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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005.

or

For the transition period from              to             

Commission file number 001-12487

FIRST STATE BANCORPORATION

(Exact name of registrant as specified in its charter)

(505) 241-7500

(Registrant’s telephone number, including area code)

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

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  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 15,351,384 shares of common stock, no par value, outstanding as of May 5, 2005.

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FIRST STATE BANCORPORATION AND SUBSIDIARY

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PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements.

First State Bancorporation and Subsidiary

Consolidated Condensed Balance Sheets

(unaudited)

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

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Operations

For the three months ended March 31, 2005 and 2004

(unaudited)

(Dollars in thousands, except per share amounts)

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Comprehensive Income

For the three months ended March 31, 2005 and 2004

(unaudited)

(Dollars in thousands)

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Cash Flows

For the three months ended March 31, 2005 and 2004

(unaudited)

(Dollars in thousands)

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Notes to Consolidated Condensed Financial Statements

(unaudited)

1. Consolidated Condensed Financial Statements

The accompanying consolidated condensed financial statements of First State Bancorporation and subsidiary (the “Company”) are unaudited and include our accounts and those of our wholly owned subsidiary, First State Bank N.M. (the “Bank”). All significant intercompany accounts and transactions have been eliminated. Information contained in our consolidated condensed financial statements and notes thereto should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2004.

Our consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, all adjustments (consisting only of normally recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

2. New Accounting Standards

On March 1, 2005, the Federal Reserve Board released a final rule (FR) incorporating two substantive changes in the capital treatment of trust preferred securities that would impact bank holding companies and a number of clarifications of existing policies and guidelines. The substantive changes included in the FR that affect bank holding companies provide that: (1) As of March 31, 2009, the amount of trust preferred securities that a bank holding company may include as Tier 1 capital will be limited to 25% of the sum of all core capital elements including trust preferred securities, net of goodwill less any associated deferred tax liability, and (2) After March 31, 2009, amounts of trust preferred securities in excess of the 25% limit will be included in Tier 2 capital, limited to 50% of Tier 1 capital. Based on our current amount of trust preferred securities, the FR will not impact our capital calculations.

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

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB 25. Among other provisions, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15, 2005, although early adoption is allowed. However, on April 14, 2005, the Securities and Exchange Commission announced that the compliance date of SFAS 123R will be suspended until January 1, 2006 for calendar year companies.

SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 148.

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SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options.

We currently expect to adopt SFAS 123R, effective January 1, 2006 based on the new compliance date announced by the Securities and Exchange Commission; however, we have not yet determined which of the aforementioned adoption methods we will use. Subject to a complete review of the requirements of SFAS 123R, based on stock options granted to date using our current pricing model (i.e., Black-Scholes), the adoption of SFAS 123R on January 1, 2006, is expected to reduce 2006 earnings by approximately $800,000.

In March 2004, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides accounting guidance regarding the determination of when an impairment (i.e., fair value is less than amortized cost) of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in earnings. EITF 03-1 also requires annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities classified as available-for-sale or held-to-maturity that are in an unrealized loss position at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The Financial Accounting Standards Board has decided to delay the effective date for the measurement and recognition guidance until new implementation guidance can be issued. The Proposed Staff Position EITF 03-1-a is expected to be issued in final form in 2005.

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

3. Stock-Based Compensation

We apply 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. 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, we have elected to continue to apply the intrinsic value-based method and have included the disclosure required by SFAS No. 148.

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.

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See Note 2. New Accounting Standards for further discussion regarding the impact SFAS 123R is expected to have on our operations.

4. Earnings per Common Share

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

The following is a reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months ended March 31:

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

5. Treasury Stock

Our Board of Directors has authorized us to purchase up to 1,050,000 shares of our common stock in the open market. As of March 31, 2005, we have purchased 784,100 shares. We did not purchase any additional shares during the three months ended March 31, 2005. We may purchase additional shares, the amount of which will be determined by market conditions. We sponsor a deferred compensation plan, which is included in the consolidated financial statements. At March 31, 2005, the assets of the deferred compensation plan included 32,525 shares of Company common stock.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

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

Consolidated Condensed Balance Sheets

Our total assets increased by $77.6 million from $1.816 billion as of December 31, 2004 to $1.893 billion as of March 31, 2005. The increase was primarily made up of a $15.9 million increase in cash and cash equivalents, a $14.7 million increase in investment securities and a $46.5 million increase in loans.

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

Deposits, which are our main source of funds for loans and investments, increased by $12.6 million from $1.401 billion as of December 31, 2004 to $1.414 billion as of March 31, 2005. Securities sold under agreements to repurchase decreased $31.2 million from $69.7 million at December 31, 2004 to $38.5 million at March 31, 2005, due primarily to one customer that removed excess cash from the Bank during the first quarter. Federal Home Loan Bank advances and other increased $92.5 million from $153.9 million at December 31, 2004 to $246.3 million at March 31, 2005.

The following table represents customer deposits, by category, at the dates indicated.

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Consolidated Results of Operations For the Three Months Ended March 31, 2005

Our net income for the three months ended March 31, 2005, was $4.3 million, an increase of $732,000 or 20% from $3.6 million for the same period of 2004. The increase in net income resulted from an increase in net interest income of $2.7 million, partially offset by an increase in non-interest expenses of $1.7 million and a decrease in non-interest income of $242,000. Our annualized return on average assets was 0.94% for the three months ended March 31, 2005, compared to 0.88% for the same period of 2004.

Our net interest income increased $2.7 million to $19.3 million for the first quarter of 2005 compared to $16.6 million for the first quarter of 2004. This increase was composed of a $4.4 million increase in total interest income offset by a $1.7 million increase in total interest expense. The increase in interest income was composed of an increase of $2.8 million due to increased average interest earning assets of $202.5 million, aided by a $1.6 million increase due to a 0.38% increase in the yield on average interest earning assets. The increase in average interest-earning assets occurred in loans and investment securities. The increase in loans of $140.5 million was made possible by our successful efforts to attract new customers and the increase in our investment securities of $61.0 million was driven primarily by purchases of securities to satisfy collateral pledging requirements due to an increase in public deposits since prior year. The increase in total interest expense was composed of an increase of $516,000 due to increased average interest-bearing liabilities of $145.0 million and an increase of $1.2 million due to a 0.32% increase in the cost of interest-bearing liabilities. The increase in average interest-bearing liabilities was due to an increase in average interest-bearing deposits of $134.2 million and an increase in average borrowings including FHLB advances and junior subordinated debentures of $16.3 million. The increase in interest-bearing deposits is a result of our success in increasing market share in New Mexico.

The increase in yield on interest earning assets of 0.38% reflects the impact of the Federal Reserve Bank’s increase of the discount rate beginning in the third quarter of 2004 and into 2005. The discount rate has increased 1.75% since the first quarter of 2004. The increase in the discount rate contributes to a corresponding increase in the prime rate. A substantial portion of our loan portfolio consists of adjustable rate loans whose rates are adjusted based upon the then prevailing prime rate. The increase in the prime rate has led to a corresponding increase in the yield on our loan portfolio. We expect that the Federal Reserve Bank rate increases in the first quarter of 2005 will cause the yield on our loan portfolio to continue to increase slightly in the coming months as existing loans reprice.

The increase in our cost of interest bearing liabilities is a result of higher interest payments made to our deposit and repurchase agreement customers as well as higher interest rates paid on our borrowings. The interest rate that we pay to our deposit and repurchase agreement customers is influenced by the level of the discount rate. As a result of the increases in the discount rate made by the Federal Reserve Bank since the third quarter of 2004, we have increased the interest rates that we pay on our customers’ deposits and repurchase agreements and increased the corresponding interest payments to these customers. In addition, the increase in the discount rate has corresponded to an increase in interest expense related to our borrowings as the majority of our borrowings mature within one year and are being replaced with borrowings at the higher current rates. We continue to use a laddering approach to our borrowings with maturities of approximately one year.

We believe that the competitive environment for deposits will significantly determine the impact on the net interest margin of changes in interest rates. During the quarter ended March 31, 2005, the net interest margin increased by 0.14% over the quarter ended March 31, 2004 due primarily to Federal Reserve Bank rate increases. We believe that additional increases in rates would cause an increase in our net interest margin due to our asset sensitive position. The extent of future increases in our net interest margin will depend on the amount and timing of any further Federal Reserve Bank increases and our ability to manage the cost of interest-bearing liabilities and stay competitive in the markets we serve.

Our provision for loan losses was $1.1 million for the first quarter of 2005, compared to $1.4 million for the first quarter of 2004. Net charge-offs for the first quarter of 2005 were $364,000 compared to $1.4 million for the first quarter of 2004. The allowance for loan losses to total loans held for investment was 1.14% and the ratio of

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allowance for loan losses to non-performing loans was 243% at March 31, 2005, compared to the allowance for loan losses to total loans held for investment of 1.14% and the ratio of allowance for loan losses to non-performing loans of 175% at March 31, 2004. Total non-performing assets to total assets were 0.42% at March 31, 2005, compared to 0.62% at March 31, 2004. We provide for loan losses based upon our judgments concerning the adequacy of the allowance for loan losses considering such factors as loan growth, delinquency trends, previous charge-off experience, and local and national economic conditions.

Our total non-interest income decreased by $242,000 to $3.2 million for the three months ended March 31, 2005, compared to $3.5 million for the same period of 2004. The income from credit and debit transaction fees decreased $484,000 from the first quarter of 2004, which is directly related to the sale of the merchant card portfolio in the third quarter of 2004. The sale resulted in lower fee income as well as lower salaries and related expenses of the operation. Absent in the first quarter of 2005 is any gain or loss from the sale of investment securities compared to gains of $236,000 in the first quarter of 2004. These decreases in non-interest income were offset by the gain on sales of mortgage loans, which increased $358,000 from the first quarter of 2004 reflecting a higher level of loan origination activity, which has steadily increased since the second quarter of 2004 as we have continued to expand and focus on our mortgage division.

Our total non-interest expenses increased by $1.7 million to $14.8 million for the first quarter of 2005, compared to $13.1 million for the same period of 2004. This increase was due primarily to a $2.0 million increase in salaries and employee benefits, a $149,000 increase in occupancy expense, a $139,000 increase in data processing, and a $91,000 increase in legal, accounting, and consulting. The increase in salaries and benefits is a result of several senior level lenders added in the Colorado and Utah markets in addition to overall growth in employees and an increase in commissions related to the higher level of single-family mortgage loan originations. These increases were offset by a decrease of $406,000 in credit and debit card interchange due to the sale of our merchant card services in the third quarter of 2004. Absent in the first quarter of 2005 is any loss on sale of loans compared to the loss on sale of loans of $435,000 in the first quarter of 2004 due to the sale of approximately $38 million in loans obtained in the acquisition of First Community.

Allowance for Loan Losses

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

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

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Liquidity and Capital Expenditures

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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