10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2008.

or

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

Commission file number 001-12487

FIRST STATE BANCORPORATION

(Exact name of registrant as specified in its charter)

NEW MEXICO	85-0366665
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

7900 JEFFERSON NE ALBUQUERQUE, NEW MEXICO	87109
(Address of principal executive offices)	(Zip Code)

(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting Company  ¨

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

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: 20,243,192 shares of common stock, no par value, outstanding as of November 3, 2008.

FIRST STATE BANCORPORATION AND SUBSIDIARY

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	33
	PART II. OTHER INFORMATION
Item 5.	Other Information	34
Item 6.	Exhibits	34
	SIGNATURES	36

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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)

	September 30, 2008			December 31, 2007
Assets
Cash and due from banks	$	68,312		$	82,036
Interest-bearing deposits with other banks		1,530			1,875
Federal funds sold		1,500			798
Total cash and cash equivalents		71,342			84,709
Investment securities:
Available for sale (at market, amortized cost of $403,630 at September 30, 2008, and $393,478 at December 31, 2007)		398,682			393,553
Held to maturity (at amortized cost, market value of $64,366 at September 30, 2008, and $103,117 at December 31, 2007)		64,829			103,753
Non-marketable securities, at cost		30,864			19,098
Total investment securities		494,375			516,404
Mortgage loans available for sale		14,981			20,778
Loans held for investment, net of unearned interest		2,746,156			2,520,432
Less allowance for loan losses		(68,374	)		(31,712	)
Net loans		2,692,763			2,509,498
Premises and equipment (net of accumulated depreciation of $30,261 at September 30, 2008 and $27,138 at December 31, 2007)		61,938			66,181
Accrued interest receivable		12,482			15,761
Other real estate owned		15,929			18,107
Goodwill		—			127,365
Intangible assets (net of accumulated amortization of $5,963 at September 30, 2008, and $4,043 at December 31, 2007)		16,169			18,089
Cash surrender value of bank-owned life insurance		44,849			42,999
Deferred tax asset		38,007			1,776
Other assets, net		20,920			23,314
Total assets	$	3,468,774		$	3,424,203
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing	$	476,094		$	485,419
Interest-bearing		2,021,187			2,089,268
Total deposits		2,497,281			2,574,687
Securities sold under agreements to repurchase		141,929			213,270
Federal Home Loan Bank advances		518,309			203,000
Junior subordinated debentures		98,503			98,613
Other liabilities		23,105			23,771
Total liabilities		3,279,127			3,113,341
Stockholders’ equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued or outstanding		—			—
Common stock, no par value, authorized 50,000,000 shares; issued 21,953,067 at September 30, 2008 and 21,811,980 at December 31, 2007; outstanding 20,231,725 at September 30, 2008 and 20,091,293 at December 31, 2007		222,489			220,797
Treasury stock, at cost (1,721,342 shares at September 30, 2008 and 1,720,687 shares at December 31, 2007)		(25,027	)		(25,021	)
Retained earnings (deficit)		(4,748	)		115,039
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on investment securities, net of tax		(3,067	)		47
Total stockholders’ equity		189,647			310,862
Total liabilities and stockholders’ equity	$	3,468,774		$	3,424,203
Book value per share	$	9.37		$	15.47
Tangible book value per share	$	8.57		$	8.23

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Operations

For the three and nine months ended September 30, 2008 and 2007

(unaudited)

(Dollars in thousands, except per share amounts)

	Three months ended September 30, 2008			Three months ended September 30, 2007			Nine months ended September 30, 2008			Nine months ended September 30, 2007
Interest income:
Interest and fees on loans	$	43,757		$	53,910		$	134,637		$	153,886
Interest on marketable securities:
Taxable		4,709			4,816			14,377			14,768
Non-taxable		976			643			2,824			1,908
Federal funds sold		13			100			72			395
Interest-bearing deposits with other banks		13			46			68			143
Total interest income		49,468			59,515			151,978			171,100
Interest expense:
Deposits		13,419			19,094			45,203			53,031
Short-term borrowings		2,715			4,294			7,502			13,272
Long-term debt		556			193			1,264			651
Junior subordinated debentures		1,116			2,031			3,696			4,928
Total interest expense		17,806			25,612			57,665			71,882
Net interest income		31,662			33,903			94,313			99,218
Provision for loan losses		(15,635	)		(2,447	)		(48,235	)		(6,559	)
Net interest income after provision for loan losses		16,027			31,456			46,078			92,659
Non-interest income:
Service charges		3,969			2,812			10,683			8,060
Credit and debit card transaction fees		1,037			1,141			3,013			3,156
Gain (loss) on sale or call of investment securities		(556	)		—			(682	)		30
Gain on sale of loans		840			1,024			3,196			3,783
Income on cash surrender value of bank-owned life insurance		455			413			1,349			1,723
Other		662			664			2,126			2,334
Total non-interest income		6,407			6,054			19,685			19,086
Non-interest expenses:
Salaries and employee benefits		12,468			12,221			38,748			38,175
Occupancy		4,360			3,887			12,523			10,966
Data processing		1,341			1,610			4,267			4,860
Equipment		1,915			2,076			5,972			5,999
Legal, accounting, and consulting		590			681			1,956			2,147
Marketing		1,057			799			2,538			2,520
Telephone		479			584			1,545			1,803
Other real estate owned		660			217			2,426			733
FDIC insurance premiums		554			449			1,549			588
Goodwill impairment charge		—			—			127,365			—
Amortization of intangibles		640			642			1,920			1,729
Other		3,233			4,311			9,462			11,135
Total non-interest expenses		27,297			27,477			210,271			80,655
Income (loss) before income taxes		(4,863	)		10,033			(144,508	)		31,090
Income tax expense (benefit)		(3,085	)		3,463			(28,348	)		10,812
Net income (loss)	$	(1,778	)	$	6,570		$	(116,160	)	$	20,278
Earnings per share:
Basic earnings (loss) per share	$	(0.09	)	$	0.32		$	(5.76	)	$	0.99
Diluted earnings (loss) per share	$	(0.09	)	$	0.32		$	(5.76	)	$	0.98
Dividends per common share	$	—		$	0.09		$	0.18		$	0.26

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Comprehensive Income

For the three and nine months ended September 30, 2008 and 2007

(unaudited)

(Dollars in thousands)

	Three months ended September 30, 2008			Three months ended September 30, 2007		Nine months ended September 30, 2008			Nine months ended September 30, 2007
Net income (loss)	$	(1,778	)	$	6,570	$	(116,160	)	$	20,278
Other comprehensive income (loss), net of tax - unrealized holding gains (losses) on securities available for sale arising during period		(1,215	)		2,029		(3,537	)		1,773
Reclassification adjustment for (gains) losses included in net income		345			—		423			(19	)
Total comprehensive income (loss)	$	(2,648	)	$	8,599	$	(119,274	)	$	22,032

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 nine months ended September 30, 2008 and 2007

(unaudited)

(Dollars in thousands)

	Nine months ended September 30, 2008			Nine months ended September 30, 2007
Operating activities:
Net income (loss)	$	(116,160	)	$	20,278
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		48,235			6,559
Goodwill impairment charge		127,365			—
Provision for decline in value of other real estate owned		1,067			114
Provision for decline in value of premises and equipment		270			—
Net (gain) loss on sale of other real estate owned		363			(183	)
Gain on sale of loans		(3,196	)		(3,783	)
Depreciation and amortization		6,663			6,283
Share-based compensation expense		604			853
(Gain) loss on sale of investment securities available for sale		682			(30	)
(Gain) loss on disposal of premises and equipment		(5	)		8
Increase in bank-owned life insurance cash surrender value		(1,350	)		(1,153	)
Amortization of premium or discount on securities, net		(848	)		(1,070	)
Amortization of core deposit intangible		1,920			1,729
Mortgage loans originated for sale		(210,217	)		(267,615	)
Proceeds from sale of loans		216,464			311,005
Excess tax benefits from share-based compensation		—			(941	)
Deferred taxes		(34,322	)		6,728
(Increase) decrease in accrued interest receivable		3,279			(953	)
(Increase) decrease in other assets, net		1,667			(4,788	)
Decrease in other liabilities, net		(666	)		(9,170	)
Net cash provided by operating activities		41,815			63,871
Cash flows from investing activities:
Net increase in loans		(241,183	)		(190,093	)
Purchases of investment securities carried at amortized cost		(56,515	)		(988	)
Maturities of investment securities carried at amortized cost		95,584			6,570
Purchases of investment securities carried at market		(173,769	)		(17,655	)
Maturities of investment securities carried at market		161,154			41,555
Sale of investment securities available for sale		2,484			70,991
Purchases of non-marketable securities carried at cost		(11,766	)		(9,018	)
Redemption of non-marketable securities carried at cost		—			9,285
Purchases of premises and equipment		(2,198	)		(11,537	)
Purchase of other investment		—			(1,200	)
Purchase of bank-owned life insurance		(500	)		—
Redemption of bank-owned life insurance		—			796
Bank-owned life insurance proceeds		—			570
Purchase of trust preferred capital securities		—			(1,966	)
Redemption of trust preferred capital securities		—			898
Net proceeds from other real estate owned		7,475			6,835
Proceeds from sales of fixed assets		35			1,179
Cash paid for business acquisition, net of cash received		—			(57,164	)
Net cash used in investing activities	$	(219,199	)	$	(150,942	)

(Continued)

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Cash Flows

For the nine months ended September 30, 2008 and 2007

(unaudited)

(Dollars in thousands)

(continued)

	Nine months ended September 30, 2008			Nine months ended September 30, 2007
Cash flows from financing activities:
Net increase (decrease) in interest-bearing deposits	$	(68,081	)	$	64,680
Net increase (decrease) in non-interest-bearing deposits		(9,325	)		3,303
Net increase (decrease) in securities sold under agreements to repurchase		(71,341	)		27,730
Proceeds from Federal Home Loan Bank advances		508,100			155,000
Payments on Federal Home Loan Bank advances		(192,791	)		(166,764	)
Issuance of junior subordinated debentures		—			65,466
Redemption of junior subordinated debentures		—			(29,898	)
Proceeds from common stock issued		1,088			1,848
Excess tax benefits from share-based compensation		—			941
Dividends paid		(3,627	)		(5,336	)
Treasury stock		(6	)		(16,175	)
Net cash provided by financing activities		164,017			100,795
Change in cash and cash equivalents		(13,367	)		13,724
Cash and cash equivalents at beginning of period		84,709			84,380
Cash and cash equivalents at end of period	$	71,342		$	98,104
Supplemental disclosure of non-cash investing and financing activities:
Transfers from loans held for sale to loans held for investment	$	2,746		$	5,075
Additions to other real estate owned in settlement of loans	$	6,632		$	5,234
Supplemental disclosure of cash flow information:
Cash paid for interest	$	58,875		$	70,234
Cash paid for income taxes, net	$	3,451		$	9,320
Summary of assets acquired, and liabilities assumed through acquisitions:
Cash and cash equivalents		—			14,836
Investment securities		—			72,549
Loans held for investment, net		—			245,147
Loans held for sale		—			47,045
Accrued interest receivable		—			2,540
Goodwill and intangibles		—			72,559
Premises and equipment		—			12,985
Other real estate owned		—			6,899
Bank-owned life insurance		—			8,771
Other assets, net		—			594
Net deferred tax asset		—			9,545
Deposits		—			(359,921	)
Securities sold under agreements to repurchase		—			(10,926	)
Federal Home Loan Bank advances		—			(24,371	)
Junior subordinated debentures		—			(10,072	)
Other liabilities		—			(16,180	)

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,” “First State,” “we,” “our,” or similar terms) are unaudited and include our accounts and those of our wholly owned subsidiary, First Community Bank (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, 2007.

Our consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required for complete financial statements. In our opinion, all adjustments (consisting only of normally recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

Certain previous period balances have been reclassified to conform to the 2008 presentation.

2. New Accounting Standards

In November 2007, the SEC issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” Staff Accounting Bulletin No. 109 supersedes Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments.” It clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. However, it retains the guidance in Staff Accounting Bulletin No. 105 that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment. The guidance is effective on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of Staff Accounting Bulletin No. 109 did not have a material impact on the Company’s consolidated condensed financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 allows companies to report selected financial assets and liabilities at fair value. The changes in fair value are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately on the balance sheet. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of SFAS 159 did not have any impact on the Company’s consolidated financial statements. For additional information, see note 6 to the Company’s consolidated condensed financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require or permit assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. In February 2008, Financial Accounting Standards Board Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157,” was issued. FSP No. 157-2 delayed the application of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of SFAS 157 did not have any impact on the Company’s consolidated financial position or results of operations. For additional information, see note 6 to the Company’s consolidated condensed financial statements.

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3. Share-Based Compensation

For the three months ended September 30, 2008 and 2007, respectively, we recorded approximately $208,000 and $314,000 of pretax share-based compensation expense associated with outstanding unvested stock options and restricted stock awards in salaries and employee benefits in the accompanying consolidated condensed statements of operations. For the nine months ended September 30, 2008 and 2007, respectively, we recorded approximately $604,000 and $853,000 of pretax share-based compensation expense associated with outstanding unvested stock options and restricted stock awards in salaries and employee benefits in the accompanying consolidated condensed statements of operations.

The following table summarizes our stock option activity during the nine months ended September 30, 2008:

	Shares		Weighted average exercise price
Outstanding at December 31, 2007	1,410,685		$	16.92
Granted	412,545			8.86
Exercised	—			—
Expired	(9,000	)		16.07
Forfeited	(48,000	)		20.35
Outstanding at September 30, 2008	1,766,230		$	14.95
Options exercisable at September 30, 2008	713,345		$	15.62

The Company estimated the weighted average fair value of options granted during the nine months ended September 30, 2008 to be approximately $2.64. The value of each stock option grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 3.06%; expected dividend yield of 3.12%; an expected life of 7.2 years; and expected volatility of 36.63%.

4. Earnings (loss) per Common Share

Basic earnings (loss) per share are computed by dividing net income (loss) (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 and nine months ended September 30:

	Three Months Ended September 30,
	2008							2007
	Income (Numerator)			Shares (Denominator)	Per Share Amount			Income (Numerator)		Shares (Denominator)	Per Share Amount
	(Dollars in thousands, except share and per share amounts)
Basic EPS:
Net income (loss)	$	(1,778	)	20,232,171	$	(0.09	)	$	6,570	20,279,943	$	0.32
Effect of dilutive securities
Options		—		—					—	159,993
Diluted EPS:
Net income (loss)	$	(1,778	)	20,232,171	$	(0.09	)	$	6,570	20,439,936	$	0.32

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	Nine Months Ended September 30,
	2008							2007
	Income (Numerator)			Shares (Denominator)	Per Share Amount			Income (Numerator)		Shares (Denominator)	Per Share Amount
	(Dollars in thousands, except share and per share amounts)
Basic EPS:
Net income (loss)	$	(116,160	)	20,177,842	$	(5.76	)	$	20,278	20,507,847	$	0.99
Effect of dilutive securities
Options		—		—					—	246,498
Diluted EPS:
Net income (loss)	$	(116,160	)	20,177,842	$	(5.76	)	$	20,278	20,754,345	$	0.98

Due to the net loss for the three and nine month periods ended September 30, 2008, 1,513,066 and 1,286,977 weighted-average stock options outstanding, respectively, were excluded from the calculation of diluted earnings per share because their inclusions would have been antidilutive. For the three and nine month periods ended September 30, 2007, 302,538 and 256,788 stock options outstanding, respectively, were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were equal to or greater than the average share price of the common shares, and therefore, their inclusion would have been antidilutive.

5. Goodwill and Other Intangible Assets

The excess of cost over the fair value of the net assets of acquired banks is recorded as goodwill. As a result of the Company’s market capitalization being less than stockholders’ equity at June 30, 2008, we performed an analysis to determine whether and to what extent our goodwill may have been impaired. The Company has one reporting unit. The estimated fair value of the Company, which was less than the Company’s stockholders’ equity balance at June 30, 2008, was determined using three methods: comparable transactions; discounted cash flow models, and a market premium approach. Because of the requirements defined in paragraph 23 of SFAS No. 142, “Goodwill and Other Intangible Assets,” the market premium approach, based on the fair value of the Company’s common stock on June 30, 2008 plus a control premium, received significant weighting in our analysis at the June 30, 2008 testing date. The second step of the analysis compared the implied fair value of goodwill to the carrying amount of goodwill on the Company’s balance sheet. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to the excess. The implied fair value of the Company’s goodwill was determined in the same manner as goodwill recognized in a business combination. That is, the estimated fair value of the Company on the test date is allocated to all of the Company’s individual assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination with the estimated fair value of the Company representing the price paid to acquire it. The allocation process performed on the test date is only for purposes of determining the implied fair value of goodwill and no assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as part of this process. Based on the analysis, we determined that the implied fair value of the Company’s goodwill was zero, resulting in the recognition of a goodwill impairment charge to earnings of $127.4 million in June 2008. The goodwill impairment charge had no effect on the Company’s or the Bank’s cash balances or liquidity.

The Company also reviewed its core deposit intangibles for potential impairment and did not find any indication of impairment.

6. Fair Value

As discussed in note 2, the Company adopted the fair value financial accounting standards SFAS No. 157 and SFAS No. 159 as of January 1, 2008.

SFAS No. 159 provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. SFAS No. 159 permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has not elected to apply the fair value option to any financial assets or liabilities, except as already applicable under other accounting standards.

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SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements. The following presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value of the asset or liability is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company used the following methods and significant assumptions to estimate fair value.

Securities available for sale – For these securities, the Company obtains fair value measurements from The Baker Group Software Solution, Inc., an independent pricing service. Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are based on pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed income securities do not trade on a daily basis, the pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Models are used to assess interest rate impact and develop prepayment scenarios. Relevant credit information, perceived market movements and sector news are integrated into the pricing applications and models. Securities that are priced using these types of inputs are classified within Level 2 of the valuation hierarchy.

Impaired loans – Impaired loans are reported at the present value of the estimated 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 dependent on the underlying collateral. Collateral values are estimated using independent appraisals or internally developed estimates based on the nature of the collateral and considering similar assets or other available information. The independent appraisals are considered Level 2 inputs and the internally developed estimates are considered Level 3 inputs.

Loans held for sale – These loans are reported at the lower of cost or fair value. Fair value is determined based on expected proceeds based on sales contracts and commitments. At September 30, 2008, all of the Company’s loans held for sale are carried at cost.

Other real estate owned – These assets are reported at the lower of the investment in the related loan or the estimated fair value of the assets received. Fair value of the assets received is determined based on current market information, including independent appraisals minus estimated costs of disposition. Independent appraisals are considered Level 2 inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial Assets	Balance as of September 30, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Securities available for sale	$	398,682	$	55	$	398,627	$	—

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During the nine months ended September 30, 2008, First State recorded an “other than temporary” impairment charge of $898,000 on FHLMC preferred stock. This stock is held in the available for sale portfolio and was acquired as part of the acquisition of Front Range Capital Corporation in March 2007, at which time it was valued at approximately $953,000.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described previously in this note. For assets measured at fair value on a nonrecurring basis, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios.

	Carrying value at September 30, 2008									Nine months ended September 30, 2008
	(Dollars in thousands)
	Total			Level 1		Level 2		Level 3		Total Losses
Impaired loans	$	26,910	(1)	$	—	$	25,838	$	1,072	$	12,300	(2)
Other real estate owned		15,929	(3)		—		15,929		—		1,067	(4)
										$	13,367

(1) Represents the carrying value of loans for which a specific reserve was recorded based on the estimated value of the collateral.

(2) Represents the write-downs of loans during the period based on the estimated value of the collateral.

(3) Represents the fair value of other real estate owned that is measured at net realizable value.

(4) Represents write-downs during the period of other real estate owned subsequent to the initial classification as a foreclosed asset.

7. Guarantees and Commitments

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.

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. Commitments to extend credit amounting to $506.2 million were outstanding at September 30, 2008.

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. Standby letters of credit amounting to $78.6 million were outstanding at September 30, 2008.

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 real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

8. Agreement with Regulators

On September 26, 2008, the Company and the Bank voluntarily entered into an informal agreement (“Informal Agreement”) with the Federal Reserve Bank of Kansas City and the New Mexico Financial Institutions Division (the “Regulators”). Under the

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terms of the Informal Agreement, the Company and or the Bank agreed, among other things, to formulate a written plan to maintain a sufficient capital position at the Bank and at the Company, including attaining a tier 1 leverage ratio of 9% and a total risk-based capital ratio of 12% at the Bank level, with no date specified for achieving those levels. In addition, the Company and the Bank have agreed to maintain an adequate allowance for loan and lease losses; not to pay any dividends; not to distribute any interest, principal or other sums on trust preferred securities; not to issue or guarantee any debt or trust preferred securities; and not to purchase or redeem any shares of the Company’s stock. This Informal Agreement can be terminated by a joint decision between the Regulators if they conclude such action is warranted. The Company and the Bank are actively engaged in responding to the issues in this Informal Agreement. The Company and the Bank both currently have sufficient capital to be considered “well capitalized” under regulatory guidelines. The capital ratios for First State and the Bank are provided in the table below.

Risk-Based Capital and Leverage Ratios

	As of September 30, 2008 Risk-Based Ratios
	Tier I Capital		Total Capital		Leverage Ratio
First State Bancorporation	8.16	%	10.44	%	7.12	%
First Community Bank	9.19	%	10.45	%	8.02	%
Minimum required ratio	4.0	%	8.0	%	4.0	%
“Well capitalized” minimum ratio	6.0	%	10.0	%	5.0	%

9. Junior Subordinated Debentures

The Company has formed various Trusts for the purpose of issuing trust preferred securities in pooled transaction to investors. In addition, effective March 1, 2007, as a result of the Company’s acquisition of Front Range, the Company assumed all the duties, warranties, and obligations related to Front Range’s Trust II Securities and Trust II Debentures. The First State NM Statutory Trust III Junior Subordinated Debentures, the First State NM Statutory Trust IV Junior Subordinated Debentures, the First State NM Statutory Trust V Junior Subordinated Debentures, the First State NM Statutory Trust VI Junior Subordinated Debentures, the First State NM Statutory Trust VII Junior Subordinated Debentures, the First State NM Statutory Trust VIII Junior Subordinated Debentures, and the Front Range Trust II Junior Subordinated Debentures provide interest only payments payable at three-month intervals with variable rates adjusted quarterly. So long as there are no events of default, payment of interest may be deferred for up to twenty consecutive interest payment periods. In order to maintain the liquidity of the holding company and to help improve capital ratios, and pursuant to the Informal Agreement, the Company notified the holders of the trust preferred securities that the quarterly interest payments would be deferred. See note 8 above.

Junior Subordinated Debentures are summarized as follows:

	As of September 30, 2008		As of December 31, 2007		Annual Interest Rate
	(Dollars in thousands)
Trust III	$	5,155	$	5,155	3 Month LIBOR plus 2.25%
Trust IV		10,310		10,310	3 Month LIBOR plus 1.75%
Trust V		7,732		7,732	3 Month LIBOR plus 1.75%
Trust VI		20,619		20,619	3 Month LIBOR plus 1.65%
Trust VII		21,651		21,651	3 Month LIBOR plus 1.45%
Trust VIII		23,196		23,196	3 Month LIBOR plus 1.35%
Front Range Capital Trust II		9,485		9,485	8.5% though February 23, 2011, 3 Month LIBOR plus 3.45% thereafter
Purchase accounting adjustment		355		465	—
Total	$	98,503	$	98,613

Accrued interest payable on the Junior Subordinated Debentures totaled $874,000 at September 30, 2008.

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10. Federal Home Loan Bank Advances

Short-term (original term less than one year) FHLB advances totaled $448.1 million at September 30, 2008 and had a weighted-average interest rate of 2.29%. Short-term FHLB advances totaled $191.0 million at December 30, 2007 and had a weighted-average interest rate of 3.85%.

FHLB advances with original maturities exceeding one year are summarized as follows:

	As of September 30, 2008		As of December 31, 2007
	(Dollars in thousands)
$30.0 million note, interest only at 2.66%, payable monthly, due on October 2, 2009	$	30,000	$	—
$30.0 million note, interest only at 2.73%, payable monthly, due on April 12, 2010		30,000		—
$7.5 million note, interest at 5.75%, payable in monthly principal and interest installments of approximately $144,000 through August 1, 2011		4,634		5,705
$7.5 million note, interest at 5.78%, payable in monthly principal and interest installments of approximately $109,000 through August 1, 2013		5,575		6,295
Total	$	70,209	$	12,000

As of September 30, 2008, the contractual maturities of FHLB advances are as follows:

	(Dollars in thousands)
2008	$	448,714
2009		32,548
2010		32,699
2011		2,278
2012		1,218
Thereafter		852
Total	$	518,309

11. Subsequent Events

On October 20, 2008, First State applied for $90 million of capital from the U.S. government under the Troubled Asset Relief Program (“TARP”). The TARP is the primary mechanism for immediate relief under the $700 billion Emergency Economic Stabilization Act of 2008 which was passed by Congress on October 3, 2008 and provides the U.S. Secretary of the Treasury broad authority to take actions with the aim of restoring liquidity and stability to the U.S. financial system. The TARP authorizes the Treasury Secretary to purchase troubled assets directly from financial institutions, establish a program to guarantee the troubled assets of financial institutions, and directly purchase the equities of financial institutions. The TARP will make $250 billion in capital available to U.S. financial institutions in exchange for preferred stock with warrants for common stock having a value equal to 15 percent of the preferred stock issued. As of November 10, 2008, First State’s application had not yet been approved.

On October 31, 2008, First State completed the closure of its Utah operations, in response to current economic conditions and other factors affecting the banking industry that are placing a premium on capital levels. The Utah operations were acquired as part of the First Community Industrial Bank acquisition in October of 2002 and consisted of two branches, one in Salt Lake City and one in the nearby suburb of Midvale, Utah. At September 30, 2008, the Utah operations included $289.5 in total loans and $13.3 million in deposits. In conjunction with the closure, First State recorded approximately $92,000 in severance and continuation bonus expense in the quarter ended September 30, 2008 which is included in salaries and employee benefits expense in the consolidated condensed statements of operations. At September 30, 2008, the total amount accrued for the severance and continuation bonuses was approximately $58,000. First State also recorded a write-down of $365,000 related to the impairment of the land and building that housed one of the Utah branches, reflecting its estimated net realizable value. This impairment charge is included in occupancy expense in the consolidated condensed statements of operations.

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

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1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s current expectations or predictions of future results or events. We make these forward-looking statements in reliance on the safe harbor provisions provided under the Private Securities Litigation Reform Act of 1995.

All statements, other than statements of historical fact, included in this Form 10-Q which relate to performance, development or activities that we expect or anticipate will or may happen in the future, are forward looking statements. The discussions regarding our growth strategy, expansion of operations in our markets, acquisitions, competition, loan and deposit growth or decline, timing of new branch openings, and response to consolidation in the banking industry include forward-looking statements. Other forward-looking statements may be identified by the use of forward-looking words such as “believe,” “expect,” “may,” “might,” “will,” “should,” “seek,” “could,” “approximately,” “intend,” “plan,” “estimate,” or “anticipate” or the negative of those words or other similar expressions.

Forward-looking statements involve inherent risks and uncertainties and are based on numerous assumptions. They are not guarantees of future performance. 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, lack of available credit, lack of confidence in the financial markets, loss of key personnel or inability to hire suitable personnel, faster or slower than anticipated growth, economic conditions, our competitors’ responses to our marketing strategy or new competitive conditions, and competition in the geographic and business areas in which we conduct our operations. Forward-looking statements contained herein are made only as of the date made, and we do not undertake any obligation to update them to reflect events or circumstances after the date of this report to reflect the occurrence of unanticipated events.

Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include the following:

There can be no assurance that the recently enacted Emergency Economic Stabilization Act of 2008 will help stabilize the U.S. financial system, and the expiration of programs implemented under such legislation may have unintended adverse effects on us.

In response to the financial crises affecting the banking system and financial markets, on October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (the “EESA”) into law. Pursuant to the EESA, the U.S. Treasury has the authority, among other things, to purchase up to $700 billion of mortgage-backed and other securities from financial institutions for the purpose of stabilizing the financial markets. The U.S. Treasury and the bank regulatory agencies have also announced coordinated programs to invest an aggregate of $250 billion (out of the $700 billion) in capital issued by qualifying U.S. financial institutions and to guarantee senior debt of all FDIC insured institutions and their qualifying holding companies, as well as deposits in non-interest bearing transaction accounts. The capital purchase program involves the issuance by qualifying institutions of preferred stock and warrants to purchase common stock to the U.S. Treasury. The U.S. federal government has taken or is considering taking other actions to address the financial crises that could further impact our business.

There can be no assurance regarding the actual impact that the EESA or these programs will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the EESA and these programs to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to capital or the trading price of our common stock. To the extent that we participate in these programs or other programs, there is no assurance that such programs will remain available for sufficient periods of time or on acceptable terms to benefit us, and the expiration of such programs could have unintended adverse effects on us. Although we have applied for $90 million of the $250 billion available under the Troubled Asset Relief Program (see “Liquidity and Capital” below), there is no assurance that the application will be approved.

Current market developments may adversely affect our industry, business, results of operations and access to capital.

Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as

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major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, in turn have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have ceased to provide funding to even the most credit-worthy borrowers or to other financial institutions. The resulting lack of available credit and lack of confidence in the financial markets could materially and adversely affect our financial condition and results of operations and our access to capital. In particular, we may face the following risks in connection with these events:

• The processes we use to estimate inherent losses may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, which may no longer be capable of accurate estimation.

• Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future charge-offs.

• Our ability to borrow or otherwise raise capital from other financial institutions on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.

• We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs, limit our ability to pursue business opportunities, and increase compliance challenges.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients, resulting in a significant credit concentration with respect to the financial services industry overall. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Our results of operations and financial condition could be adversely affected if we become the subject of rumors or questions regarding our financial soundness.

We operate in a highly regulated environment; changes in federal and state laws and regulations and accounting principles may adversely affect us.

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

In particular, we are subject to the Bank Holding Company Act of 1956, as amended, and to regulation and supervision by the Federal Reserve Board. First Community Bank, as a state member bank of the Federal Reserve System, is subject to regulation and supervision by the Federal Reserve Board and the New Mexico Financial Institutions Division of the Regulation and Licensing Department and, because its deposits are insured, by the Federal Deposit Insurance Corporation. Our operations in Colorado, Utah, and Arizona may also be subject to regulation and supervision by the State of Colorado Division of Banking, the Utah Department of Financial Institutions, and the Arizona State Banking Department, respectively. Regulators have significant discretion and power to

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prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of the regulators’ supervisory and enforcement duties. If regulators exercise these powers, our results of operations and financial condition may be adversely affected.

The Federal Reserve Board has a policy stating that a bank holding company is expected to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support the subsidiary bank. Under this doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices if it fails to commit resources to such a subsidiary bank. A capital injection may be required at times when the holding company may be required to borrow the funds or otherwise obtain the funds from external sources. As a result of the most recent safety and soundness examination of the Company and our subsidiary First Community Bank, which was conducted jointly by the Federal Reserve and the New Mexico Financial Institutions Division, we entered into an Informal Agreement on September 26, 2008. Under the terms of the Informal Agreement, we agreed, among other things, to formulate a written plan to maintain a sufficient capital position at the Bank and at the Company, including attaining a tier 1 leverage ratio of 9% and a total risk-based capital ratio of 12% at the Bank level, with no date specified for achieving those levels. In addition, the Company and the Bank have agreed to maintain an adequate allowance for loan and lease losses; not to pay any dividends; not to distribute any interest, principal or other sums on trust preferred securities; not to issue or guarantee any debt or trust preferred securities; and not to purchase or redeem any shares of the Company’s stock. This Informal Agreement can be terminated by a joint decision between the Regulators if they conclude such action is warranted.

The value of our investments is influenced by varying economic and market conditions and a decrease in value could have an adverse effect on our results of operations, liquidity and financial condition.

We classify investment securities in one of three categories and account for them as follows: (1) debt securities that we have the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost; (2) 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 (3) 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 we will hold for an indefinite period of time and may be used as a part of our asset/liability management strategy and may be sold in response to changes in interest rates, prepayments, or similar factors. Available for sale securities are carried at estimated market value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of related deferred income taxes. Upon purchase of investment securities, management designates securities as either held to maturity or available for sale. Amortization of premiums and accretion of discounts are calculated using a method that approximates the effective interest method. Declines in the fair value of individual investment securities held to maturity and available for sale below their cost that are other-than-temporary are recorded as write-downs of the individual securities to their fair value and the related write-downs are included in earnings as realized losses. We do not maintain a trading portfolio.

In accordance with applicable accounting standards, we review our investment securities to determine if declines in fair value below cost are other-than-temporary. This review is subjective and requires a high degree of judgment. We conduct this review on a quarterly basis, using both quantitative and qualitative factors, to determine whether a decline in value is other-than-temporary. Such factors considered include the length of time and the extent to which market value has been less than cost, financial condition and near term prospects of the issuer, recommendations of investment advisors, and forecasts of economic, market or industry trends. This review process also entails an evaluation of our ability and intent to hold individual securities until they mature or full cost can be recovered.

The current economic environment and recent volatility of the securities markets increase the difficulty of assessing investment impairment and the same influences tend to increase the risk of potential impairment of these assets. During the nine months ended September 30, 2008, we recorded the following charges for other-than-temporary impairment of securities: an impairment charge in the first quarter of 2008 of $333,000 on FHLMC preferred stock, and an impairment charge in the third quarter of 2008 of an additional $565,000 on such FHLMC preferred stock. Over time, the economic and market environment may further deteriorate or provide additional insight regarding the fair value of certain securities, which could change our judgment regarding impairment. This could result in realized losses relating to other-than-temporary declines recorded as an expense. Given the current market conditions

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and the significant judgments involved, there is continuing risk that further declines in fair value may occur and material other-than-temporary impairments may result in realized losses in future periods which could have an adverse effect on our results of operations, liquidity and financial condition.

Defaults in the repayment of loans may negatively affect our business.

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

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

Our profitability depends significantly on local and overall economic conditions.

Our success is dependent to a significant extent upon local economic conditions in the communities we serve and the general economic conditions in the United States. The economic conditions, including real estate values, in these areas and throughout the United States, have a significant impact on loan demand, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. The current decline in general economic conditions, including the decline in real estate values, has resulted in an increase in our nonperforming assets and an increase in our charge-offs on defaulted loans during the first three quarters of 2008. A further decline in economic conditions, including depressed real estate values, over a prolonged period of time in any of these areas could cause additional significant increases in nonperforming assets and could continue to affect our ability to recover on defaulted loans by foreclosing and selling the real estate collateral, which could continue to cause decreased operating results, liquidity, and capital. As of September 30, 2008, approximately 85% of the book value of our loan portfolio consisted of loans collateralized by various types of real estate.

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

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

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation have joint supervisory guidance on sound risk management practices for concentrations in commercial real estate lending. The guidance is intended to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. The agencies are concerned that rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in commercial real estate markets. The guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance does not limit banks’ commercial real estate lending, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. The lending and risk management practices will be taken into account in supervisory evaluation of capital adequacy. Our commercial real estate

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portfolio as of September 30, 2008 meets the definition of commercial real estate concentration as set forth in the final guidelines. If our risk management practices are found to be deficient, it could result in increased reserves and capital costs.

Our small to medium-sized business customers may have less financial resources with which to weather a downturn in the economy.

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

Fluctuations in interest rates could reduce our profitability.

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

In addition, our net income is affected by our interest rate sensitivity. Interest rate sensitivity is the difference between our interest-earning assets and our interest-bearing liabilities maturing or repricing within a given time period. Interest rate sensitivity is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. Since the middle of 2007, and as of September 30, 2008 the Federal Reserve has lowered the discount rate eight times for a total of 325 basis points which has negatively impacted our interest spread. As of September 30, 2008, our cumulative interest rate gap for the period up to three months was a positive $200.8 million. The two most recent rate cuts in October 2008, which totaled 100 basis points, will again negatively impact our interest spread. If additional rate decreases occur, our results of operations and financial condition may be further adversely affected.

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

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

Our real estate construction loan portfolio may expose us to increased credit risk.

At September 30, 2008, our portfolio of real estate construction loans totaled $950.2 million or 34.4% of total loans. Approximately 47% of these loans are related to residential construction and approximately 53% are for commercial purposes or vacant land. During 2007 and 2008, the housing markets declined, evidenced by excess lot inventory and higher levels of completed unsold housing inventory. The decline in the housing market, sub-prime loan crisis, and tightening of credit markets has led to higher than normal

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foreclosure rates on a national level. Of the four Southwest states that we operate in, Arizona, where we have the lowest exposure, has had the largest downturn in the residential real estate market. Although New Mexico, Colorado and Utah have not experienced as significant a downturn in the residential real estate market, foreclosure rates have had a ripple effect on the construction industry as well as the acquisition and development sectors, exposing us to increased credit risk within our construction loan portfolio.

Banking regulations may restrict our ability to pay dividends.

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

First Community Bank is prohibited under federal law from paying any dividend that would cause it to become “undercapitalized.” As of September 30, 2008, First Community Bank met the capital requirements of a “well capitalized” institution under applicable Federal Reserve Board regulations. We cannot assure you that the bank will remain “well capitalized.”

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

Although First Community Bank meets the definition of “well capitalized,” it is currently precluded from paying dividends pursuant to the Informal Agreement. There is no assurance that First Community Bank will be able or permitted to resume paying dividends.

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

If we suspend payments on our trust preferred securities, we will not be able to pay dividends to holders of our common stock. The terms of our trust preferred securities allow us to suspend payments of interest, at our option, for up to five years. We expect that similar provisions will exist in any future offerings of trust preferred securities. However, if we exercise our option to suspend those payments, we will be prohibited from paying any dividends on any class of capital stock for as long as the trust preferred interest payments remain suspended. During the third quarter of 2008, we suspended the payment of interest on all of our existing trust preferred securities, pursuant to the Informal Agreement. Our ability to make interest payments on the trust preferred securities is highly dependent on receiving dividends from First Community Bank. There is no assurance that we will be able to resume making the interest payments.

Competition with other financial institutions could adversely affect our profitability.

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

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Environmental liability associated with commercial lending could result in losses.

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

We are dependent on key personnel.

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

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

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

Our Restated Articles of Incorporation also prohibit business combinations with a person who acquires 10% or more of any class of our equity securities, including our common stock, unless the acquiror receives prior approval for the business combination from at least 66.6% of the votes entitled to vote at a meeting of our shareholders held to vote on the proposed business combination. This provision in our Restated Articles of Incorporation is in addition to the limitations that New Mexico law provides that may discourage potential acquirors from purchasing shares of our common stock. Under New Mexico law, our directors may consider the interest of persons other than our shareholders when faced with unsolicited offers for control of us. For example, our directors may consider the interest of our employees, suppliers, creditors, the communities we serve, and the State of New Mexico generally in evaluating any change of control offer.

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

We may fail to realize the anticipated benefits of acquisitions.

The success of acquisitions depends, in part, on our ability to realize the anticipated growth opportunities, economies of scale, and other benefits from combining of operations into ours. To realize the anticipated benefits of acquisitions, our management team must develop strategies and implement business plans that will successfully combine the businesses. If we do not realize economies of scale and other anticipated benefits as a result of acquisitions, the value of our common stock may decline.

An extended disruption of our vital infrastructure could negatively impact our operations, results, and financial condition.

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

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

Technology in our industry is evolving rapidly. Our ability to compete and our future results depend in part on our ability to make timely and cost-effective enhancements and additions to our technology, to introduce new products and services that meet customer demands, and to keep pace with rapid advancements in technology. Maintaining flexibility to respond to technological and market dynamics may require substantial expenditures and lead-time. We cannot assure you that we will successfully identify and develop new products or services in a timely manner, that offerings, technologies, or services developed by others will not render our offerings obsolete or noncompetitive, or that the technologies in which we focus our investments will achieve acceptance in the marketplace and provide a return on our investment.

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

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

Consolidated Condensed Balance Sheets

As a result of the Company’s market capitalization being less than our stockholders’ equity at June 30, 2008, we performed an analysis to determine whether and to what extent our goodwill may have been impaired. The Company has one reporting unit. The estimated fair value of the Company, which was less than the Company’s stockholders’ equity balance at June 30, 2008, was determined using three methods: comparable transactions; a discounted cash flow model, and a market premium approach. Because of the requirements defined in paragraph 23 of SFAS No. 142, “Goodwill and Other Intangible Assets,” the market premium approach, based on the fair value of the Company’s common stock on June 30, 2008, plus a control premium, received significant weighting in our analysis at the June 30, 2008 testing date. The second step of the analysis compared the implied fair value of goodwill to the carrying amount of goodwill on the Company’s balance sheet. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to the excess. The implied fair value of the Company’s goodwill was determined in the same manner as goodwill recognized in a business combination. That is, the estimated fair value of the Company on the test date is allocated to all of the Company’s individual assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination with the estimated fair value of the Company representing the price paid to acquire it. The allocation process performed on the test date is only for purposes of determining the amount of goodwill impairment, as no assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as part of this process. Based on the analysis, we determined that the implied fair value of goodwill was zero, resulting in the recognition of a goodwill impairment charge to earnings of $127.4 million in June 2008. The goodwill impairment charge had no effect on the Company’s or the Bank’s cash balances or liquidity.

Our total assets increased by $44.6 million from $3.424 billion as of December 31, 2007, to $3.469 billion as of September 30, 2008. The increase in total assets is primarily due to a $225.7 million increase in loans held for investment, partially offset by the $127.4 million write-off of goodwill, less the deferred tax impact of the write-off, and an increase in the allowance for loan losses from $31.7 million at December 31, 2007 to $68.4 million at September 30, 2008.

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

	September 30, 2008				December 31, 2007				September 30, 2007
	Amount		%		Amount		%		Amount		%
	(Dollars in thousands)
Commercial	$	352,579	12.8	%	$	342,141	13.5	%	$	334,120	13.5	%
Real estate-commercial		1,117,029	40.4	%		967,322	38.1	%		908,606	36.6	%
Real estate-one- to four-family		283,262	10.3	%		235,015	9.2	%		246,031	9.9	%
Real estate-construction		950,238	34.4	%		928,582	36.5	%		920,017	37.1	%
Consumer and other		43,048	1.6	%		47,372	1.9	%		53,664	2.2	%
Mortgage loans available for sale		14,981	0.5	%		20,778	0.8	%		16,545	0.7	%
Total	$	2,761,137	100.0	%	$	2,541,210	100.0	%	$	2,478,983	100.0	%

We currently utilize deposits and FHLB advances as our main sources of funding for loans and investments. Deposits decreased by $77.4 million from $2.575 billion as of December 31, 2007 to $2.497 billion as of September 30, 2008. FHLB advances increased by $315.3 million from $203.0 million at December 31, 2007 to $518.3 million at September 30, 2008, as loan growth continued and deposits declined. Of the $518.3 million of FHLB advances, $448.1 million are short-term and $70.2 million are long-term of which $60.0 million was borrowed during the quarter ended June 30, 2008. See note 10 to the consolidated condensed financial statements for additional information. The decrease in securities sold under agreements to repurchase was primarily due to a general decrease in net activity and a shift in depositors’ funds into higher rate deposit products including money market savings accounts and certificates of deposit offered through the Certificate of Deposit Account Registry Service (“CDARS”) network. CDARS provides 100% FDIC insurance on larger certificates of deposits by reciprocating with other network banks.

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

	September 30, 2008				December 31, 2007				September 30, 2007
	Amount		%		Amount		%		Amount		%
	(Dollars in thousands)
Non-interest-bearing	$	476,094	19.1	%	$	485,419	18.9	%	$	504,212	19.8	%
Interest-bearing demand		296,955	11.9	%		336,914	13.1	%		322,686	12.7	%
Money market savings accounts		535,075	21.4	%		355,889	13.8	%		354,773	13.9	%
Regular savings		102,685	4.1	%		107,096	4.2	%		108,440	4.3	%
Certificates of deposit less than $100,000		408,399	16.4	%		490,741	19.1	%		484,493	19.0	%
Certificates of deposit greater than $100,000		678,073	27.1	%		798,628	30.9	%		774,224	30.3	%
Total	$	2,497,281	100.0	%	$	2,574,687	100.0	%	$	2,548,828	100.0	%

Consolidated Results of Operations

Our net loss for the three months ended September 30, 2008, was $1.8 million, or a $0.09 loss per diluted share, compared to $6.6 million in net income or $0.32 in earnings per diluted share for the same period in 2007. The net loss for the three months ended September 30, 2008 resulted primarily from the level of provision for loan losses due to an increase in non-performing assets, and a $565,000 “other than temporary” impairment charge on FHLMC preferred stock. Our net loss for the nine months ended September 30, 2008, was $116.2 million, or a $5.76 loss per diluted share, compared to $20.3 million in net income or $0.98 in earnings per diluted share for the same period in 2007. The net loss for the nine months ended September 30, 2008 was primarily due to the $127.4 million goodwill impairment charge that occurred in the second quarter of 2008 and the level of provision for loan losses due to the increase in non-performing assets. The goodwill write-off followed our evaluation for impairment, and resulted primarily from the disruption in the financial sector that has caused the market valuation for bank stocks to decline significantly, including the market value of First State common stock.

First State has disclosed in this Form 10-Q certain non-GAAP financial measures to provide meaningful supplemental information regarding First State’s operational performance and to enhance investors’ overall understanding of First State’s operating financial performance. Management believes that these non-GAAP financial measures allow for additional transparency and are used by some

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investors, analysts, and other users of First State’s financial information as performance measures. These non-GAAP financial measures are presented for supplemental informational purposes only for understanding First State’s operating results and should not be considered a substitute for financial information presented in accordance with GAAP. These non-GAAP financial measures presented by First State may be different from non-GAAP financial measures used by other companies. The below table presents performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measurements to the GAAP financial measurements.

FINANCIAL SUMMARY:

	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited - $ in thousands except per-share amounts)	2008			2007			2008			2007
Net income (loss) as reported	$	(1,778	)	$	6,570		$	(116,160	)	$	20,278
Goodwill impairment charge, net of tax		—			—			107,290			—
Net income (loss) excluding goodwill write-off	$	(1,778	)	$	6,570		$	(8,870	)	$	20,278
GAAP diluted earnings (loss) per share	$	(0.09	)	$	0.32		$	(5.76	)	$	0.98
Diluted earnings (loss) per share excluding goodwill write-off	$	(0.09	)	$	0.32		$	(0.44	)	$	0.98
GAAP return on average assets		(0.20	)%		0.79	%		(4.48	)%		0.85	%
Return on average assets excluding goodwill write-off		(0.20	)%		0.79	%		(0.34	)%		0.85	%
GAAP return on average equity		(3.63	)%		8.48	%		(56.13	)%		8.79	%
Return on average equity excluding goodwill write-off		(3.63	)%		8.48	%		(4.29	)%		8.79	%
Non-interest expense as reported	$	27,297		$	27,477		$	210,271		$	80,655
Goodwill impairment charge		—			—			(127,365	)		—
Non-interest expense excluding goodwill write-off	$	27,297		$	27,477		$	82,906		$	80,655
GAAP efficiency ratio		71.70	%		68.77	%		184.45	%		68.18	%
Efficiency ratio excluding goodwill write-off		71.70	%		68.77	%		72.73	%		68.18	%
GAAP operating expenses to average assets		3.13	%		3.29	%		8.11	%		3.37	%
Operating expenses to average assets excluding goodwill write-off		3.13	%		3.29	%		3.20	%		3.37	%
Net interest margin		3.87	%		4.57	%		3.98	%		4.64	%
Average equity to average assets		5.61	%		9.28	%		7.98	%		9.64	%

Our net interest income decreased $2.2 million to $31.7 million for the three months ended September 30, 2008 compared to $33.9 million for the same period in 2007. This decrease was composed of a $10.0 million decrease in total interest income, partially offset by a $7.8 million decrease in total interest expense.

The decrease in total interest income for the three months ended September 30, 2008 was composed of a decrease of $16.9 million due to a 1.98% decrease in the yield on average interest-earning assets, partially offset by an increase of $6.9 million due to increased average interest earning assets of $313.0 million. The increase in average earning assets occurred primarily in loans, due to our continued organic growth.

The decrease in total interest expense for the three months ended September 30, 2008 was composed of a decrease of $10.5 million due to a 1.48% decrease in the cost of interest-bearing liabilities, partially offset by an increase of $2.7 million due to increased average interest-bearing liabilities of $254.9 million. The increase in average interest-bearing liabilities was primarily due to an increase in average short-term borrowings of $207.8 million. This increase was primarily due to the overall growth in our loan portfolio exceeding our ability to generate deposits.

Our net interest income decreased $4.9 million to $94.3 million for the nine months ended September 30, 2008 compared to $99.2 million for the same period in 2007. This decrease was composed of a $19.1 million decrease in total interest income, partially offset by a $14.2 million decrease in total interest expense.

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The decrease in total interest income for the nine months ended September 30, 2008 was composed of a decrease of $38.9 million due to a 1.59% decrease in the yield on average interest-earning assets partially offset by an increase of $19.8 million due to increased average interest earning assets of $306.6 million. The increase in average interest earning assets occurred primarily in loans, due to our continued organic growth and the acquisition of Front Range Capital Corporation (“Front Range”), which occurred on March 1, 2007.

The decrease in total interest expense for the nine months ended September 30, 2008 was composed of a decrease of $23.2 million due to a 1.12% decrease in the cost of interest-bearing liabilities, partially offset by an increase of $9.0 million due to increased average interest-bearing liabilities of $277.2 million. The increase in average interest-bearing liabilities was primarily due to an increase in average interest-bearing deposits of $150.2 million, due primarily to an increase in market share in New Mexico and Colorado, enhanced by the Front Range acquisition. Average short-term borrowings increased by $89.2 million as the overall growth in our loan portfolio exceeded our ability to generate deposits.

Our net interest margin was 3.87% and 4.57% for the third quarter of 2008 and 2007, respectively, and 3.96% for the second quarter of 2008. The net interest margin was 3.98% and 4.64% for the nine months ended September 30, 2008 and 2007, respectively. The decrease in the net interest margin is primarily due to the changes in the interest rate environment over the last twelve months through September 30, 2008. The Federal Reserve Bank has lowered the federal funds target rate by 325 basis points over this period which led to an equal decrease in the prime lending rate. A significant portion of our loan portfolio is tied directly to the prime lending rate and adjusts daily when there is a change in the prime lending rate. The rates paid on customer deposits are influenced more by competition in our markets and tend to lag behind Federal Reserve Bank action, both in timing and magnitude. Our asset sensitivity and the lag on deposit repricing negatively impacted the margin in the recent falling rate environment. The increase in the level of non-accrual loans in the current year and the reversal of interest on these loans has also negatively impacted the net interest margin in 2008 as compared to 2007. In addition, the overall growth in our loan portfolio has exceeded our ability to generate deposits by $128.4 million since September 30, 2007. This has resulted in a shift in our liability mix, which has increased the level of FHLB borrowings. Even in the current rate environment, our borrowing costs remain above the cost of our traditional deposits including non-interest bearing deposits, which has added to the net interest margin compression.

In conjunction with the Federal Reserve Bank’s lower target rates, we have lowered selected deposit rates, but remain competitive in the markets we serve. The rates on our borrowings, including securities sold under agreements to repurchase, FHLB borrowings, and junior subordinated debentures have all decreased during the current year. However, the majority of our junior subordinated debentures reprice quarterly based on the three month LIBOR which began to increase late in the third quarter of 2008, and as such, we expect that the cost of these debentures will increase in the fourth quarter. The 50 basis point reductions in rates by the Federal Reserve on October 8, 2008 and October 29, 2008, respectively, are expected to reduce the net interest margin in the fourth quarter of 2008 as well. The extent of any future changes in our net interest margin will depend on the amount and timing of any Federal Reserve rate changes, the level of borrowings needed, our non-performing asset levels, our ability to manage the cost of interest-bearing liabilities, and our ability to stay competitive in the markets we serve.

Non-interest Income and Non-interest Expense

An analysis of the components of non-interest income for the three months ended September 30, 2008 and 2007 is presented in the table below.

Non-interest Income (Dollars in thousands)	Three Months Ended September 30,
	2008			2007		$ Change			% Change
Service charges	$	3,969		$	2,812	$	1,157		41	%
Credit and debit card transaction fees		1,037			1,141		(104	)	(9	)%
Gain (loss) on sale of call of investment securities		(556	)		—		(556	)	—	%
Gain on sale of loans		840			1,024		(184	)	(18	)%
Income on cash surrender value of bank-owned life insurance		455			413		42		10	%
Other		662			664		(2	)	—	%
	$	6,407		$	6,054	$	353		6	%

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The increase in service charges on deposit accounts is due to an increase in NSF fees charged per occurrence, an increase in account analysis fees, increased volume, and a reduction in fees waived from deposit accounts.

The decrease in gain on sale of loans is primarily due to reduced volumes reflecting the nationwide slow down in the residential mortgage market.

The loss on investment securities is due to an “other than temporary” impairment charge of $565,000 on FHLMC preferred stock. This stock is held in the available for sale portfolio and was acquired as part of the acquisition of Front Range Capital Corporation in March 2007, at which time it was valued at approximately $953,000. First State had previously recorded a $333,000 “other than temporary” impairment charge on the FHLMC preferred stock in the first quarter of 2008.

An analysis of the components of non-interest expense for the three months ended September 30, 2008 and 2007 is presented in the table below.

Non-interest expense (Dollars in thousands)	Three Months Ended September 30,
	2008		2007		$ Change			% Change
Salaries and employee benefits	$	12,468	$	12,221	$	247		2	%
Occupancy		4,360		3,887		473		12	%
Data processing		1,341		1,610		(269	)	(17	)%
Equipment		1,915		2,076		(161	)	(8	)%
Legal, accounting, and consulting		590		681		(91	)	(13	)%
Marketing		1,057		799		258		32	%
Telephone		479		584		(105	)	(18	)%
Other real estate owned		660		217		443		204	%
FDIC insurance premiums		554		449		105		23	%
Amortization of intangibles		640		642		(2	)	—	%
Other		3,233		4,311		(1,078	)	(25	)%
	$	27,297	$	27,477	$	(180	)	(1	)%

The increase in salaries and employee benefits is primarily due to normal compensation increases for job performance, $205,000 of severance related to an employment agreement for a terminated officer of the Bank, and an increase in self-insured medical and dental claims, partially offset by a decrease in incentive compensation expense, mortgage commissions, stock compensation expense, and expenses related to temporary help.

The increase in occupancy is primarily due to approximately $365,000 of expense recorded in the third quarter of 2008 related to the impairment of the land and building that housed one of our Utah branches. This branch, along with the leased Utah branch facility, closed on October 31, 2008.

The decrease in data processing is primarily due to a decrease in computer processing costs related to Front Range’s legacy system and a reduction in credit card processing costs due to the sale of our credit card portfolio in November 2007.

The increase in marketing expenses is primarily due to an increase in direct advertising costs related to the Bank’s new ad campaign combined with costs associated with the introduction of the Bank’s new deposit products.

The increase in expenses for other real estate owned is primarily due to an increase in losses on sales of other real estate owned and $198,000 in write-downs of two vacant parcels of land and one branch banking facility listed for sale.

The decrease in other non-interest expense is primarily due to the net $449,000 loss in 2007 on redemption of certain trust preferred securities that did not recur in 2008 and a decrease of approximately $362,000 in losses related to demand deposit and credit card accounts, including a $180,000 fraud loss that was recorded in the September 2007 quarter and recovered in the December 2007 quarter. The decrease in other non-interest expenses is also due to decreases in travel, meals and entertainment, and supplies expense resulting from our expense management initiative.

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An analysis of the components of non-interest income for the nine months ended September 30, 2008 and 2007 is presented in the table below.

Non-interest Income (Dollars in thousands)	Nine Months Ended September 30,
	2008			2007		$ Change			% Change
Service charges on deposit accounts	$	10,683		$	8,060	$	2,623		33	%
Credit and debit card transaction fees		3,013			3,156		(143	)	(5	)%
Gain (loss) on sale or call of investment securities		(682	)		30		(712	)	(2,373	)%
Gain on sale of loans		3,196			3,783		(587	)	(16	)%
Income on cash surrender value of bank- owned life insurance		1,349			1,723		(374	)	(22	)%
Other		2,126			2,334		(208	)	(9	)%
	$	19,685		$	19,086	$	599		3	%

The increase in service charges on deposit accounts is due to an increase in NSF fees charged per occurrence, an increase in account analysis fees, increased volume enhanced by the Front Range acquisition, and a reduction in fees waived from deposit accounts.

The loss on investment securities includes an “other than temporary” impairment charge of $898,000 on FHLMC preferred stock as described above. This other than temporary impairment was partially offset by gains from calls and sales of securities during the period.

The decrease in gain on sale of loans is primarily due to reduced volumes reflecting the nationwide slow down in the residential mortgage market.

The decrease in cash surrender value of bank-owned life insurance is due to the receipt of approximately $550,000 in June 2007 from the death benefit of an insured employee, partially offset by earnings on an additional $8.8 million in cash surrender value of bank-owned life insurance acquired in conjunction with the Front Range acquisition on March 1, 2007.

An analysis of the components of non-interest expense for the nine months ended September 30, 2008 and 2007 is presented in the table below.

Non-interest Expenses (Dollars in thousands)	Nine Months Ended September 30,
	2008		2007		$ Change			% Change
Salaries and employee benefits	$	38,748	$	38,175	$	573		2	%
Occupancy		12,523		10,966		1,557		14	%
Data processing		4,267		4,860		(593	)	(12	)%
Equipment		5,972		5,999		(27	)	(1	)%
Legal, accounting, and consulting		1,956		2,147		(191	)	(9	)%
Marketing		2,538		2,520		18		1	%
Telephone		1,545		1,803		(258	)	(14	)%
Other real estate owned		2,426		733		1,693		231	%
FDIC insurance premiums		1,549		588		961		163	%
Amortization of intangibles		1,920		1,729		191		11	%
Goodwill impairment charge		127,365		—		127,365		—	%
Other		9,462		11,135		(1,673	)	(15	)%
	$	210,271	$	80,655	$	129,616		161	%

- 26 -

The increase in salaries and employee benefits is primarily due to the Front Range acquisition which occurred on March 1, 2007, normal compensation increases for job performance, $205,000 of severance related to an employment agreement for a terminated officer of the Bank, and an increase in self-insured medical and dental claims, partially offset by a decrease in incentive compensation expense, mortgage commissions, stock compensation expense, retention and stay bonuses for Front Range employees that did not recur in 2008, and a reduction in expenses related to temporary help.

The increase in occupancy expense reflects the acquisition of Front Range, the lease of space and other occupancy costs in Ft. Collins for a new branch that opened in June 2007, the lease of space that began in April 2007 for a new branch location in Albuquerque that opened in the fourth quarter of 2007, the lease of space and other occupancy costs for two new branches in Phoenix that opened in the second quarter of 2007, approximately $198,000 of expense related to lease impairment at an Albuquerque administrative facility that is no longer occupied, and approximately $365,000 of expense recorded in the third quarter of 2008 related to the impairment of the land and building that currently houses one of our Utah branches.

The decrease in data processing is primarily due to expenses incurred in 2007 related to the Front Range system conversion that did not recur in 2008, a decrease in computer processing costs related to Front Range’s legacy system and a reduction in credit card processing costs due to the sale of our credit card portfolio in November 2007.

The increase in expenses for other real estate owned is primarily due to a $305,000 increase in losses on sales of other real estate owned, and an increase of approximately $953,000 due to write-downs of properties to reflect their estimated net realizable value. Write-downs during the nine months ended September 30, 2008 totaled $1.1 million, $198,000 of which occurred in the current quarter and is discussed above. Of the remaining $900,000, $869,000 is due to write-downs in the six months ended June 30, 2008, and includes $623,000 related to a residential lot development property in the Denver, Colorado metro area, which was transferred to other real estate owned in December 2006. The Company has an agreement to sell this property, in lot takedown phases, to a national homebuilder. In June 2008, the property was written down to reflect its estimated net realizable value, reflecting a reduction in the lot takedown pricing. The $869,000 also includes a $151,000 write-down to estimated net realizable value of a property that occurred in conjunction with an offer to purchase a property that was previously held for future expansion and development by Front Range. The remaining $95,000 write-down occurred in conjunction with an agreement to sell a vacant land parcel in Albuquerque that was previously held for expansion by the Bank. This transaction was completed in the third quarter of 2008. The increase is also due to an increase in taxes and insurance coinciding with the increase in other real estate owned that occurred beginning with the Front Range acquisition on March 1, 2007.

The increase in FDIC insurance premiums is due to new FDIC assessment rates that took effect at the beginning of 2007. The new assessment system allowed eligible insured depository institutions to share a one-time assessment credit pool, which offset premiums for a period of time. First Community Bank’s share of the credit was used up in the third quarter of 2007. The Company expects that FDIC insurance premiums will increase substantially in 2009. See “Federal Deposit Insurance Corporation Proposed Restoration Plan” below.

The goodwill impairment charge represents the write-off of goodwill in the second quarter of 2008. See note 5 to the consolidated condensed financial statements above.

The decrease in other non-interest expense is primarily due to the net $449,000 loss in 2007 on redemption of certain trust preferred securities that did not recur in 2008 and a decrease of approximately $551,000 in losses related to demand deposit and credit card accounts, including a $180,000 fraud loss that was recorded in the September 2007 quarter and recovered in the December 2007 quarter. The decrease in other non-interest expenses is also due to a decrease in acquisition integration costs that did not recur in 2008, a decrease in travel, meals, and entertainment and supplies expense resulting from our expense management initiative, and a decrease in expense related to our credit cards rewards program, due to the sale of the credit card portfolio in November 2007, partially offset by an increase in loan review fees, and an increase in branch security costs. The loan review function was fully outsourced beginning in January 2008.

- 27 -

Income taxes

The income tax benefit for the three and nine months ended September 30, 2008 resulted from the pre-tax loss. The effective income tax rate of 19.6% for the nine months ended September 30, 2008 is due to the impact of permanent non-deductible and non-taxable items, principally the non-deductible portion of the goodwill impairment charge, and to the impact of finalizing the 2007 tax return in September 2008. The 63.4% effective income tax rate for the three months ended September 30, 2008 is also due to the impact of permanent non-deductible and non-taxable items, and to the impact of finalizing the 2007 tax return in September 2008. These items had a more significant impact in the three month period, due to the difference in the magnitude of the net loss, as compared to the nine months ended September 30, 2008.

Allowance for Loan Losses

We use a systematic methodology with subjective elements to determine the adequacy of the allowance for loan losses and record a provision to maintain an adequate allowance to provide for inherent losses in the loan portfolio based on current facts and circumstances. This methodology 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.

ALLOWANCE FOR LOAN LOSSES:	Nine months ended September 30, 2008			Twelve months ended December 31, 2007			Nine months ended September 30, 2007
	(Dollars in thousands)
Balance beginning of period	$	31,712		$	23,125		$	23,125
Allowance related to acquired loans		—			2,958			2,958
Provision for loan losses		48,235			10,267			6,559
Net charge-offs		(11,573	)		(4,638	)		(3,026	)
Balance end of period	$	68,374		$	31,712		$	29,616
Allowance for loan losses to total loans held for investment		2.49	%		1.26	%		1.20	%
Allowance for loan losses to non-performing loans		67	%		103	%		158	%

NON-PERFORMING ASSETS:	September 30, 2008			December 31, 2007			September 30, 2007
	(Dollars in thousands)
Accruing loans – 90 days past due	$	1,988		$	2		$	236
Non-accrual loans		99,498			30,736			18,463
Total non-performing loans		101,486			30,738			18,699
Other real estate owned		15,929			18,107			18,736
Total non-performing assets	$	117,415		$	48,845		$	37,435
Potential problem loans	$	95,444		$	63,961		$	51,610
Total non-performing assets to total assets		3.38	%		1.43	%		1.12	%

Our provision for loans losses was $15.6 million and $48.2 million for the three and nine month periods ended September 30, 2008 compared to $2.4 million and $6.6 million for the same periods in 2007. The increase in the provision during 2008 resulted from the increase in non-performing loans, the increase in net charge-offs, and the continued growth of the loan portfolio. Approximately 70% of the increase in non-performing loans during the three months ended September 30, 2008 came from First State’s Utah market. In preparing to exit the Utah market, management took a very critical view of the Utah loan portfolio and identified additional potential problem loans. Further softening in the Utah housing market, in particular the Salt Lake City area, contributed to the level of problem loans. The allowance was increased, based on management’s current evaluation, to provide for probable inherent losses in the portfolio, with consideration given to specific known risks, past experience, the status and amount of non-performing loans, trends in delinquencies, charge-off experience, and local and national economic conditions.

Approximately 31% of our non-performing loans are in New Mexico, approximately 34% are in Colorado, approximately 33% are in Utah, and 2% are in Arizona. The real estate construction loan category currently comprises the largest percentage of non-performing loans, at approximately 77% at September 30, 2008. Of the $950 million of real estate construction loans at September 30, 2008, approximately 47% are related to residential construction and approximately 53% are for commercial purposes or vacant land.

- 28 -

We sell virtually all of the residential mortgage loans that are originated from our mortgage division and we have no securities that are backed by sub-prime mortgages.

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.

Federal Deposit Insurance Corporation Proposed Restoration Plan

The deposits of First Community Bank are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). Temporary legislation in 2008 increased the coverage of all interest-bearing deposits from $100,000 to $250,000 and provides unlimited coverage of all non-interest bearing demand deposits thru December 31, 2009. Currently, the FDIC insurance premiums are calculated on a risk-based assessment system that enables the FDIC to tie each bank’s premiums to the risk it poses to the deposit insurance fund. On October 7, 2008, the FDIC issued a notice of proposed rulemaking (“NPR”) and request for comment proposing to: alter the way in which it differentiates for risk in the risk-based assessment system; revise deposit insurance assessment rates, including base assessment rates; and make technical and other changes to the rules governing the risk-based assessment system. The NPR would raise current rates uniformly by seven basis points beginning January 1, 2009. All other changes, which could increase rates further, would take effect on April 1, 2009, the proposed date on which the rule would become effective. If the NPR is accepted in its current form, we expect our 2009 FDIC insurance premiums to exceed $5.0 million compared to our premiums which are expected to total just over $2.0 million for 2008.

Utah Closure

On October 31, 2008, First State completed the closure of its Utah operations, in response to our inability to generate deposits in the Utah market and to current economic conditions and other factors affecting the banking industry that are placing a premium on capital levels. The Utah operations were acquired as part of the First Community Industrial Bank acquisition in October of 2002 and consisted of two branches, one in Salt Lake City and one in the nearby suburb of Midvale, Utah. At September 30, 2008, the Utah operations included $289.5 in total loans and $13.3 million in deposits. In conjunction with the closure, First State expects to record approximately $110,000 in severance and continuation bonus expense, $92,000 of which was recognized through September 30, 2008 and is included in salaries and employee benefits expense in the consolidated condensed statements of operations. At September 30, 2008, the total amount accrued for the severance and continuation bonuses was approximately $58,000. First State also recorded a write-down of $365,000 related to the impairment of the land and building that housed one of the Utah branches, reflecting its estimated net realizable value. This impairment charge is included in occupancy expense in the consolidated condensed statements of operations.

Liquidity and Capital

In order to help improve the Company’s and the Bank’s capital ratios, the Company took action to suspend its cash dividend payments to shareholders in July, 2008 and the bank has not declared a cash dividend to the Company since May, 2008. Neither organization will declare or pay any cash dividends for the foreseeable future. In addition, pursuant to the Informal Agreement, the Company notified the holders of its trust preferred securities that interest payments would be deferred as provided for in the terms of each indenture agreement.

The actions listed above have been incorporated into a proposed capital plan which the Company will submit to its regulators, the Federal Reserve Bank of Kansas City and the New Mexico Financial Institutions Division (the “Regulators”), in connection with the Informal Agreement between the Company, the Bank, and the Regulators, which was entered into voluntarily by the Company and the Bank on September 26, 2008. Under the terms of the Informal Agreement, the Company and or the Bank agreed, among other things, to formulate a written plan to maintain a sufficient capital position at the Bank and at the Company, including attaining a tier 1 leverage ratio of 9% and a total risk-based capital ratio of 12% at the Bank level, with no date specified for achieving those levels. In addition, the Company and the Bank have agreed to maintain an adequate allowance for loan and lease losses; not to pay any dividends; not to distribute any interest, principal or other sums on trust preferred securities; not to issue or guarantee any debt or trust

- 29 -

preferred securities; and not to purchase or redeem any shares of the Company’s stock. This Informal Agreement can be terminated by a joint decision between the Regulators if they conclude such action is warranted. Through the prior and current actions taken, the Company and the Bank are actively engaged in responding to the issues in the Informal Agreement. The capital plan to be submitted will also include the expected reduction in total loans arising from the closure of our Utah operations and the possible sale of loans anticipated to be complete in the fourth quarter of 2008. The Company and the Bank both currently have sufficient capital to be considered “well capitalized” under regulatory guidelines, but management and the board of directors understand the need to move towards higher capital levels, given the uncertainties in today’s economic environment and capital markets.

Our primary sources of funds are customer deposits, loan repayments, maturities of and cash flow from investment securities, and borrowings. Borrowings include federal funds purchased, securities sold under repurchase agreements, borrowings from the Federal Home Loan Bank, and the Federal Reserve Bank discount window. Other sources of capital and liquidity may include short-term debt, additional subordinated debentures, or the issuance of preferred or common stock. There can be no assurance that these sources of liquidity will be available or have an acceptable cost structure. In addition, capital from the U.S. government under the Troubled Asset Relief Program (“TARP”) may be available. The TARP is the primary mechanism for immediate relief under the $700 billion Emergency Economic Stabilization Act of 2008 which was passed by Congress on October 3, 2008 and provides the U.S. Secretary of the Treasury broad authority to take actions with the aim of restoring liquidity and stability to the U.S. financial system. The TARP authorizes the Treasury Secretary to purchase troubled assets directly from financial institutions, establish a program to guarantee the troubled assets of financial institutions, and directly purchase the equities of financial institutions. The TARP will make $250 billion in capital available to U.S. financial institutions in exchange for preferred stock with warrants having a value equal to 15 percent of the preferred stock issued. The initial exercise price for the warrants and the market price for determining the number of shares of common stock subject to the warrants will be determined based on the market price of First State’s common stock on the date that the preferred stock is issued, calculated on a 20-trading day trailing average. First State has applied for $90 million of capital under the TARP program, and estimates that the $90 million would result in a level of total risk-based capital above 13%. Management believes, in current market conditions, that the capital available under the TARP program will have significantly less dilution than any comparable capital infusion from the public market. However, there can be no assurance that this source of capital will be approved. See “Risk Factors” above.

Quantitative measures established by regulation to ensure capital adequacy require First State to maintain minimum amounts and ratios of total and Tier I capital (as defined in regulations and set forth in the following table) to risk-weighted assets, and of Tier I capital to average total assets (leverage ratio). The capital ratios for First State and the Bank are provided in the table below.

Risk-Based Capital and Leverage Ratios

	As of September 30, 2008 Risk-Based Ratios
	Tier I Capital		Total Capital		Leverage Ratio
First State Bancorporation	8.16	%	10.44	%	7.12	%
First Community Bank	9.19	%	10.45	%	8.02	%
Minimum required ratio	4.0	%	8.0	%	4.0	%
“Well capitalized” minimum ratio	6.0	%	10.0	%	5.0	%

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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	Three Months Ended September 30,
	2008							2007
	Average Balance			Interest Income or Expense		Average Yield or Cost		Average Balance			Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
Assets
Loans:
Commercial	$	350,133		$	5,633	6.40	%	$	333,846		$	7,210	8.57	%
Real estate		2,352,668			36,872	6.23	%		2,059,793			45,024	8.67	%
Consumer		43,833			1,103	10.01	%		55,481			1,435	10.26	%
Mortgage		9,405			149	6.30	%		14,123			241	6.77	%
Other		1,750			—	—			2,292			—	—
Total loans		2,757,789			43,757	6.31	%		2,465,535			53,910	8.67	%
Allowance for loan losses		(59,525	)						(29,945	)
Securities:
U.S. government and mortgage-backed		381,000			4,465	4.66	%		398,044			4,541	4.53	%
State and political subdivisions:
Non-taxable		82,988			976	4.68	%		49,655			643	5.14	%
Taxable		3,454			50	5.76	%		—			—	—
Other		28,660			194	2.69	%		19,510			275	5.59	%
Total securities		496,102			5,685	4.56	%		467,209			5,459	4.64	%
Interest-bearing deposits with other banks		1,697			13	3.05	%		4,319			46	4.23	%
Federal funds sold		2,787			13	1.86	%		8,349			100	4.75	%
Total interest-earning assets		3,258,375			49,468	6.04	%		2,945,412			59,515	8.02	%
Non-interest-earning assets:
Cash and due from banks		66,678							75,232
Other		205,995							320,867
Total non-interest-earning assets		272,673							396,099
Total assets	$	3,471,523						$	3,311,566
Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing demand accounts	$	314,350		$	582	0.74	%	$	327,265		$	907	1.10	%
Certificates of deposit > $100,000		614,250			5,891	3.82	%		756,413			9,248	4.85	%
Certificates of deposit < $100,000		442,570			3,474	3.12	%		475,825			5,628	4.69	%
Money market savings accounts		581,443			3,270	2.24	%		350,604			3,027	3.43	%
Regular savings accounts		106,307			202	0.76	%		112,451			284	1.00	%
Total interest-bearing deposits		2,058,920			13,419	2.59	%		2,022,558			19,094	3.75	%
Securities sold under agreements to repurchase		148,822			454	1.21	%		183,709			1,976	4.27	%
Short-term borrowings		384,133			2,261	2.34	%		176,289			2,318	5.22	%
Long-term debt		70,416			556	3.14	%		13,966			193	5.48	%
Junior subordinated debentures		98,521			1,116	4.51	%		109,393			2,031	7.37	%
Total interest-bearing liabilities		2,760,812			17,806	2.57	%		2,505,915			25,612	4.05	%
Non-interest-bearing demand accounts		495,043							478,753
Other non-interest-bearing liabilities		21,056							19,525
Total liabilities		3,276,911							3,004,193
Stockholders’ equity		194,612							307,373
Total liabilities and stockholders’ equity	$	3,471,523						$	3,311,566
Net interest income				$	31,662						$	33,903
Net interest spread						3.47	%						3.97	%
Net interest margin						3.87	%						4.57	%
Ratio of average interest-earning assets to average interest-bearing liabilities						118.02	%						117.54	%

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	Nine Months Ended September 30,
	2008							2007
	Average Balance			Interest Income or Expense		Average Yield or Cost		Average Balance			Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
Assets
Loans:
Commercial	$	343,859		$	17,587	6.83	%	$	327,680		$	21,068	8.60	%
Real estate		2,253,400			112,991	6.70	%		1,960,825			127,700	8.71	%
Consumer		45,329			3,431	10.11	%		56,398			4,268	10.12	%
Mortgage		14,010			628	5.99	%		18,080			850	6.29	%
Other		2,234			—	—			2,275			—	—
Total loans		2,658,832			134,637	6.76	%		2,365,258			153,886	8.70	%
Allowance for loan losses		(42,499	)						(27,987	)
Securities:
U.S. government and mortgage-backed		395,247			13,638	4.61	%		411,401			14,071	4.57	%
State and political subdivisions:
Non-taxable		79,488			2,824	4.75	%		49,928			1,908	5.11	%
Taxable		2,231			98	5.87	%
Other		23,641			641	3.62	%		18,190			697	5.12	%
Total securities		500,607			17,201	4.59	%		479,519			16,676	4.65	%
Interest-bearing deposits with other banks		2,445			68	3.72	%		4,115			143	4.65	%
Federal funds sold		3,966			72	2.42	%		10,364			395	5.10	%
Total interest-earning assets		3,165,850			151,978	6.41	%		2,859,256			171,100	8.00	%
Non-interest-earning assets:
Cash and due from banks		66,521							73,446
Other		272,619							293,837
Total non-interest-earning assets		339,140							367,283
Total assets	$	3,462,491						$	3,198,552
Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing demand accounts	$	327,039		$	2,160	0.88	%	$	336,637		$	2,831	1.12	%
Certificates of deposit > $100,000		734,844			20,559	3.74	%		708,841			25,692	4.85	%
Certificates of deposit < $100,000		398,078			12,247	4.11	%		448,945			15,487	4.61	%
Money market savings accounts		517,477			9,598	2.48	%		324,898			8,117	3.34	%
Regular savings accounts		107,514			639	0.79	%		115,402			904	1.05	%
Total interest-bearing deposits		2,084,952			45,203	2.90	%		1,934,723			53,031	3.66	%
Securities sold under agreements to repurchase		181,678			2,366	1.74	%		187,789			6,102	4.34	%
Short-term borrowings		270,535			5,136	2.54	%		181,362			7,170	5.29	%
Long-term debt		49,992			1,264	3.38	%		16,133			651	5.40	%
Junior subordinated debentures		98,557			3,696	5.01	%		88,556			4,928	7.44	%
Total interest-bearing liabilities		2,685,714			57,665	2.87	%		2,408,563			71,882	3.99	%
Non-interest-bearing demand accounts		478,445							463,464
Other non-interest-bearing liabilities		21,894							18,198
Total liabilities		3,186,053							2,890,225
Stockholders’ equity		276,438							308,327
Total liabilities and stockholders’ equity	$	3,462,491						$	3,198,552
Net interest income				$	94,313						$	99,218
Net interest spread						3.54	%						4.01	%
Net interest margin						3.98	%						4.64	%
Ratio of average interest-earning assets to average interest-bearing liabilities						117.88	%						118.71	%

To effectively measure and manage interest rate risk, we use gap analysis and simulation analysis to determine the impact on net interest income under various interest rate scenarios, balance sheet trends, and strategies. From these analyses, we quantify interest rate risk and we develop and implement appropriate strategies. Additionally, we utilize duration and market value sensitivity measures when these measures provide added value to the overall interest rate risk management process. The overall interest rate risk position and strategies are reviewed by management and the Board of Directors of First Community Bank on an ongoing basis.

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Rising and falling interest rate environments can have various impacts on a bank’s net interest income, depending on the short-term interest rate gap that the bank maintains, the relative changes in interest rates that occur when the bank’s various assets and liabilities reprice, unscheduled repayments of loans, early withdrawals of deposits and other factors. As of September 30, 2008, our cumulative interest rate gap for the period up to three months was a positive $200.8 million and for the period up to one year was a negative $190.4 million.

Based solely on our interest rate gap for the period up to three months, our net income could be favorably impacted by increases in interest rates or unfavorably impacted by decreases in interest rates. The period three months to less than one year could be unfavorably impacted by increases in interest rates or favorably impacted by decreases in interest rates. A large portion of interest-bearing liabilities include savings and NOW accounts, on which rates are more influenced by competition in the marketplace versus changes in the interest rate environment. Repricing of these interest-bearing liabilities tends to lag behind changes in the overall interest rate environment in both timing and magnitude.

The following table sets forth our estimate of maturity or repricing, and the resulting interest rate gap of our interest-earning assets and interest-bearing liabilities at September 30, 2008. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits, and competition.

	Less than three months		Three months to less than one year			One to five years		Over five years		Total
	(Dollars in thousands)
Interest-earning assets:
Investment securities	$	52,586	$	92,559		$	175,618	$	173,612	$	494,375
Interest-bearing deposits with other banks		705		825			—		—		1,530
Federal funds sold		1,500		—			—		—		1,500
Loans:
Commercial		205,322		51,290			86,681		9,286		352,579
Real estate		1,138,333		257,595			763,364		206,218		2,365,510
Consumer		12,965		7,382			17,600		5,101		43,048
Total interest-earning assets	$	1,411,411	$	409,651		$	1,043,263	$	394,217	$	3,258,542
Interest-bearing liabilities:
Savings and NOW accounts	$	186,945	$	240,453		$	427,395	$	79,922	$	934,715
Certificates of deposit greater than $100,000		252,511		334,976			90,259		327		678,073
Certificates of deposit less than $100,000		121,896		193,536			92,153		814		408,399
Securities sold under agreements to repurchase		141,929		—			—		—		141,929
FHLB advances and other		418,712		31,889			67,708		—		518,309
Junior subordinated debentures		88,663		—			9,840		—		98,503
Total interest-bearing liabilities	$	1,210,656	$	800,854		$	687,355	$	81,063	$	2,779,928
Interest rate gap	$	200,755	$	(391,203	)	$	355,908	$	313,154	$	478,614
Cumulative interest rate gap at September 30, 2008	$	200,755	$	(190,448	)	$	165,460	$	478,614
Cumulative gap ratio at September 30, 2008		1.17		0.91			1.06		1.17

Item 4. Controls and Procedures.

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2008, pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures and internal control over financial reporting are, to the best of their knowledge, effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Our Chief Executive Officer and Chief Financial Officer have also concluded that there were no changes in our internal control over financial reporting or in other factors that occurred during the registrant’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

- 33 -

PART II – OTHER INFORMATION

Item 5. Other Information.

None

Item 6. Exhibits.

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of May 22, 2002, by and among First State Bancorporation, First State Bank N.M. (formerly known as First State Bank of Taos), First Community Industrial Bank, Blazer Financial Corporation, and Washington Mutual Finance Corporation. *
2.2	Agreement and Plan of Merger, dated as of August 31, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc. and AccessBank. (5)
2.3	Agreement and Plan of Merger, dated as of September 2, 2005, by and among First State Bancorporation, New Mexico Financial Corporation, and Ranchers Banks. (6)
2.4	Amendment Number 1 to the Agreement and Plan of Merger, dated September 29, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc., and AccessBank. (7)
2.5	Agreement and Plan of Merger, dated as of October 4, 2006, by and among First State Bancorporation, MSUB, Inc., Front Range Capital Corporation, and Heritage Bank. (11)
2.6	Loan Purchase Agreement, dated July 27, 2007, by and between First Community Bank, successor by merger to Heritage Bank and CAPFINANCIAL CV2, LLC. (16)
3.1	Restated Articles of Incorporation of First State Bancorporation. (1)
3.2	Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. (10)
3.3	Amended Bylaws of First State Bancorporation. *
3.4	Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. (19)
10.1	Executive Employment Agreement. *
10.2	First State Bancorporation 2003 Equity Incentive Plan. *
10.3	Executive Deferred Compensation Plan. * (Participation and contributions to this Plan have been frozen as of December 31, 2004.)
10.4	First Amendment to Executive Employment Agreement. (4)
10.5	Officer Employment Agreement. (4)
10.6	First Amendment to Officer Employment Agreement. (4)
10.7	First State Bancorporation Deferred Compensation Plan. (3)
10.8	First State Bancorporation Compensation and Bonus Philosophy and Plan. (13)
10.9	First Amendment to the First State Bancorporation 2003 Equity Incentive Plan. (9)
10.10	Second Amendment to the First State Bancorporation 2003 Equity Incentive Plan. (9)
10.11	Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. (14)
10.12	Restated and Amended Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. (8)
10.13	Third Amendment to First State Bancorporation 2003 Equity Incentive Plan. (10)
10.14	Compensation Committee Approval and Board Ratification of Certain Executive Salaries. (12)
10.15	Fourth Amendment to First State Bancorporation 2003 Equity Incentive Plan. (17)
10.16	Second Amendment to Executive Employment Agreement (Stanford). (15)
10.17	Second Amendment to Executive Employment Agreement (Dee). (15)
10.18	Second Amendment to Executive Employment Agreement (Spencer). (15)
10.19	Second Amendment to Executive Employment Agreement (Martin). (15)
10.20	Key Executives Incentive Plan. (18)
10.21	Second Amendment to the First State Bancorporation Deferred Compensation Plan. (2)
10.22	Executive Compensation Plan of Heritage Bank. (2)
10.23	Form of Adoption Agreement for Executive compensation Plan of Heritage Bank. (2)
10.24	Executive Retirement Plan of Heritage Bank Amendment and Restatement. (2)
10.25	Form of Adoption Agreement for Executive Retirement Plan of Heritage Bank. (2)
14	Code of Ethics for Executives. *
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

- 34 -

31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

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

(2) Incorporated by reference from First State Bancorporation’s 10-K for the year ended December 31, 2007.

(3) Incorporated by reference from First State Bancorporation’s 10-K for the year ended December 31, 2005.

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

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

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

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

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

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

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

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

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

(13) Incorporated by reference from First State Bancorporation’s Form 8-K filed on January 26, 2006.

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

(15) Incorporated by reference from First State Bancorporation’s Form 8-K filed on July 27, 2007.

(16) Incorporated by reference to Exhibit 2.1 from First State Bancorporation’s Form 8-K filed on August 1, 2007.

(17) Incorporated by reference from First State Bancorporation’s 10-Q for the quarter ended June 30, 2007.

(18) Incorporated by reference to Exhibit 10.1 from First State Bancorporation’s Form 8-K filed on August 10, 2007.

(19) Incorporated by reference from First State Bancorporation’s 10-Q for the quarter ended June 30, 2008.

* Filed herewith.

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SIGNATURES

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

	FIRST STATE BANCORPORATION
Date: November 10, 2008	By:	/s/ Michael R. Stanford
		Michael R. Stanford, President & Chief Executive Officer
Date: November 10, 2008	By:	/s/ Christopher C. Spencer
		Christopher C. Spencer, Senior Vice President and Chief Financial Officer

- 36 -

EXHIBIT INDEX

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of May 22, 2002, by and among First State Bancorporation, First State Bank N.M. (formerly known as First State Bank of Taos), First Community Industrial Bank, Blazer Financial Corporation, and Washington Mutual Finance Corporation. *
2.2	Agreement and Plan of Merger, dated as of August 31, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc. and AccessBank. (5)
2.3	Agreement and Plan of Merger, dated as of September 2, 2005, by and among First State Bancorporation, New Mexico Financial Corporation, and Ranchers Banks. (6)
2.4	Amendment Number 1 to the Agreement and Plan of Merger, dated September 29, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc., and AccessBank. (7)
2.5	Agreement and Plan of Merger, dated as of October 4, 2006, by and among First State Bancorporation, MSUB, Inc., Front Range Capital Corporation, and Heritage Bank. (11)
2.6	Loan Purchase Agreement, dated July 27, 2007, by and between First Community Bank, successor by merger to Heritage Bank and CAPFINANCIAL CV2, LLC. (16)
3.1	Restated Articles of Incorporation of First State Bancorporation. (1)
3.2	Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. (10)
3.3	Amended Bylaws of First State Bancorporation. *
3.4	Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. (19)
10.1	Executive Employment Agreement. *
10.2	First State Bancorporation 2003 Equity Incentive Plan. *
10.3	Executive Deferred Compensation Plan. * (Participation and contributions to this Plan have been frozen as of December 31, 2004.)
10.4	First Amendment to Executive Employment Agreement. (4)
10.5	Officer Employment Agreement. (4)
10.6	First Amendment to Officer Employment Agreement. (4)
10.7	First State Bancorporation Deferred Compensation Plan. (3)
10.8	First State Bancorporation Compensation and Bonus Philosophy and Plan. (13)
10.9	First Amendment to the First State Bancorporation 2003 Equity Incentive Plan. (9)
10.10	Second Amendment to the First State Bancorporation 2003 Equity Incentive Plan. (9)
10.11	Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. (14)
10.12	Restated and Amended Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. (8)
10.13	Third Amendment to First State Bancorporation 2003 Equity Incentive Plan. (10)
10.14	Compensation Committee Approval and Board Ratification of Certain Executive Salaries. (12)
10.15	Fourth Amendment to First State Bancorporation 2003 Equity Incentive Plan. (17)
10.16	Second Amendment to Executive Employment Agreement (Stanford). (15)
10.17	Second Amendment to Executive Employment Agreement (Dee). (15)
10.18	Second Amendment to Executive Employment Agreement (Spencer). (15)
10.19	Second Amendment to Executive Employment Agreement (Martin). (15)
10.20	Key Executives Incentive Plan. (18)
10.21	Second Amendment to the First State Bancorporation Deferred Compensation Plan. (2)
10.22	Executive Compensation Plan of Heritage Bank. (2)
10.23	Form of Adoption Agreement for Executive Compensation Plan of Heritage Bank. (2)
10.24	Executive Retirement Plan of Heritage Bank Amendment and Restatement. (2)
10.25	Form of Adoption Agreement for Executive Retirement Plan of Heritage Bank. (2)
14	Code of Ethics for Executives. *
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

- 37 -

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

(2) Incorporated by reference from First State Bancorporation’s 10-K for the year ended December 31, 2007.

(3) Incorporated by reference from First State Bancorporation’s 10-K for the year ended December 31, 2005.

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

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

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

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

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

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

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

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

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

(13) Incorporated by reference from First State Bancorporation’s Form 8-K filed on January 26, 2006.

(14) Incorporated by reference from Access Anytime Bancorp, Inc.’s Registration Statement on Form S-8, filed June 2, 1997 (SEC file No. 333-2821.

(15) Incorporated by reference from First State Bancorporation’s Form 8-K filed on July 27, 2007.

(16) Incorporated by reference to Exhibit 2.1 from First State Bancorporation’s Form 8-K filed on August 1, 2007.

(17) Incorporated by reference from First State Bancorporation’s 10-Q for the quarter ended June 30, 2007.

(18) Incorporated by reference to Exhibit 10.1 from First State Bancorporation’s Form 8-K filed on August 10, 2007.

(19) Incorporated by reference from First State Bancorporation’s 10-Q for the quarter ended June 30, 2008.

* Filed herewith.

- 38 -

EX-2.1

Exhibit 2.1

EXECUTION VERSION

AGREEMENT AND PLAN OF MERGER

By and Among

FIRST STATE BANCORPORATION,

FIRST STATE BANK OF TAOS,

WASHINGTON MUTUAL FINANCE CORPORATION,

BLAZER FINANCIAL CORPORATION

and

FIRST COMMUNITY INDUSTRIAL BANK

Dated as of May 22, 2002

TABLE OF CONTENTS

ARTICLE I DEFINITIONS	5
1.1 Defined Terms	5
1.2 Interpretation	13
ARTICLE II THE MERGER	14
2.1 The Merger	14
2.2 Effective Time	14
2.3 Effects of the Merger	14
2.4 Conversion of Bank Common Stock	14
2.5 Merger Sub Common Stock	15
2.6 Articles of Incorporation	15
2.7 By-Laws	15
2.8 Directors and Officers	15
2.9 Closing	15
2.10 Deliveries at Closing	15
2.11 Withholding	16
2.12 Payment to Sole Stockholder	16
2.13 Reservation of Right to Revise Transaction	17
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER	17
3.1 Organization	17
3.2 Capitalization	18
3.3 Authority; No Violation	18
3.4 Consents and Approvals	20
3.5 Reports	20
3.6 Financial Statements	21
3.7 Broker’s Fees	22
3.8 Absence of Certain Changes or Events	22
3.9 Legal Proceedings	23
3.10 Taxes	23
3.11 Employee Benefit Plans	25
3.12 Bank Information	26
3.13 Compliance with Applicable Law	27
3.14 Bank Contracts	27
3.15 Agreements with Regulatory Agencies	29
3.16 Property	29
3.17 Environmental Matters	30
3.18 Insurance	31
3.19 Employee Matters	32
3.20 Investment Securities	32

2

3.21 Administration of Fiduciary Accounts	32
3.22 Derivative Transactions	33
3.23 Loans	33
3.24 Intellectual Property	35
3.25 No other Representations	35
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER	36
4.1 Organization	36
4.2 Authority; No Violation	36
4.3 Consents and Approvals	37
4.4 Broker’s Fees	38
4.5 Reports	38
4.6 Legal Proceedings	38
4.7 Agreements with Regulatory Agencies; Approvals; Financing	38
4.8 No Other Representations	39
ARTICLE V ADDITIONAL COVENANTS	39
5.1 Covenants relating to the Bank	39
5.2 Loan, Accrual and Reserve Policies	42
5.3 Buyer Forbearance	42
ARTICLE VI ADDITIONAL AGREEMENTS	43
6.1 Regulatory Matters	43
6.2 Access to Information	44
6.3 Financing; Cooperation; Legal Conditions to the Merger	45
6.4 Third Party Proposals	46
6.5 Further Assurances	46
6.6 Confidentiality	46
6.7 Certain Tax Matters	47
6.8 Books and Records	53
6.9 Subsequent Interim Financial Statements	54
6.10 Notification of Certain Matters	54
6.11 [Intentionally Omitted]	54
6.12 Non-Solicitation	54
6.13 Dividend	55
6.14 Intercompany Arrangements	56
6.15 Employees	56
6.16 Other Real Estate Owned and Non-Performing Loans	58
6.17 Additional Loans	59
6.18 Computer Equipment	59

3

ARTICLE VII CONDITIONS PRECEDENT	59
7.1 Conditions to Each Party’s Obligation to Effect the Merger	59
7.2 Conditions to Obligations of Buyer and Merger Sub	60
7.3 Conditions to Obligations of Parent, Seller and the Bank	60
ARTICLE VIII TERMINATION AND AMENDMENT	62
8.1 Termination	62
8.2 Effect of Termination	63
8.3 Termination Fee	63
8.4 Amendment	64
8.5 Extension; Waiver	64
ARTICLE IX INDEMNIFICATION	64
9.1 Survival Periods	64
9.2 Indemnification by Seller and Parent	65
9.3 Indemnification by Buyer	66
9.4 Indemnification Procedure	67
9.5 Limitations	69
9.6 Exclusive Remedy	70
ARTICLE X GENERAL PROVISIONS	71
10.1 Expenses	71
10.2 Notices	71
10.3 Counterparts	72
10.4 Entire Agreement	72
10.5 Governing Law	72
10.6 Enforcement of Agreement	73
10.7 Severability	73
10.8 Publicity	73
10.9 Assignment; No Third Party Beneficiaries	73

4

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER, dated as of May 22, 2002, by and among First State Bancorporation, a New Mexico corporation (“Buyer”), First State Bank of Taos, a New Mexico state chartered bank and a wholly owned subsidiary of Buyer (“Merger Sub”), First Community Industrial Bank, an industrial bank incorporated under the laws of the State of Colorado (the “Bank”), Blazer Financial Corporation, a Louisiana corporation and the sole stockholder of the Bank (“Seller”), and Washington Mutual Finance Corporation, a Delaware corporation and the sole stockholder of the Seller (“Parent”). (Merger Sub and the Bank are sometimes collectively referred to herein as the “Constituent Corporations”.)

WHEREAS, the Boards of Directors of Buyer, Merger Sub and the Bank have determined that it is in the best interests of their respective companies and their stockholders to consummate the business combination transaction provided for herein in which the Bank will, subject to the terms and conditions set forth herein, merge (the “Merger”) with and into Merger Sub, with Merger Sub surviving the Merger as a wholly owned subsidiary of Buyer; and

WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger.

NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows:

ARTICLE I

DEFINITIONS

1.1 Defined Terms. For all purposes of this Agreement (as defined below), the following terms shall have the respective meanings set forth in this Section 1.1 (such definitions to be equally applicable to both the singular and plural forms of the terms herein defined):

“Acquisition Proposal” has the meaning set forth in Section 6.4.

“Affiliate” means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by or is under common control with, such Person. The term “control” (including, with correlative meaning, the terms “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies

5

of such Person, whether through the ownership of voting securities or other ownership interest, by contract or otherwise.

“Affiliated Group” means an affiliated group, as that term is defined by Section 1504(a) of the Code and the Treasury Regulations promulgated thereunder, any similar group defined under state, local or foreign law, or any group of which the Bank (or any predecessor of the Bank) is or was a member for purposes of filing Consolidated or Combined Tax Returns.”

“Agreement” means this Agreement and Plan of Merger, including the Annexes, Schedules and Exhibits attached hereto and made a part hereof, as the same may be amended from time to time in accordance with the provisions hereof.

“Allocation” has the meaning set forth in Section 6.7(h).

“Articles of Merger” has the meaning set forth in Section 2.2.

“Bank” has the meaning set forth in the Recitals hereto.

“Bank Assets” has the meaning set forth in Section 3.16.

“Bank Balance Sheet” has the meaning set forth in Section 3.6(a).

“Bank Contracts” has the meaning set forth in Section 3.14(a).

“Bank Merger Act” means the Bank Merger Act of 1960, as amended, and any successor to such statute.

“Basket” has the meaning set forth in Section 9.5(c).

“BHC Act” means the Bank Company Holding Act of 1956, as amended, and any successor to such statute.

“Big Four Accounting Firms” has the meaning set forth in Section 6.7(c).

“Business Day” means any day other than a Saturday, a Sunday or a day on which banks in Albuquerque, New Mexico or Denver, Colorado are authorized or obligated by Law or executive order to close.

“Buyer” has the meaning set forth in the Recitals.

“Buyer Disclosure Schedule” means the disclosure schedule being delivered to Seller by Buyer prior to the execution and delivery of this Agreement.

“Buyer Indemnified Party” means Buyer, Buyer’s Affiliates (which, after the Closing shall include the Bank), and each of their respective directors, officers, shareholders, attorneys, accountants, agents and employees, and the respective heirs, successors and assigns of each of the foregoing.

6

“Buyer Plans” has the meaning set forth in Section 6.15(a).

“Buyer Savings Plan” has the meaning set forth in Section 6.15(b).

“CBC” has the meaning set forth in Section 2.1.

“CBCA” has the meaning set forth in Section 2.1.

“Certificate” has the meaning set forth in Section 2.4(b).

“Closing” has the meaning set forth in Section 2.2.

“Closing Date” has the meaning set forth in Section 2.2.

“Code” means the Internal Revenue Code of 1986, as amended.

“Common Stock” means the common stock, par value $10.00 per share, of the Bank.

“Confidentiality Agreement” has the meaning set forth in Section 6.2(b).

“Consolidated or Combined Tax Returns” means any and all Tax Returns that include or included the Bank (or any predecessor or successor of the Bank) that is or was required to be filed by any Person (including any Tax Returns filed on a consolidated, combined, unitary or aggregate group basis of which the Bank (or any predecessor or successor of the Bank) is or has been a member).

“Constituent Corporations” has the meaning set forth in the Recitals.

“Damages” has the meaning set forth in Section 9.2(a).

“Director of Financial Institutions Division” means the Director of Financial Institutions Division of the Licensing and Regulation Department of the State of New Mexico.

“Dividend” has the meaning set forth in Section 6.13.

“Dividend Adjustment Amount” means the amount, if any, by which $37,500,000 exceeds the Dividend.

“Dividend Cut-Off Date” has the meaning set forth in Section 6.13.

“DOJ” has the meaning set forth in Section 8.1(b).

“Effective Time” has the meaning set forth in Section 2.2.

“Encumbrances” means any and all liens, charges, security interests, options, claims, mortgages, pledges, proxies, voting trusts or agreements, obligations,

7

understandings or arrangements or other restrictions on title or transfer of any nature whatsoever.

“Environmental Law” means all Laws (including common law), past or current, relating to pollution or protection of human health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata, and natural resources), including (i) those related to emissions, discharges, exposures, Releases or threatened Releases of Hazardous Materials, or otherwise relating to any environmental aspect of the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials and (ii) environmental provisions of Laws, past or current , other than Environmental Laws.

“ERISA” has the meaning set forth in Section 3.11(a).

“ERISA Affiliate” has the meaning set forth in Section 3.11(a).

“Estimated Payments” has the meaning set forth in Section 6.7(d).

“FDIC” means the Federal Deposit Insurance Corporation and any successor thereto.

“Federal Reserve Board” has the meaning set forth in Section 3.4.

“Final Stub Period Taxable Income” has the meaning set forth in Section 6.7(d).

“Final Stub Period Taxable Loss” has the meaning set forth in Section 6.7(d).

“GAAP” means generally accepted accounting principles in the United States.

“Governmental Entity” has the meaning set forth in Section 3.4.

“Hazardous Material” means any pollutant, contaminant, substance, material, or waste defined as “hazardous” or “toxic” under applicable Environmental Laws, including toxic substances, hazardous substances, petroleum and petroleum products, polychlorinated biphenyls, asbestos or asbestos-containing materials, lead or lead-based paints or materials, and radon.

“Indemnification Event” means any event, action, proceeding or claim for which a Person is entitled to indemnification under this Agreement.

“Indemnitor” means the indemnifying person, in the case of any obligation to indemnify, pursuant to the terms of this Agreement.

“Injunction” has the meaning set forth in Section 7.1(b).

8

“Insurance Policies” has the meaning set forth in Section 3.18.

“Intellectual Property” has the meaning set forth in Section 3.24.

“Judgment” means any judgment, injunction, order, writ, ruling or award of any Governmental Entity of competent jurisdiction.

“KBW” has the meaning set forth in Section 4.4.

“Knowledge of Seller” or “Known to Seller” shall mean actual knowledge of the persons listed on Section 1.1 of the Seller Disclosure Schedule.

“Law” means all laws (including common law), statutes, treaties, codes, ordinances, rules, regulations, orders and judgments of any Governmental Entity, foreign or domestic.

“Leases” means all lease and sublease agreements and similar agreements with respect to personal property entered into by the Bank, as lessor, through the date hereof including all collateral security therefor such as guarantees and all insurance policies or proceeds.

“Lien” means any charge, mortgage, pledge, security interest, restriction, claim, lien, or encumbrance.

“Loan Commitments” means the collective reference to each commitment or obligation to extend credit to any person (including pursuant to a letter of credit or banker’s acceptance) or to participate therein, whether or not such commitment, obligation or participation has been accepted or utilized by such person.

“Loan Documents” means the agreements, instruments, certificates, or other documents at any time evidencing or otherwise relating to, governing, or executed in connection with, or as security for, a Loan or Loan Commitment, including without limitation, notes, bond, loan agreements, letter of credit applications, letters of credit, lease financing contracts, bankers’ acceptances, drafts, guarantees, deeds of trust, mortgages, assignments, security agreements, pledges, subordination or priority agreement, lien priority agreements, undertakings, security instruments, financing statements, certificates, documents, legal opinions, participation and assignment agreements and inter-creditor agreements, and all amendments, modifications, renewals, extensions, rearrangements, and substitutions with respect to any of the foregoing.

“Loan Property” has the meaning set forth in Section 3.17(f).

“Loan Request Documents” has the meaning set forth in Section 5.1b(vi).

“Loans” means loans, advances, notes, borrowing arrangements or other extensions of credit including, without limitation, Leases, credit enhancements, commitments, guarantees, interest-bearing assets, interests in loan participations and assignments, customer liabilities on letters of credit, bankers acceptances and

9

participations in letters of credit (including in all cases loans made to pay interest accruing on loans, whether or not due or payable (sometimes referred to as capitalized interest)) and all amendments, modifications, renewals, extensions, refinancings and refundings of or for any of the foregoing.

“Material Adverse Effect” means a material adverse effect on (i) in the case of the Bank, (x) the assets, properties, liabilities, business, prospects, results of operations or condition (financial or other) of the Bank or (y) the ability of Parent, Seller and their Affiliates (including the Bank) to perform their obligations hereunder and to consummate the transactions contemplated hereby or (ii) in the case of Buyer, the ability of Buyer to perform its obligations hereunder and to consummate the transactions contemplated hereby; provided, however, that in determining whether a Material Adverse Effect has occurred, there shall be excluded any effect the cause of which is (1) any change in banking, savings association and similar Laws of general applicability or interpretations thereof by courts or Governmental Entities, (2) any change in GAAP or regulatory accounting requirements applicable to banks, savings associations, or their holding companies generally, (3) the announcement of this Agreement or any action or omission of either party or any Subsidiary thereof required or permitted to be taken by it under this Agreement (including the payment by the Bank of the Dividend and the sale or liquidation of Bank Assets in accordance with Section 6.13 in order to have sufficient cash to pay the Dividend but excluding with respect to the Bank, Parent and Seller compliance with Section 5.1(a)), (4) any changes in general economic conditions affecting banks, savings associations, or their holding companies generally, (5) any change in national or international, political or social conditions, including without limitation, the engagement of the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack upon or within the United States, or any of its territories, possessions or diplomatic or consular offices or upon any military installation, equipment or personnel of the United States, provided that none of the changes or occurrences described in this clause (5) results in the destruction or loss of use of the Bank Assets, (6) an increase in the level of non-performing assets of the Bank following the date hereof (provided that Seller and Parent are in compliance with their obligations under Sections 5.1(a), 5.1(b)(vi) and 6.16), (7) an increase in the rate of charge-offs after the date hereof on Loans made by the Bank (provided that Parent and Seller are in compliance with their obligations under Sections 5.1(a), 5.1(b)(vi), 5.2 and 6.16) and (8) any change in the Bank’s net income associated with any reduction of net Loans in the ordinary course of business consistent with past practice (provided that Parent and Seller are in compliance with their obligations under Sections 5.1(a) and 6.17).

“Merger” has the meaning set forth in the Recitals hereto.

“Merger Consideration” has the meaning set forth in Section 2.4(a).

“Merger Sub” has the meaning set forth in the Recitals hereto.

“NMBA” has the meaning set forth in Section 2.1.

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“OREO” means other real estate owned.

“Participation Facility” has the meaning set forth in Section 3.17(f).

“Permitted Liens” means (i) Encumbrances reflected or reserved on the Bank’s Balance Sheet, (ii) statutory Liens for Taxes not yet due and payable, (iii) mechanics’, materialmen’s, workmen’s, repairmen’s, warehousemen’s, carrier’s and other similar liens and encumbrances arising in the ordinary course of business, which in the aggregate, are not material, and (iv) such encumbrances and imperfections of title as do not materially detract from the value of the properties or assets and do not materially interfere in the present or proposed use of such properties or assets.

“Person” means any individual, partnership, limited partnership, limited liability partnership, limited liability company, foreign limited liability company, trust, estate, corporation, custodian, trustee, executor, administrator, nominee, Governmental Entity or any other entity.

“Plans” has the meaning set forth in Section 3.11(a).

“Preliminary Stub Period Taxable Income” has the meaning set forth in Section 6.7(d).

“Preliminary Stub Period Taxable Loss” has the meaning set forth in Section 6.7(d).

“Purchase Price” means $67 million, plus the Dividend Adjustment Amount, if any.

“Registration Statement” means the registration statement to be filed by Buyer with the SEC under the Securities Act with respect to the shares of common stock, no par value of Buyer (the “Buyer Common Stock”), to be issued by Buyer in order to fund payment of a portion of the Purchase Price.

“Regulatory Agencies” has the meaning set forth in Section 3.5.

“Regulatory Agreement” means any agreement, consent agreement or memorandum of understanding with, any commitment letter or similar undertaking to, any order or directive by, any extraordinary supervisory letter from, or any board resolutions adopted at the request of (whether or not set forth in Section 3.15 of the Seller Disclosure Schedule or Section 4.7 of the Buyer Disclosure Schedule), any Regulatory Agency or other Governmental Entity

“Release” means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment.

“Representative” means, with respect to any Person, any officer, director, employee, agent, advisor or other representative of such Person.

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“Requisite Regulatory Approvals” has the meaning set forth in Section 7.1(a).

“SEC” means the U.S. Securities and Exchange Commission.

“Securities” has the meaning set forth in Section 6.3(b).

“Securities Act” means the Securities Act of 1933, as amended.

“Seller” has the meaning set forth in the Recitals.

“Seller Disclosure Schedule” means the disclosure schedule being delivered to Buyer by Seller prior to the execution and delivery of this Agreement.

“Seller Pension Plan” has the meaning set forth in Section 6.15(e).

“Seller Savings Plan” has the meaning set forth in Section 6.15(b).

“Seller’s Account” means an account designated by Seller by written notice to Buyer given at least two (2) Business Days prior to the Closing Date.

“Seller’s Affiliated Group” has the meaning set forth in Section 6.7(f).

“Settlement Party” has the meaning set forth in Section 6.7(c).

“Shares” means all of the issued and outstanding shares of Common Stock.

“SRO” has the meaning set forth in Section 3.5.

“State Regulator” has the meaning set forth in Section 3.5.

“Straddle Period” means a taxable year or period beginning before, and ending after, the Closing Date.

“Stub Notification Period” has the meaning set forth in Section 6.7(d).

“Subsidiary” means, when used with respect to any Person, any corporation, partnership, limited liability company or other organization, whether incorporated or unincorporated, which is controlled by such Person, directly or indirectly, or is consolidated with such Person for financial reporting purposes.

“Surviving Bank” has the meaning set forth in Section 2.1.

“Tax” or “Taxes” means any tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever imposed by any Governmental Entity (including, without limitation, any federal, state, local, foreign or provincial income, gross receipts, property, sales, use, gains, license, excise, franchise, employment, social security, withholding, payroll, alternative or added minimum, ad valorem, transfer, value

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added, customs, or any amount that could be imposed under section 1.1502-6 of the Treasury Regulations or any similar provision of state, local, or foreign Law or imposed otherwise as successor, transferee or by way of contract, and any other direct or indirect sums imposed in lieu of any of the foregoing) together with any interest, addition or penalty imposed thereon.

“Tax Claim” has the meaning set forth in Section 6.7(c)(i).

“Tax Indemnified Party” has the meaning set forth in Section 6.7(c)(i).

“Tax Indemnifying Party” has the meaning set forth in Section 6.7(c)(i).

“Tax Records” means all Tax Returns and tax related workpapers relating to the Bank or any of its assets.

“Tax Return” means all returns, reports, statements, declarations, estimates and forms or other documents (including any related or supporting information) required to be file with respect to Taxes.

“Tax Sharing Agreements” has the meaning set forth in Section 6.7(f).

“Termination Fee” has the meaning set forth in Section 8.3(a).

“Third Party Claim” has the meaning set forth in Section 9.4(b).

“Transferred Employees” has the meaning set forth in Section 6.15(a).

“Transfer Tax” or “Transfer Taxes” has the meaning set forth in Section 6.7(g).

“Treasury Regulations” means the regulations promulgated under the Code.

1.2 Interpretation. When a reference is made in this Agreement to Articles, Sections, Exhibits or Schedules, such reference shall be to an Article or Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”. The phrases “the date of this Agreement”, “the date hereof” and terms of similar import, unless the context otherwise requires, shall be deemed to refer to May 22, 2002. The symbol “$” and the terms “dollar” and “dollars” all refer to the lawful currency of the United States of America denominated in dollars. Any disclosure in a particular section of a party’s Disclosure Schedule shall be deemed disclosed in respect of any other section thereof to the extent it is reasonably readily apparent that such disclosure is applicable to such other section; provided, however, that (i) there shall be no such deemed disclosure to any such section or subsection that reads

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“none” or words of similar import, and (ii) the parties acknowledge and agree that the terms, provisions, impact or importance of any document or item listed shall not be deemed disclosed for any reason hereunder except to the extent expressly disclosed in the Disclosure Schedule.

ARTICLE II

THE MERGER

2.1 The Merger. Subject to the terms and conditions of this Agreement, in accordance with the applicable provisions of the Colorado Banking Code (the “CBC”), the Colorado Business Corporation Act (the “CBCA”), and the New Mexico Banking Act (the “NMBA”) at the Effective Time, the Bank shall merge with and into Merger Sub. Merger Sub shall be the surviving company (hereinafter sometimes called the “Surviving Bank”) in the Merger, and shall continue its existence as a state charted bank under the laws of the State of New Mexico. The Surviving Bank shall retain the name “First State Bank of Taos”. Upon consummation of the Merger, the separate existence of the Bank shall terminate.

2.2 Effective Time. Upon the terms and subject to the conditions of this Agreement, on the Closing Date (or such other date as Buyer, Seller and the Bank shall agree), Buyer, Merger Sub and the Bank shall (i) file with the Secretary of State of the State of Colorado articles of merger and any other appropriate documents (all of such documents the “Articles of Merger”) executed and acknowledged in accordance with the relevant provisions of the CBCA and (ii) file with the Director of Financial Institutions Division pursuant to the NMBA and the Public Regulation Commission of the State of New Mexico this Agreement together with copies of the resolutions of Seller and Buyer approving this Agreement and a certificate of the appropriate officers of each of Merger Sub and the Bank that no shareholders of each such party voted against approval of this Agreement. The Merger shall become effective upon the later of the date on which the Articles of Merger have been duly filed with the Public Regulation Commission of the State of Colorado and the date on which this Agreement has been filed with the Director of Financial Institutions Division and the Public Regulation Commission of the State of New Mexico or such other time as is agreed upon by the parties and specified in the Articles of Merger, and such time is hereinafter referred to as the “Effective Time”.

2.3 Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in Section 7-111-106 of the CBCA and Section 58-4-8 NMBA.

2.4 Conversion of Bank Common Stock. The aggregate amount to be paid by or on behalf of Buyer as a result of the Merger shall equal the Purchase Price, payable as follows:

(a) At the Effective Time, each share of Common Stock issued and outstanding immediately prior to the Effective Time shall, by virtue of this Agreement and without any action on the part of the holder thereof, be converted into the right to

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receive an amount in cash, without interest, equal to the Purchase Price divided by the number of Shares (the “Merger Consideration”).

(b) All of the shares of Common Stock converted into the right to receive the Merger Consideration pursuant to this Article II shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and each certificate (each a “Certificate”) previously representing any such shares of Common Stock shall thereafter only represent the right to receive the cash into which the shares of Common Stock represented by such Certificate have been converted pursuant to this Section 2.4. Certificates previously representing shares of Common Stock shall be exchanged for cash upon the surrender of such Certificates in accordance with Section 2.12 hereof, without any interest thereon.

2.5 Merger Sub Common Stock. Each of the 22,500 shares of the common stock, par value $100.00 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding immediately after the Effective Time and shall constitute all of the issued and outstanding shares of the Surviving Bank.

2.6 Articles of Incorporation. At the Effective Time, the Articles of Incorporation of Merger Sub as in effect at the Effective Time, shall be the Articles of Incorporation of the Surviving Bank.

2.7 By-Laws. At the Effective Time, the By-Laws of Merger Sub, as in effect immediately prior to Effective Time, shall be the By-Laws of the Surviving Bank until thereafter amended in accordance with applicable law.

2.8 Directors and Officers. The directors and officers of Merger Sub immediately prior to the Effective Time shall be the directors and officers of the Surviving Bank, each to hold office in accordance with the Articles of Incorporation and By-Laws of the Surviving Bank until their respective successors are duly elected or appointed and qualified.

2.9 Closing. Subject to the terms and conditions of this Agreement, the closing of the Merger (the “Closing”) will take place at 10:00 a.m., local time, on the first Business Day which is no earlier than the 11th calendar day of a month and which follows the satisfaction or waiver (subject to applicable law) of the latest to occur of the conditions set forth in Article VII (other than those conditions which relate to actions to be taken at the Closing) (the “Closing Date”), at the offices of Heller Ehrman White & McAuliffe LLP in Seattle, Washington, unless another time, date or place is agreed to in writing by the parties hereto.

2.10 Deliveries at Closing.

(a) At the Closing, Buyer shall deliver, or cause to be delivered, to Seller the officer’s certificate contemplated by Section 7.3(c) and the agreement described in Section 6.18.

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(b) At the Closing, Seller shall deliver, or cause to be delivered, to Buyer:

(i) one or more Certificates representing all of the Shares, duly executed in blank or accompanied by stock powers duly executed in blank, in proper form for surrender pursuant to the Merger;

(ii) the officer’s certificate contemplated by Section 7.2(c);

(iii) the other documents required to be delivered by Seller at the Closing under this Agreement;

(iv) the agreement described in Section 6.18;

(v) the corporate minute books for the Bank; and

(vi) a certificate (in form and substance reasonably satisfactory to Buyer) that, as of the Closing Date, Seller is not a foreign person within the meaning of section 1445 of the Code and the Treasury Regulations thereunder, such certificate to be substantially in the form described in Treasury Regulations section 1.1445-2(b)(2)(iii)(B).

2.11 Withholding. Notwithstanding anything in this Agreement to the contrary, if Seller does not deliver the certificate described in Section 2.10(b)(vi) at or prior to the Closing, Buyer shall be permitted to withhold from the Merger Consideration the amount required to be withheld pursuant to section 1445 of the Code, as calculated by Buyer in good faith, and (a) Buyer shall not be deemed to be in default of any of its obligations under this Agreement by virtue of having withheld such amount and (b) the amount so withheld shall be deemed to have been paid to Seller for all purposes under this Agreement.

2.12 Payment to Sole Stockholder. Subject to Section 2.11, no later than the Business Day before the Closing Date, Buyer shall deposit into escrow the aggregate amount of cash equal to the sum of (i) $67 million and (ii) the amount of consideration Parent shall be entitled to receive pursuant to Section 6.18 with either a bank or trust company reasonably acceptable to each of Parent and Buyer with mutually agreed upon escrow instructions to such bank or trust company to pay such amount to Parent, by wire transfer of immediately available funds to Seller’s Account, as soon as reasonably practicable upon the occurrence of the Effective Time. In addition, if the Dividend Adjustment Amount is greater than $0, then, subject to Section 2.11, Buyer shall deposit the Dividend Adjustment Amount into such escrow or at Buyer’s option, Buyer may request that the Bank deposit the Dividend Adjustment Amount into such escrow, in each case, no later than the day prior to the Closing Date. If Buyer elects to have the Bank deposit the Dividend Adjustment Amount into the escrow, Buyer shall so notify Seller, Parent and the Bank in writing at least five Business Days prior to the Closing Date, and Seller and Parent shall cause Bank to deposit the Dividend Adjustment Amount into the escrow provided that all regulatory filings or consents in connection with such deposit have been made or received. If any such regulatory filing or consent is not made or obtained, then

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Buyer shall have no obligation to deposit the Dividend Adjustment Amount into the escrow. The escrow shall provide that if the Merger does not close, all amounts in the escrow shall be returned to Buyer, provided, however, in the event that the Bank deposits the Dividend Adjustment Amount into escrow, then the escrow shall provide that in the event the Merger does not close, an amount equal to the Dividend Adjustment Amount, together with all interest earned thereon in the escrow, shall be returned to the Bank.

2.13 Reservation of Right to Revise Transaction. With the prior written consent of Seller, Buyer may at any time change the method of effecting the acquisition of the Bank by Buyer; provided, however, that no such change shall (a) alter or change the amount or kind of the Purchase Price, (b) adversely affect the tax treatment to Seller as a result of receiving the Purchase Price or (c) delay or jeopardize consummation of the Merger.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER

Each of Parent and Seller hereby jointly and severally represents and warrants to Buyer as follows:

3.1 Organization.

(a) Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of Louisiana. Seller has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted.

(b) Parent is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware. Parent has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted.

(c) The Bank is an industrial bank duly organized under the Laws of the State of Colorado. The Bank has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified has not had and would not reasonably be expected to have a Material Adverse Effect on the Bank. The copies of the articles of incorporation, bylaws or similar governing documents of the Bank, copies of which have previously been made available to Buyer, are true, complete and correct copies of such documents as in effect as of the date of this Agreement.

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(d) The minute books of the Bank contain true and correct records of all meetings and other corporate actions held or taken since December 31, 1997 of its stockholders and Board of Directors (including committees of its Board of Directors).

3.2 Capitalization.

(a) The authorized capital stock of the Bank consists of 600,000 shares of Common Stock. There are (i) 594,459.70 shares of Common Stock issued and outstanding, (ii) no shares of preferred stock issued or outstanding and (iii) no shares of Common Stock or preferred stock reserved for issuance upon exercise of outstanding stock options or otherwise. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable, with no personal liability attaching to the ownership thereof. Seller owns all of the issued and outstanding shares of Common Stock, free and clear of any and all Encumbrances. The Bank does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of capital stock or any other equity security of the Bank or any securities representing the right to purchase or otherwise receive any shares of capital stock or any other equity security of the Bank. Without limiting the generality of the foregoing, there is no outstanding option, warrant, convertible or exchangeable security, right, subscription, call, unsatisfied pre-emptive right or other agreement or right of any kind to purchase or otherwise acquire (including, without limitation, by exchange or conversion) any of the Bank’s capital stock and, except as disclosed in Section 3.2(a) of the Seller Disclosure Schedule, no oral or written agreement, contract, arrangement, understanding, plan or instrument of any kind to which any of Parent, Seller, the Bank or any of their Affiliates is subject with respect to the issuance, voting or sale of issued or unissued shares of the Bank’s capital stock.

(b) The Bank has no Subsidiaries.

(c) Except as disclosed in Section 3.2(c) of the Seller Disclosure Schedule, the Bank does not own beneficially, directly or indirectly, any equity securities or similar interests of any Person, or any interest in a partnership or joint venture of any kind.

3.3 Authority; No Violation.

(a) Parent has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Parent, and no other corporate proceedings on the part of Parent or any of its Affiliates (other than Seller and the Bank) are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This

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Agreement has been duly and validly executed and delivered by Parent and (assuming due authorization, execution and delivery by Buyer and Merger Sub) this Agreement constitutes a valid and binding obligation of Parent, enforceable against Parent in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally.

(b) Seller has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Seller, and no other corporate proceedings on the part of Seller or any of its Affiliates (other than Parent and the Bank) are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Seller and (assuming due authorization, execution and delivery by Buyer and Merger Sub) this Agreement constitutes a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally.

(c) The Bank has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of the Bank, and by Seller as the sole shareholder of the Bank and by Parent, and no other corporate proceedings on the part of the Bank or any of its Affiliates (other than Parent and Seller) are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Bank and (assuming due authorization, execution and delivery by Buyer and Merger Sub) this Agreement constitutes a valid and binding obligation of the Bank, enforceable against the Bank in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally.

(d) Neither the execution and delivery of this Agreement by Parent, Seller or the Bank, nor the consummation by Parent or Seller or the Bank of the transactions contemplated hereby, nor compliance by Parent or Seller or any of their respective Affiliates (including the Bank) with any of the terms or provisions hereof, will (i) violate any provision of the certificate of incorporation, bylaws or similar governing documents of Parent or Seller or the certificate of incorporation, bylaws or similar governing documents of any of their respective Affiliates

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(including the Bank), or (ii) assuming that the consents and approvals referred to in Section 3.4 hereof are duly obtained, (A) violate any Law (or with respect to the Bank, any directive, policy or guideline of any Governmental Entity which has jurisdiction over the Bank) or Judgment applicable to Parent, Seller or any of their respective Affiliates (including the Bank), or any of their respective properties or assets, or (B) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Encumbrance upon any of the respective properties or assets of Parent, Seller or any of their respective Affiliates (including the Bank) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Parent, Seller or any of their respective Affiliates (including the Bank) is a party, or by which they or any of their respective properties or assets may be bound or affected, including the Bank Contracts, except, in the case of clause (ii), for such violations, conflicts, defaults, terminations, accelerations and Encumbrances which are described with particularity in Section 3.3(d) of the Seller Disclosure Schedule or would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Bank.

3.4 Consents and Approvals. Except for (a) the filing of applications and notices, as applicable, with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the BHC Act and approval of such applications and notices, (b) the filing of applications with each of the Director of the Financial Institutions Division of the State of New Mexico, the Banking Board of the State of Colorado and the Banking Commissioner of the State of Utah and approval of such applications, (c) the filing of Articles of Merger with the Secretary of State of the State of Colorado pursuant the CBCA, (d) the filing of this Agreement together with copies of the resolutions of Seller and Buyer approving this Agreement and a certificate of the appropriate officers of each of Merger Sub and the Bank that no shareholders of each such party voted against approval of this Agreement the Director of Financial Institutions Division pursuant to the NMBA and the Public Regulation Commission of the State of New Mexico, (e) such filings, authorizations or approvals as may be set forth in Section 3.4 of the Seller Disclosure Schedule, and (f) consents, approvals, filings or registrations the failure of which to be obtained or made will not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Bank, Parent, Seller or Buyer, no consents or approvals of or filings or registrations with any court, administrative agency or commission or other governmental authority or instrumentality (each a “Governmental Entity”) or with any third party are necessary in connection with (i) the execution and delivery by Parent, Seller or the Bank of this Agreement or (ii) the consummation by Parent, Seller or any of their respective Affiliates (including the Bank) of the Merger and the other transactions contemplated hereby.

3.5 Reports. The Bank has timely filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that it was

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required to file since July 31, 1997 with (a) the Federal Reserve Board, (b) the FDIC, (c) any state banking commissions or any other state regulatory authority (each a “State Regulator”) and (d) and any self-regulatory organization (“SRO”) (collectively, the “Regulatory Agencies”), and has paid all fees and assessments due and payable in connection therewith. Except for normal examinations conducted by a Regulatory Agency in the regular course of the business of the Bank, no Regulatory Agency has initiated any proceeding or, to the knowledge of Seller, investigation into the business or operations of the Bank since July 31, 1997. There is no unresolved material violation, criticism, or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of the Bank.

3.6 Financial Statements.

(a) Seller has previously made available to Buyer copies of (i) the statements of financial condition of the Bank as of December 31 for the fiscal years 2001 and 2000, and the related statements of operations and comprehensive income, stockholder’s equity for the fiscal years then ended, accompanied by the audit report of Deloitte & Touche LLP, independent public accountants with respect to the Bank, and (ii) the unaudited statements of financial condition of the Bank as of March 31, 2002 and the related unaudited statement of operations for the three (3) month period then ended. The December 31, 2001 statement of financial condition of the Bank (including the related notes, where applicable) (the “Bank Balance Sheet”) fairly presents the consolidated financial position of the Bank as of the date thereof, and the other financial statements referred to in this Section 3.6 (including the related notes, where applicable) fairly present, and the financial statements referred to in Section 6.9 hereof will fairly present (subject, in the case of the unaudited statements, to recurring audit adjustments normal in nature and amount) the financial position and the results of the consolidated operations of the Bank for the respective fiscal periods or as of the respective dates therein set forth; each of such statements (including the related notes, where applicable) comply, and the financial statements referred to in Section 6.9 hereof will comply, in all material respects with applicable accounting requirements with respect thereto; and each of such statements (including the related notes, where applicable) has been, and the financial statements referred to in Section 6.9 hereof will be, prepared in accordance with GAAP consistently applied during the periods involved, except as indicated in the notes thereto.

(b) Except (i) as disclosed in Section 3.6(b) of the Seller Disclosure Schedule, (ii) to the extent reflected or reserved against in the March 31, 2002 balance sheet and (iii) for liabilities and obligations that (A) are incurred after the date of such balance sheet in the ordinary course of conducting its business consistent with past practices and (B) individually or in the aggregate have not had and would not reasonably be expected to have a Material Adverse Effect on the Bank, the Bank does not have any liabilities or obligations of any nature, whether accrued, absolute, contingent or otherwise (including liabilities as guarantor, successor or otherwise with respect to obligations of others) and whether due or to become

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due. The foregoing representation shall not apply with respect to Tax matters, which matters shall be governed solely by the tax representations and warranties in Section 3.10 of this Agreement and the indemnity provisions contained in Section 6.7.

(c) The books and records of the Bank are maintained in accordance with GAAP and any other applicable legal and accounting requirements and reflect all transactions in a lawful manner. All assets and liabilities of the Bank and all transactions thereof have been recorded in all material respects on the books and records of the Bank in accordance with GAAP and accurately present in all material respects the transactions described therein.

(d) Section 3.6(d) of the Seller Disclosure Schedule sets forth a true, complete and correct list of each bank account and safe deposit box with respect to which the Bank is a depositor and a list of the current signatories with respect to such accounts and safe deposit boxes.

(e) The deposit accounts of the Bank are insured by the FDIC through the Bank Insurance Fund to the fullest extent permitted by the Federal Deposit Insurance Act, and all premiums and assessments required to be paid in connection therewith have been paid by the Bank.

3.7 Broker’s Fees. Neither Parent, Seller nor any Affiliate of Seller (including the Bank) nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker’s fees, commissions or finder’s fees in connection with any of the transactions contemplated by this Agreement.

3.8 Absence of Certain Changes or Events.

(a) Since December 31, 2001, there has been no change, development, event or circumstance or combination of changes, developments, events or circumstances which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect on the Bank.

(b) Except as set forth in Section 3.8(b) of the Seller Disclosure Schedule or as contemplated by this Agreement or, from and after the date of this Agreement, as permitted under Section 5.1, since December 31, 2001, the Bank has carried on its business in the ordinary course consistent with past practices.

(c) Since December 31, 2001, neither Seller nor any of its Affiliates (in each case, only with respect to the Bank or its business), nor the Bank has (i) except for normal increases in the ordinary course of business consistent with past practices, and except as required by Law or by any contract listed in Section 3.8(c) of the Seller Disclosure Schedule, increased the compensation, pension, or other fringe benefits or perquisites payable to any officer, employee or director of the Bank

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from the amount thereof in effect as of December 31, 2001 (which amounts have been previously disclosed to Buyer), granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay, or paid any bonus or (ii) except as set forth in Section 3.8(c) of the Seller Disclosure Schedule or as contemplated by this Agreement, taken any of the actions set forth in Section 5.1(b) hereof nor has any matter, event or circumstance described in Section 5.1(b) otherwise occurred or arisen.

(d) Since December 31, 2001, the Bank has not, as of the date of this Agreement, declared or paid any dividends on any shares of its capital stock (including the Shares).

3.9 Legal Proceedings.

(a) Except as disclosed in Section 3.9(a) of the Seller Disclosure Schedule, neither Parent, Seller or any of their respective Affiliates (in each case, only with respect to the Bank’s business) nor the Bank is a party to any, and there are no pending or, to the Knowledge of Seller, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Parent, Seller or any of their respective Affiliates (in each case, only with respect to the Bank’s business) or the Bank, other than any such proceedings, claims, actions or investigations which, individually or in the aggregate, have not had or would not reasonably be expected to have, a Material Adverse Effect on the Bank.

(b) Except as disclosed in Section 3.9(b) of the Seller Disclosure Schedule, there is no Judgment or regulatory restriction imposed upon Parent, Seller or any of their respective Affiliates (in each case, only with respect to the Bank’s business), the Bank or the assets of the Bank.

(c) There is no legal, administrative, arbitral or other proceeding, claim, action or governmental or regulatory investigation of any nature pending or, to the Knowledge of Seller, threatened against Seller or any of their respective Affiliates which seeks to enjoin or obtain damages in respect of the consummation of the transactions contemplated by this Agreement.

3.10 Taxes. Except as set forth in Section 3.10 of the Seller Disclosure Schedules:

(a) All material Tax Returns required to be filed by the Bank and all Consolidated and Combined Tax Returns have been filed with the appropriate taxing authorities when due and in accordance with applicable Law, and all such Tax Returns and Consolidated and Combined Tax Returns are true, correct and complete in all material respects.

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(b) All material Taxes owed by the Bank and all material Taxes owed by any Person for which the Bank could be held responsible (whether or not shown on any Tax Return or any Consolidated or Combined Tax Return) have been duly and timely paid.

(c) No claim has ever been made by an authority in any jurisdiction that the Bank was required to file any Tax Return that was not filed.

(d) Seller has prior to the date hereof provided to Buyer copies of all Tax Returns of the Bank and the portion of any Consolidated or Combined Tax Return that includes the Bank for all periods ending on or after December 31, 1997.

(e) There are no outstanding agreements extending or waiving the statutory period of limitations applicable to any claim for, or the period for the collection or assessment of, Taxes due for any taxable period with respect to any Tax for which the Bank may be subject or liable.

(f) There are no pending, or to the Knowledge of Seller, threatened, audits, assessments, collections, investigations or other proceedings by any Governmental Entity with respect to Taxes against the Bank.

(g) There are no Liens for Taxes upon the assets or properties of the Bank, except for statutory Liens for current Taxes not yet due.

(h) The Bank is not a party to any agreement relating to the sharing or allocation of Taxes or indemnification agreement with respect to Taxes or similar contract or arrangement.

(i) The Bank has not entered into any closing agreement pursuant to section 7121 of the Code (or any similar provision of state, local or foreign tax law) or any other agreement with similar Tax purposes.

(j) The Bank has no liability for Taxes of any Person (other than members of the Affiliated Group of which Washington Mutual, Inc. is the common parent) under section 1.1502-6 of the Treasury Regulations (or similar provisions of state, local or foreign law), as a transferee or successor, by contract or otherwise, except for any liability (i) pursuant to any lease agreement or (ii) that is not material and is pursuant to a contract entered into in the ordinary course of business.

(k) Since the date of the Bank Balance Sheet, the Bank has not incurred any liability for Taxes other than in the ordinary course of business.

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(l) No power of attorney is currently in force with respect to any matter relating to Taxes of the Bank.

(m) The Bank has withheld and paid, or accrued on the Bank Balance Sheet all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party.

(n) The Bank is not obligated to make any payments, and is not party to any agreement that would obligate it to make any payments, that would not be deductible under section 280G of the Code by reason of transactions contemplated by this Agreement.

(o) Since July 3, 1997, the Bank has not been a member of an Affiliated Group filing Combined or Consolidated Tax Returns (other than as a member of an Affiliated Group the common parent of which was Washington Mutual, Inc.).

3.11 Employee Benefit Plans.

(a) Section 3.11(a) of the Seller Disclosure Schedule contains a true, complete and correct list of each deferred compensation plan and each incentive compensation plan, equity compensation plan, “welfare” plan, fund or program (within the meaning of section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)); each “pension” plan, fund or program (within the meaning of section 3(2) of ERISA); each employment, termination or severance agreement; and each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by the Bank or any of its Affiliates or by any trade or business, whether or not incorporated (an “ERISA Affiliate”), that together with the Bank would be deemed a “single employer” within the meaning of section 4001(b) of ERISA, or to which the Bank or an ERISA Affiliate is party, whether written or oral, for the benefit of any employee or former employee of the Bank (the “Plans”).

(b) With respect to each Plan, Seller has heretofore delivered or made available to Buyer true and complete copies of the Plan and any amendments thereto (or if the Plan is not a written Plan, a description thereof).

(c) No liability under Title IV or section 302 of ERISA has been incurred by the Bank or any ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to the Bank or any ERISA Affiliate of incurring any such liability, other than liability for premiums due the Pension Benefit Guaranty Corporation (which premiums have been paid when due).

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(d) With respect to each Plan that is subject to Section 412 of the Code or Title IV of ERISA, the present value of accrued benefits under such plan, based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such plan’s actuary with respect to such plan did not exceed, as of its latest valuation date, the then current value of the assets of such plan allocable to such accrued benefits.

(e) No Plan is a “multiemployer pension plan,” as defined in section 3(37) of ERISA, nor is any Plan a plan described in section 4063(a) of ERISA.

(f) Each Plan has been operated and administered in all material respects in accordance with its terms and applicable law, including but not limited to ERISA and the Code.

(g) Each Plan intended to be “qualified” within the meaning of section 401(a) of the Code has been determined to be so qualified by the Internal Revenue Service and nothing has occurred that would reasonably be expected to result in any such plan ceasing to be so qualified.

(h) Except as disclosed in Section 3.11(h) of the Seller Disclosure Schedule, no Plan provides medical, surgical, hospitalization, death or similar benefits (whether or not insured) for employees or former employees of the Bank for periods extending beyond their retirement or other termination of service, other than (i) coverage mandated by applicable law, (ii) death benefits under any “pension plan,” or (iii) benefits the full cost of which is borne by the current or former employee (or his beneficiary).

(i) Except as disclosed in Section 3.11(i) of the Seller Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee or officer of the Bank or any ERISA Affiliate to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer.

(j) There are no pending or, to the Knowledge of Seller, threatened or anticipated claims by or on behalf of any Plan, by any employee or beneficiary covered under any such Plan, or otherwise involving any such Plan (other than routine claims for benefits or claims which would not be reasonably expected to have a Material Adverse Effect on the Bank).

3.12 Bank Information. None of the information supplied or to be supplied by Parent, Seller or the Bank for the purpose of inclusion or incorporation by reference in (a) any syndication and other materials (including in any registration statement or prospectus to be filed under the Securities Act) to be delivered to potential financing sources in

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connection with the transactions contemplated by this Agreement or (b) any document to be filed with any Regulatory Agency in connection with the transactions contemplated by this Agreement will contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

3.13 Compliance with Applicable Law. The Bank holds and has at all times held, all licenses, franchises, permits and authorizations necessary for the lawful conduct of its business under and pursuant to all, and has complied in all respects with and is not in default in any respect under any, applicable Law (or any directive, policy or guideline of any Governmental Entity which has bank regulatory jurisdiction over the Bank) or Judgment relating to the Bank or applicable to the employees conducting the Bank’s business, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act and all other applicable fair lending Laws and other Laws relating to discriminatory business practices, except where the failure to hold such license, franchise, permit or authorization or such noncompliance or default has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Bank. The Bank has not received written notice of any violations of any of the above.

3.14 Bank Contracts.

(a) Except as set forth in Section 3.14(a) of the Seller Disclosure Schedule, the Bank is not a party to or bound by any contract, arrangement, commitment or understanding (whether written or oral):

(i) with respect to the employment or retention of any director, officer, employee or consultant;

(ii) which, upon the consummation of the transactions contemplated by this Agreement, will (either alone or upon the occurrence of any additional acts or events) result in any payment or benefits (whether of severance pay or otherwise) becoming due, or the acceleration or vesting of any rights to any payment or benefits, from Buyer, the Bank, the Surviving Bank or any of their respective Subsidiaries to any officer, director, consultant or employee thereof;

(iii) which is a material contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed in whole or in part after the date of this Agreement;

(iv) which is a consulting agreement (including data processing, software programming and licensing contracts) not terminable on 90 days or less notice involving the payment of more than $5,000 per annum, in the

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case of any such agreement with an individual, or $50,000 per annum, in the case of any other such agreement;

(v) which materially restricts the conduct of any line of business by the Bank or any of its Affiliates;

(vi) (including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan) any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement, or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement;

(vii) with any of Parent, Seller or its Affiliates (other than the Bank), including any intercompany indebtedness, guaranty, receivable, payable or other account maintained between the Bank, on the one hand, and Parent, Seller or any of their respective other Affiliates, on the other hand;

(viii) which relates to indebtedness owed by the Bank, or the guarantee thereof (other than contracts evidencing deposit liabilities, purchases of federal funds, fully-secured repurchase agreements, trade payables and contracts relating to borrowings or guarantees made in the ordinary course of business);

(ix) involving intellectual property or relating to the provision of data processing, network communication or other technical services to or by the Bank, other than agreements entered into in the ordinary course of business;

(x) with respect to any mortgage, pledge, indenture or security agreement or similar arrangement constituting an Encumbrance upon the assets or properties of the Bank;

(xi) for the sale or purchase of personal property having a value individually, with respect to all sales or purchases thereunder, in excess of $10,000, other than in the ordinary course of business; or

(xii) for the sale or purchase of fixed assets or real estate having a value individually, with respect to all sales or purchases thereunder, in excess of $10,000, other than the sale of OREO in the ordinary course of business.

Each contract, arrangement, commitment or understanding of the type described in this Section 3.14(a), whether or not set forth in Section 3.14(a) of the Seller Disclosure

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Schedule, is referred to herein as a “Bank Contract”. The Bank has previously made available to Buyer true, complete and correct copies of each Bank Contract.

(b) Except as set forth in Section 3.14(b) of the Seller Disclosure Schedules, (i) each Bank Contract is valid and binding, in full force and effect and enforceable in accordance with its respective terms, subject to general principles of equity and to bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally, (ii) the Bank has performed in all material respects all obligations required to be performed by it to date under each Bank Contract and (iii) no event or condition exists or has occurred which violates, conflicts with, results in a breach of any provision of or the loss of any benefit under, constitutes a default (or an event which, with notice or lapse of time, or both, would constitute a default) on the part of any party under, results in the termination of or a right of termination or cancellation on the part of any party under, accelerates the performance required on the part of any party by, or results in the creation of any Encumbrance (other than Permitted Liens) upon any of the assets of the Bank under, any of the terms, conditions or provisions of any Bank Contract, except, in each case, where such failure to be valid and binding or in full force and effect, failure to be enforceable, failure to perform or such violation, conflict, breach or default, has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Bank.

3.15 Agreements with Regulatory Agencies. None of Parent, Seller or any of their respective Affiliates (in each case, only with respect to the Bank) nor the Bank is subject to any cease-and-desist or other order issued by any Regulatory Agency or other Governmental Entity, or is a party to any Regulatory Agreement that restricts the conduct of its business or that in any manner relates to its capital adequacy, its credit policies, its management or its business, nor has any of Parent, Seller or any of their respective Affiliates (in each case, with respect to the Bank) or the Bank been advised in writing by any Regulatory Agency or other Governmental Entity that it is considering issuing or requesting any Regulatory Agreement. As of the date of this Agreement, none of Parent, Seller, the Bank nor any of their respective Affiliates is aware of any fact or circumstance which is reasonably likely to prevent Buyer or any of its Subsidiaries from obtaining the governmental approvals and consents required in connection with the consummation of the transactions contemplated hereby.

3.16 Property.

(a) Except as set forth in Section 3.16(a) of the Seller Disclosure Schedule, the Bank has good and marketable title free and clear of all Encumbrances to all of the properties and assets, real and personal, tangible or intangible (other than OREO), which are reflected on the statement of financial condition of the Bank as of December 31, 2001 or acquired after such date (collectively, the “Bank Assets”), except for (i) dispositions of such properties or assets in the ordinary course of business or, after the date hereof, permitted by this Agreement, and (ii) Permitted Liens.

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(b) Except as set forth in Section 3.16(b) of the Seller Disclosure Schedule, the Bank owns or leases all properties and assets, real and personal, tangible or intangible, required to conduct its business in the ordinary course, consistent with past practice.

(c) With respect to each lease pursuant to which the Bank, as lessee, leases real or personal property, (i) such lease is valid and binding, in full force and effect and enforceable in accordance with its respective terms subject to general principles of equity and to bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally, (ii) the Bank has performed in all material respects all obligations required to be performed by it to date under such lease, (iii) no event or condition exists or has occurred which violates, conflicts with, results in a breach of any provision of or the loss of any benefit under, constitutes a default (or an event which, with notice or lapse of time, or both, would constitute a default) on the part of any party under, results in the termination of or a right of termination or cancellation on the part of any party under, accelerates the performance required on the part of any party by, or results in the creation of any Encumbrance (other than a Permitted Lien) upon any of the assets of the Bank under, any of the terms, conditions or provisions of any such lease, except, in each case, where such failure to be valid and binding or in full force and effect, failure to be enforceable, failure to perform or such violation, conflict, breach or default, has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Bank and (iv) without limiting the generality of Section 3.3(c), except as set forth in Section 3.16(c) of the Seller Disclosure Schedule, consummation of the transactions contemplated hereby will not violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) on the part of any party under, result in the termination of or a right of termination or cancellation on the part of any party under, accelerate the performance required on the part of any party by, or result in the creation of any Encumbrance upon any of the assets of the Bank under, any of the terms, conditions or provisions of any such lease.

3.17 Environmental Matters.

(a) The Bank is and has been in compliance in all material respects with all applicable Environmental Laws.

(b) The Bank possesses all permits, licenses, registrations, identification numbers, authorizations and approvals required under applicable Environmental Laws for the operation of its business as presently conducted.

(c) The Bank has not received any written claim, notice of violation or citation concerning any violation or alleged violation of any applicable Environmental

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Law or any alleged liability involving the presence of any Hazardous Material pursuant to any Environmental Law.

(d) There are no writs, injunctions, decrees, orders or judgments outstanding, or any actions, suits, proceedings or investigations pending or, to the Knowledge of Seller, threatened in writing, before any Governmental Entity or other forum in which the Bank, any Participation Facility or, to the Knowledge of Seller, any Loan Property, has been or, with respect to threatened proceedings, may be, named as a defendant (i) for alleged noncompliance (including by any predecessor) with any Environmental Laws, or (ii) relating to the Release, threatened Release or exposure to any Hazardous Material whether or not occurring at or on a site owned, leased or operated by the Bank, any Participation Facility or any Loan Property.

(e) During the period of (i) the Bank’s ownership or operation of any of its respective current or former properties, (ii) the Bank’s participation in the management of any Participation Facility, or (iii), to the knowledge of Seller, the Bank’s interest in a Loan Property, there has been no Release of Hazardous Materials which would require either reporting or remediation or would result in liability pursuant to any Environmental Law in, on, under or affecting any such property, Participation Facility or Loan Property. To the Knowledge of Seller, prior to the period of (1) the Bank’s ownership or operation of any of its respective current or former properties, (2) the Bank’s participation in the management of any Participation Facility, or (3) the Bank’s interest in a Loan Property, there was no Release or threatened Release of Hazardous Materials in, on, under or affecting any such property, Participation Facility or Loan Property.

(f) The following definitions apply for purposes of this Section 3.17: (i) “Loan Property” means any property in which the Bank holds a security interest, and, where required by the context, said term means the owner or operator of such property; and (ii) “Participation Facility” means any facility in which the Bank participates in the management and, where required by the context, said term means the owner or operator of such property.

(g) Notwithstanding any other representation and warranty in this Article III, the representations and warranties contained in this Section 3.17 constitute the sole representations and warranties of Seller with respect to any Environmental Law.

3.18 Insurance. Section 3.18 of the Seller Disclosure Schedule sets forth a true, complete and correct list of the names, types, insurance policy numbers, insurance carriers, principal amounts of coverage and deductible amounts for all insurance policies maintained by Seller or any of its Affiliates (including the Bank) with respect to the Bank or its business (the “Insurance Policies”). Each of the Insurance Policies is in full force and effect, all premiums with respect thereto covering all periods up to and including the date of this Agreement have been paid, such premiums covering all periods from the date

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hereof up to and including the Closing Date shall have been paid on or before the Closing Date, to the extent then due and payable. Each of the Insurance Policies is valid and enforceable in accordance with its respective terms, subject to general principles of equity and to bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally. Neither Seller nor any of its Affiliates (including the Bank) has been refused any insurance with respect to the Bank’s business, nor has any coverage been limited or terminated by any insurance carrier to which any of the foregoing has applied for such insurance or with which any of the foregoing has carried insurance during the last three (3) years.

3.19 Employee Matters. Except as set forth in Section 3.19 of the Seller Disclosure Schedule, (a) the Bank is and has been in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment, health and safety, and wages and hours; (b) the Bank has not received written notice of any charge or complaint against the Bank pending before the Equal Employment Opportunity Commission, the National Labor Relations Board, or any other government agency or court or other tribunal regarding an unlawful employment practice; (c) the Bank is not party to any collective bargaining agreement and there is no labor strike, slowdown, dispute or work stoppage actually pending or threatened against or affecting the Bank; (d) the Bank has not received written notice that any representation petition respecting the employees of the Bank has been filed with the National Labor Relations Board; (e) to Seller’s Knowledge, there are no union claims to represent any of the Bank’s employees and to Seller’s Knowledge, there has been no labor union prior to the date hereof organizing any employees of the Bank into one or more collective bargaining units; (f) there are no complaints, lawsuits, arbitrations or other proceedings pending, or to Seller’s Knowledge, threatened by or on behalf of any present or former employee of the Bank alleging breach of any express or implied contract of employment; (g) the Bank is and has been in compliance with all notice and other requirements under the Worker Adjustment and Retraining Notification Act (“WARN”) or similar state or local statute.

3.20 Investment Securities. Section 3.20 of the Seller Disclosure Schedule sets forth (a) the book and estimated fair value as of December 31, 2001 of the investment securities, mortgage-backed securities and securities held or available for sale of the Bank and (b) an investment securities report as of such date which includes security descriptions, CUSIP numbers, pool face values, book values and coupon rates. Except as set forth in Section 3.20 of the Seller Disclosure Schedule, none of such securities are denominated in currencies other than U.S. dollars.

3.21 Administration of Fiduciary Accounts. The Bank has properly administered all accounts for which it acts as a fiduciary, including but not limited to accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents and applicable state and federal law and regulation and common law. Neither the Bank nor any of its directors, officers, employees or agents has committed any breach of trust with respect to any such fiduciary account, and the accountings for each such fiduciary

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account are true, complete and correct and accurately reflect the assets of such fiduciary account.

3.22 Derivative Transactions. Since December 31, 2001, the Bank has not engaged in transactions in or involving forwards, futures, options on futures, swaps or other derivative instruments except (a) as agent on the order and for the account of others or (b) as principal for purposes of hedging interest rate risk on U.S. dollar-denominated securities and other financial instruments and, in any case, in accordance with all applicable Laws and all directives, policies or guidelines of any Governmental Entity which has bank regulatory jurisdiction over the Bank. None of the counterparties to any contract or agreement with respect to any such instrument is in default with respect to such contract or agreement and no such contract or agreement, were it to be a Loan (as defined below) held by the Bank, would be classified as “Other Loans Specially Mentioned”, “Special Mention”, “Substandard”, “Doubtful”, “Loss”, “Classified”, “Criticized”, “Credit Risk Assets”, “Concerned Loans” or words of similar import. The financial position of the Bank under or with respect to each such instrument has been reflected in the books and records of the Bank in accordance with GAAP consistently applied, and no open exposure of the Bank with respect to any such instrument (or with respect to multiple instruments with respect to any single counterparty) exceeds $50,000.

3.23 Loans.

(a) Except as set forth in Section 3.23(a) of the Seller Disclosure Schedule, the Bank as a lender is not a party to any written or oral (i) non-U.S. dollar denominated Loans, with or to any obligor, (ii) Loan with any director or executive officer of the Bank, or any person, corporation or enterprise controlling, controlled by or under common control with the Bank, other than residential mortgage loans and consumer credit in accordance with applicable bank regulatory Laws and all applicable directives, policies or guidelines of any Governmental Entity which has bank regulatory jurisdiction over the Bank, or (iii) Loan which was, as of May 16, 2002 (A) more than ninety (90) days past due with respect to any scheduled payment of principal or interest, (B) classified as “Other Loans Specially Mentioned”, “Special Mention”, “Substandard”, “Doubtful”, “Loss”, “Classified”, “Criticized”, “Credit Risk Assets”, “Concerned Loans” or words of similar import by any federal or state regulator or by the Bank’s internal credit review system, (C) on non-accrual status as a result of the Bank’s loan review procedures, or (D) which is a “negotiated loan” as that term is defined in Financial Accounting Standards No. 15.

(b) Except for the Loans acquired pursuant to Section 6.17, each Loan or Loan Commitment was made or acquired by the Bank in the ordinary course of business consistent with past practice at the time such Loan or Loan Commitment was made or acquired, as the case may be. Section 3.23(b) of the Seller Disclosure Schedule contains the following true, complete and correct information (as of a date no earlier than March 31, 2002) with respect to each Loan or Loan Commitment: (i) the unpaid principal balance of each such Loan as

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well as the aggregate amount of each Loan Commitment, (ii) the payment status and maturity date of each such Loan, (iii) an indication whether such Loan is secured or unsecured and if secured, the priority of such security, (iv) the Bank’s percentage of ownership of any such Loan or Loan Commitment (including such percentage of ownership of any participation arrangement relating to any Loan or Loan Commitment), and (v) the rate associated with each Loan and Loan Commitment. The credit files contain a true, complete and correct description of the collateral (including the Lien position of such collateral) securing each Loan or Loan Commitment.

(c) With respect to each Loan or Loan Commitment:

(i) Each Loan Document contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the practical realization (including realization by judicial foreclosure) of the benefits intended to be provided thereby, including by the security interest or Lien, if any, created and granted (or purported to be created or granted) by such Loan Document, subject to general principles of equity whether applied in a court of law or a court of equity and to bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally;

(ii) Each Loan, Loan Commitment and related Loan Document was issued, made and maintained in accordance with applicable Law and all applicable directives, policies or guidelines of any Governmental Entity which has bank regulatory jurisdiction over the Bank, and constitutes a valid, legal and binding obligation of the obligor thereunder, enforceable in accordance with its terms; there is no valid claim against the Bank with respect to, or valid defense to the enforcement by the Bank of, such Loan or Loan Commitment, subject to general principles of equity whether applied in a court of law or a court of equity and to bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally;

(iii) All Liens in any collateral described in each Loan Commitment and Loan Document as security for each Loan and Loan Commitment constitute valid and perfected Liens in such collateral (assuming the relevant person obligated on or in respect to such Loan or Loan Commitment, including any guarantor, hypothecator or other provider of security) has rights in the collateral as to permit attachment), subject to (x) general principles of equity whether applied in a court of law or a court of equity and to bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally and (y) federal and state laws relating to fraudulent conveyances and preferences;

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(iv) None of the rights or remedies under the Loan Documents in favor of the Bank have been amended, modified, waived, supplemented, subordinated or otherwise altered by the Bank other than in good faith and in the ordinary course of business;

(v) All writings and other documents relating to any such amendment, modification, waiver, supplement, subordination or other alteration of any Loan or Loan Commitment are included among the Loan Documents; and

(vi) Section 3.23(c)(vi) of the Seller Disclosure Schedule identifies all separate accounts, including, but not limited to, all lockboxes, escrow accounts (other than for loans serviced by others), cash collateral accounts, investment accounts and security deposits held or maintained by or on behalf of the Bank or any debtor in connection with any Loan or Loan Commitment.

(d) Except as set forth in Section 3.23(d) of the Seller Disclosure Schedule, each file of Loan Documents pertaining to each Loan and Loan Commitment includes all documents relating to each such Loan or Loan Commitment that are necessary to enforce such Loan or Loan Commitment and the collateral security therefor, if any, and any commitment fees with respect thereto, if any.

(e) Section 3.23(e) of the Seller Disclosure Schedule sets forth, as of April 30, 2002, the aggregate principal balance of Loans that are (i) 1 to 29 days past due, (ii) 30 to 59 days past due, (iii) 60 to 89 days past due and (iv) more than 89 days past due.

3.24 Intellectual Property. Except to the extent it uses marks or names involving the name of “Washington Mutual” or logos thereof, the Bank owns or possesses valid and binding licenses and other rights to use without payment all material patents, copyrights, trade secrets, trade names, servicemarks and trademarks (the “Intellectual Property”) used in its business; and neither Seller nor any of its Affiliates (including the Bank) has received any notice of conflict with respect thereto that asserts the right of others. The Bank has performed in all material respects all the obligations required to be performed and is not in default in any material respect under any contract, agreement, arrangement or commitment relating to the Intellectual Property.

3.25 No other Representations. Except for the representations and warranties contained in this Article III, neither Parent, Seller nor any other Person or entity makes any representation or warranty, express or implied, on behalf of Parent, Seller or any of their Affiliates.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES

OF BUYER

Buyer hereby represents and warrants to Parent and Seller as follows:

4.1 Organization.

(a) Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of New Mexico.

(b) Merger Sub is a bank duly organized, validly existing and in good standing under the Laws of the State of New Mexico and is a member of the Federal Reserve System.

4.2 Authority; No Violation.

(a) (i) Buyer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, it being understood that “transactions contemplated hereby” as used in this Article IV (other than in Section 4.2(a)(ii) or Section 4.2(b)) include the filing of any registration statements or prospecti and the issuance of any securities in connection with financing required to be made in connection with consummation of the Merger.

(ii) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Buyer and no other corporate proceedings on the part of Buyer are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Buyer and (assuming due authorization, execution and delivery by Parent, Seller and the Bank) this Agreement constitutes a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally.

(b) Merger Sub has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Merger Sub and no other corporate proceedings on the part of Merger Sub are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly

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executed and delivered by Merger Sub and (assuming due authorization, execution and delivery by Parent, Seller and the Bank) this Agreement constitutes a valid and binding obligation of Merger Sub, enforceable against Merger Sub in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally.

(c) Neither the execution and delivery of this Agreement by Buyer on Merger Sub, nor the consummation by Buyer or Merger Sub of the transactions contemplated hereby, nor compliance by Buyer or Merger Sub with any of the terms or provisions hereof, will (i) violate any provision of the Articles of Incorporation or bylaws of Buyer, or the articles of incorporation or bylaws or similar governing documents of any of its Subsidiaries (including Merger Sub) or (ii) assuming that the consents and approvals referred to in Section 4.3 are duly obtained, (A) violate any Law or Judgment applicable to Buyer or any of its Subsidiaries (including Merger Sub) or any of their respective properties or assets, or (B) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Encumbrance upon any of the respective properties or assets of Buyer or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Buyer or any of its Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except, in the case of clause (ii)(B), for such violations, conflicts, defaults, terminations, accelerations and Encumbrances which would not have, individually or in the aggregate, a Material Adverse Effect on Buyer.

4.3 Consents and Approvals. Except for (a) the filing of applications and notices, as applicable, with the Federal Reserve Board under the BHC Act and approval of such applications and notices, (b) the filing of applications with each of the Director of the Financial Institutions Division of the State of New Mexico, the Banking Board of the State of Colorado and the Banking Commissioner of the State of Utah and approval of such applications, (c) the filing with the SEC of the Registration Statement and the declaration of effectiveness thereof, (d) filings under state securities and blue sky laws, (e) approval of the listing of the Buyer Common Stock on The Nasdaq Stock Market, (f) NASD approval of underwriting arrangements, (g) the filing of Articles of Merger with the Secretary of State of the State of Colorado pursuant to the CBCA, (h) the filing of this Agreement together with copies of the resolutions of Seller and Buyer approving this Agreement and a certificate of the appropriate officers of each of Merger Sub and the Bank that no shareholders of each such party voted against approval of this Agreement with the Director of Financial Institutions Division pursuant to the NMBA and the Public Regulation Commission of the State of New Mexico and (i) such filings, authorizations

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or approvals as may be set forth in Section 4.3 of the Buyer Disclosure Schedule, no consents or approvals of or filings or registrations with any Governmental Entity or with any third party are necessary in connection with (i) the execution and delivery by Buyer and Merger Sub of this Agreement and (ii) the consummation by Buyer and Merger Sub of the Merger and the other transactions contemplated hereby, other than consents, approvals, filings or registrations which have been obtained or made or which, if not obtained or made, would not have, individually or in the aggregate, a Material Adverse Effect on Buyer.

4.4 Broker’s Fees. Neither Buyer, Merger Sub nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker’s fees, commissions or finder’s fees in connection with any of the transactions contemplated by this Agreement, except for underwriting and similar fees in connection with financings and except that Buyer has engaged, and will pay a fee to, Keefe, Bruyette & Woods, Inc. (“KBW”) in accordance with the terms of the agreement dated May 26, 2002 between Buyer and KBW.

4.5 Reports. Buyer and each of its Subsidiaries have timely filed all material reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file since July 31, 1997 with any Governmental Entities and have paid all fees and assessments due and payable in connection therewith. Except for normal examinations conducted by a Governmental Entity in the regular course of business of Buyer and its Subsidiaries, no Governmental Entity has initiated any proceeding or, to the knowledge of Buyer’s, investigation into the business or operations of Buyer or any of its Subsidiaries since July 31, 1997. There is no material unresolved violation, criticism, or exceptions by any Governmental Entity with respect to any report or statement relating to any examinations of Buyer or any of its Subsidiaries.

4.6 Legal Proceedings.

(a) Neither Buyer nor any of its Subsidiaries is a party to any, and there are no pending or, to the best of Buyer’s knowledge, threatened legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Buyer or any of its Subsidiaries or challenging the validity or propriety of the transactions contemplated by this Agreement, other than any proceedings, claims, actions or investigations which, individually or in the aggregate, have not had or would not reasonably be expected to have a Material Adverse Effect on Buyer.

(b) There is no injunction, order, judgment, decree, or regulatory restriction imposed upon Buyer, any of its Subsidiaries or the assets of Buyer or any of its Subsidiaries which has had, or would reasonably be expected to have, a Material Adverse Effect on Buyer.

4.7 Agreements with Regulatory Agencies; Approvals; Financing. Except as set forth in Section 4.7 of the Buyer Disclosure Schedule, neither Buyer nor any of its Subsidiaries

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is subject to any cease-and-desist or other order issued by, or is a party to any written Regulatory Agreement that restricts the conduct of its business or relates to its capital adequacy, its credit policies, its management or its business, nor has Buyer or any of its Subsidiaries been advised by any Government Entity that it is considering issuing or requesting any Regulatory Agreement. As of the date of this Agreement, Buyer is not aware of any fact or circumstance which is reasonably likely to prevent it or any of its Subsidiaries from obtaining the governmental approvals and consents or the financings required in connection with the consummation of the transactions contemplated hereby. Buyer has received a letter from KBW stating that KBW is highly confident that Buyer will be able to obtain the financing required to consummate the transactions contemplated hereby, and as of the date of this Agreement, Buyer is not aware of any incorrect or incomplete facts on which KBW relied in issuing such letter.

4.8 No Other Representations. Except for the representations and warranties contained in this Article IV, neither Buyer, Merger Sub nor any other Person or entity makes any representation or warranty, express or implied, on behalf of Buyer or any of its Affiliates.

ARTICLE V

ADDITIONAL COVENANTS

5.1 Covenants relating to the Bank.

(a) During the period from the date of this Agreement and continuing until the Effective Time, except as expressly contemplated or permitted by this Agreement or with the prior written consent of Buyer, each of Parent and Seller shall cause the Bank to carry on its business in the ordinary course consistent with past practice, and each of Parent and Seller shall use commercially reasonable efforts to make available to Buyer the services of the officers and employees of the Bank, to preserve (and to cause the Bank to preserve) the good will and relationships with customers, suppliers and others having business dealings with the Bank, to maintain (and to cause the Bank to maintain) the Bank’s assets that constitute tangible personal property in normal operating condition and repair in accordance with past practice (ordinary wear and tear excepted), to maintain (and to cause the Bank to maintain) the books and records of the Bank in the regular manner, to cause the Bank to perform in all material respects all of its obligations under the Bank Contracts, and to cause the Bank to comply in all material respects with all applicable Laws and all applicable directives, policies or guidelines of any Governmental Entity which has bank regulatory jurisdiction over the Bank.

(b) Without limiting the generality of clause (a), and except as set forth in Section 5.1 of the Seller Disclosure Schedule or as otherwise contemplated by this Agreement or consented to in writing by Buyer, each of Parent and Seller shall not and shall not permit any of its Affiliates to (in each case, only with respect to the Bank or its assets, liabilities, operations or business) to, and shall not permit the Bank to:

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(i) solely in the case of the Bank, declare or pay any dividends on, or make other distributions in respect of, any shares of its capital stock, other than cash dividends in accordance with Section 6.13 hereof;

(ii) (A) repurchase, redeem or otherwise acquire any shares of the capital stock of the Bank, or any securities convertible into or exercisable for any shares of the capital stock of the Bank, (B) split, combine or reclassify any shares of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (C) create, allot, issue, deliver or sell, or authorize or propose the creation, allotment, issuance, delivery or sale of, any shares of its capital stock or any securities convertible into or exercisable for, or any rights, warrants or options to acquire or right to subscribe in respect of any such shares, or enter into any agreement with respect to any of the foregoing;

(iii) file any application to relocate or terminate the operations of any branch or banking office of it;

(iv) make any equity investment or commitment to make such an investment in real estate or in any real estate development project, other than in connection with foreclosures, settlements in lieu of foreclosure or troubled loan or debt restructurings in the ordinary course of business consistent with prudent banking practices;

(v) except as permitted under Section 6.13, restructure or materially change its investment securities portfolio or its gap position, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported;

(vi) except as may result from the loan purchase required by Section 6.17, make or purchase, or commit to make or purchase, any loan or loans, or extend any line of credit, to any borrower and its affiliates in an aggregate principal amount greater than $500,000 or in an amount which, when aggregated with any existing indebtedness to the Bank and lines of credit from the Bank of such borrower and its affiliates, would exceed $500,000; provided, however, that if at any time from the date of this Agreement to the Closing Date, the Bank desires to make or purchase, or commit to make or purchase, any such loan, or extend any such line of credit, the Bank shall furnish to Buyer, promptly upon its substantial completion, the information package prepared by the Bank’s loan committee with respect to such proposed loan requests and any other information that Buyer may reasonably request (collectively, the “Loan Request Documents”), and unless, within 72 hours of receiving the Loan Request Documents, Buyer notifies the Bank (whether telephonically or in writing) that Buyer objects to the making of such loan or the extension of such credit, Buyer shall be deemed to have consented to such loan or extension of credit;

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(vii) amend its articles of incorporation, by-laws or other similar governing documents or adopt resolutions inconsistent therewith;

(viii) other than pursuant to those agreements set forth on Section 5.1(b)(viii) of the Seller Disclosure Schedule and entered into prior to the date of this Agreement, make any capital expenditures in excess of (A) $25,000 per project or related series of projects or (B) $250,000 in the aggregate, other than expenditures necessary to maintain existing assets in good repair;

(ix) enter into any new line of business;

(x) acquire or agree to acquire, by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof ;

(xi) change any of the accounting methods used by it unless required by GAAP,

(xii) make, revoke, change, or amend any election relating to Taxes, enter into any closing agreement relating to Taxes, settle or compromise any claim or assessment relating to Taxes, in each case other than income Taxes, or amend any Tax Returns (other than income Tax Returns);

(xiii) Except as disclosed in Section 5.1(b)(xiii) of the Seller Disclosure Schedule, (A) adopt, amend or terminate (other than terminations required by the express terms thereof) any employee benefit plan or any agreement, arrangement, plan or policy between the Bank and one or more of its current or former directors, officers or employees, or (B) other than normal wage or salary increases in the ordinary course of business consistent with past practice, increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit except as required by any plan or agreement as in effect as of the date hereof and set forth in Section 3.11(a) of the Seller Disclosure Schedule (including the granting of stock options, stock appreciation rights, restricted stock, restricted stock units or performance units or shares);

(xiv) other than as required by those agreements set forth in Section 5.1(b)(xiv) of the Seller Disclosure Schedule, and, except as permitted under Section 6.13 and Section 6.16, sell, lease, encumber, assign or otherwise dispose of, or agree to sell, lease, encumber, assign or otherwise dispose of, any of its assets, properties or other rights or agreements;

(xv) incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity,

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except for advances from a Federal Home Loan Bank made in the ordinary course of business consistent with past practices;

(xvi) create, renew, amend or terminate or give notice of a proposed renewal, amendment or termination of, any Bank Contract, agreement or lease for goods, services or office space to which the Bank is a party or by which the Bank or its properties is bound, other than the renewal in the ordinary course of business of any lease the term of which expires prior to the Closing Date;

(xvii) take any action intended or reasonably likely to result in (A) a Material Adverse Effect on the Bank or Buyer, (B) any of the representations and warranties of Seller set forth in this Agreement being or becoming untrue in any material respect at any time at or prior to the Closing Date, (C) any of the conditions to the Merger set forth in Article VII not being satisfied in a timely manner or (D) a material violation of any provision of this Agreement, except, in each case, as required by applicable Law;

(xviii) settle any claim, action or proceeding against the Bank in an amount in any one case in excess of $10,000 or $100,000 in the aggregate;

(xix) enter into any contract, arrangement, commitment or understanding (whether written or oral) with any of Seller or its Affiliates (other than the Bank), including any intercompany indebtedness, guaranty, receivable, payable or other account maintained between the Bank, on the one hand, and Seller and any of its other Affiliates, on the other hand; and

(xx) agree to do any of the foregoing.

5.2 Loan, Accrual and Reserve Policies. Notwithstanding that Seller believes that the Bank and its Subsidiaries have established all reserves and taken all provisions for possible loan losses required by GAAP and applicable Laws, Parent and Seller recognize that Buyer may have adopted different loan, accrual and reserve policies (including loan classifications and levels of reserves for possible loan losses). From and after the date of this Agreement to the Closing Parent and Seller shall cause the Bank to continue to make periodic provisions (but in no event less than monthly) for reserves for possible loan losses in accordance with the Bank’s reserve methodology (but in no event shall such provisions be less than the net charge-offs during such period). In addition, at or prior to Closing, Parent and Seller shall cause the Bank to establish additional reserves for possible loan losses in an amount equal to $1,000,000.

5.3 Buyer Forbearance. Except as expressly contemplated or permitted by this Agreement, or as required by applicable Law or any applicable directive, policy or guideline of any Governmental Entity which has bank regulatory jurisdiction over Buyer or Merger Sub, during the period from the date of this Agreement to the Closing Date, Buyer shall not, and shall not permit any of its Subsidiaries to: (i) take any action that is

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intended or may reasonably be expected to result in any of its representations or warranties herein being or becoming untrue in any material respect at any time prior to the Closing, in any of the conditions to the Merger set forth in Article VII not being satisfied or in a material violation of any provision of this Agreement, (ii) intentionally take any action or fail to take any action which would reasonably be expected to materially and adversely impair or delay consummation of the transactions contemplated hereby beyond the time period contemplated by this Agreement, (iii) acquire, by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or corporation, partnership, association or other business organization or division thereof except as would not be material to Buyer and other than in connection with foreclosures, settlements in lieu of foreclosure or troubled loan or debt restructurings in the ordinary course of business consistent with past practices, or (iv) agree to, or make any commitment to, take any of the actions prohibited by this Section 5.3.

ARTICLE VI

ADDITIONAL AGREEMENTS

6.1 Regulatory Matters.

(a) The parties hereto shall cooperate with each other and use their commercially reasonable efforts to promptly prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, and to obtain as promptly as practicable all permits, consents, approvals and authorizations of all [third parties and] Governmental Entities which are necessary or advisable to consummate the Merger and the other transactions contemplated by this Agreement. Seller and Buyer shall have the right to review in advance, and to the extent practicable each will consult the other on, in each case subject to applicable Laws relating to the exchange of information, all the information relating to Parent, Seller or the Bank, on the one hand, or Buyer or Merger Sub, on the other hand, and any of their respective Affiliates, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto shall act reasonably and as promptly as practicable. The parties hereto agree that they will consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and Governmental Entities necessary or advisable to consummate the transactions contemplated by this Agreement and each party will keep the other apprised of the status of matters relating to completion of the transactions contemplated herein.

(b) Buyer and Seller shall, upon request, promptly furnish each other with all information concerning themselves, their Affiliates (including with respect to Parent, Seller and the Bank), directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with any

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statement, filing, notice or application made by or on behalf of Buyer, Seller or any of their respective Affiliates to any Governmental Entity in connection with the Merger and the other transactions contemplated by this Agreement.

(c) Buyer and Seller shall promptly furnish each other with copies of written communications received by Buyer or Seller, as the case may be, or any of their respective Subsidiaries or Affiliates from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated hereby.

6.2 Access to Information.

(a) Upon reasonable notice and subject to applicable Laws relating to the exchange of information, each of Parent and Seller shall, and shall cause each of its Affiliates (including the Bank) to, afford to the officers, employees, accountants, counsel and other Representatives of Buyer, access, during normal business hours during the period prior to the Closing, to all of Parent and its Affiliates’ (including the Bank) properties, books, contracts, commitments, records, Tax Records, officers, employees, accountants, counsel and other Representatives, in each case to the extent related to the Bank or its business and in a manner not unreasonably disruptive to the business of the Bank, and, during such period, each of Parent and Seller shall, and shall cause each of its Affiliates (including the Bank) to, make available to Buyer all information concerning the Bank’s business, properties and personnel as Buyer may reasonably request. Neither Parent, Seller nor any of their Affiliates shall be required to provide access to or to disclose information where such access or disclosure would violate the rights of its customers, jeopardize any attorney-client or work product privilege or contravene any Law, rule, regulation, Judgment or fiduciary duty existing prior to the date of this Agreement or binding agreement listed in Section 6.2 of the Seller Disclosure Schedule. The parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply.

(b) All information furnished to Buyer pursuant to Section 6.2(a) shall be subject to, and Buyer shall hold all such information in confidence in accordance with, the provisions of the Mutual Nondisclosure Agreement, dated July 10, 2001 (the “Confidentiality Agreement”), between Affiliates of Buyer and Seller. Notwithstanding the foregoing or any provision of the Confidentiality Agreement, each of Parent and Seller acknowledges and agrees that (and each of Parent and Seller shall cause each of its Affiliates to acknowledge and agree that) from and after the Closing, all information relating to the Bank or its business shall be deemed to be confidential information of Buyer (except to the extent publicly available or available from a third party not subject to a confidentiality obligation with respect to such information) and shall not be subject to the terms of the Confidentiality Agreement.

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(c) No investigation by any of the parties or their respective Representatives shall affect the representations, warranties, covenants or agreements of the other set forth herein.

6.3 Financing; Cooperation; Legal Conditions to the Merger.

(a) Buyer shall promptly prepare and file with the SEC the Registration Statement. Buyer shall use commercially reasonable efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable after such filing.

(b) Each of Parent and Seller shall, and shall cause its Affiliates (including the Bank) to, cooperate with Buyer in respect of any proposed offering by private placement, registered offering or otherwise, of securities (whether debt or equity) (the “Securities”), the proceeds of which are to be used to finance the transactions contemplated hereby and the payment of all related fees, costs and expenses. Without limiting the generality of the foregoing, each of Parent and Seller will cause (i) management of the Bank to cooperate in the preparation of offering documents with respect to the sale of any Securities and to provide Buyer and its Representatives with all information (including additional financial information) concerning Parent, Seller or the Bank and its activities as may, in Buyer’s judgment, be reasonably necessary or advisable in connection with the offering and sale of the Securities by Buyer or any subsidiary of Buyer and (ii) Deloitte & Touche LLP (and, if necessary, any other independent certified public accountants of Parent, Seller or the Bank to provide any (A) consents required in connection with such offering documents and (B) “cold comfort” letters and updates thereof in form and substance reasonably satisfactory to the managing underwriter or underwriters of such proposed offering, addressed to each of the underwriters, such letters to be in customary form and covering such matters of the type customarily covered in “cold comfort” letters in connection with underwritten offering of securities similar to the Securities.

(c) Each of Buyer, on the one hand, and Parent and Seller, on the other hand, shall, and shall cause its Affiliates to, use their commercially reasonable efforts (i) to take, or cause to be taken, all actions necessary, proper or advisable to comply promptly with all legal requirements which may be imposed on such party or its Affiliates with respect to the Merger and, subject to the conditions set forth in Article VII hereof, to consummate the transactions contemplated by this Agreement and (ii) to obtain (and to cooperate with the other party to obtain) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity and any other third party which is required to be obtained by Parent, Seller or Buyer or any of their respective Affiliates in connection with the Merger and the other transactions contemplated by this Agreement, and to comply with the terms and conditions of such consent, authorization, order or approval; provided, however, that neither Buyer, on the one hand, nor Parent or Seller, on the other hand, shall be obligated to pay any consideration therefore to the third

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party from whom any such consent, authorization or approval is requested (other than filing fees and other similar fees payable to a Governmental Entity).

6.4 Third Party Proposals. None of Parent, Seller, the Bank, any of their respective Affiliates or any of their respective Representatives shall, directly or indirectly solicit, encourage or facilitate inquiries or proposals, or enter into any definitive agreement, with respect to, or initiate or participate in any negotiations or discussions with any Person concerning, any acquisition or purchase of all or any material portion of the assets of, or of any equity interest in, the Bank or any merger or business combination with the Bank other than as contemplated by this Agreement (each, an “Acquisition Proposal”) or furnish any information regarding the Bank to any such Person. Parent, Seller, the Bank, each of their respective Affiliates and each of their respective Representatives shall (a) notify Buyer immediately if any Acquisition Proposal (including the terms thereof) is received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated with, any of Parent, Seller, the Bank, or any of their respective Affiliates or Representatives, and (b) immediately cease or cause to be terminated any existing activities, including discussions or negotiations with any parties, conducted prior to the date hereof with respect to any Acquisition Proposal and to seek to have all materials distributed to such Persons by Parent, Seller, the Bank, or any of their respective Affiliates and Representatives returned to Seller promptly. None of Parent, Seller, the Bank, or any of their respective Affiliates and Representatives shall amend, modify, waive or terminate, or otherwise release any Person from, any standstill, confidentiality or similar agreement or arrangement currently in effect with respect to the Bank. Parent and Seller shall cause the Bank, each of its and the Bank’s respective Affiliates and each of their respective Representatives to comply with the provisions of this Section 6.4. It is understood and acknowledged that this Section 6.4 shall have no application to acquisition proposal with respect to Parent or any Affiliate other than the Bank or Seller.

6.5 Further Assurances. Each party to this Agreement shall execute such documents and other papers and perform such further acts as may be reasonably required to carry out the provisions hereof and the transactions contemplated hereby. Following the Closing Date upon the request of Buyer, Parent and Seller shall promptly execute and deliver such further instruments of assignment, transfer, conveyance, endorsement, direction or authorization and other documents as Buyer may reasonably request to effectuate the purposes of this Agreement.

6.6 Confidentiality. From and after the Closing Date, each of Parent and Seller shall, and shall cause its Affiliates and their respective Representatives to keep confidential all information relating to the Bank or its business (whether in the possession of Seller, its Affiliate or such Representative at the time of the Closing or subsequently obtained by Parent, Seller, any Affiliate of Parent or any such Representative pursuant to this Agreement or any agreement entered into in connection with the transactions contemplated hereby), and shall not directly or indirectly use such information for any competitive purpose. The obligation to keep such information confidential shall continue indefinitely from the Closing Date and shall not apply to any information which (a) is in the public domain, (b) is published or otherwise becomes part of the public domain

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through no fault of Parent, Seller, any of their Affiliates or any of their Representatives or (c) becomes available to Parent, Seller, any of their Affiliates or any of their Representatives on a non-confidential basis from a source that did not acquire such information (directly or indirectly) from Seller or Buyer or any of their respective Affiliates or Representatives on a confidential basis. Notwithstanding the foregoing, Parent, Seller, their Affiliates and their respective Representatives may make disclosures required by Law; provided, that Parent and Seller, to the extent practicable, shall provide Buyer with prompt notice thereof so that Buyer may seek a protective order or other appropriate remedy or waive compliance with the provisions of this Section 6.6. In the event that such protective order or other remedy is not obtained or Buyer waives compliance with the provisions of this Section 6.6, Parent and Seller shall or shall cause the Person required to disclose such information to furnish only that portion of the information that such Person is advised in the opinion of Seller’s counsel is legally required, and, to the extent practicable, Parent and Seller shall exercise their commercially reasonable efforts to obtain reliable assurance that confidential treatment is accorded the information so furnished.

6.7 Certain Tax Matters.

(a) Seller Tax Indemnification. Each of Parent and Seller, jointly and severally, accepts full and exclusive liability for and agrees to indemnify fully and hold harmless each Buyer Indemnified Party from and against:

(i) (A) any Taxes with respect to the Bank or the assets of the Bank acquired by Merger Sub in the Merger (1) for any taxable year or period that ends on or before the Closing Date and (2) for any Straddle Period which are allocable to the portion of such Straddle Period deemed to end on the Closing Date (as determined pursuant to Section 6.7(e) hereof), (B) any Taxes with respect to any Affiliated Group of which the Bank (or any predecessor of the Bank) is or was a Member prior to or on the Closing Date which is attributable to, or resulting from, the application of Treasury Regulation 1.1502-6 or any similar provision of state, local or foreign Tax Law, and (C) any additional income Taxes with respect to Bank or assets of Bank acquired by Merger Sub in the Merger for any taxable year or period that ends after the Closing Date resulting from the Parent, Seller, Bank or any of their respective Affiliates making, revoking, changing or amending any election relating to Taxes on or after the date of this Agreement and on or prior to the Closing Date without the prior written consent of Buyer. Seller shall be entitled to a refund of Taxes referred to in this Section 6.7(a)(i). The foregoing obligations shall not apply to any Taxes resulting from any transaction (other than the Merger) undertaken on the Closing Date after the Closing.

(b) Buyer Tax Indemnification. Buyer accepts full and exclusive liability for and agrees to indemnify fully and hold harmless each Seller Indemnified Party from and against any Taxes with respect to the Bank or the assets of the Bank acquired

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by Merger Sub in the Merger that are not the responsibility of Seller pursuant to Section 6.7(a). Buyer shall be entitled to a refund of such Taxes.

(c) Procedures Relating to Tax Indemnification.

(i) Notice of Tax Claims. If a claim for Taxes, including, without limitation, notice of a pending or threatened audit, shall be made by any taxing authority to the party seeking indemnification (the “Tax Indemnified Party”), which, if successful, could result in an indemnity payment pursuant to this Section 6.7 (a “Tax Claim”), the Tax Indemnified Party shall promptly notify the other party (the “Tax Indemnifying Party”) in writing of the Tax Claim. Such notice will state the nature and basis of the Tax Claim and the amount thereof, to the extent known by the Tax Indemnified Party. If written notice of a Tax Claim is not promptly given to the Tax Indemnifying Party in detail sufficient to apprise the Tax Indemnifying Party of the nature of the Tax Claim, the Tax Indemnifying Party shall not be liable to the Tax Indemnified Party to the extent that the Tax Indemnifying Party’s position is materially prejudiced as a result thereof.

(ii) Defense of Tax Claims by Tax Indemnifying Party.

(A) Parent and Seller shall have the sole right to represent the interests of any successor in interest of the Bank (including Merger Sub) with respect to any Tax Claim relating to income Taxes of the Bank for any taxable period ending on or before the Closing Date and to employ nationally recognized counsel of its choice at its expense in connection with such audit or proceeding. Seller shall be entitled to consent to the entry of any judgment or settlement with respect to any Tax Claim referred to in the preceding sentence provided that Seller’s contemplated judgment or settlement is only for monetary damages and would not have a material impact on the Taxes of Merger Sub, Buyer or their Affiliates for periods or years following the Closing Date. Otherwise, Seller shall be required to obtain the prior written consent of Buyer before entering into any judgment or settlement with respect to such Tax Claim (not to be unreasonably withheld or delayed).

(B) Buyer shall have the sole right to represent the interests of any successor in interest of the Bank (including Merger Sub) with respect to any Tax Claim relating to any Taxes (other than for any Tax Claim for Taxes referred to in Sections 6.7(c)(ii)(A), and to employ counsel of its choice at its expense in connection with such Tax Claim. Buyer shall be entitled to consent to the entry of any judgment or settlement with respect to any Tax Claim referred to in the preceding sentence. Notwithstanding the foregoing, Buyer shall keep Seller apprised of all proceedings and correspondence and discussions with taxing authorities with respect to Taxes for which Seller or Parent may be held liable under the terms of this Agreement and shall not consent to the entry of any judgment or settlement with respect to such Taxes without the prior written

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consent of the Seller (not to be unreasonably withheld or delayed). In the event that Buyer does not exercise its right described in this Section 6.7(c)(ii)(B) to conduct the defense of any claim for Taxes for which Seller or Parent may be held liable under this Agreement, Seller or Parent may conduct such defense and consent to the entry of any judgment or settlement with respect to such claim in a manner that it reasonably may deem appropriate.

(iii) Tax Dispute Resolution Mechanism. Any dispute arising in connection with the application of this Section 6.7 shall be submitted to a jointly selected “Big Four Accounting Firm” or nationally recognized law firm (the “Settlement Party”) for resolution, which resolution shall be final, conclusive and binding on the parties. Notwithstanding anything in this Agreement to the contrary, the fees and expenses of the Settlement Party in resolving a dispute shall be paid by Buyer and Seller in proportion to each party’s respective liability for Taxes which are the subject of the dispute as determined by the Settlement Party. Any such settlement shall be deemed a final arbitration award that is enforceable pursuant to all terms of the Federal Arbitration Act, 9 U.S.C. §§ 1 et. seq. For purposes of this Section 6.7(c)(iii), a “Big Four Accounting Firm” shall mean PricewaterhouseCoopers LLP, Ernst & Young LLP, KPMG LLP, and Deloitte & Touche LLP or their successors.

(iv) Survival of Tax Provisions. Any Tax Claim to be made pursuant to this Section 6.7 must be made within a reasonable period of time before the expiration (with valid extensions) of the applicable statutes of limitations relating to the Taxes at issue provided, that if claimant complies with Section 6.7(c)(i) and such compliance results in notification being delivered to the Tax Indemnifying Party after the expiration of the applicable statute of limitation, such claim shall survive.

(v) Purchase Price Adjustment. All indemnification payments under this Section 6.7 and Article IX shall be deemed adjustments to the Purchase Price.

(d) Return Filings and Tax Payment Obligations.

(i) Seller. Parent or Seller shall duly, properly and timely file or cause to be duly, properly and timely filed the federal, Colorado, and Utah income Tax Returns and all other Combined and Consolidated Tax Returns that include the Bank for the period ending on or before the Closing Date and shall pay or cause to be paid all Taxes due with respect to such Tax Returns. The Bank shall pay to Seller on a quarterly basis (but in no event later than the due date of taxes described in this paragraph) estimated federal and state tax payments (“Estimated Payments”) in an amount equal to 39% of the Bank’s federal taxable income for the period commencing on January 1, 2002, and ending on the Closing Date. For purposes of such calculation, the Bank’s federal taxable income shall be prepared on a separate basis in a manner consistent with prior

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practice except such taxable income shall exclude any income or gain which is recognized as a result of the Merger. Within 120 business days after the Closing Date, Seller shall prepare and provide Buyer with a separate taxable income computation for the Bank (together with appropriate supporting documentation) for the period January 1, 2002 until the Closing Date (the “Preliminary Stub Period Taxable Income” if positive and the “Preliminary Stub Period Taxable Loss” if negative). Such Preliminary Stub Period Taxable Income or Loss, as the case may be, shall be prepared in the manner described in this paragraph and assuming the taxable year ended on the Closing Date. Buyer shall have 20 business days after receiving such calculation from Seller to inform Seller whether Buyer agrees with such calculation (“Stub Notification Period”). If Buyer informs Seller within the Stub Notification Period that Buyer agrees with such calculation, such calculation shall become the “Final Stub Period Taxable Income” if positive or “Final Stub Period Taxable Loss” if negative. If Buyer informs Seller within the Stub Notification Period Buyer does not agree with such calculation and the parties can not otherwise come to an agreement, the parties shall resolve such dispute by the mechanism provided in Section 6.7(c)(iii) which shall determine the “Final Stub Period Taxable Income” or “Final Stub Period Taxable Loss” as the case may be. Once determined by either of the two preceding sentences, the Final Stub Period Taxable Income or Final Stub Period Taxable Loss, as the case may be, shall be final and shall not be modified thereafter except with the consent of both parties. If the Estimated Payments exceed 39% of the Final Stub Period Taxable Income, Parent and Seller, jointly and severally, shall reimburse the Buyer for such excess within 5 business days of the determination of the Final Stub Period Taxable Income. If the Estimated Payments are less than 39% of the Final Stub Period Taxable Income, Buyer shall reimburse the Seller for such excess within 5 business days of the determination of the Final Stub Period Taxable Income. If there is a Final Stub Period Taxable Loss, Parent and Seller, jointly and severally, shall reimburse Buyer for all of the Estimated Payments plus 39% of the Final Stub Period Taxable Loss within 5 business days of the determination of the Final Stub Period Taxable Loss.

(ii) Buyer. Buyer shall file or cause to be filed when due (a) all Tax Returns required to be filed with respect to the assets of the Bank acquired by Merger Sub in the Merger for all taxable periods ending after the Closing Date (including Straddle Period Tax Returns) and (b) all Tax Returns of the Bank for periods ending on or before the Closing Date (other than those described in Section 6.7(d)(i) of this Agreement). Buyer shall pay (or cause to be paid) any Taxes due in respect of such Tax Returns. All Straddle Period Tax Returns and all Tax Returns relating to periods ending on or before the Closing Date that are prepared by Buyer pursuant to this section shall be prepared in a manner consistent with proper past practice. Such returns shall be submitted to the Seller no later than 30 business days prior to the due date and filing thereof and Seller shall have the right to review and comment thereon. Upon reasonable review and comment by the Seller, such Tax Returns, as modified by reasonable comments of the Seller, shall be filed with applicable taxing authorities.

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(iii) Cooperation. Parent, Seller, Buyer and Merger Sub shall reasonably cooperate, and shall cause their respective Affiliates and such parties’ respective directors, officers, employees, agents, auditors and representatives reasonably to cooperate, in preparing and filing all Tax Returns (including claims for refund), including maintaining and making available to each other all records necessary in connection with Taxes and in resolving all disputes and audits with respect to all taxable periods relating to Taxes.

(e) Allocation and Apportionment of Taxes. To the extent permitted or required by law or administrative practice, the taxable year of the Bank which includes the Closing Date shall be treated as closing on the Closing Date. For all purposes of this Agreement, where it is necessary to apportion between the Seller and the Buyer a Tax liability of the Bank for a Straddle Period (which is not treated under the immediately preceding sentence as closing on the Closing Date), such Tax liability shall be apportioned as follows:

(i) in the case of Taxes that are either (A) based upon or related to income or receipts or (B) imposed in connection with any sale or other transfer or assignment of property (real or personal, tangible or intangible), such Taxes shall be deemed equal to the amount that would be payable if the taxable year ended on the Closing Date;

(ii) in the case of Taxes not described in Section 6.7(e)(i) that are imposed on a periodic basis and measured by the amount, value or level of any item (such as personal property taxes and real estate taxes), such Taxes shall be deemed to be the amount of such Taxes for the entire period (or, in the case of such determined on an arrears basis, the amount of such Taxes for the immediately preceding period) multiplied by a fraction, the numerator of which is the number of calendar days in the taxable period ending on (and including) the Closing Date, and the denominator of which is the number of calendar days in the entire taxable period.

(f) Tax Sharing Agreements. Any and all existing agreements relating to the allocation and sharing of Taxes (the “Tax Sharing Agreements”) between the Bank and Parent, Seller and any member of the affiliated group, as defined in Section 1504(a) of the Code, of which Seller, Parent or any Affiliate of Seller or Parent is the common parent (“Seller’s Affiliated Group”) shall be terminated as of the Closing Date. None of the Bank, Buyer, Merger Sub, Seller, Parent and any Affiliate of Buyer, Merger Sub, Seller or Parent shall have any further rights or obligations under any such Tax Sharing Agreement.

(g) Transfer Taxes. Notwithstanding anything else contained in this Agreement, all excise, sales, use, transfer (including real property transfer), stamp, documentary, filing, recordation and other similar taxes, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or

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penalties resulting from the transactions contemplated by this Agreement (“Transfer Taxes”) shall be borne by Buyer. Notwithstanding section 6.7(d) of this Agreement, which shall not apply to Tax Returns relating to Transfer Taxes, any Tax Returns that must be filed in connection with Transfer Taxes shall be prepared and filed when due by the party primarily responsible under applicable local law for filing such Tax Returns, and such party will use reasonably commercial efforts to provide such Tax Returns to the other party at least 10 days prior to the due date for such Tax Returns. Buyer and Seller shall, and Buyer and Seller shall cause each of their respective Affiliates to, cooperate in the preparation, execution, and filing of all Tax Returns relating to Transfer Taxes which become payable in connection with the transactions contemplated by this Agreement.

(h) Allocation of Purchase Price. Within 120 days following the Closing Date, Buyer shall provide Seller with a statement containing an allocation of the Purchase Price plus the liabilities of the Bank assumed by Merger Sub in the Merger among the assets of the Bank acquired by Merger Sub in the Merger (the “Allocation”). The Allocation shall be made in accordance with Section 1060 of the Code and the regulations promulgated thereunder. The Allocation shall be subject to the reasonable approval of Seller and the parties shall negotiate in good faith to resolve any dispute regarding the Allocation. Each of Buyer, Merger Sub, Seller, and Parent shall (i) timely file all forms (including Internal Revenue Service Form 8594) and Tax Returns required to be filed in connection with the Allocation, (ii) be bound by the Allocation for purposes of determining Taxes, (iii) prepare and file, and cause its Affiliates to prepare and file, its Tax Returns on a consistent basis with the Allocation and (iv) take no position, and cause its Affiliates to take no position, inconsistent with such allocation on any applicable Tax Return, in any audit or proceeding before any taxing authority, in any report made for Tax, financial accounting or any other purposes, or otherwise. In the event that the Allocation is disputed by any taxing authority, the party receiving the notice of such dispute shall promptly notify the other party hereto concerning the existence and resolution of such dispute. Any indemnification payment treated as an adjustment to Purchase Price shall be reflected as an adjustment to the price allocated to a specific asset, if any, giving rise to the adjustment and if any such adjustment does not relate to a specific asset, such adjustment shall be allocated among the assets of the Bank acquired by Merger Sub in the Merger in accordance with the price allocation method provided in this Section 6.7(h).

(i) Tax Treatment. The parties intend for the Merger to be treated as a taxable sale of assets by Bank to Merger Sub followed by a liquidation of Bank into Seller.

(j) Coordination with Other Provisions. Except for the provisions in Section 9.4(d) of this Agreement, the provisions under this Section 6.7 (and not any other provision in this Agreement) shall govern all indemnity claims with respect to Taxes relating to the Bank or the assets of the Bank acquired by Merger Sub in the Merger.

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6.8 Books and Records.

(a) At or as soon as reasonably practicable following the Closing, each of Parent and Seller shall, and shall cause each of their Affiliates to, deliver to Buyer any and all books of account, records, files and invoices, including all equipment maintenance data, accounting records, sales and sales promotional data and materials, advertising materials, sales training materials, educational support program materials, customer lists, cost and pricing information, supplier lists, business plans, correspondence, litigation files and any other records and data, in each case principally relating to the Bank or its business, provided, however, that (i) Parent and Seller shall not be obligated to provide any information to the extent that it does not relate to the Bank or its business and (ii) Parent and Seller shall be entitled to retain copies of Tax Records of the Bank.

(b) For seven (7) years following the Closing Date, Buyer will retain, at Buyer’s sole expense, the books, records and other items transferred pursuant to Section 6.8(a). During such period, Buyer will afford to Seller, its counsel and accountants, during normal business hours, reasonable access to such books and records retained by Buyer and permit the copying thereof at Seller’s expense. Following the expiration of such period, Buyer may dispose of any such books and records, provided, that Buyer shall give Seller 60 days prior written notice of its intent to dispose of such books and records and offers to surrender such books and records to Seller.

(c) After the Closing Date, Buyer shall, at the request of Seller, (i) provide reasonable assistance in the collection of information or documents; (ii) make Buyer’s employees available when reasonably requested by Seller in connection with claims or actions brought by or against third parties based upon events or circumstances concerning the Bank or its business or assets where Buyer’s employees would have relevant knowledge or information; and (iii) otherwise reasonably cooperate with Seller in connection with the contest or defense of such claims or actions. Seller shall reimburse Buyer for all reasonable out-of-pocket costs and expenses incurred by Buyer in providing said assistance.

(d) For seven (7) years following the Closing Date, each of Parent and Seller will retain, at Seller’s sole expense, any records and documents relating to the Bank or its business that were retained by Parent or Seller under this Agreement. During such period, Parent and Seller will afford to Buyer, its counsel and accountants, during normal business hours, reasonable access to such records and documents relating to the Bank or its business retained by Parent or Seller and permit the copying thereof at Buyer’s expense. Following the expiration of such period, Parent and Seller may dispose of any such records and documents relating to the Bank or its business, provided, that Parent and Seller shall give Buyer 60 days prior written notice of its intent to dispose of such books and records and offers to surrender such books and records to Buyer.

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(e) After the Closing Date, each of Parent and Seller shall, at the request of Buyer, (i) provide reasonable assistance in the collection of information or documents; (ii) make Parent’s and Seller’s and their respective Affiliates’ employees available when reasonably requested by Buyer in connection with claims or actions brought by or against third parties based upon events or circumstances which either concern the Bank or its business or as to which Seller’s employees would have relevant knowledge or information; and (iii) otherwise reasonably cooperate with Buyer in connection with the contest or defense of such claims or actions. Except to the extent that any such claim is indemnifiable by Seller under Article IX, Buyer shall reimburse Seller for all reasonable out-of-pocket costs and expenses incurred by Seller in providing said assistance.

6.9 Subsequent Interim Financial Statements. As soon as reasonably available, but in no event more than 45 days after the end of each fiscal quarter, including the fiscal quarter ended March 31, 2002, Parent shall deliver to Buyer the Bank’s statements of financial condition and related statements of operations prepared in accordance with GAAP with respect to such most recently completed fiscal quarter.

6.10 Notification of Certain Matters. Each of Buyer, on the one hand, and Parent and Seller, on the other hand, shall give prompt written notice to the other of any fact, event or circumstance known to it that would cause or constitute a material breach of any of its representations, warranties, covenants or agreements contained in this Agreement. In addition, each of Parent and Seller shall give prompt written notice to Buyer of any fact, event or circumstance Known to Parent or Seller that is reasonably likely, individually or taken together with all other facts, events and circumstances known to it, to result in any Material Adverse Effect on the Bank or Buyer.

6.11 [Intentionally Omitted]

6.12 Non-Solicitation

(a) For a period of two years following the Closing Date, Parent and Seller shall not, and each of Parent and Seller shall cause their respective Affiliates not to, directly or indirectly, solicit any of the banking business of any Person who is a customer of the Bank as of the Closing Date; provided, however, that the foregoing restriction shall not prohibit (i) general advertising or general solicitations not targeted specifically to the Bank’s customers or (ii) solicitations to customers of the Bank who have a banking or financial services relationship with the Parent, Seller or an Affiliate other than their relationship with the Bank.

(b) For a period of two years following the Closing Date, Parent, and Seller shall not, and each of Parent and Seller shall cause their respective Affiliates not to, directly or indirectly, solicit for purposes of employment (other than through general advertising or other general solicitation not targeted to the Buyer’s employees), any Person who is employed by Buyer or of any of its Affiliates at the time of such solicitation.

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(c) Each of Parent and Seller acknowledges that the covenants contained in this Section 6.12 were a material and necessary inducement for Buyer to agree to the transactions contemplated hereby, and to ensure that the full value of the Bank and its business being acquired is transferred to Buyer as contemplated by the parties and that violation of any of the covenants contained in this Section 6.12 will cause irreparable and continuing damage to Bank, that Bank shall be entitled to injunctive or other equitable relief from any court or other governmental authority of competent jurisdiction restraining any further violation of such covenants and that such injunctive relief shall be cumulative and in addition to any other rights or remedies to which Bank may be entitled.

(d) Should any provision of this Section 6.12 for any reason be declared by any Governmental Entity invalid, or partly or wholly unenforceable, such declaration or decision shall not affect the validity or enforceability of any of the other provisions of this Agreement, which remaining provisions shall remain in full force and effect and the application of such invalid or unenforceable provision to Persons or circumstances other than those as to which it is held invalid or unenforceable shall be valid and enforced to the fullest extent permitted under applicable Law.

6.13 Dividend. At any time prior to the end of the fifth Business Day preceding the Closing Date (the “Dividend Cut-Off Date”), Seller shall be entitled to cause the Bank to declare and pay, subject to compliance with applicable Laws and all applicable directives, policies or guidelines of any Governmental Entity which has bank regulatory jurisdiction over the Bank, one or more cash dividends in an aggregate amount not to exceed $37,500,000 (without taking account of any other payments that are required or permitted to be made by the Bank to Seller or Parent under the terms of this Agreement, including payments under Section 6.7(d)(i) or under Section 6.14). The aggregate amount of all such cash dividends actually declared and paid by the Bank on or prior to the Dividend Cut-Off Date is referred to herein as the “Dividend.”

In the event that the Bank does not have sufficient cash and cash equivalents to pay the Dividend, the Bank shall first liquidate its securities portfolio (or the necessary portion thereof) (other than FHLB stock or other investments which may not be transferred) either through a sale of such portfolio (or portions thereof) to one or more non-Affiliates or through an in-kind dividend of such portfolio (or portions thereof) to Seller. If less than all of the securities portfolio (other than FHLB stock and non-transferable investments) is to be liquidated, Buyer and Seller shall mutually select the securities to be liquidated. The Bank shall not be permitted to sell Loans to fund the Dividend unless the value of the Bank’s cash, cash equivalents and securities portfolio (other than FHLB stock and other non-transferable investments) is less than the amount required to be liquidated in order to fund the Dividend. If it is necessary to sell or distribute Loans, then the Bank must sell or distribute Loans selected by Buyer until aggregate net proceeds sufficient to fund the Dividend have been realized. In any event, the Bank shall use its commercially reasonable efforts to obtain the highest available price for any asset sold to fund the Dividend and any such sale shall be conducted in a

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commercially reasonable manner.

6.14 Intercompany Arrangements.

(a) On or prior to the Closing Date, (i) the Bank shall pay and discharge all amounts of intercompany indebtedness owed by the Bank to Seller or any Affiliate of Seller (other than the Bank), including all amounts owed under the tax sharing arrangement between the Bank, on the one hand, and Seller or any Affiliate of Seller, on the other hand, for periods ending on or before December 31, 2001, and (ii) Seller shall pay and discharge (or cause to be paid and discharged) all amounts of intercompany indebtedness owed by Seller or any Affiliate (other than the Bank) to the Bank. The payments made pursuant to Section 6.14(a)(i) shall not include payments for income Taxes that are covered by Section 6.7(d)(i).

(b) Other than as expressly contemplated by this Agreement and except for an agreement dated July 1, 1999 to which an Affiliate services loans owned by the Bank, Seller shall, and shall cause each of its Affiliates (other than the Bank) to, terminate, effective at or prior to the Closing Date, in accordance with their terms, any and all agreements (including without limitation agreements granting Bank the right to use marks or names involving the name of “Washington Mutual”, “Wamu”, “WM” or similar names or logos thereof) then in effect as between Seller, any Affiliate of Seller (other than the Bank) or any predecessor thereof, on the one hand, and the Bank, on the other hand and, at such time, all rights under any such agreement shall terminate and all liabilities under any such agreement shall be paid and discharged in accordance with the provisions of Section 6.14(a) above.

6.15 Employees.

(a) Each person who is an employee of the Bank immediately preceding the Closing Date (including employees on short-term leave but excluding employees on long-term disability) shall continue as an employee of the Surviving Bank after the Closing Date. Buyer shall provide each employee of the Bank who continues employment with the Surviving Bank after the Closing (“Transferred Employee”) with total cash compensation (including bonus, commissions and incentives) that is for a period of twelve months following the Effective Time comparable in the aggregate to the total cash compensation of such Transferred Employee prior to the Effective Time and with participation in the employee benefit plans, programs and arrangements of Buyer or Merger Sub, as applicable (the “Buyer Plans”), on the same terms as such plans and benefits are offered to similarly situated employees of Buyer or First State Bank, as applicable; provided, however, that Buyer shall not be obligated to provide any such Transferred Employee with coverage under any “bank-owned” life insurance policy maintained by Buyer. In addition, Buyer and the Surviving Bank agree to pay any Transferred Employee who is terminated within twelve months after the Closing severance benefits which are no less than the amount to which such Transferred Employee would have been entitled under the Bank’s current severance plan in effect as

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of the Closing. With respect to Transferred Employees who are on short-term leave as of the Closing, the Buyer and the Surviving Bank shall from and after the Effective Time be liable for all obligations relating to such employees under FMLA, COBRA and similar federal or state Laws.

(b) Buyer will, and will cause the Surviving Bank to, give Transferred Employees full credit for purposes of eligibility, vesting, and determination of the level of benefits under any employee benefit plans or arrangements maintained by the Buyer or the Surviving Bank (but not for purposes of benefit accruals under any defined benefit retirement plan maintained by, or contributed to by, any such entity) in which such Transferred Employees are eligible to participate for such Transferred Employees’ service with the Bank to the same extent recognized by the Bank immediately prior to the Closing Date. Without limiting the generality of the foregoing, Buyer will, or will cause the Surviving Bank to recognize such Transferred Employees’ service with the Bank for purposes of participation in any retirement, disability, medical insurance, tuition reimbursement, vacation pay accrual and sick leave plans, policies, programs or arrangements (but not for purposes of benefit accruals under any defined benefit retirement plan maintained by, or contributed to by, any such entity). Buyer shall, or shall cause the Surviving Bank to, (i) waive all limitations as to preexisting conditions exclusions and waiting periods with respect to participation and coverage requirements applicable to Transferred Employees under any welfare plan that such employees may be eligible to participate in after the Closing, other than limitations or waiting periods that are already in effect with respect to such employees and that have not been satisfied as of the Closing under any welfare plan maintained for the Transferred Employees immediately prior to the Closing and (ii) provide each Transferred Employee with credit for any co-payments and deductibles paid prior to the Closing in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans that such employees are eligible to participate in after the Closing. Upon or promptly following the Closing, the Bank shall pay to each Transferred Employee his or her accrued vacation balance as of the Closing Date. For a period of 12 months following the Closing Date, Buyer agrees to allow each Transferred Employee to take unpaid leave for a number of days equal to such employees’ accrued vacation. Transferred Employees shall become eligible for sick pay under Buyer’s sick pay policies. For purposes of the Transferred Employees participation in Buyer’s sick pay policies, the Transferred Employees will be given credit for their accrued sick leave with the Bank prior to the Closing, but will be entitled to sick pay under Buyer’s sick pay policies no greater than the maximum amount of sick pay permitted under such policies. Buyer agrees to take all actions necessary and appropriate to remove any age restrictions contained in any qualified defined contribution plan maintained by Buyer (“Buyer Savings Plan”) which would, if not removed, prevent Transferred Employees who were eligible to participate in any qualified defined contribution maintained by Seller (“Seller Savings Plan”) as of the Closing Date from participating in such Buyer Savings Plan and to permit Transferred Employees to enter the Buyer Savings Plan immediately following the Effective Time.

(c) Seller shall be responsible for the payment of any severance obligations, including, but not limited to, any amounts to be paid or payable under any

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employment or severance agreement or arrangement in effect as of the Closing, with respect to any employee of the Bank as of the Closing who is not a Transferred Employee.

(d) Seller agrees to indemnify Buyer, Merger Sub and the Bank from any liability, cost or expense relating to any post-retirement medical and life insurance benefits for which any current or former employee of the Bank is entitled immediately prior to the Closing Date.

(e) Each Transferred Employee shall cease to accrue any further benefits under either the Seller Savings Plan or the Seller’s Cash Balance Pension Plan (the “Seller Pension Plan”) effective as of the Closing Date, and each Transferred Employee who is a participant in the Seller Savings Plan or the Seller Pension Plan shall be given the opportunity to receive, as soon as practicable following the Closing Date, a distribution of his or her account balance under such plan and, if Buyer agrees, shall be given the opportunity to elect to “roll over” such account balance to the Buyer Savings Plan, subject to and in accordance with the provisions of such plans and applicable Law.

6.16 Other Real Estate Owned and Non-Performing Loans.

(a) Promptly following the date hereof, Seller or Parent shall purchase from Bank all of the Bank’s OREO as of April 30, 2002 at a price equal to the net book value of such OREO on the Bank’s books. In addition, (i) on or before the 20^th day of each month beginning in June 2002 and ending with the month immediately preceding the Effective Time and (ii) on or before Closing, Seller or Parent shall purchase from Bank all of the Bank’s OREO as of the last day of the previous month at a price equal to the net realizable value of such OREO on the Bank’s books.

(b) If, as of the last day of the last full calendar month prior to the Closing Date, the outstanding principal balance (after reversing any accrued but unpaid interest or other accrued but unpaid charges or fees) of Loans that are 90 days or more delinquent exceeds $2,000,000, then at or prior to the Closing Date Seller or Parent shall purchase from Bank a number of such Loans (beginning with the most delinquent of such Loans and continuing sequentially to the next most delinquent of such Loans) at the outstanding principal balance (after reversing any accrued but unpaid interest or other accrued but unpaid charges or fees) sufficient to reduce the outstanding principal balance of Loans that are 90 days or more delinquent as of the last day of the last full calendar month ending at least ten days prior to the Closing Date to an amount not in excess of $2,000,000 (after reversing any accrued but unpaid interest or other accrued but unpaid charges or fees).

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6.17 Additional Loans.

At any time prior to the 10th Business Day prior to Closing, Buyer shall have the right to request that the Bank purchase up to $5,900,000 in additional first lien single-family real estate loans with the geographic, credit and other standards set forth on Section 6.17 of the Seller Disclosure Schedule, and upon Buyer’s timely request Parent and Seller shall cause the Bank to, and the Bank shall, make such purchase prior to the Closing except to the extent that making such purchase could be reasonably expected to preclude the Bank from making a distribution of the Dividend in the full amount of $37,500,000.

6.18 Computer Equipment.

On or prior to Closing, Parent and Merger Sub shall execute and deliver an agreement in form and substance reasonably acceptable to each of them pursuant to which, at the Effective Time, Parent shall sell and assign, and Merger Sub shall purchase and assume, the computer equipment and the software licenses set forth on Section 6.18 of the Seller Disclosure Schedule. In consideration of sale and assignment described in the previous sentence, Buyer shall pay Parent at the Effective Time an amount equal to the net book value of such equipment as of the Closing Date. Merger Sub shall not be required to pay any third party in connection with the transfer of such software licenses. The agreement shall provide that the equipment and licenses shall be made available to Merger Sub as of the Effective Time and Merger Sub shall be responsible for moving the equipment. In the event that Merger Sub, after exercising commercially reasonable efforts, is unable to relocate the equipment to Albuquerque and to operate the equipment effectively in Albuquerque following the Effective Time, then Parent agrees to provide operation of the equipment for up to three months following the Effective Time, provided that Merger Sub shall reimburse Parent for reasonable costs incurred in connection with such operation. In addition, the agreement shall provide Merger Sub with reasonable access to the equipment following the Closing for purposes of operating and maintaining the equipment, preparing the equipment for relocation and moving the equipment from Parent’s premises.

ARTICLE VII

CONDITIONS PRECEDENT

7.1 Conditions to Each Party’s Obligation to Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction at or prior to the Closing of the following conditions:

(a) Regulatory Approvals. All regulatory approvals required to consummate the transactions contemplated hereby, including the Merger, shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired (all such approvals and the expiration of all

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such waiting periods being referred to herein as the “Requisite Regulatory Approvals”).

(b) No Injunctions or Restraints; Illegality. No Judgment or other legal restraint or prohibition (an “Injunction”) preventing the consummation of the Merger shall be in effect. No Law shall have been enacted, entered, promulgated or enforced by any Governmental Entity which prohibits or makes illegal consummation of the Merger.

7.2 Conditions to Obligations of Buyer and Merger Sub. The obligation of Buyer to effect the Merger is also subject to the satisfaction (or waiver by Buyer) at or prior to the Closing of the following conditions:

(a) Representations and Warranties. (i) The representations and warranties of Parent and Seller set forth in Section 3.2 (a) and (b) of this Agreement shall be true and correct as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date; and (ii) the representations and warranties of Parent and Seller set forth in this Agreement (other than those set forth in Section 3.2(a) and (b)) shall be true and correct as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, in each case, without regard to any exception or qualification in such representations and warranties relating to materiality or a Material Adverse Effect; provided, however, that notwithstanding anything in this Agreement to the contrary, the condition set forth in this Section 7.2(a) (ii) shall be deemed to have been satisfied even if such representations and warranties are not true and correct, unless the failure of any of such representations and warranties to be so true and correct would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Bank.

(b) Performance of Obligations of Parent and Seller. Each of Parent and Seller shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date.

(c) Certificate. Buyer shall have received a certificate signed on behalf of Seller and Parent by an executive officer of Seller and Parent to the effect that the conditions set forth in Sections 7.2(a) and (b) above have been satisfied. No exceptions taken in such certificate will modify Seller’s or Parent’s representations, warranties, covenants or agreements made or deemed made hereunder or have any effect for purposes of Buyer’s closing conditions or indemnity rights hereunder.

(d) No Pending Governmental Actions. No proceeding initiated by any Governmental Entity seeking an Injunction shall be pending.

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(e) Consents. The consent, approval or waiver of each Person (other than the Governmental Entities referred to in Section 3.4) whose consent to or approval of the Merger shall be required under any loan or credit agreement, note, mortgage, indenture, lease, license or other agreement or instrument shall have been obtained and shall remain in full force and effect, other than any consent, approval or waiver the failure of which to obtain or to be in full force and effect would not reasonably be expected to have a Material Adverse Effect on the Bank. Without limiting the generality of the foregoing, the contract or other third party consents specified in Section 7.2(e) of the Buyer Disclosure Schedule will have been obtained.

(f) Regulatory Approvals. None of the approvals referred to in Section 7.1(a) and no Law enacted, entered, promulgated or enforced by any Governmental Entity after the date hereof shall have imposed any condition or requirement which would be reasonably likely to have or result in a material adverse effect on the economic or business benefits to Buyer of the transactions contemplated by the Agreement.

(g) Financing. Buyer shall have obtained, upon terms and conditions satisfactory to Buyer in its sole and absolute discretion, all financing required to consummate the transactions contemplated hereby and to pay all related fees, costs and expenses.

7.3 Conditions to Obligations of Parent, Seller and the Bank. The obligation of Parent, Seller and the Bank to effect the Merger is also subject to the satisfaction (or waiver by Seller) at or prior to the Closing of the following conditions:

(a) Representations and Warranties. The representations and warranties of Buyer set forth in this Agreement shall be true and correct as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date; provided, however, that notwithstanding anything in this Agreement to the contrary, the condition set forth in this Section 7.3(a) shall be deemed to have been satisfied even if such representations and warranties are not true and correct, unless the failure of any of the representations and warranties to be so true and correct would have, individually or in the aggregate, a Material Adverse Effect on Buyer.

(b) Performance of Obligations of Buyer and Merger Sub. Each of Buyer and Merger Sub shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date.

(c) Certificate. Seller shall have received a certificate signed on behalf of Buyer by an executive officer of Buyer to the effect that the conditions set forth in Sections 7.3(a) and (b) above have been satisfied. No exceptions taken in such certificate will modify Buyer’s representations, warranties, covenants or agreements made or

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deemed made hereunder or have any effect for purposes of Seller’s closing conditions or indemnity rights hereunder.

(d) No Pending Governmental Actions. No proceeding initiated by any Governmental Entity seeking an Injunction shall be pending.

(e) Consideration. Subject to Section 2.11, Buyer shall have deposited an amount of cash equal to $67.0 million and the consideration Parent is entitled to receive pursuant to Section 6.18 into escrow as set forth in Section 2.12 and either (i) the Dividend Adjustment Amount shall have been deposited in escrow as provided in Section 2.12 or (ii) Seller shall have in its sole discretion agreed to another procedure for payment of the Dividend Adjustment Amount.

ARTICLE VIII

TERMINATION AND AMENDMENT

8.1 Termination. This Agreement may be terminated at any time prior to the Closing:

(a) by mutual written consent of Seller and Buyer;

(b) by either Buyer or Seller upon written notice to the other party (i) 60 days after the date on which any request or application for a Requisite Regulatory Approval shall have been denied by any Governmental Entity which must grant such Requisite Regulatory Approval, unless within the 60-day period following such denial or withdrawal a petition for rehearing or an amended application has been filed with the applicable Governmental Entity, provided, however, that no party shall have the right to terminate this Agreement pursuant to this Section 8.1(b)(i) if such denial shall be due to the failure of the party seeking to terminate this Agreement or an Affiliate to perform or observe the covenants and agreements of such party or Affiliate set forth herein or (ii) if any Governmental Entity of competent jurisdiction shall have issued a final nonappealable order enjoining or otherwise prohibiting the Merger;

(c) by either Buyer or Seller if the Merger shall not have been consummated on or before October 11, 2002, unless the failure of the Closing to occur by such date shall be due to the failure of the party seeking to terminate this Agreement or an Affiliate to perform or observe the covenants and agreements of such party set forth herein; provided, however, that at the written request of Buyer such date shall be extended to November 12, 2002 provided that (a) Buyer is able to certify in writing that all regulatory and shareholder approvals and the financing required to consummate the transactions contemplated hereby are reasonably expected to be obtained prior to November 12, 2002 and (b) Buyer delivers to Seller an updated letter from KBW stating that KBW is highly confident that Buyer will be

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able to obtain the financing required to consummate the transactions contemplated hereby;

(d) by either Buyer or Seller (provided that the terminating party or an Affiliate is not then in material breach of any representation, warranty, covenant or other agreement contained herein) if there shall have been a breach of any of the representations or warranties set forth in this Agreement on the part of the other party or one of its Affiliates, which breach is not cured within thirty (30) days following written notice to the party committing (or whose Affiliate is committing) such breach, or which breach, by its nature, cannot be cured prior to the Closing; provided, however, that neither party shall have the right to terminate this Agreement pursuant to this Section 8.1(d) unless the breach of representation or warranty, together with all other such breaches, would entitle the party receiving such representation not to consummate the transactions contemplated hereby under Section 7.2(a) (in the case of a breach of representation or warranty by Seller or an Affiliate) or Section 7.3(a) (in the case of a breach of representation or warranty by Buyer or an Affiliate); or

(e) by either Buyer or Seller (provided that the terminating party or an Affiliate is not then in material breach of any representation, warranty, covenant or other agreement contained herein) if there shall have been a material breach of any of the covenants or agreements set forth in this Agreement on the part of the other party or an Affiliate, which breach shall not have been cured within thirty (30) days following receipt by the party committing (or whose Affiliate is committing) such breach of written notice of such breach from the other party hereto, or which breach, by its nature, cannot be cured prior to the Closing.

8.2 Effect of Termination. In the event of termination of this Agreement by either Buyer or Seller as provided in Section 8.1, this Agreement shall forthwith become void and have no effect except (a) Sections 6.2(b), 8.2, 8.3 and 10.1 shall survive any termination of this Agreement and (b) that notwithstanding anything to the contrary contained in this Agreement, no party shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement; provided, however, that in any instance where the Termination Fee is payable, the receipt of the Termination Fee by Seller shall constitute the sole and exclusive remedy for Parent, Seller and the Bank under this Agreement and neither Buyer nor Merger Sub shall have any further liability under this Agreement.

8.3 Termination Fee.

(a) If this Agreement is terminated by either party for any reason other than termination by Buyer pursuant either to Section 8.1(d) or Section 8.1(e), then Buyer shall pay to Seller in immediately available funds a termination fee in an amount equal to $2 million (the “Termination Fee”); provided, however, that Buyer shall not be obligated to pay the Termination Fee (i) in the event that at the time of termination there is a breach by Seller or Parent of its representations or

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warranties contained herein which would entitle Buyer not to consummate the transactions contemplated hereby under Section 7.2(a) or there is a breach by Seller or an Affiliate of its covenants and other agreements contained herein which would entitle Buyer to terminate this Agreement under Section 8.1(e) and (ii) if the condition set forth in Section 7.3(e) that the Dividend Adjustment Amount is deposited into the escrow is not satisfied solely because the Banking Board of the State of Colorado has objected to such deposit.

(b) Any payment of the Termination Fee pursuant to this Section 8.3 shall be made within three Business Days after termination of this Agreement by wire transfer of immediately available funds.

8.4 Amendment. Subject to compliance with applicable Law, this Agreement may be amended by the parties hereto. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.

8.5 Extension; Waiver. At any time prior to the Closing, each of the parties hereto may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other party hereto, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions of the other party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.

ARTICLE IX

INDEMNIFICATION

9.1 Survival Periods. All representations and warranties of the parties contained in this Agreement, the Seller Disclosure Schedule or any certificate delivered in connection herewith shall survive the Closing and continue for a period of eighteen (18) months following the Closing Date and, if notice of a claim is provided on or prior to the end of such period, such claim shall survive until the final resolution or adjudication thereof, provided that the representations and warranties in Sections 3.1, 3.2, 3.3(b) and 3.16(a) shall survive without limit and provided, further, that the representations and warranties contained in Sections 3.10, 3.23(a), 3.23(b), 3.23(c)(i), 3.23(c)(iv), 3.23(vi), 3.23(d) and 3.23(e) shall not survive the Closing. In addition, the right to indemnification, payment of damages or other remedy shall survive and shall be unaffected by (and shall not be deemed waived by) any investigation, audit, appraisal or inspection (actual or constructive) at any time made by or on behalf of (a) Buyer or Merger Sub in the case of the Parent’s and Seller’s indemnification of Buyer, and (b) Parent, Seller or the Bank, in the case of Buyer’s indemnification of Parent and Seller. Any covenant or other agreement set forth herein shall survive the Closing without limitations.

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9.2 Indemnification by Seller and Parent.

(a) From and after the Closing and subject to the provisions of this Article IX, each of Parent and Seller, jointly and severally, accepts full and exclusive liability for and agrees to pay and to indemnify fully, hold harmless and defend each Buyer Indemnified Party from and against any and all claims, demands, liabilities, damages, penalties, judgments, assessments, losses, costs and expenses in any case, whether arising under strict liability or otherwise (including reasonable attorneys’ fees and expenses) (collectively, “Damages”), resulting from, arising out of, based on or relating to:

(i) any breach of or inaccuracy in any representation or warranty of Seller or Parent in this Agreement or in any certificate furnished to Buyer pursuant to this Agreement (other than any representations and warranties that do not survive the Closing);

(ii) any breach of or inaccuracy in any representation or warranty of Seller or Parent in this Agreement as of the Closing Date (other than any such representation or warranty which, by its terms, is made as of a specific date and other than any representations and warranties that do not survive the Closing), each of which representations and warranties will be deemed for purposes of this Section 9.2(a)(ii) to have been made by Seller and Parent as of the Closing Date; or

(iii) any breach of any covenant or agreement made by Seller or Parent in this Agreement or in any certificate furnished to Buyer pursuant to this Agreement.

(b) Notwithstanding anything in this Agreement to the contrary, for purposes of this Section 9.2, (i) a breach of a representation or warranty shall be deemed to exist either if such representation or warranty is actually inaccurate or breached or would have been inaccurate or breached if such representation or warranty had not contained any limitation or qualification as to materiality, Material Adverse Effect on the Bank (which instead will be read as any adverse effect or change) or similar language, and (ii) the amount of Damages in respect of any breach of a representation or warranty (including any deemed breach resulting from the application of clause (i)) shall be determined without regard to any limitation or qualification as to materiality, Material Adverse Effect on the Bank (which instead will be read as any adverse effect or change) or similar language set forth in such representation or warranty, it being the intention of the parties hereto that (except as otherwise set forth in this Article IX) the Buyer Indemnified Parties shall be indemnified and held harmless from and against any and all Damages suffered or incurred by any of them resulting from, arising out of, based on or relating to, the failure of any representation or warranty to be true, correct and complete in any respect, determined in each case without regard to any

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qualification as to materiality or Material Adverse Effect on the Bank or similar language set forth with respect thereto.

(c) For the purposes of this Article IX, in computing such individual or aggregate amounts of Damages, the amount of each Damage shall be deemed to be an amount net of any net insurance proceeds and any net indemnity, contribution or other similar payment actually received from any insurer or other third party with respect thereto. A Buyer Indemnified Party (except as otherwise provided below) may, but need not, commence legal or other proceedings to collect indemnity, contribution or other payments from any such insurer or other third party. If a Buyer Indemnified Party elects to do so, the costs and expenses (including reasonable fees and disbursements of counsel) reasonably incurred by the Buyer Indemnified Parties in pursuing any insurance proceeds or indemnity, contribution or other similar payment from any insurer or other third party shall be deemed to be Damages with respect to the matter for which indemnification is being sought, except to the extent such costs and expenses are paid or reimbursed by such insurer or other third party and except that Buyer Indemnified Party shall not be entitled to such costs and expenses incurred after Parent has agreed to pay the Damages with respect to which indemnification is being sought and Parent has requested that Buyer not seek payment from any insurer or third party. If a Buyer Indemnified Party elects not to commence such legal or other proceedings, the Buyer Indemnified Party shall so advise Parent and, if requested by Parent, Buyer, at Parent’s election, shall, to the extent permissible, assign the right to pursue the applicable claim or right to payment to Parent (whether by insurance coverage, contribution claims, subrogation or otherwise), and the Buyer Indemnified Party shall reasonably cooperate with Parent, furnish such documents, witness testimony and other evidence, and execute and deliver any and all powers of attorney, instruments of assignment and other documents, as Parent reasonably may request, all at Parent’s sole cost and expense, to facilitate Parent’s prosecution of the applicable claim or right to payment. If such assignment is not permissible, the Buyer Indemnified Party will at the request of Parent commence legal or other proceedings provided that Parent agrees to pay the Damages and all costs, expenses or other Damages incurred by the Buyer Indemnified Party in such proceeding.

9.3 Indemnification by Buyer. From and after the Closing and subject to the provisions of this Article IX, Buyer agrees to pay and to indemnify fully, hold harmless and defend each Seller Indemnified Party from and against any and all Damages resulting from, arising out of, based on or relating to:

(a) any breach of or inaccuracy in any representation or warranty of Buyer in this Agreement or in any certificate furnished to Seller pursuant to this Agreement; or

(b) any breach of any covenant or agreement made by Buyer in this Agreement or in any certificate furnished to Seller pursuant to this Agreement.

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9.4 Indemnification Procedure. For the purposes of administering the indemnification provisions of this Article IX, the following procedures shall apply from and after the Closing Date:

(a) An indemnified party shall notify the Indemnitor of any Indemnification Event in writing within thirty (30) days following the receipt of notice of the commencement of any action or proceeding or within sixty (60) days of (A) the assertion of any claim against such indemnified party or (B) the discovery by such indemnified party of any loss giving rise to indemnity pursuant to this Article IX (any 30-day or 60-day notification requirement shall begin to run, in the case of a claim amended to give rise to an Indemnification Event, from the first day such claim is amended to include any claim that is an Indemnification Event hereunder), such notice to describe in reasonable detail (to the extent known) the basis of such Indemnification Event. The failure to give notice as required by this Section 9.4(a) in a timely fashion shall not result in a waiver of any right to indemnification hereunder, except to the extent that the Indemnitor’s ability to defend against the event with respect to which indemnification is sought is materially adversely affected by the failure of the indemnified party to give notice in a timely fashion as required by this Section 9.4(a).

(b) If a claim by a third party (a “Third Party Claim”) is made against an indemnified party, and if such indemnified party intends to seek indemnity with respect thereto under this Article IX, such indemnified party shall promptly notify in writing the Indemnitor of such claims; provided, that, the failure to promptly notify the Indemnitor will not relieve the Indemnitor of any liability it may have to the indemnified party, except to the extent that the Indemnitor demonstrates that the defense of such Third-Party Claim is prejudiced by the indemnified party’s failure to give notice within such time period. The Indemnitor shall have 30 days after receipt of such notice to undertake, conduct and control, through counsel of its own choosing and at its own expense, the settlement or defense thereof, and the indemnified party shall cooperate with it in connection therewith; provided that the Indemnitor shall permit the indemnified party to participate in such settlement or defense through counsel chosen by such indemnified party, provided that the fees and expenses of such counsel shall be borne by such indemnified party. If the Indemnitor so chooses to assume the defense it shall do so promptly and diligently. So long as the Indemnitor is reasonably contesting any such claim in good faith, the indemnified party shall not pay or settle any such claim. If the Indemnitor does not notify the indemnified party in writing within 30 days after the receipt of the indemnified party’s written notice of a claim of indemnity hereunder that it elects to undertake the defense thereof or if, after giving such notice, the Indemnitor shall fail to reasonably contest such claim in good faith or shall cease to do so, the indemnified party shall have the right to contest, settle or compromise the claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. The Indemnitor shall not, except with the written consent of the indemnified party, enter into any settlement unless (A) there is no finding or admission of any violation of applicable Law, (B) the sole relief

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provided is monetary damages that are paid in full by the Indemnitor, (C) neither the indemnified party nor any of its Affiliates shall have no liability with respect to any compromise or settlement of such Third Party Claim, and (D) the compromise or settlement provides to all indemnified parties and their Affiliates and agents an unconditional release from all liability with respect to such Third-Party Claim or the facts underlying such Third-Party Claim. With respect to any Third-Party Claim subject to the indemnification under this Article IX, (i) both the indemnified party and the Indemnitor, as the case may be, shall keep the other party reasonably informed of the status of such Third-Party Claim and any related proceedings at all stages thereof, (ii) the parties agree to render to each other such assistance as they may reasonably require of each other and to cooperate in good faith with each other in order to ensure the proper and adequate defense of any Third-Party Claim and (iii) the parties agree to cooperate in such a manner as to preserve in full (to the extent possible) the confidentiality of all confidential information and the attorney-client and work-product privileges.

(c) In the event indemnification is requested, the relevant Indemnitor and its Representatives shall have access to the premises, books and records of the indemnified party or parties seeking such indemnification and the Affiliates of the indemnified party or parties to the extent reasonably necessary (i) for the Indemnitor to determine if the indemnification claim relates to an Indemnification Event and (ii) to assist the Indemnitor in defending or settling any action, proceeding or claim; provided, however, that (A) such access shall be conducted in such manner so as not to interfere unreasonably with the operation of the business of the indemnified party (or parties) or their Affiliates and (B) no such access shall be required where such access would jeopardize any attorney-client or work product privilege or contravene any Law, rule, regulation, Judgment or fiduciary duty. The parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of (B) of the preceding sentence apply.

(d) Except as reasonably necessary (i) for the Indemnitor to determine if the indemnification claim relates to an Indemnification Event and (ii) to assist it in defending or settling such action, proceeding or claim, the indemnified party (or parties) and their Affiliates shall not be required to disclose any information with respect to themselves (or former Affiliates), and the indemnified party (or parties) and their Affiliates shall not be required to participate in the defense of any claim to be indemnified hereunder (except as otherwise expressly set forth herein). In addition, the amount of any Damages (including Taxes) for which indemnification is provided under Section 6.7 or this Article IX shall be reduced to take account of any net Tax benefit by the indemnified party arising from the incurrence or payment of any Damages (including Taxes).

(e) Notwithstanding anything to the contrary in this Section 9.4, the Indemnitor shall continue to pay the reasonable attorneys’ fees and disbursements and other costs of separate legal counsel for the indemnified parties (as a group) (i) relating to

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their participation in any Indemnification Event (whether or not the Indemnitor shall have assumed the defense of such Indemnification Event) to the extent such participation relates to a claim or defense that the Indemnitor does not have, cannot assert on behalf of the indemnified party or that the indemnified party shall have reasonably concluded (based on advice of outside counsel) relates to a claim or defense as to which the Indemnitor may have a conflict of interest, or (ii) relating to discovery against or testimony of such indemnified party and for participation of such indemnified party’s own counsel in such discovery and testimony.

(f) Subject to Section 7.2(c), each indemnified party under this Article IX shall use its reasonable efforts to mitigate liabilities for which it seeks or reasonably anticipates seeking indemnification hereunder.

9.5 Limitations.

(a) Notwithstanding any provision to the contrary contained in this Agreement, the maximum aggregate amount of Damages relating to breaches of representations or warranties payable by Seller and Parent pursuant to Sections 9.2(a)(i) and (ii) of this Agreement shall not exceed $50,000,000.

(b) Notwithstanding any provision to the contrary contained in this Agreement, the maximum aggregate amount of Damages relating to breaches of representations or warranties payable by Buyer pursuant to Section 9.3(a) of this Agreement shall not exceed $50,000,000.

(c) Notwithstanding anything to the contrary contained in this Agreement, no claim shall be made against Parent or Seller for indemnification under Section 9.2(a)(i) or (a)(ii) with respect to any Damages unless the aggregate of all such Damages described in clauses (i) and (ii) of Section 9.2(a) shall exceed $1,000,000 (the “Basket”), and Parent and Seller shall only be required to pay or be liable for any such Damages arising under such clauses (i) and (ii) of Section 9.2(a) to the extent that their aggregate amount exceeds the Basket, and then only with respect to Damages incurred in excess of such amount, provided, however, that the Basket contained in this Section 9.5(c) shall not apply to, and dollar-for-dollar recovery shall be available with respect to, Damages suffered, incurred or sustained which arise out of, result from or are attributable to breaches of any of the representations or warranties contained in Section 3.2.

(d) Notwithstanding any other provision to the contrary, in no event shall Buyer, on the one hand, or Parent or Seller, on the other hand, be liable to the other for any consequential or punitive Damages resulting from any breach of this Agreement except to the extent that they are recovered against a Buyer Indemnified Party or a Seller Indemnified Party as an indemnified party with respect to an indemnified Third Party Claim.

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9.6 Exclusive Remedy. Except as provided in Sections 6.7 and 10.6, the right to indemnification, if any, with respect to breaches of representations, warranties and covenants pursuant to this Article IX shall after Closing constitute the sole and exclusive remedy with respect thereto, shall preclude any other monetary award (whether at law or in equity) and shall preclude assertion by any party hereto of any right to any such monetary award from the Indemnitor.

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ARTICLE X

GENERAL PROVISIONS

10.1 Expenses. Except as may be contemplated by Section 6.7(g), all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses.

10.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation), mailed by registered or certified mail (return receipt requested) or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

if to Buyer, to:
	First State Bancorporation
	7900 Jefferson NE
	Albuquerque, New Mexico 87109
	Attention:	Brian Reinhardt
		Chief Financial Officer
	with a copy to:
	Skadden, Arps, Slate, Meagher & Flom LLP
	1600 Smith, Suite 4400
	Houston, Texas 77002
	Attn:	Frank Ed Bayouth II

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and
	if to Parent or Seller, to:
		Washington Mutual Finance Corporation
		8900 Grand Oak Circle
		Tampa, FL 33637
		Attention:	Dan Gilbert, Chief Executive Officer
and
		Washington Mutual, Inc.
		1201 Third Avenue, WMT 1601
		Seattle, WA 98101
		Attention:	Todd Baker, Executive Vice President
and
		Washington Mutual, Inc.
		1201 Third Avenue, WMT 1706
		Seattle, WA 98101
		Attention:	Carey M. Brennan, Senior Vice President and Assistant General Counsel
		with a copy to:
		Heller Ehrman White & McAuliffe LLP
		701 Fifth Avenue, Suite 6100
		Seattle, WA 98104
		Attention:	Bernard L. Russell

10.3 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.

10.4 Entire Agreement. This Agreement (including the documents and the instruments referred to herein) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, other than the Confidentiality Agreement.

10.5 Governing Law. This Agreement shall be governed and construed in accordance with the Laws of New York, without regard to any applicable conflicts of law provisions thereof.

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10.6 Enforcement of Agreement. The parties hereto agree that irreparable damage would occur in the event that Sections 6.4, 6.6 or 6.12 of this Agreement were not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of Sections 6.4, 6.6 or 6.12 this Agreement and to enforce specifically the terms and provisions thereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity.

10.7 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.

10.8 Publicity. Except as otherwise required by Law or the rules of the New York Stock Exchange or The NASDAQ Stock Market, so long as this Agreement is in effect, neither Buyer, Parent nor Seller shall, or shall permit any of its Affiliates to, issue or cause the publication of any press release or other public announcement with respect to, or otherwise make any public statement concerning, the transactions contemplated by this Agreement without the consent of the other parties, which consent shall not be unreasonably withheld or delayed.

10.9 Assignment; No Third Party Beneficiaries. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other party. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Except as otherwise expressly provided herein, this Agreement (including the documents and instruments referred to herein) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

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IN WITNESS WHEREOF, Buyer, Merger Sub, Parent, Seller and the Bank have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written.

FIRST STATE BANCORPORATION
By:	/S/ MICHAEL R. STANFORD
Name:	Michael R. Stanford
Title:	President & CEO
FIRST STATE BANK OF TAOS
By:	/S/ MICHAEL R. STANFORD
Name:	Michael R. Stanford
Title:	President & CEO
FIRST COMMUNITY INDUSTRIAL BANK
By:	/S/ TODD H. BAKER
Name:	Todd H. Baker
Title:	Vice President of Mergers & Acquisitions
WASHINGTON MUTUAL FINANCE CORPORATION
By:	/S/ RICHARD M. LEVY
Name:	Richard M. Levy
Title:	Senior Vice President
BLAZER FINANCIAL CORPORATION
By:	/S/ RICHARD M. LEVY
Name:	Richard M. Levy
Title:	Senior Vice President

i

EX-3.3

Exhibit 3.3

FIRST STATE BANCORPORATION

BYLAWS

(As Amended Through April 15, 2003)

ARTICLE 1

Shareholders

SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of the Corporation for the election of directors and for the transaction of any other business that may be properly brought before the meeting shall be held at the place, date, and hour as designated by resolution of the Board of Directors.

SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes shall be called by the Secretary upon receipt of a written request from either the Chairman of the Board or the President, a majority of the directors, or any person or persons authorized by the New Mexico Business Corporation Act (the “NMBCA”) to request such a meeting. Special meetings of the shareholders shall be held at the place, date, and hour as designated by either the Chairman of the Board or the President or by resolution of the Board of Directors.

SECTION 3. PROCEDURE. At each meeting of the shareholders the President shall act as chairperson of the meeting. The chairperson of the meeting shall determine the order of business and all other matters of procedure. The chairperson of the meeting may establish rules to maintain order and to conduct the meeting. The chairperson of the meeting shall act in his or her absolute discretion, and his or her rulings are not subject to appeal.

ARTICLE II

Directors

SECTION 1. BOARD OF DIRECTORS. The business of the Company shall be managed by a Board of Directors. The number of directors constituting the Board of Directors shall be established from time to time by resolution of the Board of Directors, within the limitations set forth in the Restated Articles of Incorporation, as amended.

No person who has attained the age of seventy-five shall be eligible for election as a director of the Corporation unless he or she is already a member of the Board of Directors. No director who has attained the age of seventy-five shall serve as a director effective with the next annual meeting of the shareholders.

SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at times and places determined by the Board of Directors.

SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be called by the Secretary upon the receipt of a request from the

Chairman of the Board, the President, or any three directors. Notice of special meetings shall be given to each director at any time before the special meeting either personally or by telephone (including by message or recording devise) or telegraph or facsimile not less than twenty-four hours before the meeting or by mail not less than three days before the meeting. Any notice shall be directed to the address or telephone number of each director as furnished to the Secretary for that purpose.

SECTION 4. ADJOURNMENT OF MEETINGS. The directors may adjourn from time to time any regular or special meeting at which a quorum is present, without notice other than announcement at the meeting. The adjourned meeting may be called to order at any time without further notice, and any business may be transacted which might have been transacted at the original meeting.

SECTION 5. COMPENSATION OF DIRECTORS. The Board of Directors may by resolution provide for payment of fees for attendance at meetings of the Board of Directors and the reimbursement of expenses of directors in attending meetings. The Board of Directors may also by resolution provide for the payment of other fees or compensation to members of the Board of Directors.

SECTION 6. AUTHORITY TO APPOINT COMMITTEES AND DELEGATE AUTHORITY. The Board of Directors, by resolution adopted by a majority of the full Board of Directors: (i) may designate from among its members one or more committees, each of which, except to the extent limited by law, the Restated Articles of Incorporation, these Bylaws, and the resolution establishing the committee, shall have and may exercise all the authority of the Board of Directors, and may also prescribe rules of operation of the committee, (ii) and shall appoint and constitute the following committees as standing committees of the Board of Directors – Audit Committee, Compensation Committee and Nominating, each of whose members shall be appointed by the Board of Directors and shall meet the requirements of the rules of the National Association of Securities Dealers, Securities Exchange Commission and other governing bodies, (iii) Regular meetings of any committee may be held without notice at times and places determined by the Board of Directors or the committee. Special meetings of any committee shall be called by the Secretary upon the receipt of a request from the Chairman of the Board, the President, the chairman of the committee, or any two members of the committee. Notice of special meetings shall be given in the same manner as provided in Section 3 of this Article II. Committee actions shall be subject to review and approval by the Board of Directors.

ARTICLE III

Officers

SECTION 1. NUMBER. The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents (one or more of whom may be designated Executive Vice President or Senior Vice President), a Secretary, and a Treasurer, and may include a Controller. A chief executive officer, a chief operating officer, a chief financial officer, and a chief accounting officer may be designated by the Board of Directors from among the officers

SECTION 2. ELECTION AND TERM OF OFFICE. Each officer shall be elected by the Board of Directors and shall hold office until the meeting of the Board of Directors following the next annual meeting of the shareholders and until his or her successor has been elected and qualified or until his or her earlier retirement, resignation, or removal. The Chairman of the Board shall be chosen from among the directors.

SECTION 3. REMOVAL AND VACANCIES. Any officer may be removed at any time with or without cause by the Board of Directors. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided for election to the office.

SECTION 4. ASSISTANT OFFICERS. The Company may have assistant officers as the Board of Directors may elect. Each assistant officer shall hold office at the pleasure of, and may be removed at any time with or without cause by, the Board of Directors. Assistant officers may include one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers.

SECTION 5. DUTIES. Each officer shall have the authority and shall perform the duties as may be assigned by the Board of Directors or the President, or as shall be conferred or required by law or these Bylaws, or as shall be incidental to the office.

ARTICLE IV

Indemnification of Directors, Officers, Employees, and Agents

SECTION 1. GENERAL INDEMNIFICATION. Each person who is a party or is threatened to be made a party, either as plaintiff, defendant, respondent, or otherwise, to any action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative (other than an administrative proceeding or civil action instituted by any federal banking agency) (a “Proceeding”), based upon, arising from, relating to, or by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation or non-profit corporation, cooperative, partnership, joint venture, trust, or other incorporated or unincorporated enterprise, or any employee benefit plan or trust (each, a “Company Affiliate”), shall be indemnified and held harmless by the Company to the fullest extent authorized by the NMBCA, as the same exists on the date of the adoption of this Bylaw April 15, 2003 or as may hereafter be amended (but, in the case of any such amendment, only to the extend that such amendment permits the Company to provide broader indemnification rights than the NMBCA permitted to

Company to provide prior to such amendment), against any and all expenses, liability, and loss (including, without limitation, investigation expenses and expert witnesses’ and attorneys’ fees and expenses, judgments, penalties, fines, and amounts paid or to be paid in settlement) actually incurred by such person in connection therewith; provided, however, that, except as provided in the second paragraph of this Section 1 of Article IV with respect to Proceedings seeking to enforce rights under this Bylaw, the Company shall indemnify any such person seeking to enforce such rights in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by a two-thirds vote of the Board of Directors. The right to indemnification conferred in this Section 1 of Article IV shall be a contract right and shall include the right to be paid by the Company for expenses to be incurred in defending or prosecuting any such Proceeding in advance of its final disposition. The right to advance payment to any person subject to this Article shall be considered additional consideration for such person’s past and/or continuing service to the Company and if such advance is later deemed to be subject to repayment under the NMBCA, such advance shall not be deemed a loan or extension of credit and no interest is due or owing thereon.

The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 1 of Article IV shall not be exclusive of any other right which any person may be entitled under any statute, provision of the Restated Articles of Incorporation, or Bylaw, an agreement, a resolution of shareholders or directors, or otherwise both as to action in such person’s official capacity and as to action in another capacity while holder such office.

The Company may purchase and maintain insurance or furnish similar protection, including, but not limited to, providing a trust fund, letter of credit, or self-insurance, on behalf of any person who is a director, officer, employee, or agent of the Corporation or who while a director, officer, employee, or agent of the Company, is serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of a Company Affiliate, against any liability asserted against and incurred by such director, officer, employee, or agent in such capacity or arising out of such director’s, officer’s, employee’s, or agent’s status as such, whether or not the Company would have the power to indemnify such director, officer, employee, or agent against such liability under the NMBCA.

The Company’s indemnity of any person who was or is serving at its request as a director, officer, partner, trustee, employee, or agent of a Company affiliate shall be reduced by any amounts such person may collect as indemnification from such Company Affiliate.

The Company may, by action of its Board of Directors, authorize one or more officers to grant rights to indemnification and advancement of expenses to employees or agents of the Company on such terms and conditions as such officer or officers deem appropriate under the circumstances.

In case any provision in this Section 1 of Article IV shall be determined at any time to be unenforceable in any respect, the other provisions shall not in any way be affected or impaired thereby, and the affected provision shall be given the

fullest possible enforcement in the circumstances, it being the intention of the Company to afford indemnification and advancement of expenses to the persons indemnified hereby to the fullest extent permitted by law.

For purposes of this Section 1 of Article IV, references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan or trust; references to “serving at the request of the Company” shall include any service as a director, officer, employee, or agent of the Company which imposes duties on, or involved services by, such director, officer, employee, or agent with respect to an employee benefit plan or trust, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan or trust shall be deemed to have acted in a manner “not opposed to the best interests of the Company.”

The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 1 of Article IV shall, unless otherwise provided when authorized, continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.

SECTION 2. INDEMNIFICATION IN FEDERAL REGULATORY PROCEEDING. Each person who is a party to any administrative proceeding or civil action instituted by any federal banking agency (a “Federal Regulatory Proceeding”), based upon, arising from, relating to, or by reason of the fact that such person is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation or non-profit corporation, cooperative partnership, joint venture, trust, or other incorporated or unincorporated enterprise, or any employee benefit plan or trust (each, a “Company Affiliate”), shall be indemnified and held harmless by the Company to the fullest extent authorized by the NMBCA and allowed by 12 U.S.C. 1828(k) and regulations thereunder, 12 C.F.R. Part 359, as the same exist on the date of the adoption of this Bylaw April 15, 2003 or as they may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than the NMBCA, 12 U.S.C. 1828(k), and the regulations thereunder permitted the Company to provide prior to such amendment), against any and all legal and other professional fees and expenses (including, without limitation, investigation expenses and expert witnesses’ and attorneys’ fees and expenses) (“Legal Expenses”) actually incurred by such person in connection with a Federal Regulatory Proceeding; provided, however, that (except for Legal Expenses and restitution covered by insurance or a fidelity bond as provided in this Section 2 of Article IV) such person shall not be indemnified against any civil money penalty, judgment, or other liability or Legal Expenses in connection with any Federal Regulatory Proceeding that results in a final order or settlement pursuant to which such person is assessed a civil money penalty, is removed from office, or is required to cease and desist from or to take any affirmative action described in Section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(b). Payment or reimbursement of Legal Expenses by the Company, including any payment in advance of final deposition of the Federal Regulatory Proceeding, shall be made

in accordance with the procedure set forth in 12 C.F.R. Part 359. The right to indemnification conferred in this Section 2 of Article IV, subject to the limitations contained in 12 C.F.R. Part 359, shall be a contract right and shall include the right to be paid by the Company for expenses to be incurred in defending any Federal Regulatory Proceeding in advance of its final disposition.

The right to indemnification and the payment of Legal Expenses incurred in defending a Federal Regulator Proceeding in advance of its final disposition conferred in the Article IV shall not be exclusive of any other right allowed by 12 U.S.C. 1828(k) and regulations thereunder to which any person may be entitled under any statute, provision of the Restated Articles of Incorporation, or Bylaw, and agreement, a resolution of shareholders or directors, or otherwise both as to action in such person’s official capacity and as to action in another capacity while holding such office.

The Company may purchase and maintain insurance of fidelity bond on behalf of any person who is a director, officer, employee, or agent of the Company or who, while a director, officer, employee, or agent of the Company, is serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of the Company Affiliate, against any liability for Legal Expenses or for restitution to the Company arising in a Federal Regulator Proceeding asserted against and incurred by such director, officer, employee, or agent in such capacity or arising out of such director’s, officer’s employee’s, or agent’s status as such, and regardless of whether such person is liable for any civil money penalty, judgment, or other liability in the Federal Regulator Proceeding, the Company may use the proceeds of such insurance or bond to pay or reimburse such person for Legal Expenses and the amount of any restitution payable by such person to the Company.

The Company may, by action of its Board of directors, authorize one or more officers to grant rights to indemnification and advancement of expenses as provide in this Section 2 of Article IV to employees or agents of the Company on such terms and conditions as such officer or officers deem appropriate under the circumstances.

SECTION 3. GENERAL. Anything in this Article IV to the contrary notwithstanding, no elimination of this Bylaw and no amendment of this Bylaw adversely affecting the right of any person to indemnification or advancement of expenses hereunder shall be effective until the sixtieth day following notice to such indemnified person of such action, and no elimination of or amendment to this Bylaw shall deprive any such person of such person’s rights hereunder arising out of alleged or actual occurrences, acts, or failures to act which had their origin prior to such sixtieth day.

In case any provision in the Article IV shall be determined at any time to be unenforceable in any respect, the other provisions shall not in any way be affected or impaired thereby, and the affected provision shall be given the fullest possible enforcement in the circumstances, it being the intention of the Company to afford indemnification and advancement of expenses to the persons indemnified to the fullest extend permitted by law.

The indemnification and advancement of expenses provided by, or granted pursuant to, this Article IV shall, unless otherwise provided when authorized, continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.

References to “serving at the request of the Company” shall include any service as a director, officer, employee, or agent of the Company which imposes duties on, or involved services by, such director, officer, employee, or agent with respect to an employee benefit plan or trust, its participants, or beneficiaries.

ARTICLE V

Share Certificates and Transfer of Shares

SECTION 1. SHARE CERTIFICATES. Shares of stock of the Corporation may, at the discretion of the Board of Directors, be represented by certificates or may be uncertificated. Any share certificates of the Corporation shall be in the form and contain the provisions determined by the Board of Directors and required by the NMBCA

SECTION 2. TRANSFER RULES. The Board of Directors, the Chairman of the Board, the President, or the Secretary may from time to time promulgate rules or regulations as it or such officer may deem advisable concerning the issue, transfer, registration, or replacement of share certificates of the Company.

SECTION 3. REGISTERED SHAREHOLDERS. The Company shall be entitled to treat the holder of record of any share or shares as the holder in fact of those shares. The Company shall not be bound to recognize any equitable or other claim to or interest in any shares on the part of any other person, regardless of whether the Corporation has actual or imputed knowledge of a claim of interest, except as otherwise required by the laws of New Mexico.

ARTICLE VI

Fiscal Year and Seal

SECTION 1. FISCAL YEAR. The fiscal year of the Company shall begin on the first day of January and end on the last day of December of each year.

SECTION 2. SEAL. The seal of the Company shall be circular in form. Around the margin of the seal shall be placed the words “First State Bancorporation” and in the center the words “Corporate Seal Incorporated 1988 New Mexico.”

ARTICLE VII

Amendments

These Bylaws may be altered, amended, or repealed by the affirmative vote of a majority of the Board of Directors at any regular meeting or, if notice of intention to amend, alter, or repeal the Bylaws is given in the notice of the meeting, at any

special meeting of the Board of Directors.

Secretary, First State Bancorporation

EX-10.1

Exhibit 10.1

EXECUTIVE EMPLOYMENT AGREEMENT

THIS EXECUTIVE EMPLOYMENT AGREEMENT (“Agreement”) is entered into by and between [Executive] (the “Executive”) and First State Bancorporation, a New Mexico corporation (the “Company”), effective as of August 31, 2001 (the “Commencement Date”).

WHEREAS, the Company desires to provide for the service and employment of the Executive with the Company and the Executive wishes to perform services for the Company, all in accordance with the terms and conditions provided herein.

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the Executive and the Company hereby agree as follows:

Section 1. EMPLOYMENT. The Company does hereby employ the Executive and the Executive does hereby accept employment as [Title]. The Executive shall have all the duties, responsibilities and authority normally performed by the [Title] and shall render services consistent with such position on the terms set forth herein and shall report to the Board of Directors of the Company (the “Board”). In addition, the Executive shall have such other executive and managerial powers and duties with respect to the Company and its subsidiaries as may reasonably be assigned to him by the Board, to the extent consistent with his position and status as [Title] set forth above. The Executive agrees to devote all of his working time and efforts to the business and affairs of the Company and its subsidiaries, subject to periods of vacation and sick leave to which he is entitled, and shall not engage in activities that substantially interfere with such performance; provided, however, that this Agreement shall not be interpreted to prohibit the Executive from serving on the board of directors of any not for profit corporation or engaging in civic and community service consistent with the public image of the Company.

Section 2. TERM OF AGREEMENT. The term (the “Term”) of this Agreement shall be for three (3) years from the Commencement Date (unless earlier terminated pursuant to Section 5), and shall automatically renew for a further three (3) year Term on the first anniversary of the Commencement Date and for a further three (3) year Term each year thereafter; provided that the agreement shall not renew for a further three (3) year Term if the Company gives Notice of Non-Renewal (“Notice of Non-Renewal”) to the Executive in accordance with Section 10 at least sixty (60) days prior to the next anniversary of the Commencement Date.

Section 3. LOCATION. In connection with the Executive’s employment by the Company, the Executive shall be based at the headquarters of the Company in Albuquerque, New Mexico except for required travel for the Company’s business.

Section 4. COMPENSATION.

(a) BASE SALARY. Effective as of the Commencement Date, the Company shall pay the Executive a base salary (“Base Salary”) at an initial rate of [Base Salary] per year, payable in accordance with the Company’s policies relating to salaried employees. The Executive’s Base Salary may be increased, but may not be decreased, by the Compensation Committee of the Board (the “Compensation Committee”) in its sole discretion.

(b) ANNUAL BONUS. Commencing with the fiscal year of the Company (“Fiscal Year”) in which the Commencement Date occurs, the Executive shall have the opportunity to earn a bonus (“Bonus”) for each Fiscal Year as recommended by the Compensation Committee in accordance with the bonus policies of the Compensation Committee (“Bonus Plan”). The Executive shall be entitled to receive such other bonuses as are determined in the discretion of the Board.

(c) FRINGE BENEFITS.

(i) GENERAL. The Executive shall be entitled to participate in each fringe, welfare, 401(k) savings plan, deferred compensation plan, pension benefit and incentive programs adopted from time to time by the Company for its employees.

(ii) VACATION. The Executive will receive four (4) weeks of paid vacation annually, subject to the terms of the Company’s vacation policies as they relate to senior executive officers.

(iii) INSURANCE. Executive shall be covered under any life insurance, salary continuation and long-term disability insurance programs, in accordance with their terms, as in effect for senior executive officers from time to time.

(iv) AUTOMOBILE. The Company shall furnish Executive with a current model vehicle suitable to his status as [Title].

Section 5. TERMINATION.

(a) NOTICE OF TERMINATION. “Notice of Termination” shall mean a notice in accordance with Section 10 of an intention to terminate Executive’s employment that shall state the specific termination provision in this Agreement upon which the terminating party relies.

(b) DATE OF TERMINATION. “Date of Termination” shall mean:

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(i) if the Executive’s employment is terminated because of death, the date of the Executive’s death; or

(ii) if the Executive’s employment is terminated for any other reason, the date specified in the Notice of Termination, which shall not be a date prior to the date such Notice of Termination is given or the expiration of any required notice period.

(iii) if the agreement is terminated by Notice of Non-Renewal, the date of which the agreement terminates by expiration of the three (3) year Term.

(c) TERMINATION FOR CAUSE. The Company may terminate the Executive’s employment under this Agreement for Cause (as defined below) at any time, in which event any rights of the Executive to continued employment under the Agreement shall thereupon cease.

(i) “Cause” shall exist if the Executive:

(A) fails, on a willful and continuing basis, to devote his full business time to Corporation’s business affairs (other than due to illness or incapacity, vacations, incidental civic activities and incidental personal time); or

(B) is convicted of a felony or a crime involving dishonesty, or breach of trust; or

(C) participates in an act of fraud, embezzlement or theft (regardless of whether a criminal conviction is obtained); or

(D) makes an unauthorized disclosure of confidential information that results in significant injury to the Company; or

(E) is the subject of state or federal regulatory action or is the substantial causative factor in regulatory action against the Company or its subsidiaries.

(ii) The Company may not terminate Executive’s employment for Cause unless and until a determination that Cause exists is made and approved by a majority of the Board (excluding the Executive), Executive is given at least fifteen (15) days’ written notice of the Board meeting called to make such determination and an opportunity to cure during such notice period, and Executive is given the opportunity to address such meeting.

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(d) TERMINATION OTHER THAN FOR CAUSE. The Company may terminate the Executive’s employment under this Agreement without Cause at any time. The Executive’s right to continued employment under the Agreement shall cease, subject to the Section 6 and other provisions of this Agreement.

(e) TERMINATION BY REASON OF EXECUTIVE’S DISABILITY. “Disability” shall be deemed the reason for the termination by the Company of the Executive’s employment if, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive’s duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive’s duties.

(f) TERMINATION BY THE EXECUTIVE.

(i) Prior to a Change of Control. The Executive may terminate his employment hereunder voluntarily at any time upon at least thirty (30) days’ prior notice to the Company.

(ii) Upon Change of Control. The Executive may terminate his employment hereunder at his sole discretion during the twenty-four (24) month period following a Change of Control (as defined below) upon thirty (30) days prior notice to the Company.

(g) NON-RENEWAL OF AGREEMENT.

(i) Prior to a Change of Control. Upon Notice of Non-Renewal of the agreement, the Executive shall be entitled to all severance benefits provided by Section 6(b).

(ii) Upon a Change of Control. Upon Notice of Non-Renewal of the agreement, the Executive shall be entitled to all severance benefits provided by Section 6(c).

(iii) Survival of Entitlements. The severance payments and benefits provided by Sections 6(b) and (c) shall survive the non-renewal of the agreement.

Section 6. SEVERANCE PAYMENTS.

(a) ACCRUED AND UNPAID BENEFITS. Following the termination of the Executive’s employment with the Company at any time for any reason, the Executive shall receive:

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(i) any earned, but unpaid, Base Salary,

(ii) any earned, but unpaid, bonus for any Fiscal Year that ended prior to the Fiscal Year in which the Date of Termination occurs,

(iii) the cash equivalent of any accrued, but unused, vacation; and

(iv) any vested and accrued employee benefits, subject to the terms of the applicable employee benefit plans.

The amounts payable under subparagraphs 6(a)(i), (ii) and (iii) shall be paid within thirty (30) days following the Date of Termination.

(b) SEVERANCE BENEFITS PRIOR TO A CHANGE OF CONTROL. If the Company terminates the Executive’s employment with the Company for any reason other than (i) the Executive’s death, (ii) the Executive’s Disability or (iii) Cause, the Executive shall be entitled to the following:

(i) All amounts payable pursuant to Section 6(a);

(ii) An amount equal to two (2) times the sum of (A) the Executive’s Base Salary in effect at the time of the termination and (B) without proration, the most recent annual bonus paid pursuant to Section 4(b) hereof. Such payment shall be made in accordance with the Company’s normal payroll procedures applicable to senior executive officers at the time of such termination as if the Executive had continued to be employed.

(iii) Continued participation in the Company’s welfare benefit plans, fringe benefits, 401(k) savings plan, deferred compensation plan, and employee perquisites.

(c) SEVERANCE BENEFITS FOLLOWING A CHANGE OF CONTROL. If during the twenty-four (24) month period following a Change of Control the Company terminates the Executive’s employment with the Company for any reason other than Cause, or if the Executive terminates his employment with the Company, by resignation, death or disability, the Executive shall be entitled to the following:

(i) All amounts payable pursuant to Section 6(a);

(ii) An amount equal to three (3) times the sum of (A) the Executive’s Base Salary in effect at the time of the

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termination and without proration, (B) the most recent Bonus paid pursuant to Section 4(b) hereof (without deduction for any contributions by the Company for the Executive’s benefit to any retirement or other investment plans). Such payment shall be made in a lump sum in cash within thirty (30) days after the Date of Termination;

(iii) Continued participation in the Company’s welfare benefit plans, fringe benefits, 401(k) savings plan, and employee perquisites for the three (3) year period commencing on the Date of Termination;

(iv) All of the Executive’s outstanding options to purchase Company common stock shall become fully vested and nonforfeitable as of the Date of Termination;

(v) Any restricted stock that is unvested shall become fully vested and nonforfeitable as of the Date of Termination; and

(vi) The Executive, to the extent determined to be nondiscriminatory under the Company’s qualified employee benefit plans, shall become fully vested in his benefits under such plans. Additionally, the Executive shall become fully vested with respect to any of the Company’s non-qualified benefit plans in which he is a participant.

(d) CHANGE OF CONTROL. A “Change of Control” is deemed to have occurred if:

(i) A person [as that term is used in Section 13d of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)] becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of shares of the Company having twenty five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company without the prior approval of at least two-thirds of the members of the Board unaffiliated with that person;

(ii) Persons who constitute the directors of the Company at the beginning of a 24-month period cease to constitute at least two-thirds of all directors at any time during the period, unless the election of any new or replacement directors was approved by a vote of at least a majority of the members of the Board in office immediately before the period and of the new and replacement directors so approved;

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(iii) The adoption of any plan or proposal to liquidate or dissolve the Company; or

(iv) Any merger or consolidation of the Company unless thereafter (1) directors of the Company immediately prior thereto continue to constitute at least two-thirds of the directors of the surviving entity or transferee, or (2) the Company’s securities continue to represent or are converted into securities that represent more than 80 percent of the combined voting power of the surviving entity or transferee.

Notwithstanding anything to the contrary in this Section 6(d), no rights under this Agreement shall accrue to the Executive because of a Change in Control if the Executive, or any group of which the Executive is a member, is the person who acquisition constituted the Change in Control.

(e) Section 280G GROSS UP. If the aggregate of all payments or benefits made or provided to the Executive under this Agreement and under all other plans and programs of the Company (the “Aggregate Payment”) is determined to constitute a parachute payment, as such term is defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the “Code”), the Company shall pay to the Executive, prior to or coincident with the time any excise tax imposed by Section 4999 of the Code (the “Excise Tax”) is payable with respect to such Aggregate Payment, an additional amount that, after the imposition of all penalties, income, excise and other federal, state and local taxes thereon, is equal to the sum of the Excise Tax on the Aggregate Payment and interest and penalties imposed with respect to the Excise Tax and such additional amount (“Additional Amount”). The determination of whether the Aggregate Payment constitutes a Parachute Payment and, if so, the amount to be paid to the Executive and the time of payment pursuant to this Section 6(e) shall be made by an independent auditor (the “Auditor”) selected by the Company. Notwithstanding the foregoing, in the event that the amount of the Executive’s Excise Tax liability is subsequently determined to be greater than the Excise Tax liability with respect to which an initial Additional Amount has been paid to the Executive under this Section 6(e), the Company shall pay to the Executive a further Additional Amount with respect to such additional Excise Tax (and any interest and penalties thereon) at the time and in the amount determined in the same manner as the initial Additional Amount was determined so as to make the Executive whole, on an after-tax basis, with respect to such Excise Tax (and any interest and penalties thereon) and such additional amount paid by the Company. In the event the amount of the Executive’s Excise Tax liability is subsequently determined to be less than the Excise Tax liability with respect to which an initial payment to the Executive has been made, the Executive shall, as soon as practical after the determination is made, pay to the Company the amount of the overpayment by the Company, reduced by the amount of any relevant taxes already paid by the Executive and not refundable, all as determined by the Auditor. The Executive and the Company shall cooperate with each other in connection with any proceeding or claim relating to the existence or amount of liability for Excise Tax,

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and all expenses incurred by the Executive in connection therewith shall be paid by the Company promptly upon notice of demand from the Executive.

(f) MITIGATION. The Executive shall not be required to mitigate damages with respect to any payments made pursuant to this Agreement, and no compensation received by Executive from other employment with respect to services rendered after the Date of Termination shall reduce the obligations of the Company under this Agreement.

(g) RELEASE OF EMPLOYMENT CLAIMS. The Executive agrees, as a condition to receipt of the payments and benefits provided for in Sections 6(b) and (c), that he will execute a comprehensive release, releasing any and all claims arising out of the Executive’s employment (other than enforcement of this Agreement and the Executive’s rights under any of the Company’s incentive compensation and employee benefit plans and programs to which he is entitled under this Agreement).

Section 7. CONFIDENTIALITY AND NON-COMPETITION

(a) CONFIDENTIALITY. “Confidential Information” shall mean nonpublic information about the Company and its subsidiaries or their affiliates, and their respective clients and customers that is not disclosed by the Company or its subsidiaries for financial reporting purposes and that was learned by the Executive in the course of his employment with the Company including, without limitation, any proprietary knowledge, trade secrets, data, formulae, information and client and customer lists and all papers, resumes and records (including computer records) of the documents containing such Confidential Information. Confidential Information does not include information regarding the Executive’s own compensation and benefits.

(i) The Executive acknowledges that in his employment with the Company, he will occupy a position of trust and confidence. The Executive shall not, except as may be required to perform his duties hereunder or as required by applicable law, without limitation in time or until such information shall have become public other than by the Executive’s unauthorized disclosure, disclose to others or use, whether directly or indirectly, any Confidential Information.

(ii) The Executive acknowledges that all Confidential Information is specialized, unique in nature and of great value to the Company and its subsidiaries, and that such Confidential Information gives the Company and its subsidiaries a competitive advantage. The Executive agrees to deliver or return to the Company, at the Company’s request at any time or upon termination or expiration of his employment or as soon thereafter as possible, all documents, computer tapes and disks, records, lists, data, drawings, prints, notes

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and written information (and all copies thereof) furnished by or on behalf of or for the benefit of the Company and its subsidiaries or their affiliates or prepared by the Executive during the term of his employment by the Company, but excluding documents relating to the Executive’s own compensation and benefits.

(b) NON-COMPETITION. Executive agrees that for a period of twelve (12) months following the Date of Termination, Executive shall not directly or indirectly induce or attempt to influence any employee of the Company to terminate his or her employment with the Company and shall not engage in (as a principal, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any financial institution operating within any county in New Mexico in which the Company or any subsidiary has an office or branch (excluding publicly traded financial institutions in which Executive’s interest is less than 1%). If the period of time or the area specified in this paragraph should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such number of months or the area shall be reduced by the elimination of such portion thereof or both so that such restriction may be enforced in such area and for such time as is adjudged by the court considering the matter to be reasonable.

(c) SOLICITATION OF CUSTOMERS. Executive agrees that for a period of twelve (12) months from the Date of Termination, Executive will not solicit, on his own behalf, or that of his employer, the trade or patronage of any persons or entities known to him to be customers or clients of the Company during the period of Executive’s employment, regardless of the location of such customers or clients.

(d) STANDSTILL. During the period commencing on the Commencement Date and ending on the third (3^rd) anniversary of the Date of Termination, Executive will not, directly or indirectly:

(i) make, or in any way participate in any Solicitation of Proxies to vote, solicit any consent or communicate with or seek to advise or influence any person or entity with respect to the voting of any Company common stock or engage, encourage, participate in or support a Solicitation in Opposition with respect to the Company;

(ii) solicit, seek to effect, negotiate with or provide any information to any other party with respect to, or make any statement or proposal, whether written or oral, to the Board or any director or officer of the Company or otherwise make any public announcement or proposal whatsoever with respect to, any form of business combination transaction involving the Company including, without limitation, a merger, exchange offer or liquidation of the Company’s assets, or any restructuring, recapitalization or similar transaction with respect to the Company; or

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(iii) otherwise act to seek to control, disrupt or influence the management, policies or affairs of the Company, or instigate or encourage any third party to take any action described in this Section 7(e).

Defined terms used in this Section 7(e) shall have the following meanings: “Solicitation in Opposition” shall have the meaning specified in Note 3 to Rule 14(a)-6(a) under the Exchange Act; “Proxy” shall have the meaning ascribed to it in Rule 14a-1 under the Exchange Act; “Solicitation” shall have the meaning ascribed to it in Rule 14a-1 under the Exchange Act.

(e) REMEDIES. In the event of a breach or threatened breach of this Section 7, the Executive agrees that the Company shall be entitled to apply for injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient.

(f) SURVIVAL OF PROVISIONS. The obligations contained in this Section 7 shall, to the extent provided in this Section 7, survive the termination or expiration of the Executive’s employment with the Company and, as applicable, shall be fully enforceable thereafter in accordance with the terms of this Agreement.

Section 8. INDEMNIFICATION. Company will indemnify the Executive against any legal expenses he may incur in litigation against the Company, any shareholder of the Company, or any other person, to enforce or defend his rights under this Agreement; further, the Company shall indemnify, defend and hold harmless the Executive against all losses, claims, damages, costs, expenses (including attorney fees), liabilities, judgments or amounts paid in settlement (which settlement shall require the prior written consent of the Company, which consent shall not be unreasonably withheld) of or in connection with any claim, action, suit, proceeding or investigation which arises out of such person serving in his capacity as an employee or Executive of the Company and pertaining to any matter or fact arising, existing or occurring before the Change of Control (including, without limitation, the events giving rise to the Change of Control) to the full extent permitted under applicable New Mexico or federal law (including, but not limited to, Title XII of the United States Code) and the Articles of Incorporation and bylaws of the Company as in effect at the time of the Change of Control. The Company will advance expenses incurred by such persons in connection with such claims to the full extent permitted by such laws, Articles of Incorporation and bylaws.

These indemnification obligations of the Company will continue in force for a period of five (5) years after the date on which the Change of Control is effective, and will apply to any claims asserted or made within such period. Such indemnification shall not be due if an arbitrator and/or court of law, as appropriate under Section 11, determines that the Executive’s position in the litigation was frivolous and/or that the Executive did not pursue such litigation in good faith.

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The Company shall use its best efforts to maintain in effect for three (3) years after a Change of Control officers and directors liability insurance with respect to claims arising from facts or events which occurred before the Change of Control with at least the same coverage and amounts, and containing terms and conditions no less advantageous, as the coverage provided by the Company prior to the Change of Control.

Section 9. WITHHOLDING. The Company shall make such deductions and withhold such amounts from each payment made to the Executive hereunder as may be required from time to time by law, governmental regulation or order.

Section 10. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be given by hand, facsimile or first-class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given upon delivery or three (3) days after mailing or twenty-four (24) hours after transmission of a facsimile to the respective persons named below:

(a) If to the Company:

7900 Jefferson NE

Albuquerque NM 87109

(b) If to the Executive:

7900 Jefferson NE

Albuquerque NM 87109

Either party may change such party’s address for notices by notice duly given pursuant hereto.

Section 11. DISPUTE RESOLUTION; ATTORNEYS’ FEES. Any and all disputes arising out of, under, in connection with, or relating to this Agreement, the breach or alleged breach of this Agreement, or its enforceability, shall be settled either by litigation in the courts of the United States or the State of New Mexico or by arbitration in Albuquerque, New Mexico, such forum to be selected by the Executive in his discretion. In the event the Executive elects to resolve disputes through arbitration, such arbitration shall be conducted before a single arbitrator under the terms set forth in this Agreement and otherwise in accordance with the Federal Arbitration Act and the Rules of the American Arbitration Association. Judgment upon an arbitration award may be entered in any court having jurisdiction of the matter. The duty to arbitrate shall survive the cancellation or termination of this Agreement.

(a) The arbitrator shall be selected in the following manner:

(i) The parties shall select an arbitrator; or

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(ii) If the parties are unable to agree on an arbitrator within thirty (30) days of the demand for arbitration, then the American Arbitration Association shall submit a list of seven individuals to the parties and the arbitrator shall be selected by the parties alternately striking names from the list of seven with the Executive making the first strike.

(b) The arbitrator designated and acting under this Agreement shall determine the controversy in accordance with the laws of the State of New Mexico and applicable federal law as applied to the facts as he finds them.

(c) The decision of the arbitrator shall be rendered within thirty (30) days after the hearing by the arbitrator, unless otherwise agreed to in writing by all parties, and such decision shall be in writing and in duplicate, one counterpart to be delivered to each party.

(d) The parties desire that, in the event the Executive elects to resolve disputes by arbitration, the enforceability of this arbitration provision and the proceedings thereunder be subject to the fullest extent possible to the provisions of the Federal Arbitration Act.

Section 12. GOVERNING LAW. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of New Mexico, without regard to its conflicts of law principles.

Section 13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to the Executive’s employment and compensation by the Company, including the Executive Income Protection Plan.

Section 14. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto.

Section 15. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer or sale of all or substantially all of the assets of the Company with or to any other individual or entity or any similar event, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and such successor shall discharge and

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perform all the promises, covenants, duties and obligations of the Company hereunder.

Section 16. SEVERABILITY. In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violate such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Furthermore, any court order striking any portion of this Agreement shall modify the stricken terms as little as possible to give as much effect as possible to the intentions of the parties under this Agreement.

Section 17. HEADINGS; INCONSISTENCY. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of the Company, the terms of this Agreement shall control.

Section 18. COUNTERPARTS. This Agreement may be executed in counterparts (including counterparts delivered by facsimile), each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument.

Section 19. REPRESENTATION BY COUNSEL; INTERPRETATION. Each party acknowledges that it has had the opportunity to be represented by counsel in connection with this Agreement. Any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has hereunto signed this Agreement on the date first above written.

FIRST STATE BANCORPORATION
By:	[Name]
Title:	Chairman of the Board

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EXECUTIVE

[Executive]

Terms Approved by Compensation Committee

Meeting 9/6/01 (see Minutes of meeting)

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EX-10.2

Exhibit 10.2

FIRST STATE BANCORPORATION

2003 EQUITY INCENTIVE PLAN

Effective Date: June 6, 2003

Approved by Stockholders: June 6, 2003

Termination Date: See Section 13.2

SECTION 1. HISTORY AND PURPOSE

First State Bancorporation, a New Mexico corporation (the “Company”), adopted the First State Bancorporation 1993 Stock Option Plan (the “1993 Plan”) on October 5, 1993. The 1993 Plan was subsequently amended on June 5, 1998, June 8, 2001 and December 13, 2002. By its terms, the 1993 Plan terminates effective October 5, 2003, unless earlier terminated by the Company. The Company hereby adopts the First State Bancorporation 2003 Equity Incentive Plan (the “Plan”) immediately prior to or coincident with the termination of the 1993 Plan as a means to provide a variety of types of equity ownership to certain individuals for the purposes specified below. The shares that were reserved for grant under the 1993 Plan that were not granted under the 1993 Plan shall be included in the total number of shares reserved for issuance under this Plan.

The purpose of the Plan is to further the growth and development of the Company, by affording an opportunity for stock ownership to selected Employees, Directors and Consultants of the Company and its Subsidiaries who are responsible for the conduct and management of its business or who are involved in endeavors significant to its success and thereby to create in them a more direct interest in the future success of the operations of the Company by relating incentive compensation to increases in shareholder value, so that the income of those participating in the Plan is more closely aligned with the income of the Company’s stockholders. The Plan is also intended to assist the Company in attracting new Employees and Consultants and retaining existing Employees and Consultants; to optimize the profitability and growth of the Company through incentives which are consistent with the Company’s goals; to provide incentives for excellence in individual performance; and to promote teamwork.

SECTION 2. DEFINITIONS

Unless otherwise indicated, the following words when used herein shall have the following meanings:

2.1 “Affiliate” shall mean, with respect to any person or entity, a person or entity that directly or indirectly through one or more intermediaries, controls, or is controlled by,

or is under common control with, such person or entity.

2.2 “Award” shall mean the grant of Options, Restricted Stock, Stock Appreciation Rights (“SARs”) or other stock-based grant under the Plan.

2.3 “Board of Directors” shall mean the Board of Directors of the Company.

2.4 “Cause” shall mean “Cause,” as defined in the Participant’s employment agreement, if applicable, or if the Participant has not entered into an employment agreement with the Company, as determined in the sole and absolute discretion of the Company, a termination on account of dishonesty, fraud, misconduct, unauthorized use or disclosure of confidential information or trade secrets or conviction or confession of a crime punishable by law (except minor violations), in each such case as determined by the Plan Administrator, and its determination shall be conclusive and binding. Such actions constituting “Cause” shall include, without limitation: (1) repeated refusal to obey written directions of the Board of Directors or a superior officer (so long as such directions do not involve illegal or immoral acts); (2) repeated acts of substance abuse that are materially injurious to the Company or any of its Subsidiaries; (3) fraud or dishonesty that is materially injurious to the Company or any of its Subsidiaries; (4) breach of any material obligation of nondisclosure or confidentiality owed to the Company or any of its Subsidiaries; (5) commission of a criminal offense involving money or other property of the Company (excluding any traffic violations or similar violations); or (6) commission of a criminal offense that constitutes a felony in the jurisdiction in which the offense is committed. A Participant who agrees to resign from his or her affiliation with the Company in lieu of being terminated for Cause may be deemed to have been terminated for Cause for purposes of the Plan.

2.5 “Change in Control” shall be deemed to have occurred in the event of any one of the following:

(a) A person (as that term is used in Section 13d of the Securities Exchange At of 1934, as amended (the “Exchange Act”)) becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of shares of the Company having twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company without the prior approval of at least two-thirds of the members of the Board unaffiliated with that person; or

(b) Persons who constitute the directors of the Company at the beginning of a 24-month period cease to constitute at least two-thirds of all directors at any time during the period, unless the election of any new or replacement directors was approved by a vote of at least a majority of the members of the Board in office immediately before the period and of the new and replacement directors so approved;

(c) The adoption of any plan or proposal to liquidate or dissolve the Company; or

(d) Any merger or consolidation of the Company unless thereafter (1) directors of the Company immediately prior thereto continue to constitute at least two-thirds of the directors of the surviving entity or transferee, or (2) the Company’s securities continue to represent or are converted into securities that represent more than eighty percent (80%) of the combined voting power of the surviving entity or transferee.

The Plan Administrator’s reasonable determination as to whether such an event has occurred shall be final and conclusive. A Change in Control shall not occur with respect to an Employee if, in advance of such event, the Employee agrees in writing that such event shall not constitute a Change in Control. Notwithstanding anything to the contrary in this section, no rights under this Plan shall accrue to the Employee because of a Change in Control if the Employee or any group of which the Employee is a member, is the person whose acquisition constitutes the Change in Control.

2.6 “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

2.7 “Consultant” shall mean a consultant, agent, advisor or independent contractor who provides service to the Company and who does not receive wages subject to income tax federal withholding under section 3401 of the Code; provided, however, that such person renders bona fide services that are not in connection with the offer and sale of the Company’s securities in a capital raising transaction and does not directly or indirectly promote or maintain a market for the Company’s securities.

2.8 “Continuous Service” shall mean that the Participant’s service with the Company or an Affiliate, whether as an Employee, Consultant or Director, is not interrupted or terminated. The Participant’s Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Plan Administrator, in its sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave.

2.9 “Director” shall mean a member of the Board of Directors.

2.10 “Effective Date” shall mean the effective date of the Plan.

2.11 “Employee” shall include common law employees of the Company and its

Subsidiaries and any person who has accepted a binding offer of employment from the Company or its Subsidiary, but shall exclude any individual classified by the Company as an independent contractor or leased employee.

2.12 “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

2.13 “Fair Market Value” shall mean the value of the Stock, determined in accordance with the following:

(a) Publicly Traded. If the Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, then the Fair Market Value per share shall be deemed to be the average (mean) of the “high” and “low” sales prices for the Stock or security in the over-the-counter market for the preceding five days as reported by the National Association of Securities Dealers Automated Quotations System, or, if the prices are not reported thereby, the average of the closing bid and asked prices for the preceding five days, reported by the National Quotations Bureau.

(b) Not Publicly Traded. If none of these conditions apply, the Fair Market Value per share shall be deemed to be an amount as determined in good faith by the Plan Administrator by applying any reasonable valuation method.

2.14 “Incentive Stock Option” shall mean any option granted to an eligible Employee under the Plan, which the Company intends at the time the option is granted to be an Incentive Stock Option within the meaning of Code Section 422.

2.15 “Nonqualified Stock Option” shall mean any option granted to an eligible Employee, Director or Consultant under the Plan that is not an Incentive Stock Option.

2.16 “Option” shall mean and refer collectively to Incentive Stock Options and Nonqualified Stock Options.

2.17 “Option Agreement” shall mean the agreement specified in Section 7.2.

2.18 “Option Stock Restriction Agreement” shall mean an agreement placing certain restrictions upon the Participant’s right to transfer shares, including without limitation the creation of an irrevocable right of first refusal upon the transfer of shares in favor of the Company and its designees and provisions requiring the Participant to transfer the shares to the Company or the Company’s designees upon a termination of employment, as described in Section 7.7.

2.19 “Parent” shall mean a parent corporation of the Company as defined in Code

Section 424(e).

2.20 “Participant” shall mean any Employee, Director or Consultant who is granted an Award under the Plan. “Participant” shall also mean the personal representative of a Participant and any other person who acquires the right to exercise or receive payment pursuant to an Award by bequest or inheritance.

2.21 “Plan Administrator” shall mean the body that is responsible for the administration of the Plan, as determined pursuant to Section 4.1.

2.22 “Related Option” shall mean an Incentive Stock Option or a Nonqualified Stock Option that has been granted in conjunction with a SAR.

2.23 “Restricted Stock” shall mean shares of Stock granted to a Participant that are subject to the restrictions set forth in Section 8 of the Plan and the Restricted Stock Award Agreement. “Restricted Stock” shall also include any shares of the Company’s capital stock issued as the result of a dividend on or split of Restricted Stock. Upon termination of the restrictions, such Stock or other capital stock shall no longer be Restricted Stock.

2.24 “Restricted Stock Award Agreement” shall mean the agreement specified in Section 8.2 between the Company and a Participant pursuant to which Restricted Stock is granted to the Participant.

2.25 “Restriction Period” shall be the period set forth in the Restricted Stock Award Agreement that is the period beginning on the date of grant of the Award and ending on the vesting of the Restricted Stock.

2.26 “Reorganization” shall mean any one of the following events:

(a) the merger or consolidation of the Company (but only if the Company is not the surviving corporation or if the Company becomes a subsidiary of another corporation) or the acquisition of its assets or stock pursuant to a non-taxable reorganization, unless the surviving or acquiring corporation assumes the outstanding Awards or substitutes new Awards (for Options, in a manner consistent with regulations under Code Section 424);

(b) the dissolution or liquidation of the Company;

(c) the appointment of a receiver for all or substantially all of the Company’s assets or business;

(d) the appointment of a trustee for the Company after a petition has been filed for

the Company’s reorganization under applicable statutes; or

(e) the sale, lease, or exchange of all or substantially all of the Company’s assets and business.

2.27 “Retirement” shall mean the date on which an Employee or Consultant voluntarily terminates his or her Continuous Service after reaching the age of 60 following at least ten years of Continuous Service with the Company or reaching the age of 65 following at least five years of Continuous Service.

2.28 “Rule 16b-3” shall mean Rule 16b-3 promulgated by the Securities Exchange Commission under the Exchange Act, together with any successor rule, as in effect from time to time.

2.29 “Stock” shall mean the Company’s common stock, no par value, and any share or shares of the Company’s capital stock hereafter issued or issuable in substitution for such shares.

2.30 “Subsidiary” shall mean a subsidiary corporation of the Company as defined in Code Section 424(f).

2.31 “SAR” shall mean a stock appreciation right granted pursuant to Article 9 of the Plan.

2.32 “Termination Date” shall mean the termination date of the Plan, as first set forth above.

SECTION 3. EFFECTIVE DATE

The Effective Date of the Plan shall be the effective date first set forth above; provided, however, that the adoption of the Plan by the Board of Directors is subject to approval and ratification by the shareholders of the Company within 12 months of the effective date. Incentive Stock Options granted under the Plan prior to approval of the Plan by the shareholders of the Company shall be subject to approval of the Plan by the shareholders of the Company. If the shareholders of the Company do not approve the Plan as specified above, the Plan shall terminate retroactively to the date of initial adoption and any grant of Awards hereunder shall be null and void without any further action by the Board or the Company.

SECTION 4. ADMINISTRATION

4.1 PLAN ADMINISTRATOR. The Plan shall be administered by the Board of Directors, unless and until such time as the Board of Directors delegates the administration of the Plan to a committee, which shall be appointed by and shall serve at the pleasure of the Board of Directors. Any committee member shall be deemed to have resigned

automatically from the committee upon his or her termination of service with the Company. To the extent the Board considers it desirable for transactions relating to a grant of Options to be eligible to qualify for an exemption under Rule 16b-3, the Plan Administrator shall consist of a committee of two or more Directors of the Company, all of whom qualify as “non-Employee Directors” within the meaning of Rule 16b-3. To the extent the Board considers it desirable for compensation delivered pursuant to a grant of Options to be eligible to qualify for an exemption under Code Section 162(m), the Plan Administrator shall consist of a committee of two or more Directors of the Company, all of whom qualify as “outside Directors” within the meaning of Code Section 162(m). The Board may from time to time remove members from or add members to any such committee; fill vacancies on the committee, howsoever caused; and otherwise increase or decrease the number of members of such committee, in each case as the Board deems appropriate to permit transactions in Shares pursuant to the Plan and to satisfy such conditions of Rule 16b-3 or Code Section 162(m) as then in effect.

4.2 MEETINGS AND ACTIONS. The Plan Administrator shall hold meetings at such times and places as it may determine. A majority of the members of the Plan Administrator shall constitute a quorum, and the acts of the majority of the members present at a meeting or a consent in writing signed by all members of the Plan Administrator shall be the acts of the Plan Administrator and shall be final, binding and conclusive upon all persons, including the Company, its Subsidiaries, its stockholders, and all persons having any interest in Awards that may be or have been granted pursuant to the Plan.

4.3 POWERS OF PLAN ADMINISTRATOR. The Plan Administrator shall have the full and exclusive right to grant and determine terms and conditions of all Awards granted under the Plan and to prescribe, amend and rescind rules and regulations for administration of the Plan. In selecting Participants and granting Awards, the Plan Administrator shall take into consideration the contribution the Participant has made or may make to the success of the Company or its Subsidiaries and such other factors as the Plan Administrator shall determine.

4.4 INTERPRETATION OF PLAN. The Plan Administrator may correct any defect, supply any omission, or reconcile any inconsistency in the Plan or in any agreement entered into hereunder. The determination of the Plan Administrator as to any disputed question arising under the Plan, including questions of construction and interpretation, shall be final, binding and conclusive upon all persons, including the Company, its Subsidiaries, its shareholders, and all persons having any interest in Awards that may be or have been granted pursuant to the Plan.

4.5 INDEMNIFICATION. Each person who is or shall have been a member of the Plan Administrator or of the Board of Directors shall be indemnified and held harmless by

the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid in settlement thereof, provided that the Company approved such settlement, or paid in satisfaction of a judgment in any such action, suit or proceeding, provided such person shall give the Company an opportunity, at its own expense, to handle and defend the same before undertaking to handle and defend it on such person’s own behalf. The foregoing right of indemnification shall not be exclusive of, and is in addition to, any other rights of indemnification to which any person may be entitled under the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

SECTION 5. STOCK SUBJECT TO THE PLAN

5.1 PLAN LIMIT. The aggregate number of shares of Stock that may be issued under Awards granted pursuant to the Plan shall not exceed 750,000 shares; provided, however, that a maximum of 100,000 shares may be issued as Restricted Stock Awards. Shares that may be issued under Awards may consist, in whole or in part, of authorized but unissued stock or treasury stock of the Company not reserved for any other purpose. In addition, the Company may use the proceeds received from a Participant upon the exercise of his or her Option to repurchase shares of Stock in the open market, which shall be available for grant of Awards under the Plan.

5.2 INDIVIDUAL LIMIT. Subject to the provisions of Section 5.4 relating to adjustments upon changes in the shares of Stock, no Participant shall be eligible to be granted Awards covering more than 10% of the shares of Stock then available under the Plan during any calendar year.

5.3 UNUSED STOCK. If any outstanding Award under the Plan expires or for any other reason ceases to be exercisable, in whole or in part, other than upon exercise of the Award, the shares which were subject to such Award and as to which the Award had not been exercised shall continue to be available under the Plan. Any shares that are repurchased by the Company in accordance with the terms of an Option Stock Restriction Agreement shall upon such repurchase once again be available for issuance under the Plan. Any Restricted Stock that is forfeited to the Company pursuant to restrictions contained in this Plan or the Restricted Stock Award Agreement shall again be available for issuance under the Plan.

5.4 ADJUSTMENT FOR CHANGE IN OUTSTANDING SHARES.

(a) In General. If there is any change, increase or decrease, in the outstanding shares of Stock that is effected without receipt of additional consideration by the Company, by reason of a stock dividend, subdivision, reclassification, recapitalization,

merger, consolidation, stock split, combination or exchange of stock, or other similar circumstances, then in each such event, the Plan Administrator shall make an appropriate adjustment in the aggregate number of shares of Stock available under the Plan, the number of shares of Stock subject to each outstanding Award and the Option or Restricted Stock prices in order to prevent the dilution or enlargement of any Participant’s rights. In the event of any adjustment in the number of shares of Stock covered by any Award, including those provided in subsection (b) and (d) below, each such Award shall cover only the number of full shares resulting from such adjustment. The Plan Administrator’s determinations in making any adjustment shall be final and conclusive.

(b) Adjustments for Certain Distributions of Property. If the Company at any time distributes with respect to its Stock securities of other property (except cash or Stock), a proportionate part of those securities or other property shall be set aside and delivered to the Participant when he exercises an Option or the restrictions on Restricted Stock lapse. The securities or other property shall be in the same ratio to the total securities and property set aside for the Participant as the number of shares of Stock with respect to which the Option is then exercised or the Restricted Stock then vests is to the total shares of Stock subject to the Award.

(c) Exceptions to Adjustment. Except as expressly provided herein, the issue by the Company of shares of Stock of any class, or securities convertible into or exchangeable for shares of Stock of any class, for cash or property or for labor or services, either upon sale of upon exercise of rights or warrants to subscribe therefore, or upon conversion of shares or obligations of the Company convertible into or exchangeable for shares of Stock of any class shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to any Award granted under the Plan.

5.5 RETENTION OF RIGHTS. The existence of this Plan and any Award granted pursuant to the Plan shall not affect the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other change in the Company’s capital structure or its business, or a merger or consolidation or the Company, or any issue of bonds, debentures, or preferred or preference stock ranking before or affecting the Stock, or the dissolution of the Company or any sale or transfer of all or any part of the Company’s assets or business, or any other corporate act or proceeding, whether similar or not.

5.6 NO REPRICING OF OPTIONS. No modifications to reduce the exercise price (repricing) of previously fixed stock option Awards issued under the Plan may be made pursuant to the Plan.

SECTION 6. ELIGIBILITY

All full-time and part-time Employees of the Company and its Subsidiaries who are responsible for the conduct and management of its business or who are involved in endeavors significant to its success shall be eligible to receive any Award under the Plan. Directors and Consultants who are not Employees of the Company or its Subsidiaries shall be eligible to receive any Award, other than Incentive Stock Options, under the Plan. Any Director who is otherwise eligible to participate, who makes an election in writing not to receive any grants under the Plan, shall not be eligible to receive any such grants during the period set forth in such election.

SECTION 7. GRANT OF OPTIONS

7.1 GRANT OF OPTIONS. The Plan Administrator may from time to time in its discretion determine which of the eligible Employees, Directors and Consultants of the Company or its Subsidiaries should receive Options, the type of Options to be granted (whether Incentive Stock Options or Nonqualified Stock Options), the number of shares subject to such Options, and the dates on which such Options are to be granted. No Employee may be granted Incentive Stock Options to the extent that the aggregate Fair Market Value (determined as of the time each Option is granted) of the Stock with respect to which any such Options are exercisable for the first time during a calendar year (under all incentive stock option plans of the Company and its Parent and Subsidiaries) would exceed $100,000. To the extent that the limitation set forth in the preceding sentence has been exceeded, the Options that exceed the annual limitation shall be deemed to be Nonqualified Stock Options rather than Incentive Stock Options.

7.2 OPTION AGREEMENT. Each Option granted under the Plan shall be evidenced by a written Option Agreement setting forth the terms upon which the Option is granted. Each Option Agreement shall designate the type of Options being granted (whether Incentive Stock Options or Nonqualified Stock Options), and shall state the number of shares of Stock, as designated by the Plan Administrator, to which that Option pertains. More than one Option, and any combination of Options, SARs and Restricted Stock Awards, may be granted to an eligible person.

(a) Option Price. The option price per share of Stock under each Option shall be determined by the Plan Administrator and stated in the Option Agreement. The option price for Incentive Stock Options granted under the Plan shall not be less than 100% of the Fair Market Value (determined as of the day the Option is granted) of the shares subject to the Option. The option price for Nonqualified Stock Options granted under the Plan shall not be less than 85% of the Fair Market Value (determined as of the day the Option is granted) of the shares subject to the Option.

(b) Duration of Options. Each Option shall be of a duration as specified in the Option Agreement; provided, however, that the term of each Incentive Stock Option shall be no more than ten years from the date on which the Option is granted and shall be

subject to early termination as provided herein.

(c) Vesting. Unless otherwise stated in the Option Agreement, Options shall be subject to the following vesting schedule, which may be waived or accelerated by the Plan Administrator at any time:

Period of Participant’s Continuous Service from the Grant Date	Percentage or Fraction of Shares Subject to Option that become Vested and Exercisable
0 years	0	%
1 year	20	%
2 years	40	%
3 years	60	%
4 years	80	%
5 years	100	%

(d) Additional Limitations on Grant for 10% Stockholders. No Incentive Stock Option shall be granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock (as determined in accordance with Code Section 424(d)) representing more than 10% of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary, unless the option price of such Incentive Stock Option is at least 110% of the Fair Market Value (determined as of the day the Incentive Stock Option is granted) of the stock subject to the Incentive Stock Option and the Incentive Stock Option by its terms is not exercisable more than five years from the date it is granted.

(e) Rights as Stockholder. A Participant shall have no rights as a stockholder of the Company with respect to any shares of Stock covered by an Option until the date of the issuance of the stock certificate for such shares.

(f) Other Terms and Conditions. The Option Agreement may contain such other provisions, which shall not be inconsistent with the Plan, as the Plan Administrator shall deem appropriate, including, without limitation, provisions that relate to the Participant’s ability to exercise an Option in whole or in part to the passage of time or the achievement of specific goals or the occurrence of certain events, as specified by the Plan Administrator.

7.3 NONTRANSFERABILITY OF OPTIONS. Options granted pursuant to the Plan are not transferable by the Participant other than by will or the laws of descent and distribution and shall be exercisable during the Participant’s lifetime only by the Participant. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the Options contrary to the provisions hereof, or upon the levy of any attachment or similar process upon the Award, the Award shall immediately become null and void.

Notwithstanding the foregoing, to the extent specified in an Option Agreement, an Option may be transferred by a Participant solely to (1) the Participant’s immediate family (children, grandchildren, or spouse) or trusts or other entities established for the benefit of the Participant’s immediate family; or (2) the trust underlying a nonqualified deferred compensation plan established and maintained by the Company, to the extent specifically permitted in the trust agreement. Any such transfer of an Incentive Stock Option shall result in the conversion of the Option to a Nonqualified Stock Option.

7.4 MANNER OF EXERCISE. Subject to the limitations and conditions of the Plan or the Option Agreement, an Option shall be exercisable, in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, which notice shall specify the number of shares of Stock to be purchased and shall be accompanied by (a) payment in full to the Company of the purchase price of the shares to be purchased; plus (b) payment in full of such amount as the Company shall determine to be sufficient to satisfy any liability it may have for any withholding of federal, state or local income or other taxes incurred by reason of the exercise of the Option; (c) representations meeting the requirements of Sections 11.4 and/or 11.5 if requested by the Company; and (d) an Option Stock Restriction Agreement meeting the requirements of Section 7.7 if requested by the Company. Except as provided in Section 7.5, the conditions of this Section 7.4 shall be satisfied at the time that the Option or any part thereof is exercised, and no shares of Stock shall be issued or delivered until such conditions have been satisfied by the Participant.

7.5 PAYMENT OF PURCHASE PRICE. Payment for shares and withholding taxes shall be in the form of either (a) cash, (b) a certified or bank cashier’s check to the order of the Company, or (c) shares of the Stock, properly endorsed to the Company, in an amount the Fair Market Value of which on the date of receipt by the Company equals or exceeds the aggregate option price of the shares with respect to which the Option is being exercised, provided that such shares have been held outright by the Participant for at least six months, (d) any other form of legal consideration that may be acceptable to the Plan Administrator, or (e) in any combination thereof; provided, however, that no payment may be made in shares of Stock unless the Plan Administrator has approved of payment in such form by such Participant with respect to the Option exercise in question. If approved by the Plan Administrator with respect to the Option exercise in question, if the Stock is not registered under Section 12(g) of the Exchange Act at the time an Option is exercised, payment may be made by authorization for the Company to retain from the total number of shares of Stock as to which the Option is exercised that number of shares of Stock having a Fair Market Value on the date of exercise equal to the exercise price for the total number of shares of Stock as to which the Option is exercised. Should the Stock be registered under Section 12(g) of the Exchange Act at the time an Option is exercised, and to the extent the option is exercised for vested shares, then payment may also be made through a special sale and remittance procedure pursuant to which the Participant shall concurrently provide irrevocable written instructions (1) to a brokerage firm designated by the Company to

effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable withholding taxes, and (2) to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Upon the exercise of any Option, the Company, in its sole discretion, may permit the deferred payment of the purchase price on such terms and conditions, as the Company shall specify.

7.6 TERMINATION OF CONTINUOUS SERVICE. Any vesting of the Option shall cease upon termination of Continuous Service, and the Option shall be exercisable only to the extent that it was exercisable on the date of such termination. Any Option not exercisable as of the date of termination, and any Option or portions thereof not exercised within the period specified herein, shall terminate.

(a) Termination Other than for Cause. Subject to any limitations set forth in the Option Agreement, and provided that the notice of exercise is provided prior to the expiration of the Option, the Participant shall be entitled to exercise the Option (i) during the Participant’s Continuous Service, and (ii) for a period of three months after the date of termination of the Participant’s Continuous Service for reason other than for Cause, or such longer period as may be set forth in the Option Agreement.

(b) Termination by Death. Notwithstanding subsection (a), if a Participant’s Continuous Service should terminate as a result of the Participant’s death, or if a Participant should die within a period of three months after termination of the Participant’s Continuous Service under circumstances in which subsection (a) would permit the exercise of the Option following termination, the personal representatives of the Participant’s estate or the person or persons who shall have acquired the Option from the Participant by bequest or inheritance may exercise the Option at any time within one year after the date of death, but not later than the expiration date of the Option.

(c) Termination by Disability or Retirement. Notwithstanding subsection (a), if a Participant’s Continuous Service should terminate by reason of (i) the Participant’s disability (within the meaning of the long-term disability policy maintained by the Company, or if none, within the meaning of Code Section 22(e)(3)), or (ii) the Participant’s Retirement, the Participant may exercise the Option at any time within one year after the date of termination but not later than the expiration date of the Option.

(d) Termination for Cause; Breach of Covenant Not to Compete or Nondisclosure Agreement. Notwithstanding anything herein to the contrary, and unless otherwise provided by the Option Agreement, unexercised Options granted to the Participant shall terminate immediately if the Participant is terminated for Cause, breaches any obligation under a covenant not to compete with the Company or any of its

Subsidiaries, or breaches any obligation under an agreement not to use or disclose proprietary information obtained from or through the Company or any of its Subsidiaries, upon such occurrence.

7.7 OPTION STOCK RESTRICTION AGREEMENT. Upon demand by the Company, the Participant shall execute and deliver to the Company an Option Stock Restriction Agreement in such form as the Company may provide at the time of exercise of the Option. Such Agreement may include, without limitation, restrictions upon the Participant’s right to transfer shares, including the creation of an irrevocable right of first refusal in the Company and its designees, and provisions requiring the Participant to transfer the shares to the Company or the Company’s designees upon a termination of Continuous Service. Upon such demand, execution of the Option Stock Restriction Agreement by the Participant prior to the transfer or delivery of any shares and prior to the expiration of the option period shall be a condition precedent to the right to purchase such shares, unless such condition is expressly waived in writing by the Company.

SECTION 8. STOCK APPRECIATION RIGHTS

8.1 GRANT OF SARS. The Plan Administrator may from time to time in its discretion determine which of the eligible Employees, Directors and Consultants of the Company or its Subsidiaries should receive SARs, the number of shares subject to such SARs, and the dates on which such SARs are to be granted. The Plan Administrator may, but shall not be obligated to, grant SARs pursuant to the provisions of this Section 8.1 to any Participant with respect to all or any portion of the shares of Stock subject to the Related Option. The SAR may be granted either concurrently with the grant of the Related Option or at any time thereafter prior to the complete exercise, termination, expiration or cancellation of the Related Option. The grant of the SAR shall be evidenced in the written Option Agreement for the Related Option, either as initially issued or as amended. The Option Agreement shall state the number of shares of SARs being granted, as designated by the Plan Administrator. More than one SAR may be granted to a Participant. The exercise price per share of each SAR shall be determined by the Plan Administrator and stated in the Option Agreement. Each SAR shall be of the same duration as the Related Option.

8.2 EXERCISE OF SARS. Each SAR shall be exercisable to the extent the Related Option is then exercisable (including any vesting provisions provided in Section 7.2) and may be subject to such additional limitations on exercisability as the Option Agreement may provide (e.g., solely in the event of a Change in Control). In no event shall a SAR be exercisable after the expiration, termination or exercise of the Related Option. Upon the exercise of SARs, the Related Option shall be considered to have been exercised to the extent of the number of shares of Stock with respect to which SARs are exercised, both for purposes of acquiring shares of Stock upon exercise of an Option and for purposes of determining the number of shares of Stock

which may be issued pursuant to the Plan. The effective date of exercise of a SAR shall be the date on which the Company shall have received notice from the Participant of the exercise thereof. Upon the exercise of SARs, the Participant shall receive in cash an amount equal to the Fair Market Value on the date of exercise of such SAR of the shares of Stock with respect to which such SAR shall have been exercised over the aggregate exercise price of the Related Option.

SECTION 9. RESTRICTED STOCK AWARDS

9.1 AWARD OF RESTRICTED STOCK. The Plan Administrator may from time to time in its sole discretion determine which of the eligible Employees, Directors, or Consultants of the Company should receive grants of Restricted Stock, the number of shares of Restricted Stock to be granted to each such eligible Employee, Director, and Consultant, the dates on which such shares of Restricted Stock are to be granted, and the restrictions applicable to each grant of shares of Restricted Stock.

9.2 RESTRICTED STOCK AWARD AGREEMENT. Each Restricted Stock Award granted under the Plan shall be evidenced by a written Restricted Stock Award Agreement setting forth the terms upon which the Restricted Stock Award is granted. Each Restricted Stock Award Agreement shall state the number of shares of Stock, as designated by the Plan Administrator, to which that Restricted Stock Award pertains; the price, if any, to be paid by the Participant for the Restricted Stock; and the restrictions applicable to each grant of shares of Restricted Stock. More than one Restricted Stock Award may be granted to an eligible person. The terms of any Restricted Stock Award Agreement need not be identical to the terms of other Restricted Stock Award Agreement applicable to other grants of Restricted Stock under the Plan to the same or other Participants. No shares of Restricted Stock shall be issued under the Plan until the Participant of such shares provides the Company with a signed Restricted Stock Award Agreement in the form specified by the Plan Administrator with respect to the grant of Restricted Stock to that Participant.

(a) Issuance of Restricted Stock. The right to receive Restricted Stock shall be conditioned upon the delivery by the Participant of (a) payment in full, in cash, check, or by certified or bank cashier’s check to the Company (or payment by such other consideration as shall be permitted by the Plan Administrator) or, upon approval of the Plan Administrator, shares of the Stock, properly endorsed to the Company, in an amount the Fair Market Value of which on the date of receipt by the Company equals or exceeds the aggregate purchase price of the shares; (b) payment in similar form equal to such amount as the Company shall determine to be sufficient to satisfy any liability it may have for any withholding of federal, state or local income or other taxes incurred by reason of the vesting of the Restricted Stock or the Participant’s election under Code Section 83(b); (c) a representation meeting the requirements of Section 12.4 if requested by the Plan Administrator; and (d) a copy of the executed Restricted Stock Award

Agreement in the form specified by the Plan Administrator with respect to the grant of Restricted Stock to that Participant.

(b) Vesting. Unless otherwise stated in the Award Agreement, Restricted Stock shall be subject to the following vesting schedule, which may be waived or accelerated by the Plan Administrator at any time:

Period of Participant’s Continuous Service from the Grant Date	Percentage or Fraction of Shares that become Vested
0 years	0	%
1 year	20	%
2 years	40	%
3 years	60	%
4 years	80	%
5 years	100	%

(c) Stock Certificates. The stock certificate or certificates representing the Restricted Stock shall be registered in the name of the Participant to whom such Restricted Stock shall have been granted. Such certificates shall remain in the custody of the Company and the Participant shall deposit with the Company stock powers or other instruments of assignment, each endorsed in blank, so as to permit retransfer to the Company of all or a portion of the Restricted Stock that shall be forfeited or otherwise not become vested in accordance with the Plan and the applicable Restricted Stock Award Agreement.

(d) Restrictions and Rights. Restricted Stock shall constitute issued and outstanding shares of Stock for all corporate purposes. The Participant shall have the right to vote such Restricted Stock, to receive and retain all regular cash dividends and such other distributions, as the Board of Directors may, in its discretion, designate, pay or distribute on such Restricted Stock, and to exercise all other rights, powers and privileges of a holder of Stock with respect to such Restricted Stock, except as set forth in this section. The Restricted Stock Award Agreement may contain such other provisions, which shall not be inconsistent with the Plan, as the Plan Administrator shall deem appropriate.

(e) Forfeiture. If the Participant fails to satisfy any applicable restrictions, terms and conditions set forth in this Plan or in the Restricted Stock Award Agreement for any reason, any Restricted Stock held by such Participant and affected by such conditions shall be forfeited to the Company in return for such consideration as shall be specified in the Restricted Stock Award Agreement. The Company and its officers are authorized to reflect such forfeiture of Restricted Stock on the Company’s stock ledger.

9.3 NONTRANSFERABILITY OF RESTRICTED STOCK. Restricted Stock granted

pursuant to the Plan is not transferable by the Participant until all restrictions on such Restricted Stock shall have lapsed. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the Restricted Stock, contrary to the provisions hereof, or upon the levy of any attachment or similar process upon the Restricted Stock, the Restricted Stock shall immediately become null and void. Notwithstanding the foregoing, to the extent specified in an Award Agreement, Restricted Stock may be transferred by a Participant solely to (1) the Participant’s immediate family (children, grandchildren, or spouse) or trusts or other entities established for the benefit of the Participant’s immediate family; or (2) the trust underlying a nonqualified deferred compensation plan established and maintained by the Company, to the extent specifically permitted in the trust agreement.

9.4 TERMINATION OF CONTINUOUS SERVICE. In the event that a Participant terminates Continuous Service with the Company for any reason, including disability of the Participant, any unvested Restricted Stock held by such Participant as of the date of such termination of Continuous Service shall be forfeited to the Company as of the date of termination of Continuous Service.

SECTION 10. OTHER AWARDS

The Plan Administrator may from time to time in its sole discretion determine which of the eligible Employees, Directors, or Consultants of the Company should receive grants of other grants of Stock and/or other Awards that are value in whole or in part by reference to, or are otherwise based upon, Stock, including without limitation dividend equivalents, standalone stock appreciation rights, phantom stock (including restricted stock units) and performance units. Such Awards may be issued alone or in conjunction with other Awards under the Plan. In addition, the Plan Administrator may, from time to time, in its sole discretion and consistent with applicable law that would prohibit the imposition of the constructive receipt of income under Code Section 451, afford a Participant the opportunity to convert the form of Award currently held by the Participant prior to the time such Participant would become vested in such Award (e.g., from a Restricted Stock Award to an Award of restricted stock units).

SECTION 11. CHANGE IN CONTROL; CORPORATE REORGANIZATION

Upon the occurrence of a Change in Control or Reorganization, with respect to Awards held by Participants whose Continuous Service has not terminated, the vesting of such Awards (and, if applicable, the time during which such Awards may be exercised) shall be accelerated in full, and, if applicable, the Awards shall terminate if not exercised at or prior to such Change in Control or Reorganization; provided, however, that if the Option Agreement or Restricted Stock Award Agreement applicable to a particular Award states that no acceleration of vesting shall occur with respect to the Award under such agreement, the agreement shall control. Unless the surviving corporation or acquiring corporation agrees to assume any outstanding Award, the Plan Administrator shall, upon written notice to all Participants holding such fully vested Awards,

provide that all unexercised Awards must be exercised within a specified number of days of the date of such notice or such Awards will terminate. In response to such a notice, a Participant may make an irrevocable election to exercise the Participant’s Award contingent upon and effective as of the effective date of the Change in Control or Reorganization. Prior to such a Change in Control or Reorganization, the Plan Administrator may, in its sole discretion, terminate any or all unexercised Awards (after acceleration of vesting) in exchange for consideration similar to that received by stockholders of Stock of the Company in the Change in Control or Reorganization, less the exercise price required under such Awards.

SECTION 12: ISSUANCE OF SHARES

12.1 TRANSFER OF SHARES TO PARTICIPANT. As soon as practicable after (i) a Participant has given the Company written notice of exercise of an Option and has otherwise met the requirements of Section 7.2, or (ii) a Participant has satisfied any applicable restrictions, terms and conditions set forth in this Plan or in the Restricted Stock Award Agreement with respect to a Restricted Stock Award, the Company shall register a certificate in such Participant’s name for the number of shares of Stock as to which the Option has been exercised or the Restricted Stock Award has been satisfied and shall, upon the Participant’s request, deliver such certificate to the Participant. In no event shall the Company be required to transfer fractional shares to the Participant, and in lieu thereof, the Company may pay an amount in cash equal to the Fair Market Value of such fractional shares on the date of exercise.

12.2 LEGEND. All certificates evidencing shares of Restricted Stock originally issued or subsequently transferred to any person or entity, which are subject to the terms and provisions of this Agreement shall bear a legend that reads substantially as follows, in addition to such other legends as counsel to the Company may deem appropriate:

“THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF THE COMPANY’S 2003 EQUITY INCENTIVE PLAN AND AN AGREEMENT BETWEEN THE ISSUER AND THE REGISTERED HOLDER, OR HIS PREDECESSOR IN INTEREST, WHEREBY THE TRANSFER IN ANY MANNER OF SUCH SHARES OF STOCK OR ANY INTEREST THEREIN IS RESTRICTED AND THE SHARES OF STOCK ARE SUBJECT TO FORFEITURE. A COPY OF SAID PLAN AND SAID AGREEMENT MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF THE ISSUER.”

To the extent that restrictions on the Restricted Stock have lapsed, certificates bearing the legend provided for herein may be submitted to the Company, and the Company shall reissue such certificates free of such legend.

12.3 COMPLIANCE WITH LAWS. If the issuance or transfer of shares by the

Company would for any reason, in the opinion of counsel for the Company, violate any applicable federal or state laws or regulations, the Company may delay issuance or transfer of such shares to the Participant until compliance with such laws can reasonably be obtained. In no event shall the Company be obligated to effect or obtain any listing, registration, qualification, consent or approval under any applicable federal or state laws or regulations or any contract or agreement to which the Company is a party with respect to the issuance of any such shares. If, after reasonable efforts, the Company is unable to obtain the authority that counsel for the Company deems necessary for the lawful issuance and sale of shares upon exercise of Options or vesting of Restricted Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell shares upon exercise of such Options or vesting of Restricted Stock unless and until such authority is obtained.

12.4 INVESTMENT REPRESENTATION. The Company may require any Participant, as a condition precedent to exercising any Option or purchasing any Restricted Stock, to provide a written representation providing assurances satisfactory to the Company (a) as to the Participant’s knowledge and experience in financial and business matters and/or that the Participant has engaged a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, (b) that the Participant is capable of evaluating, alone or together with the purchaser representative, the merits and risks of acquiring the Stock; and (c) that the Participant is acquiring the stock subject to the Option or the Restricted Stock for such person’s own account and not with any present intention of selling or otherwise distributing the stock. Such a representation shall not be required if (1) the issuance of the shares pursuant to an Award has been registered under a then currently effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or (2) as to any particular requirement, a determination is made by counsel for the Company that such representation is not required. Certificates representing Stock acquired pursuant to an Award may contain such legends and transfer restrictions as the Company shall deem reasonably necessary or desirable, including, without limitation, legends restricting transfer of the Stock until there has been compliance with federal and state securities laws and until the Participant or any other holder of the Stock has paid the Company such amounts as may be necessary in order to satisfy any withholding tax liability of the Company.

12.5 LOCK-UP AGREEMENT. Upon demand by the Company, the Participant shall execute and deliver to the Company a representation that, in connection with the first underwritten registered offering of any securities of the Company under the Securities Act of 1933, as amended, the Participant will not sell or otherwise transfer or dispose of any shares of Stock held by the Participant (other than those included in the registration) for a period specified by the representative of the underwriters not to exceed 180 days following the effective date of the registration statement of the Company filed under the Act; provided, however, that (a) such agreement shall apply only to the Company’s underwritten

public offering of shares of Stock of the Company or the development of a public trading market for the shares of Stock of the Company; and (b) all officers and Directors of the Company and holders of at least one percent (1%) of the Company’s voting securities at the time of such initial public offering enter into similar agreements.

The obligations described in this section shall not apply to a registration solely to employee benefit plans on Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Stock (or other securities) subject to the foregoing restriction until the end of said 180-day period.

SECTION 13: AMENDMENT AND TERMINATION

13.1 AMENDMENT OF THE PLAN. The Board of Directors may at any time and from time to time alter, amend, suspend or terminate the Plan or any part thereof as it may deem proper, except that no such action shall diminish or impair the rights under an Award previously granted. Unless the shareholders of the Company shall have given their approval, the total number of shares which may be issued under the Plan shall not be increased, except as provided in Section 5.4, and no amendment shall be made which reduces the price at which the Stock may be offered upon the exercise of Options under the Plan below the minimum required by Section 7.2(a), except as provided in Section 5.4, or which materially modifies the requirements as to eligibility for participation in the Plan. Subject to the terms and conditions of the Plan, the Board of Directors may modify, extend or renew outstanding Awards granted under the Plan, or accept the surrender of outstanding Awards in substitution therefor, except that no such action shall diminish or impair the rights under an Award previously granted without the consent of the Participant.

13.2 TERMINATION OF THE PLAN. This Plan shall not have any fixed Termination Date. The Board of Directors may at any time suspend or terminate the Plan. No such suspension or termination shall diminish or impair the rights under an Award previously granted without the consent of the Participant. Notwithstanding the foregoing, no Incentive Stock Options may be granted any time after ten years after the adoption by the Board of any amendments to the Plan that constitutes the adoption of a new plan for purposes of Code Section 422.

SECTION 14: GENERAL PROVISIONS

14.1 NO EMPLOYMENT RIGHTS. Nothing contained in this Plan or in any Award granted under the Plan shall confer upon any Participant any right with respect to the continuation of such Participant’s Continuous Service by the Company or any Subsidiary or interfere in any way with the right of the Company or any Subsidiary, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such

Continuous Service or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of the Award.

14.2 OTHER EMPLOYEE BENEFITS. Unless so provided by the applicable plan, the amount of compensation deemed to be received by a Participant as a result of the exercise of an Award shall not constitute earnings with respect to which any other employee benefits of the person are determined, including without limitation benefits under any pension, profit sharing, life insurance, or disability or other salary continuation plan.

14.3 CONFIDENTIALITY OF INFORMATION. Information regarding the grant of Awards under this Plan is confidential and may not be shared with anyone other than the Participant’s immediate family and personal financial advisor and other person(s) designated by Participant by power of attorney or assignment.

14.4 SEVERABILITY. If any provision of this Plan is held by any court or governmental authority to be illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions. Instead, each provision held to be illegal or invalid shall, if possible, be construed and enforced in a manner that will give effect to the terms of such provision to the fullest extent possible while remaining legal and valid.

14.5 GOVERNING LAW AND VENUE. This Plan, and all Awards granted under this Plan, shall be construed and shall take effect in accordance with the laws of the State of New Mexico without regard to conflicts of laws principles. Resolution of any disputes under this Agreement shall only be held in courts in Santa Fe, New Mexico.

14.6 USE OF PROCEEDS. Any cash proceeds received by the Company from the sale of shares of Stock under the Plan shall be used for general corporate purposes.

*             *             *

Adopted as of the Effective Date as first set forth above.

FIRST STATE BANCORPORATION
By:	/s/ Leonard J. DeLayo, Jr.
Name:	Leonard J. DeLayo, Jr.
Title:	Chairman of the Board

EX-10.3

Exhibit 10.3

FIRST STATE BANCORPORATION

EXECUTIVE DEFERRED COMPENSATION PLAN

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

WHEREAS, the Company now wishes to set forth the terms and conditions upon which compensation or stock awards of the executive employees and fees of the Directors may be deferred or additional compensation may be paid to the employees or Directors to the employees’ or Directors’ beneficiaries after an employee’s termination without cause, retirement, disability, or death or a Director’s cessation of service or death.

NOW, THEREFORE, the Company adopts this Plan.

ARTICLE 1.

DEFINITIONS

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

1.1 Account means the account established for each Employee pursuant to Section 2.1.

1.2 Administrator means the Compensation Committee of First State Bancorporation. The Administrator shall have the right to delegate certain responsibilities under the Plan and to engage agents as it sees fit to provide assistance with the Plan, including legal, accounting or other service providers.

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

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

(a) A person [as that term is used in Section 13d of the Securities Exchange At of 1934, as amended (the “Exchange Act”) becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange

Act) of shares of the Company having twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company without the prior approval of at least two-thirds of the members of the Board unaffiliated with that person; or

(b) Persons who constitute the directors of the Company at the beginning of a 24-month period cease to constitute at least two-thirds of all directors at any time during the period, unless the election of any new of replacement directors was approved by a vote of at least a majority of the members of the Board in office immediately before the period and of the new and replacement directors so approved;

(c) The adoption of any plan or proposal to liquidate or dissolve the Company; or

(d) Any merger or consolidation of the Company unless thereafter (1) directors of the Company immediately prior thereto continue to constitute at least two-thirds of the directors of the surviving entity or transferee, or (2) the Company’s securities continue to represent or are converted into securities that represent more than eighty percent (80%) of the combined voting power of the surviving entity or transferee.

The Administrator’s reasonable determination as to whether such an event has occurred shall be final and conclusive. A Change in Control shall not occur with respect to an Employee if, in advance of such event, the Employee agrees in writing that such event shall not constitute a Change in Control. Notwithstanding anything to the contrary in this Section 1.4, no rights under this Plan shall accrue to the Employee because of a Change in Control if the Employee or any group of which the Employee is a member, is the person whose acquisition constitutes the Change in Control.

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

1.6 Compensation means the Employee’s wages, salaries, fees, for professional services and other amounts received (whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent the amounts are includable in gross income, including but not limited to commissions, compensation for services on the basis of a percentage of profits, bonuses, fringe benefits, reimbursements and expense allowances, but not including those items excludable for the definition of compensation under Treas. Reg. Section 1.415-2(d)(3). For Directors, Compensation means the annual fees paid as compensation to the Director by the Company for serving on its Board of Directors, including retainer fees and meeting fees.

1.7 Director means a member of the Company’s Board of Directors who is not an employee of the Company or an Employer.

1.8 Disability Date means the date on which the Administrator makes a final determination that the Employee is suffering from a physical or mental incapacity as a result of which the Employee has been absent from the full-time performance of the Employee’s duties with an Employer for period of six (6) consecutive months, the Employer has given the Employee a notice of termination of employment due to disability, and, within thirty (30) days after such notice is given, the Employee shall not have returned to the full-time performance of his or her duties. To the extent required by law and to the extent the Administrator is ruling on a claim for benefits on account of a disability, the Plan will follow, with respect to that claim, claims procedures required by law for plans providing disability benefits.

1.9 Effective Date means February 15, 2002.

1.10 Employee means an individual employed by an Employer as a highly compensated and/or management level employee and who is selected by the Administrator in its sole discretion to participate in this Plan.

1.11 Employer means the Company, its successor and parent and any successor to all or a major portion of the Company’s assets or business which assumes the obligations of the Company, and each other related entity that may adopt this Plan from time to time with the consent of the Company. For Directors, Employer means the Company.

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

1.13 Fair Market Value means the closing price of a share of Stock as reported by the National Market System or any national securities exchange which may then be the primary trading market for the Stock on a particular date. In the event that there are no Stock transactions on such date, the Fair Market Value shall be determined as of the immediately preceding date on which there were Stock transactions.

1.14 Hardship means an unforeseeable event that imposes an immediate and severe financial burden upon a Participant and that is incapable of being ameliorated through other resources available to the Participant, including insurance or borrowing from commercial lenders. Such hardship may include payment of a Participant’s medical expenses, eviction from his or her primary residence, or other circumstances. The Administrator in its sole, absolute and unfettered discretion in a reasonable and nondiscriminatory manner shall determine whether or not an event constitutes a “hardship” under the Plan.

1.15 Participant means an Employee or Director.

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

1.17 Plan Year means the 12 consecutive month period ending each

December 31, except the first Plan Year shall begin February 15, 2003 and end on December 31, 2003.

1.18 Retirement Date means the first day of the first month which coincides with, or immediately follows, the date on which the Employee reaches 65 years of age or, if later, the date upon which the Employee actually retires.

1.19 Stock shall mean shares of common stock of First State Bancorporation.

1.20 Stock Award means all or any portion of an award based on Stock (which may be in the form of incentive stock options, nonqualified stock options, restricted stock, restricted stock units or other awards similar in nature) granted to an Employee pursuant to the Company’s equity compensation plan in existence as of the date of the initial grant of the award.

1.21 Stock Award Units means the amount of Stock Awards elected to be deferred by an Employee as provided in Section 2.3(b)(2).

1.22 Termination Date means the first day of the first month that coincides with, or immediately follows, the date on which the Employee terminates service with his or her Employer (without being immediately employed by another Employer) and has not forfeited benefits pursuant to Article 5. Termination Date shall not include the date on which an Employee begins an approved leave of absence from the Employer; provided that, failure to return from such leave of absence on a timely basis shall result in a Termination Date of the date on which the Employee was scheduled to return. For Directors, Termination Date mean the date on which the Director resigns or is removed from service on the Company’s Board of Directors for any reason, including death or disability.

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

ARTICLE 2.

BENEFIT

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

2.2 Participant Accounts. Each Participant shall have an Account established in his or her name under the Plan to which his or her

Employer shall credit an annual benefit as specified in Section 2.3. The Administrator shall cause benefit statements reflecting the current amount in the Participant’s Account to be distributed to the Employees on an annual basis.

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

(A) Employer Contribution. The Employer may contribute an amount to each Employee’s Account determined in the sole discretion of the Administrator. The contribution may be different with respect to each Employee, and may, without limitation, be calculated in accordance with certain pre-established performance goals or with reference to the amount of the Employee’s contribution. The contribution shall be made on a date at the beginning of each Plan Year in respect of the immediately preceding Plan Year, or at such other time as the Administrator may determine in its sole discretion. No Employer Contribution shall be made on behalf of Directors.

(B) Participant Contribution.

(1) Compensation Deferral Election. The Participant may elect, on the form provided by the Administrator, to contribute a dollar amount or percentage of Compensation that otherwise would be payable to the Participant by the Employer. The minimum amount of Compensation that may be deferred under the Plan for any Plan Year by an Employee is 5% of an Employee’s base pay or 5% of an Employee’s bonus compensation. The maximum amount of Compensation that may be deferred under the Plan for any Plan Year by an Employee is 50% of the Employee’s base pay and 100% of the Employee’s bonus compensation. The maximum amount of Compensation that may be deferred under the Plan for any Plan Year by a Director is 100% of the Director’s Compensation. Any election to defer receipt of Compensation by the Participant must be made before the beginning of the period of service for which the compensation is payable. A Participant’s contribution will be made on each date on which the Participant receives a check for Compensation from the Employer. Notwithstanding the foregoing, not more frequently than once per Plan Year, the Employee may revoke, in the form provided by the Administrator, his or her deferral election with respect to Compensation not yet

earned by the Employee. Such revocation must be made before the Employee performs the service for which the Compensation is payable and shall remain in effect until the end of the Plan Year in which the revocation is made. Any subsequent election to defer receipt of compensation shall not apply until the calendar year following the calendar year in which the Employee made the revocation.

(2) Stock Award Units Deferral Election. To the extent permitted by the plan or agreement under which the Stock Award was granted, an Employee with a vested but unexercised stock option or restricted stock, restricted stock units, or other Stock Awards retaining characteristics that prevent the application of the constructive receipt rules of Code section 451 may elect to defer all or any portion of the Stock Award to the Employee’s Account hereunder in the form of Stock Award Units; provided, that such election to defer must occur at least six (6) months prior to the date of such exercise or lapse of restrictions. Any such election made by the Employee is irrevocable; however, in the event of an Employee’s death prior to the exercise or lapse of restrictions, the deferral election shall not become effective. A Stock Award Units Deferral election shall not count toward the minimum or maximum Compensation Deferral election under Section 2.3(b)(1). This Plan governs the deferral of the delivery and receipt of Stock Award Units upon the exercise of options or on restricted stock units only. The options and restricted Stock themselves, including any requirements as to exercise, are governed by the terms of the plan under which they were granted.

(A) Calculation of Units upon Exercise of Options under the Plan, Other Awards. An Employee shall not hold Stock in his or her Account under the Plan. Immediately upon transfer of a Stock Award in the form of Stock or upon exercise of a Stock Award in the form of an option, the Stock Award shall be converted to Stock Award Units. The number of Stock Award Units credited to an Employee’s Account upon the exercise of the option previously transferred to the Plan shall equal the difference between (1) the number of shares of Stock subject to the

Employee’s option, and (2) the number of shares of Stock delivered by the Employee in payment of the option exercise price, less any shares of Stock withheld in accordance with the plan under which the option was granted to satisfy FICA, Medicare or any other taxes due upon the exercise of such Stock Option. The number of Stock Award Units credited to an Employee’s account upon an Employee’s election to convert restricted stock to restricted stock units shall equal the number of shares of Stock originally granted as restricted stock.

(B) Conversion of Stock Award Units. Stock Award Units shall remain in an Employee’s Account until such time as the Employee becomes eligible to receive a distribution of his or her Account. The number of shares of Stock that an Employee will receive at the time of distribution shall be equal to the number of Stock Award Units in the Employee’s Account as of the date the Employee becomes eligible to receive a distribution of his or her Account.

(C) No Rights as Shareholder. An Employee who has elected to defer a Stock Award into the Plan shall have no rights as a shareholder of the Company with respect to the Stock Award Units in his or her Account.

(D) Dividend Equivalent Allocation. As of each dividend payment date with respect to shares of Stock, the Administrator shall credit each Employee’s Account with an amount equivalent to the dividends paid by the Company on the number of shares of Stock equal to the number of Stock Award Units in the Participant’s Account. Such dividend equivalent amounts credited to a Participant’s Account shall be “reinvested” in additional Stock Award Units at a price equal to the Fair Market Value of such Stock as of the dividend payment date.

(E) Adjustments. In the event that the Administrator determines that any dividend or other distribution with respect to shares of Stock (whether in the form of cash, stock, securities of a subsidiary of the Company,

other securities or other property), any recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Stock or other securities of the Company, issuance of warrants or other rights to purchase Stock or other securities of the Company, or any other similar corporate transaction or event affects the Stock such that an adjustment to the Employee’s allocations to their Accounts is appropriate to prevent reduction or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Administrator may, in its sole discretion and in a manner it deems equitable, adjust the Stock Units allocated to Employee Accounts.

2.14 Investment of Account. To the extent the Participant’s Account is held in the Trust, the Participant shall have the right, consistent with the terms of the Trust, to invest the amounts deferred into his or her Account as a Compensation Deferral among the investment vehicles selected by the Administrator in its sole discretion, which may include, without limitation, variable life insurance products and mutual funds. Any losses incurred or gains realized by the Participant shall be subtracted from or added to the amount in the Participant’s Account on a regular frequency as determined by the Administrator. A Participant may choose to reallocate the amounts in his or her Account among the investment alternatives on a regular frequency as determined solely by the Administrator. A Participant’s Stock Award Units may not be invested.

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

ARTICLE 3.

VESTING OF BENEFITS

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

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

Such vesting schedule shall also apply to investment gains and earnings, if any, earned on the Employee’s Account pursuant to Section 2.4. “Years of Employment” shall mean 12 consecutive month periods measured from the later of: (a) the Effective Date of the Plan; or (b) the date of the Employee’s initial employment with the Employer. There shall be no vesting credit for past employment.

3.2 Subject to Trust. The Employer’s obligation to the Participants is an unfunded, unsecured promise to pay compensation in the future, including, without limitation, all amounts held in the form of Stock Award Units. No Participant or Beneficiary shall acquire any property interest in his or her Account or any other assets of the Employer, their rights being limited to receiving from the Employer deferred payments as set forth in this Plan and the underlying Trust. All amounts contributed to the Trust with respect to the Participants shall be held in accordance with the terms of the Trust. All amounts credited to a Trust account shall be subject to the claims of the general creditors of the Employer. Nothing contained in the Plan shall constitute a guaranty by any person that the assets of an Employer will be sufficient to pay any benefit hereunder.

3.3 Acceleration of Vesting. In the event of (a) a Change in Control, or (b) an Employee’s Death, Disability Date or Retirement Date, all unvested amounts shall become immediately vested.

ARTICLE 4.

PAYMENT OF BENEFIT

4.1 Employee’s Retirement or Disability. Upon the earlier of an Employee’s Retirement Date or Disability Date, the Employee shall be entitled to receive a distribution equal to the Employee’s vested Account balance under the Plan as of the date of such Retirement Date or Disability Date. Such distribution shall be paid in a single lump sum, or, upon the Employee’s election, in substantially equal annual installments over a period of years, the number of years to be determined solely by the Administrator from time to time in the normal course of administering the plan (but not to exceed ten years); provided, that such election is made prior to the date on which the Employee becomes entitled to a distribution. Payment shall be made (or shall begin) on the first day of the month following the date on which the Account becomes payable, or as soon as administratively practicable thereafter. Each subsequent payment (if applicable) shall be made on the anniversary of the first distribution date. Notwithstanding the foregoing, if the Employee’s Account does not exceed $10,000 (or such other de minimis amount as the Administrator determine in a reasonable and nondiscriminatory manner and calculating the Stock Award Units at then Fair Market Value) on the date on which the Employee becomes entitled to a distribution of his or her Account, the Administrator may elect to pay the value of the Account to the Employee in a single lump sum distribution.

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

4.3 Change in Control. Upon the occurrence of a Change in Control, a Participant shall be entitled to receive a distribution equal to the Participant’s vested Account balance under the Plan (after application of Section 3.3). Such distribution shall be paid in a single lump sum, or, upon the Participant’s election, in substantially equal annual installments over a period of three years; provided, that such election is made prior to the date on which the Employee becomes entitled to a distribution. Payment shall be made (or shall begin) on the first day of the month following the date on which the Change in Control occurs, or as soon as administratively practicable thereafter. Each subsequent payment (if applicable) shall be made on the anniversary of the first distribution date. Unless otherwise provided in an Employee’s current employment agreement with an Employer, if payment of a Participant’s vested account balance will, when combined with other payments to the Participant under other plans or agreements, create an excise tax liability to a Participant pursuant to Code section 280G, then the amount of the distribution from this Plan may be reduced by the Employer at the written direction of the Participant to prevent any imposition of such excise tax; provided that, the amount distributed to the Participant less any such reduction shall fully satisfy the Employer’s obligation to the Participant under this Plan.

4.4 General In Service Distributions. An Employee may elect to receive a distribution of his or her Account balance while still employed with the Employer solely under the following conditions:

(A) Hardship. With approval of the Administrator, an Employee may elect to receive a lump sum distribution from his or her Account in the amount necessary to eliminate a Hardship, including any amount needed to pay taxes to net the amount of the Hardship.

(B) Accelerated Distribution. An Employee may elect to receive a distribution of his or her total vested Account balance at any time; provided, however, that commencement of a distribution under this Section 4.4(b) shall require the Employee to forfeit 10% of the Employee’s total vested Account balance prior to such distribution. No partial distributions shall be allowed.

An Employee who receives a distribution pursuant to either subsection (a) or (b) of this Section 4.4 shall be prohibited from participating in the Plan for (1) the remainder of the Plan Year in which the distribution is made, and (2) the entire Plan Year following the Plan Year in which the distribution is made.

4.5 Form of Payment. The portion of a Participant’s Account attributable to Employer and Compensation Deferral amounts under Section 2.3(a) and 2.3(b)(1) shall be payable solely in the form of cash. The portion of an Employee’s Account attributable to an Employee’s Stock Award Units under Section 2.3(b)(2) shall be payable solely in the form of Stock. If an installment distribution is in effect, the portion of the Employee’s Account attributable to Stock Award Units shall continue to be credited with dividend equivalents under Section 2.3(b)(2)(C) until fully paid.

4.6 Constructive Receipt. If and only to the extent this Plan is determined to provide the Employee benefits that are deemed to be “constructively received” by the Employee under the Code, as amended, the Employee’s vested accrued benefit in his or her Account shall be distributed to the Employee as of the date such constructive receipt is deemed to have occurred.

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

ARTICLE 5.

FORFEITURE OF BENEFIT

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

ARTICLE 6.

AMENDMENT OR TERMINATION OF PLAN

The Company reserves the right to amend or terminate this Plan at any time and from time to time for any reason by action of the Board of Directors of

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

ARTICLE 7.

CLAIMS PROCEDURES

7.1 Denial of Benefits. The following claims procedures are generally applicable to claims filed under the Plan. To the extent required by law and to the extent the Administrator is ruling on a claim for benefits on account of a disability, the Plan will follow, with respect to that claim, claims procedures required by law for plans providing disability benefits.

(A) Filing a Claim. All claims shall be filed in writing by the Participant, Beneficiary or the authorized representative of the claimant (the “claimant”) by completing the procedures that the Administrator requires. The procedures shall be reasonable and may include the completion of forms and the submission of documents and additional information. For purposes of this Section, a request for a withdrawal under Section 4.4 shall be considered a claim.

(B) Review of Claim. The Administrator shall review all materials and shall decide whether to approve or deny the claim. If a claim is denied in whole or in part, the Administrator shall provide written notice of denial to the claimant within a reasonable period of time no later than 90 days after the Administrator receives the claims, unless special circumstances require an extension of time for processing the claim. If an extension is required, the Administrator shall notify the claimant in writing before the end of the 90-day period and indicate the special circumstances requiring an extension of time and the date by which the Administrator expects to render a decision on the claim. The extension shall not exceed an additional 90 days. The notice of denial shall be written in a manner calculated to be understood by the claimant and shall include the following:

(1) the specific reason(s) for the adverse determination;

(2) specific references to pertinent Plan provisions on which the adverse determination is based;

(3) a description of any additional material or information necessary for the claimant to perfect

his claim and the reason why such material or information is necessary; and

(4) a description of the Plan’s review procedures and time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse determination on review.

(C) Appeal Process. If the claimant wishes a review of the denied claim, the claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimant’s claim for benefits. The claimant may submit to the Administrator in writing any issues, documents, records, comments or other information he may have regarding his claim for benefits under the Plan. Such request for an appeal must be made by the claimant in writing within 60 days after receipt of notice that his claim has been denied by the Administrator.

A document, record or other information shall be considered “relevant” to a claim if such document, record or other information (i) was relied upon in making the benefit determination, (ii) was submitted, considered or generated in the course of making the benefit determination, without regard to whether such document, record or other information was relied upon in making the benefit determination, or (iii) demonstrates compliance with the administrative processes and safeguards required pursuant to ensure and to verify that benefit claim determinations are made in accordance with the Plan and that, where appropriate, the Plan provisions have been applied consistently with respect to similarly situated claimants.

(D) Review of Appeal. The Administrator shall make its decision on review solely on the basis of the written record, including documents and written materials submitted by the claimant. The Administrator shall make a decision on the review within a reasonable period of time, not later than 60 days after the Administrator receives the claimant’s written request for review unless special circumstances require additional time for review of the claim. If an extension is required, the Administrator shall notify the claimant in writing before the end of the 60-day period and indicate the special circumstances requiring an extension of time and the date by which the Administrator expects to render a decision on the claim. The extension shall not exceed an additional 60 days. The decision on review will be written in a manner calculated to be understood by the claimant. If the claim is denied, the written notice shall include the following:

(1) the specific reason(s) for the adverse

determination;

(2) specific references to pertinent Plan provisions on which the adverse determination is based;

(3) a statement that the claimant shall be entitled, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimant’s claim for benefits (as “relevant” is defined in this section); and

(4) a statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

The Administrator shall have full discretion and power to decide all claims and reviews of denied claims, respectively, including determining eligibility, status and the rights of all individuals under the Plan and construing any and all terms of the Plan. Following the approval of a claim for benefits, the Administrator shall have the authority to construe and administer the Plan in a manner that is consistent with the payment of benefits in accordance with the approved claim.

Notwithstanding anything herein to the contrary, any notification from the Administrator to the claimant under this Section may be made electronically, provided that such notification complies with Department of Labor Regulation Sections 2520.104b-1(c)(1)(i), (iii), and (iv).

7.2 Exhaustion of Remedies; Limitation of Actions. In the event of any dispute over benefits under this Plan, all remedies available to the disputing individual under this article must be exhausted before legal recourse of any type is sought. No legal action at law or in equity may be filed against the Plan, the Employer, the Company or the Administrator relating to any dispute over benefits under this Plan more than one year after the Administrator has made a final decision under the claims review process described in this Article 7.

ARTICLE 8.

MISCELLANEOUS

8.1 Effect Upon Employment or Service. Nothing contained herein shall be construed to be a contract of employment for any term of years, and this Plan shall not confer upon an Employee the right to continue in the employ of the Employer nor the right of a Director to continue to serve on the Board of Directors.

8.2 Non-Assignability. A Participant may not voluntarily or involuntarily anticipate, assign, or alienate (either at law or in equity) any benefit under

the Plan. Furthermore, a benefit under the Plan shall not be subject to attachment, garnishment, levy, execution, or other legal or equitable process.

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

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

8.5 Entire Understanding. This instrument contains the entire understanding between the Employer and the Participants relating to the Plan, and supersedes any prior agreement between the parties, whether written or oral. This Plan and any provision of the Plan may be waived, modified, amended, changed, discharged or terminated only in writing signed by the Employer and the Participants.

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

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

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

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

FIRST STATE BANCORPORATION
	By:
	Title:
	Date:

EX-14

Exhibit 14

Code of Ethical Conduct for Senior Executive Officers

In my role as _____________________ of First State Bancorporation,

I recognize that Senior Executive Officers hold an important and elevated role in corporate governance. I am uniquely capable and empowered to ensure that stakeholders’ interests are appropriately balanced, protected and preserved. Accordingly, this Code provides principles to which Senior Executive Officers are expected to adhere and advocate. The Code embodies rules regarding individual and peer responsibilities, as well as responsibilities to the company, the public and other stakeholders.

I certify to you that I adhere to and advocate the following principles and responsibilities governing my professional and ethical conduct.

To the best of my knowledge and ability:

1. I will act with honesty and integrity.

2. I will avoid actual or apparent conflicts of interest in personal and professional relationships, and will disclose to the Chair of the Board of Directors and the Chair of the Company’s Audit Committee any material transaction or relationship that reasonably could be expected to give rise to such a conflict to the Chair of the Board of Directors or the Company’s Audit Committee.

3. I will provide information that is full, fair, accurate, complete, relevant, timely and understandable to the public, Securities Exchange Commission and NASD.

4. I will comply with rules and regulations of federal, state, and local governments, and other appropriate private and public regulatory agencies.

5. I will report promptly any violations of the Code to the Chair of the Board of Directors and the Chair of the Company’s Audit Committee.

6. I will act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing my independent judgment to be subordinated to personal interests.

7. I will respect the confidentiality of information acquired in the course of my work and will not disclose such information except when authorized or otherwise legally obligated to disclose. Confidential information acquired in the course of my work will not be used for personal advantage.

8. I will proactively promote ethical behavior as a responsible partner among peers in my work environment and community

9. I will achieve responsible use of and control over all assets and resources employed or entrusted to me.

I recognize that I am accountable to the Company’s Board of Directors and its shareholders and, in event of my violation of the Code, I will face appropriate sanctions from the Board of Directors.

Title

EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Michael R. Stanford, certify that:

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

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: November 10, 2008
	/s/ Michael R. Stanford
	Michael R. Stanford
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Christopher C. Spencer, certify that:

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

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: November 10, 2008
	/s/ Christopher C. Spencer
	Christopher C. Spencer Senior Vice President and Chief Financial Officer, and Principal Accounting Officer

EX-32.1

Exhibit 32.1

Certification of CEO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of First State Bancorporation, a New Mexico corporation (the “Company”), for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Stanford, as President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

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

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

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

/s/ Michael R. Stanford

Michael R. Stanford

President and Chief Executive Officer

November 10, 2008

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

EX-32.2

Exhibit 32.2

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of First State Bancorporation, a New Mexico corporation (the “Company”), for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher C. Spencer, as Senior Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

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

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

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

/s/ Christopher C. Spencer

Christopher C. Spencer

Senior Vice President and Chief Financial Officer, and Principal Accounting Officer

November 10, 2008

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