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, 2010.

¨	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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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: 20,857,034 shares of common stock, no par value, outstanding as of November 8, 2010.

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		22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34

Item 4.	Controls and Procedures		37

PART II. OTHER INFORMATION

Item 4.	Reserved		38

Item 5.	Other Information		38

Item 6.	Exhibits		38

	SIGNATURES		40

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PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

First State Bancorporation and Subsidiary

Consolidated Condensed Balance Sheets

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


	(unaudited) September 30, 2010			December 31, 2009
Assets
Cash and due from banks	$	47,658		$	40,863
Interest-bearing deposits with other banks		184,923			104,938
Federal funds sold		—			144

Total cash and cash equivalents		232,581			145,945

Investment securities:
Available for sale (at fair value, amortized cost of $412,360 at September 30, 2010, and $472,737 at December 31, 2009)		416,958			473,580
Held to maturity (at amortized cost, fair value of $57,581 at December 31, 2009)		—			58,455
Non-marketable securities, at cost		27,275			30,089

Total investment securities		444,233			562,124

Mortgage loans held for sale		6,391			14,172
Loans held for investment, net of unearned interest		1,627,329			2,003,518
Less allowance for loan losses		(120,073	)		(129,222	)

Net loans		1,513,647			1,888,468

Premises and equipment (net of accumulated depreciation of $33,103 at September 30, 2010, and $29,934 at December 31, 2009)		30,640			34,583
Accrued interest receivable		6,448			8,106
Other real estate owned		58,455			46,503
Intangible assets (net of accumulated amortization of $5,406 at September 30, 2010, and $4,622 at December 31, 2009)		4,618			5,402
Cash surrender value of bank-owned life insurance		11,338			11,001
Net deferred tax asset		—			1,771
Income tax receivable		2,233			28,084
Other assets, net		10,851			12,408

Total assets	$	2,315,044		$	2,744,395


Liabilities and Stockholders’ Equity (Deficit)
Liabilities:
Deposits:
Non-interest-bearing	$	319,828		$	350,704
Interest-bearing		1,623,842			1,683,624

Total deposits		1,943,670			2,034,328

Securities sold under agreements to repurchase		33,268			40,646
Federal Home Loan Bank advances		265,037			497,046
Junior subordinated debentures		98,209			98,319
Other liabilities		24,887			27,025

Total liabilities		2,365,071			2,697,364

Stockholders’ equity (deficit):
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 22,543,834 at September 30, 2010 and 22,450,391 at December 31, 2009; outstanding 20,857,034 at September 30, 2010 and 20,729,049 at December 31, 2009		223,669			223,928
Treasury stock, at cost (1,686,800 shares at September 30, 2010 and 1,721,342 at December 31, 2009)		(24,427	)		(25,027	)
Retained deficit		(253,867	)		(152,713	)
Accumulated other comprehensive income -
Unrealized gain on investment securities, net of tax		4,598			843

Total stockholders’ equity (deficit)		(50,027	)		47,031

Total liabilities and stockholders’ equity (deficit)	$	2,315,044		$	2,744,395

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Operations

For the three and nine months ended September 30, 2010 and 2009

(unaudited)

(Dollars in thousands, except per share amounts)


	Three months ended September 30, 2010			Three months ended September 30, 2009			Nine months ended September 30, 2010			Nine months ended September 30, 2009
Interest income:
Interest and fees on loans	$	21,073		$	26,777		$	65,304		$	97,386
Interest on marketable securities:
Taxable		3,925			3,730			12,083			11,862
Non-taxable		311			(383	)		1,503			1,923
Federal funds sold		—			—			—			12
Interest-bearing deposits with other banks		75			100			287			269

Total interest income		25,384			30,224			79,177			111,452

Interest expense:
Deposits		5,525			8,552			18,743			31,990
Short-term borrowings		49			467			334			1,971
Long-term debt		1,637			2,220			5,451			5,536
Junior subordinated debentures		668			665			1,881			2,365

Total interest expense		7,879			11,904			26,409			41,862

Net interest income		17,505			18,320			52,768			69,590
Provision for loan losses		(24,200	)		(52,500	)		(93,400	)		(116,900	)

Net interest loss after provision for loan losses		(6,695	)		(34,180	)		(40,632	)		(47,310	)
Non-interest income:
Service charges		2,558			3,157			8,064			10,610
Credit and debit card transaction fees		937			871			2,684			2,867
Gain on investment securities		4,236			4,209			6,955			6,963
Gain on sale of loans		766			665			1,974			3,290
Gain on sale of Colorado branches		—			—			—			23,292
Other		443			824			1,338			2,406

Total non-interest income		8,940			9,726			21,015			49,428

Non-interest expenses:
Salaries and employee benefits		7,549			9,067			22,423			33,026
Occupancy		2,471			3,285			8,113			10,726
Data processing		1,251			1,340			3,664			4,252
Equipment		1,153			1,324			3,491			4,735
Legal, accounting, and consulting		2,449			2,489			5,155			5,432
Marketing		284			613			807			1,950
Telephone		301			426			984			1,220
Other real estate owned		5,155			2,143			19,431			3,918
FDIC insurance premiums		2,536			1,843			7,691			7,111
Penalties and interest		—			897			2			898
Amortization of intangibles		261			272			784			1,475
Other		2,526			2,841			8,241			8,968

Total non-interest expenses		25,936			26,540			80,786			83,711

Loss before income taxes		(23,691	)		(50,994	)		(100,403	)		(81,593	)
Income tax expense		—			546			751			546

Net loss	$	(23,691	)	$	(51,540	)	$	(101,154	)	$	(82,139	)

Loss per share:
Basic loss per share	$	(1.14	)	$	(2.49	)	$	(4.86	)	$	(3.99	)

Diluted loss per share	$	(1.14	)	$	(2.49	)	$	(4.86	)	$	(3.99	)

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Comprehensive Loss

For the three and nine months ended September 30, 2010 and 2009

(unaudited)

(Dollars in thousands)


	Three months ended September 30, 2010			Three months ended September 30, 2009			Nine months ended September 30, 2010			Nine months ended September 30, 2009
Net loss	$	(23,691	)	$	(51,540	)	$	(101,154	)	$	(82,139	)
Other comprehensive loss, net of tax - unrealized holding gains (losses) on securities available for sale arising during period		(70	)		2,473			6,480			3,940
Change in valuation allowance on deferred tax assets resulting from changes in unrealized holding gains on securities		(1,720	)		(137	)		1,483			(100	)
Reclassification adjustment for gains included in net loss		(2,563	)		(2,546	)		(4,208	)		(4,213	)

Total comprehensive loss	$	(28,044	)	$	(51,750	)	$	(97,399	)	$	(82,512	)

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Cash Flows

For the nine months ended September 30, 2010 and 2009

(unaudited)

(Dollars in thousands)


	Nine months ended September 30, 2010			Nine months ended September 30, 2009
Cash flows from operating activities:
Net loss	$	(101,154	)	$	(82,139	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		93,400			116,900
Provision for decline in value of other real estate owned		15,006			2,212
Net (gain) loss on sale of other real estate owned		(29	)		205
Depreciation and amortization		4,028			5,077
Decrease in intangibles		—			8,382
Premium on deposits sold		—			(30,000	)
Share-based compensation expense (benefit)		(230	)		434
Gain on sale of loans		(1,974	)		(3,290	)
Gain on sale of investment securities available for sale		(6,955	)		(6,963	)
Loss on disposal of premises and equipment		6			42
Increase in bank-owned life insurance cash surrender value		(337	)		(1,273	)
Amortization of securities, net		6,360			1,164
Amortization of core deposit intangible		784			1,475
Mortgage loans originated for sale		(89,665	)		(245,165	)
Proceeds from sale of mortgage loans originated for sale		99,420			256,594
Deferred income taxes		1,701			—
Decrease in accrued interest receivable		1,658			2,819
Change in income tax receivable		25,851			—
Decrease in other assets, net		1,084			10,112
Increase (decrease) in other liabilities, net		(1,538	)		4,694

Net cash provided by operating activities		47,416			41,280

Cash flows from investing activities:
Net decrease in loans		214,366			124,953
Purchases of investment securities carried at amortized cost		—			(8,700	)
Maturities of investment securities carried at amortized cost		1,184			11,805
Purchases of investment securities carried at fair value		(288,181	)		(387,338	)
Maturities of investment securities carried at fair value		105,682			103,505
Sale of investment securities available for sale		300,742			187,143
Purchases of non-marketable securities carried at cost		(64	)		(51	)
Redemption of non-marketable securities carried at cost		2,878			2,297
Purchases of premises and equipment		(268	)		(380	)
Surrender of bank-owned life insurance		—			35,686
Proceeds from sale of and payments on other real estate owned		32,876			8,504
Proceeds from the sale of fixed assets		9			4
Net cash paid upon sale of Colorado branches		—			(81,890	)

Net cash provided (used) by investing activities		369,224			(4,462	)

Cash flows from financing activities:
Net increase (decrease) in interest-bearing deposits		(59,782	)		117,020
Net increase (decrease) in non-interest-bearing deposits		(30,876	)		19,672
Net decrease in securities sold under agreements to repurchase		(7,378	)		(75,955	)
Proceeds from Federal Home Loan Bank advances		270,000			430,000
Payments on Federal Home Loan Bank advances		(502,009	)		(429,897	)
Proceeds from common stock issued		41			488

Net cash provided by (used in) financing activities		(330,004	)		61,328

Increase in cash and cash equivalents		86,636			98,146
Cash and cash equivalents at beginning of period		145,945			66,580

Cash and cash equivalents at end of period	$	232,581		$	164,726

(Continued)

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First State Bancorporation and Subsidiary

Consolidated Condensed Statements of Cash Flows

For the nine months ended September 30, 2010 and 2009

(unaudited)

(Dollars in thousands)

(continued)


	Nine months ended September 30, 2010		Nine months ended September 30, 2009
Supplemental disclosure of noncash investing and financing activities:
Additions to other real estate owned in settlement of loans	$	59,274	$	34,812

Loans originated through the sale of other real estate owned	$	830	$	728

Change in deferred tax asset for vested expired stock options	$	70	$	—

Transfer of fixed assets to other real estate owned	$	531	$	515

Transfer of fixed asset to other assets	$	44

Transfer of investment securities held to maturity to investment securities available for sale	$	57,280	$	—

Release of common stock held in deferred compensation plan	$	600

Supplemental disclosure of cash flow information:
Cash paid for interest	$	25,320	$	67,875

Cash received for income taxes	$	26,866	$	4,890

See accompanying notes to unaudited consolidated condensed financial statements.

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First State Bancorporation and Subsidiary

Notes to Consolidated Condensed Financial Statements

(unaudited)

1. Consolidated Condensed Financial Statements

The accompanying consolidated condensed financial statements of First State Bancorporation and subsidiary (the “Company,” “First State,” “we,” “our,” or similar terms) are unaudited and include our accounts and those of our wholly owned subsidiary, First Community Bank (the “Bank”). All significant intercompany accounts and transactions have been eliminated. Information contained in our consolidated condensed financial statements and notes thereto should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

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 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The Company’s Board of Directors meets monthly along with the Bank’s Board of Directors, and provides broad oversight to the Company’s business. Direct oversight of the Bank’s business, including development of strategic direction, policies, and other matters, is provided by its Board of Directors. The Bank board is composed entirely of internal management, with H. Patrick Dee, the Company’s President and Chief Executive Officer filling the positions of Chairman and Chief Executive Officer at the Bank.

In preparing the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. These estimates and assumptions are subject to a greater degree of uncertainty as a result of current economic conditions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates and it is reasonably possible that a change in these estimates will occur in the near term.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses including the assessment of the underlying collateral values, the valuation of real estate acquired in satisfaction of loans, valuation and other-than-temporary impairment of investment securities, the assessment of impairment of intangible assets, and the valuation of deferred tax assets. In connection with the determination of the allowance for loan losses and real estate owned, management obtains independent appraisals for significant properties.

Management believes that the estimates and assumptions it uses to prepare the consolidated financial statements, including those referred to above are adequate. However, further deterioration of the loan portfolio and/or changes in economic conditions would require future additions to the allowance and future adjustments to the valuation of other real estate owned. Further, regulatory agencies, as an integral part of their examination process, periodically review the allowance for losses on loans and other real estate owned, and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. In addition, current uncertain and volatile economic conditions will likely affect our future business results.

The Company’s results of operations depend on establishing underwriting criteria to minimize loan losses and generating net interest income. The components of net interest income, interest income and interest expense, are affected by general economic conditions and by competition in the marketplace.

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Capital Adequacy and Regulatory Matters, Going Concern Consideration, and Management’s Plan

At September 30, 2010, the Bank’s regulatory capital status fell to “critically undercapitalized.” An institution is deemed to be “critically undercapitalized” if its ratio of tangible equity to total assets is equal to or less than 2.0 percent. The Bank’s capital ratios are as follows: tangible equity to total assets (using end of period assets) of 1.86 percent, total risk-based capital ratio of 4.01 percent, a tier 1 risk-based capital ratio of 2.68 percent, and a leverage ratio of 1.73 percent. In order to be “adequately capitalized” under regulatory capital guidelines, the Bank generally must have a total risk-based capital ratio of 8.0 percent or greater, a Tier 1 risk-based capital ratio of 4.0 percent or greater, and a leverage ratio of 4.0 percent or greater.

Under the PCA provisions of the FDI Act, depository institutions that are “critically undercapitalized” must be placed into conservatorship or receivership within 90 days of becoming critically undercapitalized, unless the Bank’s primary federal regulatory authority (the Federal Reserve, in the case of the Bank) determines, with the concurrence of the FDIC, and documents that “other action” would better achieve the purposes of the PCA provisions. If the Bank remains critically undercapitalized on average during the calendar quarter beginning 270 days after it became critically undercapitalized, the FDI Act requires the appointment of a receiver unless the Federal Reserve, with the concurrence of the FDIC, determines that, among other things, the institution has positive net worth and the Federal Reserve and the FDIC both certify that the institution is viable and not expected to fail. In addition to the restrictions on its operations to which it is already subject (under the Directive described above and under the regulatory agreement entered into on July 2, 2009) the Bank would be prohibited from doing any of the following without the prior written approval of the FDIC: entering into material transactions outside the usual course of business; extending credit for highly leveraged transactions; amending the Bank’s charter or bylaws; making a change to accounting methods; engaging in any “covered transaction” (as defined in Section 23A of the Federal Reserve Act) with an affiliate; paying excessive compensation or bonuses; paying interest on new or renewed liabilities at a rate that would increase the Bank’s weighted average cost of funds to a level significantly exceeding the prevailing rates on interest on deposits in the Bank’s normal market areas; and making any principal or interest payment on subordinated debt beginning 60 days after becoming critically undercapitalized.

In addition, the FDIC may place further restrictions on the Bank’s activities, similar to those authorized for the FDIC in the case of “significantly undercapitalized” institutions. These additional requirements and restrictions may include, among others, a requirement for a sale of Bank shares or obligations of the Bank sufficient to return the Bank to adequately capitalized status; if grounds exist for the appointment of a receiver or conservator for the Bank, a requirement that the Bank be acquired or merged with another institution; requiring the Bank to reduce its total assets; ordering a new election of Bank directors; requiring the Bank to dismiss any senior executive officer or director who held office for more than 180 days before the Bank became undercapitalized; requiring the Bank to employ “qualified” senior executive officers; requiring First State to divest the Bank if the regulators determine that the divestiture would improve the Bank’s financial condition and future prospects; and requiring the Bank to take any other action that the FDIC determines will better carry out the purposes of the statute requiring the imposition of one or more of the restrictions described above. The regulatory provisions under which the regulatory authorities act are intended to protect depositors, the deposit insurance fund and the banking system and are not intended to protect shareholders or other investors in other securities in a bank or its holding company. The Regulators and/or the FDIC can institute other corrective measures to require additional capital and have broad enforcement powers to impose additional restrictions on operations, substantial fines and other penalties for violation of laws and regulations.

Due to the deteriorated capital level of the Bank, there is substantial doubt as to the ability of the Company to continue as a going concern. Significant additional sources of capital are required for the Company to continue operating through 2010 and beyond. Although management does not believe that the holding company, First State Bancorporation, has the ability to raise new capital; management continues to take prudent steps with respect to raising capital for the subsidiary, First Community Bank. Any such transaction is expected to result in a dilution in the holding company’s ownership of the Bank to a level that is likely to be below five percent. There can be no assurance that the Bank will be successful in raising capital.

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amended (the “FDI Act”). This Directive is in addition to the formal agreement (the “Regulator Agreement”) with the Federal Reserve Bank of Kansas City and the New Mexico Financial Institutions Division (collectively, the “Regulators”) executed on July 2, 2009, and described below.

The Directive requires that within 60 days of the effective date of the Directive or such additional time as the Board of Governors may permit, the Bank, in conjunction with the Company must (1) increase the Bank’s equity in an amount sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H; (2) enter into and close a contract to be acquired by a depository institution holding company or combine with another insured depository institution; or (3) take other necessary measures to make the Bank “adequately capitalized.” The Bank did not satisfy the requirements within the 60 day deadline.

The Directive also (1) restricts the Bank from making any capital distribution, including the payment of dividends; and (2) requires prior written approval from the Federal Reserve Bank of Kansas City (the “Reserve Bank”) and fulfillment of one of the requirements above, for the Bank to solicit and accept new deposit accounts or renew any time deposit bearing an interest rate that exceeds the prevailing effective rates on deposits of comparable amounts and maturities in the Bank’s market area. In accordance with the Directive, the Bank submitted an acceptable plan and timetable to the Reserve Bank to conform the rates of interest paid on all existing non-time deposit accounts to the prevailing effective rates on deposits of comparable amounts in the Bank’s market area.

The Reserve Bank may, in its sole discretion, grant written extensions of time to the Bank to comply with any provision of the Directive.

Because the Bank, in conjunction with the Company, failed to meet or satisfy the requirements of the Directive, the Federal Reserve, in concurrence with the FDIC, can take further regulatory enforcement actions against the Bank at any time; however, neither the Federal Reserve nor the FDIC have taken further action.

Under the terms of the Regulator Agreement, executed on July 2, 2009, the Company and the Bank agreed, among other things, to engage an independent consultant acceptable to the Regulators to assess the Bank’s management and staffing needs, assess the qualifications and performance of all officers of the Bank, and assess the current structure and compositions of the Bank’s board of directors and its committees. In addition, within 60 days of the Regulator Agreement, the Company and/or the Bank was required to submit a written plan to strengthen lending and credit risk management practices and improve the Bank’s position regarding past due loans, problem loans, classified loans, and other real estate owned; maintain sufficient capital at the Bank, holding company and the consolidated level; improve the Bank’s earnings and overall condition; and improve management of the Bank’s liquidity position, funds management process, and interest rate risk management. The Company and/or the Bank have also agreed to maintain an adequate allowance for loan and lease losses; charge-off or collect assets classified as “loss” in the Report of Examination that have not been previously collected or charged off; not to pay any dividends; not to distribute any interest, principal or other sums on trust preferred securities; not to issue, increase or guarantee any debt; not to purchase or redeem any shares of the Company’s stock; and not to accept any new brokered deposits, even if the Bank is considered well capitalized. Within 30 days of the Regulator Agreement, the Bank was required to submit a written plan to the Regulators for reducing its reliance on brokered deposits.

The Board of Directors of the Company and the Bank was also required to appoint a Compliance Committee to monitor and coordinate the Company’s and the Bank’s compliance with the provisions of the Regulator Agreement, obtain prior approval for the appointment of new directors, the hiring or change in responsibilities of senior executive officers, and to comply with restrictions on severance payments and indemnification payments to institution affiliated parties.

Failure to comply with the provisions of the Regulator Agreement could subject the Company and/or the Bank to additional enforcement actions. Management continues to work closely with the Regulators regarding the Regulator Agreement and believes that the Company and the Bank are in substantial compliance with the requirements of the Regulator Agreement, except for the requirement to submit an acceptable capital plan. Capital plans as required by the Regulator Agreement for the Company and the Bank were submitted timely, but were not accepted by the regulators due to uncertainty around the Company’s ability to execute the plans. Management continues to work toward full compliance with the requirements of the Regulator Agreement. However, there can be no assurance that the Company and/or the Bank will be able to comply fully with the provisions of the Regulator Agreement, or that efforts to comply with the Regulator Agreement will not have adverse effects on the Company’s ability to continue as a going concern.

- 9 -

During the second quarter the Company initiated a repurchase offer for all of the outstanding trust preferred securities issued by the holding company at a significant discount to par value as part of a plan to raise capital. The repurchase of substantially all of the trust preferred securities was considered to be a key element toward successfully recapitalizing the Company. The trust preferred security holders did not accept the offers and the offers expired in early July and were not extended. Consequently, Bank management is in direct discussions with potential investors regarding a potential investment directly in the Bank. If the Bank raises capital independently from the Company, any such transaction is expected to result in a dilution in the Company’s ownership of the Bank to a level that is likely to be below five percent. There can be no assurance that the Company will be successful in raising capital at the Bank or the holding company.

The FDIC’s definitions for “significantly undercapitalized” and “critically undercapitalized” do not apply to bank holding companies, so the Company remains “undercapitalized” despite the continued deterioration of the ratios. At the current time, the Company’s “undercapitalized” classification has no immediate impact on its day-to-day operations because the holding company has no immediate significant cash flow needs or significant obligations that are due in the next twelve months. In addition, the prompt corrective actions required by the Regulators are directed at the Bank. The Bank is currently subject to the prompt supervisory and regulatory actions pursuant to the FDIC Improvement Act of 1991.

The condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result should the Company not be able to continue as a going concern.

Given current economic conditions and trends, the Company may continue to experience asset quality deterioration and higher levels of non-performing loans, as well as continued compression of its net interest margin, which would result in negative earnings and financial condition pressures.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier I capital (as defined in regulations and set forth in the following table) to risk-weighted assets, and of Tier I capital to average total assets (leverage ratio). The regulatory capital calculation limits the amount of allowance for loan losses that is included in capital to 1.25 percent of risk-weighted assets.


As of September 30, 2010	Actual						For capital adequacy purposes					To be considered well capitalized
As of September 30, 2010	Amount			Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total capital to risk-weighted assets:
Consolidated	$	(59,243	)		(3.7	)%	$	128,184		8.0	%	$	160,230		10.0	%
Bank subsidiary		64,105			4.0	%		127,926		8.0	%		159,907		10.0	%
Tier I capital to risk-weighted assets:
Consolidated		(59,243	)		(3.7	)%		64,092		4.0	%		96,138		6.0	%
Bank subsidiary		42,881			2.7	%		63,963		4.0	%		95,944		6.0	%
Tier I capital to average total assets:
Consolidated		(59,243	)		(2.4	)%		99,234		4.0	%		124,043		5.0	%
Bank subsidiary		42,881			1.7	%		99,105		4.0	%		123,881		5.0	%

Liquidity

Management continues to focus significant attention on the overall liquidity position of the Bank due to the current economic environment and capital structure of the Bank with particular focus on the level of cash liquidity along with monitoring the other liquidity sources available to us including a borrowing line (fully secured by securities) and other assets that can be monetized including the cash surrender value of bank-owned life insurance. The Bank’s most liquid assets are cash and cash equivalents and marketable investment securities that are not pledged as collateral. The levels of these assets are dependent on operating, financing, lending, and investing activities during any given period. The Bank continues to accumulate and maintain cash liquidity from loan reductions and investment activity to compensate for the limited off balance sheet liquidity options currently available.

- 10 -

The Bank’s total liquidity position decreased $156 million to approximately $388 million at September 30, 2010, from $544 million at June 30, 2010, and increased $176 million since December 31, 2009. The increase in total liquidity for the year is attributable to $256 million in out of market certificates of deposit generated through deposit listing services, continued runoff in the loan portfolio including loan payoffs and loan amortization net of charge-offs and migration into other real estate owned of approximately $270 million, receipt of $26 million of federal tax refunds, and an increase in public customers in the FDIC Transaction Account Guarantee (“TAG”) program which results in the release of pledged investment securities. The increases were offset by a decline in in-market non-brokered deposits of $181 million for the year including a decrease of $153 million in the third quarter, maturities of $166 million in brokered deposits including CDARS reciprocal during the first nine months of the year, and the loss of our ability to access the Federal Reserve Discount window due to the Bank’s classification as “critically undercapitalized.”

The decrease in in-market non-brokered deposits during 2010 is partially due to a reduction in the level of public entity deposits which have declined $67 million since December 31, 2009, including a decline of $75 million in the quarter ended September 30, 2010. To the extent the public entity deposits are not insured under TAG, these deposits are required to be fully collateralized with investment securities and declines do not reduce our overall liquidity. In addition, one of our larger deposit customers reduced their deposit levels by $22 million during the third quarter.

Due to the level of cash in excess of that needed to support branch operations accumulated in the first nine months of 2010, the Bank has repaid $230 million in FHLB borrowings during 2010 including $90 million during the third quarter of 2010, which has decreased its exposure to the FHLB by approximately 47% for the year. The election to pay down the $90 million in the third quarter negatively impacted our liquidity by approximately $50 million as the FHLB only released $40 million in collateral as a result of the pay downs.

At September 30, 2010, the Bank’s total liquidity position of approximately $388 million consists of cash liquidity and several other liquidity sources. The cash liquidity of $185 million consists of excess investable cash included in interest-bearing deposits with other banks, primarily at the Federal Reserve Bank. The Bank’s other liquidity sources include approximately $175 million of unpledged investments, a borrowing line with a total capacity of approximately $20 million, fully collateralized by investment securities, and $8 million of redeemable bank owned life insurance policies. The Bank’s excess investable cash and unpledged investments currently make up 16% of total assets compared to 8% a year ago. Management continues to believe it is prudent to operate with the higher levels of excess cash and investment securities in the near term.

The Bank currently has $36 million in brokered deposits including CDARS reciprocal of which $3 million mature in the next 90 days and the remainder mature in 2011. The Bank has maintained significant levels in overnight investments, which combined with normal expected repayments of loans outstanding, should provide adequate cash liquidity required to redeem these brokered deposits at maturity as we do not have the ability to renew these brokered deposits.

The Bank is a participating institution in the TAG program which has been extended by the FDIC to December 31, 2010. The TAG program provides our deposit customers in non-interest bearing and interest-bearing NOW accounts paying twenty-five basis points or less full FDIC insurance for an unlimited amount. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raised the standard maximum deposit insurance amount to $250,000 and provides unlimited insurance for non-interest bearing accounts through 2012; however, interest-bearing NOW accounts will no longer qualify. The Bank currently has approximately $195 million in interest-bearing NOW accounts that will no longer qualify for an unlimited amount under the program effective January 1, 2011, of which approximately $156 million are public entity deposits that will need to be collateralized, reducing the level of unpledged investment securities.

The assets of the holding company consist primarily of the investment in the Bank and a money market savings account held in the Bank. The primary sources of the holding company’s cash revenues are dividends from the Bank along with interest received from the money market account. The Bank is currently precluded from paying dividends pursuant to the Regulator Agreement. At September 30, 2010, the holding company had cash of approximately $459,000 and has no immediate significant cash flow needs or significant obligations that are due in the next twelve months.

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2. New Accounting Standards

In July 2010, the FASB issued Accounting Standards Update No. 2010-20. This update provides amendments to Topic 310 “Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The update will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures. Companies will be required to provide more information about the credit quality of their financing receivables in their disclosures, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. The amendments in the update apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade accounts receivable. Short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. Management does not expect this update to have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06. This update provides amendments to Topic 820 “Fair Value Measurements and Disclosures.” The update requires the separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements. The update also requires that reconciliation for fair value measurements using significant unobservable inputs (Level 3) present separately information about purchases, sales, issuances and settlements and clarifies existing disclosures regarding the level of disaggregation and inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Adoption of this guidance effective in 2010 did not have a material impact on the Company’s consolidated financial statements. Management does not expect the guidance effective in 2011 to have a material impact on the Company’s consolidated financial statements.

3. Earnings (loss) per Common Share

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


	Three Months Ended September 30,
	2010								2009
	Loss (Numerator)			Shares (Denominator)		Per Share Amount			Loss (Numerator)			Shares (Denominator)		Per Share Amount
	(Dollars in thousands, except share and per share amounts)
Basic EPS:
Net loss	$	(23,691	)		20,857,034	$	(1.14	)	$	(51,540	)		20,660,518	$	(2.49	)

Effect of dilutive securities
Options		—			—					—			—

Diluted EPS:
Net loss	$	(23,691	)		20,857,034	$	(1.14	)	$	(51,540	)		20,660,518	$	(2.49	)

Due to the net loss for the three-month periods ended September 30, 2010 and 2009, approximately 791,845 and 1,369,196 weighted-average stock options outstanding, respectively, were excluded from the calculation of diluted earnings (loss) per share because their inclusion would have been antidilutive.

- 12 -


	Nine Months Ended September 30,
	2010								2009
	Loss (Numerator)			Shares (Denominator)		Per Share Amount			Loss (Numerator)			Shares (Denominator)		Per Share Amount
	(Dollars in thousands, except share and per share amounts)
Basic EPS:
Net loss	$	(101,154	)		20,816,628	$	(4.86	)	$	(82,139	)		20,579,984	$	(3.99	)

Effect of dilutive securities
Options		—			—					—			—

Diluted EPS:
Net loss	$	(101,154	)		20,816,628	$	(4.86	)	$	(82,139	)		20,579,984	$	(3.99	)

Due to the net loss for the nine-month periods ended September 30, 2010 and 2009, approximately 869,136 and 1,488,713 weighted-average stock options outstanding, respectively, were excluded from the calculation of diluted earnings (loss) per share because their inclusion would have been antidilutive.

4. Investment Securities

Following is a summary of amortized cost and approximate fair value of investment securities:


	Amortized Cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(Dollars in thousands)
As of September 30, 2010
Obligations of the U.S. government agencies—Available for sale	$	5,560	$	268	$	—	$	5,828
Mortgage-backed securities (residential):
Pass-through certificates—Available for sale		61,717		1,029		—		62,746
Collateralized mortgage obligations—Available for sale		303,067		4,154		533		306,688
Obligations of states and political subdivisions—Available for sale		42,016		745		1,065		41,696
Federal Home Loan Bank stock		23,168		—		—		23,168
Federal Reserve Bank stock		3,972		—		—		3,972
Bankers’ Bank of the West stock		135		—		—		135

Total	$	439,635	$	6,196	$	1,598	$	444,233


As of December 31, 2009
Obligations of U.S. government agencies—Available for sale	$	5,571	$	—	$	116	$	5,455
Mortgage-backed securities (residential):
Pass-through certificates:
Available for sale		98,007		594		177		98,424
Held to maturity		21,804		693		—		22,497
Collateralized mortgage obligations:
Available for sale		315,668		1,452		2,021		315,099
Held to maturity		2,348		—		703		1,645
Obligations of states and political subdivisions:
Available for sale		53,491		1,456		345		54,602
Held to maturity		34,303		136		1,000		33,439
Federal Home Loan Bank stock		23,103		—		—		23,103
Federal Reserve Bank stock		6,851		—		—		6,851
Bankers’ Bank of the West stock		135		—		—		135

Total	$	561,281	$	4,331	$	4,362	$	561,250

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The amortized cost and estimated fair value of investment securities at September 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.


	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Within one year:
Available for sale	$	1,447	$	1,475
One through five years:
Available for sale		13,863		14,433
Five through ten years:
Available for sale		8,943		9,185
After ten years:
Available for sale		23,324		22,431
Mortgage-backed securities (residential)^(a)		61,717		62,746
Collateralized mortgage obligations^(a)		303,066		306,688
Federal Home Loan Bank stock		23,168		23,168
Federal Reserve Bank stock		3,972		3,972
Bankers’ Bank of the West stock		135		135

Total	$	439,635	$	444,233

(a)

Substantially all of the Company’s mortgage-backed securities are due in 10 years or more based on contractual maturity. The estimated weighted average life, which reflects anticipated future prepayments, is approximately 2.8 years for pass-through certificates and 1.7 years for collateralized mortgage obligations.

Marketable securities available for sale with a fair value of approximately $223.9 million were pledged to collateralize deposits as required by law and for other purposes including collateral for securities sold under agreements to repurchase, FHLB borrowings, and federal funds lines at September 30, 2010.

Proceeds from sales of investments in debt securities for the nine months ended September 30, 2010 were $300.7 million. Gross losses realized were zero for the nine months ended September 30, 2010. Gross gains realized were approximately $7.0 million for the nine months ended September 30, 2010. The Company calculates gain or loss on sale of securities based on the specific identification method.

The unrealized losses on investment securities are caused by fluctuations in market interest rates. The majority of the gross unrealized losses as of September 30, 2010 have been in an unrealized loss position for less than 12 months as summarized in the table below. We have approximately 16 investment positions that are in an unrealized loss position. The underlying cash obligations of Ginnie Mae securities are guaranteed by the U.S. government. The securities are purchased by the Company for their economic value. Because the decrease in fair value is primarily due to market interest rates, projected cash flows are expected to be in excess of amortized cost, and because the Company has the intent and ability to hold these investments until a market price recovery, or maturity of the securities, the Company has concluded that the investments are not considered other-than-temporarily impaired.

At March 23, 2010, the Company transferred its investment securities classified as held to maturity to available for sale due to the continued deteriorating capital position of the Bank. The potential to monetize gains while reducing risk weighted assets, and the lack of the current tax benefit from obligations of state and political subdivisions to the Company as a result of the losses incurred over the last two years led to the decision to transfer the entire held to maturity portfolio to the available for sale portfolio. Accordingly, the Company reclassified these securities with an amortized cost of $57.3 million, from held to maturity to available for sale as of March 23, 2010. The net unrealized loss at the date of transfer amounted to $350,000 and was recorded in other comprehensive income, net of tax.

- 14 -


	Less than twelve months				Greater than twelve months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
As of September 30, 2010	(Dollars in thousands)
Obligations of the U.S. government agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities (residential)		—		—		—		—		—		—
Collateralized mortgage obligations		46,940		290		1,767		243		48,707		533
Obligations of states and political subdivisions		4,000		1,000		3,072		65		7,072		1,065

Total	$	50,940	$	1,290	$	4,839	$	308	$	55,779	$	1,598


As of December 31, 2009
Obligations of the U.S. government agencies	$	5,455	$	116	$	—	$	—	$	5,455	$	116
Mortgage-backed securities (residential)		39,876		177		—		—		39,876		177
Collateralized mortgage obligations		133,012		1,744		6,265		980		139,277		2,724
Obligations of states and political subdivisions		5,680		1,045		4,350		300		10,030		1,345

Total	$	184,023	$	3,082	$	10,615	$	1,280	$	194,638	$	4,362

5. Loans and Allowance for Loan Losses

Following is a summary of loans and non-performing loans by major categories:


	Loans				Non-Performing Loans
	September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
	(Dollars in thousands)
Commercial	$	210,687	$	259,353	$	18,474	$	13,037
Consumer and other		21,652		28,202		2,589		5,893
Real estate – commercial		829,412		883,598		77,651		70,065
Real estate – one to four family		155,054		187,085		14,109		22,497
Real estate – construction		410,524		645,280		146,457		146,197

Loans held for investment		1,627,329		2,003,518		259,280		257,689
Mortgage loans available for sale		6,391		14,172		—		—

Total loans	$	1,633,720	$	2,017,690	$	259,280	$	257,689

The Company’s loans are currently concentrated in New Mexico, Colorado, Utah, and Arizona. The loan portfolio is heavily concentrated in real estate at approximately 86%. Similarly, the Company’s potential problem loans are concentrated in real estate loans, specifically the real estate construction category. These real estate construction loans are considered to be the loans with the highest risk of loss. Real estate construction loans comprise approximately 25.1% of the total loans of the Company. Of the $410.5 million of real estate construction loans, approximately 35% are related to residential construction and approximately 65% are for commercial purposes or vacant land. Approximately 64% of our real estate construction loans are in New Mexico, approximately 18% are in Colorado, approximately 16% are in Utah and approximately 2% are in Arizona.

The following is a summary of the real estate construction loans by type:


	Construction Loans September 30, 2010
	(Dollars in thousands)
	Total		% of Total			$ Non- Performing		% Non- Performing			$ Delinquent		% Delinquent			YTD Charge Offs Net of Recoveries
1-4 family vertical construction	$	25,286		6	%	$	16,509		65.3	%	$	2,009		1.4	%	$	7,200
1-4 family lots and lot development		119,024		29			46,857		39.4			1,813		1.2			24,062
Commercial owner occupied		5,470		2			683		12.5			—		—			539
Commercial non-owner occupied (land development and vertical construction)		116,110		28			47,979		41.3			1,542		1.1			18,635
Vacant land		144,634		35			34,429		23.8			3,999		2.7			14,657

Total	$	410,524		100	%	$	146,457		35.7	%	$	9,363		6.4	%	$	65,093

- 15 -


	Construction Loans December 31, 2009
	(Dollars in thousands)
	Total		% of Total			$ Non-Performing		% Non-Performing			$ Delinquent		% Delinquent			YTD Charge Offs Net of Recoveries
1-4 family vertical construction	$	63,464		10	%	$	24,098		38.0	%	$	11,548		18.2	%	$	16,185
1-4 family lots and lot development		180,749		28			61,169		33.8			7,534		4.2			31,189
Commercial owner occupied		18,535		3			2,117		11.4			—		—			13
Commercial non-owner occupied (land development and vertical construction)		217,879		33			34,117		15.7			16,238		7.5			13,125
Vacant land		164,653		26			24,696		15.0			1,861		1.1			19,301

Total	$	645,280		100	%	$	146,197		22.7	%	$	37,181		5.8	%	$	79,813

The increase in non-performing loans relates to various small-to medium-sized loans. At September 30, 2010, the non-performing loans included approximately 360 borrower relationships. The largest borrower relationships are loans for acquisition and development of residential lots. The 24 largest, with balances ranging from $2.7 million to $15.2 million, comprise $137.1 million, or 53%, of the total non-performing loans and have balances of $66.2 million in New Mexico, $32.4 million in Colorado, and $38.5 million in Utah. The $137.1 million is net of partial charge-offs of $34.5 million, the majority of which occurred in 2010. The allowance for loan losses on these loans totaled $16.4 million at September 30, 2010. These 24 loans are collateralized by partially developed lots, developed lots and vertical construction. No other non-performing borrower relationship is greater than 1% of the total non-performing loans.

The allowance for loan losses is established through a provision for loan losses charged to operations as losses are estimated. Loan amounts determined to be uncollectible are charged-off to the allowance and recoveries of amounts previously charged-off, if any, are credited to the allowance.

Management uses a systematic methodology, which is applied monthly, to evaluate the amount of allowance for loan losses and the resultant provisions for loan losses it considers adequate to provide for probable inherent losses in the portfolio. This estimate is subject to a greater degree of uncertainty as a result of current economic conditions. As future events and their effects cannot be determined with precision, actual results could differ significantly from the estimate.

The allowance consists of specific, historical, and subjective components. The methodology includes the following elements:

–

A periodic detailed analysis of the loan portfolio

–

A systematic loan grading system

–

A periodic review of the summary of the allowance for loan loss balance

–

Identification of loans to be evaluated on an individual basis for impairment under ASC Section 310-10-35, “Subsequent Measurement” of ASC Topic 310, “Receivables”

–

Consideration of internal factors such as our size, organizational structure, loan portfolio structure, loan administration procedures, past due and delinquency trends, and historical loss experience

–

Consideration of risks inherent in different kinds of lending

–

Consideration of external factors such as local, regional, and national economic factors

–

An overall evaluation of the quality of the underlying collateral, and holding and disposition costs

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement, including contractual interest payments. When a loan has been identified as impaired, the amount of impairment is measured using cash flow of expected repayments discounted using the loan’s contractual interest rate or at the fair value of the underlying collateral less estimated selling costs when it is determined that the source of repayment is the liquidation of the underlying collateral.

- 16 -

The following summarizes impaired loans, which include troubled debt restructurings (“TDR’s”) at September 30, 2010 and December 31, 2009.


(Dollars in thousands)	September 30, 2010		December 31, 2009
TDR’s – non-performing loans	$	47,099	$	—
TDR’s – performing loans		11,816		—

Total TDR’s		58,915		—
Non TDR’s – non-performing loans		212,181		257,689

Total impaired loans	$	271,096	$	257,689

A TDR is a formal restructuring of a loan where the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including a reduction in the stated interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date. TDR’s can involve loans remaining on non-accrual, moving to non-accrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of six months to demonstrate the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a non-accrual loan. TDR’s are evaluated in accordance with ASC Topic 310-10-40, “Troubled Debt Restructurings by Creditors.” At September 30, 2010 there were commitments to advance funds on TDR’s of approximately $280,000.

The allowance recorded on total impaired loans in accordance with ASC Section 310-10-35, “Subsequent Measurement” of ASC Topic 310, “Receivables” was approximately $33.6 million and $24.5 million at September 30, 2010 and December 31, 2009, respectively.

We utilize external appraisals to determine the fair value of the collateral for all real estate related loans. Appraisals are obtained upon origination of real estate loans. Updated real estate appraisals are generally obtained at the time a loan is classified as a non-performing asset and determined to be impaired, unless a current appraisal is already on file. New appraisals for impaired loans are obtained annually thereafter or sooner if circumstances indicate that a significant change in value has occurred. Due to the potential for real estate values to change rapidly, appraised values for real estate are discounted to account for deteriorating real estate markets. These discounts consider economic differences that exist in the various markets we serve as well as differences experienced by type of loan and collateral and typically range from 0% to 30% depending on the circumstances surrounding each individual loan. A larger discount may be applied to stale dated appraisals where a current appraisal has been ordered but not yet received. For loans secured by other types of assets such as inventory, equipment, and receivables, the values are typically established based on current financial information of the borrower after applying discounts, usually 50% to 100% for stale dated financial information; however, only 7.7% of our non-performing loans as of September 30, 2010 are secured by collateral other than real estate.

Historical credit loss rates are applied to all commercial and real estate loans, smaller than an established threshold and thus not subject to individual review. The loss rates are derived from a migration analysis, which tracks the historical net charge-off experience.

The subjective portion of the allowance for loan losses, which is judgmentally determined, is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans. In calculating the subjective portion of the allowance for loan loss, we consider levels and trends in delinquencies, charge-offs and recoveries, changes in underwriting and policies, the experience of lending management and staff, national and local economic conditions, industry conditions, changes in credit concentrations, independent loan review results, and overall problem loan levels.

- 17 -

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


	Nine months ended September 30, 2010			Year ended December 31, 2009			Nine months ended September 30, 2009
	(Dollars in thousands)
ALLOWANCE FOR LOAN LOSSES:
Balance beginning of period	$	129,222		$	79,707		$	79,707
Allowance related to loans sold		—			(7,747	)		(7,747	)
Provision charged to operations		93,400			162,600			116,900
Loans charged-off		(104,767	)		(107,506	)		(75,812	)
Recoveries		2,218			2,168			1,555

Balance end of period	$	120,073		$	129,222		$	114,603

The allowance for loan losses was 7.38%, 6.45% and 5.41% of total loans held for investment at September 30, 2010, December 31, 2009 and September 30, 2009, respectively.

6. Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment, other real estate owned, and certain other assets. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

Accounting guidance 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. This fair value option election is 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 did not elect to apply the fair value option to any financial assets or liabilities, except as already applicable under other accounting guidance.

The Company groups its assets and liabilities at fair values in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine 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 following is a description of the valuation methodologies used for assets and liabilities that are recorded at fair value and for estimating fair value for financial instruments not recorded at fair value.

Cash and cash equivalents – Carrying value approximates fair value since the majority of these instruments are payable on demand and do not present credit concerns.

Securities available for sale – Securities available for sale are recorded at fair value on a recurring basis. For the majority of securities, the Company obtains fair value measurements from Interactive Data Corporation (“IDC”), 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. Pricing as received from

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IDC is reviewed for reasonableness each quarter. In addition, the Company obtains pricing on select securities from Bloomberg and compares this pricing to the pricing obtained from IDC. No significant differences have been found. The Company has four securities consisting of municipal bonds that are classified within level 3 of the valuation hierarchy. These four bonds have a par value of $21.0 million, weighted average coupon of 7.58%, and remaining weighted average lives of 22.86 years. The estimated fair value of these securities totaling $20.0 million is calculated by discounting scheduled or anticipated cash flows through maturity using current rates at which similar bonds would be entered into based on current market conditions, equivalent estimated average lives, and additional credit risk premiums to incorporate associated credit risk.

Non-marketable securities – These securities include Federal Home Loan Bank, Federal Reserve Bank, and Bankers’ Bank of the West stock. This stock is carried at cost, which approximates fair value. The fair value determination was determined based on the ultimate recoverability of the par value of the stock and considered, among other things, any significant decline in the net assets of the institutions, scheduled dividend payments, any impact of legislative and regulatory changes, and the liquidity position of the institutions.

Loans held for investment – We do not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating the entry price fair value for disclosure purposes. The estimated fair value of the loan portfolio is calculated by discounting scheduled cash flows over the estimated maturity of loans using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or repricing terms. Credit risk is accounted for through a reduction of contractual cash flows by loss estimates of classified loans and as a component of the discount rate.

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. External appraisals are used to determine the fair value of the collateral for all real estate related loans. Appraisals are obtained upon origination of real estate loans. Updated real estate appraisals are generally obtained at the time a loan is classified as a non-performing asset and determined to be impaired, unless a current appraisal is already on file. New appraisals for impaired loans are obtained annually thereafter or sooner if circumstances indicate that a significant change in value has occurred. Due to the potential for real estate values to change rapidly, appraised values for real estate are discounted to account for deteriorating real estate markets. These discounts consider economic differences that exist in the various markets we serve as well as differences experienced by type of loan and collateral and typically range from 0% to 30% depending on the circumstances surrounding each individual loan. A larger discount may be applied to stale dated appraisals where a current appraisal has been ordered but not yet received. For loans secured by other types of assets such as inventory, equipment, and receivables, the values are typically established based on current financial information of the borrower after applying discounts, usually 50% to 100% for stale dated financial information; however only 7.7% of our non-performing loans as of September 30, 2010 are secured by collateral other than real estate. Appraisals with discounts up to 10% are considered Level 2 inputs. Appraisals with discounts greater than 10% and the internally developed estimates, including discounted estimated cash flows of expected repayments are considered Level 3 inputs.

Loans held for sale – These loans are reported at the lower of cost or fair value, less costs to sell. Fair value is determined based on expected proceeds based on sales contracts and commitments. At September 30, 2010 and December 31, 2009, all of the Company’s loans held for sale are carried at cost, as generally, cost is less than the price at which the Company commits to sell the loan to the permanent investor.

Accrued interest receivable – Carrying value of interest receivable approximates fair value, since these instruments have short-term maturities.

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 less estimated costs of disposition. Due to the potential for real estate values to change rapidly, appraised values for real estate are discounted to account for deteriorating real estate markets. These discounts consider economic differences that exist in the various markets we serve as well as differences experienced by type of loan and collateral and typically range from 0% to 30% depending on the circumstances surrounding each individual loan. A larger discount may be applied to stale dated appraisals where a current appraisal has been ordered but not yet received. Appraisals with discounts up to 10% are considered Level 2 inputs. Appraisals with discounts greater than 10% are considered Level 3 inputs.

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Cash surrender value of bank-owned life insurance – The carrying value of cash surrender value of bank-owned life insurance is the amount realizable by the Company if it were to surrender the policy to the issuing company. Because the carrying value is equal to the amount the Company could realize in cash, the carrying value is considered its fair value.

Deposits – The estimated fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market deposits, approximates the amounts payable on demand at September 30, 2010 and December 31, 2009. The fair value of fixed maturity certificates of deposit is estimated by discounting the future contractual cash flows using the rates currently offered for deposits of similar remaining maturities.

Securities sold under agreements to repurchase and federal funds purchased – The carrying value of securities sold under agreements to repurchase and federal funds purchased, which reset frequently to market interest rates, approximates fair value.

FHLB advances and other – Fair values for FHLB advances and other are estimated based on the current rates offered for similar borrowing arrangements at September 30, 2010.

Junior subordinated debentures – The fair value of fixed junior subordinated debentures, the majority of which reset quarterly to market interest rates, is estimated by discounting the future contractual cash flows using the rates currently offered for similar borrowing arrangements.

Off-balance sheet items – The majority of our commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the borrower or the Company, they only have value to the borrower and to the Company. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the fair value of financial instruments table below because it is immaterial.

Assets and Liabilities Measured at Fair Value on a Recurring Basis


Financial Assets	Balance as of September 30, 2010		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:

Obligations of U.S. government agencies:	$	5,828	$	—	$	5,828	$	—
Mortgage-backed securities (residential):
FHLMC		635		—		635		—
FNMA		61		—		61		—
GNMA		362,522		—		362,522		—
Other		6,216		—		6,216		—
Obligations of states and political Subdivisions		41,696		—		21,723		19,973

Total securities available for sale	$	416,958	$	—	$	396,985	$	19,973

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(Dollars in thousands)	Balance 12/31/2009		Total net gains (losses) included in net Income		Total net gains (losses) included in other comprehensive income			Purchases, sales, issuances and settlements, net			Net transfers into and/ or out of Level 3		Balance 09/30/2010		Net unrealized gains (losses) included in net income related to assets and liabilities held at period end
Securities available for sale:
Obligations of states and political subdivisions (a) (b)	$	—	$	—	$	(1,000	)	$	(8,427	)	$	20,973	$	19,973	$	—

Total securities available for sale	$	—	$	—	$	(1,000	)	$	(8,427	)	$	20,973	$	19,973	$	—

(a)	Classified as Level 3 securities in 2010 due to the reclassification from the held to maturity portfolio to the available for sale portfolio where assets are measured at fair value on a recurring basis.

(b)	The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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. The valuation methodologies used to measure these fair value adjustments are described previously in this note.


	Carrying value at September 30, 2010								Period ended September 30, 2010
	(Dollars in thousands)
	Total		Level 1		Level 2		Level 3		Total Losses
Impaired loans including accruing TDR’s	$	271,096	$	—	$	122,100	$	148,996	$	111,702	⁽¹⁾
Other real estate owned⁽²⁾	$	58,455	$	—	$	44,571	$	13,884	$	15,006	⁽³⁾

									$	126,708

(1)	Total losses on impaired loans represents the sum of charge offs, net of recoveries, of $102.5 million, plus the increase in specific reserves of $9.2 million for the nine month period ended September 30, 2010.

(2)	Represents the fair value of other real estate owned that is measured at fair value less costs to sell.

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

The table below is a summary of fair value estimates as of September 30, 2010, and December 31, 2009, for financial instruments. This table excludes financial instruments that are recorded at fair value on a recurring basis.


	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	232,581	$	232,581	$	145,945	$	145,945
Marketable securities held to maturity		—		—		58,455		57,581
Federal Home Loan Bank, Federal Reserve Bank, and Bankers’ Bank of the West stock		27,275		27,275		30,089		30,089
Loans, net		1,513,647		1,546,690		1,888,468		1,902,352
Accrued interest receivable		6,448		6,448		8,106		8,106
Cash surrender value of bank-owned life insurance		11,338		11,338		11,001		11,001
Financial liabilities:
Deposits		1,943,670		1,965,573		2,034,328		2,041,898
Securities sold under agreements to repurchase		33,628		33,628		40,646		40,646
FHLB advances		265,037		268,608		497,046		502,792
Junior subordinated debentures		98,209		98,209		98,319		98,319

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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 $115.0 million were outstanding at September 30, 2010.

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 $9.3 million were outstanding at September 30, 2010.

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. Income Taxes

Income tax expense of $751,000 for the nine months ended September 30, 2010, was primarily due to the impact of finalizing the 2009 tax return during the second quarter of 2010. There was no income tax expense (benefit) for the three months ended September 30, 2009, as the net operating loss and other net deferred tax assets were fully offset by a deferred tax asset valuation allowance. Income tax expense of $546,000 for the three and nine months ended September 30, 2009 is due to the limitation of our net operating loss carryback for alternative minimum tax purposes. ASC Topic 740, “Income Taxes” requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if based on the available evidence, it is more likely than not that such assets will be not be realized. The valuation allowance at September 30, 2010, December 31, 2009, and September 30, 2009 was $69.3 million, $61.7 million and $65.1 million, respectively.

Item 2.

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

Forward-Looking Statements

Certain statements in this Form 10-Q are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s current expectations or predictions of future results or events. We make these forward-looking statements in reliance on the safe harbor provisions provided under the Private Securities Litigation Reform Act of 1995.

All statements, other than statements of historical fact, included in this Form 10-Q that 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, inability to reach terms acceptable to potential investors, acquisitions, dispositions, competition, loan and deposit growth or decline, timing of new branch openings, attempts to raise capital at the Bank and/or holding company level, capital expectations, 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, actions by regulators, lack of available credit, lack of confidence in the financial markets, loss

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of key personnel or inability to hire suitable personnel, faster or slower than anticipated growth, economic conditions, our competitors’ responses to our marketing strategy or new competitive conditions, and competition in the geographic and business areas in which we conduct our operations. Forward-looking statements contained herein are made only as of the date made, and we do not undertake any obligation to update them to reflect events or circumstances after the date of this report to reflect the occurrence of unanticipated events.

Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. These factors are included in our Form 10-K for the year ended December 31, 2009, and updated in our Form 10-Q for the period ended June 30, 2010, as filed with the Securities and Exchange Commission.

Consolidated Condensed Balance Sheets

Our total assets decreased by $429 million from $2.744 billion as of December 31, 2009, to $2.315 billion as of September 30, 2010. The decrease in total assets is primarily due to a $384 million decrease in loans held for investment, due to continued runoff in the loan portfolio including loan payoffs and loan amortization. Total deposits decreased by $90.7 million, from $2.034 billion at December 31, 2009, to $1.944 billion at September 30, 2010. Traditional deposits, which exclude CDARS reciprocal deposits, brokered deposits and out-of-market certificates of deposit generated through deposit listing services, decreased by $180.5 million, including a decrease of $152.3 million in the third quarter. Brokered deposits and CDARS reciprocal deposits decreased by $166.3 million and we generated $256 million in out-of-market certificates of deposit through deposit listing services during the first nine months of the year. FHLB advances decreased by $232 million from December 31, 2009, as we elected to pay off advances with accumulated cash.

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


	September 30, 2010					December 31, 2009					September 30, 2009
	Amount		%			Amount		%			Amount		%
	(Dollars in thousands)
Commercial	$	210,687		12.9	%	$	259,353		12.8	%	$	263,918		12.4	%
Real estate-commercial		829,412		50.8	%		883,598		43.8	%		893,463		42.1	%
Real estate-one- to four-family		155,054		9.5	%		187,085		9.3	%		203,749		9.6	%
Real estate-construction		410,524		25.1	%		645,280		32.0	%		725,707		34.1	%
Consumer and other		21,652		1.3	%		28,202		1.4	%		30,430		1.4	%
Mortgage loans available for sale		6,391		0.4	%		14,172		0.7	%		8,525		0.4	%

Total	$	1,633,720		100.0	%	$	2,017,690		100.0	%	$	2,125,792		100.0	%

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


	September 30, 2010					December 31, 2009					September 30, 2009
	Amount		%			Amount		%			Amount		%
	(Dollars in thousands)
Non-interest-bearing	$	319,828		16.5	%	$	350,704		17.2	%	$	389,672		18.1	%
Interest-bearing demand		362,157		18.6	%		353,705		17.4	%		336,950		15.7	%
Money market savings accounts		281,074		14.5	%		381,566		18.8	%		390,288		18.1	%
Regular savings		89,649		4.6	%		88,044		4.3	%		90,008		4.2	%
Certificates of deposit less than $100,000		221,193		11.4	%		232,852		11.5	%		237,932		11.1	%
Certificates of deposit greater than $100,000		634,184		32.6	%		425,739		20.9	%		430,758		20.0	%
CDARS Reciprocal deposits		5,585		0.3	%		56,741		2.8	%		97,271		4.5	%
Brokered deposits		30,000		1.5	%		144,977		7.1	%		178,804		8.3	%

Total	$	1,943,670		100.0	%	$	2,034,328		100.0	%	$	2,151,683		100.0	%

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Consolidated Results of Operations

Our net loss for the three months ended September 30, 2010 was $23.7 million, or $(1.14) per diluted share, compared to a net loss of $51.5 million or $(2.49) per diluted share for the same period in 2009. Our net loss for the nine months ended September 30, 2010 was $101.2 million, or $(4.86) per diluted share, compared to a net loss of $82.1 million or $(3.99) per diluted share for the same period in 2009. The net loss for the three and nine months ended September 30, 2010 resulted primarily from the provisioning for loan losses due to charge-offs and continued migration of loans to non-performing status and write-downs of other real estate owned, due principally to the continued difficult economic environment. The net loss for the three and nine months ended September 30, 2009 resulted primarily from the significant provision for loan losses due to the level of non-performing assets and increased charge-offs. The loss for the nine months ended September 30, 2009 was mitigated by the gain on the sale of our Colorado branches of $23.3 million in June 2009.

Our net interest income decreased approximately $815,000 to $17.5 million for the three months ended September 30, 2010, compared to $18.3 million for the same period in 2009. This decrease was composed of a $4.8 million decrease in total interest income, partially offset by a $4.0 million decrease in total interest expense.

The decrease in total interest income was composed of a decrease of $660,000 due to a 0.07% decrease in the yield on average interest-earning assets, and a decrease of $4.2 million due to decreased average interest earning assets of $421.6 million. The decrease in average earning assets occurred primarily in loans, due to loan payoffs and loan amortization, partially offset by an increase in average investment securities.

The decrease in total interest expense was composed of a decrease of $952,000 million due to a 0.51% decrease in the cost of interest-bearing liabilities, and a decrease of $3.1 million due to decreased average interest-bearing liabilities of $254,000 million. The decrease in average interest-bearing liabilities occurred primarily in average short-term borrowings and long-term debt as we paid off FHLB advances with excess accumulated cash.

Our net interest income decreased approximately $16.8 million to $52.8 million for the nine months ended September 30, 2010, compared to $69.6 million for the same period in 2009. This decrease was composed of a $32.3 million decrease in total interest income, partially offset by a $15.5 million decrease in total interest expense.

The decrease in total interest income was composed of a decrease of $10.8 million due to a 0.68% decrease in the yield on average interest-earning assets, and a decrease of $21.5 million due to decreased average interest earning assets of $540.7 million. The decrease in average earning assets occurred primarily in loans, due primarily to our Colorado branch sale on June 26, 2009, combined with loan payoffs and loan amortization, partially offset by an increase in average investment securities.

The decrease in total interest expense was composed of a decrease of $5.0 million due to a 0.54% decrease in the cost of interest-bearing liabilities, and a decrease of $10.5 million due to decreased average interest-bearing liabilities of $392.0 million. The decrease in average interest-bearing liabilities occurred primarily in average interest-bearing deposits, due to the sale of our Colorado branches on June 26, 2009. Average short-term borrowings also decreased, as we paid off FHLB advances with excess accumulated cash.

Our net interest margin was 2.84% and 2.68% for the three and nine months ended September 30, 2010, respectively. The net interest margins for the three and nine months ended September 30, 2009 were 2.53% and 2.93%, respectively. The net interest margin for the three months ended June 30, 2010 was 2.67%. The increase in the net interest margin for the three month period ended September 2010 compared to the three month period ended September 2009 is primarily due to approximately $1.5 million of accrued interest reversed on two Colorado metropolitan municipal district bonds in the third quarter of 2009 which negatively impacted the three month period ended September 2009 by 21 basis points. In addition, the net interest margin has shown signs of improvement recently due to increased rates on loan renewals and the continued decline in our overall cost of deposits. The decrease in the net interest margin for the nine month period ended September 30, 2010 compared to the same period in 2009 is primarily due to the continued increase in non-performing assets, repositioning of the investment portfolio, and a conscious effort to continue carrying the high levels of interest bearing cash and investment securities over the last fifteen months to maintain on balance sheet liquidity.

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The significant level of non-performing loans has continued to put pressure on our net interest margin. The margin compression is a direct result of reversals of accrued interest on loans moving to non-accrual status during the period as well as the inability to accrue interest on the respective loans going forward, ultimately resulting in an earning asset with a zero yield. Non-accrual loans totaled $259 million at September 30, 2010, up from $229 million at September 30, 2009. Non-accrual loans at September 30, 2010, declined slightly from June 30, 2010, which totaled $269 million. Non-accrual loans currently make up 11% of interest earning assets compared to 8% a year ago.

The repositioning of the investment portfolio has contributed to the margin compression as we have sold a significant portion of the investment portfolio with higher yields over the last eighteen months in order to monetize gains in the investment portfolio. We have replaced the investments sold with GNMA investments which are 0% risk weighted for regulatory capital purposes, and continue to be purchased at lower yields due to the current rate environment and our continued focus on shorter average life investments in anticipation of rates increasing over the next 12 to 24 months. In addition, during the third quarter of 2009, we classified two Colorado metropolitan municipal district bonds with a fair value of $17.8 million as non-accrual investment securities due to the status of the developments and related uncertainty of the cash flows.

The higher levels of interest bearing cash and growth in the investment portfolio are the result of efforts to build on balance sheet liquidity in the current banking environment through cash received on loan pay downs and amortization and an increase in out of market deposits, however, this increase in liquidity negatively impacts our margin. During the first quarter of 2010 we began to focus our efforts on generating deposits outside of our normal market areas of New Mexico and Arizona through the use of two deposit listing services due to our inability to issue brokered deposits and limited liquidity sources. We have focused on maturities of 12 to 24 months for these out of market certificates of deposit with $256 million generated as of September 30, 2010. This strategy has increased our cash liquidity and allowed us to purchase additional investments, but at the same time results in further margin compression by increasing our earning asset base with lower yielding assets and contributing to an increase in interest expense. Interest bearing cash and investments currently make up 28% of interest earning assets compared to 25% a year ago.

The rates paid on customer deposits also impact the margin and are influenced more by competition in our markets and tend to lag behind Federal Reserve Bank action in both timing and magnitude, particularly in this very low rate environment. Although we have lowered selected deposit rates since the beginning of 2009 and throughout 2010 and are restricted to the rates we can pay due to First Community Bank’s (the “Bank”) regulatory capital ratios and the Prompt Corrective Action Directive (the “Directive”), we continue to remain competitive in the markets we serve as we have the ability to pay up to the market area average rates on deposits.

Our net interest margin increased to 2.84% in the third quarter of 2010 from 2.67% in the second quarter of 2010, due primarily to a slightly higher yield on loans and a small decrease in the cost of deposits. The slightly higher yield on loans for the quarter ended September 30, 2010 is primarily due to interest income recorded on certain loans returning to accrual status and interest income recorded on certain non-performing loans that were paid off. The extent of future changes in our net interest margin will depend on the amount and timing of any Federal Reserve rate changes, our overall liquidity position, 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.

Given current economic conditions and trends, we may continue to experience asset quality deterioration and higher levels of nonperforming loans in the near-term, which would result in continued negative earnings and financial condition pressures.

Non-interest Income

An analysis of the components of non-interest income is presented in the table below.


Non-interest income (Dollars in thousands)	Three Months Ended September 30,
	2010		2009		$ Change			% Change
Service charges	$	2,558	$	3,157	$	(599	)		(19	)%
Credit and debit card transaction fees		937		871		66			8
Gain on investment securities		4,236		4,209		27			1
Gain on sale of mortgage loans		766		665		101			15
Other		443		824		(381	)		(46	)

	$	8,940	$	9,726	$	(786	)		(8	)%

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The decrease in service charges on deposit accounts is primarily due to a general decrease in NSF and overdraft activity driven in part by new regulations effective in July 2010, requiring customers to opt in to the Bank’s overdraft protection product.

The decrease in other non-interest income is primarily due to a decrease in bank-owned life insurance income of approximately $245,000. In September 2009, we surrendered approximately 80 percent of our bank-owned life insurance policies with a value of approximately $36 million for liquidity and risk-based capital purposes.


Non-interest income (Dollars in thousands)	Nine Months Ended September 30,
	2010		2009		$ Change			% Change
Service charges	$	8,064	$	10,610	$	(2,546	)		(24	)%
Credit and debit card transaction fees		2,684		2,867		(183	)		(6	)
Gain on investment securities		6,955		6,963		(8	)		—
Gain on sale of mortgage loans		1,974		3,290		(1,316	)		(40	)
Gain on sale of Colorado branches		—		23,292		(23,292	)		(100	)
Other		1,338		2,406		(1,068	)		(44	)

	$	21,015	$	49,428	$	(28,413	)		(58	)%

The decrease in service charges on deposit accounts is primarily due to the completion of the sale of the Colorado branches on June 26, 2009, which accounted for 19 percent of deposits and to a general decrease in NSF and overdraft activity.

The decrease in gain on sale of loans is primarily due to decreased volumes of sales of residential mortgage loans. During the nine months ended September 30, 2010, we sold approximately $98.1 million in loans compared to approximately $255.7 million during the same period in 2009. The decline in volume is primarily due to the closure of the Colorado mortgage operations in conjunction with the Colorado branch sale, and to a lesser extent to the continued sluggish housing market.

The 2009 gain on sale of Colorado branches is from the completion of our sale transaction on June 26, 2009.

The decrease in other non-interest income is primarily due to a decrease in bank-owned life insurance income of approximately $936,000.

Non-interest Expense

An analysis of the components of non-interest expense is presented in the tables below:


Non-interest expense (Dollars in thousands)	Three Months Ended September 30,
	2010		2009		$ Change			% Change
Salaries and employee benefits	$	7,549	$	9,067	$	(1,518	)		(17	)%
Occupancy		2,471		3,285		(814	)		(25	)
Data processing		1,251		1,340		(89	)		(7	)
Equipment		1,153		1,324		(171	)		(13	)
Legal, accounting, and consulting		2,449		2,489		(40	)		(2	)
Marketing		284		613		(329	)		(54	)
Telephone		301		426		(125	)		(29	)
Other real estate owned		5,155		2,143		3,012			141
FDIC insurance premiums		2,536		1,843		693			38
Penalties and interest		—		897		(897	)		(100	)
Amortization of intangibles		261		272		(11	)		(4	)
Other		2,526		2,841		(315	)		(11	)

	$	25,936	$	26,540	$	(3,403	)		(2	)%

The decrease in salaries and employee benefits is primarily due to a decrease in headcount. At September 30, 2010, full time equivalent employees totaled 494 compared to 559 at September 30, 2009. The decrease is also due to the lower mortgage commissions as a result of reduced volume in mortgage loans originated for sale, a decrease in stock-based

- 26 -

compensation expense, and lower benefits expense due to the discontinuation of matching contributions under the First State Bancorporation Employee Savings Plan. There was also a reduction in separation pay primarily related to the closure of the mortgage division in 2009 that did not recur in 2010.

The decrease in occupancy is primarily due to a decrease in rent expense and other related expenses due to the termination of certain leases primarily related to administrative functions in Colorado, Utah, and New Mexico, and to leasehold impairment charges on vacated office space that occurred in the third quarter of 2009.

Legal, accounting, and consulting expense for the three months ended September 30, 2010 includes approximately $1.3 million of costs associated with our efforts to raise capital. Legal, accounting, and consulting fees incurred in the three month period ended September 30, 2009 included approximately $1.5 million in consulting costs for a staffing model and a revenue enhancement model that were prepared in connection with our efforts to control non-interest expenses and increase other non-interest income.

The decrease in marketing expenses is primarily due to a decrease in discretionary spending for direct advertising, Bank sponsorships and contributions.

The increase in FDIC insurance premiums relates to higher FDIC assessment rates due to our capital classification for regulatory purposes as well as changes in our deposit mix.

Penalties and interest in 2009 of $896,000 related to the surrender of certain bank-owned life insurance policies.

Income tax expense for the three months ended September 30, 2009, of $546,000 is due to the limitation on alternative minimum tax carrybacks due to our net operating loss position.

An analysis of the components of non-interest expense for the nine months ended September 30, 2010 and 2009 is presented in the table below.


Non-interest expense (Dollars in thousands)	Nine Months Ended September 30,
	2010		2009		$ Change			% Change
Salaries and employee benefits	$	22,423	$	33,026	$	(10,603	)		(32	)%
Occupancy		8,113		10,726		(2,613	)		(24	)
Data processing		3,664		4,252		(588	)		(14	)
Equipment		3,491		4,735		(1,244	)		(26	)
Legal, accounting, and consulting		5,155		5,432		(277	)		(5	)
Marketing		807		1,950		(1,143	)		(59	)
Telephone		984		1,220		(236	)		(19	)
Other real estate owned		19,431		3,918		15,513			396
FDIC insurance premiums		7,691		7,111		580			8
Penalties and interest		2		898		(896	)		(100	)
Amortization of intangibles		784		1,475		(691	)		(47	)
Other		8,241		8,968		(727	)		(8	)

	$	80,786	$	83,711	$	(2,925	)		(4	)%

The decrease in salaries and employee benefits is primarily due to a decrease in headcount. At September 30, 2010, full time equivalent employees totaled 494 compared to 559 at September 30, 2009. The sale of the Colorado branches and the related closure of the Colorado mortgage division accounted for a headcount reduction of 193 full time equivalent employees effective June 26, 2009. The decrease is also due to the lower mortgage commissions as a result of reduced volume in mortgage loans originated for sale, a decrease in stock-based compensation expense, and lower benefits expense due to the discontinuation of matching contributions under the First State Bancorporation Employee Savings Plan. There was also a reduction in separation pay related to the sale of the Colorado branches and the related closure of the mortgage division that did not recur in 2010.

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The decrease in occupancy is primarily due to a decrease in rent expense and other related expenses due to the sale of the Colorado branches and the Colorado mortgage division closure.

The decrease in data processing fees is primarily due to the decrease in debit card transactions, and a reduction in software maintenance which is based on a decreased number of users resulting from the sale of the Colorado branches on June 26, 2009. In addition, software amortization decreased due to the assets being fully amortized.

The decrease in equipment is primarily due to the decrease in depreciation expense on equipment and a decrease in equipment rental and associated costs due to the sale of the Colorado branches and Colorado mortgage division closure in June 2009.

Legal, accounting, and consulting expense for the nine months ended September 30, 2010 includes approximately $2.0 million of costs associated with our efforts to raise capital. Legal, accounting, and consulting fees incurred in the three month period ended September 30, 2009 included approximately $1.5 million in consulting costs for a staffing model and a revenue enhancement model that were prepared in connection with our efforts to control non-interest expenses and increase other non-interest income, and approximately $850,000 of legal and investment banking fees incurred in connection with the sale of our Colorado branches.

The decrease in marketing expenses is primarily due to a decrease in discretionary spending for direct advertising, Bank sponsorships and contributions, and fees related to a staffing model put in place to help reduce expenses that did not recur in 2010.

The increase in expenses for other real estate owned is primarily due to an increase in write-downs of properties to reflect their fair values, an increase in taxes and insurance, and other related expenses incurred on the larger portfolio of properties, partially offset by gains on sales of these properties, as opposed to losses on sales of other real estate owned during the third quarter of 2009.

The increase in FDIC insurance premiums relates to higher FDIC assessment rates due to our capital classification for regulatory purposes as well as changes in our deposit mix. The higher rate was partially offset by the decrease in deposits related to our Colorado branch sale on June 26, 2009 and the five basis point special assessment for $1.4 million that occurred in the second quarter of 2009 and did not recur in 2010.

The decrease in amortization of intangibles is due to the sale of our Colorado branches on June 26, 2009.

Income tax expense of $751,000 for the nine months ended September 30, 2010 relates to final adjustments upon completion and filing of our 2009 tax return.

Allowance for Loan Losses

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

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	Nine months ended September 30, 2010			Year ended December 31, 2009			Nine months ended September 30, 2009
	(Dollars in thousands)
ALLOWANCE FOR LOAN LOSSES:
Balance beginning of period	$	129,222		$	79,707		$	79,707
Provision for loan losses		93,400			162,600			116,900
Net charge-offs		(102,549	)		(105,338	)		(74,257	)
Allowance related to other loans held for sale		—			(7,747	)		(7,747	)

Balance end of period	$	120,073		$	129,222		$	114,603

Allowance for loan losses to total loans held for investment		7.38	%		6.45	%		5.41	%
Allowance for loan losses to non-performing loans		46.31	%		50.15	%		50.13	%

	September 30, 2010			December 31, 2009			September 30, 2009
	(Dollars in thousands)
NON-PERFORMING ASSETS:
Accruing loans – 90 days past due	$	102		$	—		$	—
Non-accrual loans		259,178			257,689			228,621

Total non-performing loans	$	259,280		$	257,689		$	228,621
Other real estate owned		58,445			46,503			42,086
Non-accrual investment securities		17,775			18,775			18,775

Total non-performing assets	$	335,500		$	322,967		$	289,482

Potential problem loans	$	135,258		$	173,003		$	205,782
Total non-performing assets to total assets		14.49	%		11.77	%		10.03	%

The provision for loan losses was $93.4 million for the nine months ended September 30, 2010, compared to $116.9 million for the same period in 2009. The provision for loan losses was $24.2 million for the third quarter of 2010, compared to $52.5 million for the third quarter of 2009. The allowance for loan losses was 7.38% and 5.41% of total loans held for investment at September 30, 2010 and September 30, 2009, respectively. Non-performing loans decreased by $9.6 million in the third quarter of 2010 and $17.4 million in the second quarter of 2010. This compares to increases of $28.5 million in the first quarter of 2010, and increases of $45.3 million, $47.7 million, $17.3 million, and $29.1 million in the first, second, third and fourth quarters of 2009, respectively. Potential problem loans declined for the fifth quarter in a row decreasing by $28.6 million from June 30, 2010 and $70.5 million from September 30, 2009. Potential problem assets are defined as loans presently accruing interest, and not contractually past due 90 days or more and not restructured, but about which management has doubt as to the future ability of the borrower to comply with present repayment terms, which may result in the reporting of the loans as non-performing assets in the future. Net charge-offs totaled $102.5 million at September 30, 2010, as we continued to charge off all specific reserves that have been determined to be collateral dependent.

The following summarizes impaired loans, which include non-accrual loans and performing and non-performing troubled debt restructurings (“TDR’s”), at September 30, 2010 and December 31, 2009.


(Dollars in thousands)	September 30, 2010		December 31, 2009
TDR’s – non-performing loans	$	47,099	$	—
TDR’s – performing loans		11,816		—

Total TDR’s		58,915		—
Non TDR’s – non-performing loans		212,181		257,689

Total impaired loans	$	271,096	$	257,689

A TDR is a formal restructuring of a loan where the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including a reduction in the stated interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date. TDR’s can involve loans remaining on non-accrual, moving to non-accrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of six months to demonstrate the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a non-accrual loan. TDR’s are evaluated in accordance with ASC Topic 310-10-40, “Troubled Debt Restructurings by Creditors.” At September 30, 2010, there were commitments to advance funds on TDR’s of approximately $280,000.

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The allowance recorded on total impaired loans in accordance with ASC Topic 310-10-35 (specific reserves) was approximately $33.6 million and $24.5 million at September 30, 2010 and December 31, 2009, respectively.

Approximately 54% of our non-performing loans are in New Mexico, approximately 22% are in Colorado, and approximately 24% are in Utah.

Other real estate owned increased approximately $12.0 million compared to December 31, 2009, and $16.4 million compared to September 30, 2009. We continue to be successful in disposing of real estate after gaining control of the properties. During the nine months ended September 30, 2010, we took title to properties totaling $60.6 million at fair value and disposed of properties with a carrying value of $33.7 million. Other real estate owned at September 30, 2010 includes $56.0 million in foreclosed or repossessed assets, and $2.5 million in facilities and vacant land listed for sale.

Non-accrual investment securities include 30 year municipal utility district bonds related to two residential housing developments in the Denver, Colorado metropolitan area which are not current on debt service. The terms of the agreements allow the districts to defer interest in the case where available funds from development of the district are not sufficient to cover the debt service. Due to the status of the developments and related uncertainty of the timing of the cash flows, we have classified these investments as non-accrual.

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

Capital Adequacy, Regulatory Matters, and Going Concern Considerations

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As the Company’s financial condition has deteriorated, the Company has been under close scrutiny by its Regulators. Effective August 26, 2010, the Bank executed a Prompt Corrective Action Directive (the “Directive”) by and between the Bank and the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Directive was issued due to the Bank’s “significantly undercapitalized” status at June 30, 2010, as defined in section 208.43(b)(4) of Regulation H of the Federal Reserve for purposes of section 38 of the Federal Deposit Insurance Act, as amended (the “FDI Act”). This Directive is in addition to the formal agreement (the Regulator Agreement”) with the Federal Reserve Bank of Kansas City and the New Mexico Financial Institutions Division (collectively, the “Regulators”) executed on July 2, 2009, and described below.

The Directive also (1) restricts the Bank from making any capital distribution, including the payment of dividends; and (2) requires prior written approval from the Federal Reserve Bank of Kansas city (the “Reserve Bank”) and fulfillment of one of the requirements above, for the Bank to solicit and accept new deposit accounts or renew any time deposit bearing an interest rate that exceeds the prevailing effective rates on deposits of comparable amounts and maturities in the Bank’s market area. In accordance with the Directive, the Bank submitted an acceptable plan and timetable to the Reserve Bank to conform the rates of interest paid on all existing non-time deposit accounts to the prevailing effective rates on deposits of comparable amounts in the Bank’s market area.

The Reserve Bank may, in its sole discretion, grant written extensions of time to the Bank to comply with any provision of the Directive.

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Agreement, the Company and/or the Bank was required to submit a written plan to strengthen lending and credit risk management practices and improve the Bank’s position regarding past due loans, problem loans, classified loans, and other real estate owned; maintain sufficient capital at the Bank, holding company and the consolidated level; improve the Bank’s earnings and overall condition; and improve management of the Bank’s liquidity position, funds management process, and interest rate risk management. The Company and/or the Bank have also agreed to maintain an adequate allowance for loan and lease losses; charge-off or collect assets classified as “loss” in the Report of Examination that have not been previously collected or charged off; not to pay any dividends; not to distribute any interest, principal or other sums on trust preferred securities; not to issue, increase or guarantee any debt; not to purchase or redeem any shares of the Company’s stock; and not to accept any new brokered deposits, even if the Bank is considered well capitalized. Within 30 days of the Regulator Agreement, the Bank was required to submit a written plan to the Regulators for reducing its reliance on brokered deposits.

During the second quarter, the Company initiated a repurchase offer for all of the outstanding trust preferred securities issued by the holding company at a significant discount to par value as part of a plan to raise capital. The repurchase of substantially all of the trust preferred securities was considered to be a key element toward successfully recapitalizing the Company. The trust preferred security holders did not accept the offers and the offers expired in early July and were not extended. Consequently, Bank management is in direct discussions with potential investors regarding a potential investment directly in the Bank. If the Bank raises capital independently from the Company, any such transaction is expected to result in a dilution in the Company’s ownership of the Bank to a level that is likely to be below five percent. There can be no assurance that the Company will be successful in raising capital at the Bank or the holding company.

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As of September 30, 2010	Actual						For capital adequacy purposes					To be considered well capitalized
	Amount			Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total capital to risk-weighted assets:
Consolidated	$	(59,243	)		(3.7	)%	$	128,184		8.0	%	$	160,230		10.0	%
Bank subsidiary		64,105			4.0	%		127,926		8.0	%		159,907		10.0	%
Tier I capital to risk-weighted assets:
Consolidated		(59,243	)		(3.7	)%		64,092		4.0	%		96,138		6.0	%
Bank subsidiary		42,881			2.7	%		63,963		4.0	%		95,944		6.0	%
Tier I capital to average total assets:
Consolidated		(59,243	)		(2.4	)%		99,234		4.0	%		124,043		5.0	%
Bank subsidiary		42,881			1.7	%		99,105		4.0	%		123,881		5.0	%

Liquidity

The decrease in in-market non-brokered deposits during 2010 is due to a reduction in the level of public entity deposits which have declined $67 million since December 31, 2009, including a decline of $75 million in the quarter ended September 30, 2010. To the extent the public entity deposits are not insured under TAG, these deposits are required to be fully collateralized with investment securities and declines do not reduce our overall liquidity. In addition, one of our larger deposit customers reduced their deposit levels by $22 million during the third quarter.

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Nasdaq Delisting

On July 26, 2010, we received a notice from the Nasdaq that its Hearings Panel denied our request for continued listing on Nasdaq. Nasdaq suspended trading of the Company’s shares effective at the open of business on Wednesday, July 28, 2010. The Company’s common stock is currently quoted for trade on the OTC Bulletin Board, an electronic quotation service for unlisted public securities under the symbol FSNM.PK. However, there is no assurance that an active market for the Company’s common stock will develop or be maintained. The Company’s common stock will continue to be registered with the SEC.

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 balances. Non-accruing loans have been included in the table as loans carrying a zero yield.

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	Three Months Ended September 30,
	2010								2009
	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	$	222,734		$	2,978		5.30	%	$	270,941		$	3,549			5.20	%
Real estate		1,450,717			17,364		4.75	%		1,898,700			22,349			4.67	%
Consumer		22,088			633		11,37	%		29,030			774			10.58	%
Mortgage		8,352			98		4.66	%		8,027			105			5.19	%
Other		677			—		—			1,002			—			—

Total loans		1,704,568			21,073		4.90	%		2,207,700			26,777			4.81	%
Allowance for loan losses		(123,378	)							(114,576	)
Securities:
U.S. government and mortgage-backed		552,055			3,835		2.76	%		367,409			3,569			3.85	%
State and political subdivisions:
Non-taxable		50,332			311		2.45	%		96,607			(383	)		(1.57	)%
Taxable		491			8		6.46	%		2,313			34			5.83	%
Other		27,254			82		1.19	%		30,632			127			1.64	%

Total securities		630,132			4,236		2.67	%		496,961			3,347			2.67	%
Interest-bearing deposits with other banks		114,991			75		0.26	%		166,431			100			0.24	%
Federal funds sold		—			—		—	%		188			—			0.13	%

Total interest-earning assets		2,449,691			25,384		4.11	%		2,871,280			30,224			4.18	%
Non-interest-earning assets:
Cash and due from banks		47,109								50,724
Other		122,038								145,442

Total non-interest-earning assets		169,147								196,166

Total assets	$	2,495,460							$	2,952,870


Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing demand accounts	$	360,784		$	271		0.30	%	$	312,932		$	485			0.61	%
Money market savings accounts		303,384			414		0.54	%		428,300			1,461			1.35	%
Regular savings accounts		90,187			90		0.40	%		91,291			116			0.50	%
Certificates of deposit > $100,000		657,683			3,232		1.95	%		427,080			3,096			2.88	%
Certificates of deposit < $100,000		226,962			1,150		2.01	%		243,427			1,744			2.84	%
CDARS Reciprocal		11,623			81		2.76	%		97,984			712			2.88	%
Brokered CDs		48,494			287		2.35	%		178,872			938			2.08	%

Total interest-bearing deposits		1,699,117			5,525		1.29	%		1,779,886			8,552			1.91	%
Securities sold under agreements to repurchase		40,816			18		0.17	%		31,101			20			0.26	%
Short-term borrowings		55,978			31		0.22	%		150,000			447			1.18	%
Long-term debt		259,182			1,637		2.51	%		347,919			2,220			2.53	%
Junior subordinated debentures		98,227			668		2.70	%		98,374			665			2.68	%

Total interest-bearing liabilities		2,153,320			7,879		1.45	%		2,407,280			11,904			1.96	%
Non-interest-bearing demand accounts		343,871								398,293
Other non-interest-bearing liabilities		24,714								26,616

Total liabilities		2,521,905								2,832,189
Stockholders’ equity		(26,445	)							120,681

Total liabilities and stockholders’ equity	$	2,495,460							$	2,952,870

Net interest income				$	17,505							$	18,320

Net interest spread							2.66	%								2.21	%
Net interest margin							2.84	%								2.53	%
Ratio of average interest-earning assets to average interest-bearing liabilities							113.76	%								119.27	%

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	Nine Months Ended September 30,
	2010								2009
	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	$	239,445		$	9,146		5.11	%	$	318,196		$	12,552		5.27	%
Real estate		1,563,242			53,977		4.62	%		2,160,653			81,590		5.05	%
Consumer		23,707			1,891		10.66	%		34,521			2,635		10.21	%
Mortgage		7,820			290		4.96	%		17,723			609		4.59	%
Other		877			—		—			1,128			—		—

Total loans		1,835,091			65,304		4.76	%		2,532,221			97,386		5.14	%
Allowance for loan losses		(124,321	)							(99,691	)
Securities:
U.S. government and mortgage-backed		553,731			11,796		2.85	%		358,982			11,337		4.22	%
State and political subdivisions:
Non-taxable		65,356			1,503		3.07	%		98,625			1,923		2.61	%
Taxable		490			23		6.28	%		3,046			134		5.88	%
Other		27,794			264		1.27	%		30,821			391		1.70	%

Total securities		647,371			13,586		2.81	%		491,474			13,785		3.75	%
Interest-bearing deposits with other banks		148,419			287		0.26	%		139,851			269		0.26	%
Federal funds sold		77			—		0.11	%		8,086			12		0.20	%

Total interest-earning assets		2,630,958			79,177		4.02	%		3,171,632			111,452		4.70	%
Non-interest-earning assets:
Cash and due from banks		47,826								60,994
Other		130,559								168,984

Total non-interest-earning assets		178,385								229,978

Total assets	$	2,685,022							$	3,301,919


Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing demand accounts	$	359,816		$	1,022		0.38	%	$	318,108		$	1,530		0.64	%
Money market savings accounts		346,297			1,993		0.77	%		504,459			6,093		1.61	%
Regular savings accounts		90,190			306		0.45	%		98,679			377		0.51	%
Certificates of deposit > $100,000		600,435			9,505		2.12	%		467,706			11,036		3.15	%
Certificates of deposit < $100,000		232,318			3,828		2.20	%		303,321			6,995		3.08	%
CDARS Reciprocal deposits		22,633			418		2.47	%		147,311			2,968		2.69	%
Brokered CDs		98,046			1,671		2.28	%		197,849			2,991		2.02	%

Total interest-bearing deposits		1,749,735			18,743		1.43	%		2,037,433			31,990		2.10	%
Securities sold under agreements to repurchase		41,715			69		0.22	%		73,496			156		0.28	%
Short-term borrowings		115,641			265		0.31	%		190,028			1,815		1.28	%
Long-term debt		288,245			5,451		2.53	%		286,258			5,536		2.59	%
Junior subordinated debentures		98,263			1,881		2.56	%		98,410			2,365		3.21	%

Total interest-bearing liabilities		2,293,599			26,409		1.54	%		2,685,625			41,862		2.08	%
Non-interest-bearing demand accounts		357,570								454,674
Other non-interest-bearing liabilities		24,425								25,168

Total liabilities		2,675,594								3,165,467
Stockholders’ equity		9,428								136,452

Total liabilities and stockholders’ equity	$	2,685,022							$	3,301,919

Net interest income				$	52,768							$	69,590

Net interest spread							2.48	%							2.61	%
Net interest margin							2.68	%							2.93	%
Ratio of average interest-earning assets to average interest-bearing liabilities							114.71	%							118.10	%

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

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Rising and falling interest rate environments can have various impacts on a bank’s net interest income, depending on the short-term interest rate gap that the bank maintains, the relative changes in interest rates that occur when the bank’s various assets and liabilities reprice, unscheduled repayments of loans, early withdrawals of deposits and other factors. As of September 30, 2010, our cumulative interest rate gap for the period up to three months was a positive $249.2 million and for the period up to one year was a negative $231.3 million. Based solely on our interest rate gap of three months or less, our net income would be further unfavorably impacted by additional decreases in interest rates or favorably impacted by increases in interest rates. For the period three months to less than one year, our net income would be further unfavorably impacted by increases in interest rates.

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, 2010. 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:
Interest-bearing deposits with other banks	$	184,679	$	—		$	244		$	—	$	184,923
Investment securities		26,305		85,651			237,520			94,757		444,233
Loans:
Commercial		109,307		44,718			33,581			23,081		210,687
Real estate		396,345		226,568			476,711			295,366		1,394,990
Consumer		7,232		4,028			7,934			2,458		21,652

Total loans held for investment		512,884		275,314			518,226			320,905		1,627,329

Mortgage loans available for sale		6,391		—			—			—		6,391

Total interest-earning assets	$	730,259	$	360,965		$	755,990		$	415,662	$	2,262,876

Interest-bearing liabilities:
Savings and NOW accounts	$	146,577	$	174,681		$	321,263		$	90,359	$	732,880
Certificates of deposit greater than $100,000		82,418		369,142			181,550			1,074		634,184
Certificates of deposit less than $100,000		46,376		110,085			64,212			520		221,193
CDARS Reciprocal deposits		3,031		424			2,130			—		5,585
Brokered deposits		—		25,646			4,354			—		30,000
Securities sold under agreements to repurchase		33,268		—			—			—		33,268
FHLB advances and other		80,690		151,984			32,363			—		265,037
Junior subordinated debentures		88,663		9,546			—			—		98,209

Total interest-bearing liabilities	$	481,023	$	841,508		$	605,872		$	91,953	$	2,020,356

Interest rate gap	$	249,236	$	(480,543	)	$	150,118		$	323,709	$	242,520

Cumulative interest rate gap at September 30, 2010	$	249,236	$	(231,307	)	$	(81,189	)	$	242,520

Cumulative gap ratio at September 30, 2010		1.52		0.83			0.96			1.12

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, 2010, pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures and internal control over financial reporting are, to the best of their knowledge, effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

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

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PART II – OTHER INFORMATION

Item 4.

Reserved.

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. ⁽¹⁹⁾
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. ⁽⁴⁾
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. ⁽⁵⁾
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. ⁽⁶⁾
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. ⁽¹⁰⁾
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. ⁽¹⁵⁾
2.7		Written Agreement, dated July 2, 2009, by and between First Community Bank, Federal Reserve Bank of Kansas City, and New Mexico Financial Institutions Division. ⁽²²⁾
2.8		Retention of Financial Advisor, dated August 5, 2009, by and between First State Bancorporation and Keefe, Bruyette & Woods. ⁽²³⁾
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. ⁽³⁾
3.3		Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. ⁽⁹⁾
3.4		Amended Bylaws of First State Bancorporation. ⁽²⁴⁾
3.5		Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. ⁽¹⁸⁾
10.1		Executive Employment Agreement. ⁽¹⁹⁾
10.2		First State Bancorporation 2003 Equity Incentive Plan. ⁽¹⁹⁾
10.3		Executive Deferred Compensation Plan.⁽¹⁹⁾(Participation and contributions to this Plan have been frozen as of December 31, 2004.)
10.4		First Amendment to Executive Employment Agreement. ⁽²⁵⁾
10.5		Officer Employment Agreement. ⁽²⁵⁾
10.6		First Amendment to Officer Employment Agreement. ⁽²⁵⁾
10.7		First State Bancorporation Deferred Compensation Plan. ⁽³⁾
10.8		First State Bancorporation Compensation and Bonus Philosophy and Plan.⁽¹²⁾
10.9		First Amendment to the First State Bancorporation 2003 Equity Incentive Plan. ⁽⁸⁾
10.10		Second Amendment to the First State Bancorporation 2003 Equity Incentive Plan. ⁽⁸⁾
10.11		Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. ⁽¹³⁾
10.12		Restated and Amended Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. ⁽⁷⁾
10.13		Third Amendment to First State Bancorporation 2003 Equity Incentive Plan. ⁽⁹⁾
10.14		Compensation Committee Approval and Board Ratification of Certain Executive Salaries.⁽¹¹⁾
10.15		Fourth Amendment to First State Bancorporation 2003 Equity Incentive Plan. ⁽¹⁶⁾
10.16		Second Amendment to Executive Employment Agreement (Stanford). ⁽¹⁴⁾
10.17		Second Amendment to Executive Employment Agreement (Dee). ⁽¹⁴⁾
10.18		Second Amendment to Executive Employment Agreement (Spencer). ⁽¹⁴⁾
10.19		Second Amendment to Executive Employment Agreement (Martin). ⁽¹⁴⁾
10.20		Key Executives Incentive Plan. ⁽¹⁷⁾

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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⁾
10.26		First Amendment to the Key Executives Incentive Plan. ⁽²⁰⁾
10.27		Branch purchase agreement, dated as of March 10, 2009, by and among Great Western Bank, First Community Bank, and First State Bancorporation. ⁽²¹⁾
14		Code of Ethics for Executives. ⁽¹⁹⁾
31.1		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(20)	Incorporated by reference to Exhibit 10.1 from First State Bancorporation’s Form 8-K filed on December 30, 2008.

(21)	Incorporated by reference from First State Bancorporation’s 10-K for the year ended December 31, 2008.

(22)	Incorporated by reference from First State Bancorporation’s Form 8-K filed on July 9, 2009.

(23)	Incorporated by reference from First State Bancorporation’s Form 8-K filed on August 6, 2009.

(24)	Incorporated by reference from First State Bancorporation’s Form 10-K filed on March 31, 2010.

(25)	Incorporated by reference from First State Bancorporation’s 10-Q for the quarter ended March 31. 2010.

*	Filed herewith.

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SIGNATURES

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


	FIRST STATE BANCORPORATION

Date: November 10, 2010	By:	/s/ H. Patrick Dee
		H. Patrick Dee, President & Chief Executive Officer

Date: November 10, 2010	By:	/s/ Christopher C. Spencer
		Christopher C. Spencer, Senior Vice President and Chief Financial Officer

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EXHIBIT INDEX


Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of May 22, 2002, by and among First State Bancorporation, First State Bank N.M. (formerly known as First State Bank of Taos), First Community Industrial Bank, Blazer Financial Corporation, and Washington Mutual Finance Corporation. ⁽¹⁹⁾
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. ⁽⁴⁾
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. ⁽⁵⁾
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. ⁽⁶⁾
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. ⁽¹⁰⁾
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. ⁽¹⁵⁾
2.7		Written Agreement, dated July 2, 2009, by and between First Community Bank, Federal Reserve Bank of Kansas City, and New Mexico Financial Institutions Division. ⁽²²⁾
2.8		Retention of Financial Advisor, dated August 5, 2009, by and between First State Bancorporation and Keefe, Bruyette & Woods. ⁽²³⁾
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. ⁽³⁾
3.3		Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. ⁽⁹⁾
3.4		Amended Bylaws of First State Bancorporation. ⁽²⁴⁾
3.5		Articles of Amendment to the Restated Articles of Incorporation of First State Bancorporation. ⁽¹⁸⁾
10.1		Executive Employment Agreement. ⁽¹⁹⁾
10.2		First State Bancorporation 2003 Equity Incentive Plan. ⁽¹⁹⁾
10.3		Executive Deferred Compensation Plan.⁽¹⁹⁾(Participation and contributions to this Plan have been frozen as of December 31, 2004.)
10.4		First Amendment to Executive Employment Agreement. ⁽²⁵⁾
10.5		Officer Employment Agreement. ⁽²⁵⁾
10.6		First Amendment to Officer Employment Agreement. ⁽²⁵⁾
10.7		First State Bancorporation Deferred Compensation Plan. ⁽³⁾
10.8		First State Bancorporation Compensation and Bonus Philosophy and Plan.⁽¹²⁾
10.9		First Amendment to the First State Bancorporation 2003 Equity Incentive Plan. ⁽⁸⁾
10.10		Second Amendment to the First State Bancorporation 2003 Equity Incentive Plan. ⁽⁸⁾
10.11		Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. ⁽¹³⁾
10.12		Restated and Amended Access Anytime Bancorp, Inc. 1997 Stock Option and Incentive Plan. ⁽⁷⁾
10.13		Third Amendment to First State Bancorporation 2003 Equity Incentive Plan. ⁽⁹⁾
10.14		Compensation Committee Approval and Board Ratification of Certain Executive Salaries.⁽¹¹⁾
10.15		Fourth Amendment to First State Bancorporation 2003 Equity Incentive Plan. ⁽¹⁶⁾
10.16		Second Amendment to Executive Employment Agreement (Stanford). ⁽¹⁴⁾
10.17		Second Amendment to Executive Employment Agreement (Dee). ⁽¹⁴⁾
10.18		Second Amendment to Executive Employment Agreement (Spencer). ⁽¹⁴⁾
10.19		Second Amendment to Executive Employment Agreement (Martin). ⁽¹⁴⁾
10.20		Key Executives Incentive Plan. ⁽¹⁷⁾
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⁾
10.26		First Amendment to the Key Executives Incentive Plan. ⁽²⁰⁾
10.27		Branch purchase agreement, dated as of March 10, 2009, by and among Great Western Bank, First Community Bank, and First State Bancorporation. ⁽²¹⁾
14		Code of Ethics for Executives. ⁽¹⁹⁾

- 41 -


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(20)	Incorporated by reference to Exhibit 10.1 from First State Bancorporation’s Form 8-K filed on December 30, 2008.

(21)	Incorporated by reference from First State Bancorporation’s 10-K for the year ended December 31, 2008.

(22)	Incorporated by reference from First State Bancorporation’s Form 8-K filed on July 9, 2009.

(23)	Incorporated by reference from First State Bancorporation’s Form 8-K filed on August 6, 2009.

(24)	Incorporated by reference from First State Bancorporation’s Form 10-K filed on March 31, 2010.

(25)	Incorporated by reference from First State Bancorporation’s 10-Q for the quarter ended March 31. 2010.

*	Filed herewith.

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Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting Company

FIRST STATE BANCORPORATION 10-Q