10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended December 31, 2005

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

For the transition period from              to             

Commission file number: 001-12487

FIRST STATE BANCORPORATION

(Exact name of registrant as specified in its charter)

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
NONE	NONE

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

Common Stock, no par value

(Title of class)

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

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

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

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

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

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

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

As of March 14, 2006, there were 17,569,810 shares of common stock issued and outstanding.

Documents Incorporated By Reference

Certain Part III information is incorporated herein by reference, pursuant to Instruction G of Form 10-K, from First State Bancorporation’s Proxy Statement for its 2006 Annual Shareholders’ Meeting, which will be filed with the Commission by April 19, 2006.

TABLE OF CONTENTS

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

Forward-Looking Statements

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

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PART I

Item 1: Business.

First State Bancorporation

We are a New Mexico-based bank holding company. We provide commercial banking services to businesses through our subsidiary bank, First Community Bank, formerly First State Bank N.M. (“First Community Bank” or “Bank”). At December 31, 2005, we operated thirty-one branch offices, including twenty-three in New Mexico (three offices in Taos, nine offices in Albuquerque, four offices in Santa Fe, and one office each in Rio Rancho, Los Lunas, Bernalillo, Pojoaque, Placitas, Moriarty, and Belen), six in Colorado (Denver, Colorado Springs, Fort Collins, Lakewood, Littleton, and Longmont), and two in Utah (Midvale and Salt Lake City). In January 2006, we closed on the acquisition of two financial institutions which strengthened our branch network in New Mexico and gave us a presence in Arizona. See “History.” First Community Bank began in 1922 in Taos County as a single bank, and is currently the largest bank in that county. At December 31, 2005, we had total assets, total deposits, and total stockholders’ equity of $2.158 billion, $1.510 billion, and $160 million, respectively.

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

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

At December 31, 2005, First State Bancorporation and First Community Bank were “well capitalized” under regulatory capital guidelines.

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

History

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

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

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

On October 1, 2002 we entered the Colorado and Utah markets when we completed our acquisition of First Community Industrial Bank. We acquired approximately $343 million in loans and approximately $242 million in deposits, and recognized goodwill of approximately $43 million related to the transaction. We merged First Community Industrial Bank into First State Bank and officially changed the name of the Bank to First State Bank N.M.

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

Operating Strategy

Our operating strategies include:

• Providing responsive, personal customer service

• Fostering a culture in which employees are valued and respected

• Attracting new account relationships

• Emphasizing community involvement

• Developing new business opportunities

• Increasing efficiency

• Optimizing asset/liability management

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

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

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

Community Involvement. First Community Bank’s management and other employees participate actively in a wide variety of civic and community activities and organizations in New Mexico, Colorado, and Utah. First Community Bank management also sponsors a number of community-oriented events each year, contributing over $1 million toward these events in 2005. We believe that these activities assist First Community Bank through increased visibility and through development and maintenance of customer relationships.

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

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

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

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

Growth Strategy

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

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1998 to $2.2 billion through internal growth, de novo branching, and acquisition activity. Our acquisition of Access and NMFC in January 2006, added approximately $400 million in total assets. Since 1993, large out of state financial institutions have acquired several banks that compete with us. These institutions concentrate on the mass retail customer base and extremely large customers. They also reduce service levels to small to medium size businesses. These institutions’ method of doing business affords us a continuing opportunity to gain profitable new account relationships and to expand existing relationships.

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

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

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

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

Market Areas and Banks

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

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

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

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

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

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

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

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

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

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

First Community Bank’s operations as of December 31, 2005 are divided into eight regions: Taos which includes Taos County; Santa Fe which includes Santa Fe County; Albuquerque metropolitan area which includes Bernalillo and Sandoval Counties; Los Lunas which includes Valencia and Torrance Counties; Northern Colorado which includes Larimer and Boulder Counties; Central Colorado which includes Denver, Jefferson, and Arapahoe Counties; Southern Colorado which includes El Paso County; and Utah which includes Salt Lake County. The Access and NMFC acquisitions add two additional operating regions: Southern New Mexico which includes Roosevelt, Curry, and Dona Ana Counties, and Arizona which includes Maricopa County.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Competition

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

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

Employees

As of December 31, 2005, we had 663 full-time equivalent employees. We place a high priority on staff development, training, and selective hiring. We select new employees on the basis of both technical skills and customer-service capabilities. Our staff development involves training in marketing, customer service, and regulatory compliance. Our employees are not covered by a collective bargaining agreement. We believe that our relationship with our employees is good. The Access and NMFC acquisitions have added approximately 180 full-time employees.

Supervision and Regulation

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

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

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

First Community Bank. As a New Mexico-chartered state member bank of the Federal Reserve System, First Community Bank is subject to regulation and supervision by the Federal Reserve Board and the New Mexico Financial Institutions Division and, as a result of the insurance of its deposits, by the FDIC. Almost every aspect of the operations and financial condition of First Community Bank is subject to extensive regulation and supervision and to various requirements and restrictions under federal and state law, including requirements governing capital adequacy, liquidity, earnings, dividends, reserves against

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deposits, management practices, branching, loans, investments, and the provision of services. Various consumer protection laws and regulations also affect the operations of First Community Bank. The deposits of First Community Bank are insured up to applicable limits by the FDIC.

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

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

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

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

As a bank holding company, we are a legal entity separate and distinct from First Community Bank. Our principal asset is the outstanding capital stock of First Community Bank. As a result, our ability to pay dividends on our common stock will depend primarily on the ability of First Community Bank to pay dividends to us in amounts sufficient to service our obligations. Dividend payments from First Community Bank are subject to federal and state limitations, generally based on the capital level and current and retained earnings of the bank. Approval of the Federal Reserve Board is required, for example, for payment of any dividend if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits (as defined by regulatory agencies) for that year combined with its retained net profits for the preceding two years. First Community Bank may not pay a dividend in an amount greater than its net profits. First Community Bank is also prohibited under federal law from paying any dividend that would cause it to become undercapitalized. In addition, the Federal regulatory agencies are authorized to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of dividends could, depending on the financial condition of First Community Bank, be deemed to constitute an unsafe or unsound practice.

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

Capital Adequacy Requirements. We are subject to the Federal Reserve Board’s risk-based capital and leverage guidelines for bank holding companies. The minimum ratio of total capital to risk-weighted assets (which are the credit risk equivalents of balance sheet assets and certain off balance sheet items

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

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

Risk-Based Capital and Leverage Ratios

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

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

The federal bank regulatory agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the regulations of the Federal Reserve Board provide that concentration of credit risk, interest rate risk and certain risks arising from nontraditional activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account by regulatory agencies in assessing an organization’s overall capital adequacy. The risk-based capital regulations also provide for the consideration of interest rate risk in the agencies’ determination of a banking institution’s capital adequacy. The regulations require such institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk.

Prompt Corrective Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the federal banking agencies must take prompt supervisory and regulatory actions against undercapitalized depository institutions. Depository institutions, such as First Community Bank, are assigned one of five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” and are subjected to differential regulation corresponding to the capital category within which the institution falls. Under certain

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circumstances, a well capitalized, adequately capitalized, or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions (including paying dividends) or paying management fees to a holding company if the institution would thereafter be undercapitalized. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits.

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

• prohibiting the payment of principal and interest on subordinated debt;

• prohibiting the holding company from making distributions without prior regulatory approval;

• placing limits on asset growth and restrictions on activities;

• placing additional restrictions on transactions with affiliates;

• restricting the interest rate the institution may pay on deposits;

• prohibiting the institution from accepting deposits from correspondent banks; and

• in the most severe cases, appointing a conservator or receiver for the institution.

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy. Failure to meet capital guidelines could subject the bank to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, and to certain restrictions on business. As of December 31, 2005, each of First State Bancorporation and First Community Bank exceeded the required capital ratios for classification as “well capitalized.”

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

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

• fails to become adequately capitalized when required to do so;

• fails to submit a timely and acceptable capital restoration plan;

• or materially fails to implement an accepted capital restoration plan.

Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class

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of securities registered under Section 12 of the Securities Exchange Act of 1934, such as First State Bancorporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of First State Bancorporation.

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

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

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

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

Interstate Banking and Branching. The Riegle-Neal Act enacted in 1994 permits an adequately capitalized and adequately managed bank holding company, with Federal Reserve Board approval, to acquire banking institutions located in states other than the bank holding company’s home state without regard to whether the transaction is prohibited under state law. In addition, national banks and state banks with different home states are permitted to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating banking institution has passed legislation prior to that date that expressly prohibits interstate mergers. De novo interstate branching is permitted if the laws of the host state so authorizes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Other

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

Available Information

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

Item 1A: Risk Factors.

Interest Rate Risk

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

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

Government Policies

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

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

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

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

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

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

Credit Risk

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

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

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

Competition

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

Economy

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

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

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

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Integration Risk

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

Acquisition Risk

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

Disruptions

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

Item 1B: Unresolved Staff Comments.

None.

Item 2: Properties.

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

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

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

Item 3: Legal Proceedings.

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

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

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

PART II

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

Price Range of Common Stock

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

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

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

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

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

Dividend Policy

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

21

declaration and payment of cash dividends are determined by the Board of Directors in light of the earnings, capital requirements, our financial condition, and other relevant factors. Our ability to pay cash dividends depends on the amount of cash dividends paid to us by First Community Bank and our capital position. Capital distributions, including dividends, by First Community Bank are subject to federal and state regulatory restrictions tied to its earnings and capital. Information regarding dividend restrictions on our banking subsidiary is incorporated herein by reference to Item 1. “Business–Supervision and Regulation/Payment of Dividends.”

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information regarding compensation plans under which shares of Common Stock may be issued upon the exercise of option, warrants and rights under the First State Bancorporation 1993 Stock Option Plan and the 2003 Equity Incentive Plan as of December 31, 2005:

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

Item 6: Selected Financial Data.

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

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

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

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

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

Item 8: Financial Statements and Supplementary Data.

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

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

None.

Item 9A: Controls and Procedures.

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

An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005 pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2005, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized, and reported as and when required. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

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

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

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

Item 9B: Other Information.

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

23

PART III

Item 10: Directors and Executive Officers of the Registrant.

Information regarding directors appearing under the caption “Election of Directors” in our Proxy Statement for the 2006 Annual Meeting of Shareholders is hereby incorporated by reference. Information relating to disclosure of delinquent Form 3, 4, and 5 filers is incorporated by reference to the information appearing under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2006 Annual Meeting of Shareholders.

Information regarding our audit committee financial experts appearing under the caption “Information with Respect to Standing Committees of the Board of Directors and Meetings” in our Proxy Statement for the 2006 Annual Meeting of Shareholders is hereby incorporated by reference.

Information regarding our Code of Ethics appearing under the caption “Corporate Governance” in our Proxy Statement for the 2006 Annual Meeting of Shareholders is hereby incorporated by reference. The Code of Ethics has been filed with the Commission and is posted on our website at www.fcbnm.com “Investor Relations.”

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

Item 11: Executive Compensation.

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

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

Information setting forth the security ownership of certain beneficial owners and management appearing under the caption “Voting Securities and Principal Holders” in the 2006 Proxy Statement is hereby incorporated by reference.

Item 13: Certain Relationships and Related Transactions.

Information regarding certain related transactions appearing under the caption “Certain Business Relationships” in the 2006 Proxy Statement is hereby incorporated by reference.

Item 14: Principal Accounting Fees and Services.

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

24

PART IV

Item 15: Exhibits, Financial Statement Schedules.

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

1. Financial Statements:

• Financial Highlights

• Management’s Discussion and Analysis of Financial Condition and Results of Operations

• Management’s Report on Internal Controls over Financial Reporting

• Report of Independent Registered Public Accounting Firm (Consolidated Financial Statements)

• Report of Independent Registered Public Accounting Firm (Internal Controls over Financial Reporting)

• Consolidated Balance Sheets as of December 31, 2005 and 2004

• Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004, and 2003

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

• Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2005, 2004, and 2003

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

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

2. Financial Statement Schedules

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

3. Exhibits

No.	Description
2.1	Agreement and Plan of Merger, dated as of May 22, 2002, by and among First State Bancorporation, First State Bank N.M. (formerly known as First State Bank of Taos), First Community Industrial Bank, Blazer Financial Corporation, and Washington Mutual Finance Corporation. (6)
2.2	Agreement and Plan of Merger, dated as of August 31, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc. and AccessBank. (9)
2.3	Agreement and Plan of Merger, dated as of September 2, 2005, by and among First State Bancorporation, New Mexico Financial Corporation and Ranchers Banks. (10)
2.4	Amendment Number 1 to the Agreement and Plan of Merger, dated September 29, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc. and AccessBank. (11)
3.1	Restated Articles of Incorporation of First State Bancorporation. (1)
3.2	Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation.*
3.3	Amended Bylaws of First State Bancorporation. (7)
4	Shareholder Protection Rights Agreement dated October 25, 1996. (3)
10.1	Executive Employment Agreement. (5)

25

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

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

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

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

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

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

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

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

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

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

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

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

 * Filed herewith.

26

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 BANCORPORATION
By:	/s/ Michael R. Stanford
	Michael R. Stanford, President and
	Chief Executive Officer

Dated: March 16, 2006

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

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

27

A PPENDIX A

FIRST STATE BANCORPORATION AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

A-1

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

A-2

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

A-3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF

OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Basis of Presentation

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

Overview and Outlook

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

Highlights for 2005 are as follows:

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

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

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

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

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

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

Business Combination

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

A-4

Critical Accounting Estimates and Judgments

Allowance for Loan Loss

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

Goodwill

The excess of cost over fair value of the net assets of acquired banks is recorded as goodwill. We test goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We completed our annual goodwill impairment tests during the fourth quarter in 2005, 2004, and 2003, and found no impairment.

Recent Accounting Pronouncements and Developments

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

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

Results of Operations

Earnings Performance

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

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

A-5

Net Interest Income

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

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

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

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

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

A-6

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

	Years ended December 31,
	2005							2004							2003
	Average Balance			Interest Income or Expense		Average Yield or Cost		Average Balance			Interest Income or Expense		Average Yield or Cost		Average Balance			Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
Assets
Loans:
Commercial	$	182,690		$	12,763	6.99	%	$	160,891		$	9,420	5.85	%	$	115,872		$	6,995	6.04	%
Real estate—mortgage		1,001,867			71,577	7.14			927,375			59,867	6.46			842,845			57,541	6.83
Real estate—construction		241,417			20,369	8.44			158,147			11,100	7.02			106,205			7,273	6.85
Consumer		28,092			2,778	9.89			29,654			2,777	9.36			32,673			3,219	9.85
Mortgage		21,991			1,296	5.89			8,167			459	5.62			12,564			706	5.62
Other		1,089			—	—			670			—	—			582			—	—
Total loans		1,477,146			108,783	7.36	%		1,284,904			83,623	6.51	%		1,110,741			75,734	6.82	%
Allowance for loan losses		(16,948	)						(14,829	)						(13,008	)
Securities:
U.S. government and mortgage-backed		276,278			10,272	3.72			236,582			8,801	3.72			190,580			7,327	3.84
States and political subdivisions:
Non-taxable		33,786			1,824	5.40			13,879			573	4.13			4,478			181	4.04
Taxable		—			—	—			—			—	—			488			9	1.84
Other		17,105			687	4.02			14,193			372	2.62			9,078			286	3.15
Total securities		327,169			12,783	3.91	%		264,654			9,746	3.68	%		204,624			7,803	3.81	%
Interest-bearing deposits with other banks		4,056			125	3.08			4,982			57	1.14			5,216			63	1.21
Federal funds sold		7,968			266	3.34			1,087			16	1.47			10,247			113	1.10
Total interest-earning assets		1,816,339			121,957	6.71	%		1,555,627			93,442	6.01	%		1,330,828			83,713	6.29	%
Non-interest-earning assets:
Cash and due from banks		51,514							51,424							47,667
Other		126,710							113,134							101,228
Total non-interest-earning assets		178,224							164,558							148,895
Total assets	$	1,977,615						$	1,705,356						$	1,466,715
Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing demand accounts	$	267,027		$	2,238	0.84	%	$	237,144		$	1,118	0.47	%	$	199,890		$	907	0.45	%
Certificates of deposit < $100,000		226,992			6,973	3.07			231,686			6,183	2.67			270,101			7,840	2.90
Certificates of deposit > $100,000		322,685			10,902	3.38			295,398			8,712	2.95			238,750			7,429	3.11
Money market savings accounts		207,056			3,935	1.90			194,961			2,636	1.35			145,910			2,043	1.40
Regular savings accounts		72,882			677	0.93			67,480			573	0.85			58,367			493	0.84
Total interest-bearing deposits		1,096,642			24,725	2.25	%		1,026,669			19,222	1.87	%		913,018			18,712	2.05	%
Federal funds purchased and securities sold under agreements to repurchase		85,435			2,039	2.39			64,278			199	0.31			61,109			302	0.49
Short-term borrowings		117,475			3,972	3.38			71,235			993	1.39			34,308			459	1.34
Long-term debt		123,742			4,123	3.33			84,848			1,728	2.04			69,696			1,610	2.31
Junior subordinated debentures		44,310			2,853	6.44			34,459			1,733	5.03			32,500			1,546	4.76
Total interest-bearing liabilities		1,467,604			37,712	2.57	%		1,281,489			23,875	1.86	%		1,110,631			22,629	2.04	%
Non-interest-bearing demand accounts		349,570							279,101							224,680
Other non-interest-bearing liabilities		7,746							5,644							5,076
Total liabilities		1,824,920							1,566,234							1,340,387
Stockholders’ equity		152,695							139,122							126,328
Total liabilities and stockholders’ equity	$	1,977,615						$	1,705,356						$	1,466,715
Net interest income				$	84,245						$	69,567						$	61,084
Net interest spread						4.14	%						4.15	%						4.25	%
Net interest margin						4.64	%						4.47	%						4.59	%
Ratio of average interest-earning assets to average interest-bearing liabilities						123.76	%						121.39	%						119.83	%

A-7

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

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

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

A-8

Non-interest Income

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

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

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

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

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

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

Non-interest Expense

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

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

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

A-9

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

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

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

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

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

Income Tax Expense

Income tax expense increased to $11.8 million in 2005, from $8.6 million in 2004 and $8.0 million in 2003. The effective tax rate, computed by dividing income tax expense by income before taxes, was 35.5% in 2005, compared to 36.0% in 2004, and 34.9% in 2003. The effective tax rate is lower than the statutory tax rate primarily due to bank owned life insurance and tax-exempt interest income. The effective tax rate in 2005 and 2003 also benefited from an increase in the rate at which net deferred taxes are expected to be realized. Management anticipates that our effective tax rate will be approximately 36% in 2006.

Return on Equity and Assets

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

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

Financial Condition

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

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

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

Asset/Liability Management

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

A-10

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

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

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

As of December 31, 2005, our cumulative interest rate GAP for the period up to three months was a positive $289.9 million and for the period up to one year was a positive $126.6 million. Based solely on our interest rate GAP of twelve months or less, our net income could be unfavorably impacted by a decrease in interest rates or favorably impacted by an increase in interest rates.

A-11

The following table sets forth the estimated maturity or repricing, and the resulting interest rate GAP of our interest-earning assets and interest-bearing liabilities at December 31, 2005. The amounts are based upon regulatory reporting formats and, therefore, may not be consistent with financial information appearing elsewhere in this report that has been prepared in accordance with accounting principles generally accepted in the United States of America. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits, and competition.

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

The following table presents an analysis of the sensitivity inherent in our net interest income and market value of portfolio equity (market value of assets, less the market value of liabilities). The interest rate scenarios presented in the table include interest rates at December 31, 2005, and as adjusted by instantaneous parallel rate changes upward and downward of up to 200 basis points. Each rate scenario reflects unique prepayment and repricing assumptions.

Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, this analysis is not intended to be a forecast of the actual effect of a change in market interest rates. This analysis is based on the earlier of repricing or contractual final maturity of our assets and liabilities at December 31, 2005.

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

A-12

Investment Portfolio

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

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

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

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

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

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

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

A-13

Loan Portfolio

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

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

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

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

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

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

A-14

Nonperforming Assets

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

Potential problem assets are defined as loans presently accruing interest, and not contractually past due 90 days or more and not restructured, but about which management has doubt as to the future ability of the borrower to comply with present repayment terms, which may result in the reporting of the loans as nonperforming assets in the future. Management monitors the performance and value of any collateral securing such loans monthly, and in cases where the loan balance exceeds estimated fair value of collateral, a specific portion of the allowance for loan losses is allocated to these loans. At December 31, 2005, approximately $1.2 million of the allowance for loan losses was allocated specifically to such loans.

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

	As of December 31,
	2005			2004			2003			2002			2001
	(Dollars in thousands)
Loans past due 90 days or more	$	21		$	4		$	13		$	721		$	3
Non-accrual loans		6,698			7,969			12,515			10,241			2,480
Total nonperforming loans		6,719			7,973			12,528			10,962			2,483
Other real estate owned		778			1,255			1,557			908			272
Total nonperforming assets	$	7,497		$	9,228		$	14,085		$	11,870		$	2,755
Allowance for loan losses	$	17,413		$	15,331		$	14,121		$	11,838		$	7,207
Potential problem assets	$	17,684		$	22,174		$	15,115		$	23,286		$	13,331
Ratio of total nonperforming assets to total assets		0.35	%		0.51	%		0.86	%		0.86	%		0.33	%
Ratio of total nonperforming loans to total loans		0.44	%		0.58	%		1.02	%		1.08	%		0.45	%
Ratio of allowance for loan losses to total nonperforming loans		259	%		192	%		113	%		108	%		290	%

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

Analysis of the Allowance for Loan Losses

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

• A periodic detailed analysis of the loan portfolio

• A systematic loan grading system

• A periodic review of the summary of the allowance for loan loss balance

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

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

• Consideration of risks inherent in different kinds of lending

• Consideration of external factors such as local, regional, and national economic factors

• An overall evaluation of the quality of the underlying collateral, and holding and disposition costs

A-15

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

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

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

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

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

A-16

The provision for loan losses decreased to $3.9 million in 2005, from $4.5 million in 2004 and $5.5 million in 2003. The provision in each year was based on management’s judgment concerning the amount of allowance for loan losses necessary after its review of various factors, which we believe affect the credit quality of the loan portfolio. Charge-offs net of recoveries of loans were $1.8 million in 2005, $3.3 million in 2004, and $3.3 million in 2003. The percentage of net charge-offs to average loans was 0.12% in 2005, 0.26% in 2004, and 0.29% in 2003. Management intends to continue to provide for potential loan losses based upon growth in the portfolio, trends in delinquencies, charge-off experience, and local and national economic conditions.

Deposits

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

	Years ended December 31,
	2005				2004				2003
	(Dollars in thousands)
	Average Balance		Weighted Average Interest Rate		Average Balance		Weighted Average Interest Rate		Average Balance		Weighted Average Interest Rate
Interest-bearing demand accounts	$	267,027	0.84	%	$	237,144	0.47	%	$	199,890	0.45	%
Certificates of deposit		549,677	3.25			527,084	2.83			508,851	3.00
Money market savings accounts		207,056	1.90			194,961	1.35			145,910	1.40
Regular savings accounts		72,882	0.93			67,480	0.85			58,367	0.84
Total interest-bearing deposits		1,096,642	2.25	%		1,026,669	1.87			913,018	2.05
Non-interest-bearing demand accounts		349,570	—			279,101	—			224,680	—
Total deposits	$	1,446,212	1.71	%	$	1,305,770	1.47	%	$	1,137,698	1.64	%

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

	As of December 31,
	2005				2004				2003
	(Dollars in thousands)
Three months or less	$	128,282	37.65	%	$	69,605	21.74	%	$	63,007	23.58	%
Three through six months		57,243	16.80			64,530	20.16			56,613	21.18
Six through twelve months		53,390	15.67			75,104	23.47			61,401	22.98
Over twelve months		101,786	29.88			110,862	34.63			86,235	32.26
Totals	$	340,701	100.00	%	$	320,101	100.00	%	$	267,256	100.00	%

Securities Sold Under Agreements to Repurchase

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

Securities sold under agreements to repurchase are summarized as follows:

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

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

A-17

Short-term FHLB Advances

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

Short-term FHLB advances are summarized as follows:

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

Liquidity and Sources of Funds

Our primary sources of funds are customer deposits, loan repayments, and borrowings. These funds are used to make loans, acquire investment securities and other assets, and fund continuing operations. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments, which are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions, and other factors, are not stable sources of funds. Our deposits increased to $1.510 billion at December 31, 2005, from $1.401 billion at December 31, 2004. Growth in deposits has occurred primarily as a result of our efforts to increase market share by taking advantage of market dislocations caused by the acquisition of local competitors and growth in the economy of our market areas.

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

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

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

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

A-18

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

Contractual Obligations and Commercial Commitments

The following tables present contractual cash obligations, defined as principal of non-deposit obligations with maturities in excess of one year, and property and equipment operating lease obligations, and commercial commitments, defined as commitments to extend credit as of December 31, 2005. See Notes 9, 10, and 13 of the notes to the consolidated financial statements.

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

Capital Resources

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

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

Impact of Inflation

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

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

A-19

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

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

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

A-20

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

First State Bancorporation:

We have audited the accompanying consolidated balance sheets of First State Bancorporation and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

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

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

KPMG LLP

Albuquerque, New Mexico

March 14, 2006

A-21

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

First State Bancorporation:

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

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

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

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

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

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of First State Bancorporation and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005 and our report dated March 14, 2006 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

Albuquerque, New Mexico

March 14, 2006

A-22

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

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

See accompanying notes to consolidated financial statements.

A-23

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

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

See accompanying notes to consolidated financial statements.

A-24

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

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

See accompanying notes to consolidated financial statements.

A-25

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

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

See accompanying notes to consolidated financial statements.

A-26

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share amounts)

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

See accompanying notes to consolidated financial statements.

A-27

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

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

First State Bancorporation is a New Mexico-based holding company that serves communities in New Mexico, Colorado, and Utah through its wholly owned subsidiary First Community Bank, formerly First State Bank N.M. (“First Community Bank” or “Bank”). First Community Bank is a state chartered bank providing a full range of commercial banking services in Taos, Albuquerque, Santa Fe, Rio Rancho, Los Lunas, Bernalillo, Placitas, Pojoaque, Belen, and Moriarty, New Mexico; Denver, Cherry Creek, Littleton, Lakewood, Colorado Springs, Fort Collins, and Longmont, Colorado; and Midvale and Salt Lake City, Utah. First State Bancorporation and First Community Bank are collectively referred to as “the Company.”

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

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

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

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

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

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

(b) Investment Securities

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

A-28

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

(c) Loans, and Allowance for Loan Losses

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

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

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

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

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

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

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

(d) Premises and Equipment

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

A-29

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(e) Goodwill and Intangible Assets

The excess of cost over the fair value of the net assets of acquired banks is recorded as goodwill. The Company tests goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company completed its annual goodwill impairment tests during the fourth quarter in 2005, 2004, and 2003, and found no impairment.

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

(f) Other Real Estate Owned

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

(g) Bank Owned Life Insurance

The Company owns life insurance policies on certain of its officers. The cash surrender value of these policies was approximately $32.0 million and $19.9 million at December 31, 2005 and 2004, respectively. During 2005, the Company purchased additional policies on officers with a value of $10.9 million. The increase in the cash surrender value is included in non-interest income in the consolidated statements of operations and amounted to approximately $1.2 million, $799,000, and $958,000 in 2005, 2004, and 2003, respectively.

(h) Income Taxes

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

(i) Statements of Cash Flows

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

A-30

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(j) Earnings per Common Share

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

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

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

(k) Stock-Based Compensation

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

A-31

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

(l) Reclassifications

Certain previous period balances have been reclassified to conform to the 2005 presentation.

(m) Reporting Comprehensive Income

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

(n) Other New Accounting Standards

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

A-32

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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

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

A-33

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Subsequent Events (unaudited)

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

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

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

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

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

A-34

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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

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

3. Cash and Due from Banks

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

A-35

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Investment Securities

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

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

A-36

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The amortized cost and estimated market value of investment securities at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.

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

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

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

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

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

A-37

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

5. Loans

Following is a summary of loans by major categories:

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

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

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

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

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

A-38

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Approximate loan portfolio maturities on fixed-rate loans and repricings on variable-rate loans at December 31, 2005 are as follows:

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

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

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

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

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

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

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

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

A-39

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Premises and Equipment

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

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

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

7. Goodwill and Intangible Assets

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

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

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

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

A-40

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Following is a summary of intangible assets:

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

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

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

8. Deposits

Following is a summary of interest-bearing deposits:

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

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

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

A-41

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. Borrowings

Securities Sold Under Agreements to Repurchase

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

Securities sold under agreements to repurchase are summarized as follows:

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

Federal Funds Purchased

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

A-42

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Federal Home Loan Bank Advances and Other

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

	As of December 31,
	2005		2004
	(Dollars in thousands)
$14 million note payable to FHLB, interest at 2.33%, due on January 4, 2005	$	—	$	14,000
$60 million note payable to FHLB, interest at 2.24%, due on January 5, 2005		—		60,000
$17 million note payable to FHLB, interest at 2.03%, due on January 7, 2005		—		17,000
$250,000 note payable to FHLB, interest at 8.26%, payable in monthly principal and interest installments of approximately $3,000 through February 1, 2005		—		6
$25 million note payable to FHLB, interest only at 1.52% payable monthly, due on March 16, 2005		—		25,000
$25 million note payable to FHLB, interest only at 1.86% payable monthly, due on April 22, 2005		—		25,000
$40 million note payable to FHLB, interest at 3.74%, due on January 6, 2006		40,000		—
$25 million note payable to FHLB, interest only at 3.22% payable monthly, due on January 12, 2006		25,000		—
$25 million note payable to FHLB, interest only at 4.24% payable monthly, due on January 17, 2006		25,000		—
$25 million note payable to FHLB, interest only at 3.32% payable monthly, due on February 8, 2006		25,000		—
$25 million note payable to FHLB, interest only at 3.71% payable monthly, due on March 16, 2006		25,000		—
$25 million note payable to FHLB, interest only at 3.61% payable monthly, due on April 20, 2006		25,000		—
$25 million note payable to FHLB, interest only at 3.86% payable monthly, due on June 19, 2006		25,000		—
$20 million note payable to FHLB, interest at 2.93%, payable in monthly principal and interest installments of approximately $359,000 through November 1, 2007		8,014		12,020
Other note payable		779		826
Total FHLB Advances and Other	$	198,793	$	153,852

A-43

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

Short-term FHLB advances are summarized as follows:

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

Other Note Payable

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

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

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

10. Junior Subordinated Debentures

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

A-44

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

On May 26, 2005, the Company formed First State NM Statutory Trust IV (“Trust IV”) for the purpose of issuing trust preferred securities (“Trust IV Securities”) in a pooled transaction to unrelated investors. Trust IV issued $10,000,000 of Trust IV Securities that qualify as Tier I capital for regulatory purposes that bear interest at an annual rate equal to the three-month LIBOR plus 1.75% and invested the proceeds thereof in $10,310,000 of junior subordinated deferrable interest debentures of the Company (“Trust IV Debentures”) that also bear interest at an annual rate equal to the three-month LIBOR plus 1.75%. The Trust IV Securities and the Trust IV Debentures provide interest only payments payable at three-month intervals with the rate adjusted quarterly on March 15, June 15, September 15, and December 15 (6.24% at December 31, 2005). Both the Trust IV Securities and the Trust IV Debentures will mature on June 15, 2035; however, they are callable at par beginning June 15, 2010. So long as there are no events of default, the Company may defer payments of interest for up to twenty consecutive interest payment periods. As of December 31, 2005, the Company has not deferred any payments of interest.

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

Junior Subordinated Debentures are summarized as follows:

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

A-45

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Income Taxes

Income tax expense consisted of the following:

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

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

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

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

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

A-46

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. During 2005, the Company increased the rate at which management believes, primarily based upon the Company’s current enacted tax rate, that deferred income taxes will be recognized from 36% to 38%.

In order to fully realize the deferred tax asset on the Company’s consolidated balance sheet at December 31, 2005 of approximately $8.7 million, the Company will need to generate future taxable income of approximately $24.9 million. Based on the Company’s historical and current pre-tax income, management believes it is more likely than not that the Company will realize the benefit of the temporary differences prior to the expiration of the carry-forward period and further believes that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. There can be no assurance, however, that the Company will generate taxable income or any specific level of continuing taxable income.

12. Stockholders’ Equity

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

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

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

For the years ended December 31, 2005, 2004, and 2003, the Company received income tax benefits of $189,000, $363,000, and $1.8 million, respectively, related to the exercise of nonqualifying employee stock options. These benefits are included in cash flows from operating activities in the consolidated statements of cash flows.

A-47

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Outstanding options at December 31, 2005 are as follows:

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

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

A-48

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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

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

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

13. Commitments and Contingencies

Employee Benefit Plans

First Community Bank sponsors an employee tax-sheltered savings plan for substantially all full-time employees which provides a mandatory 50% match by First Community Bank of employee contributions up to a maximum of 6% of gross annual wages. Full vesting occurs after three years. Contributions to the plan totaled approximately $529,000 in 2005, $402,000 in 2004, and $361,000 in 2003.

A-49

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

Leases

The Company leases certain of its premises and equipment under noncancellable operating leases from certain related and unrelated parties. Rent expense for the years ended December 31, 2005, 2004, and 2003, totaled approximately $4.7 million, $4.5 million, and $3.8 million, respectively. Minimum future payments under these leases at December 31, 2005, are as follows:

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

One of the Company’s branch locations was constructed on land owned by a Director of the Company. The Company is leasing the site for an initial term of 15 years. Lease payments were approximately $79,000 in 2005, $76,000 in 2004, and $74,000 in 2003, respectively. Management believes the lease is on terms similar to other third-party commercial transactions in the ordinary course of business.

A-50

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Financial Instruments with Off-balance Sheet Risk

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

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

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

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

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

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

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

Outstanding Letter of Credit

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

Employment Agreements

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

Legal Matters

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

A-51

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. Regulatory Matters

Bank regulations specify the level of dividends that can be paid by First Community Bank. During the year ended December 31, 2005, First Community Bank paid no dividends to First State Bancorporation. As of December 31, 2005, First Community Bank had approximately $41.0 million in retained earnings, which were available for the payment of dividends to First State Bancorporation subject to regulatory capital requirements. Future dividend payments will be dependent upon the level of earnings generated by First Community Bank and/or regulatory restrictions, if any.

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

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

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

A-52

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Condensed Financial Information of Parent Company

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

Condensed Statements of Condition

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

Condensed Statements of Operations

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

A-53

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Statements of Cash Flows

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

16. Fair Value of Financial Instruments

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

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

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

A-54

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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

Federal Home Loan Bank and Federal Reserve Bank Stock. The stock is carried at cost, which approximates market at December 31, 2005 and 2004.

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

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

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

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

Deposits. The estimated fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market deposits, approximates the amounts payable on demand at December 31, 2005 and 2004. The fair value of fixed maturity certificates of deposit is estimated by discounting the future contractual cash flows using the rates currently offered for deposits of similar remaining maturities.

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

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

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

A-55

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

A-56

EX-3.2

EXHIBIT 3.2

ARTICLES OF AMENDMENT

TO THE

ARTICLES OF INCORPORATION

OF

FIRST STATE BANCORPORATION

Pursuant to the provisions of Section 53-13-4 of the New Mexico Business Corporation Act (Chapter 53, Articles 11 through 18 NMSA 1978), FIRST STATE BANCORPORATION hereby adopts the following Articles of Amendment to its Articles of Incorporation:

ARTICLE I.

The name of the corporation is FIRST STATE BANCORPORATION (the “Company”).

ARTICLE II.

The following amendment to the Company’s articles of incorporation was adopted by the shareholders of the Company on June 6, 1997, in the manner prescribed by the New Mexico Business Corporation Act:

Article 4

Section 4.1 Authorized Shares. The total number of shares that the corporation shall have authority to issue is twenty-one million (21,000,000) shares, of which twenty million (20,000,000) shares shall be common stock, no par value and one million (1,000,000) shares shall be preferred shares as determined pursuant to Section 4.3 hereof.

ARTICLE III

The number of shares of the Company’s common stock outstanding on June 6, 1997, was 2,553,380 and the number of shares entitled to vote on the amendment was 2,553,380. No shares of any class were entitled to vote as a class.

ARTICLE IV.

The number of shares voted for the amendment was 2,070,783. The number of shares voted against the amendment was 26,894.

DATED: October 2, 1997

FIRST STATE BANCORPORATION
By:	/s/ Michael Stanford
Michael Stanford, President
By:	/s/ H. Patrick Dee
H. Patrick Dee, Secretary

Under the penalty of perjury, the undersigned declares that the foregoing document executed by the corporations and that the statements contained therein are true and correct to the best of my knowledge.

/s/ Michael Stanford

Michael Stanford

EX-10.7

Exhibit 10.7

FIRST STATE BANCORPORATION

DEFERRED COMPENSATION PLAN

Effective December 1, 2005

FIRST STATE BANCORPORATION

DEFERRED COMPENSATION PLAN

WHEREAS, First State Bancorporation (the “Company”), a New Mexico corporation, recognizes the valuable services performed by certain of its executive employees and the executive employees of related companies and wishes to encourage these employees to continue their employment with their respective employers; and

WHEREAS, the Company now wishes to set forth the terms and conditions upon which compensation of the executive employees may be deferred or additional compensation may be paid to the employees to the employees’ beneficiaries after an employee’s separation from service, retirement, disability, or death in compliance with Section 409A of the Internal Revenue Code and its accompanying regulations.

NOW, THEREFORE, the Company adopts this Plan.

ARTICLE 1.

DEFINITIONS

For purposes of this Plan, unless the context requires otherwise, the following words and phrases shall have the meanings indicated below:

1.1 Account means the account established for each Employee pursuant to Section 2.2.

1.2 Administrator means the compensation committee of the board of directors of the Company. The Administrator shall have the right to delegate certain responsibilities under the Plan and to engage agents as it sees fit to provide assistance with the Plan, including legal, accounting or other service providers.

1.3 Base Compensation means the Participant’s regular wages, salaries, fees, for professional services and other amounts received in the course of regular payroll practices (whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer for payroll periods beginning on or after the first day of the Plan Year to the extent the amounts are includable in gross income, including but not limited to commissions, fringe benefits, reimbursements and expense allowances, but not including those items excludable for the definition of compensation under Treas. Reg. Section 1.415-2(d)(3) and including non-performance based bonuses.

1.4 Beneficiary(ies) means (a) the person or persons, natural or otherwise, so designated in writing by the Employee in a form provided for this purpose and filed with the Administrator (and, in the event that more than one person is so designated, benefits shall be allocated equally among such persons unless another allocation method acceptable to the Administrator is specified in such designation) or (b) the Employee’s estate in the event no such designation is made or no person so designated survives the Employee.

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1.5 Change in Control means the date on which one of the following shall have occurred with respect to the Company, but not with respect to any other Employer:

(a) any one person, or more than one person acting as a “group,” acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of the Company. However, if any one person, or more than one person acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the Company (or to cause a change in the effective control of the Company (within the meaning of paragraph (g)(5)(vi) of Prop. Treas. Reg. § 1.409A-3). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this Section 1.4(a).

(b) Any one person, or more than one person acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 35 percent or more of the total voting power of the stock of the Company;

(c) A majority of members of the Company’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s board of directors prior to the date of the appointment or election;

(d) Any one person, or more than one person acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 40 percent of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

For purposes of this Section 1.5, persons will not be considered to be acting as a group solely because they purchase or own stock of the Company at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

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1.6 Code means the Internal Revenue Code of 1986, as amended at the particular time applicable.

1.7 Disability Date means the date on which the earlier of the following occurs:

(a) The Participant is determined to be disabled under the terms of the long term disability policy then in place with the Employer; or

(b) The Participant is determined to be totally disabled by the Social Security Administration.

1.8 Effective Date means December 1, 2005.

1.9 Employee means an individual who is employed by an Employer as a highly compensated and/or management level employee whom the Employer reasonably anticipates will earn at least $200,000 in total compensation per Plan Year.

1.10 Employer means the Company, its successor and parent and any successor to all or a major portion of the Company’s assets or business which assumes the obligations of the Company, and each other related entity of the Company, including, without limitation, First State Bank of New Mexico.

1.11 ERISA means the Employee Retirement Income Security Act of 1974, as amended at the particular date applicable.

1.12 Participant means an Employee selected by the Administrator in its sole discretion to participate in this Plan who has completed and returned the Plan enrollment forms pursuant to Section 2.1.

1.13 Performance-Based Compensation means the Participant’s compensation, the payment of which or the amount of which is contingent on the satisfaction of pre-established organizational or individual performance criteria and that is calculated based upon a performance period of at least 12 months, such as bonuses or amounts based on profit-sharing criteria.

1.14 Plan means the First State Bancorporation Deferred Compensation Plan as adopted herein and all amendments thereto.

1.15 Plan Year means the 12 consecutive month period ending each December 31.

1.16 Retirement Date means the first day of the first month which coincides with, or immediately follows the earlier of (a) the date on which the Participant reaches 60 years of age with ten years of continuous service with the Employer, or (b) the date on which the Participant reaches age 65 with five years of continuous service with the Employer; or, if later, the date on which the Participant actually retires.

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1.17 Termination Date means the first day of the first month that coincides with, or immediately follows, the date on which the Employee terminates service with his or her Employer (without being immediately employed by another Employer) and has not forfeited benefits pursuant to Article 5. Termination Date shall not include the date on which an Employee begins an approved leave of absence from the Employer; provided that, failure to return from such leave of absence on a timely basis shall result in a Termination Date on the earlier of (1) six months following the date on which the approved leave began; or (2) the date on which the Employee was scheduled to return.

1.18 Trust means the trust executed by and between the Company and such trustee as may be chosen by the Administrator. The trust shall be a “rabbi trust” established in accordance with Internal Revenue Service Revenue Procedure 94-52.

1.19 Unforeseeable Emergency means a severe financial hardship of a Participant or a Beneficiary resulting from:

(a) an illness or accident of the Participant or Beneficiary, or his or her spouse or dependent (as defined in section 152(a)), including the need to pay for medical expenses such as non-refundable deductibles and the costs of prescription drug medication;

(b) loss of the Participant or Beneficiary’s property due to casualty, including the need to rebuild a home following damage to a home not otherwise covered by insurance (for example, not as a result of a natural disaster);

(c) imminent foreclosure of or eviction from the Participant’s or Beneficiary’s primary residence;

(d) funeral expenses of a spouse or a dependent; or

(e) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or Beneficiary.

The purchase of a home and the payment of college tuition are not unforeseeable emergencies.

ARTICLE 2.

BENEFIT

2.1 Enrollment. As a condition of participation, each Participant shall complete, execute and return to the Administrator within 30 days of the initial date of eligibility, an election form, a beneficiary designation form, and any other enrollment documentation that may be required by the Administrator from time to time in its sole discretion. Participation in the Plan shall begin as of the first day of the first payroll period following receipt by the Administrator of such forms or as soon as practicable thereafter.

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2.2 Participant Accounts. Each Participant shall have an Account established in his or her name under the Plan to which his or her Employer shall credit an annual benefit as specified in Section 2.3. The Administrator shall cause benefit statements reflecting the current amount in the Participant’s Account to be distributed to each Participant on an annual basis.

2.3 Benefit. The Employer of the Participant shall contribute and each Participant’s Account shall be credited with an amount equal to the sum of (a) and (b), as follows:

(a) Employer Contribution. The Employer may contribute an amount to each Participant’s Account determined in the sole discretion of the Employer. The contribution may be different with respect to each Participant, and may, without limitation, be calculated in accordance with certain pre-established performance goals or with reference to the amount of the Participant’s contribution. The contribution shall be made on a date at the beginning of each Plan Year in respect of the immediately preceding Plan Year, or at such other time as the Administrator may determine in its sole discretion.

(b) Participant Contribution.

(1) Base Compensation Deferral Election. The Participant may elect, on the form provided by the Administrator, to contribute a dollar amount or percentage of Base Compensation that otherwise would be payable to the Participant by the Employer. The minimum amount of Base Compensation that may be deferred under the Plan for any Plan Year by a Participant is 5% of a Participant’s Base Compensation. The maximum amount that may be deferred under the Plan for any Plan Year by a Participant is 50% of the Participant’s Base Compensation. An initial election to defer receipt of Base Compensation must be made not later than 30 days after the date the Employee becomes a Participant. Any subsequent election to defer receipt of Base Compensation by the Participant must be made before the first day of the Plan Year for which the Base Compensation is payable.

(2) Performance-Based Compensation Deferral Election. The Participant may elect, on the form provided by the Administrator, to contribute a dollar amount or percentage of Performance-Based Compensation that otherwise would be payable to the Participant by the Employer. The minimum amount that may be deferred under the Plan for any Plan Year by a Participant is 5% of a Participant’s Performance-Based Compensation. The maximum amount that may be deferred under the Plan for any Plan Year by a Participant is 100% of the Participant’s Performance-Based Compensation. An initial election to defer receipt of Base Compensation must be made not later than 30 days after the date the Employee becomes a Participant. Any subsequent election to defer receipt of Performance-Based Compensation by the Participant must be made no later than 6 months before the end of the period used to calculate the Performance-Based Compensation.

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2.4 Investment of Account. To the extent the Participant’s Account is held in the Trust, the Participant shall have the right, consistent with the terms of the Trust, to invest the amounts credited to his or her Account among the investment vehicles selected by the Administrator in its sole discretion, which may include, without limitation, variable life insurance products and mutual funds. Any losses incurred or gains realized by the Participant shall be subtracted from or added to the amount in the Participant’s Account on a regular frequency as determined by the Administrator. A Participant may choose to reallocate the amounts in his or her Account among the investment alternatives on a regular frequency as determined solely by the Administrator.

2.5 Obligation Limited to Account. The Employer shall have no additional financial obligation to the Participant under this Plan beyond the amounts credited to the Participant’s Account in accordance with this Article 2.

ARTICLE 3.

VESTING OF BENEFITS

3.1 Vesting. All amounts contributed to a Participant’s Account pursuant to Section 2.3 (b) of the Plan shall be immediately vested. All amounts contributed to a Participant’s Account pursuant to Section 2.3(a) of the Plan shall be vested in accordance with the following schedule, subject to the forfeiture provision of Article 5:

Completed Years of Employment	Vested Percentage
0	0
1	33	%
2	67	%
3	100	%

Such vesting schedule shall also apply to investment gains and earnings, if any, earned on the Participant’s Account pursuant to Section 2.4.

“Years of Employment” shall mean 12 consecutive month periods measured from the later of: (a) the Effective Date of the Plan; or (b) the date of the Employee’s initial employment with the Employer. There shall be no vesting credit for past employment.

3.2 Subject to Trust. The Employer’s obligation to the Participants is an unfunded, unsecured promise to pay compensation in the future. No Participant or Beneficiary shall acquire any property interest in his or her Account or any other assets of the Employer, their rights being limited to receiving from the Employer deferred payments as set forth in this Plan and the underlying Trust. All amounts contributed

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to the Trust with respect to the Participants shall be held in accordance with the terms of the Trust. All amounts credited to a Trust account shall be subject to the claims of the general creditors of the Employer. Nothing contained in the Plan shall constitute a guaranty by any person that the assets of an Employer will be sufficient to pay any benefit hereunder.

3.3 Acceleration of Vesting. A Participant’s unvested Account shall become immediately vested in the event of:

(a) a Change in Control,

(b) the Participant’s Retirement Date,

(c) the Participant’s death or presumed death while employed by the Employer, or

(d) the Participant’s Disability Date.

ARTICLE 4.

PAYMENT OF BENEFIT

4.1 Employee’s Retirement or Disability. Upon the earlier of a Participant’s Retirement Date or Disability Date, the Participant shall be entitled to receive a distribution equal to the Participant’s vested Account balance under the Plan as of the date of such Retirement Date or Disability Date. Such distribution shall be paid in a single lump sum, or, upon the Participant’s valid election, in substantially equal annual installments over a period of either five or ten years. Any such election must be made not later than 30 days following the date on which the Employee first becomes a Participant. If permitted by the Administrator, a Participant may elect a different form of distribution prospectively only, for any amounts to be deferred or added to his or her Account in a subsequent Plan Year, provided that such election is made prior to the Plan Year to which the election applies.

Payment shall be made (or shall begin) on the first day of the month following the date on which the Account becomes payable, or as soon as administratively practicable thereafter. Each subsequent payment (if applicable) shall be made on the anniversary of the first distribution date. Where the installment form of distribution is selected, the amount of each installment shall be calculated by dividing the Participant’s vested Account balance as of the date of the distribution by the number of installments remaining pursuant to the Participant’s distribution election. Each installment shall take into account earnings or losses, if any, attributable to the balance of the vested Account remaining unpaid.

Notwithstanding the foregoing, if the Participant’s vested Account does not exceed $10,000 on the date on which the Participant becomes entitled to a distribution of his or her Account (whether lump sum or installment), the Administrator may elect to pay the value of the Account to the Participant in a single lump sum distribution.

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4.2 Participant’s Termination or Death. Upon the earlier of a Participant’s Termination Date or death (or presumed death), the Participant’s vested Account balance under the Plan shall be distributed to the Participant or, in the event of death or presumed death, to the Participant’s Beneficiary, in a single lump sum as soon as practicable following the Termination Date or date of death (or presumed death).

4.3 Delay in Payment for Specified Employee. If the Participant is determined by the Employer to be a “specified employee” within the meaning of Prop. Treas. Reg. §1.409A-1(i) or any successor regulation, then any payment made on account of the Participant reaching his Termination Date or actual retirement shall be made (or shall begin) on the first day of the month following the six-month anniversary of the date the Participant’s Termination Date or actual retirement, or as soon as administratively practicable thereafter. Each subsequent payment (if applicable) shall be made on the anniversary of the Participant’s Termination Date. No delay is required for payments made on account of the Participant’s death (or presumed death) or attainment of his Retirement Date (unless the Participant actually retires) or Disability Date.

4.4 Change in Control. Upon the occurrence of a Change in Control, a Participant shall be entitled to receive a distribution equal to the Participant’s Account balance under the Plan (after application of Section 3.3). Such distribution shall be paid in a single lump sum or, upon the Participant’s valid election, in substantially equal annual installments over a period of three years. Such election must be made on the Participant’s initial election to participate in the Plan. Payment shall be made (or shall begin) on the first day of the month following the date on which the Change in Control occurs, or as soon as administratively practicable thereafter. Each subsequent payment (if applicable) shall be made on the anniversary of the first distribution date. Unless otherwise provided in a Participant’s current employment agreement with an Employer, if payment of a Participant’s vested account balance will, when combined with other payments to the Participant under other plans or agreements, create an excise tax liability to a Participant pursuant to Code section 280G, then the amount of the distribution from this Plan may be reduced by the Employer at the written direction of the Participant to prevent any imposition of such excise tax; provided that, the balance in the Participant’s Account will be distributed as soon as practicable following the one-year anniversary of the Change in Control, or such later date as the Administrator determines, in its sole discretion, will not result in the characterization of such payment as an “excess parachute payment.”

4.5 Distribution upon Unforeseeable Emergency. A Participant may elect to receive a distribution of all or a portion of his or her Account balance at any time if the Participant experiences an Unforeseeable Emergency. Whether a Participant is faced with an Unforeseeable Emergency permitting a distribution under this Section 4.5 is to be determined based on the relevant facts and circumstances, but, in any case, a distribution on account of Unforeseeable Emergency may not be made to the extent that such emergency is or may be relieved through reimbursement or

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compensation from insurance or otherwise, by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not cause severe financial hardship, or by cessation of deferrals under the Plan. Moreover, a distribution because of an Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need (which may include amounts necessary to pay any Federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution). A Participant who receives a distribution pursuant to this Section 4.5 shall be prohibited from participating in the Plan for the remainder of the Plan Year in which the distribution is made.

4.6 Form of Payment. The Participant’s vested Account shall be payable solely in the form of cash.

4.7 Constructive Receipt. If and only to the extent this Plan is determined to fail to meet the requirements of Code Section 409A and Proposed Treas. Reg. 1.409A-1 et. seq. or any successor regulations, payment may be made to a Participant. Such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A and the regulations.

4.8 Withholding. All amounts payable to the Participant or the Participant’s Beneficiary shall be made subject to all applicable federal and state withholding requirements.

ARTICLE 5.

FORFEITURE OF BENEFIT

Notwithstanding any other provision of the Plan, in the event that a Participant’s employment with the Employer is terminated for cause as determined in the sole discretion of the Administrator, the Participant shall forfeit any benefit payment otherwise payable to the Participant under Section 2.3(a) of the Plan. For the purpose of the Plan, “cause” shall be: (1) the definition of “cause” used in the Employee’s current employment agreement with the Employer; or, (2) if the Participant has not entered into an employment agreement with the Employer, as determined in the sole and absolute discretion of the Administrator: (a) refusal to obey written directions of the Board of Directors or a superior officer (so long as such directions do not involve illegal or immoral acts); (b) substance abuse that is injurious to the Employer; (c) fraud or dishonesty that is injurious to the Employer; (d) breach of any obligation of nondisclosure or confidentiality owed to the Employer; (e) commission of a criminal offense involving money or other property of the Employer (excluding any traffic violations or similar violations); or (f) commission of a criminal offense that constitutes a felony or a misdemeanor involving moral turpitude, recklessness or fraud in the jurisdiction in which the offense is committed. A Participant who agrees to resign from his or her affiliation with the Employer in lieu of being terminated for cause may be deemed to have been terminated for cause for purposes of the Plan.

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ARTICLE 6.

AMENDMENT OR TERMINATION OF PLAN

The Company reserves the right to amend or terminate this Plan at any time and from time to time for any reason by action of the board of directors of the Company; provided, that no amendment shall affect an Employee’s right to receive benefits under Section 2.3(b) upon termination of the Plan. The Administrator shall have the right to amend this Plan at any time and from time to time if such amendment is necessary to comply with the Code, ERISA or if, in the judgment of the Administrator, such amendment will not result in any material increase in the benefits provided under or the cost of maintaining the Plan. Any such amendment may be made retroactively effective to the extent permitted by applicable law. No Employer other than the Company shall have the right to amend or terminate this Plan.

ARTICLE 7.

MISCELLANEOUS

7.1 Effect Upon Employment. Nothing contained herein shall be construed to be a contract of employment for any term of years, and this Plan shall not confer upon an Employee the right to continue in the employ of the Employer.

7.2 Non-Assignability. A Participant may not voluntarily or involuntarily anticipate, assign, or alienate (either at law or in equity) any benefit under the Plan. Furthermore, a benefit under the Plan shall not be subject to attachment, garnishment, levy, execution, or other legal or equitable process.

7.3 Participation in Other Plans. Nothing in this Plan shall affect any right that a Participant may otherwise have to participate in any retirement plan or agreement that the Employer has adopted or may adopt hereafter.

7.4 Governing Law. To the extent not preempted by federal law, this Plan shall be construed in accordance with, and shall be governed by, the laws of the State of New Mexico.

7.5 Entire Understanding. This instrument contains the entire understanding between the Employer and the Participants relating to the Plan, and supersedes any prior agreement between the parties, whether written or oral.

7.6 Provisions Severable. To the extent that any one or more of the provisions of the Plan shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired.

7.7 Status under ERISA and the Code. This Plan is intended to be an unfunded plan for the benefit of a select group of management or highly compensated employees (a “top hat” plan) within the meaning of the ERISA, only to the extent that ERISA may be deemed to apply, and shall be interpreted and administered to the extent possible in a manner consistent with that intent. Any claim or appeal for benefits made

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under this Plan shall be processed in accordance with the claims procedures outlined in Part V of Title I of ERISA. This Plan is intended to comply with Section 409A of the Internal Revenue Code and shall be interpreted to so comply.

7.8 Indemnification. The Company agrees to indemnify and defend to the fullest extent permitted by law all persons who are, were, or may serve as Administrator against any liabilities, damages, costs and expenses (including attorney’s fees and amounts paid in settlement of any claim approved by the Company) occasioned by their occupying or having occupied an administrative position in connection with the Plan, except when due to their willful misconduct or recklessness.

The following page is the execution page]

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In witness whereof, the Company has executed this Plan on the date written below.

FIRST STATE BANCORPORATION
By:	/s/ Michael R. Stanford
	Michael R. Stanford
Title:	President and Chief Executive Officer
Date:	December 1, 2005

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EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

First State Bancorporation:

We consent to the incorporation by reference in the registration statements (No. 333-17727) on Form S-3, and (No. 333-3048, No. 333-92795, No. 333-83132, No. 333-107061, and No. 333-131642) on Form S-8 of First State Bancorporation of our reports dated March 14, 2006, with respect to the consolidated balance sheets of First State Bancorporation and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005, annual report on Form 10-K of First State Bancorporation.

KPMG LLP

Albuquerque, New Mexico

March 15, 2006

EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Michael R. Stanford, certify that:

1. I have reviewed this report on Form 10-K of First State Bancorporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2006
	/s/ Michael R. Stanford
	Michael R. Stanford
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Christopher C. Spencer, certify that:

1. I have reviewed this report on Form 10-K of First State Bancorporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2006
	/s/ Christopher C. Spencer
	Christopher C. Spencer
	Senior Vice President and
	Chief Financial Officer, and
	Principal Accounting Officer

EX-32.1

Exhibit 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

In connection with the Annual Report on Form 10-K of First State Bancorporation, a New Mexico corporation (the “Company”), for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Stanford, as President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to First State Bancorporation and will be retained by First State Bancorporation and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ Michael R. Stanford

Michael R. Stanford

President and Chief Executive Officer

March 16, 2006

This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 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

In connection with the Annual Report on Form 10-K of First State Bancorporation, a New Mexico corporation (the “Company”), for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher C. Spencer, as Senior Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to First State Bancorporation and will be retained by First State Bancorporation and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ Christopher C. Spencer

Christopher C. Spencer

Senior Vice President and Chief Financial Officer,

and Principal Accounting Officer

March 16, 2006

This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.