FIRST STATE BANCORPORATION - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10 - Q

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2002.

or

[ ] 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 1-12487

FIRST STATE BANCORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEW MEXICO 85-0366665
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

7900 JEFFERSON NE
ALBUQUERQUE, NEW MEXICO 87109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(505) 241-7500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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 XX No
--- ---

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 7,323,237 shares of common
stock, no par value, outstanding as of November 12, 2002.

FIRST STATE BANCORPORATION AND SUBSIDIARY

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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FIRST STATE BANCORPORATION AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(unaudited)

See accompanying notes to unaudited consolidated condensed financial statements.

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FIRST STATE BANCORPORATION AND SUBSIDIARY
Consolidated Condensed Statements of
Operations For the three and nine months ended
September 30, 2002 and 2001
(unaudited)

See accompanying notes to unaudited consolidated condensed financial statements.

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FIRST STATE BANCORPORATION AND SUBSIDIARY
Consolidated Condensed Statements of Comprehensive
Income For the three and nine months ended September
30, 2002 and 2001
(unaudited)

See accompanying notes to unaudited consolidated condensed financial statements.

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FIRST STATE BANCORPORATION AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
For the three and nine months ended September 30, 2002 and 2001
(unaudited)

See accompanying notes to unaudited consolidated condensed financial statements.

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FIRST STATE BANCORPORATION AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
(unaudited)

1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The accompanying consolidated condensed financial statements are unaudited and
include our accounts and those of our subsidiary, First State Bank N.M. (the
"Bank") (100% owned). All significant intercompany accounts and transactions
have been eliminated. Information contained in our consolidated condensed
financial statements and notes thereto should be read in conjunction with our
consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K for the year ended December 31, 2001.

The consolidated condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and instructions to Form 10-Q. Accordingly,
they do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In our opinion, all adjustments (consisting only of
normally recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2002, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.

2. EARNINGS PER COMMON SHARE

Basic earnings per share are computed by dividing income available to common
stockholders (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 for the quarters and nine months ended September
30:

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3. STOCKHOLDERS' EQUITY

In connection with our acquisition and merger of First Community Industrial Bank
into First State Bank N.M., we issued 2.4 million shares of our common stock. We
offered these shares to the public at a price of $22.50 per share. In connection
with this offering, we paid a 5% commission to the underwriters, and certain
legal, accounting, and printing expenses resulting in net proceeds to us of
approximately $51.4 million. The net proceeds were used to pay a portion of the
purchase price for First Community Industrial Bank.

Our Board of Directors has authorized us to purchase up to 525,000 shares of our
common stock. As of September 30, 2002, we have purchased 354,050 shares,
including 4,500 shares totaling $93,967 during the first nine months of 2002. We
may purchase additional shares, the amount of which will be determined by market
conditions.

4. NEW ACCOUNTING PRONOUNCEMENTS

We adopted Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"),
"Goodwill and Other Intangible Assets," as of January 1, 2002, and no longer
amortize goodwill. As of the date of adoption, we had unamortized goodwill in
the amount of $360,852, which was subject to the transition provisions of SFAS
No. 142. We have determined there is no transitional impairment loss at January
1, 2002. There was no amortization expense for the three and nine months ended
September 30, 2002, whereas this expense amounted to $26,051 for the three
months ended September 30, 2001, and $78,154 for the nine months ended September
30, 2001. Our reported net income for the three and nine months ended September
30, 2001, adjusted for the effects of goodwill amortization, would have been
$2,115,793 compared to $2,285,812 for the three months ended September 30, 2002
and $6,063,438 compared to $6,616,697 for the nine months ended September 30,
2002. Likewise, our basic and diluted earnings per share for the three months
ended September 30, 2001 adjusted for excluding the effects of goodwill
amortization would have been $0.43 and $0.42, respectively, compared to $0.38
and $0.36, respectively, for the three months ended September 30, 2002. Our
basic and diluted earnings per share for the nine months ended September 30,
2001 adjusted for excluding the effects of goodwill amortization would have been
$1.24 and $1.20, respectively, compared to $1.25 and $1.21, respectively, for
the nine months ended September 30, 2002.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
but retains many of the fundamental provisions of SFAS No. 121. SFAS No. 144
also supersedes APB Opinion No. 30, "Reporting the Results of Operations,
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144
retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held for sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The adoption of SFAS No. 144 did not have an impact
on our consolidated financial statements.

5. JUNE 2002 OFFERING OF TRUST PREFERRED SECURITIES

In June 2002, we formed First State NM Statutory Trust II for the purpose of
issuing trust-preferred securities in a pooled transaction to unrelated
investors. The trust preferred transaction closed on June 26, 2002. First State
NM Statutory Trust II used the gross proceeds from the sale of trust-preferred
securities to purchase $25,774,000 of Junior Subordinated Deferrable Interest
Debentures issued by us, which are included in long-term debt in the
accompanying consolidated condensed balance sheet at September 30, 2002. The
debentures have a final maturity of 30 years and bear interest at an annual rate
equal to the three-month London Interbank Offered Rate plus 3.45%, payable at
three-month intervals. The annual rate of interest on the debentures is equal to
5.24% at September 30, 2002. The annual rate is adjusted at each payment date
and was most recently adjusted on September 26, 2002. Prior to June 26, 2007,
the annual rate will not exceed 11.95%. The debentures are callable at par
beginning June 26, 2007. So long as there are no events of default, we may defer
payments of interest for up to twenty consecutive interest payment periods.
However, if we defer payments of interest, we will be prohibited from paying any
dividends on any class of capital stock for as long as the trust preferred
interest payments remain deferred.

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6. ACQUISITION OF FIRST COMMUNITY INDUSTRIAL BANK

On October 1, 2002, we completed our acquisition and merger of First Community
Industrial Bank, a former indirect subsidiary of Washington Mutual, Inc., into
First State Bank N.M. The acquisition price was approximately $67.1 million and
was financed through the public offering of approximately 2.4 million shares of
our common stock, which netted us approximately $51.4 million and was completed
in August 2002, and through the issuance of approximately $25.0 million in trust
preferred securities in June 2002.

The acquisition will be accounted for on October 1, 2002 as a purchase in
accordance with the provisions of Statement of Financial Accounting Standards
No. 141, Business Combinations and will result in the creation of tax-deductible
goodwill and certain identifiable intangible assets with both definite and
indefinite lives.

The Statements of Operations for the three and nine months ended September 30,
2002 do not include the results of operations of the assets acquired and
liabilities assumed as a result of this acquisition.

The following is a condensed summary of management's current estimates of the
assets acquired and liabilities assumed in the acquisition. Management is in the
process of finalizing the determination of the fair values of the assets
acquired and liabilities assumed; accordingly, the following estimates will be
adjusted and certain identifiable intangibles will be quantified upon the
completion of management's valuation process.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

CONSOLIDATED CONDENSED BALANCE SHEETS

Our total assets increased by $170.6 million from $827.9 million as of December
31, 2001, to $998.5 million as of September 30, 2002. The increase was primarily
made up of a $67.0 million increase in cash and cash equivalents, a $1.6 million
increase in investment securities, and an $87.7 million increase in net loans.
The increases in assets were funded by increased deposits of $99.4 million,
issuance of trust-preferred securities of approximately $25.0 million, and
issuance of 2.4 million shares of common stock with net proceeds to us of
approximately $51.4 million. The proceeds from the issuance of common stock and
a portion of the proceeds from the issuance of trust preferred securities were
used to fund the $67.1 million purchase price of First Community Industrial
Bank.

We believe that the increase in loans, particularly real estate mortgage loans,
is partially a result of our continuing effort to increase our market share by
providing local decision-making and service to business customers in our markets
and partially a result of increased loan demand spurred by the current low
interest rate environment. We do not believe that the increase in loans has
significantly altered our credit risk profile.

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

Deposits, which are our main source of funds for loans, investments, and federal
funds sold, increased by $99.4 million from $685.0 million as of December 31,
2001, to $784.4 million as of September 30, 2002. We believe that this increase
is a result of our continuing efforts to increase market share. Customer
repurchase agreements decreased by $10.3 million from $72.3 million at December
31, 2001, to $62.0 million at September 30, 2002. The following table represents
customer deposits, by category, at the dates indicated.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002

Our net income for the three months ended September 30, 2002, was $2.3 million,
an increase of $196,000 or 9.4% from $2.1 million for the same period of 2001.
The increase in net income resulted from an increase in net interest income
before provision for loan losses of $677,000 and an increase in non-interest
income of $778,000, partially offset by an increase in non-interest expenses of
$1.4 million. Our annualized return on average assets was 0.96% for the three
months ended September 30, 2002, compared to 1.12% for the same period of 2001.

Our net interest income before the provision for loan losses increased $677,000
to $9.8 million for the third quarter of 2002 compared to $9.1 million for the
third quarter of 2001. This increase was composed of a $216,000 decrease in
total interest income offset by an $893,000 decrease in total interest expense.
The decrease in interest income was composed of an increase of $3.2 million due
to an increase in average interest earning assets of $180.5 million, offset by a
$3.4 million decrease due to a 1.75% decrease in the yield on average interest
earning assets. The decrease in total interest expense was due to a $798,000
increase in interest expense resulting from a $120.6 million increase in average
interest bearing liabilities and a $1.7 million decrease in interest expense due
to a 1.15% decrease in the cost of interest bearing liabilities.

The decrease in yield on interest earning assets reflects the impact of the
current low rate environment, which resulted from the Federal Reserve Bank's
reductions of the discount rate in 2001. These cuts in the discount rate
contributed to a series of corresponding reductions in the prime rate. A
substantial portion of our loan portfolio consists of adjustable rate loans
whose rates are adjusted based upon the then prevailing prime rate. The decrease
in the prime rate has led to a corresponding reduction in the yield on our loan
portfolio. We aim to keep the maturity of our investment securities relatively
short. As a result of the current low rate environment, our policy of investing
in securities with short maturities has caused us to experience reduced yields
on our securities as they mature and are reinvested.

-9-

The decrease in our cost of interest bearing liabilities is a result of lower
interest payments made to our deposit and repurchase agreement customers. The
interest rate that we pay to our deposit and repurchase agreement customers is
influenced by the level of the discount rate. As a result of the series of
reductions in the discount rate that were made by the Federal Reserve Bank in
2001, we reduced the interest rates that we pay on our customers' deposits and
repurchase agreements and reduced the corresponding interest payments to these
customers. This decrease was partially offset by the issuance of trust-preferred
securities that bear a higher interest rate than customer deposits or repurchase
agreements.

We believe that the competitive environment for deposits will significantly
determine the impact on the net interest margin of changes in interest rates. We
also believe that additional decreases in rates would cause compression of our
net interest margin, while increases would cause an increase in our net interest
margin.

Our provision for loan losses was $469,000 for the third quarter of 2002,
compared to $627,000 for the third quarter of 2001. Net charge-offs for the
third quarter of 2002 were $170,000 compared to $388,000 for the third quarter
of 2001. The allowance for loan losses to total loans was 1.26% and the
allowance for loan losses to non-performing loans was 226% at September 30,
2002, compared to the allowance for loan losses to total loans of 1.33% and the
allowance for loan losses to non-performing loans of 262% at September 30, 2001.
Total non-performing assets to total assets were 0.44% at September 30, 2002,
compared to 0.41% at September 30, 2001. We provide for loan losses based upon
our judgments concerning the adequacy of the allowance for loan losses
considering such factors as loan growth, delinquency trends, previous charge-off
experience, and local and national economic conditions.

Our total non-interest income increased by $778,000 to $3.3 million for the
three months ended September 30, 2002, compared to $2.5 million for the same
period of 2001. The increase was primarily composed of a $172,000 increase in
gains on sales of mortgage loans, caused by greater new home construction and
refinancing resulting from the lower interest rate environment, a $221,000
increase in credit and debit card transaction fees resulting from increased
transaction volume due to increased market share, a $160,000 increase in service
charges on deposits resulting from increased deposits, and a $160,000 increase
in other banking service fees primarily due to increased volume in ATM fees.

We believe that if interest rates stabilize or begin to increase, the demand for
mortgage loans to refinance existing mortgage loans or for new home construction
will decrease and we will see a decrease in gains on sales of mortgage loans and
other loan fees associated with our mortgage lending operations.

Our total non-interest expenses increased by $1.4 million to $9.1 million for
the third quarter of 2002, compared to $7.7 million for the same period of 2001.
This increase was due partially to increases in salaries and employee benefits,
occupancy expense, and credit and debit card interchange expense. Salary and
employee benefits expense increased $716,000 resulting from a $147,000 increase
in mortgage loan commissions, and from our overall growth and annual salary
increases. Expense related to debit and credit card transactions increased by
approximately $165,000 in the third quarter of 2002. Each of these items had
corresponding increases in non-interest income.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

Our net income for the nine months ended September 30, 2002, was $6.6 million,
an increase of $631,000 or 11% from $6.0 million for the same period of 2001.
The increase in net income resulted from an increase in net interest income
before provision for loan losses of $3.0 million and an increase in non-interest
income of $2.4 million, partially offset by an increase in non-interest expenses
of $4.5 million and income taxes of $477,000. Our annualized return on average
assets was 1.01% for the nine months ended September 30, 2002, compared to 1.16%
for the same period of 2001.

Our net interest income before the provision for loan losses increased $3.0
million to $29.1 million for the nine months ended September 30, 2002, compared
to $26.0 million for the same period of 2001. This increase was composed of a
$1.0 million decrease in total interest income and a $4.0 million decrease in
total interest expense. The decrease in interest income was composed of an
increase of $9.7 million due to increased average interest earning assets of
$161.9 million offset by $10.7 million due to a 1.89% decrease in the yield on
average interest earning assets. The decrease in total interest expense was due
to a $2.7 million increase in interest expense resulting from a $122.7 million
increase in average interest bearing liabilities and a $6.7 million decrease in
interest expense due to a 1.6% decrease in the cost of interest bearing
liabilities.

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The decrease in yield on interest earning assets reflects the impact of the
current low rate environment, which resulted from the Federal Reserve Bank's
reductions of the discount rate in 2001. These cuts in the discount rate
contributed to a series of corresponding reductions in the prime rate. A
substantial portion of our loan portfolio consists of adjustable rate loans
whose rates are adjusted based upon the then prevailing prime rate. The decrease
in the prime rate has led to a corresponding reduction in the yield on our loan
portfolio. We aim to keep the maturity of our investment securities relatively
short. As a result of the current low rate environment, our policy of investing
in securities with short maturities has caused us to experience reduced yields
on our securities as they mature and are reinvested.

The decrease in our cost of interest bearing liabilities is a result of lower
interest payments made to our deposit and repurchase agreement customers. The
interest rate that we pay to our deposit and repurchase agreement customers is
influenced by the level of the discount rate. As a result of the series of
reductions in the discount rate that were made by the Federal Reserve Bank in
2001, we reduced the interest rates that we pay on our customers' deposits and
repurchase agreements and reduced the corresponding interest payments to these
customers. This decrease was partially offset by the issuance of trust-preferred
securities that bear a higher interest rate than customer deposits or repurchase
agreements.

We believe that the competitive environment for deposits will significantly
determine the impact on the net interest margin of changes in interest rates. We
also believe that additional decreases in rates would cause compression of our
net interest margin, while increases would cause an increase in our net interest
margin.

Our provision for loan losses was $1.7 million for the first nine months of
2002, compared to $1.8 million for the first nine months of 2001. Net
charge-offs for the nine months ended September 30, 2002 were $816,000 compared
to $1.1 million for the nine months ended September 30, 2001. The allowance for
loan losses to total loans was 1.26% and the allowance for loan losses to
non-performing loans was 226% at September 30, 2002, compared to the allowance
for loan losses to total loans of 1.33% and the allowance for loan losses to
non-performing loans of 262% at September 30, 2001. Total non-performing assets
to total assets were 0.44% at September 30, 2002, compared to 0.41% at September
30, 2001. We provide for loan losses based upon our judgments concerning the
adequacy of the allowance for loan losses considering such factors as loan
growth, delinquency trends, previous charge-off experience, and local and
national economic conditions.

Our total non-interest income increased by $2.4 million to $9.1 million for the
nine months ended September 30, 2002, compared to $6.7 million for the same
period of 2001. For the first nine months of 2002 compared to the first nine
months of 2001, the gains on sales of mortgage loans increased $622,000 as a
result of greater new home construction and refinancing resulting from the lower
interest rate environment, credit and debit card transaction fees increased
$778,000 resulting from increased transaction volume due to increased market
share, service charges on deposit accounts increased $379,000 as a result of
increased deposits, and other banking service fees increased $442,000 primarily
as a result of increased volume of ATM fees.

We believe that if interest rates stabilize or begin to increase, the demand for
mortgage loans to refinance existing mortgage loans or for new home construction
will decrease and we will see a decrease in gains on sales of mortgage loans and
other loan fees associated with our mortgage lending operations.

Our total non-interest expenses increased by $4.5 million to $26.1 million for
the nine months ended September 30, 2002, compared to $21.6 million for the same
period of 2001. This increase was partially due to a $2.0 million increase in
salary and employee benefits expense resulting from a $531,000 increase in
mortgage loan commissions, and our overall growth and annual salary increases.
Expenses related to debit and credit card transactions increased approximately
$658,000 for the nine months ended September 30, 2002.

ALLOWANCE FOR LOAN LOSSES

We use a systematic methodology, which is applied monthly, to determine the
amount of allowance for loan losses and the resultant provisions for loan losses
we consider adequate to provide for anticipated loan losses. The allowance is
increased by provisions charged to operations, and reduced by loan charge-offs,
net of recoveries. The following table sets forth information regarding changes
in our allowance for loan losses for the periods indicated. The principal factor
affecting the amount of the provision in each of the periods presented was
growth in the loan portfolio.

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Potential problem loans are loans not included in non-performing loans that we
have serious doubts as to the ability of the borrowers to comply with present
loan repayment terms.

LIQUIDITY AND CAPITAL EXPENDITURES

Our primary sources of funds are customer deposits, loan repayments, and
maturities of investment securities. We have additional sources of liquidity in
the form of borrowings. Borrowings include federal funds purchased, securities
sold under repurchase agreements, and borrowings from the Federal Home Loan
Bank.

ACQUISITION OF FIRST COMMUNITY INDUSTRIAL BANK

On October 1, 2002, we completed the acquisition and merger of First Community
Industrial Bank into our wholly owned subsidiary, First State Bank N.M. We
purchased First Community, which was an indirect subsidiary of Washington
Mutual, Inc., for approximately $67.1 million. We financed this acquisition
through a public offering of our common stock in August of 2002, which netted us
approximately $51.4 million and through the issuance of approximately $25.0
million in trust preferred securities in June of 2002.

First Community was a Colorado-chartered industrial bank headquartered in
Denver, Colorado. The acquisition adds First Community's six branches in the
Colorado front-range markets and three branches in the Salt Lake City and Ogden,
Utah metropolitan areas to the twenty-one branches we operate in New Mexico and
gives us access to these major metropolitan markets. We will operate in these
markets as First Community Bank, a branch of First State Bank N.M.

The acquisition will be accounted for as a purchase in accordance with the
provisions of Statement of Financial Accounting Standards No. 141, Business
Combination and is a taxable merger that results in tax-deductible goodwill and
certain other intangible assets with both definite and indefinite lives.

The Statements of Operations for the three and nine months ended September 30,
2002 do not include the results of operations of the assets and liabilities
acquired as a result of this acquisition.

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The following is a condensed summary of management's current estimates of the
assets acquired and liabilities assumed in the acquisition. Management is in the
process of finalizing the determination of the fair values of the assets
acquired and liabilities assumed; accordingly, the following estimates will be
adjusted and certain identifiable intangibles will be quantified upon the
completion of management's valuation process.

Significant portions of the loans acquired in our acquisition of First Community
are secured by residential real estate and carry the credit risks associated
with such loans. The risks associated with these loans may be different than the
risks of our September 30, 2002 loan portfolio, which consisted of loans secured
primarily by business-related real estate. The acquired loans are also located
in markets that are new to us and may have different characteristics than those
in the markets in which we have traditionally operated.

First Community reported the following allowance for loans losses,
non-performing assets, and net charge-offs at the dates indicated. All dates are
prior to our acquisition of First Community on October 1, 2002.

First Community reported the following net charge-offs for the periods
presented.

Pursuant to the purchase agreement governing our acquisition of First Community,
Washington Mutual, Inc., purchased all First Community's other real estate owned
prior to the closing of the acquisition and purchased certain non-performing
assets in order to bring total non-performing assets to the level specified in
the purchase agreement. Based upon the composition of First Community's loan
portfolio, we believe that the level of non-performing assets in First
Community's portfolio will be greater than the level we experienced in our loan
portfolio prior to October 1, 2002.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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 our 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.

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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, we quantify interest rate risk and we develop and implement
appropriate strategies. Additionally, we utilize duration and market value
sensitivity measures when these measures 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 Board of Directors of First
State Bank N.M. on an ongoing basis.

Rising and falling interest rate environments can have various impacts on a
bank's net interest income, depending on the short-term interest rate gap that
the bank maintains, the relative changes in interest rates that occur when the
bank's various assets and liabilities reprice, unscheduled repayments of loans,
early withdrawals of deposits and other factors. As of September 30, 2002, our
cumulative interest rate gap for the period up to three months was a positive
$186.3 million and for the period up to one year was a positive $215.4 million.
Based solely on our interest rate gap of twelve months or less, our net income
could be unfavorably impacted by decreases in interest rates or favorably
impacted by increases in interest rates.

The following table sets forth our estimate of maturity or repricing, and the
resulting interest rate gap of our interest-earning assets and interest-bearing
liabilities at September 30, 2002. 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.

FORWARD-LOOKING STATEMENTS

This document includes 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. 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 fluctuations in interest rates,
inflation, government regulations, loss of key personnel, faster or slower than
anticipated growth, economic conditions, competition's responses to our
marketing strategy, and competition in the geographic and business areas in
which we conduct our operations.

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ITEM 4. CONTROLS AND PROCEDURES.

Our principal executive officer and principal financial officer have, within 90
days of the filing date of this quarterly report, evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended) and have
determined that such disclosure controls and procedures are adequate. There have
been no significant changes in our internal controls or in other factors that
could significantly affect our internal controls since the date of evaluation.
We do not believe any significant deficiencies or material weaknesses exist in
our internal controls. Accordingly, no corrective actions have been taken.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

Exhibit
No. Description

2 Agreement and Plan of Merger, dated as of May 22, 2002, by and among
First State Bancorporation, First State Bank of Taos, First Community
Industrial Bank, Blazer Financial Corporation, and Washington Mutual
Finance Corporation. (1)

3.1 Restated Articles of Incorporation of First State Bancorporation. (2)

3.2 Articles of Amendment to the Restated Articles of Incorporation of
First State Bancorporation. (3)

3.3 Bylaws of First State Bancorporation. (3)

4.1 Shareholder Protection Rights Agreement dated October 25, 1996. (4)

10.1 Stock Option Plan of First State Bancorporation. (5)

10.2 Executive Employment Agreement. (6)

99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 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 Exhibit 2.1 to our Current Report on
Form 8-K, dated May 22, 2002, filed with the Commission on May 31,
2002.

(2) Incorporated by reference from the Company's Registration Statement on
Form S-2, Commission File No. 333-24417, declared effective April 25,
1997.

(3) Incorporated by reference from our Form 10-SKB for the year ended
December 31, 1997.

(4) Incorporated by reference from the Company's Form 10-QSB for the
quarter ended September 30, 1996.

(5) Incorporated by reference from our Registration Statement on Form S-8,
Commission File No. 333-83132, declared effective February 20, 2002
(which incorporates our Registration Statement on Form S-8, Commission
File No. 333-92795, declared effective December 15, 1999).

(6) Incorporated by reference from our Form 10-K for the year ended
December 31, 2001.

(b) Reports on Form 8-K.

We filed a current report on Form 8-K, dated July 19, 2002, announcing our
second quarter 2002 financial results.

We filed a current report on Form 8-K, dated July 25, 2002, announcing that the
Federal Reserve Bank of Kansas City had approved our acquisition of First
Community Industrial Bank.

We filed a current report on Form 8-K, dated August 8, 2002, announcing the sale
of 2.1 million shares of our common stock to an underwriting group led by Keefe,
Bruyette & Woods, Inc. and the underwriting group's 30-day option to purchase up
to an additional 315,000 shares of our common stock.

We filed a current report on Form 8-K, dated August 29, 2002, announcing that
Mr. H. Patrick Dee, our Executive Vice President, Secretary, Treasurer and a
member of our Board of Directors, had entered into a "trading plan" pursuant to
the requirements of Rule 10b5-1(c) promulgated by the Securities and Exchange
Commission under Section 10(b) of the Securities Exchange Act of 1934, as
amended.

-17-

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

FIRST STATE BANCORPORATION

Date: November 13, 2002 By: /s/ Michael R. Stanford
---------------------------------------
Michael R. Stanford, President
& Chief Executive Officer

Date: November 13, 2002 By: /s/ Brian C. Reinhardt
---------------------------------------
Brian C. Reinhardt,
Executive Vice President
and Chief Financial Officer

-18-

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Michael R. Stanford, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures 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 quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 13, 2002
/s/ Michael R. Stanford
-------------------------------------
Michael R. Stanford
President and Chief Executive Officer

-19-

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Brian C. Reinhardt, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures 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 quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 13, 2002
/s/ Brian C. Reinhardt
---------------------------------
Brian C. Reinhardt
Executive Vice President and
Chief Financial Officer

-20-

INDEX TO EXHIBITS

- ----------
(1) Incorporated by reference from Exhibit 2.1 to our Current Report on
Form 8-K, dated May 22, 2002, filed with the Commission on May 31,
2002.

(2) Incorporated by reference from the Company's Registration Statement on
Form S-2, Commission File No. 333-24417, declared effective April 25,
1997.

(3) Incorporated by reference from our Form 10-SKB for the year ended
December 31, 1997.

(4) Incorporated by reference from the Company's Form 10-QSB for the
quarter ended September 30, 1996.

(5) Incorporated by reference from our Registration Statement on Form S-8,
Commission File No. 333-83132, declared effective February 20, 2002
(which incorporates our Registration Statement on Form S-8, Commission
File No. 333-92795, declared effective December 15, 1999).

(6) Incorporated by reference from our Form 10-K for the year ended
December 31, 2001.