FIRST STATE BANCORPORATION - 10-K Annual Report

Back to GetFilings.com

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, 2002
------------------------------------------------------

[ ] 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: 22-25144

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)

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 (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 the delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

The aggregate market value of the Common Stock as of June 28, 2002 (the last
business day of the registrant's most recently completed second quarter), based
upon the last sale price of the Common Stock at June 28, 2002 as reported by The
Nasdaq Stock Market, held by non-affiliates was approximately $113,563,000.
Determination of stock ownership by non-affiliates was made solely for the
purpose of responding to this requirement and the registrant is not bound by
this determination for any other purpose.

As of March 21, 2003, there were 7,405,004 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 2003 ANNUAL SHAREHOLDERS' MEETING, WHICH WILL BE FILED WITH THE
COMMISSION BY APRIL 29, 2003.

1

TABLE OF CONTENTS

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 (the "Exchange Act"). The discussions regarding our growth strategy,
competition, expansion opportunities, and response to consolidation in the
banking industry include forward-looking statements. Other forward-looking
statements can be identified by the use of forward-looking words such as
"believe," "expect," "may," "will," "should," "seek," "approximately," "intend,"
"plan," "estimate," or "anticipate" or the negative of those words or other
comparable terminology. Forward-looking statements involve inherent risks and
uncertainties. A number of important factors could cause actual results to
differ materially from those in the forward-looking statement. Some factors
include fluctuations in interest rates, inflation, government regulations, loss
of key personnel, faster or slower that anticipated growth, economic conditions,
competition's responses to the Company's marketing strategy, and competition in
the geographic and business areas in which we conduct our operations.

2

PART I

ITEM 1: BUSINESS.

THE COMPANY

First State Bancorporation (the "Company") is a New Mexico-based bank holding
company that provides commercial banking services to businesses through its
subsidiary bank, First State Bank NM ("First State Bank"). The Company operates
thirty offices, including twenty-one in New Mexico (three offices in Taos, eight
offices in Albuquerque, two offices in Santa Fe, and one office each in Rio
Rancho, Los Lunas, Bernalillo, Questa, Pojoaque, Placitas, Moriarty, and Belen),
six in Colorado (Denver, Colorado Springs, Fort Collins, Lakewood, Littleton,
and Longmont), and three in Utah (two offices in Salt Lake City and one in
Ogden). First State Bank's branches in Colorado and Utah operate under the name
First Community Bank. First State Bank began in 1922 as one bank in Taos County,
and is currently the largest bank in the county. At December 31, 2002, the
Company had total assets, total deposits, and total stockholders' equity of $1.4
billion, $1.1 billion, and $117 million, respectively.

Management's strategy is to provide a business culture in which customers are
provided individualized customer service. As part of its operating and growth
strategies, the Company is 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, Rio Rancho, Belen, and Los Lunas), Santa Fe, and other
strategic areas in New Mexico; (iii) expand operations in the Colorado and Utah
markets including the Denver metropolitan area, Colorado Springs, Salt Lake
City, and the surrounding areas; (iv) maintain asset quality through strict
adherence to credit administration standards; (v) manage interest rate risk;
(vi) continue to improve internal operating systems; and (vii) manage
non-interest expenses.

Management believes that the Company is well qualified to pursue an aggressive
growth strategy throughout New Mexico, Colorado, and Utah due to its responsive
customer service, its streamlined management structure, the strong community
involvement of the Company's management and employees, the disruption caused by
sales of banks with New Mexico operations to other banks with headquarters
outside New Mexico, and recent expansion into the Colorado and Utah markets.
Management believes that expansion opportunities are primarily centered in the
Albuquerque metropolitan area, Santa Fe, the Denver metropolitan area, Colorado
Springs, Salt Lake City, and the surrounding markets. The Company continues 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, the Company will consider potential market acquisition targets that
complement the Company's existing operations and provide economies of scale when
combined with its existing locations. See "Growth Strategy."

At December 31, 2002, First State Bancorporation and First State Bank were "well
capitalized" under regulatory capital guidelines.

The Company's executive offices are located at 7900 Jefferson NE, Albuquerque,
New Mexico 87109, and its telephone number is (505) 241-7500.

HISTORY

First State Bank began operations in 1922 in Taos County, New Mexico. The
Company 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, the Company 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, the Company and New Mexico Bank Corporation
merged, and the operations of NBA were merged into First State Bank in December
1991.

3

On December 1, 1993, the Company purchased 94.5% of the outstanding shares of
common stock of First State Bank of Santa Fe ("Santa Fe Bank"). The parties who
sold their shares to the Company included members of the current management and
directors of the Company, and two officers of First State Bank. Santa Fe Bank
was merged into First State Bank as of June 5, 1994.

Since its initial public offering in 1993, the Company has made significant
investments in expansion and technology. Since 1993, First State Bank has opened
fourteen new branches and acquired nine branches.

During the fourth quarter of 1999, First State Bank opened a mortgage
origination division. This fee-based division allows the bank to generate fee
income from its branch network and construction lending activities as well as
attract additional customers.

On March 1, 2000, the Company closed the sale of the assets of First State
Bank's commercial leasing division. This sale resulted in approximately $64
million of leases being sold. The gain on the sale amounted to approximately
$879,000, net of transaction costs. The proceeds from the sale were used to fund
loan demand, purchase investment securities, and reduce borrowings.

On October 1, 2002 the Company entered the Colorado and Utah markets with the
completion of the acquisition of First Community Industrial Bank ("First
Community") for approximately $67 million. The Company financed this acquisition
through a public offering of its common stock in August 2002, which netted
approximately $51.0 million and through the issuance of approximately $25.0
million in trust preferred securities in June of 2002. The Company acquired
approximately $343 million in loans and approximately $242 million in deposits,
and recognized goodwill of approximately $43 million related to the transaction.
First Community was merged into First State Bank.

OPERATING STRATEGY

The Company's operating strategies include:

o Providing responsive, personal customer service

o Fostering a culture in which employees are valued and respected

o Attracting new account relationships

o Emphasizing community involvement

o Developing new business opportunities

o Increasing efficiency

o Optimizing asset/liability management

Customer service. The Company's objective is to increase market share in both
lending volume and deposits by providing responsive customer service that is
tailored to its customers' needs. By maximizing personal contact with customers,
maintaining low employee turnover, and endeavoring to understand the needs and
preferences of its customers, the Company is working to maintain and further
enhance its reputation of providing excellent customer service.

The Company has developed a streamlined management structure that allows it to
make credit and other banking decisions rapidly. Management believes that this
structure, when compared to other competing institutions, enables the Company to
provide a higher degree of service and increased flexibility to creditworthy
customers.

Employees. Management recognizes that the individual employee is the core of the
Company's overall business strategy. The Company is committed to providing a
workplace environment in which the individual employee is valued and respected.

New account relationships. The Company emphasizes relationship banking with
local businesses, local governments, and individual customers across all product
lines. The acquisition of most of the Company's local competitors by
out-of-state banking companies and the sales of institutions with

4

significant local operations to other out-of-state banks has created customer
dissatisfaction at many of these institutions and provided an opportunity for
the Company to expand its customer base. The Company intends to continue to
capitalize on this opportunity by targeting its marketing efforts to those
businesses, governments, and individuals who prefer the personalized customer
service with local decision making emphasized by the Company and delivering a
state-of-the-art array of products and services.

Community Involvement. First State Bank management and other employees
participate actively in a wide variety of civic and community activities and
organizations in New Mexico, including the Albuquerque Chamber of Commerce,
other local Chambers of Commerce, United Way, Boys and Girls Clubs, New Mexico
Museum of Natural History, and Habitat for Humanity. First State Bank also
sponsors a number of community-oriented events each year. First State Bank
management plans to replicate this commitment to community involvement in the
Colorado and Utah markets. The Company believes that these activities assist
First State Bank through increased visibility and through development and
maintenance of customer relationships.

New Business Opportunities. The Company has 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.
Expansion efforts will be focused in areas or markets that are complementary to
the Company's existing customer base and areas of operation. See "Growth
Strategy."

Increasing Efficiency. Management believes that investments in technology and
facilities made since 1993 will allow the Company to grow revenues faster than
expenses over the next few years. Management believes these investments will
allow the Company to expand its asset base without a commensurate increase in
non-interest expenses.

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

GROWTH STRATEGY

The Company expects to continue pursuing a growth strategy through a combination
of internal growth, de novo branching, and selective acquisitions. The Company's
total assets have grown from $494 million at December 31, 1998 to $1.4 billion
through internal growth, de novo branching, and acquisition activity. Several
banks that compete with the Company have been acquired by large out-of-state
financial institutions since 1993. These institutions concentrate on the mass
retail customer base and extremely large customers while reducing service levels
to small to medium size businesses, affording the Company a continuing
opportunity to gain profitable new account relationships and to expand existing
relationships.

The Company will also devote the necessary resources and support to assure that
its business culture and operating strategies, based on individualized customer
service, are successfully transferred to the new operations in Colorado and
Utah.

In addition, management believes that there continue 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. Management considers 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 the geographic diversification of the Company, (iv) the
degree to

5

which the branch would enhance the Company's presence in an existing market, and
(v) the costs of operating the branch.

Management believes that the strategy it has employed successfully in the New
Mexico market can be successfully employed in other markets in the Southwest.
Management therefore intends 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.

The Company's goal over the next five years is to continue creating a
broad-based, well capitalized, customer-focused regional financial institution.
To accommodate the Company's anticipated growth, management intends to further
develop the existing management of the Company and further develop its
management information systems and other appropriate internal management
systems. There can be no assurance, however, that the Company will achieve its
growth objectives.

MARKET AREAS AND BANKS

Markets. First State Bank serves three distinct market areas within New Mexico:
Taos County, the Albuquerque metropolitan area (Bernalillo, Sandoval, Torrance,
and Valencia counties), and Santa Fe. In 2002, First State Bank entered into the
Colorado and Utah markets with the acquisition of First Community. First
Community operates in two distinct market areas: the Colorado front range market
area, which includes the Denver metropolitan area, and the Salt Lake City and
Ogden, Utah metropolitan areas.

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

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

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

The Colorado front range market area includes the Denver metropolitan area (with
branches in Denver, Littleton and Lakewood), and the surrounding communities of
Colorado Springs, Longmont and Fort Collins. Denver, the capital of Colorado and
the state's largest city, has a diverse economy including telecommunications,
aerospace, financial services, computer software, biomedical and many other high
tech sectors. Colorado Springs also plays host to a growing number of high
technology industries. Many private sector leaders in their fields are located
in the front range area, including AT&T Broadband, Qwest Communications, Intel,
Lockheed Martin, Merrill Lynch, and Sun Microsystems. The Colorado front range
has emerged as a premier center for high-tech and other businesses providing a
blend of quality, affordable lifestyle, cultural and national sports
attractions, and desirable climate.

Salt Lake City is the state capital of Utah and the financial center of the
state. The Salt Lake City and Ogden 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.

6

First State Bank's operations are divided into nine regions: Taos which includes
Taos county; Santa Fe which includes Santa Fe county; Albuquerque which includes
Bernalillo county; Los Lunas which includes Valencia and Torrance counties; Rio
Rancho which includes Sandoval county; 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 and Weber counties.

First State Bank. The following table sets forth certain information concerning
the banking offices of First State Bank as of December 31, 2002:

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

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

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

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

7

The Colorado and Utah locations provide access to new markets enabling First
State Bank to provide conventional commercial and real estate secured commercial
lending in these markets. These locations also provide a full range of banking
services, including a full complement of deposit and residential construction
and mortgage lending, and other loan services. Prior to its acquisition by First
State Bank, First Community primarily made residential mortgage and retail
installment loans and was prohibited from accepting transaction deposit accounts
(i.e. checking accounts) due to its charter as an industrial bank.

The following is a summary of the Company's percentage of its deposits to total
deposits of FDIC insured institutions in the counties in which it does business
as of June 30, 2002:

New Mexico
Taos................................................ 44.17%

Bernalillo.......................................... 6.38%

Santa Fe............................................ 8.32%

Sandoval........................................... 30.76%

Valencia............................................ 12.77%

Torrance............................................ 10.76%

Colorado

Larimer............................................ 0.27%

Boulder.......................................... 0.65%

Denver............................................ 0.25%

Jefferson........................................... 0.50%

Arapahoe............................................ 0.48%

El Paso............................................ 1.75%

Utah

Salt Lake........................................... 0.03%

Weber............................................ 0.75%

First Community was acquired by the Company on October 1, 2002. The results
above represent the percentage of First Community's total deposits to total
deposits of FDIC insured institutions as of June 30, 2002 and were not included
in the Company's deposits as of June 30, 2002.

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

8

Management also believes that the Colorado and Utah markets represent a great
opportunity for growth as the newly acquired First Community branches now have
the ability to accept demand deposits and will begin to aggressively seek
commercial banking relationships with small and medium sized businesses. The
change in deposit and loan products combined with the integration of the
Company's individualized customer service is expected to result in increased
market share in Colorado and Utah.

COMPETITION

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

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

EMPLOYEES

As of December 31, 2002, the Company had 418 full-time equivalent employees. The
Company places a high priority on staff development, training, and selective
hiring. New hires are selected on the basis of both technical skills and
customer-service capabilities. Staff development involves training in marketing,
customer service, and regulatory compliance. None of the Company's employees is
covered by a collective bargaining agreement with the Company, and management
believes that its relationship with its employees is good.

SUPERVISION AND REGULATION

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

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

First State Bank N.M. As a New Mexico-chartered state member bank of the Federal
Reserve System, First State Bank is subject to regulation and supervision by the
Federal Reserve Board and the New Mexico Financial Institutions Division and, as
a result of the insurance of its deposits, by the FDIC. Almost every aspect of
the operations and financial condition of First State Bank is subject to
extensive

9

regulation and supervision and to various requirements and restrictions under
federal and state law, including requirements governing capital adequacy,
liquidity, earnings, dividends, reserves against deposits, management practices,
branching, loans, investments, and the provision of services. Various consumer
protection laws and regulations also affect the operations of First State Bank.
The deposits of First State Bank are insured up to applicable limits by the
FDIC.

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

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

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

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

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

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

10

Capital Adequacy Requirements. We are subject to the Federal Reserve Board's
risk-based capital and leverage guidelines for bank holding companies. The
minimum ratio of total capital to risk-weighted assets (which are the credit
risk equivalents of balance sheet assets and certain off balance sheet items
such as standby letters of credit) is 8%. At least half of the total capital
must be composed of common stockholders' equity (including retained earnings),
qualifying non-cumulative perpetual preferred stock (and, for bank holding
companies only, a limited amount of qualifying cumulative perpetual preferred
stock), and minority interests in the equity accounts of consolidated
subsidiaries, less goodwill, other disallowed intangibles and disallowed
deferred tax assets, among other items ("Tier 1 Capital"). The remainder may
consist of a limited amount of subordinated debt, other perpetual preferred
stock, hybrid capital instruments, mandatory convertible debt securities that
meet certain requirements, as well as a limited amount of reserves for loan
losses ("Tier 2 Capital"). The maximum amount of Tier 2 Capital that may be
included in an organization's qualifying total capital is limited to 100% of
Tier 1 Capital. The Federal Reserve Board has also adopted a minimum leverage
ratio for bank holding companies, requiring Tier 1 Capital of at least 3% of
average total consolidated assets.

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

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 agencies have also adopted an adjustment to the risk-based
capital calculations to cover market risk in trading accounts of certain
institutions.

The federal bank regulatory agencies recently adopted amendments to their
risk-based capital regulations to provide for the consideration of interest rate
risk in the agencies' determination of a banking institution's capital adequacy.
The amendments require such institutions to effectively measure and monitor
their interest rate risk and to maintain capital adequate for that risk.

Prompt Corrective Action. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991, the federal banking agencies must take prompt
supervisory and regulatory actions against

11

undercapitalized depository institutions. Depository institutions, such as First
State Bank, are assigned one of five capital categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized," and are subjected to differential regulation
corresponding to the capital category within which the institution falls. Under
certain circumstances, a well capitalized, adequately capitalized or
undercapitalized institution may be treated as if the institution were in the
next lower capital category. A depository institution is generally prohibited
from making capital distributions (including paying dividends) or paying
management fees to a holding company if the institution would thereafter be
undercapitalized. Adequately capitalized institutions cannot accept, renew or
roll over brokered deposits except with a waiver from the FDIC, and are subject
to restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew or roll over brokered
deposits.

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

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

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

o placing limits on asset growth and restrictions on activities;

o placing additional restrictions on transactions with affiliates;

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

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

o 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, 2002, each of First State Bancorporation and First State 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 State Bank, as well as officers, directors and other
institution-affiliated parties of these organizations, to administrative
sanctions and potentially substantial civil money penalties. In addition to the
grounds discussed under "Prompt Corrective Action," the appropriate federal
banking agency may appoint the FDIC as conservator or receiver for a banking
institution (or the FDIC may appoint itself, under certain circumstances) if any
one or more of a number of circumstances exist, including, without limitation:

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

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

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

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

12

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

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

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

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

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

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

The Gramm-Leach-Bliley Act. The GLBA 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

13

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

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

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

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

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

14

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

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

ITEM 2: PROPERTIES.

With the exception of its Main and Southside facilities in Taos, the Journal
Center facility in Albuquerque, and the Bernalillo facility, which are owned by
First State Bank, the Company leases its banking facilities. See Item 13:
"Certain Relationships and Related Transactions." The following table shows the
size and age of each of the banking facilities owned or leased by the Company:

15

Central Colorado
Cherry Creek 43,000 20,000 4,000 Constructed 1-85
Lakewood 80,000 40,000 3,222 Constructed 1-85
Littleton 25,000 3,500 3,500 Constructed 1-85
Southern Colorado
Colorado Springs 19,024 10,500 10,500 Constructed 1-60
Utah
Holladay 20,000 2,250 2,250 Constructed 1-80
Ogden 43,000 30,000 2,350 Constructed 1-84
Salt Lake City 100,000 45,000 4,750 Constructed 1-75

ITEM 3: LEGAL PROCEEDINGS.

Periodically and in the ordinary course of business, various claims and lawsuits
are brought against the Company, such as claims to enforce liens, condemnation
proceedings on properties in which the Company holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Company's business. In the opinion of the Company's management,
the ultimate liability, if any, resulting from known claims or lawsuits will not
have a material adverse effect on the consolidated financial position or results
of operations of the Company.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 2002.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company, their positions, and their respective
ages (as of January 1, 2003) are as follows:

16

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on The NASDAQ Stock Market's National
Market under the symbol "FSNM." The following table sets forth, for the periods
indicated, the high and low closing sale prices on The NASDAQ Stock Market's
National Market as reported by NASDAQ. The Company's 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.

The last reported sale price of the Company's Common Stock on March 21, 2003,
was $21.74 per share. As of March 21, 2003, there were approximately 104
shareholders of record, not including shareholders who beneficially own Common
Stock held in nominee or street name.

DIVIDEND POLICY

The Company paid cash dividends of $2.2 million or $0.40 per share in 2002 and
$1.7 million or $0.34 per share in 2001, which amounted to 21.61% and 20.47%, of
net income in 2002 and 2001, respectively. The declaration and payment of cash
dividends are determined by the Board of Directors in light of the earnings,
capital requirements, and financial condition of the Company, and other relevant
factors. The ability of the Company to pay cash dividends depends on the amount
of cash dividends paid to it by First State Bank and the capital position of the
Company. Capital distributions, including dividends, by First State Bank are
subject to federal and state regulatory restrictions tied to its earnings and
capital. Information regarding dividend restrictions on the Company's banking
subsidiary is incorporated herein by reference to Item 1. Business-Supervision
and Regulation/Payment of Dividends.

ITEM 6: SELECTED FINANCIAL DATA.

Selected Financial Data are filed as part of this report and appear immediately
following the signature page.

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Management's Discussion and Analysis of Financial Condition and Results of
Operations are filed as part of this report and appear immediately following
Selected Financial Data.

17

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.
PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information regarding directors appearing under the caption "Election of
Directors" in the Company's Proxy Statement for the 2003 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 the Company's Proxy Statement for the 2003 Annual
Meeting of Shareholders.

Information regarding executive officers is included in Part I of this Form 10-K
as permitted by General Instruction G (3).

ITEM 11: EXECUTIVE COMPENSATION.

Information appearing under the captions "Compensation of Directors" and
"Executive Compensation" in the 2003 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 2003 Proxy Statement is hereby incorporated by reference.
Information set forth under the caption "Securities Authorized for Issuance
Under Equity Compensation Plans" in the 2003 Proxy Statement is incorporated
herein by reference.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information regarding certain related transactions appearing under the caption
"Certain Business Relationships" in the 2003 Proxy Statement is hereby
incorporated by reference.

ITEM 14: CONTROLS AND PROCEDURES.

Our principal executive officer and principal financial officer have, within 90
days of the filing date of this annual 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.

18

PART IV

ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT ON
FORM 10-K:

1. Financial Statements:

o Selected Quarterly Financial Data

o Independent Auditors' Report

o Consolidated Balance Sheets as of December 31, 2002 and 2001

o Consolidated Statements of Operations for the Years Ended December 31,
2002, 2001, and 2000

o Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2002, 2001, and 2000

o Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001, and 2000

o Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001, and 2000

2. Financial Statement Schedules

None

3. Exhibits

19

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. (8)

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

(2) Incorporated by reference from the Company's Registration Statement on Form
SB-2, Commission File No. 33-68166, declared effective November 3, 1993.

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

(4) Incorporated by reference from the Company's 10-KSB for the year ended
December 31, 1997.

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

(6) Incorporated by reference from the Company's 10-K for the year ended
December 31, 2001.

(7) Incorporated by reference from the Company's Form 8-K filed on May 31,
2002.

(8) Filed Herewith.

(b) REPORTS ON FORM 8-K.

On October 11, 2002, the Company filed a current report on Form 8-K announcing
the Company had completed its acquisition of First Community Industrial bank.

On October 21, 2002, the Company filed a current report on Form 8-K announcing
the Company's third quarter 2002 financial results.

On December 16, 2002, the Company filed a current report on Form 8-K/A amending
the current report on Form 8-K filed on October 11, 2002, to include the
remaining required financial information with respect to the Company's
acquisition of First Community Industrial Bank. The following financial
statements were filed as part of such Form 8-K/A: (1) First Community Industrial
Bank Unaudited Condensed Balance Sheet as of September 30, 2002, (2) First State
Bancorporation Unaudited Pro Forma Combined Condensed Financial Information, (3)
First State Bancorporation Unaudited Pro Forma Combined Condensed Balance Sheet
as of September 30, 2002, (4) First State Bancorporation Unaudited Pro Forma
Combined Condensed Statement of Operations for the Nine Months Ended September
30, 2002, and (5) First State Bancorporation Unaudited Pro Forma Combined
Condensed Statement of Operations for the Year Ended December 31, 2001.

On December 18, 2002, the Company filed a current report on Form 8-K announcing
that Michael R. Stanford, the President, Chief Executive Officer and a Director
of the Company, and Mr. Leonard J. Delayo, Jr., a Director of the Company, had
each 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.

20

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: Michael R. Stanford
---------------------------------------
Michael R. Stanford, President and
Chief Executive Officer

Dated: March 27, 2003

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

21

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Michael R. Stanford, certify that:

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

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

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and

c) Presented in this annual 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
annual 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: March 26, 2003
/s/ Michael R. Stanford
--------------------------------------
Michael R. Stanford
President and Chief Executive Officer

22

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Christopher C. Spencer, certify that:

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

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

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and

c) Presented in this annual 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
annual 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: March 26, 2003
/s/ Christopher C. Spencer
--------------------------------------
Christopher C. Spencer
Senior Vice President and
Chief Financial Officer and Principal
Accounting Officer

23

FIRST STATE BANCORPORATION AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

-1-

-2-

-3-

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

BASIS OF PRESENTATION

The following represents management's discussion and analysis of First
State Bancorporation, Inc.'s (the "Company") consolidated financial condition as
of December 31, 2002 and 2001, and its results of consolidated operations for
the years ended December 31, 2002, 2001, and 2000. This discussion should be
read in conjunction with the consolidated financial statements and related
footnotes and the five-year summary of selected financial data.

GENERAL

For the year ended December 31, 2002, the Company reported net income of
$10.0 million, an increase of $1.9 million or 22.3% from the $8.1 million earned
in 2001. The increase in net income was primarily due to increases in net
interest income to $44.1 million in 2002 from $35.2 million in 2001, and
non-interest income to $12.7 million in 2002 from $9.4 million in 2001. The
increase in net interest income was due to increases in loans and investment
securities made possible by the Company's successful effort to capture
additional deposit market share in 2002, and the acquisition of First Community
Industrial Bank ("First Community").

The Company completed the acquisition and merger of First Community on
October 1, 2002 for approximately $67 million. The Company financed this
acquisition through a public offering of its common stock in August 2002, which
netted approximately $51 million, and through the issuance of approximately $25
million in trust preferred securities in June of 2002. The acquisition was
accounted for using the purchase method of accounting, and accordingly, the
assets and liabilities of First Community were recorded at their respective fair
values on October 1, 2002. First State acquired approximately $343 million in
loans and approximately $242 million in deposits, and recognized goodwill of
approximately $43 million related to the transaction. The First Community
account balances acquired on October 1, 2002 and the results of operations since
October 1, 2002 are included in the results of the Company.

During 2002, the Company's deposits increased $395 million. The increase
in net interest income was partially offset by increases in non-interest
expenses to $38.6 million in 2002 from $29.6 million in 2001. The increases in
net interest income and non-interest expenses resulted from the Company's
expansion strategy, which is to increase market share by capitalizing on the
dislocation of customers caused by continued consolidation in the banking
industry. Total assets have grown to $1.4 billion in 2002 from $828 million in
2001. Total deposits have grown to $1.1 billion in 2002 from $685 million in
2001.

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, 2002, 2001,
and 2000, the Company's average interest-earning assets were $920 million, $672
million, and $557 million, respectively. For the same periods, the Company's net
interest margins were 4.79%, 5.24%, and 5.73%.

During the years ended December 31, the Company's net interest income
increased by $8.9 million to $44.1 million or 25.1% in 2002 from $35.2 million
in 2001, which was an increase of $3.2 million or 10.3% from $32.0 million in
2000. These increases were due to a $194.8 million or 39.2% increase in average
loans to $692 million in 2002 from $497 million in 2001, and a $71.9 million or
16.9% increase from $426 million in 2000. A significant factor in the increase
in average loans in 2002 was due to the $343 million ($86 million increase in
average loans) of loans acquired on October 1, 2002, in the First Community
acquisition. The increase as a result of increased average loan balances was
offset by a decrease in yield on loans to 7.6% in 2002 from 9.4% in 2001. This
decrease was a direct result of the Federal Reserve Bank cutting rates, which
has a like effect on the prime rate to which a significant portion of the
Company's loans are tied.

During 2002, the cost of interest-bearing liabilities decreased to 2.44%
from 3.76% in 2001, which was a decrease from 4.46% in 2000 as a result of
decreasing interest rates precipitated by the Federal Reserve Bank's rate cuts.

-4-

Management believes that any additional interest rate cuts by the Federal
Reserve Bank would reduce the Company's net interest margin. The extent of any
reduction in net interest margin will depend on the amount and timing of any
further Federal Reserve Bank reductions and the Company's ability to manage the
cost of interest-bearing liabilities given its competitive position in the
markets it serves.

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 for the
Company. 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.

-5-

Loan fees of $5.1 million, $3.9 million, and $2.9 million are included in
interest income for the years ended December 31, 2002, 2001, and 2000,
respectively.

The following table illustrates the changes in the Company's 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.

ASSET/LIABILITY MANAGEMENT

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

The purpose of asset/liability management is to provide stable net
interest income growth by protecting the Company's earnings from undue interest
rate risk. Exposure to interest rate risk arises from volatile interest rates
and changes in the balance sheet mix. The Company's policy is to maintain 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.

-6-

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, the Company uses 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, 2002, the Company's cumulative interest rate GAP for
the period up to three months was a positive $154.0 million and for the period
up to one year was a positive $154.8 million. Based solely on the Company's
interest rate GAP of twelve months or less, net income of the Company could be
unfavorably impacted by a decrease in interest rates or favorably impacted by an
increase in interest rates.

During 2002, the Company experienced a significant increase in deposits as
a result of its strategy to capture market share and the acquisition of First
Community. As a result, the Company's total assets increased by $559 million
while its loan to deposit ratio increased to 94% at December 31, 2002, from 80%
at December 31, 2001, during a period of rapidly declining interest rates.
Management intends to maintain the current loan to deposit ratio, which should
reduce the Company's exposure to declining interest rates.

The following table sets forth the estimated maturity or repricing, and
the resulting interest rate GAP of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 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.

-7-

The following table presents an analysis of the sensitivity inherent in
the Company's 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, 2002,
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 on
the Company. This analysis is based on the earlier of repricing or contractual
final maturity of the Company's assets and liabilities at December 31, 2002.

INVESTMENT PORTFOLIO

The following table provides the carrying value of the Company's
investment portfolio at each of the dates indicated. At December 31, 2002, the
market value exceeded the carrying value by approximately $2.3 million, and at
December 31, 2001, the market value exceeded the carrying value by approximately
$287,000.

The table below provides the carrying values, maturities, and weighted
average yield of the investment portfolio of the Company as of December 31,
2002.

-8-

LOAN AND LEASE PORTFOLIO

The following table presents the amount of loans and leases of the
Company, by category, at the dates indicated.

On March 1, 2000, the Company closed the sale of the assets of its
subsidiary bank's commercial leasing division. The sale resulted in $64.4
million of leases being sold. The gain on the sale was approximately $879,000,
net of transaction costs. The proceeds from the sale were used to purchase
investment securities, fund loan demand, and reduce short-term borrowings.

The following table presents the aggregate maturities of loans in each
major category of the Company's loan portfolio at December 31, 2002. Actual
maturities may differ from the contractual maturities shown as a result of
renewals and prepayments.

-9-

NONPERFORMING ASSETS

Nonperforming assets consist of loans and leases past due 90 days or more,
non-accrual loans and leases, restructured loans and leases, and other real
estate owned. The Company generally places a loan on non-accrual status and
ceases accruing interest when loan payment performance is deemed unsatisfactory
or the Company becomes 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, 2002,
$508,000 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.

Non-accrual loans as of December 31, 2002 include approximately $5,161,000
of non-accrual loans related to the acquisition of First Community, $3,046,000
of which are in the process of being sold and are classified as mortgage loans
available for sale.

Loans on which the accrual of interest has been discontinued amounted to
$10,241,251, $2,480,575, and $1,937,452 at December 31, 2002, 2001, and 2000,
respectively. If interest on such loans had been accrued, such income would have
been approximately $203,000 in 2002, $70,000 in 2001, and $199,000 in 2000.
Actual interest income on those loans, which is recorded only when received,
amounted to zero in 2002, 2001, and 2000.

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

Management uses a systematic methodology, which is applied monthly, to
determine 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 the Company's 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

-10-

The following table sets forth information regarding changes in the
allowance for loan and lease losses of the Company for the periods indicated.

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

-11-

DEPOSITS

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

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.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase totaled $70.8 million,
$72.3 million, and $67.8 million at December 31, 2002, 2001, and 2000,
respectively. The weighted average interest rate on securities sold under
agreements to repurchase was 0.49%, 1.15%, and 5.36% at December 31, 2002, 2001,
and 2000, respectively.

Securities sold under agreements to repurchase are summarized as follows:

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.

-12-

RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

OVERVIEW. The Company's net income increased to $10.0 million in 2002,
from $8.1 million in 2001 and from $7.2 million in 2000. Net interest income
increased to $44.1 million in 2002, compared to $35.2 million in 2001 and $32.0
million in 2000. Total non-interest income increased to $12.7 million in 2002,
compared to $9.4 million in 2001 and $7.8 million in 2000. These increases were
offset by non-interest expenses that increased to $38.6 million in 2002,
compared to $29.6 million in 2001 and $26.2 million in 2000. Income tax expense
increased to $5.6 million in 2002, from $4.5 million in 2001 and $3.8 million in
2000.

The Company completed the acquisition and merger of First Community
Industrial Bank ("First Community") on October 1, 2002 for approximately $67
million. The Company financed this acquisition through a public offering of its
common stock in August 2002, which netted approximately $51 million, and through
the issuance of approximately $25 million in trust preferred securities in June
of 2002. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the assets and liabilities of First Community were
recorded at their respective fair values on October 1, 2002. First State
acquired approximately $343 million in loans and approximately $242 million in
deposits, and recognized goodwill of approximately $43 million related to the
transaction. The First Community account balances acquired on October 1, 2002
and the results of operations since October 1, 2002 are included in the results
of the Company.

During 2001, a significant competitor in the Company's market area was
acquired by another institution in the market, requiring the purchaser to divest
of significant deposits to another institution owned by an out-of-state company.
The Company geared many of its activities, including marketing efforts, to
capturing market share disrupted by this acquisition. Management believes that a
significant amount of its deposit growth in 2001 was a result of this
transaction and the Company's efforts to capitalize on it. While management
believes that the Company will continue to increase its market share as a result
of this acquisition, management does not expect its market share growth from
this acquisition to continue at the same rate as that experienced in 2002 and
2001.

The decline in interest rates in 2001 and 2002 had the impact of
compressing the Company's net interest margin because of the Company's asset
sensitive position. If the decline in rates were to halt, this compression
should be abated and any increase in rates by the Federal Reserve would be
expected to have the effect of increasing the Company's net interest margin. The
decline in rates also had the effect of stimulating demand for one- to
four-family residential real estate. That increased demand contributed to the
growth in real estate construction loans and originations of mortgage loans
available for sale. With interest rates at historically low levels, management
expects that increases in rates will occur that will slow the pace of demand for
one- to four-family residential real estate, which would have the effect of
reducing the rate of growth in construction loans and mortgage loans originated
for sale.

INTEREST INCOME. Interest income increased to $62.4 million in 2002, from
$55.7 million in 2001 and $52.2 million in 2000. This increase was due to an
increase in average interest-earning assets. Average interest-earning assets
were $920 million in 2002, compared to $672 million in 2001 and $557 million in
2000. The increase in average interest-earning assets occurred in loans and
investment securities, and was made possible by the acquisition of First
Community and the Company's successful efforts to increase its deposit market
share. Principally as a result of the Federal Reserve Bank's rate cuts, the
Company's yield on interest-earning assets decreased to 6.78% in 2002, from
8.29% in 2001 and 9.36% in 2000.

INTEREST EXPENSE. Interest expense decreased to $18.4 million in 2002,
from $20.5 million in 2001 and $20.2 million in 2000. This decrease was due to a
decrease in the cost of interest-bearing liabilities, partially offset by an
increase in average interest-bearing liabilities. Average interest-bearing
liabilities increased to $753 million in 2002, from $545 million in 2001 and
$453 million in 2000. The increase in average interest-bearing liabilities was
due to an increase in average interest-bearing deposits of $174.5 million, an
increase in average borrowings of $15.2 million, and an increase in average
trust preferred securities of $20.1 million. The increase in interest-bearing
deposits, borrowings, and trust preferred securities is a result of the
acquisition of First Community and the Company's success in increasing its
market share. The average cost of interest-bearing liabilities decreased to
2.44% in 2002, from 3.76% in 2001 and 4.46% in 2000. The decrease in the cost of
interest bearing liabilities is a direct result of the Federal Reserve Bank's
rate cuts.

NET INTEREST INCOME. Net interest income is interest earned on loans and
investments less interest expense on deposit accounts and borrowings. Primary
factors affecting the level of net interest income include the margin between
the yield earned on interest-earning assets and the rate paid on
interest-bearing liabilities, as well as the volume and composition of average
interest-earning assets and average interest-bearing liabilities. Net interest
income increased to $44.1 million in 2002, from $35.2 million in 2001 and $32.0
million in 2000. This increase was due to increases in average loans of $194.8
million and average investment securities of $38.5 million. Net interest margin
was 4.79% in 2002, compared to 5.24% in 2001 and 5.73% in 2000.

-13-

PROVISION FOR LOAN AND LEASE LOSSES. The provision for loan losses
increased to $2.6 million in 2002, from $2.4 million in 2001 and $2.5 million in
2000. 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 it believes affect the credit quality of the loan portfolio.
Charge-offs net of recoveries of loans and leases were $1.1 million in 2002,
$1.5 million in 2001, and $1.6 million in 2000. The percentage of net
charge-offs to average loans was 0.16% in 2002 and 0.30% in 2001. Management
intends to continue to provide for potential loan losses based upon growth in
the portfolio, trends in delinquencies, charge-off experience, and local and
national economic conditions.

NON-INTEREST INCOME. Non-interest income was $12.7 million in 2002,
compared to $9.4 million in 2001 and $7.8 million in 2000. The increase for 2002
compared to 2001 was primarily the result of increased service charges on
deposit accounts, credit card transaction fees, and an increase in the gain on
sale of mortgage loans. Service charges on deposits were $3.4 million, $2.9
million, and $2.4 million for the years ended December 31, 2002, 2001, and 2000,
respectively, due principally to increases in deposits in those years. The gain
on the sale of mortgage loans totaled $2.8 million in 2002, $1.8 million in
2001, and $658,000 in 2000. The increase in 2002 from 2001 was significantly
aided by the decrease in interest rates during 2002 and in 2001, which increased
demand for one- to four-family residential properties, resulting in higher
origination volumes. Credit card transaction fees increased to $4.2 million in
2002, from $3.2 million in 2001 and $2.4 million in 2000. These increases are
the result of the Company's efforts to increase its market share. In 2000,
non-interest income included an $879,000 gain on the sale of the Company's
leasing division, a $333,000 loss on the sale of investment securities, and a
$259,000 gain on the sale of a property recovered in satisfaction of a loan.

NON-INTEREST EXPENSES. Non-interest expenses increased to $38.6 million in
2002, from $29.6 million in 2001 and $26.2 million in 2000. This increase was
due largely to increases in salaries and employee benefits, occupancy,
equipment, and marketing expense as a result of the Company's growth. Salaries
and employee benefits increased to $18.0 million in 2002, from $13.6 million in
2001 and $11.8 million in 2000. Occupancy expense increased to $4.4 million in
2002, from $3.4 million in 2001 and $3.1 million in 2000. Equipment expense
increased to $2.8 million in 2002, from $2.1 million in 2001 and $1.9 million in
2000. Marketing expense increased to $2.1 million in 2002, compared to $1.5
million in 2001 and $1.3 million in 2000. The increases in salary and occupancy
expense are due primarily to the acquisition and merger of First Community,
increased commissions for the production of mortgage loans sold, and the
settlement of an executive employment agreement. The growth in marketing expense
is a result of the Company's efforts to capture market share and capitalize on
the opportunity to do so as a result of acquisitions of banks with New Mexico
operations by companies outside New Mexico. Management anticipates that
non-interest expenses will continue to increase with additional growth.

INCOME TAX EXPENSE. Income tax expense increased to $5.6 million in 2002,
from $4.5 million in 2001 and $3.8 million in 2000. Management anticipates that
the Company's effective tax rate will be slightly higher in 2003.

LIQUIDITY AND SOURCES OF FUNDS

The Company's primary sources of funds are customer deposits, and loan and
lease repayments. 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. Deposits of the
Company increased to $1.080 billion at December 31, 2002, from $685 million at
December 31, 2001. Growth in deposits has occurred primarily as a result of the
Company's acquisition and merger of First Community and efforts to increase
market share by taking advantage of market dislocations caused by the
acquisition of local competitors and growth in the economy of the Company's
market area.

Net loans of the Company increased to $1.005 billion at December 31, 2002
from $542 million as of December 31, 2001. During 2002, real estate loans
increased by $440.3 million, commercial loans increased by $10.6 million,
consumer loans increased by $10.0 million, and mortgage loans available for sale
increased by $7.3 million. The increase in loans is due to the acquisition and
merger of First Community and the Company's successful efforts to increase its
market share by taking advantage of market dislocations caused by the
acquisition of local competitors and growth in the economy of the Company's
market area.

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

-14-

Management anticipates that the Company will continue to rely primarily on
customer deposits and loan repayments, as well as retained earnings, to provide
liquidity and will use funds so provided primarily to make loans and to purchase
securities. The Company believes that its customer deposits provide a strong
source of liquidity because of the high percentage of core deposits. Borrowings
are used to compensate for reductions in other sources of funds. Borrowings may
also be used on a longer-term basis to support expanded lending activities and
to match the maturity or repricing intervals of assets. The sources of such
borrowings are federal funds sold, securities sold under agreements to
repurchase, and borrowings from the Federal Home Loan Bank.

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 extended credit as of December 31, 2002. See notes 8,
9, and 13 of the notes to the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

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 reserved, 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.

The excess of cost over fair value of the net assets of acquired banks is
recorded as goodwill. Prior to 2002, goodwill was amortized over its estimated
useful life on a straight-line basis and the recoverability of goodwill assessed
by determining whether the amortization can be recovered through projected
undiscounted future results of operations. Beginning in 2002, goodwill is no
longer amortized, but instead tested for impairment at least annually.

CAPITAL RESOURCES

The Company's total stockholders' equity increased to $117.5 million at
December 31, 2002 from $58.3 million at December 31, 2001. Of the $59.2 million
increase, $51.0 million was a result of the public offering of approximately 2.4
million shares of common stock, and $10.0 million was produced by earnings,
offset by stock repurchases of $660,000 and dividend payments of $2.2 million.

-15-

In connection with the Company's acquisition of First Community, the
Company issued 2.4 million shares of common stock. The Company offered these
shares to the public at a price of $22.50 per share. In connection with this
offering, the Company paid a 5% commission to the underwriters, and certain
legal, accounting, and printing expenses, resulting in net proceeds to the
Company of approximately $51.0 million. The net proceeds were used to pay a
portion of the purchase price for First Community.

During 2002, the Company issued trust preferred securities of $25 million
which are included as borrowings on the consolidated balance sheet and counted
as Tier I capital for regulatory capital purposes. Management currently intends
to continue to retain a major portion of the Company's earnings to support
anticipated growth. As of December 31, 2002, the Company and its subsidiary bank
met the fully phased-in regulatory capital requirements as further disclosed in
note 11 to the consolidated financial statements.

IMPACT OF INFLATION

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

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

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. The discussions regarding our interest rate sensitivity
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 fluctuations in interest
rates, inflation, government regulations, loss of key personnel, faster or
slower than anticipated growth, and economic conditions and competition in the
geographic and business areas in which we conduct our operations.

-16-

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
First State Bancorporation:

We have audited the accompanying consolidated balance sheets of First
State Bancorporation and subsidiary as of December 31, 2002 and 2001, 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, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First State
Bancorporation and subsidiary as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1(e) to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective January 1, 2002.

KPMG LLP

Albuquerque, New Mexico
January 17, 2003

-17-

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

-18-

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

-19-

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See accompanying notes to consolidated financial statements.

-20-

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.

-21-

FIRST STATE BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

-22-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

First State Bancorporation is a New Mexico-based holding company that
serves communities in New Mexico, Colorado, and Utah through its wholly owned
subsidiary First State Bank N.M. First State Bank N.M. is a state chartered bank
providing a full range of commercial banking services in Taos, Albuquerque,
Santa Fe, Rio Rancho, Los Lunas, Bernalillo, Placitas, Pojoaque, Questa, Belen,
and Moriarty, New Mexico. First State Bank N.M. also provides a full range of
commercial banking services in the Colorado and Utah markets through branches
under the name First Community Bank. First State Bancorporation and First State
Bank N.M. are collectively referred to as "the Company."

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

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

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

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

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

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

(b) Investment Securities

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

-23-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(c) Loans, and Allowance for Loan Losses

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

The allowance for loan losses is that amount which, in management's
judgment, is considered adequate to provide for potential losses in the loan
portfolio. In analyzing the adequacy of the allowance for loan losses,
management uses a comprehensive loan grading system to determine risk potential
in the portfolio, and considers the results of periodic external loan reviews.
Historical loss experience factors and specific reserves 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.

(e) Intangible Assets

The excess of cost over the fair value of the net assets of acquired banks
is recorded as goodwill. The Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," as
of January 1, 2002, and therefore, no longer amortizes goodwill. As of the date
of adoption, the Company had unamortized goodwill in the amount of $360,852,
which was subject to the transition provisions of SFAS No. 142. The Company
determined there was no transitional impairment loss at January 1, 2002.
Goodwill amortization for the years ended December 31, 2001 and 2000 was
$104,206 in each year.

-24-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's reported net income and basic and diluted earnings per share
adjusted for excluding the effects of goodwill amortization in fiscal periods
prior to 2002 would have been as follows:

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 transitional and annual goodwill
impairment tests as of January 1, 2002 and October 31, 2002, respectively, and
found no impairment.

Core deposit intangibles are amortized on an accelerated basis based on an
estimated useful life of approximately 10 years. The Company reviews its core
deposit intangible assets periodically for other-than-temporary impairment. If
such impairment is indicated, recoverability of the asset is assessed based on
expected undiscounted net cash flows.

(f) Other Real Estate Owned

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

(g) Bank Owned Life Insurance

In 2002 and 2001, the Company purchased life insurance on certain of its
officers. The cash surrender value of these policies was approximately $18.2
million and $7.6 million at December 31, 2002 and 2001, respectively. The
increase in the cash surrender value is included in non-interest income in the
consolidated statements of operations and amounted to $555,227 and $97,775 for
the years ended December 31, 2002 and 2001, respectively.

(h) Income Taxes

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

-25-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(i) Statements of Cash Flows

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

(j) Earnings per Common Share

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

(k) Stock Options

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

Compensation expense of $13,776, $49,357, and $83,013 was recognized in
2002, 2001, and 2000, respectively, pursuant to the grant of options. Had
compensation costs been determined consistent with the fair value method of SFAS
No. 123 at the grant dates for awards, net income and earnings per common share
would have changed to the pro forma amounts indicated below.

In April 1999, the Company granted 12,750 shares at $6.00 per share and in
July 1999, the Company granted 90,000 shares at $16.08 per share. In determining
the following pro forma disclosures, the fair value of options granted were
estimated as of the grant date using the Black-Scholes option-pricing model
assuming a risk-free interest rate of 4.69% for April 1999, 4.74% for July 1999,
and 5.50% for 1997; dividend yield of 1.50% for April 1999, 1.60% for July 1999,
and 0.98% for 1997; expected lives of 5 years for 1999 and 1997; and volatility
of 57.76% for April 1999, 36.21% for July 1999, and 40.23% for 1997.

-26-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(l) Reclassifications

Certain previous period balances have been reclassified to conform to the
2002 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 August 2001 the FASB 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.
Early application is permitted. The adoption of SFAS No. 144 on January 1, 2002
had no impact on the Company's consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Certain disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements. The adoption of this statement as of
December 31, 2002 had no effect on the Company's consolidated financial position
or results of operations.

-27-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2. ACQUISITION OF FIRST COMMUNITY

The Company completed the acquisition of First Community Industrial Bank
("First Community") on October 1, 2002 for approximately $67 million. The
Company financed this acquisition through a public offering of its common stock
in August 2002, which netted approximately $51.0 million, and through the
issuance of approximately $25.0 million in trust preferred securities in June of
2002. The acquisition was accounted for using the purchase method of accounting,
and accordingly, the assets and liabilities of First Community were recorded at
their respective fair values on October 1, 2002. The First Community account
balances acquired on October 1, 2002 and the results of operations since October
1, 2002 are included in the results of the Company.

The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. The Company is
currently in negotiations to sell loans with a balance of approximately $13.1
million at a discount of approximately $3.9 million, and any difference between
the recorded fair value of the loans and the final sales price will be recorded
as an addition to or reduction of goodwill.

-28-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Pro Forma Financial Information

The pro forma financial information below presents the condensed
consolidated financial results of the Company assuming that First Community,
acquired October 1, 2002, had been acquired at the beginning of 2001 and
includes the effect of amortization of goodwill in 2001 of $104,206 and other
acquired identifiable intangible assets from that date. This pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of future operations that would have been achieved had
the acquisition taken place at the beginning of 2001. Pro forma information
follows:

-29-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Goodwill and Other Acquisition - Related Intangibles

The changes in the carrying amount of goodwill for the year ended December
31, 2002 are as follows:

Goodwill recognized in the acquisition totaled $43,051 and is expected to
be fully deductible for tax purposes.

Recorded in other assets, net, the carrying amount of amortizable core
deposit intangible assets recognized in the acquisition for the year ended
December 31, 2002 was $855,000 net of accumulated amortization of $26,000.

Expected annual amortization expense related to the acquired core deposit
intangible is as follows:

3. Cash and Due from Banks

First State Bank is required to maintain certain daily reserve balances on
hand in accordance with Federal Reserve Board requirements. The consolidated
reserve balances maintained in accordance with these requirements were
approximately $882,000 and $886,000 at December 31, 2002 and 2001, respectively.

-30-

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:

-31-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The amortized cost and estimated market value of investment securities at
December 31, 2002, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations.

Marketable securities available for sale with an amortized cost of
approximately $117,050,000 and marketable securities held to maturity with an
amortized cost of approximately $65,971,000 were pledged to collateralize
deposits as required by law and for other purposes at December 31, 2002.

Proceeds from sales of investments in debt securities for the years ended
December 31 were $9,984,520 in 2002, zero in 2001, and $11,936,858 in 2000.
Gross losses realized were $94,473 in 2002, zero in 2001, and $333,142 in 2000.
Gross gains realized were zero in 2002, 2001, and 2000. The Company calculates
gain or loss on sale of securities based on the specific identification method.

5. LOANS

Following is a summary of loans by major categories:

On March 1, 2000, the Company closed the sale of the assets of its
subsidiary bank's commercial leasing division. The sale resulted in $63.7
million of leases being sold. The gain on the sale amounted to approximately
$879,000, net of transaction costs. Interest income from leases from January 1,
2000 through March 1, 2000 was $838,325.

-32-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

The recorded investment in loans which are considered impaired was
$10,241,251 at December 31, 2002, $2,480,575 at December 31, 2001, and
$1,937,452 at December 31, 2000. The average investment in loans for which
impairment has been recognized was $3,831,501 in 2002, $2,191,875 in 2001, and
$3,143,590 in 2000. The allowance for loan losses related to these loans was
$568,407 at December 31, 2002, $261,532 at December 31, 2001, and $217,837 at
December 31, 2000. The allowance for impaired loans is included in the allowance
for loan and lease losses. Interest income recognized on impaired loans was zero
in 2002, 2001, and 2000.

Loans on which the accrual of interest has been discontinued amounted to
$10,241,251, $2,480,575, and $1,937,452 at December 31, 2002, 2001, and 2000,
respectively. If interest on such loans had been accrued, such income would have
been approximately $203,000 in 2002, $70,000 in 2001, and $199,000 in 2000.
Actual interest income on those loans, which is recorded only when received,
amounted to zero in 2002, 2001, and 2000.

Activity during 2002 and 2001 regarding outstanding loans to certain
related-party loan customers of the subsidiary bank (executive officers,
directors, and principal shareholders of First State Bank, including their
families and companies in which they are principal owners) was as follows:

6. PREMISES AND EQUIPMENT

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

Depreciation and amortization expense on premises and equipment in 2002,
2001, and 2000 was $2,377,009, $1,981,830, and $1,837,473, respectively.

-33-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. DEPOSITS

Following is a summary of interest-bearing deposits:

At December 31, 2002, the scheduled maturities of all time deposits are as
follows:

8. BORROWINGS

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are comprised of customer
deposit agreements with overnight maturities. The obligations are not federally
insured but are collateralized by a security interest in U.S. Treasury, U.S.
government agency, or U.S. government agency issued mortgage-backed securities.
These securities are segregated and safekept by third-party banks. These
securities had a market value of $70,764,215 and $72,258,011, at December 31,
2002 and 2001, respectively. Interest expense included in the statements of
operations was $581,578, $1,927,283, and $2,622,854 for the years ended December
31, 2002, 2001, and 2000, respectively.

Securities sold under agreements to repurchase are summarized as follows:

-34-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Trust Preferred Securities

On November 14, 2001, the Company formed First State NM Statutory Trust I
("Trust I") for the purpose of issuing trust-preferred securities ("Securities")
in a pooled transaction to unrelated investors. Trust I issued $7,500,000 of
Securities that bear interest at an annual rate equal to the three-month LIBOR
plus 3.60% (5.01% at December 31, 2002), interest only payable at three-month
intervals (the "Payment Date"). The annual rate is adjusted at each Payment Date
beginning with the first interest payment date of March 18, 2002, provided
however, that prior to December 18, 2006, the annual rate will not exceed
12.50%. The proceeds were up streamed to the Company as Junior Subordinated
Deferrable Interest Debentures ("Debentures") under the same terms and
conditions. The Company has, through various contractual arrangements, fully and
unconditionally guaranteed all of Trust I's obligations with respect to the
Securities. The Securities qualify as Tier I capital and are presented in the
consolidated balance sheets as "Borrowings". The sole asset of Trust I is
$7,732,000 of Debentures issued by the Company. Both the Securities of Trust I
and the Debentures issued by the Company will mature on December 18, 2031;
however, they are callable at par beginning December 18, 2006. So long as there
are no events of default, the Company may defer payments of interest for up to
twenty consecutive interest payment periods.

On June 7, 2002, the Company formed First State NM Statutory Trust II
("Trust II") for the purpose of issuing trust-preferred securities ("Trust II
Securities") in a pooled transaction to unrelated investors. Trust II issued
$25,000,000 of Trust II Securities that bear interest at an annual rate equal to
the three-month LIBOR plus 3.45% (4.85% at December 31, 2002), interest only
payable at three-month intervals (the "Trust II Payment Date"). The annual rate
is adjusted at each Trust II Payment Date beginning with the first interest
payment date of September 26, 2002, provided however, that prior to June 26,
2007, the annual rate will not exceed 11.95%. The proceeds were up streamed to
the Company as Junior Subordinated Deferrable Interest Debentures ("Trust II
Debentures") under the same terms and conditions. The Company has, through
various contractual arrangements, fully and unconditionally guaranteed all of
Trust II's obligations with respect to the Trust II Securities. The Trust II
Securities qualify as Tier I capital and are presented in the consolidated
balance sheets as "Borrowings". The sole asset of Trust II is $25,774,000 of
Debentures issued by the Company. Both the Trust II Securities and the Trust II
Debentures issued by the Company will mature on June 26, 2032; however, they are
callable at par beginning June 26, 2007. So long as there are no events of
default, the Company may defer payments of interest for up to twenty consecutive
interest payment periods.

Federal Home Loan Bank Advances

First State Bank has notes payable to the Federal Home Loan Bank of Dallas
included in borrowings as follows:

-35-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 $7,909 monthly. The balances at December 31, 2002 and 2001 were
$911,047 and $946,571, respectively.

As of December 31, 2002, the contractual maturities of borrowings are as
follows:

9. LEASES

The Company leases certain of its premises and equipment under
noncancellable operating leases from certain related and unrelated parties. Rent
expense for the years ended December 31, 2002, 2001, and 2000, totaled
approximately $2,533,000, $1,811,000, and $1,602,000, respectively. Minimum
future payments under these leases at December 31, 2002, are as follows:

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 $71,956 in 2002, $69,860 in 2001, and $67,530 in
2000, respectively. In the opinion of management, the lease is on terms similar
to other third-party commercial transactions in the ordinary course of business.

The Company leases space for its operations from a limited liability
company controlled by certain Directors of the Company and certain officers of
First State Bank with an initial term of 15 years. Lease payments were $492,341
in 2002, $466,902 in 2001, and $454,000 in 2000. In the opinion of management,
this transaction and the related lease are on terms similar to other third-party
transactions in the ordinary course of business.

-36-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. INCOME TAXES

Income tax expense (benefit) consisted of the following:

Actual income tax expense from continuing operations differs from the
"expected" tax expense for 2002, 2001, and 2000 (computed by applying the U.S.
federal corporate tax rate of 34 percent to income before income taxes) as
follows:

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

The net deferred tax asset at December 31, 2002 includes approximately
$1,076,000 in assets related primarily to the allowance for loan losses acquired
from First Community.

In order to fully realize the deferred tax asset on the Company's
consolidated balance sheet at December 31, 2002 of $4,788,266, the Company will
need to generate future taxable income of approximately $14,083,000. 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.

-37-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. STOCKHOLDERS' EQUITY

The Board of Directors has authorized management to purchase up to 525,000
shares of its common stock in the open market. During 2002, the Company
purchased 27,500 shares. The funds for these purchases came from excess funds
held by the parent company. Currently, management has not determined the timing
of additional purchases, if any.

Under terms of a stock option agreement, an officer of First State Bank
had an outstanding option to purchase 9,918 common shares of the Company at a
price of $3.34 per share. This option was exercised in 2000.

Effective October 5, 1993, the Company adopted the First State
Bancorporation 1993 Stock Option Plan, which provides for the granting of
options to purchase up to 730,000 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 plan also provides that options other than those qualifying as
incentive stock options may be granted. Vesting of these options is 20% at the
date of grant and 20% per year thereafter until fully vested. Options under this
plan are as follows:

The Company has a shareholder protection rights agreement to protect the
stockholders of the Company from abusive or unfair take-over practices. The
terms of the agreement provide one right for each share of common stock held.
The rights become exercisable only if a person or a group accumulates ten
percent or more of the Company's common shares. The Company would be entitled to
redeem the rights for $0.01 per right until the tenth day following a public
announcement of an acquisition of 10% of its common shares. The rights expire on
October 25, 2006.

The Company offers a dividend reinvestment plan that allows any
stockholder of record of 300 shares 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.

Bank regulations specify the level of dividends that can be paid by First
State Bank. During the year ended December 31, 2002, First State Bank paid no
dividends to First State Bancorporation. As of December 31, 2002, First State
Bank had approximately $21.4 million in retained earnings, which were available
for the payment of dividends to First State Bancorporation subject to regulatory
capital requirements. Future dividend payments will be dependent upon the level
of earnings generated by First State Bank and/or regulatory restrictions, if
any.

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total and Tier I
capital (as defined in regulations and set forth in the following table) to
risk-weighted assets, and of Tier I capital, and of Tier I capital to total
assets. Management believes, as of December 31, 2002, that the Company and
subsidiary bank meet all capital adequacy requirements to which they are
subject.

-38-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In connection with the Company's acquisition and merger of First Community
into the Company, the Company issued 2.4 million shares of common stock. The
Company offered these shares to the public at a price of $22.50 per share. In
connection with this offering, the Company paid a 5% commission to the
underwriters, and certain legal, accounting, and printing expenses, resulting in
net proceeds to the Company of approximately $51.0 million. The net proceeds
were used to pay a portion of the purchase price for First Community.

12. EMPLOYEE BENEFIT PLANS

First State Bank sponsors an employee tax-sheltered savings plan for
substantially all full-time employees which provides a mandatory 50% matching by
First State Bank of employee contributions up to a maximum of 6% of gross annual
wages. Full vesting occurs after three years. Contributions to the plan totaled
$273,229 in 2002, $211,627 in 2001, and $179,707 in 2000.

13. Commitments and Contingencies

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

-39-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

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

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

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

14. Condensed Financial Information of Parent Company

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

CONDENSED STATEMENTS OF CONDITION

-40-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

CONDENSED STATEMENTS OF OPERATIONS

CONDENSED STATEMENTS OF CASH FLOWS

-41-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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.

-42-

FIRST STATE BANCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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, 2002 and 2001. The
fair value of fixed maturity certificates of deposit is estimated by discounting
the future contractual cash flows using the rates currently offered for deposits
of similar remaining maturities.

Securities sold under agreements to repurchase. The estimated fair value
of securities sold under agreements to repurchase, which reset frequently to
market interest rates, approximates fair value.

Borrowings. Borrowings consist of Trust Preferred Securities, Federal Home
Loan Bank advances, and a note payable whose rates approximate market at
December 31, 2002 and 2001.

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.

-43-

Index to Exhibits