First State Reports Third Quarter Results

http://www.businesswire.com/news/home/20091102005307/en

ALBUQUERQUE, N.M.--(Business Wire)--
First State Bancorporation (NASDAQ:FSNM):

OVERVIEW:

* Loans decreased $120 million.
* Retail deposits excluding brokered and public funds increased $15 million.
* Brokered deposits including CDARS reciprocal decreased $16 million.
* Net interest margin of 2.53% for the quarter.
* Total non-performing loans increased $30 million.
* $87 million of allowance not included in regulatory capital.
* First Community Bank "adequately capitalized" at September 30, 2009.
* Continued participation in "TAG" deposit guarantee program to maintain
liquidity.

First State Bancorporation ("First State") (NASDAQ:FSNM) today announced a third
quarter 2009 net loss of $51.5 million or $(2.49) per diluted share, compared to
a net loss of $1.8 million or $(0.09) per diluted share for the same period in
2008. First State`s net loss for the nine months ended September 30, 2009 was
$82.1 million, or $(3.99) per diluted share, compared to a net loss of $116.2
million, or $(5.76) per diluted share for the same period in 2008. 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 month period ended
September 30, 2009 was mitigated by the gain on the sale of our Colorado
branches of $23.3 million in June 2009. The results for the three and nine
months ended September 30, 2008 were negatively impacted by a $127.4 million
non-cash goodwill impairment charge that occurred in the second quarter of 2008
as well as provisioning for loan losses due primarily to increasing levels of
non-performing assets.

"In the past six months, our external loan review and examiners reviewed over
65% of the dollar amount of our loan portfolio. That, combined with appraisals
that we have obtained on the collateral supporting most of our higher risk loans
resulted in the level of charge-offs and provision that we recorded this
quarter," stated Michael R. Stanford, President and Chief Executive Officer. "We
don`t think this level of provisioning will be necessary in the future and
believe that the worst may now be behind us," continued Stanford.

STATEMENT OF OPERATIONS HIGHLIGHTS:
(Unaudited - $ in thousands, except share and per-share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Interest income $ 30,224 $ 49,468 $ 111,452 $ 151,978
Interest expense 11,904 17,806 41,862 57,665
Net interest income 18,320 31,662 69,590 94,313
Provision for loan losses (52,500) (15,635) (116,900) (48,235)
Net interest income (expense) after provision for loan losses (34,180) 16,027 (47,310) 46,078
Non-interest income 9,726 6,370 49,428 19,569
Non-interest expense 26,540 27,260 83,711 210,155
Loss before income taxes (50,994) (4,863) (81,593) (144,508)
Income tax expense (benefit) 546 (3,085) 546 (28,348)
Net loss $ (51,540) $ (1,778) $ (82,139) $ (116,160)
Basic loss per share $ (2.49) $ (0.09) $ (3.99) $ (5.76)
Diluted loss per share $ (2.49) $ (0.09) $ (3.99) $ (5.76)
Weighted average basic shares outstanding 20,660,518 20,232,171 20,579,984 20,177,842
Weighted average diluted shares outstanding 20,660,518 20,232,171 20,579,984 20,177,842

First State has disclosed in this release certain non-GAAP financial measures to
provide meaningful supplemental information regarding First State`s operational
performance and to enhance investors` overall understanding of First State`s
operating financial performance. Management believes that these non-GAAP
financial measures allow for additional transparency and are used by some
investors, analysts, and other users of First State`s financial information as
performance measures. These non-GAAP financial measures are presented for
supplemental informational purposes only for understanding First State`s
operating results and should not be considered a substitute for financial
information presented in accordance with GAAP. These non-GAAP financial measures
presented by First State may be different from non-GAAP financial measures used
by other companies.

Net loss excluding the gain on sale of Colorado branches for the nine months
ended September 30, 2009, was $105.4 million compared to a net loss excluding
goodwill impairment charge of $8.9 million for 2008. Net loss per diluted share
excluding the gain on sale of Colorado branches for the nine months ended
September 30, 2009 was $(5.12) compared to a net loss per diluted share
excluding goodwill impairment charge of $(0.44) for the same period in 2008.

The following table presents performance ratios in accordance with GAAP and a
reconciliation of the non-GAAP financial measurements to the GAAP financial
measurements.

FINANCIAL SUMMARY:
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited - $ in thousands except per-share amounts) 2009 2008 2009 2008

Net loss as reported $ (51,540) $ (1,778) $ (82,139) $ (116,160)
Goodwill impairment charge, net of tax - - - 107,290
Gain on sale of Colorado branches - - (23,292) -
Net income (loss) excluding goodwill impairment charge and gain on sale of Colorado branches $ (51,540) $ (1,778) $ (105,431) $ (8,870)

GAAP basic and diluted earnings (loss) per share $ (2.49) $ (0.09) $ (3.99) $ (5.76)
Diluted loss per share excluding goodwill impairment charge and gain on sale of Colorado branches $ (2.49) $ (0.09) $ (5.12) $ (0.44)

GAAP return on average assets (6.92)% (0.20)% (3.33)% (4.48)%
Return on average assets excluding goodwill impairment charge and gain on sale of Colorado branches (6.92)% (0.20)% (4.27)% (0.34)%

GAAP return on average equity (169.44)% (3.63)% (80.48)% (56.13)%
Return on average equity excluding goodwill impairment charge and gain on sale of Colorado branches (169.44)% (3.63)% (103.30)% (4.29)%

Non-interest income as reported $ 9,726 $ 6,370 $ 49,428 $ 19,569
Gain on sale of Colorado branches - - (23,292) -
Non-interest income excluding gain on sale of Colorado branches $ 9,726 $ 6,370 $ 26,136 $ 19,569

Non-interest expense as reported $ 26,540 $ 27,260 $ 83,711 $ 210,155
Goodwill impairment charge - - - (127,365)
Non-interest expense excluding goodwill impairment charge $ 26,540 $ 27,260 $ 83,711 $ 82,790

Efficiency ratio 94.63% 71.68% 70.33% 184.54%
Efficiency ratio excluding goodwill impairment charge and gain on sale of Colorado branches 94.63% 71.68% 87.45% 72.70%

GAAP operating expenses to average assets 3.57% 3.12% 3.39% 8.11%
Operating expenses to average assets excluding goodwill impairment charge and gain on sale of Colorado branches 3.57% 3.12% 3.39% 3.19%

Net interest margin 2.53% 3.87% 2.93% 3.98%

Average equity to average assets 4.09% 5.61% 4.13% 7.98%

Leverage ratio:
Consolidated 3.18% 7.12% 3.18% 7.12%
Bank Subsidiary 5.75% 8.02% 5.75% 8.02%

Total risk based capital ratio:
Consolidated 8.75% 10.44% 8.75% 10.44%
Bank Subsidiary 9.21% 10.45% 9.21% 10.45%

BALANCE SHEET HIGHLIGHTS:
(Unaudited - $ in thousands except per-share amounts) September 30, December 31, September 30, $ Change from $ Change from
2009 2008 2008 December 31, September 30,
2008 2008
Total assets $ 2,886,347 $ 3,415,049 $ 3,468,774 $ (528,702) $ (582,427)
Total loans 2,125,792 2,754,589 2,761,137 (628,797) (635,345)
Interest bearing deposits with other banks and federal funds sold 114,377 1,689 3,030 112,688 111,347
Investment securities 585,860 488,996 494,375 96,864 91,485
Deposits 2,151,683 2,522,542 2,497,281 (370,859) (345,598)
Non-interest bearing deposits 389,672 453,319 476,094 (63,647) (86,422)
Interest bearing deposits 1,762,011 2,069,223 2,021,187 (307,212) (259,176)
Borrowings 596,053 596,060 616,812 (7) (20,759)
Shareholders` equity 77,664 159,254 189,647 (81,590) (111,983)
Book value per share $ 3.76 $ 7.84 $ 9.37 $ (4.08) $ (5.61)
Tangible book value per share $ 3.49 $ 7.08 $ 8.57 $ (3.59) $ (5.08)

Net interest income was $18.3 million for the third quarter of 2009 compared to
$31.7 million for the same quarter of 2008. For the nine months ended September
30, 2009 and 2008, net interest income was $69.6 million and $94.3 million,
respectively. Our net interest margin was 2.53% and 3.87% for the third quarter
of 2009 and 2008, respectively, and 2.96% for the second quarter of 2009. The
net interest margin was 2.93% and 3.98% for the nine months ended September 30,
2009 and 2008, respectively.

Net Interest Margin

The decrease in the net interest margin is primarily due to the decrease in the
federal funds target rate that began in September 2007 and continued through
December 2008, along with the increase in non-performing assets throughout 2008
and the first three quarters of 2009. The Federal Reserve Bank has lowered the
federal funds target rate by 500 basis points, 400 of which occurred in calendar
2008, leading to an equal decrease in the prime lending rate. A significant
portion of our loan portfolio is tied directly to the prime lending rate and
adjusts daily when there is a change in the prime lending rate. The rates paid
on customer deposits are influenced more by competition in our markets and tend
to lag behind Federal Reserve Bank action in both timing and magnitude,
particularly in this very low rate environment. Although we have lowered
selected deposit rates since the beginning of 2008, we continue to remain
competitive in the markets we serve.

In addition, during the quarter ended September 30, 2009, we reversed
approximately $1.5 million in accrued interest on two Colorado metropolitan
municipal district bonds. The bond agreements allow the districts to defer
interest payments 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 cash flows, we reversed the accrued
interest on these bonds.

Our asset sensitivity including the increase in excess cash, the decrease in the
prime lending rate, and the increase in non-accrual loans combined with an
increase in borrowings and minimal deposit repricing continues to have a
negative impact on the net interest margin.

In the first quarter of 2009, in order to increase our liquidity position, we
issued additional brokered deposits and borrowed additional funds from the
Federal Home Loan Bank ("FHLB"), resulting in an increase in lower yielding cash
on the balance sheet. This strategy increased our cash liquidity and at the same
time has resulted in further margin compression by increasing our earning asset
base with lower yielding assets and contributing to an increase in interest
expense. As part of our strategy, we focused on maturities of 15 to 24 months
for brokered deposits issued in the first quarter of 2009, as well as maturities
over the next two to three years for FHLB borrowings to further strengthen our
liquidity position. Although these activities as noted above have contributed to
the recent margin compression, we continue to believe that the improvement in
our current liquidity position in the current banking environment outweighs the
margin compression we have seen over the last few quarters.

The increase in non accrual 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 loan going forward
ultimately resulting in an earning asset with a zero percent rate. The level of
non accrual loans has increased to $229 million at the end of September 2009
from $99 million at the end of September 2008. Non accrual loans now make up 8%
of interest earning assets compared to 3% a year ago.

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.

Liquidity and Capital

We continue to focus our 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 federal funds lines (fully secured
by securities or loan collateral) and other assets that can be monetized
including the cash surrender value of bank-owned life insurance. The Company`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. We continue to accumulate and maintain excess cash liquidity from
loan reductions to compensate for the limited liquidity options currently
available. In addition, during the third quarter, we redeemed approximately $36
million in bank-owned life insurance, increasing our cash liquidity.

At September 30, 2009, the Bank was considered "adequately capitalized" while
the Company was considered "undercapitalized" for the Tier 1 leverage ratio
under regulatory guidelines, subjecting both entities to prompt supervisory and
regulatory actions pursuant to the FDIC Improvement Act of 1991, and prohibiting
us from accepting, renewing, or rolling over brokered deposits except with a
waiver from the FDIC and subjecting the Bank to restrictions on the interest
rates that can be paid on deposits. From late October through December 31, 2009,
there are approximately $66 million in brokered deposits that will not be able
to be renewed. The Bank has maintained in excess of $100 million in overnight
investments, which combined with normal expected repayments of loans
outstanding, provides significantly more liquidity than required to redeem these
brokered deposits.

Our total liquidity position during the third quarter remained fairly consistent
with that of the second quarter; however, the Bank`s liquidity position
continues to evolve based on the operations of the Bank. The Bank returned to a
"well capitalized" institution with our June 30, 2009 Call Report filing
primarily as a result of selling our Colorado branches in an effort to reduce
our risk weighted assets. This classification change relieved us of the
restrictions required of an "adequately capitalized" institution; however, the
formal agreement entered into with the Federal Reserve regulators restricted our
ability to issue new brokered deposits. During the third quarter, we submitted
and received approval of our Brokered Deposit Plan. The approval of this plan
provided the ability to bring the deposits of customers participating in the
one-way sell CDARS program back into the Bank. It also allowed us to provide
this product to customers that were participating in CDARS as of June 30, 2009,
as long as we remained "well capitalized." The approval of the Brokered Deposit
Plan was nullified with the drop of the Bank`s capital status to "adequately
capitalized" at the end of September 30, 2009.

In the event that our deposit generation is negatively impacted by the recent
drop to "adequately capitalized," management believes that sufficient cash and
liquid assets are on hand to maintain operations and meet all obligations as
they come due. From a liquidity standpoint, the most significant ramification of
the drop in capitalized category relates to our inability to rollover or renew
existing brokered deposits, including CDARS reciprocal deposits, that mature or
come up for renewal while the Bank is considered adequately capitalized, without
a waiver from the FDIC. The Bank has not received a waiver from the FDIC.

Our additional liquidity sources include two federal funds borrowing lines for a
total capacity of approximately $94 million, fully collateralized by investment
securities and commercial loans. During the third quarter, the Bank secured a
subordination agreement with the FHLB, which provides the Bank the ability to
pledge non real estate commercial loans to the Federal Reserve Bank discount
window. At the end of September, the Bank had approximately $72.5 million in
additional borrowing capacity included in the $94 million above attributable to
$132 million in commercial loans currently pledged to the Federal Reserve Bank
discount window.

In addition, the Bank is a participating institution in the Transaction Account
Guarantee Program ("TAG Program"), which the FDIC extended in the third quarter
from December 31, 2009 to June 30, 2010. The TAG Program provides our deposit
customers in non-interest bearing and interest-bearing NOW accounts paying fifty
basis points or less full FDIC insurance for an unlimited amount.

Management currently anticipates that our cash and cash equivalents, expected
cash flows from operations, and borrowing capacity will be sufficient to meet
our anticipated cash requirements for working capital, loan originations,
capital expenditures, and other obligations for at least the next twelve
months.

ALLOWANCE FOR LOAN LOSSES:
(Unaudited - $ in thousands) Nine Months Year Ended Nine Months
Ended December 31, Ended
September 30, 2008 September 30,
2009 2008
Balance beginning of period $ 79,707 $ 31,712 $ 31,712
Provision for loan losses 116,900 71,618 48,235
Net charge-offs (74,257 ) (23,623 ) (11,573 )
Allowance related to loans sold (7,747 ) - -
Balance end of period $ 114,603 $ 79,707 $ 68,374
Allowance for loan losses to total loans held for investment 5.41 % 2.91 % 2.49 %
Allowance for loan losses to non-performing loans 50 % 67 % 67 %

NON-PERFORMING ASSETS:
(Unaudited - $ in thousands) September 30, 2009 December 31, 2008 September 30, 2008
Accruing loans - 90 days past due $ - $ 4,139 $ 1,988
Non-accrual loans 228,621 114,138 99,498
Total non-performing loans $ 228,621 $ 118,277 $ 101,486
Other real estate owned 42,086 18,894 15,929
Non-accrual investment securities 18,775 - -
Total non-performing assets $ 289,482 $ 137,171 $ 117,415
Potential problem loans $ 205,782 $ 130,884 $ 95,444
Total non-performing assets to total assets 10.03% 4.02% 3.38%

First State`s provision for loan losses was $52.5 million for the third quarter
of 2009 compared to $15.6 million for the same quarter of 2008. The provision
for loan losses for the nine months ended September 30, 2009 was $116.9 million,
compared to $48.2 million for the same period in 2008. First State`s allowance
for loan losses was 5.41% and 2.49% of total loans held for investment at
September 30, 2009 and September 30, 2008, respectively. The increase in the
provision is a result of an increase in non-performing loans and higher levels
of net charge-offs. Non-performing loans increased by $110.3 million during the
first three quarters of 2009, including increases of $45.3 million and $47.7
million in the first and second quarters respectively, while the increase for
the third quarter fell to $17.3 million. Potential problem loans increased by
$74.9 million from December 31, 2008; however, for the quarter ended September
30, 2009, they declined by $53.1 million. Net charge-offs totaled $74.3 million
during the first three quarters of 2009, including $13.3 million and $13.9
million in the first and second quarters, respectively. Net charge-offs for the
third quarter ended September 30, 2009 were $47.1 million which incorporates
acceleration in the timing of when previously provided specific loan reserves
are charged off. Historically, specifically provided reserves were taken as
charge-offs upon final resolution of the problem loans. In the quarter ended
September 30, 2009, we began charging off all specific reserves that have been
determined to be collateral dependent.

The increase in the allowance is based on management`s current evaluation and
provides for probable inherent losses in the portfolio, trends in delinquencies,
charge-off experience, and local and national economic conditions. Substantially
all non-performing loans are secured by real estate where fair value is more
determinable based on appraisals, which decreases the reserves needed on those
loans compared to other categories where the collateral is less tangible.

Other real estate owned increased approximately $26.2 million compared to the
same period of 2008 and increased approximately $23.2 million compared to
December 31, 2008. Other real estate owned at September 30, 2009 includes $36.2
million in foreclosed or repossessed assets, a $3.9 million property that was
previously held for future expansion and development by Front Range Capital
Corporation, a company acquired by First State in March 2007, and $2.0 million
in facilities and vacant land listed for sale.

Non-accrual investment securities include municipal utility district bonds
related to two residential housing developments in the Denver, Colorado
metropolitan area which are not current on debt service.

"We have taken a more aggressive stance on charging down loans where we have
established a specific reserve under FAS 114, resulting in a significant
increase in the historical loss percentage which is a major component of the
calculation of our allowance for loan losses," stated H. Patrick Dee, Executive
Vice President and Chief Operating Officer. "We believe this approach presents
an even more conservative level of the allowance than in the past, with over $96
million in our allowance that is based entirely on either subjective factors or
the recent historical loss percentages. Based on current appraised values of the
underlying collateral, the remaining non accrual loan balances require a reserve
of only $18 million, as all other collateral shortfalls have now been charged
off," continued Dee.

NON-INTEREST INCOME:
(Unaudited - $ in thousands) Three Months Ended
September 30,
2009 2008 $ Change % Change
Service charges $ 3,157 $ 3,969 $ (812) (21)%
Credit and debit card transaction fees 871 1,037 (166) (16)
Gain (loss) on investment securities 4,209 (556) 4,765 (857)
Gain on sale of loans 665 840 (175) (21)
Other 824 1,080 (256) (24)
$ 9,726 $ 6,370 $ 3,356 53%

The decrease in service charges and credit and debit card transaction fees is
primarily due to the completion of the sale of our Colorado branches on June 26,
2009.

The increase in gain on investment securities is due to an increase in sales of
investment securities during the period. Certain securities were sold at a gain
as part of our continued efforts to bolster capital by repositioning U.S. Agency
securities into GNMA securities which are guaranteed by the U.S. government and
therefore have a lower risk weighting for capital purposes. The 2008 loss on
investment securities includes an other-than-temporary impairment charge of
$565,000 on FHLMC preferred stock acquired as part of the acquisition of Front
Range Capital Corporation in March 2007, partially offset by gains from calls
and sales of securities during the period.

The decrease in gain on sale of residential mortgage loans is primarily due to
decreased volumes. During the third quarter of 2009, we sold approximately $46
million in loans compared to approximately $56 million during the same period in
2008. The decline in volume is due primarily to the closure of our Colorado
mortgage operations in conjunction with the Colorado branch sale.

The decrease in other non-interest income is primarily due to a decrease in
rental income, related to the sale of our Colorado branches and a decrease in
bank-owned life insurance income, partially offset by a gross receipts tax
refund. In September 2009, we surrendered bank-owned life insurance policies
with a current value of approximately $36 million for liquidity and risk-based
capital purposes. The surrenders resulted in a tax penalty of approximately
$896,000 which is included in other non-interest expense.

NON-INTEREST INCOME:
(Unaudited - $ in thousands) Nine Months Ended
September 30,
2009 2008 $ Change % Change
Service charges $ 10,610 $ 10,683 $ (73) (1)%
Credit and debit card transaction fees 2,867 3,013 (146) (5)
Gain (loss) on investment securities 6,963 (682) 7,645 (1,121)
Gain on sale of loans 3,290 3,196 94 3
Gain on sale of Colorado branches 23,292 - 23,292 -
Other 2,406 3,359 (953) (28)
$ 49,428 $ 19,569 $ 29,859 153%

The decrease in service charges and credit and debit card transaction fees is
due to the completion of the sale of our Colorado branches on June 26, 2009,
partially offset by an increase in NSF fees charged per occurrence, an increase
in account analysis fees, an increase in non-customer ATM fees, and a reduction
in fees waived from deposit accounts.

The increase in gain on investment securities is due to an increase in sales of
investment securities during the period. Certain securities were sold at a gain
as part of our continued efforts to bolster capital as described above. The 2008
loss on investment securities includes an other-than-temporary charge of
$898,000 on FHLMC preferred stock as described above, partially offset by gains
from calls and sales of securities during the period.

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

The decrease in other non-interest income is primarily due to a decrease in
check imprint income, a decrease in official check outsourcing fee income as
official check processing was brought in-house in the fourth quarter of 2008, a
decrease attributable to the redemption of VISA stock that occurred in the first
quarter of 2008, a decrease in rental income related to the sale of our Colorado
branches on June 26, 2009, and a decrease in bank-owned life insurance income,
partially offset by a gross receipts tax refund. In September 2009, we
surrendered bank-owned life insurance policies with a current value of
approximately $36 million for liquidity and risk-based capital purposes. The
surrenders resulted in a tax penalty of approximately $896,000 which is included
in other non-interest expense.

NON-INTEREST EXPENSE:
(Unaudited - $ in thousands) Three Months Ended
September 30,
2009 2008 $ Change % Change
Salaries and employee benefits $ 9,067 $ 12,468 $ (3,401) (27)%
Occupancy 3,285 4,360 (1,075) (25)
Data processing 1,340 1,341 (1) -
Equipment 1,324 1,915 (591) (31)
Legal, accounting, and consulting 2,489 590 1,899 322
Marketing 613 1,057 (444) (42)
Telephone 426 479 (53) (11)
Other real estate owned 2,143 627 1,516 242
FDIC insurance premiums 1,843 554 1,289 233
Amortization of intangibles 272 640 (368) (58)
Other 3,738 3,229 509 16
$ 26,540 $ 27,260 $ (720) (3)%

The decrease in salaries and employee benefits is primarily due to a decrease in
headcount. At September 30, 2009, full time equivalent employees totaled 559
compared to 860 at September 30, 2008. The sale of the Colorado branches and the
related closure of the Colorado mortgage division accounted for a headcount
reduction of 193. The decrease is also due to a decrease in self-insured medical
and dental claims.

The decrease in occupancy is primarily due to a decrease in building
depreciation expense, leasehold amortization, and rent and related expenses due
to the sale of the Colorado branches and the Colorado Mortgage division closure,
partially offset by higher lease impairment charges on vacated office space in
the third quarter of 2009 compared to 2008.

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.

The increase in legal, accounting, and consulting expense resulted partially
from higher levels of non-performing loans and higher legal fees as a result of
our written agreement with the regulators. In addition, we incurred
approximately $1.5 million in consulting fees related to a staffing model and
various revenue enhancement models that were prepared in connection with our
continued efforts to control non-interest expenses and increase other
non-interest income.

The decrease in marketing expenses is primarily due to a decrease in direct
advertising costs. Marketing costs were higher in the 2008 period due to the
Bank`s new ad campaign combined with costs associated with the introduction of
the Bank`s new deposit products.

The increase in expenses for other real estate owned is primarily due to an
increase in write-downs of properties to reflect further deterioration of fair
values subsequent to foreclosure and an increase in other expenses related to
the properties, both commensurate with the increase in number of properties.

The increase in FDIC insurance premiums is due to new FDIC assessment rates that
took effect on January 1, 2009, as well as an increase in average deposits. In
February 2009, the FDIC adopted an additional final rule which included an
additional uniform two basis point increase as well as other adjustments that
took effect on April 1, 2009.

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

The increase in other non-interest expenses is primarily due to interest and
penalties of approximately $896,000 related to the surrender of certain
bank-owned life insurance and appraisal costs on other real estate owned,
partially offset by a decrease in travel and entertainment and other savings
associated with our expense management initiative and the sale of our Colorado
branches in June 2009.

NON-INTEREST EXPENSE:
(Unaudited - $ in thousands) Nine Months Ended
September 30,
2009 2008 $ Change % Change
Salaries and employee benefits $ 33,026 $ 38,748 $ (5,722) (15)%
Occupancy 10,726 12,523 (1,797) (14)
Data processing 4,252 4,267 (15) -
Equipment 4,735 5,972 (1,237) (21)
Legal, accounting, and consulting 5,432 1,956 3,476 178
Marketing 1,950 2,538 (588) (23)
Telephone 1,220 1,545 (325) (21)
Other real estate owned 3,918 2,329 1,589 68
FDIC insurance premiums 7,111 1,549 5,562 359
Amortization of intangibles 1,475 1,920 (445) (23)
Goodwill impairment charge - 127,365 (127,365) (100)
Other 9,866 9,443 423 5
$ 83,711 $ 210,155 $ (126,444) (60)%

The decrease in salaries and employee benefits is primarily due to a decrease in
headcount. At September 30, 2009, full time equivalent employees totaled 559
compared to 860 at September 30, 2008. The sale of the Colorado branches and the
related closure of the Colorado mortgage division accounted for a headcount
reduction of 193. The decrease is also due to a decrease in incentive bonus
expense and a decrease in self-insured medical and dental claims, partially
offset by increased mortgage commissions and separation pay associated with the
sale of the Colorado branches and the closure of our Colorado Mortgage division.
The separation pay related to the Colorado branches and the Colorado Mortgage
division totaled $1.3 million.

The decrease in occupancy is primarily due to a decrease in building
depreciation expense, leasehold amortization, and rent and related expenses due
to the sale of the Colorado branches and Colorado Mortgage division closure,
partially offset by higher lease impairment charges on vacated office space in
the third quarter of 2009 compared to 2008.

The decrease in equipment is primarily due to the decrease in equipment
depreciation expense and equipment rental and associated costs on equipment
related to the Colorado branches that were sold in June 2009.

The increase in legal, accounting, and consulting expense resulted from legal
and investment banking fees incurred in connection with the sale of our Colorado
branches of approximately $1.2 million, consulting costs of $1.5 million related
to a staffing model and various revenue enhancement models that were prepared in
connection with our continued efforts to control non-interest expenses and
increase other non-interest income, and legal fees associated with higher levels
of non-performing loans and our written agreement with the regulators.

The increase in expenses for other real estate owned is primarily due to an
increase in write-downs of properties to reflect further deterioration of fair
values subsequent to foreclosure and an increase in other expenses related to
the properties, both commensurate with the increase in number of properties.

The increase in FDIC insurance premiums is due to new FDIC assessment rates that
took effect on January 1, 2009, the five basis point special assessment for $1.4
million that occurred in the second quarter of 2009, and the increase in
deposits. The final rule also permits the imposition of an additional emergency
special assessment after June 30, 2009, of up to five basis points per quarter
through 2009.

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

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

In conjunction with its third quarter earnings release, First State will host a
conference call to discuss these results, which will be simulcast over the
Internet on Monday, November 2, 2009 at 5:00 p.m. Eastern Time. To listen to the
call and view the slide presentation, visit www.fcbnm.com, Investor Relations.
The conference call will be available for replay beginning November 2, 2009
through November 13, 2009 at www.fcbnm.com, Investor Relations.

First State Bancorporation is a New Mexico based commercial bank holding company
(NASDAQ:FSNM). First State provides services, through its subsidiary First
Community Bank, to customers from a total of 40 branches located in New Mexico
and Arizona. On Friday, October 30, 2009, First State`s stock closed at $0.98
per share.

The following tables provide selected information for average balances and
average yields for the three and nine month periods ended September 30, 2009 and
September 30, 2008:

Three Months Ended Three Months Ended
September 30, 2009 September 30, 2008
(Unaudited - $ in thousands) Average Average Average Average
Balance Yield Balance Yield
AVERAGE BALANCES:
Loans $2,207,700 4.81% $2,757,789 6.31%
Investment securities 496,961 2.67% 496,102 4.56%
Interest-bearing deposits with other banks and federal funds sold 166,619 0.24% 4,484 2.31%
Total interest-earning assets 2,871,280 4.18% 3,258,375 6.04%
Total interest-bearing deposits 1,779,886 1.91% 2,058,920 2.59%
Total interest-bearing liabilities 2,407,280 1.96% 2,760,812 2.57%

Non interest-bearing demand accounts 398,293 495,043
Equity 120,681 194,612
Total assets 2,952,870 3,471,523

Nine Months Ended Nine Months Ended
September 30, 2009 September 30, 2008
(Unaudited - $ in thousands) Average Average Average Average
Balance Yield Balance Yield
AVERAGE BALANCES:
Loans $2,532,221 5.14% $2,658,832 6.76%
Investment securities 491,474 3.75% 500,607 4.59%
Interest-bearing deposits with other banks and federal funds sold 147,937 0.25% 6,411 2.92%
Total interest-earning assets 3,171,632 4.70% 3,165,850 6.41%
Total interest-bearing deposits 2,037,433 2.10% 2,084,952 2.90%
Total interest-bearing liabilities 2,685,625 2.08% 2,685,714 2.87%

Non interest-bearing demand accounts 454,674 478,445
Equity 136,452 276,438
Total assets 3,301,919 3,462,491

The following tables provide information regarding loans and deposits for the
quarters ended September 30, 2009 and 2008, and the year ended December 31,
2008:

LOANS: September 30, 2009 December 31, 2008 September 30, 2008
(Unaudited - $ in thousands)
Commercial $ 263,918 12.4% $ 356,769 13.0% $ 352,579 12.8%
Real estate - commercial 893,463 42.1% 1,172,952 42.6% 1,117,029 40.4%
Real estate - one- to four-family 203,749 9.6% 270,613 9.8% 283,262 10.3%
Real estate - construction 725,707 34.1% 896,117 32.5% 950,238 34.4%
Consumer and other 30,430 1.4% 41,474 1.5% 43,048 1.6%
Mortgage loans available for sale 8,525 0.4% 16,664 0.6% 14,981 0.5%
Total $ 2,125,792 100.0% $ 2,754,589 100.0% $ 2,761,137 100.0%

DEPOSITS: September 30, 2009 December 31, 2008 September 30, 2008

(Unaudited - $ in thousands)
Non-interest bearing $ 389,672 18.1% $ 453,319 18.0% $ 476,094 19.1%
Interest-bearing demand 336,950 15.7% 296,732 11.8% 296,955 11.9%
Money market savings accounts 390,288 18.1% 471,011 18.6% 535,075 21.4%
Regular savings 90,008 4.2% 100,691 4.0% 102,685 4.1%
Certificates of deposit less than $100,000 237,932 11.1% 325,110 12.9% 346,010 13.9%
Certificates of deposit greater than $100,000 430,758 20.0% 471,826 18.7% 522,929 20.9%
CDARS Reciprocal deposits 97,271 4.5% 212,249 8.4% 155,143 6.2%
Brokered deposits 178,804 8.3% 191,604 7.6% 62,390 2.5%
Total $ 2,151,683 100.0% $ 2,522,542 100.0% $ 2,497,281 100.0%

Certain statements in this news release 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 news
release which relate to performance, development or activities that we expect or
anticipate will or may happen in the future, are forward-looking statements. The
discussions regarding our growth strategy, expansion of operations in our
markets, acquisitions, dispositions, competition, loan and deposit growth,
timing of new branch openings, 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, loss of key personnel
or inability to hire suitable personnel, faster or slower than anticipated
growth, economic conditions, our competitors` responses to our marketing
strategy or new competitive conditions, and competition in the geographic and
business areas in which we conduct our operations. Forward-looking statements
contained herein are made only as of the date made, and we do not undertake any
obligation to update them to reflect events or circumstances after the date of
this report to reflect the occurrence of unanticipated events.

Because forward-looking statements involve risks and uncertainties, we caution
that there are important factors, in addition to those listed above, that may
cause actual results to differ materially from those contained in the
forward-looking statements. These factors are included in our Form 10-K for the
period ended December 31, 2008, and are updated in our Form 10-Q for the period
ended June 30, 2009, as filed with the Securities and Exchange Commission.

First State`s news releases and filings with the Securities and Exchange
Commission are available through the Investor Relations section of First State`s
website at www.fcbnm.com.

First State Bancorporation
H. Patrick Dee
Chief Operating Officer
505-241-7102
Christopher C. Spencer
Chief Financial Officer
505-241-7154

Copyright Business Wire 2009