price for the
acquisition. The acquisition is anticipated to close in early March 2007. The transaction has been approved by the Front Range shareholders, the Federal Reserve Bank of Kansas City, the Colorado Division of Banking, and the Financial Institutions
Division for the State of New Mexico.



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##### Table of Contents

Critical Accounting Estimates and Judgments

Allowance for Loan Losses

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 provided for inherent losses in the loan portfolio based on historical loss experience, 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 2006, 2005, and 2004, and found no impairment.

Recent
Accounting Pronouncements and Developments

Note 1 to the consolidated financial statements discusses new accounting policies we
adopted during 2006 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 2006, 2005, and 2004 is presented below. Additional data on our performance during the past five
years appear in Financial Highlights.



|                           |  |                          |         |   |      |   |         |      |  |   |        |  
|-------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                           |  | Years ended December 31, |        
|                           |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|                           |  | (Dollars in thousands)   |        
|Interest income            |  | $                        | 181,852 |   |      | $ | 121,957 |      |  | $ | 93,442 |  
|Interest expense           |  |                          | 67,051  |   |      |   | 37,712  |      |  |   | 23,875 |  
|                           |  |                          |         |   |      |   |         |      |  |   |        |  
|Net interest income        |  |                          | 114,801 |   |      |   | 84,245  |      |  |   | 69,567 |  
|Provision for loan losses  |  |                          | (6,993  | ) |      |   | (3,920  | )    |  |   | (4,500 | )
|Non-interest income        |  |                          | 19,472  |   |      |   | 16,451  |      |  |   | 14,191 |  
|Non-interest expense       |  |                          | 92,008  |   |      |   | 63,590  |      |  |   | 55,478 |  
|                           |  |                          |         |   |      |   |         |      |  |   |        |  
|Income before income taxes |  |                          | 35,272  |   |      |   | 33,186  |      |  |   | 23,780 |  
|Income tax expense         |  |                          | 12,497  |   |      |   | 11,788  |      |  |   | 8,555  |  
|                           |  |                          |         |   |      |   |         |      |  |   |        |  
|Net income                 |  | $                        | 22,775  |   |      | $ | 21,398  |      |  | $ | 15,225 |  
|                           |  |                          |         |   |      |   |         |      |  |   |        |  

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.



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##### Table of Contents

During the years ended December 31, our net interest income increased by $30.6 million to $114.8
million or 36.3% in 2006 from $84.2 million in 2005, which was an increase of $14.7 million or 21.1% from $69.6 million in 2004. These increases were primarily due to a $426 million or 28.9% increase in average loans to $1.903 billion in 2006 from
$1.477 billion in 2005, and a $192 million or 15.0% increase from $1.285 billion in 2004. 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, as well as through the acquisitions of Access and NMFC. Of the total increase in average loans, approximately
$218.9 million is a result of the loans acquired from Access and NMFC. The increase in interest income was aided by an increase in yield on loans to 8.49% in 2006 from 7.36% in 2005 and 6.51% in 2004. This increase in yield was a direct result of
the Federal Reserve Bank increasing rates during 2005 and during the first half of 2006, which has a direct effect on the prime rate to which a significant portion of our loans are tied. The increase in net interest income during 2006 was also due
to an increase in average investment securities of $100.5 million in 2006. This increase in average investment securities is composed of approximately $30.6 million in purchases of new securities to satisfy collateral pledging requirements in
addition to an increase of approximately $69.9 million as a result of the investments acquired from Access and NMFC.

During 2006, the cost
of interest-bearing liabilities also increased to 3.50% from 2.57% in 2005 and 1.86% in 2004 as a result of increasing interest rates precipitated by the Federal Reserve Banks rate increases. In addition, during 2006, the mix of deposits
shifted toward higher cost deposit products, particularly shorter-term certificates of deposit. 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 4.89% in 2006, compared to 4.64% in 2005, and
4.47% in 2004. The increase in net interest margin from 2004 to 2005 and from 2005 to 2006 is due primarily to rate increases made by the Federal Reserve Bank beginning in the middle of 2004 and continuing into the first half of 2006, and our asset
sensitive position. We experienced margin compression during the second half of 2006, due primarily to the repricing of existing deposits, the higher cost of new deposits, and the need to utilize borrowings to fund the loan growth which has
continued to outpace deposit growth. The net interest margin may compress further in 2007 if we continue to experience strong loan growth without a corresponding increase in core deposits, or due to further repricing of deposits at higher rates.

The amortization of the purchase accounting adjustments for the acquisitions of Access and NMFC contributed approximately nine basis
points to the net interest margin in the year ended December 31, 2006. The contribution to the net interest margin from these purchase accounting adjustments will decrease to approximately six basis points during 2007.

Management believes that the extent of future changes in net interest margin will depend on the amount and timing of any further Federal Reserve Bank
rate changes, the level of borrowings needed to fund loan growth, our ability to manage the cost of interest-bearing liabilities, and our ability to stay competitive in the markets we serve.



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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, |          
|                                                                                 |  | 2006                     |           |   | 2005                     |   |                     | 2004 |       
|                                                                                 |  | AverageBalance           |           |   | InterestIncome orExpense |   | AverageYield orCost |      |        | AverageBalance |  |   | InterestIncome orExpense |   | AverageYield orCost |   |         | AverageBalance |        |   | InterestIncome orExpense |   | AverageYield orCost |  
|                                                                                 |  | (Dollars in thousands)   |          
|Assets                                                                           |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Loans:                                                                           |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Commercial                                                                       |  | $                        | 252,827   |   |                          | $ | 21,959              |      | 8.69   | %              |  | $ | 182,690                  |   |                     | $ | 12,763  |                | 6.99   | % |                          | $ | 160,891             |   |  | $ | 9,420  |  | 5.85   | %
|Real estate                                                                      |  |                          | 1,570,038 |   |                          |   | 132,455             |      | 8.44   |                |  |   | 1,243,284                |   |                     |   | 91,946  |                | 7.40   |   |                          |   | 1,085,522           |   |  |   | 70,967 |  | 6.54   |  
|Consumer                                                                         |  |                          | 60,162    |   |                          |   | 5,915               |      | 9.83   |                |  |   | 28,092                   |   |                     |   | 2,778   |                | 9.89   |   |                          |   | 29,654              |   |  |   | 2,777  |  | 9.36   |  
|Mortgage                                                                         |  |                          | 18,697    |   |                          |   | 1,287               |      | 6.88   |                |  |   | 21,991                   |   |                     |   | 1,296   |                | 5.89   |   |                          |   | 8,167               |   |  |   | 459    |  | 5.62   |  
|Other                                                                            |  |                          | 1,690     |   |                          |   |                    |      |       |                |  |   | 1,089                    |   |                     |   |        |                |       |   |                          |   | 670                 |   |  |   |       |  |       |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total loans                                                                      |  |                          | 1,903,414 |   |                          |   | 161,616             |      | 8.49   | %              |  |   | 1,477,146                |   |                     |   | 108,783 |                | 7.36   | % |                          |   | 1,284,904           |   |  |   | 83,623 |  | 6.51   | %
|Allowance for loan losses                                                        |  |                          | (21,735   | ) |                          |   |                     |      |        |                |  |   | (16,948                  | ) |                     |   |         |                |        |   |                          |   | (14,829             | ) |  |   |        |  |        |  
|Securities:                                                                      |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|U.S. government and mortgage-backed                                              |  |                          | 367,587   |   |                          |   | 16,115              |      | 4.38   |                |  |   | 276,278                  |   |                     |   | 10,272  |                | 3.72   |   |                          |   | 236,582             |   |  |   | 8,801  |  | 3.72   |  
|States and political subdivisions:                                               |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Non-taxable                                                                      |  |                          | 46,577    |   |                          |   | 2,395               |      | 5.14   |                |  |   | 33,786                   |   |                     |   | 1,824   |                | 5.40   |   |                          |   | 13,879              |   |  |   | 573    |  | 4.13   |  
|Taxable                                                                          |  |                          |          |   |                          |   |                    |      |       |                |  |   |                         |   |                     |   |        |                |       |   |                          |   |                    |   |  |   |       |  |       |  
|Other                                                                            |  |                          | 13,529    |   |                          |   | 711                 |      | 5.26   |                |  |   | 17,105                   |   |                     |   | 687     |                | 4.02   |   |                          |   | 14,193              |   |  |   | 372    |  | 2.62   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total securities                                                                 |  |                          | 427,693   |   |                          |   | 19,221              |      | 4.49   | %              |  |   | 327,169                  |   |                     |   | 12,783  |                | 3.91   | % |                          |   | 264,654             |   |  |   | 9,746  |  | 3.68   | %
|Interest-bearing deposits with other banks                                       |  |                          | 7,206     |   |                          |   | 398                 |      | 5.52   |                |  |   | 4,056                    |   |                     |   | 125     |                | 3.08   |   |                          |   | 4,982               |   |  |   | 57     |  | 1.14   |  
|Federal funds sold                                                               |  |                          | 10,792    |   |                          |   | 617                 |      | 5.72   |                |  |   | 7,968                    |   |                     |   | 266     |                | 3.34   |   |                          |   | 1,087               |   |  |   | 16     |  | 1.47   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-earning assets                                                    |  |                          | 2,349,105 |   |                          | $ | 181,852             |      | 7.74   | %              |  |   | 1,816,339                |   |                     | $ | 121,957 |                | 6.71   | % |                          |   | 1,555,627           |   |  | $ | 93,442 |  | 6.01   | %
|Non-interest-earning assets:                                                     |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Cash and due from banks                                                          |  |                          | 69,346    |   |                          |   |                     |      |        |                |  |   | 51,514                   |   |                     |   |         |                |        |   |                          |   | 51,424              |   |  |   |        |  |        |  
|Other.                                                                           |  |                          | 195,748   |   |                          |   |                     |      |        |                |  |   | 126,710                  |   |                     |   |         |                |        |   |                          |   | 113,134             |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total non-interest-earning assets                                                |  |                          | 265,094   |   |                          |   |                     |      |        |                |  |   | 178,224                  |   |                     |   |         |                |        |   |                          |   | 164,558             |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total assets                                                                     |  | $                        | 2,592,464 |   |                          |   |                     |      |        |                |  | $ | 1,977,615                |   |                     |   |         |                |        |   |                          | $ | 1,705,356           |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Liabilities and Stockholders' Equity                                             |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Deposits:                                                                        |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Interest-bearing demand accounts                                                 |  | $                        | 320,311   |   |                          | $ | 3,698               |      | 1.15   | %              |  | $ | 267,027                  |   |                     | $ | 2,238   |                | 0.84   | % |                          | $ | 237,144             |   |  | $ | 1,118  |  | 0.47   | %
|Certificates of deposit < $100,000                                               |  |                          | 372,509   |   |                          |   | 15,026              |      | 4.03   |                |  |   | 226,992                  |   |                     |   | 6,973   |                | 3.07   |   |                          |   | 231,686             |   |  |   | 6,183  |  | 2.67   |  
|Certificates of deposit > $100,000                                               |  |                          | 538,634   |   |                          |   | 23,045              |      | 4.28   |                |  |   | 322,685                  |   |                     |   | 10,902  |                | 3.38   |   |                          |   | 295,398             |   |  |   | 8,712  |  | 2.95   |  
|Money market savings accounts                                                    |  |                          | 245,675   |   |                          |   | 7,450               |      | 3.03   |                |  |   | 207,056                  |   |                     |   | 3,935   |                | 1.90   |   |                          |   | 194,961             |   |  |   | 2,636  |  | 1.35   |  
|Regular savings accounts                                                         |  |                          | 111,111   |   |                          |   | 1,222               |      | 1.10   |                |  |   | 72,882                   |   |                     |   | 677     |                | 0.93   |   |                          |   | 67,480              |   |  |   | 573    |  | 0.85   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-bearing deposits                                                  |  |                          | 1,588,240 |   |                          |   | 50,441              |      | 3.18   | %              |  |   | 1,096,642                |   |                     |   | 24,725  |                | 2.25   | % |                          |   | 1,026,669           |   |  |   | 19,222 |  | 1.87   | %
|Federal funds purchased and securities sold under agreements to repurchase       |  |                          | 149,818   |   |                          |   | 6,249               |      | 4.17   |                |  |   | 85,435                   |   |                     |   | 2,039   |                | 2.39   |   |                          |   | 64,278              |   |  |   | 199    |  | 0.31   |  
|Short-term borrowings                                                            |  |                          | 79,099    |   |                          |   | 4,121               |      | 5.21   |                |  |   | 117,475                  |   |                     |   | 3,972   |                | 3.38   |   |                          |   | 71,235              |   |  |   | 993    |  | 1.39   |  
|Long-term debt                                                                   |  |                          | 42,641    |   |                          |   | 1,717               |      | 4.03   |                |  |   | 123,742                  |   |                     |   | 4,123   |                | 3.33   |   |                          |   | 84,848              |   |  |   | 1,728  |  | 2.04   |  
|Junior subordinated debentures                                                   |  |                          | 57,978    |   |                          |   | 4,523               |      | 7.80   |                |  |   | 44,310                   |   |                     |   | 2,853   |                | 6.44   |   |                          |   | 34,459              |   |  |   | 1,733  |  | 5.03   |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total interest-bearing liabilities                                               |  |                          | 1,917,776 |   |                          |   | 67,051              |      | 3.50   | %              |  |   | 1,467,604                |   |                     |   | 37,712  |                | 2.57   | % |                          |   | 1,281,489           |   |  |   | 23,875 |  | 1.86   | %
|Non-interest-bearing demand accounts                                             |  |                          | 439,138   |   |                          |   |                     |      |        |                |  |   | 349,570                  |   |                     |   |         |                |        |   |                          |   | 279,101             |   |  |   |        |  |        |  
|Other non-interest-bearing liabilities                                           |  |                          | 11,069    |   |                          |   |                     |      |        |                |  |   | 7,746                    |   |                     |   |         |                |        |   |                          |   | 5,644               |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total liabilities                                                                |  |                          | 2,367,983 |   |                          |   |                     |      |        |                |  |   | 1,824,920                |   |                     |   |         |                |        |   |                          |   | 1,566,234           |   |  |   |        |  |        |  
|Stockholders' equity                                                             |  |                          | 224,481   |   |                          |   |                     |      |        |                |  |   | 152,695                  |   |                     |   |         |                |        |   |                          |   | 139,122             |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Total liabilities and stockholders' equity                                       |  | $                        | 2,592,464 |   |                          |   |                     |      |        |                |  | $ | 1,977,615                |   |                     |   |         |                |        |   |                          | $ | 1,705,356           |   |  |   |        |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Net interest income                                                              |  |                          |           |   |                          | $ | 114,801             |      |        |                |  |   |                          |   |                     | $ | 84,245  |                |        |   |                          |   |                     |   |  | $ | 69,567 |  |        |  
|                                                                                 |  |                          |           |   |                          |   |                     |      |        |                |  |   |                          |   |                     |   |         |                |        |   |                          |   |                     |   |  |   |        |  |        |  
|Net interest spread                                                              |  |                          |           |   |                          |   |                     |      | 4.24   | %              |  |   |                          |   |                     |   |         |                | 4.14   | % |                          |   |                     |   |  |   |        |  | 4.15   | %
|Net interest margin                                                              |  |                          |           |   |                          |   |                     |      | 4.89   | %              |  |   |                          |   |                     |   |         |                | 4.64   | % |                          |   |                     |   |  |   |        |  | 4.47   | %
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                          |           |   |                          |   |                     |      | 122.49 | %              |  |   |                          |   |                     |   |         |                | 123.76 | % |                          |   |                     |   |  |   |        |  | 121.39 | %



A-7



---

##### Table of Contents

Loan fees of $7.3 million, $6.3 million, and $5.7 million are included in interest income for the years
ended December 31, 2006, 2005, and 2004, respectively.

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



|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|------------------------------------------------------------------------- |  | --------------------------------------------------- | ------ | - | --------------------------------------------------- | - | ------ | ----- |  | - | ------ | - |  | ---- | ------ | - | ----- | - | ------ | - |  | - | ------
|                                                                          |  | Years ended December 31,                           
|                                                                          |  | 2006 vs. 2005 Increase (decrease) due to changes
in |        |   | 2005 vs. 2004 Increase (decrease) due to changes
in
|                                                                          |  | Volume                                              |        |   | Rate                                                |   |        | Total |  |   | Volume |   |  | Rate |        |   | Total
|                                                                          |  | (Dollars in thousands)                             
|Interest-earning assets                                                   |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Loans:                                                                    |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Commercial                                                                |  | $                                                   | 4,900  |   |                                                     | $ | 4,296  |       |  | $ | 9,196  |   |  | $    | 1,276  |   |       | $ | 2,067  |   |  | $ | 3,343 
|Real estate                                                               |  |                                                     | 25,235 |   |                                                     |   | 15,274 |       |  |   | 40,509 |   |  |      | 10,654 |   |       |   | 10,325 |   |  |   | 20,979
|Consumer                                                                  |  |                                                     | 3,171  |   |                                                     |   | (34    | )     |  |   | 3,137  |   |  |      | (146   | ) |       |   | 147    |   |  |   | 1     
|Mortgage                                                                  |  |                                                     | (194   | ) |                                                     |   | 185    |       |  |   | (9     | ) |  |      | 777    |   |       |   | 60     |   |  |   | 837   
|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Total loans                                                               |  |                                                     | 33,112 |   |                                                     |   | 19,721 |       |  |   | 52,833 |   |  |      | 12,561 |   |       |   | 12,599 |   |  |   | 25,160
|Securities:                                                               |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|U.S. government and mortgage-backed                                       |  |                                                     | 3,395  |   |                                                     |   | 2,448  |       |  |   | 5,843  |   |  |      | 1,477  |   |       |   | (6     | ) |  |   | 1,471 
|States and political subdivisions:                                        |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Non-taxable                                                               |  |                                                     | 691    |   |                                                     |   | (120   | )     |  |   | 571    |   |  |      | 822    |   |       |   | 429    |   |  |   | 1,251 
|Taxable                                                                   |  |                                                     |       |   |                                                     |   |       |       |  |   |       |   |  |      |       |   |       |   |       |   |  |   |      
|Other                                                                     |  |                                                     | (144   | ) |                                                     |   | 168    |       |  |   | 24     |   |  |      | 76     |   |       |   | 239    |   |  |   | 315   
|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Total securities                                                          |  |                                                     | 3,942  |   |                                                     |   | 2,496  |       |  |   | 6,438  |   |  |      | 2,375  |   |       |   | 662    |   |  |   | 3,037 
|Interest-bearing deposits with other banks                                |  |                                                     | 97     |   |                                                     |   | 176    |       |  |   | 273    |   |  |      | (11    | ) |       |   | 79     |   |  |   | 68    
|Federal funds sold                                                        |  |                                                     | 94     |   |                                                     |   | 257    |       |  |   | 351    |   |  |      | 101    |   |       |   | 149    |   |  |   | 250   
|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Total interest-earning assets                                             |  |                                                     | 37,245 |   |                                                     |   | 22,650 |       |  |   | 59,895 |   |  |      | 15,026 |   |       |   | 13,489 |   |  |   | 28,515
|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Interest-bearing liabilities                                              |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Deposits:                                                                 |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Interest-bearing demand accounts                                          |  |                                                     | 447    |   |                                                     |   | 1,013  |       |  |   | 1,460  |   |  |      | 141    |   |       |   | 979    |   |  |   | 1,120 
|Certificates of deposit < $100,000                                        |  |                                                     | 4,470  |   |                                                     |   | 3,583  |       |  |   | 8,053  |   |  |      | (125   | ) |       |   | 915    |   |  |   | 790   
|Certificates of deposit > $100,000                                        |  |                                                     | 7,296  |   |                                                     |   | 4,847  |       |  |   | 12,143 |   |  |      | 805    |   |       |   | 1,385  |   |  |   | 2,190 
|Money market savings accounts                                             |  |                                                     | 734    |   |                                                     |   | 2,781  |       |  |   | 3,515  |   |  |      | 164    |   |       |   | 1,135  |   |  |   | 1,299 
|Regular savings accounts                                                  |  |                                                     | 355    |   |                                                     |   | 190    |       |  |   | 545    |   |  |      | 46     |   |       |   | 58     |   |  |   | 104   
|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Total interest-bearing deposits                                           |  |                                                     | 13,302 |   |                                                     |   | 12,414 |       |  |   | 25,716 |   |  |      | 1,031  |   |       |   | 4,472  |   |  |   | 5,503 
|Federal funds purchased and securities soldunder agreements to repurchase |  |                                                     | 1,537  |   |                                                     |   | 2,673  |       |  |   | 4,210  |   |  |      | 66     |   |       |   | 1,774  |   |  |   | 1,840 
|Short-term borrowings                                                     |  |                                                     | (1,298 | ) |                                                     |   | 1,447  |       |  |   | 149    |   |  |      | 645    |   |       |   | 2,334  |   |  |   | 2,979 
|Long-term debt                                                            |  |                                                     | (2,702 | ) |                                                     |   | 296    |       |  |   | (2,406 | ) |  |      | 792    |   |       |   | 1,603  |   |  |   | 2,395 
|Junior subordinated debentures                                            |  |                                                     | 880    |   |                                                     |   | 790    |       |  |   | 1,670  |   |  |      | 495    |   |       |   | 625    |   |  |   | 1,120 
|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Total interest-bearing liabilities                                        |  |                                                     | 11,719 |   |                                                     |   | 17,620 |       |  |   | 29,339 |   |  |      | 3,029  |   |       |   | 10,808 |   |  |   | 13,837
|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       
|Total increase (decrease) in net interest income                          |  | $                                                   | 25,526 |   |                                                     | $ | 5,030  |       |  | $ | 30,556 |   |  | $    | 11,997 |   |       | $ | 2,681  |   |  | $ | 14,678
|                                                                          |  |                                                     |        |   |                                                     |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       



A-8



---

##### 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 |          
|                                       |  | 2006                     |        | 2005     |   | 2004   |          | 2006-2005 |        | 2005-2004 |   |       | 2006-2005 |   |        | 2005-2004 | 
|                                       |  | (Dollars in thousands)   |       
|Service charges on deposit accounts    |  | $                        | 7,575  |          | $ | 5,658  |          | $         | 4,410  |           | $ | 1,917 |           | $ | 1,248  |           |  | 34 | % |  | 28  | %
|Credit and debit card transaction fees |  |                          | 2,959  |          |   | 2,192  |          |           | 3,991  |           |   | 767   |           |   | (1,799 | )         |  | 35 |   |  | (45 | )
|Gain on sale of mortgage loans         |  |                          | 4,867  |          |   | 4,865  |          |           | 2,718  |           |   | 2     |           |   | 2,147  |           |  |   |   |  | 79  |  
|Other                                  |  |                          | 4,071  |          |   | 3,736  |          |           | 3,072  |           |   | 335   |           |   | 664    |           |  | 9  |   |  | 22  |  
|                                       |  |                          |        |          |   |        |          |           |        |           |   |       |           |   |        |           |  |    |   |  |     |  
|Total non-interest income              |  | $                        | 19,472 |          | $ | 16,451 |          | $         | 14,191 |           | $ | 3,021 |           | $ | 2,260  |           |  | 18 | % |  | 16  | %
|                                       |  |                          |        |          |   |        |          |           |        |           |   |       |           |   |        |           |  |    |   |  |     |  

Service charges on deposit accounts increased $1.9 million, $1.2 million of which was due to the
acquisitions of Access and NMFC. An increase in fees related to the Companys overdraft privilege product contributed to the increase in service charges on deposit account in 2006 and 2005. The increase was further aided by the increases in
total deposits from 2004 to 2006.

Credit and debit card transaction fees increased $767,000 in 2006, primarily due to an increase in
transaction volume. 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. Contingent payments of $250,000 were received in 2005 and 2006, respectively, based on the terms of the agreement. The gain and the contingent payments 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 $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, and maintained the level of activity
throughout 2006, originating $348.8 million in loans.

Non-interest Expense

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



|                                  |  |                          |        |          |   |        |          |           |        |           |   |        |           |   |        |           |  |       |   |  |      |  
|--------------------------------- |  | ------------------------ | ------ | -------- | - | ------ | -------- | --------- | ------ | --------- | - | ------ | --------- | - | ------ | --------- |  | ----- | - |  | ---- | -
|                                  |  | Years ended December 31, |        | $ Change |   |        | % Change |          
|                                  |  | 2006                     |        | 2005     |   | 2004   |          | 2006-2005 |        | 2005-2004 |   |        | 2006-2005 |   |        | 2005-2004 | 
|                                  |  | (Dollars in thousands)   |       
|Salaries and employee benefits    |  | $                        | 43,906 |          | $ | 31,890 |          | $         | 24,843 |           | $ | 12,016 |           | $ | 7,047  |           |  | 38    | % |  | 28   | %
|Occupancy                         |  |                          | 11,198 |          |   | 8,216  |          |           | 7,804  |           |   | 2,982  |           |   | 412    |           |  | 36    |   |  | 5    |  
|Data processing                   |  |                          | 5,688  |          |   | 3,518  |          |           | 2,934  |           |   | 2,170  |           |   | 584    |           |  | 62    |   |  | 20   |  
|Credit and debit card interchange |  |                          |       |          |   |       |          |           | 1,580  |           |   |       |           |   | (1,580 | )         |  |      |   |  | (100 | )
|Equipment                         |  |                          | 6,270  |          |   | 4,571  |          |           | 4,258  |           |   | 1,699  |           |   | 313    |           |  | 37    |   |  | 7    |  
|Legal, accounting, and consulting |  |                          | 3,292  |          |   | 1,668  |          |           | 1,372  |           |   | 1,624  |           |   | 296    |           |  | 97    |   |  | 22   |  
|Marketing                         |  |                          | 3,873  |          |   | 2,955  |          |           | 2,288  |           |   | 918    |           |   | 667    |           |  | 31    |   |  | 29   |  
|Telephone                         |  |                          | 2,172  |          |   | 1,202  |          |           | 1,219  |           |   | 970    |           |   | (17    | )         |  | 81    |   |  | (1   | )
|Supplies                          |  |                          | 1,326  |          |   | 915    |          |           | 922    |           |   | 411    |           |   | (7     | )         |  | 45    |   |  | (1   | )
|Delivery                          |  |                          | 1,074  |          |   | 873    |          |           | 901    |           |   | 201    |           |   | (28    | )         |  | 23    |   |  | (3   | )
|Loss on sale of loans             |  |                          |       |          |   |       |          |           | 435    |           |   |       |           |   | (435   | )         |  |      |   |  | (100 | )
|Amortization of intangibles       |  |                          | 1,299  |          |   | 108    |          |           | 111    |           |   | 1,191  |           |   | (3     | )         |  | 1,103 |   |  | (3   | )
|Other                             |  |                          | 11,910 |          |   | 7,674  |          |           | 6,811  |           |   | 4,236  |           |   | 863    |           |  | 55    |   |  | 13   |  
|                                  |  |                          |        |          |   |        |          |           |        |           |   |        |           |   |        |           |  |       |   |  |      |  
|Total non-interest expense        |  | $                        | 92,008 |          | $ | 63,590 |          | $         | 55,478 |           | $ | 28,418 |           | $ | 8,112  |           |  | 45    | % |  | 15   | %
|                                  |  |                          |        |          |   |        |          |           |        |           |   |        |           |   |        |           |  |       |   |  |      |  



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##### Table of Contents

Total non-interest expenses increased in 2006 and 2005 by $28.4 million and $8.1 million, respectively.
The acquisitions of Access and NMFC contributed approximately $12.5 million toward the overall increase in non-interest expenses from 2005 to 2006. In addition, the year ended December 31, 2006 included approximately $1.3 million of expense
related to the acquisitions, primarily for the conversion and implementation of information systems, and $252,000 of expenses related to the cancellation of two Access contracts. The conversion and implementation of information systems for the
Access and NMFC acquisitions, the majority of which are included in legal, accounting, and consulting expense, were completed in the third quarter of 2006.

Salary and employee benefits increased in 2006 and 2005 by $12.0 million and $7.0 million, respectively, directly related to the increase in full-time equivalent employees as we continue to grow and expand our
operations, and to normal compensation increases for job performance. There were 864 FTEs, 663 FTEs, and 552 FTEs at December 31, 2006, 2005, and 2004, respectively. Of the $12.0 million increase in salaries and benefits in
2006, $4.7 million is due to the additional employees of Access and NMFC. This $12.0 million increase also includes $1.2 million of compensation expense related to stock options, the majority of which began being expensed in 2006 as required under
SFAS 123R.

Occupancy expense increased $3.0 million in 2006, primarily due to the acquisitions of Access and NMFC, three new branches that
opened in Colorado Springs, Rio Rancho, and Salt Lake City, the lease of space in Phoenix for a new branch that opened in February 2007, additional administrative space in Albuquerque, and a branch location in Denver to be opened in the second
quarter of 2007. The increase in equipment expense in 2006 reflects the acquisitions and an increase in depreciation expense resulting from additional capital expenditures throughout 2006, primarily for information technology related equipment and
equipment for new branches. In 2005, the significant increase in occupancy and equipment was 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. Occupancy and equipment expenses are expected to continue to increase in 2007, primarily from the addition of several new branches scheduled to open in 2007 and contractual rent increases in existing
leases.

The increase in data processing expenses in 2006 and 2005 reflects our continued investment in new technologies for the benefit of
our existing customers and to attract new customers. The increase in 2006 also reflects additional costs associated with the acquisitions of Access and NMFC.

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 $1.6 million and $296,000 in 2006 and 2005, respectively. The increase in 2006 reflects costs
associated with the acquisitions of Access and NMFC, primarily for the conversion and implementation of information systems, as well as an increase in computer processing fees and software maintenance fees, resulting primarily from information
technology system upgrades. The increase in 2005 was primarily due to increased costs to comply with the requirements of the Sarbanes-Oxley Act.

The increase in marketing expenses reflects increases in direct advertising campaign costs, partially related to changing the name of our subsidiary bank to First Community Bank in 2005, as well as increases in charitable contributions and
other bank sponsored activities.

Telephone expense increased by $970,000 in 2006, $465,000 of which was due to the acquisitions of Access
and NMFC. The remaining increase is primarily due to an increase in telephone repair and maintenance, increases in local, wireless, and long distance telephone services, and an increase in costs of lines and data circuits.

Other non-interest expenses increased by $4.2 million in 2006. This increase includes the $252,000 related to the cancellation of two Access vendor
contracts, $191,000 due to the early redemption of securities associated with First State NM Statutory Trust I and the write off of the related offering costs, $140,000 related to our new debit and credit card points program, $95,000 in foreign
debit card fraud, and a $60,000 loss on the sublease of excess office space in Utah. The increase in other non-interest expenses also reflects general increases in filing and recording fees, travel and entertainment, appraisal fees, directors
fees, and security.

Income Tax Expense

Income tax expense increased to $12.5 million in 2006, from $11.8 million in 2005 and $8.6 million in 2004. The effective tax rate, computed by dividing income tax expense by income before taxes, was 35.4% in 2006, compared to 35.5% in
2005, and 36.0% in 2004. 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 also benefited from an increase in the rate at which net
deferred taxes are expected to be realized.



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##### Table of Contents

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, |  
|                                 |  | 2006                     |   |  | 2005  |   |  | 2004  |  
|Return on average assets         |  | 0.88                     | % |  | 1.08  | % |  | 0.89  | %
|Return on average equity         |  | 10.15                    |   |  | 14.01 |   |  | 10.94 |  
|Dividend payout ratio            |  | 24.75                    |   |  | 20.14 |   |  | 23.63 |  
|Average equity to average assets |  | 8.66                     |   |  | 7.72  |   |  | 8.16  |  

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  | 
|            |  | 2006                   |           | 2005     |   | 2004      |  | 2006-2005 |           |  | 2005-2004 |         | 2006-2005 |  |          | 2005-2004 |    
|            |  | (Dollars in thousands) |          
|Investments |  | $                      | 492,752   |          | $ | 454,312   |  | $         | 290,925   |  | $         | 38,440  |           |  | $163,387 |           | 8   | % |  | 56 | %
|Loans       |  |                        | 2,041,607 |          |   | 1,525,927 |  |           | 1,377,795 |  |           | 515,680 |           |  | 148,132  |           | 34  |   |  | 11 |  
|Deposits    |  |                        | 2,120,924 |          |   | 1,510,007 |  |           | 1,401,303 |  |           | 610,917 |           |  | 108,704  |           | 40  |   |  | 8  |  
|Borrowings  |  |                        | 213,413   |          |   | 247,764   |  |           | 192,513   |  |           | (34,351 | )         |  | 55,251   |           | (14 | ) |  | 29 |  

The increases in loans and deposits in 2006 include approximately $231 million in gross loans and $410 million in
deposits acquired in connection with the acquisitions of Access and NMFC.

Asset/Liability Management

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

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

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

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.



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##### Table of Contents

As of December 31, 2006, our cumulative interest rate GAP for the period up to three months was a
positive $281.2 million and for the period up to one year was a positive $126.3 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.

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, 2006. 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 than three months |           | Three months to less thanone
year |    |         | One to five years |  | Over five years |         | Total
|                                                  |  | (Dollars in thousands)
|Interest-earning assets:                          |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Investment securities                             |  | $                      | 19,837    |                                   | $  | 142,906 |                   |  | $               | 262,186 |       | $ | 67,823  |  | $ | 492,752  
|Interest-bearing deposits with other banks        |  |                        | 474       |                                   |    | 99      |                   |  |                 | 1,511   |       |   |        |  |   | 2,084    
|Federal funds sold                                |  |                        | 5,425     |                                   |    |        |                   |  |                 |        |       |   |        |  |   | 5,425    
|Loans:                                            |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Commercial                                        |  |                        | 187,773   |                                   |    | 37,865  |                   |  |                 | 67,087  |       |   | 2,841   |  |   | 295,566  
|Real estate                                       |  |                        | 948,365   |                                   |    | 210,988 |                   |  |                 | 436,360 |       |   | 94,681  |  |   | 1,690,394
|Consumer                                          |  |                        | 9,526     |                                   |    | 11,265  |                   |  |                 | 26,951  |       |   | 7,905   |  |   | 55,647   
|                                                  |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Total interest-earning assets                     |  |                        | 1,171,400 |                                   |    | 403,123 |                   |  |                 | 794,095 |       |   | 173,250 |  |   | 2,541,868
|                                                  |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Interest-bearing liabilities:                     |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Deposits:                                         |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Savings and NOW accounts                          |  |                        | 130,557   |                                   |    | 152,784 |                   |  |                 | 283,340 |       |   | 86,111  |  |   | 652,792  
|Certificates of deposit of $100,000 or more       |  |                        | 342,588   |                                   |    | 193,352 |                   |  |                 | 96,127  |       |   | 2,267   |  |   | 634,334  
|Other time accounts                               |  |                        | 72,201    |                                   |    | 205,856 |                   |  |                 | 106,180 |       |   | 2,389   |  |   | 386,626  
|Securities sold under agreements to repurchase    |  |                        | 149,171   |                                   |    |        |                   |  |                 |        |       |   |        |  |   | 149,171  
|FHLB advances and other                           |  |                        | 137,989   |                                   |    | 6,025   |                   |  |                 | 9,875   |       |   | 1,794   |  |   | 155,683  
|Junior subordinated debentures                    |  |                        | 57,730    |                                   |    |        |                   |  |                 |        |       |   |        |  |   | 57,730   
|                                                  |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Total interest-bearing liabilities                |  |                        | 890,236   |                                   |    | 558,017 |                   |  |                 | 495,522 |       |   | 92,561  |  |   | 2,036,336
|                                                  |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Interest rate GAP                                 |  | $                      | 281,164   |                                   | ($ | 154,894 | )                 |  | $               | 298,573 |       | $ | 80,689  |  | $ | 505,532  
|                                                  |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Cumulative interest rate GAP at December 31, 2006 |  | $                      | 281,164   |                                   | $  | 126,270 |                   |  | $               | 424,843 |       | $ | 505,532 |  |   |          
|                                                  |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          
|Cumulative GAP ratio at December 31, 2006         |  |                        | 1.32      |                                   |    | 1.09    |                   |  |                 | 1.22    |       |   | 1.25    |  |   |          
|                                                  |  |                        |           |                                   |    |         |                   |  |                 |         |       |   |         |  |   |          

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, 2006, 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, 2006.



|                         |  |                     |    |  |                                  |  
|------------------------ |  | ------------------- | -- |  | -------------------------------- | -
|Change in Interest Rates |  | Net Interest Income |    |  | Market Value of Portfolio Equity |  
|+200                     |  | 1                   | %  |  | 1                                | %
|+100                     |  | 1                   | %  |  | 10                               | %
|0                        |  | 0                   | %  |  | 19                               | %
|-100                     |  | 0                   | %  |  | 27                               | %
|-200                     |  | (1                  | )% |  | 36                               | %



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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, 2006, the carrying value exceeded the market value by approximately $1.4 million and at
December 31, 2005, the carrying value exceeded the market value by approximately $1.3 million. We do not own a 10 percent or greater position in any single issuer.



|                                                 |  |                        |         |      |   |         |  |   |        
|------------------------------------------------ |  | ---------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                 |  | As of December 31,    
|                                                 |  | 2006                   |         | 2005 |   | 2004   
|                                                 |  | (Dollars in thousands)
|U.S. Treasury securities                         |  | $                      | 1,000   |      | $ | 1,001   |  | $ | 1,001  
|U.S. government agency securities                |  |                        | 238,305 |      |   | 260,109 |  |   | 127,393
|Mortgage-backed securities:                      |  |                        |         |      |   |         |  |   |        
|Pass-through certificates                        |  |                        | 74,313  |      |   | 48,189  |  |   | 69,397 
|Collateralized mortgage obligations              |  |                        | 113,318 |      |   | 85,881  |  |   | 56,580 
|Obligations of states and political subdivisions |  |                        | 51,704  |      |   | 42,775  |  |   | 24,210 
|Other securities                                 |  |                        | 14,112  |      |   | 16,357  |  |   | 12,344 
|                                                 |  |                        |         |      |   |         |  |   |        
|Total investment securities                      |  | $                      | 492,752 |      | $ | 454,312 |  | $ | 290,925
|                                                 |  |                        |         |      |   |         |  |   |        

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 yields of our investment portfolio as of December 31, 2006.



|                                                   |  |                        |         |                         |       |                         |      |  
|-------------------------------------------------- |  | ---------------------- | ------- | ----------------------- | ----- | ----------------------- | ---- | -
|                                                   |  | Carryingvalue          |         | Averagematurity (years) |       | Weighted average yields |     
|                                                   |  | (Dollars in thousands) |        
|U.S. Treasury securities                           |  |                        |         |                         |       |                         |      |  
|One year or less                                   |  | $                      | 1,000   |                         | 0.68  |                         | 4.00 | %
|U.S. government agency securities                  |  |                        |         |                         |       |                         |      |  
|One year or less                                   |  |                        | 88,129  |                         | 0.77  |                         | 3.98 |  
|After one through five years                       |  |                        | 147,878 |                         | 1.73  |                         | 3.78 |  
|After five through ten years                       |  |                        | 1,311   |                         | 7.19  |                         | 4.06 |  
|After ten years                                    |  |                        | 987     |                         | 11.71 |                         | 5.06 |  
|                                                   |  |                        |         |                         |       |                         |      |  
|Total U.S. government agency securities            |  |                        | 238,305 |                         | 1.45  |                         | 3.86 |  
|Mortgage-backed securities                         |  |                        |         |                         |       |                         |      |  
|One year or less                                   |  |                        | 42      |                         | 0.93  |                         | 7.00 |  
|After one through five years                       |  |                        | 5,961   |                         | 3.14  |                         | 4.89 |  
|After five through ten years                       |  |                        | 38,617  |                         | 7.52  |                         | 4.67 |  
|After ten years                                    |  |                        | 143,011 |                         | 17.83 |                         | 4.59 |  
|                                                   |  |                        |         |                         |       |                         |      |  
|Total mortgage-backed securities obligations(a)    |  |                        | 187,631 |                         | 15.24 |                         | 4.62 |  
|Obligations of states and political subdivisions   |  |                        |         |                         |       |                         |      |  
|One year or less                                   |  |                        | 400     |                         | 0.51  |                         | 4.05 |  
|After one through five years                       |  |                        | 3,337   |                         | 3.38  |                         | 3.47 |  
|After five through ten years                       |  |                        | 15,551  |                         | 8.38  |                         | 7.05 |  
|After ten years                                    |  |                        | 32,416  |                         | 20.44 |                         | 5.90 |  
|                                                   |  |                        |         |                         |       |                         |      |  
|Total states and political subdivisions securities |  |                        | 51,704  |                         | 15.56 |                         | 6.08 |  
|Other securities                                   |  |                        | 14,112  |                         |      |                         | 5.20 |  
|                                                   |  |                        |         |                         |       |                         |      |  
|Total investment securities                        |  | $                      | 492,752 |                         | 8.14  |                         | 4.42 | %
|                                                   |  |                        |         |                         |       |                         |      |  

---

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

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



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##### Table of Contents

Loan Portfolio

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



|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |           |        |       |         |  |   |           |  |       |  
|--------------------------------- |  | ---------------------- | --------- | ------- | ----- | - | ------ | ---- | --------- |  | ----- | ------ |  | ------- | --------- |  | ------ | - | ------- | - | --------- | ------ | ----- | ------- |  | - | --------- |  | ----- | -
|                                  |  | As of December 31,     |          
|                                  |  | 2006                   |           |         | 2005  |   |        | 2004 |           |  | 2003  |        |  | 2002    |          
|                                  |  | Amount                 |           | Percent |       |   | Amount |      | Percent   |  |       | Amount |  | Percent |           |  | Amount |   | Percent |   |           | Amount |       | Percent | 
|                                  |  | (Dollars in thousands) |          
|Commercial                        |  | $                      | 295,566   |         | 14.5  | % |        | $    | 201,816   |  | 13.2  | %      |  | $       | 174,293   |  | 12.6   | % |         | $ | 160,261   |        | 13.0  | %       |  | $ | 100,813   |  | 9.9   | %
|Real estate - commercial          |  |                        | 714,086   |         | 35.0  |   |        |      | 653,566   |  | 42.8  |        |  |         | 628,074   |  | 45.6   |   |         |   | 521,013   |        | 42.3  |         |  |   | 393,734   |  | 38.7  |  
|Real estate - one- to four-family |  |                        | 217,247   |         | 10.6  |   |        |      | 170,158   |  | 11.2  |        |  |         | 198,420   |  | 14.4   |   |         |   | 258,361   |        | 21.0  |         |  |   | 314,617   |  | 30.9  |  
|Real estate - construction        |  |                        | 733,333   |         | 35.9  |   |        |      | 453,567   |  | 29.8  |        |  |         | 329,442   |  | 23.9   |   |         |   | 253,458   |        | 20.6  |         |  |   | 151,991   |  | 15.0  |  
|Consumer and other                |  |                        | 55,647    |         | 2.7   |   |        |      | 27,888    |  | 1.8   |        |  |         | 28,601    |  | 2.1    |   |         |   | 30,736    |        | 2.5   |         |  |   | 35,555    |  | 3.5   |  
|Mortgage loans available for sale |  |                        | 25,728    |         | 1.3   |   |        |      | 18,932    |  | 1.2   |        |  |         | 18,965    |  | 1.4    |   |         |   | 7,656     |        | 0.6   |         |  |   | 20,315    |  | 2.0   |  
|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |           |        |       |         |  |   |           |  |       |  
|Total loans                       |  | $                      | 2,041,607 |         | 100.0 | % |        | $    | 1,525,927 |  | 100.0 | %      |  | $       | 1,377,795 |  | 100.0  | % |         | $ | 1,231,485 |        | 100.0 | %       |  | $ | 1,017,025 |  | 100.0 | %
|                                  |  |                        |           |         |       |   |        |      |           |  |       |        |  |         |           |  |        |   |         |   |           |        |       |         |  |   |           |  |       |  

We completed the acquisitions and mergers of Access and NMFC on January 3, 2006 and
January 10, 2006, respectively. In connection with the acquisitions, we acquired approximately $231.0 million in gross loans.

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, 2006. Actual maturities may differ from the contractual maturities shown as a result of renewals and prepayments.



|                                  |  |                        |           |                   |   |                |  |       |         |  |   |          
|--------------------------------- |  | ---------------------- | --------- | ----------------- | - | -------------- |  | ----- | ------- |  | - | ---------
|                                  |  | Less thanone year      |           | One to five years |   | Over fiveyears |  | Total
|                                  |  | (Dollars in thousands)
|Fixed-rate loans:                 |  |                        |           |                   |   |                |  |       |         |  |   |          
|Commercial                        |  | $                      | 38,914    |                   | $ | 50,325         |  | $     | 1,893   |  | $ | 91,132   
|Real estate                       |  |                        | 82,316    |                   |   | 80,669         |  |       | 69,769  |  |   | 232,754  
|Consumer                          |  |                        | 15,958    |                   |   | 26,951         |  |       | 7,871   |  |   | 50,780   
|Mortgage loans available for sale |  |                        | 25,728    |                   |   |               |  |       |        |  |   | 25,728   
|                                  |  |                        |           |                   |   |                |  |       |         |  |   |          
|Total fixed-rate loans            |  |                        | 162,916   |                   |   | 157,945        |  |       | 79,533  |  |   | 400,394  
|                                  |  |                        |           |                   |   |                |  |       |         |  |   |          
|Variable-rate loans:              |  |                        |           |                   |   |                |  |       |         |  |   |          
|Commercial                        |  |                        | 186,724   |                   |   | 16,762         |  |       | 948     |  |   | 204,434  
|Real estate                       |  |                        | 1,051,309 |                   |   | 355,691        |  |       | 24,912  |  |   | 1,431,912
|Consumer                          |  |                        | 4,833     |                   |   |               |  |       | 34      |  |   | 4,867    
|                                  |  |                        |           |                   |   |                |  |       |         |  |   |          
|Total variable-rate loans         |  |                        | 1,242,866 |                   |   | 372,453        |  |       | 25,894  |  |   | 1,641,213
|                                  |  |                        |           |                   |   |                |  |       |         |  |   |          
|Total loans                       |  | $                      | 1,405,782 |                   | $ | 530,398        |  | $     | 105,427 |  | $ | 2,041,607
|                                  |  |                        |           |                   |   |                |  |       |         |  |   |          



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. During 2006, we experienced
increases in both non-performing assets and potential problem loans. Our non-performing loans are largely secured by real estate, such that we expect our ultimate losses to be nominal. The significant increase in other real estate owned at the end
of 2006 includes a $5.7 million property that is in the process of being sold. Management does not currently believe that the additional non-performing assets and potential problem loans represent significant negative trends in the remaining
portfolio, such as loan type, geographic area, or general economic conditions.

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, 2006, approximately $2.0 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,     |       
|                                                                |  | 2006                   |        |   | 2005 |   |        | 2004 |  |   | 2003   |   |  | 2002 |       
|                                                                |  | (Dollars in thousands) |       
|Loans past due 90 days or more                                  |  | $                      | 75     |   |      | $ | 21     |      |  | $ | 4      |   |  | $    | 13     |   |  | $ | 721    |  
|Non-accrual loans                                               |  |                        | 13,851 |   |      |   | 6,698  |      |  |   | 7,969  |   |  |      | 12,515 |   |  |   | 10,241 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming loans                                       |  |                        | 13,926 |   |      |   | 6,719  |      |  |   | 7,973  |   |  |      | 12,528 |   |  |   | 10,962 |  
|Other real estate owned                                         |  |                        | 6,396  |   |      |   | 778    |      |  |   | 1,255  |   |  |      | 1,557  |   |  |   | 908    |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                      |  | $                      | 20,322 |   |      | $ | 7,497  |      |  | $ | 9,228  |   |  | $    | 14,085 |   |  | $ | 11,870 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses                                       |  | $                      | 23,125 |   |      | $ | 17,413 |      |  | $ | 15,331 |   |  | $    | 14,121 |   |  | $ | 11,838 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Potential problem assets                                        |  | $                      | 35,916 |   |      | $ | 17,684 |      |  | $ | 22,174 |   |  | $    | 15,115 |   |  | $ | 23,286 |  
|                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Ratio of total nonperforming assets to total assets             |  |                        | 0.73   | % |      |   | 0.35   | %    |  |   | 0.51   | % |  |      | 0.86   | % |  |   | 0.86   | %
|Ratio of total nonperforming loans to total loans               |  |                        | 0.68   | % |      |   | 0.44   | %    |  |   | 0.58   | % |  |      | 1.02   | % |  |   | 1.08   | %
|Ratio of allowance for loan losses to total nonperforming loans |  |                        | 166    | % |      |   | 259    | %    |  |   | 192    | % |  |      | 113    | % |  |   | 108    | %

Loans on which the accrual of interest has been discontinued amounted to $13.9 million, $6.7
million, and $8.0 million at December 31, 2006, 2005, and 2004, respectively. If interest on such loans had been accrued, such income would have been approximately $934,000 in 2006, $334,000 in 2005, and $348,000 in 2004. Actual interest income
on those loans, which is recorded only when received, amounted to zero in 2006, 2005, and 2004.

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 probable inherent losses in the portfolio. 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



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##### 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, |       
|                                                                |  | 2006                     |        |   | 2005 |   |        | 2004 |  |   | 2003   |   |  | 2002 |       
|                                                                |  | (Dollars in thousands)   |       
|Allowance for loan losses, beginning of period                  |  | $                        | 17,413 |   |      | $ | 15,331 |      |  | $ | 14,121 |   |  | $    | 11,838 |   |  | $ | 7,207  |  
|Charge-offs:                                                    |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and other                                            |  |                          | 945    |   |      |   | 798    |      |  |   | 1,038  |   |  |      | 445    |   |  |   | 598    |  
|Real estate loans                                               |  |                          | 2,259  |   |      |   | 1,000  |      |  |   | 2,067  |   |  |      | 2,349  |   |  |   | 358    |  
|Consumer loans                                                  |  |                          | 573    |   |      |   | 468    |      |  |   | 426    |   |  |      | 766    |   |  |   | 298    |  
|Credit cards                                                    |  |                          | 134    |   |      |   | 107    |      |  |   | 172    |   |  |      | 142    |   |  |   | 174    |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total charge-offs                                               |  |                          | 3,911  |   |      |   | 2,373  |      |  |   | 3,703  |   |  |      | 3,702  |   |  |   | 1,428  |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Recoveries:                                                     |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and other                                            |  |                          | 65     |   |      |   | 134    |      |  |   | 136    |   |  |      | 115    |   |  |   | 121    |  
|Real estate loans                                               |  |                          | 287    |   |      |   | 240    |      |  |   | 135    |   |  |      | 141    |   |  |   | 57     |  
|Consumer loans                                                  |  |                          | 110    |   |      |   | 136    |      |  |   | 83     |   |  |      | 146    |   |  |   | 93     |  
|Credit cards                                                    |  |                          | 40     |   |      |   | 25     |      |  |   | 59     |   |  |      | 40     |   |  |   | 34     |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                                |  |                          | 502    |   |      |   | 535    |      |  |   | 413    |   |  |      | 442    |   |  |   | 305    |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs                                                 |  |                          | 3,409  |   |      |   | 1,838  |      |  |   | 3,290  |   |  |      | 3,260  |   |  |   | 1,123  |  
|Provision for loan losses                                       |  |                          | 6,993  |   |      |   | 3,920  |      |  |   | 4,500  |   |  |      | 5,543  |   |  |   | 2,589  |  
|Allowance related to acquired loans                             |  |                          | 2,128  |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 3,165  |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses, end of period                        |  | $                        | 23,125 |   |      | $ | 17,413 |      |  | $ | 15,331 |   |  | $    | 14,121 |   |  | $ | 11,838 |  
|                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                |  |                          |        |   |     
|As a percentage of average total loans:                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs                                                 |  |                          | 0.18   | % |      |   | 0.12   | %    |  |   | 0.26   | % |  |      | 0.29   | % |  |   | 0.16   | %
|Provision for loan losses                                       |  |                          | 0.37   |   |      |   | 0.27   |      |  |   | 0.35   |   |  |      | 0.50   |   |  |   | 0.37   |  
|Allowance for loan losses                                       |  |                          | 1.21   |   |      |   | 1.18   |      |  |   | 1.19   |   |  |      | 1.27   |   |  |   | 1.71   |  
|As a percentage of total loans held for investment at year-end: |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses                                       |  |                          | 1.15   |   |      |   | 1.16   |      |  |   | 1.13   |   |  |      | 1.15   |   |  |   | 1.19   |  
|As a multiple of net charge-offs:                               |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses                                       |  |                          | 6.78   |   |      |   | 9.47   |      |  |   | 4.66   |   |  |      | 4.33   |   |  |   | 10.54  |  
|Income before income taxes and provision for loan losses        |  |                          | 12.40  |   |      |   | 20.19  |      |  |   | 8.60   |   |  |      | 8.70   |   |  |   | 16.19  |  

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, Utah, and Arizona. 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,     |       
|                                            |  | 2006                   |        |                               | 2005   |   |                    | 2004 |                               |  | 2003   |                    |  | 2002                          |       
|                                            |  | (Dollars in thousands) |       
|                                            |  | Amount ofallowance     |        | Percent ofloans tototal loans |        |   | Amount ofallowance |      | Percent ofloans tototal loans |  |        | Amount ofallowance |  | Percent ofloans tototal loans |        |  | Amount ofallowance |   | Percent ofloans tototal loans |   |        | Amount ofallowance |        | Percent of loans to total loans | 
|Commercial and other and subjective portion |  | $                      | 11,273 |                               | 14.47  | % |                    | $    | 9,107                         |  | 13.22  | %                  |  | $                             | 6,785  |  | 12.64              | % |                               | $ | 6,056  |                    | 13.01  | %                               |  | $ | 6,368  |  | 9.91   | %
|Real estate                                 |  |                        | 10,427 |                               | 82.80  |   |                    |      | 7,524                         |  | 84.95  |                    |  |                               | 7,642  |  | 85.28              |   |                               |   | 6,944  |                    | 84.49  |                                 |  |   | 4,981  |  | 86.59  |  
|Consumer                                    |  |                        | 1,425  |                               | 2.73   |   |                    |      | 782                           |  | 1.83   |                    |  |                               | 904    |  | 2.08               |   |                               |   | 1,121  |                    | 2.50   |                                 |  |   | 489    |  | 3.50   |  
|                                            |  |                        |        |                               |        |   |                    |      |                               |  |        |                    |  |                               |        |  |                    |   |                               |   |        |                    |        |                                 |  |   |        |  |        |  
|Total allowance for loan losses             |  | $                      | 23,125 |                               | 100.00 | % |                    | $    | 17,413                        |  | 100.00 | %                  |  | $                             | 15,331 |  | 100.00             | % |                               | $ | 14,121 |                    | 100.00 | %                               |  | $ | 11,838 |  | 100.00 | %
|                                            |  |                        |        |                               |        |   |                    |      |                               |  |        |                    |  |                               |        |  |                    |   |                               |   |        |                    |        |                                 |  |   |        |  |        |  



A-16



---

##### Table of Contents

The provision for loan losses increased to $7.0 million in 2006, from $3.9 million in 2005 and $4.5
million in 2004. The provision in each year was based on managements judgment concerning the amount of allowance for loan losses necessary after its review of various factors, which we believe affect the credit quality of the loan portfolio.
Charge-offs net of recoveries of loans were $3.4 million in 2006, $1.8 million in 2005, and $3.3 million in 2004. The percentage of net charge-offs to average loans was 0.18% in 2006, 0.12% in 2005, and 0.26% in 2004. Management intends to continue
to provide for probable inherent losses 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, |          
|                                     |  | 2006                     |           |                             |      |   | 2005           |   |                             | 2004 |     
|                                     |  | (Dollars in thousands)   |          
|                                     |  | AverageBalance           |           | WeightedAverageInterestRate |      |   | AverageBalance |   | WeightedAverageInterestRate |      |      | AverageBalance |  | Weighted Average InterestRate |          
|Interest-bearing demand accounts     |  | $                        | 320,311   |                             | 1.15 | % |                | $ | 267,027                     |      | 0.84 | %              |  | $                             | 237,144   |  | 0.47 | %
|Certificates of deposit              |  |                          | 911,143   |                             | 4.18 |   |                |   | 549,677                     |      | 3.25 |                |  |                               | 527,084   |  | 2.83 |  
|Money market savings accounts        |  |                          | 245,675   |                             | 3.03 |   |                |   | 207,056                     |      | 1.90 |                |  |                               | 194,961   |  | 1.35 |  
|Regular savings accounts             |  |                          | 111,111   |                             | 1.10 |   |                |   | 72,882                      |      | 0.93 |                |  |                               | 67,480    |  | 0.85 |  
|                                     |  |                          |           |                             |      |   |                |   |                             |      |      |                |  |                               |           |  |      |  
|Total interest-bearing deposits      |  |                          | 1,588,240 |                             | 3.18 |   |                |   | 1,096,642                   |      | 2.25 |                |  |                               | 1,026,669 |  | 1.87 |  
|Non-interest-bearing demand accounts |  |                          | 439,138   |                             |     |   |                |   | 349,570                     |      |     |                |  |                               | 279,101   |  |     |  
|                                     |  |                          |           |                             |      |   |                |   |                             |      |      |                |  |                               |           |  |      |  
|Total deposits                       |  | $                        | 2,027,378 |                             | 2.49 | % |                | $ | 1,446,212                   |      | 1.71 | %              |  | $                             | 1,305,770 |  | 1.47 | %
|                                     |  |                          |           |                             |      |   |                |   |                             |      |      |                |  |                               |           |  |      |  

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,     |        
|                          |  | 2006                   |         |  | 2005   |   |  | 2004 |        
|                          |  | (Dollars in thousands) |        
|Three months or less      |  | $                      | 342,588 |  | 54.01  | % |  | $    | 128,282 |  | 37.65  | % |  | $ | 69,605  |  | 21.74  | %
|Three through six months  |  |                        | 96,338  |  | 15.19  |   |  |      | 57,243  |  | 16.80  |   |  |   | 64,530  |  | 20.16  |  
|Six through twelve months |  |                        | 97,014  |  | 15.29  |   |  |      | 53,390  |  | 15.67  |   |  |   | 75,104  |  | 23.47  |  
|Over twelve months        |  |                        | 98,394  |  | 15.51  |   |  |      | 101,786 |  | 29.88  |   |  |   | 110,862 |  | 34.63  |  
|                          |  |                        |         |  |        |   |  |      |         |  |        |   |  |   |         |  |        |  
|Totals                    |  | $                      | 634,334 |  | 100.00 | % |  | $    | 340,701 |  | 100.00 | % |  | $ | 320,101 |  | 100.00 | %
|                          |  |                        |         |  |        |   |  |      |         |  |        |   |  |   |         |  |        |  

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase totaled approximately $149.2 million, $223.2 million, and $69.7 million at December 31, 2006, 2005,
and 2004, respectively. The weighted average interest rate on securities sold under agreements to repurchase was 4.44%, 3.54%, and 0.43% at December 31, 2006, 2005, and 2004, respectively.

Securities sold under agreements to repurchase are summarized as follows:



|                                                 |  |                          |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 149,171 |   |      | $ | 223,195 |      |  | $ | 69,723 |  
|Weighted average interest rate                   |  |                          | 4.44    | % |      |   | 3.54    | %    |  |   | 0.43   | %
|Maximum amount outstanding at any month end      |  | $                        | 162,223 |   |      | $ | 223,195 |      |  | $ | 75,109 |  
|Average balance outstanding during the period    |  | $                        | 149,765 |   |      | $ | 85,367  |      |  | $ | 64,241 |  
|Weighted average interest rate during the period |  |                          | 4.17    | % |      |   | 2.39    | %    |  |   | 0.31   | %



A-17



---

##### Table of Contents

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 decrease in securities sold under agreements to repurchase at
December 31, 2006 compared to December 31, 2005 was due primarily to a decrease in the accounts of theses two local governmental entities, which was anticipated, as the $150 million balance in these repurchase agreements at
December 31, 2005 came primarily from the collection of property taxes. In addition, one of the governmental entities did not renew their account, effective October 2006.

Short-term FHLB Advances

Short-term Federal Home Loan Bank (FHLB) advances (original
term less than one year) totaled approximately $136 million, $65 million, and $91 million at December 31, 2006, 2005, and 2004, respectively. The weighted average interest rate on short-term FHLB advances was 5.31%, 3.93%, and 2.21% at
December 31, 2006, 2005, and 2004, respectively.

Short-term FHLB advances are summarized as follows:



|                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 136,000 |   |      | $ | 65,000  |      |  | $ | 91,000  |  
|Weighted average interest rate                   |  |                          | 5.31    | % |      |   | 3.93    | %    |  |   | 2.21    | %
|Maximum amount outstanding at any month end      |  | $                        | 144,000 |   |      | $ | 150,000 |      |  | $ | 115,000 |  
|Average balance outstanding during the period    |  | $                        | 79,099  |   |      | $ | 117,475 |      |  | $ | 71,235  |  
|Weighted average interest rate during the period |  |                          | 5.21    | % |      |   | 3.27    | %    |  |   | 1.39    | %

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 by $611.0 million to $2.121 billion at December 31, 2006, from $1.510 billion at December 31, 2005,
primarily due to $409.8 million in deposits from the acquisitions of Access and NMFC and approximately $201.2 million in deposit growth. 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. The increase in deposits includes approximately $50 million in new brokered certificates of deposit issued during the
second and fourth quarters of 2006, offset by $40 million in brokered certificates of deposit which matured during 2006.

Our total net
loans increased to $2.018 billion at December 31, 2006 from $1.508 billion as of December 31, 2005, primarily due to $228.9 million in loans from the acquisitions of Access and NMFC and approximately $281.1 million in loan growth. The loan
growth is primarily 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, Utah, and Arizona 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.

Total Federal Home Loan Bank advances and other decreased $43.1 million at
December 31, 2006, as approximately $100.2 million of the investments acquired from Access were sold with the proceeds used to pay down borrowings in the first quarter of 2006. Throughout the remainder of 2006, our loan growth continued to
outpace the growth in deposits resulting in an increase in short-term borrowings from the Federal Home Loan Bank, which occurred primarily in the fourth quarter of 2006. During 2006, we also utilized the brokered deposit market as discussed above.
At December 31, 2006, we had additional borrowing capacity at the Federal Home Loan Bank of approximately $387 million as well as unused Federal Funds lines at other banks of $57.5 million.



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On November 22, 2006, the Company formed First State NM Statutory Trust V (Trust V) for
the purpose of issuing trust preferred securities (Trust V Securities) in a pooled transaction to unrelated investors. Trust V issued $7,500,000 of Trust V Securities that bear interest at an annual rate equal to the three-month LIBOR
plus 1.75% and invested the proceeds thereof in $7,732,000 of junior subordinated deferrable interest debentures of the Company (Trust V Debentures) that also bear interest at an annual rate equal to the three-month LIBOR plus 1.75%. The
proceeds from the offering of Trust V were used to redeem First State NM Statutory Trust I (Trust I) at par. See Note 10 to the consolidated financial statements for further discussion regarding the formation of Trust V and the
redemption of Trust I. During 2007, management anticipates issuing an additional $10.0 million of Trust V Securities under the same terms as the $7.5 million issuance.

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.

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. During the year ended December 31, 2006, First Community Bank paid a $2 million dividend to First State
Bancorporation.

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, 2006. 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 toThree Years |  | Four toFive Years |        | After Five Years
|                                   |  | (Dollars in thousands)
|FHLB advances                      |  | $                      | 154,953 |                  | $ | 142,953           |  | $                 | 4,954  |                  | $ | 4,977  |  | $ | 2,069 
|Note Payable                       |  |                        | 730     |                  |   | 53                |  |                   | 115    |                  |   | 130    |  |   | 432   
|Operating leases                   |  |                        | 50,918  |                  |   | 6,296             |  |                   | 13,239 |                  |   | 11,450 |  |   | 19,933
|Junior subordinated debentures     |  |                        | 57,730  |                  |   |                  |  |                   |       |                  |   |       |  |   | 57,730
|                                   |  |                        |         |                  |   |                   |  |                   |        |                  |   |        |  |   |       
|Total contractual cash obligations |  | $                      | 264,331 |                  | $ | 149,302           |  | $                 | 18,308 |                  | $ | 16,557 |  | $ | 80,164
|                                   |  |                        |         |                  |   |                   |  |                   |        |                  |   |        |  |   |       



|                             |  |                                            |         |                   |   |                   |  |                   |        |                 |   |        |  |   |       
|---------------------------- |  | ------------------------------------------ | ------- | ----------------- | - | ----------------- |  | ----------------- | ------ | --------------- | - | ------ |  | - | ------
|                             |  | Amount of Commitment Expiration Per Period
|Commercial Commitments       |  | UnfundedCommitments                        |         | Less thanOne Year |   | One toThree Years |  | Four toFive Years |        | After FiveYears
|                             |  | (Dollars in thousands)                    
|Lines of credit              |  | $                                          | 492,396 |                   | $ | 329,299           |  | $                 | 73,880 |                 | $ | 11,378 |  | $ | 77,839
|Standby letters of credit    |  |                                            | 45,240  |                   |   | 31,044            |  |                   | 13,850 |                 |   | 346    |  |   |      
|                             |  |                                            |         |                   |   |                   |  |                   |        |                 |   |        |  |   |       
|Total commercial commitments |  | $                                          | 537,636 |                   | $ | 360,343           |  | $                 | 87,730 |                 | $ | 11,724 |  | $ | 77,839
|                             |  |                                            |         |                   |   |                   |  |                   |        |                 |   |        |  |   |       

Capital Resources

Our total stockholders' equity increased to $304.9 million at December 31, 2006 from $160.2 million at December 31, 2005. Of the $144.7 million increase, $22.8 million was produced by earnings, $2.7 million
was due to stock issuances related to stock options, restricted stock, compensation expense related to employee stock options, the dividend re-investment plan, and the employee benefit plan, $218,000 was generated from the tax benefit of exercised
options, and $540,000 was due to an increase in market value of securities available for sale. In addition,



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$49.7 million was due to common shares issued and stock options assumed in connection with the Access and NMFC acquisitions, and $74.4 million was due to the
sale, in a public offering, of approximately 3.2 million shares of common stock, significantly all of which is intended to be used to pay the purchase price for the acquisition of Front Range. These increases were offset primarily by $5.6
million in dividend payments.

Management currently intends to continue to retain a major portion of our earnings to support anticipated
growth. As of December 31, 2006, 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 13(a)-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, 2006. 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, 2006, 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, 2006 has been audited by KPMG, LLP, the Companys independent registered public accounting firm who also audited the Companys consolidated financial statements.



|                  |  |                                      
|----------------- |  | -------------------------------------
|February 23, 2007 |  | /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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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, 2006 and 2005, 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, 2006. 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, 2006 and
2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in note 1(k) to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment.

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, 2006, 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 February 23, 2007 expressed an unqualified opinion on managements assessment of, and the effective operation of,
internal control over financial reporting.

KPMG LLP

Albuquerque, New Mexico

February 23, 2007



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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, 2006, 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, 2006, is fairly stated, in all material respects, based on 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, 2006, based on 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, 2006 and 2005, 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, 2006, and our report dated February 23, 2007 expressed an unqualified opinion on those consolidated financial
statements.

KPMG LLP

Albuquerque, New Mexico

February 23, 2007



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FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)



|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                    |  | As of December 31, |          
|                                                                                                                                                                                                    |  | 2006               |           |   | 2005 |  
|ASSETS                                                                                                                                                                                              |  |                    |           |   |      |   |           |  
|Cash and due from banks (note 3)                                                                                                                                                                    |  | $                  | 76,871    |   |      | $ | 60,625    |  
|Interest-bearing deposits with other banks                                                                                                                                                          |  |                    | 2,084     |   |      |   | 102       |  
|Federal funds sold                                                                                                                                                                                  |  |                    | 5,425     |   |      |   |          |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Total cash and cash equivalents                                                                                                                                                                     |  |                    | 84,380    |   |      |   | 60,727    |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Investment securities (note 4):                                                                                                                                                                     |  |                    |           |   |      |   |           |  
|Available for sale (at market, amortized cost of $420,573 and $245,706 at December 31, 2006 and 2005, respectively)                                                                                 |  |                    | 416,002   |   |      |   | 240,434   |  
|Held to maturity (at amortized cost, market of $61,243 and $196,177 at December 31, 2006 and 2005, respectively)                                                                                    |  |                    | 62,638    |   |      |   | 197,521   |  
|Federal Home Loan Bank stock and Federal Reserve Bank stock at cost                                                                                                                                 |  |                    | 14,112    |   |      |   | 16,357    |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Total investment securities                                                                                                                                                                         |  |                    | 492,752   |   |      |   | 454,312   |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Mortgage loans available for sale (note 5)                                                                                                                                                          |  |                    | 25,728    |   |      |   | 18,932    |  
|Loans held for investment, net of unearned interest (note 5)                                                                                                                                        |  |                    | 2,015,879 |   |      |   | 1,506,995 |  
|Less allowance for loan losses (note 5)                                                                                                                                                             |  |                    | (23,125   | ) |      |   | (17,413   | )
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Net loans                                                                                                                                                                                           |  |                    | 2,018,482 |   |      |   | 1,508,514 |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Premises and equipment (net of accumulated depreciation of $24,713 and $19,145 at December 31, 2006 and 2005, respectively) (note
6)                                                                |  |                    | 59,011    |   |      |   | 30,153    |  
|Accrued interest receivable                                                                                                                                                                         |  |                    | 13,879    |   |      |   | 9,043     |  
|Other real estate owned                                                                                                                                                                             |  |                    | 6,396     |   |      |   | 778       |  
|Goodwill (note 7)                                                                                                                                                                                   |  |                    | 66,185    |   |      |   | 43,223    |  
|Intangibles (net of accumulated amortization of $1,663 and $364 at December 31, 2006 and 2005, respectively) (note 7)                                                                               |  |                    | 9,242     |   |      |   | 583       |  
|Cash surrender value of bank owned life insurance (note 1)                                                                                                                                          |  |                    | 33,466    |   |      |   | 31,994    |  
|Deferred tax asset, net (note 11)                                                                                                                                                                   |  |                    |          |   |      |   | 3,612     |  
|Other assets, net                                                                                                                                                                                   |  |                    | 17,779    |   |      |   | 14,632    |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Total assets                                                                                                                                                                                        |  | $                  | 2,801,572 |   |      | $ | 2,157,571 |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|                                                                                                                                                                                                    |  |                   
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                |  |                    |           |   |      |   |           |  
|Liabilities:                                                                                                                                                                                        |  |                    |           |   |      |   |           |  
|Deposits (note 8):                                                                                                                                                                                  |  |                    |           |   |      |   |           |  
|Non-interest-bearing                                                                                                                                                                                |  | $                  | 447,172   |   |      | $ | 385,972   |  
|Interest-bearing                                                                                                                                                                                    |  |                    | 1,673,752 |   |      |   | 1,124,035 |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Total deposits                                                                                                                                                                                      |  |                    | 2,120,924 |   |      |   | 1,510,007 |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Securities sold under agreements to repurchase and federal funds purchased (note 9)                                                                                                                 |  |                    | 149,171   |   |      |   | 229,995   |  
|Federal Home Loan Bank advances and other (note 9)                                                                                                                                                  |  |                    | 155,683   |   |      |   | 198,793   |  
|Junior subordinated debentures (note 10)                                                                                                                                                            |  |                    | 57,730    |   |      |   | 48,971    |  
|Deferred tax liability (note 11)                                                                                                                                                                    |  |                    | 256       |   |      |   |          |  
|Other liabilities                                                                                                                                                                                   |  |                    | 12,916    |   |      |   | 9,626     |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Total liabilities                                                                                                                                                                                   |  |                    | 2,496,680 |   |      |   | 1,997,392 |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Stockholders' equity (note 12):                                                                                                                                                                     |  |                    |           |   |      |   |           |  
|Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding                                                                                                              |  |                    |          |   |      |   |          |  
|Common stock, no par value, authorized 50,000,000 shares and 20,000,000 shares; issued 21,594,410 and 16,211,337; outstanding 20,777,056 and
15,394,404 at December 31, 2006 and 2005, respectively |  |                    | 216,692   |   |      |   | 89,794    |  
|Treasury stock, at cost (817,354 shares and 816,933 shares at December 31, 2006 and 2005, respectively)                                                                                             |  |                    | (6,360    | ) |      |   | (6,349    | )
|Retained earnings                                                                                                                                                                                   |  |                    | 97,394    |   |      |   | 80,255    |  
|Unearned compensation                                                                                                                                                                               |  |                    |          |   |      |   | (147      | )
|Accumulated other comprehensive income (loss)                                                                                                                                                      |  |                    |           |   |      |   |           |  
|Unrealized loss on investment securities, net of tax (notes 4 and 11)                                                                                                                               |  |                    | (2,834    | ) |      |   | (3,374    | )
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Total stockholders' equity                                                                                                                                                                          |  |                    | 304,892   |   |      |   | 160,179   |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  
|Commitments and contingencies (notes 12 and 13)                                                                                                                                                     |  |                    |           |   |      |   |           |  
|Total liabilities and stockholders' equity                                                                                                                                                          |  | $                  | 2,801,572 |   |      | $ | 2,157,571 |  
|                                                                                                                                                                                                    |  |                    |           |   |      |   |           |  

See accompanying notes to consolidated financial statements.



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FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share
amounts)



|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                              |  | Years ended December 31, |        
|                                                              |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|Interest income:                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Interest and fees on loans                                    |  | $                        | 161,616 |   |      | $ | 108,783 |      |  | $ | 83,623 |  
|Interest on marketable securities:                            |  |                          |         |   |      |   |         |      |  |   |        |  
|Taxable                                                       |  |                          | 16,826  |   |      |   | 10,959  |      |  |   | 9,173  |  
|Nontaxable                                                    |  |                          | 2,395   |   |      |   | 1,824   |      |  |   | 573    |  
|Federal funds sold                                            |  |                          | 617     |   |      |   | 266     |      |  |   | 16     |  
|Interest-bearing deposits with other banks                    |  |                          | 398     |   |      |   | 125     |      |  |   | 57     |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Total interest income                                         |  |                          | 181,852 |   |      |   | 121,957 |      |  |   | 93,442 |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Interest expense:                                             |  |                          |         |   |      |   |         |      |  |   |        |  
|Deposits                                                      |  |                          | 50,441  |   |      |   | 24,725  |      |  |   | 19,222 |  
|Short-term borrowings (note 9)                                |  |                          | 10,370  |   |      |   | 6,011   |      |  |   | 1,192  |  
|Long-term debt (note 9)                                       |  |                          | 1,717   |   |      |   | 4,123   |      |  |   | 1,728  |  
|Junior subordinated debentures (note 10)                      |  |                          | 4,523   |   |      |   | 2,853   |      |  |   | 1,733  |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Total interest expense                                        |  |                          | 67,051  |   |      |   | 37,712  |      |  |   | 23,875 |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Net interest income                                           |  |                          | 114,801 |   |      |   | 84,245  |      |  |   | 69,567 |  
|Provision for loan losses (note 5)                            |  |                          | (6,993  | ) |      |   | (3,920  | )    |  |   | (4,500 | )
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Net interest income after provision for loan losses           |  |                          | 107,808 |   |      |   | 80,325  |      |  |   | 65,067 |  
|Non-interest income:                                          |  |                          |         |   |      |   |         |      |  |   |        |  
|Service charges on deposit accounts                           |  |                          | 7,575   |   |      |   | 5,658   |      |  |   | 4,410  |  
|Other banking service fees                                    |  |                          | 867     |   |      |   | 760     |      |  |   | 756    |  
|Credit and debit card transaction fees                        |  |                          | 2,959   |   |      |   | 2,192   |      |  |   | 3,991  |  
|Gain (loss) on sale or call of investment securities (note 4) |  |                          | (140    | ) |      |   | (179    | )    |  |   | 359    |  
|Check imprint income                                          |  |                          | 609     |   |      |   | 589     |      |  |   | 584    |  
|Gain on sale of mortgage loans                                |  |                          | 4,867   |   |      |   | 4,865   |      |  |   | 2,718  |  
|Other                                                         |  |                          | 2,735   |   |      |   | 2,566   |      |  |   | 1,373  |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Total non-interest income                                     |  |                          | 19,472  |   |      |   | 16,451  |      |  |   | 14,191 |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Non-interest expenses:                                        |  |                          |         |   |      |   |         |      |  |   |        |  
|Salaries and employee benefits (notes 12 and 13)              |  |                          | 43,906  |   |      |   | 31,890  |      |  |   | 24,843 |  
|Occupancy                                                     |  |                          | 11,198  |   |      |   | 8,216   |      |  |   | 7,804  |  
|Data processing                                               |  |                          | 5,688   |   |      |   | 3,518   |      |  |   | 2,934  |  
|Credit and debit card interchange                             |  |                          |        |   |      |   |        |      |  |   | 1,580  |  
|Equipment                                                     |  |                          | 6,270   |   |      |   | 4,571   |      |  |   | 4,258  |  
|Legal, accounting, and consulting                             |  |                          | 3,292   |   |      |   | 1,668   |      |  |   | 1,372  |  
|Marketing                                                     |  |                          | 3,873   |   |      |   | 2,955   |      |  |   | 2,288  |  
|Telephone expense                                             |  |                          | 2,172   |   |      |   | 1,202   |      |  |   | 1,219  |  
|Supplies                                                      |  |                          | 1,326   |   |      |   | 915     |      |  |   | 922    |  
|Delivery expenses                                             |  |                          | 1,074   |   |      |   | 873     |      |  |   | 901    |  
|Other real estate owned                                       |  |                          | 371     |   |      |   | 334     |      |  |   | 366    |  
|FDIC insurance premiums                                       |  |                          | 234     |   |      |   | 193     |      |  |   | 181    |  
|Amortization of intangibles                                   |  |                          | 1,299   |   |      |   | 108     |      |  |   | 111    |  
|Check imprint expense                                         |  |                          | 574     |   |      |   | 638     |      |  |   | 537    |  
|Loss on sale of loans                                         |  |                          |        |   |      |   |        |      |  |   | 435    |  
|Other                                                         |  |                          | 10,731  |   |      |   | 6,509   |      |  |   | 5,727  |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Total non-interest expenses                                   |  |                          | 92,008  |   |      |   | 63,590  |      |  |   | 55,478 |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Income before income taxes                                    |  |                          | 35,272  |   |      |   | 33,186  |      |  |   | 23,780 |  
|Income tax expense (note 11)                                  |  |                          | 12,497  |   |      |   | 11,788  |      |  |   | 8,555  |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Net income                                                    |  | $                        | 22,775  |   |      | $ | 21,398  |      |  | $ | 15,225 |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Earnings per share (note 1):                                  |  |                          |         |   |      |   |         |      |  |   |        |  
|Basic earnings per share                                      |  | $                        | 1.28    |   |      | $ | 1.39    |      |  | $ | 0.99   |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  
|Diluted earnings per share                                    |  | $                        | 1.26    |   |      | $ | 1.36    |      |  | $ | 0.99   |  
|                                                              |  |                          |         |   |      |   |         |      |  |   |        |  

See accompanying notes to consolidated financial statements.



A-25



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)



|                                                                                                                                       |  |                          |        |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                       |  | Years ended December 31, |       
|                                                                                                                                       |  | 2006                     |        | 2005 |   |        | 2004 | 
|Net income                                                                                                                             |  | $                        | 22,775 |      | $ | 21,398 |      |  | $ | 15,225 |  
|Other comprehensive income (loss), net of taxunrealized holding gains (losses) on securities available for sale arising during
period |  |                          | 450    |      |   | (2,530 | )    |  |   | (1,065 | )
|Reclassification adjustment for losses (gains) included in net income                                                                  |  |                          | 90     |      |   | 115    |      |  |   | (230   | )
|                                                                                                                                       |  |                          |        |      |   |        |      |  |   |        |  
|Total comprehensive income                                                                                                             |  | $                        | 23,315 |      | $ | 18,983 |      |  | $ | 13,930 |  
|                                                                                                                                       |  |                          |        |      |   |        |      |  |   |        |  

See accompanying notes to consolidated financial statements.



A-26



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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, 2006, 2005, and 2004 |  
|                                                                   |  | Common Stock Shares                           |   |  | Common Stock Amount |         |   | Treasury Stock |   |        | Retained Earnings |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome (Loss) |      |   | Total Stockholders'Equity |  
|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 |  
|                                                                   |  |                                               |   |  |                     |         |   |                |   |        |                   |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|Net income                                                         |  |                                              |   |  |                     |        |   |                |   |       |                   |  |   | 22,775               |   |  |                                            |     |   |                           |   |       |   |  |   | 22,775  |  
|Reclassification of unearned compensation to common stock          |  |                                              |   |  |                     | (147    | ) |                |   |       |                   |  |   |                     |   |  |                                            | 147  |   |                           |   |       |   |  |   |        |  
|Dividends ($0.32) per share                                        |  |                                              |   |  |                     |        |   |                |   |       |                   |  |   | (5,636               | ) |  |                                            |     |   |                           |   |       |   |  |   | (5,636  | )
|Common shares issued from exercise of options (note 12)            |  | 41,000                                        |   |  |                     | 459     |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 459     |  
|Income tax benefit from exercise of options (note 12)              |  |                                              |   |  |                     | 218     |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 218     |  
|Common shares issued in employee benefit plan                      |  | 30,442                                        |   |  |                     | 772     |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 772     |  
|Common shares issued pursuant to dividend reinvestment plan        |  | 6,608                                         |   |  |                     | 163     |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 163     |  
|Common shares issued pursuant to public offering                   |  | 3,162,500                                     |   |  |                     | 74,405  |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 74,405  |  
|Common shares issued pursuant to acquisitions                      |  | 2,134,752                                     |   |  |                     | 48,744  |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 48,744  |  
|Stock options assumed in connection with the acquisition of Access |  |                                              |   |  |                     | 992     |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 992     |  
|Restricted stock awards (note 12)                                  |  | 7,771                                         |   |  |                     | 122     |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 122     |  
|Stock-based compensation expense related to employee stock options |  |                                              |   |  |                     | 1,170   |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | 1,170   |  
|Deferred compensation (note 13)                                    |  | (421                                          | ) |  |                     |        |   |                |   | (11    | )                 |  |   |                     |   |  |                                            |     |   |                           |   |       |   |  |   | (11     | )
|Net change in market value, net of tax                             |  |                                              |   |  |                     |        |   |                |   |       |                   |  |   |                     |   |  |                                            |     |   |                           |   | 540    |   |  |   | 540     |  
|                                                                   |  |                                               |   |  |                     |         |   |                |   |        |                   |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  
|Balance at December 31, 2006                                       |  | 20,777,056                                    |   |  | $                   | 216,692 |   |                | $ | (6,360 | )                 |  | $ | 97,394               |   |  | $                                          |     |   |                           | $ | (2,834 | ) |  | $ | 304,892 |  
|                                                                   |  |                                               |   |  |                     |         |   |                |   |        |                   |  |   |                      |   |  |                                            |      |   |                           |   |        |   |  |   |         |  

See accompanying notes to consolidated financial statements.



A-27



---

##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share
amounts)



|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                      |  | Years ended December 31, |         
|                                                                                                      |  | 2006                     |          |   | 2005 |   |          | 2004 | 
|Operating activities:                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                                            |  | $                        | 22,775   |   |      | $ | 21,398   |      |  | $ | 15,225   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Adjustments to reconcile net income to cash provided by operating activities:                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                                             |  |                          | 6,993    |   |      |   | 3,920    |      |  |   | 4,500    |  
|Provision for decline in value of other real estate owned                                             |  |                          |         |   |      |   |         |      |  |   | 56       |  
|Depreciation and amortization                                                                         |  |                          | 7,217    |   |      |   | 5,508    |      |  |   | 4,997    |  
|Income tax benefit of stock options exercised                                                         |  |                          |         |   |      |   | 189      |      |  |   | 363      |  
|Increase in bank owned life insurance cash surrender value                                            |  |                          | (1,222   | ) |      |   | (1,194   | )    |  |   | (799     | )
|Amortization of securities, net                                                                       |  |                          | (1,040   | ) |      |   | 800      |      |  |   | 858      |  
|Amortization of core deposit intangible                                                               |  |                          | 1,299    |   |      |   |         |      |  |   |         |  
|(Gain) loss on sale of investment securities available for sale                                       |  |                          | 140      |   |      |   | 179      |      |  |   | (359     | )
|Net (loss) gain on sales of other real estate owned                                                   |  |                          | 53       |   |      |   | (183     | )    |  |   | (177     | )
|(Gain) loss on sale of loans                                                                          |  |                          |         |   |      |   | (206     | )    |  |   | 435      |  
|(Gain) loss on disposal of fixed assets                                                               |  |                          | (9       | ) |      |   | (24      | )    |  |   | 174      |  
|Share-based compensation expense                                                                      |  |                          | 1,292    |   |      |   | 156      |      |  |   | 211      |  
|Mortgage loans originated for sale                                                                    |  |                          | (348,783 | ) |      |   | (347,814 | )    |  |   | (177,169 | )
|Proceeds from sale of mortgage loans originated for sale                                              |  |                          | 359,414  |   |      |   | 351,281  |      |  |   | 167,006  |  
|Excess tax benefits from share-based compensation                                                     |  |                          | (218     | ) |      |   |         |      |  |   |         |  
|Increase in accrued interest receivable                                                               |  |                          | (2,637   | ) |      |   | (2,096   | )    |  |   | (1,365   | )
|Deferred taxes                                                                                        |  |                          | 126      |   |      |   | 342      |      |  |   | 512      |  
|Increase in other assets, net                                                                         |  |                          | (2,265   | ) |      |   | (3,046   | )    |  |   | (349     | )
|Increase in other liabilities, net                                                                    |  |                          | 571      |   |      |   | 2,225    |      |  |   | 2,242    |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Total adjustments                                                                                     |  |                          | 20,931   |   |      |   | 10,037   |      |  |   | 1,136    |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                             |  |                          | 43,706   |   |      |   | 31,435   |      |  |   | 16,361   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in loans                                                                                 |  |                          | (305,573 | ) |      |   | (158,180 | )    |  |   | (179,941 | )
|Purchases of investment securities carried at amortized cost                                          |  |                          | (321,317 | ) |      |   | (337,541 | )    |  |   | (9,996   | )
|Maturities of investment securities carried at amortized cost                                         |  |                          | 510,865  |   |      |   | 215,818  |      |  |   | 19,183   |  
|Purchases of investment securities carried at market                                                  |  |                          | (207,830 | ) |      |   | (136,926 | )    |  |   | (140,370 | )
|Maturities of investment securities carried at market                                                 |  |                          | 49,780   |   |      |   | 80,205   |      |  |   | 37,992   |  
|Sale of investment securities available for sale                                                      |  |                          | 99,248   |   |      |   | 10,305   |      |  |   | 34,863   |  
|Proceeds from the sale of loans                                                                       |  |                          |         |   |      |   | 3,555    |      |  |   | 37,649   |  
|Purchases of premises and equipment                                                                   |  |                          | (11,762  | ) |      |   | (5,488   | )    |  |   | (10,488  | )
|Proceeds from sale of and payments on other real estate owned                                         |  |                          | 1,387    |   |      |   | 2,054    |      |  |   | 2,843    |  
|Proceeds from the sale of fixed assets                                                                |  |                          | 35       |   |      |   | 337      |      |  |   |         |  
|Net cash received in business acquisitions                                                            |  |                          | 25,245   |   |      |   |         |      |  |   |         |  
|Purchase of bank owned life insurance                                                                 |  |                          | (250     | ) |      |   | (10,890  | )    |  |   |         |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                                                 |  |                          | (160,172 | ) |      |   | (336,751 | )    |  |   | (208,265 | )
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in interest-bearing deposits                                                             |  |                          | 189,928  |   |      |   | 40,461   |      |  |   | 157,268  |  
|Net increase in non-interest-bearing deposits                                                         |  |                          | 11,192   |   |      |   | 68,243   |      |  |   | 48,160   |  
|Net (decrease) increase in securities sold under agreements to repurchase and federal funds purchased |  |                          | (80,824  | ) |      |   | 160,272  |      |  |   | 6,037    |  
|Proceeds from Federal Home Loan Bank advances                                                         |  |                          | 151,000  |   |      |   | 300,000  |      |  |   | 91,000   |  
|Payments on Federal Home Loan Bank advances and other                                                 |  |                          | (200,940 | ) |      |   | (255,059 | )    |  |   | (153,970 | )
|Proceeds from junior subordinated debentures                                                          |  |                          | 7,732    |   |      |   | 10,310   |      |  |   | 5,155    |  
|Redemption of junior subordinated debentures                                                          |  |                          | (7,732   | ) |      |   |         |      |  |   |         |  
|Proceeds from common stock issued                                                                     |  |                          | 76,108   |   |      |   | 860      |      |  |   | 967      |  
|Costs associated with issuance of common stock                                                        |  |                          | (927     | ) |      |   |         |      |  |   |         |  
|Excess tax benefits from share-based compensation                                                     |  |                          | 218      |   |      |   |         |      |  |   |         |  
|Dividends paid                                                                                        |  |                          | (5,636   | ) |      |   | (4,309   | )    |  |   | (3,598   | )
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                             |  |                          | 140,119  |   |      |   | 320,778  |      |  |   | 151,019  |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|(Decrease) increase in cash and cash equivalents                                                      |  |                          | 23,653   |   |      |   | 15,462   |      |  |   | (40,885  | )
|Cash and cash equivalents at beginning of year                                                        |  |                          | 60,727   |   |      |   | 45,265   |      |  |   | 86,150   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                              |  | $                        | 84,380   |   |      | $ | 60,727   |      |  | $ | 45,265   |  
|                                                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  

Continued



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share
amounts)

(continued)



|                                                                                  |  |                          |          |   |      |   |        |  |   |       
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------ |  | - | ------
|                                                                                  |  | Years ended December 31,
|                                                                                  |  | 2006                     |          |   | 2005 |   | 2004  
|Supplemental disclosure of additional noncash investing and financing activities: |  |                          |          |   |      |   |        |  |   |       
|Additions to other real estate owned in settlement of loans                       |  | $                        | 6,861    |   |      | $ | 1,394  |  | $ | 2,420 
|                                                                                  |  |                          |          |   |      |   |        |  |   |       
|Supplemental disclosure of cash flow information:                                 |  |                          |          |   |      |   |        |  |   |       
|Cash paid for interest                                                            |  | $                        | 66,539   |   |      | $ | 37,109 |  | $ | 23,873
|                                                                                  |  |                          |          |   |      |   |        |  |   |       
|Cash paid for income taxes                                                        |  | $                        | 11,270   |   |      | $ | 11,646 |  | $ | 6,344 
|                                                                                  |  |                          |          |   |      |   |        |  |   |       
|Noncash financing and investing activities:                                       |  |                          |          |   |      |   |        |  |   |       
|Stock options assumed in connection with the acquisitions of Access and NMFC      |  |                          | 992      |   |      |   |       |  |   |      
|Stock issued for the acquisitions                                                 |  |                          | 49,362   |   |      |   |       |  |   |      
|Summary of assets acquired and liabilities assumed through acquisitions:          |  |                          |          |   |      |   |        |  |   |       
|Cash and cash equivalents                                                         |  |                          | 25,245   |   |      |   |       |  |   |      
|Investment securities                                                             |  |                          | 167,480  |   |      |   |       |  |   |      
|Net loans                                                                         |  |                          | 228,880  |   |      |   |       |  |   |      
|Accrued interest receivable                                                       |  |                          | 2,199    |   |      |   |       |  |   |      
|Goodwill and intangibles                                                          |  |                          | 32,920   |   |      |   |       |  |   |      
|Premises and equipment                                                            |  |                          | 23,337   |   |      |   |       |  |   |      
|Other assets, net                                                                 |  |                          | 2,016    |   |      |   |       |  |   |      
|Deferred tax liability                                                            |  |                          | (3,476   | ) |      |   |       |  |   |      
|Deposits                                                                          |  |                          | (409,797 | ) |      |   |       |  |   |      
|FHLB advances                                                                     |  |                          | (6,808   | ) |      |   |       |  |   |      
|Junior subordinated debentures                                                    |  |                          | (8,934   | ) |      |   |       |  |   |      
|Other liabilities                                                                 |  |                          | (2,708   | ) |      |   |       |  |   |      

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, Utah, and Arizona through its wholly
owned subsidiary First Community Bank, (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, Clovis, Gallup, Grants, Las Cruces, Portales, and Moriarty, New Mexico; Denver, Cherry Creek, Littleton, Lakewood, Colorado Springs, Fort Collins, and Longmont, Colorado; Sun City and Phoenix, Arizona;
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 (FRB) 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, 2006 and 2005, the
Company met its minimum required investments.

(c) Loan, 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.

Impaired loans acquired by completion of a transfer, including business combinations, that have evidence of deterioration of
credit quality since origination, and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable (Impaired Loans) are initially recorded at fair value, as
determined by the present value of expected future cash flows, with no valuation allowance. There were no loans acquired in the acquisitions of Access and NMFC that were considered to be impaired, under the above criteria, at acquisition.

The Companys loan portfolio is concentrated in New Mexico, Colorado, Utah, and Arizona. 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.



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FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(d) Premises
and Equipment

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

(e) 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 2006, 2005, and 2004, 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, and has found no indication of impairment. If such impairment is indicated,
recoverability of the asset is assessed based on expected undiscounted net cash flows. Any impairment losses would be 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 $33.5 million and $32.0 million at December 31, 2006 and 2005, respectively. During 2006, the Company purchased additional policies on officers with a value of $250,000. 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, $1.2 million, and $799,000 in 2006, 2005, and 2004, 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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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,                        
|                                      |  | 2006                                             |        | 2005                |            | 2004           
|                                      |  | 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                            |  | $                                                | 22,775 |                     | 17,736,860 |                 | $ | 1.28                  |  | $                   | 21,398 |                 | 15,391,863 |                       | $ | 1.39                |  | $               | 15,225 |  | 15,312,068 |  | $ | 0.99
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     
|Effect of dilutive securities options |  |                                                  |       |                     | 325,071    |                 |   |                       |  |                     |       |                 | 297,582    |                       |   |                     |  |                 |       |  | 131,468    |  |   |     
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     
|Diluted EPS:                          |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     
|Net income                            |  | $                                                | 22,775 |                     | 18,061,931 |                 | $ | 1.26                  |  | $                   | 21,398 |                 | 15,689,445 |                       | $ | 1.36                |  | $               | 15,225 |  | 15,443,536 |  | $ | 0.99
|                                      |  |                                                  |        |                     |            |                 |   |                       |  |                     |        |                 |            |                       |   |                     |  |                 |        |  |            |  |   |     

For the years ended December 31, 2006, 2005, and 2004, approximately 110,000, 75,000, and
zero stock options outstanding, respectively, were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were equal to or greater than the average share price of the common shares, and
therefore, their inclusion would have been anti-dilutive.

(k) Share-Based Compensation

Effective on January 1, 2006, the Company adopted SFAS 123R using the modified prospective method, which requires measurement of compensation cost
for all share-based awards at fair value on the grant date and recognition of compensation expense over the requisite service period for awards expected to vest. The fair value of stock option grants was determined using the Black-Scholes valuation
model, which is consistent with the valuation techniques previously utilized for options in footnote disclosures required under SFAS 123 as amended by SFAS 148. The fair value of restricted stock awards is determined based on the number of shares
granted and the quoted price of our common stock. Such fair values are recognized as compensation expense over the requisite service period, net of estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred. In
conjunction with the adoption of SFAS 123R, the Company changed its method of attributing the value of share-based compensation to expense from the accelerated multiple-option approach to the straight-line single options method for all future
share-based grants. Compensation expense for all share-based payment awards granted on or prior to January 1, 2006 will continue to be recognized using the accelerated multiple-option approach. The Company recorded approximately $1.3 million of
pretax share-based compensation expense, pursuant to the grant of stock options and restricted stock, in salaries and employee benefits in 2006. Compensation expense of approximately $156,000 and $211,000 was recognized in 2005 and 2004,
respectively, as required under previous accounting standards.

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 reduces net operating cash flows and increases net financing cash
flows in periods after the effective date. In addition, SFAS 123R requires that any unearned or deferred compensation related to share-based awards be eliminated against the appropriate equity account. As such, effective January 1, 2006, the
Company reclassified approximately $147,000 of unearned compensation to common stock.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Prior to
January 1, 2006, the Company applied the intrinsic value-based method of accounting prescribed by APB 25 and related interpretations in accounting for the Companys fixed plan stock options. As such, compensation expense was recorded on
the date of grant only if the current market price of the underlying stock exceeded the exercise price. Had compensation costs been determined consistent with the fair value method of SFAS 123 at the grant dates for awards, the Companys net
income and earnings per common share would have changed to the pro forma amounts indicated below.



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

See Note 12 for further discussion of the Companys share-based employee compensation.

(l) Reclassifications

Certain previous period balances have been reclassified to conform to the 2006 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

SEC Staff Guidance  Quantifying Financial Statement Misstatements. In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, which discusses the process of quantifying financial statement misstatements. The
interpretation was adopted during the fourth quarter of 2006 and did not have any impact on the Companys consolidated financial statements.

In September 2006, the FASB issued EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). Under EITF 06-4, an
employer that enters into an endorsement split-dollar life insurance arrangement that provides an employee with a postretirement benefit should recognize a liability for the future benefits promised based on the substantive agreement with the
employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. Management has not yet determined the impact on the Companys consolidated financial statements.

On September 15, 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 will apply



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

whenever other standards require
or permit assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. Early adoption is permitted. Management does not expect the adoption of SFAS 157 to have a material impact on the Companys consolidated financial statements.

On July 13, 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. The guidance in FIN 48 is effective for reporting periods beginning after December 15, 2006. Management is currently evaluating the impact of FIN 48 on the Companys consolidated financial
statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments
(SFAS 155). SFAS 155 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 addresses issues from SFAS 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. Under the original guidance, SFAS 155 removed the exemption for
securitized financial instruments and included scenarios where certain discount mortgage-backed securities (MBSs) and discount collateralized mortgage obligations (CMOs) with embedded derivative components could
be subject to the bifurcation rules of SFAS 133, and therefore be marked to market through earnings. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after
September 15, 2006. In October 2006, the FASB met to discuss implementation issues and industry concerns surrounding SFAS 155. In January 2007, the FASB issued SFAS 133 Implementation Issue No. B40. Implementation Issue No. B40 includes a
narrow scope exception from paragraph 13(b) of SFAS 133 for securitized interests that contain only an embedded derivative that is tied to the prepayment risk of the underlying prepayable financial assets, thereby excluding certain discount
MBSs and CMOs from the bifurcation test. The guidance in Implementation Issue No. B40 generally applies to securitized interests in prepayable financial assets acquired after the adoption of SFAS 155. Management does not expect the
adoption of SFAS 155 or the guidance contained in Implementation Issue No. B40 to have a material impact on the Companys consolidated financial statements.

On November 3, 2005, the FASB issued FASB Staff Position (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 adoption of FSP 115-1 on January 1, 2006 did not have a material impact on the Companys consolidated financial statements.

2. Business
Acquisitions

On January 3, 2006, the Company acquired 100 percent of the outstanding common shares of Access Anytime Bancorp, Inc.
(Access). The results of Access operations have been included in the consolidated financial statements since that date. 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 gained the opportunity to expand its footprint to attractive markets, strengthening the Banks market
position.

The aggregate purchase price of Access was approximately $32.6 million, including approximately $31.7 million of common stock
and approximately $992,000 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. The Company assumed 74,196 options with a weighted average fair value of approximately $13.37
determined based on the market price of the Companys common stock on the date of acquisition of $24.29.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The following
table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands).



|                               |  |   |        
|------------------------------ |  | - | -------
|At January 3, 2006             |  |  
|Cash and cash equivalents      |  | $ | 17,764 
|Investments                    |  |   | 110,567
|Loans                          |  |   | 195,102
|Premises and equipment         |  |   | 14,519 
|Intangible assets              |  |   | 6,378  
|Goodwill                       |  |   | 18,584 
|Other assets                   |  |   | 2,818  
|                               |  |   |        
|Total assets acquired          |  |   | 365,732
|Deposits                       |  |   | 314,206
|Borrowings                     |  |   | 6,808  
|Junior subordinated debentures |  |   | 8,934  
|Deferred tax liability         |  |   | 1,621  
|Other liabilities              |  |   | 1,475  
|                               |  |   |        
|Total liabilities              |  |   | 333,044
|                               |  |   |        
|Net assets acquired            |  | $ | 32,688 
|                               |  |   |        

Of the $6.4 million of acquired intangible assets, the total amount was assigned to the core
deposit premium intangible, subject to amortization. The core deposit premiums are being amortized over their estimated useful lives of ten years.

On January 10, 2006, the Company acquired 100 percent of the outstanding common shares of New Mexico Financial Corporation (NMFC). The results of NMFCs operations have been included in the consolidated financial
statements since that date. 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 benefited from the increased scale and scope that resulted from the
acquisition and strengthened the Banks market position.

The purchase price of $17.7 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 $24.61 per share
determined based on the average market price of the Companys common shares over the 2-day period before and after the measurement date of November 18, 2005 on which our stock price resulted in the minimum exchange ratio of 84.83, through
closing, pursuant to the terms of the purchase agreement.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The following
table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands).



|                          |  |   |        
|------------------------- |  | - | -------
|At January 10, 2006       |  |  
|Cash and cash equivalents |  | $ | 7,481  
|Investments               |  |   | 56,913 
|Loans                     |  |   | 33,778 
|Premises and equipment    |  |   | 8,818  
|Intangible assets         |  |   | 3,580  
|Goodwill                  |  |   | 4,378  
|Other assets              |  |   | 1,397  
|                          |  |   |        
|Total assets acquired     |  |   | 116,345
|Deposits                  |  |   | 95,591 
|Deferred tax liability    |  |   | 1,855  
|Other liabilities         |  |   | 1,233  
|                          |  |   |        
|Total liabilities         |  |   | 98,679 
|                          |  |   |        
|Net assets acquired       |  | $ | 17,666 
|                          |  |   |        

Of the $3.6 million of acquired intangible assets, the total amount was assigned to the core
deposit premium intangible, subject to amortization. The core deposit premiums are being amortized over their estimated useful lives of ten years.

In conjunction with the acquisitions of Access and NMFC, the Company incurred approximately $618,000 in costs associated with the issuance of common stock, which was recorded as a reduction of stockholders equity.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The following
table reflects the pro forma results of operations assuming that the acquisitions were consummated on January 1 of the earliest indicated period. The pro forma adjustments are based on information available and certain assumptions that
management believes are reasonable. Certain acquisition related adjustments are not included in the pro forma information since they were recorded after completion of the acquisitions and are not indicative of what the historical results of the
combined company would have been had the companies actually been combined during the periods presented. This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of future operations
that would have been achieved had the acquisitions taken place at the beginning of 2005. Pro forma information follows:



|                                                    |  |                                                 |         |   |                                       |   |         |  
|--------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ------------------------------------- | - | ------- | -
|                                                    |  | Twelve Months Ended December 31, 2006           |         |   | Twelve Months Ended December 31, 2005 |  
|                                                    |  | (Dollars in thousands except per share amounts) |        
|Interest income:                                    |  |                                                 |         |   |                                       |   |         |  
|Interest and fees on loans                          |  | $                                               | 161,616 |   |                                       | $ | 128,031 |  
|Interest on marketable securities:                  |  |                                                 |         |   |                                       |   |         |  
|Taxable securities                                  |  |                                                 | 16,826  |   |                                       |   | 19,248  |  
|Non-taxable securities                              |  |                                                 | 2,395   |   |                                       |   | 1,844   |  
|Federal funds sold and interest bearing deposits    |  |                                                 | 1,015   |   |                                       |   | 417     |  
|                                                    |  |                                                 |         |   |                                       |   |         |  
|Total interest income                               |  |                                                 | 181,852 |   |                                       |   | 149,540 |  
|Interest expense:                                   |  |                                                 |         |   |                                       |   |         |  
|Deposits                                            |  |                                                 | 50,441  |   |                                       |   | 31,845  |  
|Short-term borrowings                               |  |                                                 | 10,370  |   |                                       |   | 6,864   |  
|Long-term debt                                      |  |                                                 | 1,717   |   |                                       |   | 4,123   |  
|Junior subordinated debentures                      |  |                                                 | 4,523   |   |                                       |   | 3,447   |  
|                                                    |  |                                                 |         |   |                                       |   |         |  
|Total interest expense                              |  |                                                 | 67,051  |   |                                       |   | 46,279  |  
|                                                    |  |                                                 |         |   |                                       |   |         |  
|Net interest income                                 |  |                                                 | 114,801 |   |                                       |   | 103,261 |  
|Provision for loan losses                           |  |                                                 | (6,993  | ) |                                       |   | (2,204  | )
|                                                    |  |                                                 |         |   |                                       |   |         |  
|Net interest income after provision for loan losses |  |                                                 | 107,808 |   |                                       |   | 101,057 |  
|Non-interest income                                 |  |                                                 | 19,472  |   |                                       |   | 21,401  |  
|Non-interest expenses                               |  |                                                 | 92,008  |   |                                       |   | 80,750  |  
|                                                    |  |                                                 |         |   |                                       |   |         |  
|Income before income taxes                          |  |                                                 | 35,272  |   |                                       |   | 41,708  |  
|Income tax expense                                  |  |                                                 | 12,497  |   |                                       |   | 14,807  |  
|                                                    |  |                                                 |         |   |                                       |   |         |  
|Net income                                          |  | $                                               | 22,775  |   |                                       | $ | 26,901  |  
|                                                    |  |                                                 |         |   |                                       |   |         |  
|Basic earnings per share                            |  | $                                               | 1.28    |   |                                       | $ | 1.53    |  
|                                                    |  |                                                 |         |   |                                       |   |         |  
|Diluted earnings per share                          |  | $                                               | 1.26    |   |                                       | $ | 1.51    |  
|                                                    |  |                                                 |         |   |                                       |   |         |  

During the third quarter of 2006, the Company announced the signing of a definitive agreement to
acquire Front Range Capital Corporation (Front Range) and its wholly owned subsidiary, Heritage Bank, for $72 million in cash. Front Range is a bank holding company headquartered in Broomfield, Colorado and Heritage Bank is a Colorado
state chartered bank with approximately $450 million in assets operating thirteen offices in the Denver-Boulder-Longmont triangle of northern Colorado. The Company expects to acquire approximately $314 million in loans and $361 million in deposits
in conjunction with the acquisition. In December 2006, the Company completed the sale, in a public offering, of approximately 3.2 million shares of its common stock and intends to use significantly all of the $74.4 million in net proceeds from
the offering to pay the purchase price for the acquisition. The acquisition is anticipated to close in early March 2007. The transaction has been approved by the Front Range shareholders, the Federal Reserve Bank of Kansas City, the Colorado
Division of Banking, and the Financial Institutions Division for the State of New Mexico.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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 $9.6 million and $12.1 million at December 31, 2006 and 2005,
respectively.

4. Investment Securities

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



|                                                           |  |                        |         |                        |   |                         |  |                        |       |  |   |        
|---------------------------------------------------------- |  | ---------------------- | ------- | ---------------------- | - | ----------------------- |  | ---------------------- | ----- |  | - | -------
|                                                           |  | Amortized cost         |         | Gross unrealized gains |   | Gross unrealized losses |  | Estimated market value
|                                                           |  | (Dollars in thousands)
|As of December 31, 2006                                    |  |                        |         |                        |   |                         |  |                        |       |  |   |        
|Obligations of the U.S. TreasuryHeld to maturity          |  | $                      | 1,000   |                        | $ |                        |  | $                      | 7     |  | $ | 993    
|Obligations of U.S. government agenciesAvailable for sale |  |                        | 241,735 |                        |   | 24                      |  |                        | 3,454 |  |   | 238,305
|Mortgage-backed securities:                                |  |                        |         |                        |   |                         |  |                        |       |  |   |        
|Pass-through certificates:                                 |  |                        |         |                        |   |                         |  |                        |       |  |   |        
|Available for sale                                         |  |                        | 37,772  |                        |   | 69                      |  |                        | 317   |  |   | 37,524 
|Held to maturity                                           |  |                        | 36,789  |                        |   | 69                      |  |                        | 1,321 |  |   | 35,537 
|Collateralized mortgage obligationsAvailable for sale     |  |                        | 114,049 |                        |   | 190                     |  |                        | 921   |  |   | 113,318
|Obligations of states and political subdivisions:          |  |                        |         |                        |   |                         |  |                        |       |  |   |        
|Available for sale                                         |  |                        | 27,017  |                        |   | 80                      |  |                        | 242   |  |   | 26,855 
|Held to maturity                                           |  |                        | 24,849  |                        |   | 5                       |  |                        | 141   |  |   | 24,713 
|Federal Home Loan Bank stock                               |  |                        | 9,397   |                        |   |                        |  |                        |      |  |   | 9,397  
|Federal Reserve Bank stock                                 |  |                        | 4,715   |                        |   |                        |  |                        |      |  |   | 4,715  
|                                                           |  |                        |         |                        |   |                         |  |                        |       |  |   |        
|                                                           |  | $                      | 497,323 |                        | $ | 437                     |  | $                      | 6,403 |  | $ | 491,357
|                                                           |  |                        |         |                        |   |                         |  |                        |       |  |   |        
|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
|                                                           |  |                        |         |                        |   |                         |  |                        |       |  |   |        



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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, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.



|                              |  |                        |         |                        |   |        
|----------------------------- |  | ---------------------- | ------- | ---------------------- | - | -------
|                              |  | Amortized Cost         |         | Estimated Market Value
|                              |  | (Dollars in thousands)
|Within one year:              |  |                        |         |                        |   |        
|Available for sale            |  | $                      | 88,564  |                        | $ | 88,129 
|Held to maturity              |  |                        | 1,400   |                        |   | 1,393  
|One through five years:       |  |                        |         |                        |   |        
|Available for sale            |  |                        | 151,702 |                        |   | 148,692
|Held to maturity              |  |                        | 2,523   |                        |   | 2,482  
|Five through ten years:       |  |                        |         |                        |   |        
|Available for sale            |  |                        | 10,974  |                        |   | 10,923 
|Held to maturity              |  |                        | 5,939   |                        |   | 5,841  
|After ten years:              |  |                        |         |                        |   |        
|Available for sale            |  |                        | 17,512  |                        |   | 17,416 
|Held to maturity              |  |                        | 15,987  |                        |   | 15,990 
|Mortgage-backed securities(a) |  |                        | 188,610 |                        |   | 186,379
|Federal Home Loan Bank stock  |  |                        | 9,397   |                        |   | 9,397  
|Federal Reserve Bank stock    |  |                        | 4,715   |                        |   | 4,715  
|                              |  |                        |         |                        |   |        
|Total                         |  | $                      | 497,323 |                        | $ | 491,357
|                              |  |                        |         |                        |   |        

---

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

Marketable securities available for sale with a market value of approximately $373.7 million and marketable securities held to maturity with an amortized cost of approximately $42.6 million were pledged to
collateralize deposits as required by law and for other purposes at December 31, 2006.

Proceeds from sales of investments in debt
securities for the years ended December 31, 2006, 2005, 2004 were $99.2 million, $10.3 million, and $34.9 million, respectively. Gross losses realized were $211,000 in 2006, $186,000 in 2005, and $22,000 in 2004. Gross gains realized were
$69,000 in 2006, zero in 2005, and $381,000 in 2004. 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     
|As of December 31, 2006                          |  | Fair Value              |         | UnrealizedLoss             |   | Fair Value |  | UnrealizedLoss |         | Fair Value |   | UnrealizedLoss
|                                                 |  | (Dollars in thousands) 
|Obligations of the U.S. Treasury                 |  | $                       |        |                            | $ |           |  | $              | 993     |            | $ | 7              |  | $ | 993     |  | $ | 7    
|Obligations of U.S. government agencies          |  |                         | 101,383 |                            |   | 209        |  |                | 130,216 |            |   | 3,245          |  |   | 231,599 |  |   | 3,454
|Mortgage-backed securities                       |  |                         | 69,226  |                            |   | 433        |  |                | 83,804  |            |   | 2,126          |  |   | 153,030 |  |   | 2,559
|Obligations of states and political subdivisions |  |                         | 15,243  |                            |   | 134        |  |                | 11,338  |            |   | 249            |  |   | 26,581  |  |   | 383  
|                                                 |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|Total                                            |  | $                       | 185,852 |                            | $ | 776        |  | $              | 226,351 |            | $ | 5,627          |  | $ | 412,203 |  | $ | 6,403
|                                                 |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|                                                 |  |                         |         |                            |   |           
|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
|                                                 |  |                         |         |                            |   |            |  |                |         |            |   |                |  |   |         |  |   |      

5. Loans

Following is a summary of loans by major categories:



|                                  |  |                        |           |      |   |          
|--------------------------------- |  | ---------------------- | --------- | ---- | - | ---------
|                                  |  | As of December 31,    
|                                  |  | 2006                   |           | 2005
|                                  |  | (Dollars in thousands)
|Commercial                        |  | $                      | 295,566   |      | $ | 201,816  
|Consumer and other                |  |                        | 55,647    |      |   | 27,888   
|Real estatecommercial            |  |                        | 714,086   |      |   | 653,566  
|Real estateone- to four-family   |  |                        | 217,247   |      |   | 170,158  
|Real estateconstruction          |  |                        | 733,333   |      |   | 453,567  
|Mortgage loans available for sale |  |                        | 25,728    |      |   | 18,932   
|                                  |  |                        |           |      |   |          
|Total                             |  | $                      | 2,041,607 |      | $ | 1,525,927
|                                  |  |                        |           |      |   |          

Included in the above balances are net deferred fees of approximately $6.2 million and $5.7
million, at December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, approximately $174 million and $212 million in loans were pledged as collateral for FHLB advances.

At December 31, 2006, loans were comprised of fixed and variable rate instruments as follows:



|                        |  |                        |          
|----------------------- |  | ---------------------- | ---------
|                        |  | (Dollars in thousands)
|Loans at fixed rates    |  | $                      | 400,394  
|Loans at variable rates |  |                        | 1,641,213
|                        |  |                        |          
|Total                   |  | $                      | 2,041,607
|                        |  |                        |          

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, 2006 are as follows:



|                                  |  |                        |           |              |   |               |  |       |         |  |   |          
|--------------------------------- |  | ---------------------- | --------- | ------------ | - | ------------- |  | ----- | ------- |  | - | ---------
|                                  |  | Within 1 year          |           | 1 to 5 Years |   | After 5 Years |  | Total
|                                  |  | (Dollars in thousands)
|Commercial                        |  | $                      | 225,638   |              | $ | 67,087        |  | $     | 2,841   |  | $ | 295,566  
|Real estate                       |  |                        | 1,133,625 |              |   | 436,360       |  |       | 94,681  |  |   | 1,664,666
|Consumer                          |  |                        | 20,791    |              |   | 26,951        |  |       | 7,905   |  |   | 55,647   
|Mortgage loans available for sale |  |                        | 25,728    |              |   |              |  |       |        |  |   | 25,728   
|                                  |  |                        |           |              |   |               |  |       |         |  |   |          
|Total                             |  | $                      | 1,405,782 |              | $ | 530,398       |  | $     | 105,427 |  | $ | 2,041,607
|                                  |  |                        |           |              |   |               |  |       |         |  |   |          

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



|                                    |  |                          |        |   |      |   |        |      |  |   |        |  
|----------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                    |  | Years ended December 31, |       
|                                    |  | 2006                     |        |   | 2005 |   |        | 2004 | 
|                                    |  | (Dollars in thousands)   |       
|Balance at beginning of year        |  | $                        | 17,413 |   |      | $ | 15,331 |      |  | $ | 14,121 |  
|Provision charged to operations     |  |                          | 6,993  |   |      |   | 3,920  |      |  |   | 4,500  |  
|Loans charged-off                   |  |                          | (3,911 | ) |      |   | (2,373 | )    |  |   | (3,703 | )
|Recoveries                          |  |                          | 502    |   |      |   | 535    |      |  |   | 413    |  
|Allowance related to acquired loans |  |                          | 2,128  |   |      |   |       |      |  |   |       |  
|                                    |  |                          |        |   |      |   |        |      |  |   |        |  
|Balance at end of year              |  | $                        | 23,125 |   |      | $ | 17,413 |      |  | $ | 15,331 |  
|                                    |  |                          |        |   |      |   |        |      |  |   |        |  

The recorded investment in loans, which are considered impaired, was approximately $13.9 million
at December 31, 2006, $6.7 million at December 31, 2005, and $8.0 million at December 31, 2004. The average investment in loans for which impairment has been recognized was approximately $12.4 million in 2006, $6.0 million in 2005,
and $8.6 million in 2004. The allowance for loan losses related to these loans was approximately $2.0 million at December 31, 2006, $1.2 million at December 31, 2005, and $829,000 at December 31, 2004. The allowance for impaired loans
is included in the allowance for loan losses. Interest income recognized on impaired loans was zero in 2006, 2005, and 2004.

Loans on
which the accrual of interest has been discontinued amounted to approximately $13.9 million, $6.7 million, and $8.0 million at December 31, 2006, 2005, and 2004, respectively. If interest on such loans had been accrued, such income would have
been approximately $934,000 in 2006, $334,000 in 2005, and $348,000 in 2004. Actual interest income on those loans, which is recorded only when received, amounted to zero in 2006, 2005, and 2004.

As of December 31, 2006 and 2005, loans outstanding 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) totaled $8.3 million and $10.2 million, respectively. In the opinion of management, all transactions entered into between the
Company and such related parties have been, and are, in the ordinary course of business, made on the same terms and conditions as similar transactions with unaffiliated persons.



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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,     |        
|                                               |  | 2006                         |  |                        | 2005    |  
|                                               |  |                              |  | (Dollars in thousands) |        
|Land                                           |  |                             |  | $                      | 9,196   |   |  | $ | 2,930   |  
|Building and leasehold improvements            |  | 10-30                        |  |                        | 43,617  |   |  |   | 23,905  |  
|Equipment                                      |  | 3-5                          |  |                        | 30,911  |   |  |   | 22,463  |  
|                                               |  |                              |  |                        |         |   |  |   |         |  
|                                               |  |                              |  |                        | 83,724  |   |  |   | 49,298  |  
|Less accumulated depreciation and amortization |  |                              |  |                        | (24,713 | ) |  |   | (19,145 | )
|                                               |  |                              |  |                        |         |   |  |   |         |  
|                                               |  |                              |  | $                      | 59,011  |   |  | $ | 30,153  |  
|                                               |  |                              |  |                        |         |   |  |   |         |  

Depreciation and amortization expense on premises and equipment in 2006, 2005, and 2004 was
approximately $6.2 million, $4.3 million, and $4.0 million, respectively.

7. Goodwill and Intangible Assets

Goodwill primarily relates to the Companys acquisition of First Community Industrial Bank (FCIB) in October of 2002, and to the
acquisitions of Access and NMFC in January of 2006. The goodwill recognized in the FCIB acquisition totaled approximately $42.9 million and is expected to be fully deductible for tax purposes. Of the goodwill recognized in the Access acquisition of
approximately $18.6 million, approximately $9.3 million is not expected to be deductible for tax purposes. The goodwill recognized in the NMFC acquisition of approximately $4.4 million is not expected to be deductible for tax purposes.

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



|                             |  |                          |        |      |   |       
|---------------------------- |  | ------------------------ | ------ | ---- | - | ------
|                             |  | Years ended December 31,
|                             |  | 2006                     |        | 2005
|                             |  | (Dollars in thousands)  
|Balance at beginning of year |  | $                        | 43,223 |      | $ | 43,223
|Goodwill acquired            |  |                          | 22,962 |      |   |      
|Impairment losses            |  |                          |       |      |   |      
|                             |  |                          |        |      |   |       
|Balance at end of year       |  | $                        | 66,185 |      | $ | 43,223
|                             |  |                          |        |      |   |       

The Companys core deposit intangibles primarily relate to the acquisition of FCIB in October
of 2002 and to the acquisitions of Access and NMFC in January of 2006. Core deposit intangibles recognized in the FCIB, Access, and NMFC acquisitions totaled approximately $881,000, $6.4 million, and $3.6 million, respectively. The core deposit
intangibles are being amortized over their estimated useful lives of ten years.



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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,     |       
|                             |  | 2006                   |        |   | 2005 |  
|                             |  | (Dollars in thousands) |       
|Core deposit intangibles     |  | $                      | 10,905 |   |      | $ | 947  |  
|Accumulated amortization     |  |                        | (1,663 | ) |      |   | (364 | )
|                             |  |                        |        |   |      |   |      |  
|Net core deposit intangibles |  | $                      | 9,242  |   |      | $ | 583  |  
|                             |  |                        |        |   |      |   |      |  

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



|                                           |  |                           |      
|------------------------------------------ |  | ------------------------- | -----
|                                           |  | Years ending December 31,
|                                           |  | (Dollars in thousands)   
|2007                                       |  | $                         | 1,257
|2008                                       |  |                           | 1,213
|2009                                       |  |                           | 1,168
|2010                                       |  |                           | 1,122
|2011                                       |  |                           | 1,019
|Thereafter                                 |  |                           | 3,463
|                                           |  |                           |      
|Total expected annual amortization expense |  | $                         | 9,242
|                                           |  |                           |      

8. Deposits

Following is a summary of interest-bearing deposits:



|                                   |  |                        |           |      |   |          
|---------------------------------- |  | ---------------------- | --------- | ---- | - | ---------
|                                   |  | As of December 31,    
|                                   |  | 2006                   |           | 2005
|                                   |  | (Dollars in thousands)
|Interest-bearing checking accounts |  | $                      | 322,717   |      | $ | 276,947  
|Money market savings               |  |                        | 222,263   |      |   | 190,930  
|Regular savings                    |  |                        | 107,812   |      |   | 74,831   
|Time:                              |  |                        |           |      |   |          
|Denominations $100,000 and over    |  |                        | 634,334   |      |   | 340,701  
|Denominations under $100,000       |  |                        | 386,626   |      |   | 240,626  
|                                   |  |                        |           |      |   |          
|                                   |  | $                      | 1,673,752 |      | $ | 1,124,035
|                                   |  |                        |           |      |   |          

At December 31, 2006, the scheduled maturities of all time deposits are as follows:



|           |  |                           |          
|---------- |  | ------------------------- | ---------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2007       |  | $                         | 813,997  
|2008       |  |                           | 90,682   
|2009       |  |                           | 43,393   
|2010       |  |                           | 42,697   
|2011       |  |                           | 25,535   
|Thereafter |  |                           | 4,656    
|           |  |                           |          
|           |  | $                         | 1,020,960
|           |  |                           |          



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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 $152.2 million
and $227.7 million, at December 31, 2006 and 2005, respectively. Interest expense included in the consolidated statements of operations was approximately $6.2 million, $2.0 million, and $198,000 for the years ended December 31, 2006, 2005,
and 2004, respectively.

Securities sold under agreements to repurchase are summarized as follows:



|                                                 |  |                          |         |   |      |   |         |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2006                     |         |   | 2005 |  
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 149,171 |   |      | $ | 223,195 |  
|Weighted average interest rate                   |  |                          | 4.44    | % |      |   | 3.54    | %
|Maximum amount outstanding at any month end      |  | $                        | 162,223 |   |      | $ | 223,195 |  
|Average balance outstanding during the period    |  | $                        | 149,765 |   |      | $ | 85,367  |  
|Weighted average interest rate during the period |  |                          | 4.17    | % |      |   | 2.39    | %

Federal Funds Purchased

Federal funds purchased generally mature within one to four days from the transaction date. As of December 31, 2006 and 2005, federal funds purchased
totaled zero and $6.8 million, respectively. Interest expense included in the consolidated statements of operations was approximately $3,000, $3,000, and $1,000 for the years ended December 31, 2006, 2005, and 2004, respectively. As of
December 31, 2006, the Company had available unused federal funds borrowing capacity of approximately $57.5 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,    
|                                                                                                                                                               |  | 2006                   |         | 2005
|                                                                                                                                                               |  | (Dollars in thousands)
|$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 5.27%, due on January 2, 2007                                                                                    |  |                        | 20,000  |      |   |       
|$21 million note payable to FHLB, interest at 5.49%, due on January 2, 2007                                                                                    |  |                        | 21,000  |      |   |       
|$20 million note payable to FHLB, interest at 5.27%, due on January 3, 2007                                                                                    |  |                        | 20,000  |      |   |       
|$25 million note payable to FHLB, interest at 5.27%, due on January 4, 2007                                                                                    |  |                        | 25,000  |      |   |       
|$30 million note payable to FHLB, interest at 5.24%, due on January 12, 2007                                                                                   |  |                        | 30,000  |      |   |       
|$20 million note payable to FHLB, interest only at 5.37% payable monthly, due on February 28, 2007                                                             |  |                        | 20,000  |      |   |       
|$5 million note payable to FHLB, interest at 2.99%, payable in monthly principal and interest installments of approximately $90,000 through
September 4, 2007  |  |                        | 793     |      |   |       
|$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 |  |                        | 3,889   |      |   | 8,014  
|$7.5 million note payable to FHLB, interest at 5.75%, payable in monthly principal and interest installments of approximately $144,000 through
August 1, 2011  |  |                        | 7,064   |      |   |       
|$7.5 million note payable to FHLB, interest at 5.78%, payable in monthly principal and interest installments of approximately $109,000 through
August 1, 2013  |  |                        | 7,207   |      |   |       
|Other note payable                                                                                                                                             |  |                        | 730     |      |   | 779    
|                                                                                                                                                               |  |                        |         |      |   |        
|Total FHLB Advances and Other                                                                                                                                  |  | $                      | 155,683 |      | $ | 198,793
|                                                                                                                                                               |  |                        |         |      |   |        

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, 2006, the Company had available unused borrowing capacity
from the FHLB for advances of approximately $387 million.

Included in the above FHLB advances are short-term FHLB advances (original term
less than one year) that totaled approximately $136 million and $65 million at December 31, 2006 and 2005, respectively. The weighted average interest rate on short-term FHLB advances was 5.31% and 3.93% at December 31, 2006 and 2005,
respectively.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Short-term FHLB
advances are summarized as follows:



|                                                 |  |                          |         |   |      |   |         |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                 |  | Years ended December 31, |        
|                                                 |  | 2006                     |         |   | 2005 |  
|                                                 |  | (Dollars in thousands)   |        
|Balance                                          |  | $                        | 136,000 |   |      | $ | 65,000  |  
|Weighted average interest rate                   |  |                          | 5.31    | % |      |   | 3.93    | %
|Maximum amount outstanding at any month end      |  | $                        | 144,000 |   |      | $ | 150,000 |  
|Average balance outstanding during the period    |  | $                        | 79,099  |   |      | $ | 117,475 |  
|Weighted average interest rate during the period |  |                          | 5.21    | % |      |   | 3.27    | %

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, 2006 and 2005 were approximately $730,000 and $779,000, respectively.

As of December 31, 2006, the contractual maturities of FHLB advances and other are as follows:



|           |  |                           |        
|---------- |  | ------------------------- | -------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2007       |  | $                         | 143,006
|2008       |  |                           | 2,462  
|2009       |  |                           | 2,607  
|2010       |  |                           | 2,761  
|2011       |  |                           | 2,346  
|Thereafter |  |                           | 2,501  
|           |  |                           |        
|           |  | $                         | 155,683
|           |  |                           |        

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%. 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. The Company did not defer any payments of interest and on December 18, 2006, the Securities were redeemed at par. In connection with the early redemption the
Company expensed $191,000 of related offering costs which is included in other non-interest expenses in the Companys 2006 Consolidated Statement of Operations.

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% (8.82% at December 31, 2006). 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, 2006, 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 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 (7.62% at December 31, 2006). 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, 2006, 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 (7.11% at December 31, 2006). 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, 2006, the Company has not deferred any payments of
interest.

On November 22, 2006, the Company formed First State NM Statutory Trust V (Trust V) for the purpose of issuing
trust preferred securities (Trust V Securities) in a pooled transaction to unrelated investors. Trust V issued $7,500,000 of Trust V 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 $7,732,000 of junior subordinated deferrable interest debentures of the Company (Trust V Debentures) that also bear interest at an annual rate equal to the
three-month LIBOR plus 1.75%. The Trust V Securities and the Trust V 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 (7.10% at December 31, 2006). Both the Trust V Securities and the Trust V Debentures will mature on December 15, 2036; however, they are callable at par beginning December 15, 2011. 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, 2006, the Company has not deferred any payments of interest. The proceeds from the offering of Trust V were used to
redeem Trust I at par.

On June 27, 2001, Access formed Access Anytime Capital Trust I (Access Trust I) for the purpose of
issuing trust preferred securities (Access Trust I Securities) in a pooled transaction to unrelated investors. Access Trust I issued $4,000,000 of Access Trust I Securities that qualify as Tier I capital for regulatory purposes that bear
interest at an annual rate of 10.25% and invested the proceeds thereof in $4,124,000 of junior subordinated deferrable interest debentures of Access (Access Trust I Debentures) that also bear interest at an annual rate of 10.25%. The
Access Trust I Securities and the Access Trust I Debentures provide interest only payments payable at six-month intervals. Both the Access Trust I Securities and the Access Trust I Debentures will mature on July 25, 2031; however, they are
callable at a price of 107.6875 on July 25, 2006, 106.15 on July 25, 2007, 104.6125 on July 25, 2008, 103.075 on July 25, 2009, 101.5375 on July 25, 2010, and may be redeemed at par on July 25, 2011 or after. So long as
there are no events of default, payments of interest may be deferred for up to ten consecutive interest payment periods. As of December 31, 2006, no payments of interest had been deferred. Effective January 3, 2006, as a result of the
Companys acquisition of Access, the Company assumed all the duties, warranties, and obligations of Access in relation to the Access Trust I Securities and the Access Trust I Debentures.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

On June 20,
2002, Access formed Access Anytime Capital Trust II (Access Trust II) for the purpose of issuing trust preferred securities (Access Trust II Securities) in a pooled transaction to unrelated investors. Access Trust II issued
$4,000,000 of Access 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 3.65% and invested the proceeds thereof in $4,124,000 of junior subordinated
deferrable interest debentures of Access (Access Trust II Debentures) that also bear interest at an annual rate equal to the three-month LIBOR plus 3.65%. The Access Trust II Securities and the Access Trust II Debentures provide interest
only payments payable at three-month intervals with the rate adjusted quarterly on the second business day preceding each January 15, April 15, July 15, and October 15 (9.01% at December 31, 2006). Both the Access
Trust II Securities and the Access Trust II Debentures will mature on June 30, 2032; however, they are callable at par beginning July 30, 2007. So long as there are no events of default, payments of interest may be deferred for up to
twenty consecutive interest payment periods. As of December 31, 2006, no payments of interest had been deferred. Effective January 3, 2006, as a result of the Companys acquisition of Access, the Company assumed all the duties,
warranties, and obligations of Access in relation to the Access Trust II Securities and the Access Trust II Debentures.

In conjunction
with the purchase accounting for the acquisition of Access, Access Trust I and Access Trust II were recorded at fair value on the date of acquisition. Access Trust I and Access Trust II had initial fair value adjustments of approximately $582,000
and $104,000, respectively. The fair value adjustments for Access Trust I and Access Trust II are being amortized on a straight-line basis through July 2011 and July 2007, the respective dates that the securities and debentures can be called or
redeemed at par. At December 31, 2006, the remaining fair value adjustments for Access Trust I and Access Trust II were approximately $476,000 and $35,000, respectively.

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,    
|                                                 |  | 2006                   |        | 2005
|                                                 |  | (Dollars in thousands)
|Junior Subordinated Debentures  Trust I         |  | $                      |       |      | $ | 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 |      |   | 10,310
|Junior Subordinated Debentures  Trust V         |  |                        | 7,732  |      |   |      
|Junior Subordinated Debentures  Access Trust I  |  |                        | 4,124  |      |   |      
|Junior Subordinated Debentures  Access Trust II |  |                        | 4,124  |      |   |      
|Fair Value Adjustment                            |  |                        | 511    |      |   |      
|                                                 |  |                        |        |      |   |       
|Total Junior Subordinated Debentures             |  | $                      | 57,730 |      | $ | 48,971
|                                                 |  |                        |        |      |   |       



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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,
|              |  | 2006                     |        | 2005 |   | 2004  
|              |  | (Dollars in thousands)  
|Federal       |  | $                        | 10,332 |      | $ | 9,895  |  | $ | 7,152
|State         |  |                          | 1,509  |      |   | 1,551  |  |   | 891  
|Deferred      |  |                          | 656    |      |   | 342    |  |   | 512  
|              |  |                          |        |      |   |        |  |   |      
|Total expense |  | $                        | 12,497 |      | $ | 11,788 |  | $ | 8,555
|              |  |                          |        |      |   |        |  |   |      

Actual income tax expense from continuing operations differs from the expected tax
expense for 2006, 2005, and 2004 (computed by applying the U.S. federal corporate tax rate of 35% to income before income taxes) as follows:



|                                                     |  |                          |        |   |      |   |        |      |  |   |       |  
|---------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                     |  | Years ended December 31, |       
|                                                     |  | 2006                     |        |   | 2005 |   |        | 2004 | 
|                                                     |  | (Dollars in thousands)   |       
|Computed expected tax expense                      |  | $                        | 12,345 |   |      | $ | 11,615 |      |  | $ | 8,323 |  
|Increase (reduction) in income taxes resulting from: |  |                          |        |   |      |   |        |      |  |   |       |  
|Tax-exempt interest                                  |  |                          | (759   | ) |      |   | (596   | )    |  |   | (188  | )
|State tax, net                                       |  |                          | 981    |   |      |   | 1,037  |      |  |   | 719   |  
|Deferred tax rate change                             |  |                          |       |   |      |   | (88    | )    |  |   |      |  
|Bank owned life insurance                            |  |                          | (428   | ) |      |   | (418   | )    |  |   | (269  | )
|Incentive stock option compensation expense          |  |                          | 188    |   |      |   |       |      |  |   |      |  
|Other                                                |  |                          | 170    |   |      |   | 238    |      |  |   | (30   | )
|                                                     |  |                          |        |   |      |   |        |      |  |   |       |  
|Total income tax expense                             |  | $                        | 12,497 |   |      | $ | 11,788 |      |  | $ | 8,555 |  
|                                                     |  |                          |        |   |      |   |        |      |  |   |       |  

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



|                                                       |  |                        |        |   |      |   |      
|------------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | -----
|                                                       |  | As of December 31,    
|                                                       |  | 2006                   |        |   | 2005
|                                                       |  | (Dollars in thousands)
|Deferred tax assets:                                   |  |                        |        |   |      |   |      
|Allowance for loan losses                              |  | $                      | 7,428  |   |      | $ | 6,170
|Capital loss carry-forward                             |  |                        | 890    |   |      |   |     
|Share-based compensation expense                       |  |                        | 397    |   |      |   | 197  
|Tax effect of unrealized loss on investment securities |  |                        | 1,737  |   |      |   | 1,898
|Deferred gain on sale                                  |  |                        | 310    |   |      |   | 245  
|Fair value adjustmentsacquisitions                    |  |                        | 2,073  |   |      |   |     
|Other                                                  |  |                        | 482    |   |      |   | 192  
|                                                       |  |                        |        |   |      |   |      
|Total gross deferred tax assets                        |  |                        | 13,317 |   |      |   | 8,702
|                                                       |  |                        |        |   |      |   |      
|Deferred tax liabilities:                              |  |                        |        |   |      |   |      
|Goodwill                                               |  |                        | 5,823  |   |      |   | 4,239
|Prepaid expenses                                       |  |                        | 854    |   |      |   | 469  
|Depreciation                                           |  |                        | 3,686  |   |      |   | 283  
|Core deposit intangible                                |  |                        | 3,206  |   |      |   |     
|Other                                                  |  |                        | 4      |   |      |   | 99   
|                                                       |  |                        |        |   |      |   |      
|Total gross deferred tax liabilities                   |  |                        | 13,573 |   |      |   | 5,090
|                                                       |  |                        |        |   |      |   |      
|Net deferred tax asset (liability)                     |  | $                      | (256   | ) |      | $ | 3,612
|                                                       |  |                        |        |   |      |   |      



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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, 2006 of approximately $13.3 million, the Company will need to generate future taxable income of approximately $38.0 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. Additionally, the Company has a capital loss carry-forward of $890,000 which resulted from the sale of
certain investment securities acquired from Access. This capital loss carry-forward can only be offset by capital gains. Management of the Company believes it is more likely than not that the Company will realize the benefit of the capital loss
carry-forward prior to the expiration of the carry-forward period. There can be no assurance, however, that the Company will generate taxable or capital gain income or any specific level of continuing taxable income or capital gain 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, 2006, the Company has purchased 784,100 shares. The Company did not purchase any additional shares during the year
ended December 31, 2006. 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, 2006 and 2005, the assets of the deferred compensation plan included 33,254 shares and 32,833 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 provided for the granting of options to
purchase up to 1,500,000 shares of the Companys common stock. Effective June 2, 2006, the stockholders of the Company approved an amendment to the 2003 Plan to increase the number of shares available for grant from 1,500,000 to 2,000,000.
Exercise dates and prices for the options are set by the Compensation Committee. 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 and have a contractual term of the shorter of the term set in the option
agreement or ten years. 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. No
awards under the 2003 Plan may be repriced. In connection with the Access acquisition, the Company assumed the stock option plan of Access Anytime Bancorp, Inc. All outstanding options under the assumed plan were fully vested at the date of
acquisition. Options under the plans are as follows:



|                                 |  |                          |   |      |                               |       |        |           |   |                               |   |        |  |           |                               |  |   |      
|-------------------------------- |  | ------------------------ | - | ---- | ----------------------------- | ----- | ------ | --------- | - | ----------------------------- | - | ------ |  | --------- | ----------------------------- |  | - | -----
|                                 |  | Years ended December 31,
|                                 |  | 2006                     |   | 2005 |                               | 2004 
|                                 |  | Shares                   |   |      | Weightedaverage exerciseprice |       | Shares |           |   | Weightedaverage exerciseprice |   | Shares |  |           | Weightedaverage exerciseprice
|Outstanding at beginning of year |  | 1,347,700                |   |      | $                             | 14.58 |        | 1,279,290 |   |                               | $ | 13.77  |  | 486,010   |                               |  | $ | 8.82 
|Granted                          |  | 122,500                  |   |      |                               | 25.61 |        | 115,000   |   |                               |   | 21.62  |  | 940,000   |                               |  |   | 15.69
|Assumed                          |  | 74,196                   |   |      |                               | 11.81 |        |          |   |                               |   |       |  |          |                               |  |   |     
|Exercised                        |  | (41,000                  | ) |      |                               | 11.20 |        | (26,590   | ) |                               |   | 4.74   |  | (86,728   | )                             |  |   | 5.92 
|Forfeited                        |  | (80,000                  | ) |      |                               | 16.07 |        | (20,000   | ) |                               |   | 16.85  |  | (59,992   | )                             |  |   | 14.98
|                                 |  |                          |   |      |                               |       |        |           |   |                               |   |        |  |           |                               |  |   |      
|Outstanding at year end          |  | 1,423,396                |   |      | $                             | 15.39 |        | 1,347,700 |   |                               | $ | 14.58  |  | 1,279,290 |                               |  | $ | 13.77
|                                 |  |                          |   |      |                               |       |        |           |   |                               |   |        |  |           |                               |  |   |      
|Options exercisable at year end  |  | 576,396                  |   |      | $                             | 11.92 |        | 393,700   |   |                               | $ | 10.10  |  | 289,790   |                               |  | $ | 7.08 
|                                 |  |                          |   |      |                               |       |        |           |   |                               |   |        |  |           |                               |  |   |      



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the year ended
December 31, 2006, the Company recorded approximately $1.3 million of pretax share-based compensation expense, pursuant to the grant of options and restricted stock in salaries and employee benefits. The income tax benefit associated with this
compensation expense was approximately $226,000 for the year ended December 31, 2006. In addition, for the year ended December 31, 2006, the Company received an income tax benefit of approximately $218,000 related to the exercise of
nonqualifying employee stock options. Compensation expense of approximately $156,000 and $211,000 was recognized in 2005 and 2004, respectively, pursuant to the grant of options and restricted stock, as required under previous accounting standards.
The Company received income tax benefits of $189,000 and $363,000, respectively, related to the exercise of nonqualifying employee stock options for the years ended December 31, 2005 and 2004. As of December 31, 2006, there was
approximately $2.4 million of remaining unamortized share-based compensation expense associated with unvested stock options which will be expensed over a weighted average remaining service period of approximately 4.1 years.

The total pretax intrinsic value of options exercised during the years ended December 31, 2006, 2005, and 2004 was approximately $566,000, $477,000,
and $951,000, respectively.

Outstanding options at December 31, 2006 are as follows:



|               |  |                    |  |                              |  |                              |       |                          |   |                    |  |                              |  |                         |       |  |   |          
|-------------- |  | ------------------ |  | ---------------------------- |  | ---------------------------- | ----- | ------------------------ | - | ------------------ |  | ---------------------------- |  | ----------------------- | ----- |  | - | ---------
|Grant price    |  | Optionsoutstanding |  | Weightedaverageremaininglife |  | Weightedaverageexerciseprice |       | Aggregateintrinsic value |   | Optionsexercisable |  | Weightedaverageexerciseprice |  | Aggregateintrinsicvalue
|$ 3.00  10.00 |  | 215,192            |  | 1.27                         |  | $                            | 6.08  |                          | $ | 4,017,000          |  | 215,192                      |  | $                       | 6.08  |  | $ | 4,017,000
|10.01  15.00  |  | 326,794            |  | 6.66                         |  |                              | 14.34 |                          |   | 3,403,000          |  | 122,794                      |  |                         | 13.27 |  |   | 1,410,000
|15.01  20.01  |  | 683,910            |  | 7.16                         |  |                              | 16.04 |                          |   | 5,959,000          |  | 223,410                      |  |                         | 15.98 |  |   | 1,960,000
|Over 20.01     |  | 197,500            |  | 9.15                         |  |                              | 25.07 |                          |   |                   |  | 15,000                       |  |                         | 25.07 |  |   |         
|               |  |                    |  |                              |  |                              |       |                          |   |                    |  |                              |  |                         |       |  |   |          
|               |  | 1,423,396          |  | 6.43                         |  | $                            | 15.39 |                          | $ | 13,379,000         |  | 576,396                      |  | $                       | 11.92 |  | $ | 7,387,000
|               |  |                    |  |                              |  |                              |       |                          |   |                    |  |                              |  |                         |       |  |   |          

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value,
based on the Companys closing stock price of $24.75 as of December 29, 2006, the last business day of the year, which would have been received by the option holders had all option holders exercised their options as of that date.

The Company estimated the weighted average fair value of options granted in 2006, 2005, and 2004 to be approximately $8.65, $7.26, and
$4.91, 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, |  
|                        |  | 2006                     |   |  | 2005  |   |  | 2004  |  
|Risk-free interest rate |  | 4.81                     | % |  | 4.32  | % |  | 2.79  | %
|Expected dividend yield |  | 1.25                     | % |  | 1.33  | % |  | 1.40  | %
|Expected life (years)   |  | 6                        |   |  | 6     |   |  | 6     |  
|Expected volatility     |  | 29.79                    | % |  | 31.02 | % |  | 32.77 | %

See Note 1(k) Share-Based Compensation related to SFAS 123R.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The following
table summarizes our restricted stock awards activity during the year ended December 31, 2006.



|                               |  |        |   |  |                                       |      
|------------------------------ |  | ------ | - |  | ------------------------------------- | -----
|                               |  | Shares |   |  | Weightedaverage grant date fair
value
|Nonvested at December 31, 2005 |  | 21,176 |   |  | $                                     | 15.98
|Granted                        |  | 7,771  |   |  |                                       | 23.86
|Vested                         |  | (8,376 | ) |  |                                       | 15.77
|                               |  |        |   |  |                                       |      
|Nonvested at December 31, 2006 |  | 20,571 |   |  | $                                     | 19.05
|                               |  |        |   |  |                                       |      

As of December 31, 2006, there was approximately $211,000 of remaining unamortized
share-based compensation expense associated with restricted stock awards which will be expensed over a weighted average remaining service period of approximately 3.5 years. The total fair value of shares vested during the years ended
December 31, 2006, 2005, and 2004, was approximately $206,000, $156,000, and $124,000, respectively.

The Company had a stockholder
protection rights agreement to protect the stockholders of the Company from abusive or unfair take-over practices. The terms of the agreement provided one right for each share of common stock held. The rights became 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 expired on November 20, 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. The Companys contributions to the
plan totaled approximately $732,000 in 2006, $529,000 in 2005, and $402,000 in 2004.

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, 2006 and 2005, the total assets of the plan were $894,000 and $874,000, which included an investment of $582,000 and $571,000 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 $894,000 and $874,000. The Companys
compensation expense for this plan for the years ended December 31, 2006, 2005, and 2004, totaled approximately zero, zero, 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.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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, 2006 the total assets of the plan were $94,000. An offsetting liability is
recorded in the consolidated financial statements totaling $94,000. At December 31, 2005, the total assets of the plan were zero, as the plan had not been funded. The Companys compensation expense for this plan for the years ended
December 31, 2006 and 2005 totaled approximately $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.

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, 2006, 2005, and 2004, totaled approximately $5.4 million, $4.7 million, and $4.5 million,
respectively. Minimum future payments under these leases at December 31, 2006, are as follows:



|           |  |                           |       
|---------- |  | ------------------------- | ------
|           |  | Years ending December 31,
|           |  | (Dollars in thousands)   
|2007       |  | $                         | 6,296 
|2008       |  |                           | 6,607 
|2009       |  |                           | 6,632 
|2010       |  |                           | 6,197 
|2011       |  |                           | 5,253 
|Thereafter |  |                           | 19,933
|           |  |                           |       
|           |  | $                         | 50,918
|           |  |                           |       

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 $82,000 in 2006, $79,000 in 2005, and $76,000 in 2004, respectively. Management believes the lease is on terms similar to other third-party
commercial transactions in the ordinary course of business.

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,    
|                             |  | 2006                   |         | 2005
|                             |  | (Dollars in thousands)
|Commitments to extend credit |  | $                      | 492,396 |      | $ | 393,550
|Standby letters of credit    |  |                        | 45,240  |      |   | 42,377 

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.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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 two outstanding letters of credit totaling $18.6 million from the FHLB that are used to secure certain governmental deposits over and above FDIC limits. The $13.5 letter of credit has a term of one year and will expire in June 2007 if
not renewed. The $5.1 million letter of credit has an initial term of two years and will expire in April 2008 if not renewed. The letters of credit are fully collateralized by the Companys Blanket Lien Collateral status with the FHLB as if
they 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.

14. Regulatory Matters

Bank regulations specify the level of dividends that can be paid by First
Community Bank. During the year ended December 31, 2006, First Community Bank paid a $2 million dividend to First State Bancorporation. As of December 31, 2006, First Community Bank had approximately $51.4 million in retained earnings,
which were available for the payment of dividends to First State Bancorporation, subject to regulatory capital requirements. Future dividend payments will be dependent upon the level of earnings generated by First 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.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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, 2006, that the Company and subsidiary bank meet all capital adequacy requirements to which they are subject.



|                                        |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|--------------------------------------- |  | ----------------------- | ------- | ----- | ----------------------------- | - | ------ | --------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                        |  | As of December 31, 2006 |        
|                                        |  | 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                            |  | $                       | 310,924 |       | 13.5                          | % |        | $                                 | 184,576 |  | 8.0 | %      |  | $     | 230,720 |  | 10.0 | %
|Bank subsidiary                         |  |                         | 235,726 |       | 10.2                          | % |        |                                   | 184,356 |  | 8.0 | %      |  |       | 230,446 |  | 10.0 | %
|Tier I capital to risk weighted assets: |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 287,799 |       | 12.5                          | % |        |                                   | 92,288  |  | 4.0 | %      |  |       | 138,432 |  | 6.0  | %
|Bank subsidiary                         |  |                         | 212,601 |       | 9.2                           | % |        |                                   | 92,178  |  | 4.0 | %      |  |       | 138,267 |  | 6.0  | %
|Tier I capital to average total assets: |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|Consolidated                            |  |                         | 287,799 |       | 11.0                          | % |        |                                   | 105,030 |  | 4.0 | %      |  |       | 131,288 |  | 5.0  | %
|Bank subsidiary                         |  |                         | 212,601 |       | 8.1                           | % |        |                                   | 104,828 |  | 4.0 | %      |  |       | 131,035 |  | 5.0  | %



|                                        |  |                         |         |       |                               |   |        |                                   |         |  |     |        |  |       |         |  |      |  
|--------------------------------------- |  | ----------------------- | ------- | ----- | ----------------------------- | - | ------ | --------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                        |  | 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  | %



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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,    
|                                      |  | 2006                   |         | 2005
|                                      |  | (Dollars in thousands)
|Assets:                               |  |                        |         |      |   |        
|Cash and due from banks               |  | $                      | 74,786  |      | $ | 3,724  
|Investment in subsidiary              |  |                        | 284,546 |      |   | 202,613
|Goodwill                              |  |                        | 648     |      |   | 223    
|Deferred tax asset                    |  |                        | 528     |      |   | 230    
|Other assets                          |  |                        | 3,727   |      |   | 3,336  
|                                      |  |                        |         |      |   |        
|Total assets                          |  | $                      | 364,235 |      | $ | 210,126
|                                      |  |                        |         |      |   |        
|Liabilities and equity capital:       |  |                        |         |      |   |        
|Accounts payable and accrued expenses |  | $                      | 1,613   |      | $ | 976    
|Junior subordinated debentures        |  |                        | 57,730  |      |   | 48,971 
|                                      |  |                        |         |      |   |        
|Total liabilities                     |  |                        | 59,343  |      |   | 49,947 
|                                      |  |                        |         |      |   |        
|Equity capital                        |  |                        | 304,892 |      |   | 160,179
|                                      |  |                        |         |      |   |        
|Total liabilities and equity capital  |  | $                      | 364,235 |      | $ | 210,126
|                                      |  |                        |         |      |   |        

Condensed Statements of Operations



|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Years ended December 31, |       
|                                                                     |  | 2006                     |        |   | 2005 |   |        | 2004 | 
|                                                                     |  | (Dollars in thousands)   |       
|Income:                                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash dividends from subsidiary                                       |  | $                        | 2,000  |   |      | $ |       |      |  | $ |       |  
|Other income                                                         |  |                          | 214    |   |      |   | 130    |      |  |   | 90     |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total income                                                         |  |                          | 2,214  |   |      |   | 130    |      |  |   | 90     |  
|                                                                     |  |                          |       
|Expenses:                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Interest expense                                                     |  |                          | 4,490  |   |      |   | 2,820  |      |  |   | 1,700  |  
|Compensation expense                                                 |  |                          | 658    |   |      |   | 156    |      |  |   | 211    |  
|Legal                                                                |  |                          | 30     |   |      |   | 32     |      |  |   | 29     |  
|Loss on early redemption of Trust I                                  |  |                          | 191    |   |      |   |       |      |  |   |       |  
|Other                                                                |  |                          | 782    |   |      |   | 563    |      |  |   | 473    |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Total expenses                                                       |  |                          | 6,151  |   |      |   | 3,571  |      |  |   | 2,413  |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Loss before income taxes and undistributed income of bank subsidiary |  |                          | (3,937 | ) |      |   | (3,441 | )    |  |   | (2,323 | )
|Income tax benefit                                                   |  |                          | 2,212  |   |      |   | 1,369  |      |  |   | 916    |  
|Undistributed income of bank subsidiary                              |  |                          | 24,500 |   |      |   | 23,470 |      |  |   | 16,632 |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                                           |  | $                        | 22,775 |   |      | $ | 21,398 |      |  | $ | 15,225 |  
|                                                                     |  |                          |        |   |      |   |        |      |  |   |        |  



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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, |        
|                                                                                     |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|                                                                                     |  | (Dollars in thousands)   |        
|Cash flows from operating activities:                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                           |  | $                        | 22,775  |   |      | $ | 21,398  |      |  | $ | 15,225  |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Adjustments to reconcile net income to cash provided (used) by operating activities: |  |                          |         |   |      |   |         |      |  |   |         |  
|Compensation expense                                                                 |  |                          | 658     |   |      |   | 156     |      |  |   | 211     |  
|Undistributed income of bank subsidiary                                              |  |                          | (24,500 | ) |      |   | (23,470 | )    |  |   | (16,632 | )
|Income tax benefit from exercise of options                                          |  |                          | 218     |   |      |   | 189     |      |  |   | 363     |  
|Increase in other assets                                                             |  |                          | (179    | ) |      |   | (599    | )    |  |   | (81     | )
|Increase in other liabilities, net                                                   |  |                          | 451     |   |      |   | 57      |      |  |   | 84      |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Total adjustments                                                                    |  |                          | (23,352 | ) |      |   | (23,667 | )    |  |   | (16,055 | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used by operating activities                                                |  |                          | (577    | ) |      |   | (2,269  | )    |  |   | (830    | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash received in business acquisitions                                           |  |                          | 842     |   |      |   |        |      |  |   |        |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by investing activities                                            |  |                          | 842     |   |      |   |        |      |  |   |        |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Common stock issued                                                                  |  |                          | 76,108  |   |      |   | 860     |      |  |   | 967     |  
|Costs associated with issuance of common stock                                       |  |                          | (927    | ) |      |   |        |      |  |   |        |  
|Payment from subsidiary bank for acquisition costs                                   |  |                          | 618     |   |      |   |        |      |  |   |        |  
|Payment from subsidiary bank for stock option compensation                           |  |                          | 634     |   |      |   |        |      |  |   |        |  
|Capital contributions to subsidiary bank                                             |  |                          |        |   |      |   | (7,000  | )    |  |   | (2,000  | )
|Issuance of junior subordinated debentures                                           |  |                          | 7,732   |   |      |   | 10,310  |      |  |   | 5,155   |  
|Redemption of junior subordinated debentures                                         |  |                          | (7,732  | ) |      |   |        |      |  |   |        |  
|Dividends paid                                                                       |  |                          | (5,636  | ) |      |   | (4,309  | )    |  |   | (3,598  | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by financing activities                                     |  |                          | 70,797  |   |      |   | (139    | )    |  |   | 524     |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and due from banks                                       |  |                          | 71,062  |   |      |   | (2,408  | )    |  |   | (306    | )
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and due from banks at beginning of year                                         |  |                          | 3,724   |   |      |   | 6,132   |      |  |   | 6,438   |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and due from banks at end of year                                               |  | $                        | 74,786  |   |      | $ | 3,724   |      |  | $ | 6,132   |  
|                                                                                     |  |                          |         |   |      |   |         |      |  |   |         |  

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 instruments 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:



|                                                                           |  |                        |           |            |   |                 |  |            |           |  |   |          
|-------------------------------------------------------------------------- |  | ---------------------- | --------- | ---------- | - | --------------- |  | ---------- | --------- |  | - | ---------
|                                                                           |  | 2006                   |           | 2005      
|                                                                           |  | Carrying Amount        |           | Fair Value |   | Carrying Amount |  | Fair Value
|                                                                           |  | (Dollars in thousands)
|Financial assets:                                                          |  |                        |           |            |   |                 |  |            |           |  |   |          
|Cash and cash equivalents                                                  |  | $                      | 84,380    |            | $ | 84,370          |  | $          | 60,727    |  | $ | 60,727   
|Marketable securities available for sale                                   |  |                        | 416,002   |            |   | 416,002         |  |            | 240,434   |  |   | 240,434  
|Marketable securities held to maturity                                     |  |                        | 62,638    |            |   | 61,243          |  |            | 197,521   |  |   | 196,177  
|Federal Home Loan Bank and Federal Reserve Bank stock                      |  |                        | 14,112    |            |   | 14,112          |  |            | 16,357    |  |   | 16,357   
|Loans, net                                                                 |  |                        | 2,018,482 |            |   | 2,013,306       |  |            | 1,508,514 |  |   | 1,498,006
|Accrued interest receivable                                                |  |                        | 13,879    |            |   | 13,879          |  |            | 9,043     |  |   | 9,043    
|Cash surrender value of bank owned life insurance                          |  |                        | 33,466    |            |   | 33,466          |  |            | 31,994    |  |   | 31,994   
|Financial liabilities:                                                     |  |                        |           |            |   |                 |  |            |           |  |   |          
|Deposits                                                                   |  |                        | 2,120,924 |            |   | 2,133,198       |  |            | 1,510,007 |  |   | 1,453,548
|Securities sold under agreements to repurchase and federal funds purchased |  |                        | 149,171   |            |   | 149,171         |  |            | 229,995   |  |   | 229,995  
|FHLB advances and other                                                    |  |                        | 155,683   |            |   | 155,796         |  |            | 198,793   |  |   | 198,688  
|Junior subordinated debentures                                             |  |                        | 57,730    |            |   | 57,712          |  |            | 48,971    |  |   | 48,971   

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 the majority of 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 fair value at December 31, 2006 and 2005.

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, 2006 and 2005. 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, 2006 and 2005.



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##### Table of Contents

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Junior
subordinate debentures. The carrying value of junior subordinated debentures, the majority of which reset quarterly to market interest rates, approximates fair value. The fair value of fixed junior subordinated debentures is estimated by
discounting the future contractual cash flows using the rates currently offered for similar borrowing arrangements.

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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