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 June 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, a non-accelerated filer, or a smaller reporting company. 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: 20,183,668 shares of common stock, no par value, outstanding as of August 5, 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	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
	SIGNATURES	26

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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)

	June 30, 2008			December 31, 2007
Assets
Cash and due from banks	$	78,766		$	82,036
Interest-bearing deposits with other banks		910			1,875
Federal funds sold		4,075			798
Total cash and cash equivalents		83,751			84,709
Investment securities:
Available for sale (at market, amortized cost of $414,962 at June 30, 2008, and $393,478 at December 31, 2007)		411,418			393,553
Held to maturity (at amortized cost, market value of $66,317 at June 30, 2008, and $103,117 at December 31, 2007)		66,570			103,753
Non-marketable securities, at cost		24,378			19,098
Total investment securities		502,366			516,404
Mortgage loans available for sale		12,611			20,778
Loans held for investment, net of unearned interest		2,717,066			2,520,432
Less allowance for loan losses		(58,984	)		(31,712	)
Net loans		2,670,693			2,509,498
Premises and equipment (net of accumulated depreciation of $28,334 at June 30, 2008, and $27,138 at December 31, 2007)		63,532			66,181
Accrued interest receivable		12,752			15,761
Other real estate owned		15,610			18,107
Goodwill		—			127,365
Intangibles (net of accumulated amortization of $5,323 at June 30, 2008, and $4,043 at December 31, 2007)		16,809			18,089
Cash surrender value of bank-owned life insurance		44,393			42,999
Net deferred tax asset		33,471			1,776
Other assets, net		21,505			23,314
Total assets	$	3,464,882		$	3,424,203
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing	$	522,015		$	485,419
Interest-bearing		2,124,888			2,089,268
Total deposits		2,646,903			2,574,687
Securities sold under agreements to repurchase		144,753			213,270
Federal Home Loan Bank advances		359,714			203,000
Junior subordinated debentures		98,539			98,613
Other liabilities		23,210			23,771
Total liabilities		3,273,119			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 21,872,588 at June 30, 2008 and 21,811,980 at December 31, 2007; outstanding 20,151,246 at June 30, 2008 and 20,091,293 at December 31, 2007		221,956			220,797
Treasury stock, at cost (1,721,342 shares at June 30, 2008 and 1,720,687 shares at December 31, 2007)		(25,027	)		(25,021	)
Retained earnings (deficit)		(2,969	)		115,039
Accumulated other comprehensive income (loss) - Unrealized gain (loss) on investment securities, net of tax		(2,197	)		47
Total stockholders’ equity		191,763			310,862
Total liabilities and stockholders’ equity	$	3,464,882		$	3,424,203
Book value per share	$	9.52		$	15.47
Tangible book value per share	$	8.68		$	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 six months ended June 30, 2008 and 2007

(unaudited)

(Dollars in thousands, except per share amounts)

	Three months ended June 30, 2008			Three months ended June 30, 2007			Six months ended June 30, 2008			Six months ended June 30, 2007
Interest income:
Interest and fees on loans	$	43,686		$	53,291		$	90,880		$	99,976
Interest on marketable securities:
Taxable		4,862			4,907			9,668			9,952
Non-taxable		954			609			1,848			1,265
Federal funds sold		21			170			59			295
Interest-bearing deposits with other banks		18			55			55			97
Total interest income		49,541			59,032			102,510			111,585
Interest expense:
Deposits		14,759			18,027			31,784			33,937
Short-term borrowings		1,870			4,888			4,787			8,978
Long-term debt		541			216			708			458
Junior subordinated debentures		1,125			1,726			2,580			2,897
Total interest expense		18,295			24,857			39,859			46,270
Net interest income		31,246			34,175			62,651			65,315
Provision for loan losses		(28,700	)		(2,068	)		(32,600	)		(4,112	)
Net interest income after provision for loan losses		2,546			32,107			30,051			61,203
Non-interest income:
Service charges		3,722			2,883			6,714			5,248
Credit and debit card transaction fees		1,039			1,128			1,976			2,015
Gain (loss) on sale or call of investment securities		110			(12	)		(126	)		30
Gain on sale of loans		1,109			1,310			2,356			2,759
Income on cash surrender value of bank-owned life insurance		437			956			894			1,310
Other		577			877			1,464			1,670
Total non-interest income		6,994			7,142			13,278			13,032
Non-interest expenses:
Salaries and employee benefits		12,763			13,694			26,280			25,954
Occupancy		4,138			3,838			8,163			7,079
Data processing		1,377			1,702			2,926			3,250
Equipment		1,913			2,074			4,057			3,923
Legal, accounting, and consulting		790			845			1,366			1,466
Marketing		734			773			1,481			1,721
Telephone		573			716			1,066			1,219
Other real estate owned		1,205			330			1,766			516
FDIC insurance premiums		530			76			995			139
Goodwill impairment charge		127,365			—			127,365			—
Amortization of intangibles		640			653			1,280			1,087
Other		3,113			3,536			6,229			6,824
Total non-interest expenses		155,141			28,237			182,974			53,178
Income (loss) before income taxes		(145,601	)		11,012			(139,645	)		21,057
Income tax expense (benefit)		(27,294	)		3,782			(25,263	)		7,349
Net income (loss)	$	(118,307	)	$	7,230		$	(114,382	)	$	13,708
Earnings (loss) per share:
Basic earnings (loss) per share	$	(5.87	)	$	0.35		$	(5.68	)	$	0.66
Diluted earnings (loss) per share	$	(5.87	)	$	0.35		$	(5.68	)	$	0.66
Dividends per common share	$	0.09		$	0.09		$	0.18		$	0.17

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 six months ended June 30, 2008 and 2007

(unaudited)

(Dollars in thousands)

	Three months ended June 30, 2008			Three months ended June 30, 2007			Six months ended June 30, 2008			Six months ended June 30, 2007
Net income (loss)	$	(118,307	)	$	7,230		$	(114,382	)	$	13,708
Other comprehensive loss, net of tax - unrealized holding losses on securities available for sale arising during period		(4,829	)		(988	)		(2,347	)		(256	)
Reclassification adjustment for (gains) losses included in net income (loss)		(90	)		9			103			(19	)
Total comprehensive income (loss)	$	(123,226	)	$	6,251		$	(116,626	)	$	13,433

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 six months ended June 30, 2008 and 2007

(unaudited)

(Dollars in thousands)

	Six months ended June 30, 2008			Six months ended June 30, 2007
Operating activities:
Net income (loss)	$	(114,382	)	$	13,708
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		32,600			4,112
Goodwill impairment charge		127,365			—
Provision for decline in value of other real estate owned		869			114
Net loss (gain) on sale of other real estate owned		136			(118	)
Depreciation and amortization		4,514			4,330
Share-based compensation expense		396			539
Gain on sale of mortgage loans		(2,356	)		(2,759	)
Loss (gain) on sale of investment securities available for sale		125			(30	)
(Gain) loss on disposal of premises and equipment		(12	)		3
Increase in bank-owned life insurance cash surrender value		(894	)		(281	)
Amortization on securities, net		(766	)		(705	)
Amortization of core deposit intangible		1,280			1,087
Mortgage loans originated for sale		(152,695	)		(194,652	)
Proceeds from sale of mortgage loans available for sale		160,621			198,201
Excess tax benefits from share-based compensation		—			(908	)
Deferred taxes		(30,319	)		979
Decrease in accrued interest receivable		3,009			325
Decrease in other assets, net		1,297			627
Decrease in other liabilities, net		(561	)		(8,732	)
Net cash provided by operating activities		30,227			15,840
Cash flows from investing activities:
Net increase in loans		(202,354	)		(135,674	)
Purchases of investment securities carried at amortized cost		(56,515	)		—
Maturities of investment securities carried at amortized cost		93,874			3,608
Purchases of investment securities carried at market		(141,964	)		(6,598	)
Maturities of investment securities carried at market		118,460			31,280
Sale of investment securities available for sale		2,484			70,992
Purchases of non-marketable securities carried at cost		(5,280	)		(8,857	)
Redemption of non-marketable securities carried at cost		—			6,678
Purchases of premises and equipment		(1,430	)		(8,372	)
Purchase of bank-owned life insurance		(500	)		—
Redemption of bank-owned life insurance		—			318
Purchase of trust preferred capital securities		—			(1,270	)
Net proceeds from other real estate owned		4,481			1,193
Proceeds from sales of fixed assets		15			56
Cash paid for business acquisition, net of cash received		—			(57,164	)
Net cash used in investing activities		(188,729	)		(103,810	)
Cash flows from financing activities:
Net increase in interest-bearing deposits		35,620			8,634
Net increase (decrease) in non-interest-bearing deposits		36,596			(4,707	)
Net (decrease) increase in securities sold under agreements to repurchase		(68,517	)		20,820
Proceeds from Federal Home Loan Bank advances		348,900			235,000
Payments on Federal Home Loan Bank advances		(192,186	)		(164,858	)
Issuance of junior subordinated debentures		—			42,270
Proceeds from common stock issued		763			1,487
Excess tax benefits from share-based compensation		—			908
Dividends paid		(3,626	)		(3,553	)
Treasury stock		(6	)		(16,172	)
Net cash provided by financing activities		157,544			119,829
Change in cash and cash equivalents		(958	)		31,859
Cash and cash equivalents at beginning of period		84,709			84,380
Cash and cash equivalents at end of period	$	83,751		$	116,239

(Continued)

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Cash Flows

For the six months ended June 30, 2008 and 2007

(unaudited)

(Dollars in thousands)

(continued)

	Six months ended June 30, 2008		Six months ended June 30, 2007
Supplemental disclosure of noncash investing and financing activities:
Additions to other real estate owned in settlement of loans	$	2,989	$	3,873
Additions to other real estate owned from premises and equipment	$	—	$	6,973
Transfers from loans held for sale to loans held for investment	$	2,597	$	4,951
Supplemental disclosure of cash flow information:
Cash paid for interest	$	40,615	$	44,941
Cash paid for income taxes	$	3,039	$	4,848
Summary of assets acquired, and liabilities assumed through acquisitions:
Cash and cash equivalents	$	—		14,836
Investment securities		—		72,549
Loans held for investment, net		—		256,302
Loans held for sale		—		37,928
Accrued interest receivable		—		2,540
Goodwill and intangibles		—		69,189
Premises and equipment		—		13,230
Other real estate owned		—		8,057
Bank-owned life insurance		—		8,771
Other assets, net		—		897
Net deferred tax asset		—		9,304
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		—		(16,313	)

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 six month periods ended June 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 June 30, 2008 and 2007, respectively, we recorded approximately $205,000 and $265,000 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 six months ended June 30, 2008 and 2007, respectively, we recorded approximately $396,000 and $539,000 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 six months ended June 30, 2008:

	Shares		Weighted average exercise price
Outstanding at December 31, 2007	1,410,685		$	16.92
Granted	182,045			11.84
Exercised	—			—
Expired	(9,000	)		16.07
Outstanding at June 30, 2008	1,583,730		$	16.35
Options exercisable at June 30, 2008	710,845		$	15.62

The Company estimated the weighted average fair value of options granted during the six months ended June 30, 2008 to be approximately $3.44. 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 2.49%; expected dividend yield of 3.14%; an expected life of 7.5 years; and expected volatility of 35.91%.

The options granted during the six months ended June 30, 2008 include 122,045 performance-based options granted on January 25, 2008 under the Key Executives Incentive Plan. Management currently believes that the performance targets for these options are not probable of achievement. Therefore, compensation expense for these options is not currently being recognized.

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.

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The following is a reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and six months ended June 30:

	Three Months Ended June 30,
	2008							2007
	Income (Numerator)			Shares (Denominator)	Per Share Amount			Income (Numerator)		Shares (Denominator)	Per Share
	(Dollars in thousands, except share and per share amounts)
Basic EPS:
Net income (loss)	$	(118,307	)	20,165,335	$	(5.87	)	$	7,230	20,408,485	$	0.35
Effect of dilutive securities
Options		—		—					—	199,925
Diluted EPS:
Net income (loss)	$	(118,307	)	20,165,335	$	(5.87	)	$	7,230	20,608,410	$	0.35

For the three-month periods ended June 30, 2008 and 2007, approximately 1,299,133 and 201,500 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.

	Six Months Ended June 30,
	2008							2007
	Income (Numerator)			Shares (Denominator)	Per Share Amount			Income (Numerator)		Shares (Denominator)	Per Share
	(Dollars in thousands, except share and per share amounts)
Basic EPS:
Net income (loss)	$	(114,382	)	20,150,378	$	(5.68	)	$	13,708	20,623,534	$	0.66
Effect of dilutive securities
Options		—		—					—	225,458
Diluted EPS:
Net income (loss)	$	(114,382	)	20,150,378	$	(5.68	)	$	13,708	20,848,992	$	0.66

For the six-month periods ended June 30, 2008 and 2007, approximately 1,287,695 and 201,500 stock options outstanding, respectively, were excluded from the calculation of diluted earnings (loss) 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. The Company tests goodwill for impairment on an annual basis or when events or circumstances suggest that impairment may have occurred. 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; 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 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.

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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.

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 June 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 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 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 June 30, 2008, all of the Company’s loans held for sale are carried at cost.

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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 June 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	$	411,418	$	578	$	410,840	$	—

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 June 30, 2008									Period ended June 30, 2008
	(Dollars in thousands)
	Total			Level 1		Level 2		Level 3		Total Losses
Impaired loans	$	19,622	(1)	$	—	$	19,124	$	498	$	6,455	(2)
Other real estate owned		15,610	(3)		—		15,610		—		869	(4)
										$	7,324

(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.

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

Forward-Looking Statements

Certain statements in this Form 10-Q are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). 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, timing of new branch openings, and response to consolidation in the banking industry include

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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, 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 are included in our Form 10K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission.

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 as 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 $40.7 million from $3.424 billion as of December 31, 2007, to $3.465 billion as of June 30, 2008. The increase in total assets is primarily due to a $196.6 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.

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

	June 30, 2008				December 31, 2007				June 30, 2007
	Amount		%		Amount		%		Amount		%
	(Dollars in thousands)
Commercial	$	352,039	12.9	%	$	342,141	13.5	%	$	329,161	13.3	%
Real estate-commercial		1,060,150	38.8	%		967,322	38.1	%		883,843	35.8	%
Real estate-one- to four-family		272,509	10.0	%		235,015	9.2	%		254,553	10.3	%
Real estate-construction		987,306	36.2	%		928,582	36.5	%		888,469	36.0	%
Consumer and other		45,062	1.6	%		47,372	1.9	%		55,898	2.3	%
Mortgage loans available for sale		12,611	0.5	%		20,778	0.8	%		19,987	0.8	%
Other loans available for sale		—	—			—	—			37,928	1.5	%
Total	$	2,729,677	100.0	%	$	2,541,210	100.0	%	$	2,469,839	100.0	%

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We utilize deposits and FHLB advances as our main sources of funding for loans and investments. Deposits increased by $72.2 million from $2.575 billion as of December 31, 2007 to $2.647 billion as of June 30, 2008. FHLB advances increased by $156.7 million from $203.0 million at December 31, 2007 to $359.7 million at June 30, 2008, as loan growth continued to outpace deposit growth. Of the $359.7 million of FHLB advances, $288.9 million are short-term and $70.8 million are long-term of which $60.0 million was borrowed during the quarter ended June 30, 2008. 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 the money market savings account product.

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

	June 30, 2008				December 31, 2007				June 30, 2007
	Amount		%		Amount		%		Amount		%
	(Dollars in thousands)
Non-interest-bearing	$	522,015	19.7	%	$	485,419	18.9	%	$	496,202	20.0	%
Interest-bearing demand		327,370	12.4	%		336,914	13.1	%		342,092	13.8	%
Money market savings accounts		614,666	23.2	%		355,889	13.8	%		336,698	13.5	%
Regular savings		110,139	4.2	%		107,096	4.2	%		121,486	4.9	%
Certificates of deposit less than $100,000		441,305	16.7	%		490,741	19.1	%		472,184	19.0	%
Certificates of deposit greater than $100,000		631,408	23.8	%		798,628	30.9	%		716,110	28.8	%
Total	$	2,646,903	100.0	%	$	2,574,687	100.0	%	$	2,484,772	100.0	%

Consolidated Results of Operations

Our net loss for the three months ended June 30, 2008, was $118.3 million, or a $5.87 loss per diluted share, compared to $7.2 million in net income or $0.35 in earnings per diluted share for the same period in 2007. Our net loss for the six months ended June 30, 2008, was $114.4 million, or a $5.68 loss per diluted share, compared to $13.7 million in net income or $0.66 in earnings per diluted share for the same period in 2007. The net loss was primarily due to the $127.4 million goodwill impairment charge and the $28.7 million provision for loan losses which resulted primarily from increased levels of non-performing assets. The goodwill write-off was recognized, following our evaluation for impairment, and principally as a result of the disruption in the financial sector over the last several quarters 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 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.

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FINANCIAL SUMMARY:

	Three Months Ended June 30,						Six Months Ended June 30,
(Unaudited - $ in thousands except per-share amounts)	2008			2007			2008			2007
Net income (loss) as reported	$	(118,307	)	$	7,230		$	(114,382	)	$	13,708
Goodwill impairment charge, net of tax		107,484			—			107,484			—
Net income (loss) excluding goodwill write-off	$	(10,823	)	$	7,230		$	(6,898	)	$	13,708
GAAP basic and diluted earnings (loss) per share	$	(5.87	)	$	0.35		$	(5.68	)	$	0.66
Diluted earnings (loss) per share excluding goodwill write-off	$	(0.54	)	$	0.35		$	(0.34	)	$	0.66
GAAP return on average assets		(13.58	)%		0.88	%		(6.65	)%		0.88	%
Return on average assets excluding goodwill write-off		(1.24	)%		0.88	%		(0.40	)%		0.88	%
GAAP return on average equity		(149.19	)%		9.50	%		(72.38	)%		8.95	%
Return on average equity excluding goodwill write-off		(13.65	)%		9.50	%		(4.36	)%		8.95	%
Non-interest expense as reported	$	155,141		$	28,237		$	182,974		$	53,178
Goodwill impairment charge		(127,365	)		—			(127,365	)		—
Non-interest expense excluding goodwill write-off	$	27,776		$	28,237		$	55,609		$	53,178
GAAP efficiency ratio		405.70	%		68.34	%		240.98	%		67.87	%
Efficiency ratio excluding goodwill write-off		72.64	%		68.34	%		73.24	%		67.87	%
GAAP operating expenses to average assets		17.81	%		3.43	%		10.64	%		3.41	%
Operating expenses to average assets excluding goodwill write-off		3.19	%		3.43	%		3.23	%		3.41	%
Net interest margin		3.96	%		4.66	%		4.04	%		4.68	%
Average equity to average assets		9.10	%		9.25	%		9.19	%		9.83	%
Leverage ratio:
Consolidated		7.11	%		8.70	%		7.11	%		8.70	%
Bank Subsidiary		7.88	%		8.25	%		7.88	%		8.25	%
Total risk based capital ratio:
Consolidated		10.44	%		10.97	%		10.44	%		10.97	%
Bank Subsidiary		10.32	%		10.32	%		10.32	%		10.32	%

Net income (loss) excluding the goodwill write-off for the second quarter was a loss of $10.8 million, or $0.54 per diluted share. This compares to net income of $7.2 million, or $0.35 per diluted share for the second quarter of 2007. The net loss excluding the goodwill write-off for the six months ended June 30, 2008 was $6.9 million, compared to income of $13.7 million for 2007. Net loss per diluted share excluding the goodwill write-off for the six months ended June 30, 2008 was $0.34 compared to net income per diluted share of $0.66 for the same period in 2007.

Our net interest income decreased $3.0 million to $31.2 million for the three months ended June 30, 2008 compared to $34.2 million for the same period in 2007. This decrease was composed of a $9.5 million decrease in total interest income, partially offset by a $6.5 million decrease in total interest expense.

The decrease in total interest income for the three months ended June 30, 2008 was composed of a decrease of $14.2 million due to a 1.77% decrease in the yield on average interest-earning assets, partially offset by an increase of $4.7 million due to increased average interest earning assets of $230.4 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 June 30, 2008 was composed of a decrease of $8.3 million due to a 1.24% decrease in the cost of interest-bearing liabilities, partially offset by an increase of $1.8 million

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due to increased average interest-bearing liabilities of $176.9 million. The increase in average interest-bearing liabilities was primarily due to an increase in average interest-bearing deposits of $116.8 million. Average short-term borrowings increased by $22.9 million and average long-term debt increased by $51.7 million, as a result of deposit growth being lower than loan growth.

Our net interest income decreased $2.7 million to $62.7 million for the six months ended June 30, 2008 compared to $65.3 million for the same period in 2007. This decrease was composed of a $9.1 million decrease in total interest income, partially offset by a $6.4 million decrease in total interest expense.

The decrease in total interest income for the six months ended June 30, 2008 was composed of a decrease of $23.1 million due to a 1.38% decrease in the yield on average interest-earning assets partially offset by an increase of $14.0 million due to increased average interest earning assets of $303.6 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 six months ended June 30, 2008 was composed of a decrease of $9.2 million due to a 0.93% decrease in the cost of interest-bearing liabilities, partially offset by an increase of $2.8 million due to increased average interest-bearing liabilities of $288.7 million. The increase in average interest-bearing liabilities was primarily due to an increase in average interest-bearing deposits of $208.0 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 $29.2 million and average long-term debt increased by $22.4 million, as a result of deposit growth being lower than loan growth.

Our net interest margin was 3.96% and 4.66% for the second quarter of 2008 and 2007, respectively, and 4.12% for the first quarter of 2008. The net interest margin was 4.04% and 4.68% for the six months ended June 30, 2008 and 2007, respectively. The decrease in the net interest margin is primarily due to the Federal Reserve Bank lowering the federal funds target rate by 325 basis points over the past several months which led to an equal decrease in the prime lending rate. The net interest margin has also been negatively impacted by the need to utilize borrowings to fund the loan growth which has continued to outpace deposit growth and as a result of new loans having lower yields than loans booked in the prior periods. The level of non-accrual loans and the reversal of interest on these loans have also had a negative impact on the net interest margin for the three and six months ended June 30, 2008 compared to the same periods in 2007. 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 FHLB short-term borrowings and our securities sold under agreements to repurchase have also decreased, due to the Federal Reserve Bank’s lower target rates. The cost of our junior subordinated debentures, which are indexed to LIBOR, has decreased, as the majority of the debentures reprice quarterly We expect that the impact of the rate cuts that occurred over the past several months will be minimal going forward as the majority of the asset and liability repricing has now taken place.

Non-interest Income and Non-interest Expense

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

	Three Months Ended June 30,
Non-interest income
(Dollars in thousands)	2008		2007			$ Change			% Change
Service charges	$	3,722	$	2,883		$	839		29	%
Credit and debit card transaction fees		1,039		1,128			(89	)	(8	)
Gain (loss) on sale or call of investment securities		110		(12	)		122		1,017
Gain on sale of loans		1,109		1,310			(201	)	(15	)
Income on cash surrender value of bank-owned life insurance		437		956			(519	)	(54	)
Other		577		877			(300	)	(34	)
	$	6,994	$	7,142		$	(148	)	(2	)%

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.

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The decrease in gain on sale of mortgage 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 primarily due to the receipt of approximately $550,000 in June 2007 from the death benefit of an insured employee.

The decrease in other non-interest income is primarily due to a decrease in earnings on cash deposited with our official check outsourcing vendor, partially offset by the accretion of income related to the sale of our credit card portfolio in the fourth quarter of 2007.

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

Non-interest expense (Dollars in thousands)	Three Months Ended June 30,
	2008		2007		$ Change			% Change
Salaries and employee benefits	$	12,763	$	13,694	$	(931	)	(7	)%
Occupancy		4,138		3,838		300		8
Data processing		1,377		1,702		(325	)	(19	)
Equipment		1,913		2,074		(161	)	(8	)
Legal, accounting, and consulting		790		845		(55	)	(7	)
Marketing		734		773		(39	)	(5	)
Telephone		573		716		(143	)	(20	)
Other real estate owned		1,205		330		875		265
FDIC insurance premiums		530		76		454		597
Amortization of intangibles		640		653		(13	)	(2	)
Goodwill impairment charge		127,365		—		127,365		—
Other		3,113		3,536		(423	)	(12	)
	$	155,141	$	28,237	$	126,904		(449	)%

The decrease in salaries and employee benefits is primarily due to a decrease in accrued incentive compensation and mortgage commissions, a decrease in expenses related to temporary help, and a decrease in other personnel expenses related to 2007 retention and stay bonuses and severance for Front Range employees that did not recur in 2008, partially offset by an increase in self-insured medical and dental claims. The Front Range acquisition was completed on March 1, 2007.

The increase in occupancy is primarily due to approximately $198,000 of expense recorded in the second quarter of 2008 related to lease impairment at an Albuquerque administrative facility that is no longer occupied.

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.

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 the $718,000 write-down of two properties, to reflect their estimated net realizable values. Of the $718,000, $623,000 relates to a residential lot development property in the Denver, Colorado metro area, which was transferred to other real estate owned in December 2006. During the second quarter of 2007, the Company reached agreement to sell this property to a national homebuilder. This agreement involved the sale of the lots in phases, with the last purchase to be completed in mid 2009. As of June 30, 2008, First State had received $1.9 million in takedowns, and the value of the property was $3.6 million. In July 2008, the agreement with the homebuilder was renegotiated with a reduction in the lot takedown prices. 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 is expected to close in the third quarter of 2008.

The increase in FDIC insurance premiums is due to new FDIC assessment rates that took effect at the beginning of 2007. These rates are significantly higher than the previous assessment rates. 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.

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The goodwill impairment charge represents the write-off of goodwill as discussed above.

The decrease in other non-interest expense is primarily due to a decrease in supplies, and travel, meals and entertainment, resulting primarily from our expense management initiative, a decrease in filing and recording fees, and a decrease in losses related to demand deposit and credit card accounts, partially offset by an increase in loan review fees. The loan review function was fully outsourced beginning in January 2008.

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

Non-interest income (Dollars in thousands)	Six Months Ended June 30,
	2008			2007		$ Change			% Change
Service charges	$	6,714		$	5,248	$	1,466		28	%
Credit and debit card transaction fees		1,976			2,015		(39	)	(2	)
Gain (loss) on sale or call of investment securities		(126	)		30		(156	)	(520	)
Gain on sale of loans		2,356			2,759		(403	)	(15	)
Income on cash surrender value of bank-owned life insurance		894			1,310		(416	)	(32	)
Other		1,464			1,670		(206	)	(12	)
	$	13,278		$	13,032	$	246		2	%

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 $333,000 on FHLMC preferred stock recorded in the first quarter of 2008 in accordance with generally accepted accounting principles. This stock is held in the available for sale portfolio and was acquired as part of the acquisition of Front Range in March 2007, at which time it was valued at approximately $953,000. 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 mortgage 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.

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

Non-interest expense (Dollars in thousands)	Six Months Ended June 30,
	2008		2007		$ Change			% Change
Salaries and employee benefits	$	26,280	$	25,954	$	326		1	%
Occupancy		8,163		7,079		1,084		15
Data processing		2,926		3,250		(324	)	(10	)
Equipment		4,057		3,923		134		3
Legal, accounting, and consulting		1,366		1,466		(100	)	(7	)
Marketing		1,481		1,721		(240	)	(14	)
Telephone		1,066		1,219		(153	)	(13	)
Other real estate owned		1,766		516		1,250		242
FDIC insurance premiums		995		139		856		616
Amortization of intangibles		1,280		1,087		193		18
Goodwill impairment charge		127,365		—		127,365		—
Other		6,229		6,824		(595	)	(9	)
	$	182,974	$	53,178	$	129,796		244	%

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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, and approximately $198,000 of expense related to lease impairment at an Albuquerque administrative facility that is no longer occupied.

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.

The decrease in marketing expense is primarily due to a decrease in direct advertising costs associated with our expense management initiative.

The increase in expenses for other real estate owned is primarily due to an increase in losses on sales of other real estate owned, $718,000 of write-downs for two properties in the quarter ended June 30, 2008 that is discussed above, and the $151,000 write-down of a property in the quarter ended March 31, 2008 that occurred in conjunction with an offer to purchase a property that was previously held for future expansion and development by Front Range, reflecting the property’s estimated net realizable value. The increase in expenses 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. These rates are significantly higher than the previous assessment rates. 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 goodwill impairment charge represents the write-off of goodwill as discussed above.

The decrease in other non interest expense is primarily due to a decrease in supplies, and travel, meals and entertainment resulting primarily from our expense management initiative, a decrease in acquisition integration costs that did not recur in 2008, a decrease in filing and recording fees, and a decrease in losses related to demand deposit and credit card accounts, partially offset by an increase in loan review fees, and an increase in branch security costs.

Income taxes

The income tax benefit for the three and six months ended June 30, 2008 resulted from the pre-tax loss. The effective income tax rate of 18.7% and 18.1%, respectively, for the three and six months ended June 30, 2008, is lower than the effective income tax rate for the comparable periods in 2007, due to the impact of permanent non-deductible and non-taxable items in 2008, principally the non-deductible portion of the goodwill impairment charge.

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.

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ALLOWANCE FOR LOAN LOSSES:	Six months ended June 30, 2008			Twelve months ended December 31, 2007			Six months ended June 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		32,600			10,267			4,112
Net charge-offs		(5,328	)		(4,638	)		(978	)
Balance end of period	$	58,984		$	31,712		$	29,217
Allowance for loan losses to total loans held for investment		2.17	%		1.26	%		1.21	%
Allowance for loan losses to non-performing loans		80	%		103	%		90	%
NON-PERFORMING ASSETS:	June 30, 2008			December 31, 2007			June 30, 2007
	(Dollars in thousands)
Accruing loans – 90 days past due	$	1		$	2		$	247
Non-accrual loans		73,929			30,736			32,280
Total non-performing loans		73,930			30,738			32,527
Other real estate owned		15,610			18,107			23,099
Total non-performing assets	$	89,540		$	48,845		$	55,626
Potential problem loans	$	74,791		$	63,961		$	56,039
Total non-performing assets to total assets		2.58	%		1.43	%		1.66	%

Our provision for loan losses was $28.7 million and $32.6 million for the three and six month periods ended June 30, 2008, respectively, compared to $2.1 million and $4.1 million for the same periods in 2007. The increase in the provision during the second quarter of 2008 resulted from the increase in non-performing loans, the increase in net charge-offs, and the continued growth of the loan portfolio. 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 economic conditions.

Approximately 34% of our non-performing loans are in New Mexico, approximately 48% are in Colorado, approximately 18% are in Utah, and none are in Arizona. The real estate construction loan category currently comprises the largest percentage of non-performing loans, at approximately 72% at June 30, 2008. Of the $987 million of real estate construction loans, approximately 47% are related to residential construction and approximately 53% are for commercial purposes or vacant land.

We sell virtually all of the residential mortgage loans that we originate 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.

Liquidity and Capital

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, and borrowings from the Federal Home Loan Bank.

While management anticipates that we will continue to rely primarily on customer deposits, loan repayments, and borrowings, as well as cash flow from operations, to provide liquidity, to make loans, and to purchase securities, we may also consider secondary sources of liquidity such as the issuance of additional brokered deposits, the issuance of junior subordinated debentures, private equity offerings, or the sale of equity in the capital markets. However, there is no assurance that these sources will be available or have an acceptable cost structure.

First State has obligations for which it must provide its own liquidity, primarily debt service on its junior subordinated debentures. The primary source of revenue for First State is from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to First State. Future

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dividend payments will be dependent upon the level of earnings generated by the Bank and/or regulatory restrictions, if any. Following a recent safety and soundness examination, the Bank has been asked by its regulators to temporarily suspend the payment of any dividends to First State, pending submission to the regulators of a revised capital plan. The regulators may, in the future, issue an administrative agreement or memorandum of understanding in conjunction with the request for a revised capital plan. It is not currently known at what point the Bank will be able to resume dividend payments to First State. If First State does not receive dividends from the Bank in the future it may need to seek other sources of liquidity to meet the debt service on the debentures. Other sources of liquidity may include short-term debt, additional subordinated debentures, or the issuance of common stock. There can be no assurance that these sources of liquidity will be available. If necessary, First State has the ability to defer payments of interest on the debentures for up to twenty consecutive interest payment periods.

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). Management believes, as of June 30, 2008, that First State and the Bank meet all capital adequacy requirements to which they are subject.

As of June 30, 2008	Actual				For capital adequacy purposes				To be considered well capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Total capital to risk-weighted assets:
Consolidated	$	316,800	10.4	%	$	242,738	8.0	%	$	303,423	10.0	%
Bank subsidiary		312,844	10.3	%		242,415	8.0	%		303,018	10.0	%
Tier I capital to risk-weighted assets:
Consolidated		248,065	8.2	%		121,369	4.0	%		182,054	6.0	%
Bank subsidiary		274,706	9.1	%		121,207	4.0	%		181,811	6.0	%
Tier I capital to average total assets:
Consolidated		248,065	7.1	%		139,616	4.0	%		174,520	5.0	%
Bank subsidiary		274,706	7.9	%		139,522	4.0	%		174,402	5.0	%

Recent Events

On July 7, 2008, First State announced 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 currently consist of two branches operated as First Community Bank in Salt Lake City and the nearby suburb of Midvale, Utah. Both branches are scheduled to close on October 31, 2008. At June 30, 2008, the Utah operations included $287.2 million in loans and $20.9 million in deposits. Currently, there are approximately 20 employees in Utah, who will be reduced to a core group that will facilitate the transition of the existing loans and deposits. First State expects that the closure of the Utah branches will strengthen First State’s balance sheet and capital ratios, and does not expect any significant one-time charges as part of this initiative. Management expects only minor cost savings related to this transaction through the remainder of 2008, due to severance charges as well as continuing occupancy obligations following the date of closure.

On Wednesday, July 23, 2008, First State’s Board of Directors suspended the quarterly dividend for the immediate future as an additional step toward strengthening our capital position.

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 June 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	$	343,799		$	5,687	6.65	%	$	340,808		$	7,393	8.70	%
Real estate		2,252,069			36,642	6.54	%		2,026,213			44,200	8.75	%
Consumer		45,684			1,142	10.05	%		57,584			1,459	10.16	%
Mortgage		15,028			215	5.75	%		19,063			239	5.03	%
Other		2,453			—	—			2,247			—	—
Total loans		2,659,033			43,686	6.61	%		2,445,915			53,291	8.74	%
Allowance for loan losses		(35,494	)						(28,858	)
Securities:
U.S. government and mortgage-backed		398,711			4,612	4.65	%		408,141			4,652	4.57	%
State and political subdivisions:
Non-taxable		80,962			954	4.74	%		47,786			609	5.11	%
Taxable		2,737			40	5.88	%		—			—	—
Other		22,679			210	3.72	%		19,952			255	5.13	%
Total securities		505,089			5,816	4.63	%		475,879			5,516	4.65	%
Interest-bearing deposits with other banks		2,499			18	2.90	%		5,566			55	3.96	%
Federal funds sold		4,050			21	2.09	%		12,957			170	5.26	%
Total interest-earning assets		3,170,671			49,541	6.28	%		2,940,317			59,032	8.05	%
Non-interest-earning assets:
Cash and due from banks		65,925							74,706
Other		302,631							315,352
Total non-interest-earning assets		368,556							390,058
Total assets	$	3,503,733						$	3,301,517
Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing demand accounts	$	331,432		$	702	0.85	%	$	352,950		$	974	1.11	%
Certificates of deposit > $100,000		662,600			6,003	3.64	%		712,414			8,631	4.86	%
Certificates of deposit < $100,000		463,851			4,681	4.06	%		461,687			5,298	4.60	%
Money market savings accounts		539,440			3,171	2.36	%		343,233			2,811	3.28	%
Regular savings accounts		109,594			202	0.74	%		119,795			313	1.05	%
Total interest-bearing deposits		2,106,917			14,759	2.82	%		1,990,079			18,027	3.63	%
Securities sold under agreements to repurchase		186,730			620	1.34	%		205,984			2,247	4.38	%
Short-term borrowings		223,009			1,250	2.25	%		200,064			2,641	5.29	%
Long-term debt		67,722			541	3.21	%		16,041			216	5.40	%
Junior subordinated debentures		98,557			1,125	4.59	%		93,897			1,726	7.37	%
Total interest-bearing liabilities		2,682,935			18,295	2.74	%		2,506,065			24,857	3.98	%
Non-interest-bearing demand accounts		481,463							469,377
Other non-interest-bearing liabilities		20,388							20,822
Total liabilities		3,184,786							2,996,264
Stockholders’ equity		318,947							305,253
Total liabilities and stockholders’ equity	$	3,503,733						$	3,301,517
Net interest income				$	31,246						$	34,175
Net interest spread						3.54	%						4.07	%
Net interest margin						3.96	%						4.66	%
Ratio of average interest-earning assets to average interest-bearing liabilities						118.18	%						117.33	%

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	Six Months Ended June 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	$	340,687		$	11,953	7.06	%	$	324,546		$	13,858	8.61	%
Real estate		2,203,221			76,120	6.95	%		1,910,100			82,676	8.73	%
Consumer		46,086			2,328	10.16	%		56,864			2,833	10.05	%
Mortgage		16,338			479	5.90	%		20,511			609	5.99	%
Other		2,478			—	—			2,267			—	—
Total loans		2,608,810			90,880	7.01	%		2,314,288			99,976	8.71	%
Allowance for loan losses		(33,893	)						(26,991	)
Securities:
U.S. government and mortgage-backed		402,450			9,173	4.58	%		418,190			9,530	4.60	%
State and political subdivisions:
Non-taxable		77,719			1,848	4.78	%		50,067			1,265	5.10	%
Taxable		1,613			48	5.98	%		—			—	—
Other		21,105			447	4.26	%		17,519			422	4.86	%
Total securities		502,887			11,516	4.61	%		485,776			11,217	4.66	%
Interest-bearing deposits with other banks		2,823			55	3.92	%		4,012			97	4.88	%
Federal funds sold		4,562			59	2.60	%		11,389			295	5.22	%
Total interest-earning assets		3,119,082			102,510	6.61	%		2,815,465			111,585	7.99	%
Non-interest-earning assets:
Cash and due from banks		66,441							72,538
Other		306,296							280,096
Total non-interest-earning assets		372,737							352,634
Total assets	$	3,457,926						$	3,141,108
Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing demand accounts	$	333,454		$	1,579	0.95	%	$	341,401		$	1,924	1.14	%
Certificates of deposit > $100,000		693,331			13,240	3.84	%		684,661			16,444	4.84	%
Certificates of deposit < $100,000		478,062			10,200	4.29	%		435,282			9,859	4.57	%
Money market savings accounts		485,142			6,328	2.62	%		311,832			5,090	3.29	%
Regular savings accounts		108,124			437	0.81	%		116,902			620	1.07	%
Total interest-bearing deposits		2,098,113			31,784	3.05	%		1,890,078			33,937	3.62	%
Securities sold under agreements to repurchase		198,287			1,912	1.94	%		189,863			4,126	4.38	%
Short-term borrowings		213,112			2,875	2.71	%		183,940			4,852	5.32	%
Long-term debt		39,668			708	3.59	%		17,235			458	5.36	%
Junior subordinated debentures		98,575			2,580	5.26	%		77,965			2,897	7.49	%
Total interest-bearing liabilities		2,647,755			39,859	3.03	%		2,359,081			46,270	3.96	%
Non-interest-bearing demand accounts		470,055							455,694
Other non-interest-bearing liabilities		22,317							17,522
Total liabilities		3,140,127							2,832,297
Stockholders’ equity		317,799							308,811
Total liabilities and stockholders’ equity	$	3,457,926						$	3,141,108
Net interest income				$	62,651						$	64,315
Net interest spread						3.58	%						4.03	%
Net interest margin						4.04	%						4.68	%
Ratio of average interest-earning assets to average interest-bearing liabilities						117.80	%						119.35	%

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 June 30, 2008, our cumulative interest rate gap for the period up to three months was a positive $413.0 million and for the period up to one year was a negative $4.7 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 driven by competition in the marketplace as opposed to changes in the interest rate environment. Repricing of these interest-bearing liabilities tends to lag behind changes in the overall interest rate environment.

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 June 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	$	48,268	$	100,031		$	177,953	$	176,114	$	502,366
Interest-bearing deposits with other banks		191		—			719		—		910
Federal funds sold		4,075		—			—		—		4,075
Loans:
Commercial		215,122		49,708			85,881		1,328		352,039
Real estate		1,170,700		269,992			707,247		184,637		2,332,576
Consumer		13,034		8,394			18,895		4,739		45,062
Total interest-earning assets	$	1,451,390	$	428,125		$	990,695	$	366,818	$	3,237,028
Interest-bearing liabilities:
Savings and NOW accounts	$	210,438	$	271,908		$	482,335	$	87,494	$	1,052,175
Certificates of deposit greater than $100,000		237,251		296,499			97,441		217		631,408
Certificates of deposit less than $100,000		127,823		215,497			96,832		1,153		441,305
Securities sold under agreements to repurchase		144,753		—			—		—		144,753
FHLB advances and other		229,506		61,871			68,121		216		359,714
Junior subordinated debentures		88,663		—			9,876		—		98,539
Total interest-bearing liabilities	$	1,038,434	$	845,775		$	754,605	$	89,080	$	2,727,894
Interest rate gap	$	412,956	$	(417,650	)	$	236,090	$	277,738	$	509,134
Cumulative interest rate gap at June 30, 2008	$	412,956	$	(4,694	)	$	231,396	$	509,134
Cumulative gap ratio at June 30, 2008		1.40		1.00			1.09		1.19

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 June 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.

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PART II – OTHER INFORMATION

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

On June 6, 2008 we held our annual meeting of shareholders. At that meeting the following items were submitted to a vote of security holders:

1. The following four directors were elected:

		Shares Voted
Name	Term	For	Withheld
Daniel H. Lopez, Ph.D.	3 years	17,093,927	1,942,213
Linda S. Childears	3 years	18,557,989	478,151
Michael J. Blake	3 years	18,559,612	476,528
Garrey E. Carruthers, Ph.D.	3 years	18,631,738	404,402

As a result of the election of the above listed directors, our Board of Directors will consist of those directors and the following directors: Michael R. Stanford, H. Patrick Dee, Leonard J. DeLayo, Jr., A.J. (Jim) Wells, Lowell A. Hare, Nedra Matteucci, and Kathleen L. Avila.

2. Proposal to approve an amendment to the Company’s Restated Articles of Incorporation to declassify our Board of Directors and provide for the annual election of all of our directors.

Votes: For 18,478,879; Against 340,429; Abstain 14,190.

3. Proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2008.

Votes: For 18,561,044; Against 262,209; Abstain 10,246.

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. (6)
2.2	Agreement and Plan of Merger, dated as of August 31, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc. and AccessBank. (9)
2.3	Agreement and Plan of Merger, dated as of September 2, 2005, by and among First State Bancorporation, New Mexico Financial Corporation, and Ranchers Banks. (10)
2.4	Amendment Number 1 to the Agreement and Plan of Merger, dated September 29, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc., and AccessBank. (11)
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. (15)
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. (20)
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. (14)
3.3	Amended Bylaws of First State Bancorporation. (7)
3.4	Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. *
10.1	Executive Employment Agreement. (5)
10.2	First State Bancorporation 2003 Equity Incentive Plan. (4)
10.3	Executive Deferred Compensation Plan. (7) (Participation and contributions to this Plan have been frozen as of December 31, 2004.)
10.4	First Amendment to Executive Employment Agreement. (8)

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10.5	Officer Employment Agreement. (8)
10.6	First Amendment to Officer Employment Agreement. (8)
10.7	First State Bancorporation Deferred Compensation Plan. (3)
10.8	First State Bancorporation Compensation and Bonus Philosophy and Plan. (17)
10.9	First Amendment to the First State Bancorporation 2003 Equity Incentive Plan. (13)
10.10	Second Amendment to the First State Bancorporation 2003 Equity Incentive Plan. (13)
10.11	Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. (18)
10.12	Restated and Amended Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. (12)
10.13	Third Amendment to First State Bancorporation 2003 Equity Incentive Plan. (14)
10.14	Compensation Committee Approval and Board Ratification of Certain Executive Salaries. (16)
10.15	Fourth Amendment to First State Bancorporation 2003 Equity Incentive Plan. (21)
10.16	Second Amendment to Executive Employment Agreement (Stanford). (19)
10.17	Second Amendment to Executive Employment Agreement (Dee). (19)
10.18	Second Amendment to Executive Employment Agreement (Spencer). (19)
10.19	Second Amendment to Executive Employment Agreement (Martin). (19)
10.20	Key Executives Incentive Plan. (22)
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. (7)
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

(1) Incorporated by reference from 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 Current Report on Form 8-K filed June 9, 2003 (SEC File No. 001-12487, Film No. 03737867).

(5) Incorporated by reference from First State Bancorporation’s 10-K for the year ended December 31, 2001 (SEC File No. 001-12487, Film No. 02587934).

(6) Incorporated by reference from First State Bancorporation’s Form 8-K filed on May 31, 2002 (SEC File No. 001-12487, Film No. 02668273).

(7) Incorporated by reference from First State Bancorporation’s Form 10-Q for the quarter ended March 31, 2003 (SEC File No. 001-12487, Film No. 03840367).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* 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: August 11, 2008	By:	/s/ Michael R. Stanford
		Michael R. Stanford, President & Chief Executive Officer
Date: August 11, 2008	By:	/s/ Christopher C. Spencer
		Christopher C. Spencer, Senior Vice President and Chief Financial Officer

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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. (6)
2.2	Agreement and Plan of Merger, dated as of August 31, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc. and AccessBank. (9)
2.3	Agreement and Plan of Merger, dated as of September 2, 2005, by and among First State Bancorporation, New Mexico Financial Corporation, and Ranchers Banks. (10)
2.4	Amendment Number 1 to the Agreement and Plan of Merger, dated September 29, 2005, by and among First State Bancorporation, Access Anytime Bancorp, Inc., and AccessBank. (11)
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. (15)
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. (20)
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. (14)
3.3	Amended Bylaws of First State Bancorporation. (7)
3.4	Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. *
10.1	Executive Employment Agreement. (5)
10.2	First State Bancorporation 2003 Equity Incentive Plan. (4)
10.3	Executive Deferred Compensation Plan. (7) (Participation and contributions to this Plan have been frozen as of December 31, 2004.)
10.4	First Amendment to Executive Employment Agreement. (8)
10.5	Officer Employment Agreement. (8)
10.6	First Amendment to Officer Employment Agreement. (8)
10.7	First State Bancorporation Deferred Compensation Plan. (3)
10.8	First State Bancorporation Compensation and Bonus Philosophy and Plan. (17)
10.9	First Amendment to the First State Bancorporation 2003 Equity Incentive Plan. (13)
10.10	Second Amendment to the First State Bancorporation 2003 Equity Incentive Plan. (13)
10.11	Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. (18)
10.12	Restated and Amended Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. (12)
10.13	Third Amendment to First State Bancorporation 2003 Equity Incentive Plan. (14)
10.14	Compensation Committee Approval and Board Ratification of Certain Executive Salaries. (16)
10.15	Fourth Amendment to First State Bancorporation 2003 Equity Incentive Plan. (21)
10.16	Second Amendment to Executive Employment Agreement (Stanford). (19)
10.17	Second Amendment to Executive Employment Agreement (Dee). (19)
10.18	Second Amendment to Executive Employment Agreement (Spencer). (19)
10.19	Second Amendment to Executive Employment Agreement (Martin). (19)
10.20	Key Executives Incentive Plan. (22)
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. (7)
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. *

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(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 Current Report on Form 8-K filed June 9, 2003 (SEC File No. 001-12487, Film No. 03737867).

(5) Incorporated by reference from First State Bancorporation’s 10-K for the year ended December 31, 2001 (SEC File No. 001-12487, Film No. 02587934).

(6) Incorporated by reference from First State Bancorporation’s Form 8-K filed on May 31, 2002 (SEC File No. 001-12487, Film No. 02668273).

(7) Incorporated by reference from First State Bancorporation’s Form 10-Q for the quarter ended March 31, 2003 (SEC File No. 001-12487, Film No. 03840367).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* Filed herewith.

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EX-3.4

Exhibit 3.4

PROFIT CORPORATION

ARTICLES OF AMENDMENT

TO THE

ARTICLES OF INCORPORATION

OF

FIRST STATE BANCORPORATION

NM PRC # 1396837

Pursuant to the provisions of Section 53-13-1 et seq. of the New Mexico Business Corporation Act (Chapter 53, Articles 11 through 18 NMSA 1978), FIRST STATE BANCORPORATION hereby adopts the following Articles of Amendment to its Articles of Incorporation:

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

ARTICLE TWO: Section 6.1 of Article 6 of the Articles of Incorporation of the Company is hereby amended to read as follows:

“ARTICLE 6.

Section 6.1. Number and Election of Directors. The number of directors shall be fixed as provided in the Bylaws of the Corporation (the “Bylaws”), but in no case shall the number of directors elected by the holders of the Common Stock be less than nine, or greater than fifteen. Commencing with the annual meeting of shareholders in the calendar year 2009, directors shall be elected to hold office until the next annual meeting of shareholders; provided that the terms of directors serving as of the conclusion of the 2008 annual meeting of shareholders will not be shortened, and therefore directors elected at the 2007 annual meeting of shareholders shall continue to hold office until the annual meeting of shareholders in 2010 and directors elected at the annual meeting of shareholders in 2008 shall continue to hold office until the annual meeting of shareholders in 2011. Notwithstanding the foregoing, in all cases each director shall hold office until his or her successor is elected and qualified in his or her stead.

Newly created directorships resulting from any increase in the number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office, or other cause may be filled by a majority vote of the directors then in office (even though the number of directors then in office may constitute less than a quorum). A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office. A director elected to fill an increase in the number of directors may be elected by the Board of Directors for a term of office continuing only until the next election of directors by the shareholders.

Any repeal or modification of this Section 6.1 by the shareholders of the corporation shall not adversely affect any right or protection of a director of the Corporation in respect of any act or omission before the repeal or modification.”

1

(the “Amendment”).

ARTICLE FOUR: The Amendment was adopted by the Shareholders of the Company on June 6, 2002.

ARTICLE FIVE: The number of shares of the Company outstanding at the time the Amendment was presented to a vote of the shareholders was 20,121,754, all of which were entitled to vote on the Amendment. Of the shares outstanding at the time the proposed amendment was submitted to a vote of the Shareholders of the Company, 17,520,042 voted for the Amendment and 340,429 voted against the Amendment.

ARTICLE SIX: The Amendment does not provide for an exchange, reclassification, or cancellation of issued shares.

ARTICLE SEVEN: These Articles of Amendment shall be effective upon their filing with the New Mexico Public Regulation Commission.

DATED: June 9, 2008

FIRST STATE BANCORPORATION
By:	/s/ Marshall G. Martin
	Marshall G. Martin, Authorized Officer
	Secretary, Executive Vice President, and Corporate Counsel.

2

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: August 11, 2008
	/s/ Michael R. Stanford
	Michael R. Stanford President and Chief Executive Officer

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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: August 11, 2008
	/s/ Christopher C. Spencer
	Christopher C. Spencer Senior Vice President and Chief Financial Officer, and Principal Accounting Officer

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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 June 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

August 11, 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.

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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 June 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

August 11, 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.

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