UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

or

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

Commission file number 001-12487

FIRST STATE BANCORPORATION

(Exact name of registrant as specified in its charter)

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

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

(505) 241-7500

(Registrant’s telephone number, including area code)

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,243,192 shares of common stock, no par value, outstanding as of November 3, 2008.

FIRST STATE BANCORPORATION AND SUBSIDIARY

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

- 1 -

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

First State Bancorporation and Subsidiary

Consolidated Condensed Balance Sheets

(unaudited)

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

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

See accompanying notes to unaudited consolidated condensed financial statements.

- 2 -

First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Operations

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

(unaudited)

(Dollars in thousands, except per share amounts)

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

See accompanying notes to unaudited consolidated condensed financial statements.

- 3 -

First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Comprehensive Income

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

(unaudited)

(Dollars in thousands)

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

See accompanying notes to unaudited consolidated condensed financial statements.

- 4 -

First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Cash Flows

For the nine months ended September 30, 2008 and 2007

(unaudited)

(Dollars in thousands)

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

(Continued)

- 5 -

First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Cash Flows

For the nine months ended September 30, 2008 and 2007

(unaudited)

(Dollars in thousands)

(continued)

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

See accompanying notes to unaudited consolidated condensed financial statements.

- 6 -

First State Bancorporation and Subsidiary

Notes to Consolidated Condensed Financial Statements

(unaudited)

1. Consolidated Condensed Financial Statements

The accompanying consolidated condensed financial statements of First State Bancorporation and subsidiary (the “Company,” “First State,” “we,” “our,” or similar terms) are unaudited and include our accounts and those of our wholly owned subsidiary, First Community Bank (the “Bank”). All significant intercompany accounts and transactions have been eliminated. Information contained in our consolidated condensed financial statements and notes thereto should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

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

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

2. New Accounting Standards

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

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

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

- 7 -

3. Share-Based Compensation

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

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

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

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

4. Earnings (loss) per Common Share

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

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

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

- 8 -

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

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

5. Goodwill and Other Intangible Assets

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

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

6. Fair Value

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

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

- 9 -

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

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

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

Impaired loans – Impaired loans are reported at the present value of the estimated cash flow of expected repayments discounted using the loan’s contractual interest rate or at the fair value of the underlying collateral less estimated selling costs when it is determined that the source of repayment is dependent on the underlying collateral. Collateral values are estimated using independent appraisals or internally developed estimates based on the nature of the collateral and considering similar assets or other available information. The independent appraisals are considered Level 2 inputs and the internally developed estimates are considered Level 3 inputs.

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

- 10 -

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

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

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

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

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

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

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

7. Guarantees and Commitments

In the normal course of business, various commitments and contingent liabilities are outstanding, such as standby letters of credit and commitments to extend credit. These financial instruments with off-balance sheet risk are not reflected in the consolidated financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to extend credit amounting to $506.2 million were outstanding at September 30, 2008.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Standby letters of credit amounting to $78.6 million were outstanding at September 30, 2008.

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

8. Agreement with Regulators

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

- 11 -

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

Risk-Based Capital and Leverage Ratios

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

9. Junior Subordinated Debentures

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

Junior Subordinated Debentures are summarized as follows:

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

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

- 12 -

10. Federal Home Loan Bank Advances

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

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

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

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

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

11. Subsequent Events

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

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

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

Forward-Looking Statements

Certain statements in this Form 10-Q are forward-looking statements, within the meaning of Section 27A of the Securities Act of

- 13 -

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

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

Forward-looking statements involve inherent risks and uncertainties and are based on numerous assumptions. They are not guarantees of future performance. A number of important factors could cause actual results to differ materially from those in the forward-looking statement. Some factors include changes in interest rates, local business conditions, government regulations, lack of available credit, lack of confidence in the financial markets, loss of key personnel or inability to hire suitable personnel, faster or slower than anticipated growth, economic conditions, our competitors’ responses to our marketing strategy or new competitive conditions, and competition in the geographic and business areas in which we conduct our operations. Forward-looking statements contained herein are made only as of the date made, and we do not undertake any obligation to update them to reflect events or circumstances after the date of this report to reflect the occurrence of unanticipated events.

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

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

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

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

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

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

- 14 -

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

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

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

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

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

The soundness of other financial institutions could adversely affect us.

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

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

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

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

- 15 -

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

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

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

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

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

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

- 16 -

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

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

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

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

Our profitability depends significantly on local and overall economic conditions.

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

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

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

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

- 17 -

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

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

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

Fluctuations in interest rates could reduce our profitability.

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

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

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

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

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

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

- 18 -

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

Banking regulations may restrict our ability to pay dividends.

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

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

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

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

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

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

Competition with other financial institutions could adversely affect our profitability.

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

- 19 -

Environmental liability associated with commercial lending could result in losses.

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

We are dependent on key personnel.

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

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

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

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

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

We may fail to realize the anticipated benefits of acquisitions.

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

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

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

- 20 -

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

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

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

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

Consolidated Condensed Balance Sheets

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

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

- 21 -

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

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

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

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

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

Consolidated Results of Operations

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

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

- 22 -

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

FINANCIAL SUMMARY:

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

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

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

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

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

- 23 -

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

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

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

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

Non-interest Income and Non-interest Expense

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

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

- 24 -

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

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

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

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

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

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

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

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

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

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

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

- 25 -

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

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

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

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

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

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

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

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

- 26 -

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

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

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

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

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

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

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

- 27 -

Income taxes

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

Allowance for Loan Losses

We use a systematic methodology with subjective elements to determine the adequacy of the allowance for loan losses and record a provision to maintain an adequate allowance to provide for inherent losses in the loan portfolio based on current facts and circumstances. This methodology is applied monthly, to determine the amount of allowance for loan losses and the resultant provisions for loan losses we consider adequate to provide for anticipated loan losses. The allowance is increased by provisions charged to operations, and reduced by loan charge-offs, net of recoveries. The following table sets forth information regarding changes in our allowance for loan losses for the periods indicated.

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

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

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

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

- 28 -

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

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

Federal Deposit Insurance Corporation Proposed Restoration Plan

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

Utah Closure

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

Liquidity and Capital

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

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

- 29 -

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

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

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

Risk-Based Capital and Leverage Ratios

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

- 30 -

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

- 31 -

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

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

- 32 -

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

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

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

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

Item 4. Controls and Procedures.

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

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

- 33 -

PART II – OTHER INFORMATION

Item 5. Other Information.

None

Item 6. Exhibits.

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

- 34 -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* Filed herewith.

- 35 -

SIGNATURES

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

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

- 36 -

EXHIBIT INDEX

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

- 37 -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* Filed herewith.

- 38 -