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Executives

Chris Spencer – Senior Vice President and Chief Financial Officer

Pat Dee - Executive Vice President and Chief Operating Officer

Pam Smith - Chief Credit Officer

Mike Stanford - President and Chief Executive Officer

Analysts

Jim Bradshaw - D. A. Davidson

Peyton Green - FTN Midwest Securities

Bradley Vander Ploeg - Raymond James

First State Bancorporation (OTC:FSNM) Q1 2008 Earnings Call April 28, 2008 5:00 PM ET

Operator

Thank you for standing by and welcome to the First State Bancorporation first quarter earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I’d like to turn today’s conference call over to Mr. Chris Spencer, Chief Financial Officer. Sir, you may begin.

Christopher Spencer

Thank you and welcome everyone to First State Bank Corporation’s first quarter 2008 conference call. First State Bank Corporation will provide an online simulcast to this conference call on www.fsnm.com. An online replay will follow immediately and continue for ten days. This replay of the call can be reached at 888-562-8229.

Your host this afternoon and conference leaders for this call are myself, Chris Spencer, Senior Vice President and Chief Financial Officer; Pat Dee, Executive Vice President and Chief Operating Officer; Pam Smith, Chief Credit Officer; and Mike Stanford, President and Chief Executive Officer of First State Bank Corporation.

As a reminder, The Board of Directors of First State Bank Corporation have adopted the policy that the company will comply with Securities and Exchange Commission regulation FD in all respects. Consequently, this call will proceed under an agenda, which I will announce momentarily. Matters outside the agenda items will not be discussed.

The subject matter of this conference call will include forward-looking statements. These statements are not historical facts and involve risks and uncertainties that could cause First State’s results to differ materially from those contained in such statements.

Now with that, our agenda this afternoon; Pat Dee will start out with some opening remarks. I will go through the slides that are available on our website, I will turn it back to Pat for some summary comments and then we will open the call up for questions and the answers.

With that, I will turn it over to Pat.

Patrick Dee

Thank you, Chris. Our first quarter results showed continued solid loan growth primarily in the commercial construction portfolio, which is very solid business for us right now. We saw reduced profitability due primarily to the compressed interest margin and an elevated provision for loan losses.

We are maintaining our cash dividend level and that’s an indication of our confidence and our ability to maintain sufficient profitability going forward and to be able to support this dividend level.

Our net interest margin for the quarter was 4.12%, down from 4.44% in the last quarter of 2007. The primary cause was the series of interest rate reductions by the Federal Reserve and the corresponding reduction in rates on our adjustable rate commercial loans. Margin was also impacted by the reversal of interest on non-performing loans, which increased by over $19 million during the quarter.

Our non-interest expenses decreased by almost $1.4 million from the fourth quarter of 2007, due primarily to a reduction in expenses related to other real estate owned of $1.3 million. We continue to focus our efforts on reducing certain non-interest expenses and expect to show only nominal expense increases for the remaining quarters of 2008.

Those non-interest income categories continue to increase, although we did see an overall reduction from the last quarter of 2007 due to the write-down of one security, which Chris will discuss in more detail later on.

Asset quality continues to be a challenge as we saw an increase in our non-performing assets during the quarter from about $49 million to $67 million.

We have increased our allowance for loan losses from 1.26% of loans at 12/31/07 to 1.33% as of the end of the first quarter. Our charge-offs remained relatively low at an annualized rate of 17 basis points of average loans for the quarter. Only four of the loan relationships added to the non-performing list during the quarter were in excess of $1 million. The largest was a $3.2 million condo project in Santa Fe on which we established a specific reserve of just under $200,000.

The additions to non-performing loans also included a $2.7 million relationship to a homebuilder in Denver, a $1.6 million home loan in New Mexico and a $1.5 million commercial real estate loan collateralized by a property in El Paso, Texas. We believe the Texas loan will likely be liquidated in the second quarter and we have a specific reserve of just under $300,000 that will cover our potential loss on that credit.

The additions to the non-performing numbers that I have just talked about demonstrate the geographical diversity where we’re not seeing concentrations in any one market for any particular market segment, although again a fair portion of our non-performing loans are coming from the residential construction portfolio.

Our slideshow will give a breakdown of our non-performing loans by general loan category and by state. Our non-performing loans totaled just under $50 million and we now have specific reserves on those loans of just over $5 million. Although our charge-offs for the quarter were nominal, we expect a somewhat higher level for the remainder of the year, more likely in the range of 25 to 35 basis points on an annualized basis.

We have performed a more aggressive review of our loan portfolio since the third quarter of last year and the increase in that oversight has brought about some of the identification of additional potential problem assets in the past two quarters. In particular, we’ve increased the streaking on a residential construction portfolio in New Mexico, most of which is in the Albuquerque area.

It’s difficult to predict the future trend of potential problem assets and non-performing loans, but we expect that the additions to non-performing loans in future quarters should likely be less than what we experienced in the first quarter. We continue to experience a reasonable level of sales on properties of all types in most of our markets and that should also help us limit the future increases in the level on non-performing assets as we go forward, as again, the majority of our loan portfolio is secured by real estate of some type.

During the quarter, we liquidated one former AccessBank branch, which had a carrying value of about $1.4 million, so that’s the major reason for the decrease in our OREO totals during the quarter. We continue to aggressively market our remaining OREO properties.

We’ve received a letter of intent on a site which we acquired from AccessBank and are hopeful that we will have that under contract within the next few weeks. It has a carrying value of about $1.8 million.

Another large OREO property is the Heritage placed property, which was acquired in the Front Range Capital acquisition and has a carrying value of about $4.4 million. This again is currently under contract that is subject to the buyer obtaining approval for their development plan. That sale, if it’s consummated would likely not occur until the latter part of the fourth quarter of this year or wholly for the first quarter of 2009.

Now, we’ll have Chris run through some of the detail on our results for the fourth quarter and then I will comeback and summarize a few thoughts.

Christopher Spencer

Thanks Pat. For those of you that have access to the slides, we will go through those. The first slide is just the overview which -- Pat touched on most of that with $3.9 million earnings and $0.19 per share. The interest margin for the quarter was 4.12% and we had real good strong loan growth for the quarter at an annualized rate of 11%, the provision was $3.9 million and we maintained our dividend of $0.09 on the quarter.

Total assets; we ended the first quarter at $3.46 billion primarily driven by our strong loan growth. Total loans were just over $2.6 billion. As I said, there was an 11% annualized run rate and we are right now showing a very strong pipeline for the next 90 days. We are very encouraged by that and continues to be very strong in all of our markets.

For those of you who are interested in the period numbers by state, I will give those to you now. Total loans in New Mexico at the end of March were $1,547,87,000; Colorado was 632,832; Utah was 278,877; and Arizona was 157,696.

Taking a look at deposits, deposits ended the quarter at $2.580 billion, just over that; a fairly flat growth, just an annualized growth rate of 1%. We will point out we saw a dramatic decline in our deposit totals in early January and we are encouraged by the February and March activity. We have made some very good comeback from that decrease in January, but we are just up $6 million on the quarter, but we are encouraged by the activity that we saw in February and March. Again for those of you who are interested in the state-by-state totals, at the end of March, New Mexico deposits were $1,815,556,000; Colorado was $582,780; Utah, $18,548,000; and Arizona $163,717.

The next slide depicts the non-interest bearing deposits. We did see a $19 million decline in non-interest bearing deposits in the first quarter. That’s not real unusual for us to decline in the first quarter; the first quarter in general has typically not been a real strong deposit quarter for us, but I think that we are seeing a lot of our commercial customers just more actively managing their cash positions in this market today. It’s been obviously a very, very competitive environment out there, particularly in the non-interest bearing deposit arena.

Our quarterly income, depicting at quarter-over-quarter, again $0.19 and I think it’s pretty well summed up this quarter with margin compression and the increased provision that we have already talked about and Pat mentioned, in the non-interest income arena, a lot of the categories we’re seeing some increases. Our mortgage division had a very strong quarter, the best quarter since early-to-mid last year; had nice gains on that more than we anticipated. One item in there what Pat referred to was a loss that we took on the write-down of some Freddie Mac preferred stock that we inherited from the Heritage acquisition given the issues that Freddie Mac has been having and having to issue more preferred stock at higher rates.

Our preferred stock carry coupons were right at 5%. Freddie Mac has issued new preferred stock at around the 8% level, an origin of price to that level and therefore given the accounting literature, we will require to look at that as an other than temporary impairment. Is a $1 million face value and we will look that down $333,000 based on quoted market prices at the end of March, but given that kind of offsets the increases in the mortgage gains and we were pretty flat sequential quarter or non-interest income.

The non-interest expenses I think Pat also mentioned, we were down sequential quarters about $1.4 million primarily due to reduced other real estate expenses. We were a little higher than the sequential quarter and the salaries and benefits and that’s primarily due to higher healthcare costs. We are self insured and the claims expense was a little higher than some other smaller items; for example, mortgage commissions with mortgage in the bigger quarter than anticipated is the mortgage commissions, we are at a higher level and go into that as well, but the majority of it was not kind of ongoing expenses. Our salaries, our run rate for salary expenses was actually almost $300,000 lower than the sequential quarter.

Taking a little bit further look at the net interest margin, it was 4.12% on the quarter. We anticipate that this will compress a little bit more, potentially another 10 basis points to 12 basis points in the second quarter from the last Fed cut on March 24. We still haven’t felt the entire impact of that, so the second quarter will decline. Another anticipated 10 basis points to 12 basis points and from there should be fairly stable, even with additional cuts by the Fed potentially this week, 25 basis points to 50 basis points, I think we are hearing of a possibility. Even with those, we will -- from some of the deposit reprising from past rate cuts, should pretty much offset that and be pretty stable the rest of the year.

The next slide shows return on equity and return on average assets and obviously with the decline in the portability this quarter; those metrics had suffered ratably. Looking at the efficiency ratio, the efficiency ratio for the first quarter was 73.85% obviously not going in the direction that we wanted to. Clearly that’s driven significantly by the margin which -- is what drives the denominator and so we’re kind of behind the eight bar with the margin going down as quickly as it is. As Pat indicated we are continuing to look at efficiencies across the organization and I think we have a target by the end of fiscal '08 of being closer to the mid-60 range in the margin, but this will obviously continue to be a challenge for us if there are further rate cuts and more compression at the margin.

Our non-performing asset totals have clearly increased significantly in the quarter. Now we have broken it down here probably to give you a little more color between what is actually non-performing loans and the other real estate. The other real estate actually declined almost about 1.5 million sequential quarter. As Pat mentioned the big part of that was the sale of that Access branch early in January and a small write-down of about 150,000 related to the Heritage place property, which again we have under contract again and that to get at that what we think is net reliable value. Our subsequent to the end of March, we did have another reduction from that lot inventory property up in Colorado that we have under contract and has been taken down over a period of time, so we did sell the next several lots out of that inventory totaling about $750,000.

We are going to go here to a slide that breaks down that the non-performing loans, the $50,301,000 million that we have in non-performing loans and look at them by type and geography. I think it’s important to note here that currently we have no non-performing loans in our Arizona market and very little at all in our Utah market with the majority of 90% being split between the Mexico and Colorado and clearly a much higher percentage wise in our Colorado market which we have been dealing with now for a longer period of time. It is also I think significant to note that the majority of our non-performing loans continue to be in the real estate constructions arena and then the next slide we take a look at going forward that our construction loan portfolio is going to exist at the end of March $982 million in the construction loan portfolio and how it breaks down by type of loans within the constructing portfolio and geographically.

Again the significant -- more than half of our construction portfolio is in New Mexico. With that portfolio obviously we’ve seen an increase in non-performing in New Mexico, but overall there has been a much more stable construction environment. The breakdown you can see its cleared well diversified not only by type within the construction, but on a geographical basis as well with 53% being in the Mexico, 22% in Colorado, 22%, in Utah and 6% in Arizona and that is more representative of what the overall loan portfolio breakdown is like, so it is very much like the total loan portfolios. You can see also by type approximately 50% or 49% is related to one form or another wonderful family, either vertical construction or lot development. So, hopefully that will give you a little bit more color of the construction portfolio, as we go forward.

The next slide our delinquencies. Obviously we have the increased in this quarter as well -- I’ll get to that slide for you; at 1.13% of the total loans. I think it’s also significant to note here that over half of our delinquencies are coming out of the construction arena.

Our allowance for loan losses like Pat had mentioned at the end of the quarter at 1.33% of total loans held for investment, which gives us a coverage of our non-performing loans of 69%. In the quarter we think we are being pretty conservative and upgrading on a really head started of the process quite sometime ago and in early last year as far as really looking at the Heritage portfolio, when it came on and this has been an on ongoing process of really scrubbing our portfolio and making sure we are provide adequately on our portfolio.

Our provision in the net charge-offs, or the charge-offs had a little defect that they were a little down from the last two quarters of just over $1 million. Again it’s a run rate of about 17 basis points, annualized which is 19 basis points for all of ‘07 and 18 basis points for all of '06. Again we would anticipate being more on the 25 basis point range for all of ’08. That has nice to see there was decline over the last two quarters.

Now, that concludes the slides. With that I will turn it back over to Pat for some summary comments.

Patrick Dee

Thank you, Chris. We are clearly disappointed in our results for the first quarter, but we are pleased with the opportunities that we continue to see us growing a new comfortable business of both loans and deposits. I recently received a call from a very prominent Albuquerque Company who’s business we’ve sought for sometime. They are currently evaluating banks in the area with a very low possibility of transferring their business. Especially, in today economic environment we are seeing more and more of those types of opportunities.

The margin compression in the first quarter was clearly more than we had anticipated and is due to three factors, the size of the Fed interest rate cuts, the increase in our non-performing assets and the lack of deposit growth for the quarter. It would appear that the Fed will likely not lower interest rates much more, if at all, so we would expect to see a stabilization in our interest margin once the full effective the most recent rate reduction or any future reductions is taken into account.

We continue to aggressively work our problem in potential problem assets, and we’ve added two key individuals to our special asset area in the past few months, to help us with that process. We believe that our loan underwriting has been and continues to be done on a sound basis with majority of our problem loans attributable to external forces rather than poor underwriting. We’ve told you that the economic trends in most of our markets are favorable from the standpoint of population growth and job growth and we believe that will help lessen the direct impact on our company and allow us to recover more quickly than other parts of the country.

We continue to remain at our capital levels at a well capitalized level under the risk base definitions and we will our monitor our capital levels relative to our growth and profitability during the remainder of this year and may supplement our tier 2 capital later this year and are most likely through the privet placement of either subordinated debt or trust preferred securities. With that we will open it up for questions from our analysts.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Jim Bradshaw from D. A. Davidson. Your line is open.

Jim Bradshaw - D. A. Davidson

Thank you, good afternoon.

Patrick Dee

Jim.

Christopher Spencer

Hi, Jim.

Jim Bradshaw - D. A. Davidson

Pat and Chris you’re talking about seeing a little bit higher rate of charge-offs in the later part of the year now. Are you reserve such that you draw down reserves to fund that or are you continue to keep reserves at this level of loans or you’re going a bit higher from here?

Patrick Dee

Whether or not if we go higher Jim, it will depend on what’s happening with the total level of non-performing loans and the underlying collateral values there, but we would probably expect at this point to the extent we have got charge-offs we would give provision, similar amounts. Again that’s it is going to depend on the activity within the loan portfolio, but we really expect non-performing loans probably to continue to trend upward a little bit, which would lead us to believe that we will probably end up with an allowance at the same level it is now or perhaps even a little bit higher.

Jim Bradshaw - D. A. Davidson

Let me guess, to the some degree it depends on loan growth and the loan growth seemed really good in this quarter and seems like the pipeline is being head into Q2 as well, so you might need to ranch your provision up a little bit with that too?

Patrick Dee

That’s correct. Although the provision normally that we attached to the new loan volume is less than the overall percentage that we are seeing right now, but you are right. Clearly there’s been a very pleasant surprise on good solid loan growth in the first quarter and based on what we are seeing right now we think that’s going to continue in the near-term.

Jim Bradshaw - D. A. Davidson

And the second question I have, then it relates back to that -- as loans as a percent of earning assets, are you comfortable where things are now or is there such -- is there better opportunity on the investment security side to build that portfolio too with some decent capital ratio, is that you guys have?

Patrick Dee

Well that’s kind of a delicate balance that we are going to manage going forward and clearly we look at from time-to-time some opportunities, investments and investments that when you balance the risk versus the reward and some of those investments versus lending activities we could probably see some growth on both of those categories, both loans and investments. In the past we’ve kept our investment portfolio to almost a minimal level to cover the pledging needs that we have on our public deposits and then some minor liquidity needs that we have. So, we continue to evaluate that, but we hope to continue to see plenty of opportunities to book additional loan relationships that have good solid deposit relationships with them, which is a real key for us, so make it -- in general if we can get good deposit relationships, we will continue to book a fair amount of loan growth, but we are keeping in mind our overall capital levels. One of the things that’s helping us a little bit right now is with the reduced demand for residential construction loans, we are seeing some runoff in some of those totals so that will help relieve you from the capital pressure there with growth. It’s just one of those things we’ll have to manage as we go forward.

Christopher Spencer

And Jim this is Chris. I will point while we’re talking about capital. You may have noticed our risk-based capital at the end of March is 10.7%. We found out in our model, we were penalizing ourselves and how we treated unfunded commitments off balance sheet and that equated to 3 basis points on regulatory capital, which was about $9 million. So, you will see our risk-based capital at the end of March was 10.7%.

Jim Bradshaw - D. A. Davidson

Got it, okay good and then just a couple more for if I may. Are you seeing new account growth still be pretty good with that average balances that are down per account, is that the trend that that you’re expecting or you seeing rather?

Patrick Dee

I think that we are seeing good redeposit growth across all of our markets. Certain markets I think are seeing outstanding net growth, whereas other markets we are pretty much just maintaining our overall account level. So, our deposit generation continues to be a little bit of struggle for us in some instances, but, as Chris said we were really encouraged by the activity especially in February and March, but in a lot of cases there are accounts that have managed their balances downward. So, in certain portions of the account base, we are seeing lower average account balances as well. So, there is a lot of different factors effecting that in those directions, but what we have then is overall pretty flat deposit growths for the quarter as a whole, but a nice trend in February and March and we’re continuing to focus a lot of emphasis on deposit generation both cross sales in existing customers where right now with some of the troubles that certain banks are experiencing we seem to have more opportunities to pickup a larger share of business of some of our customers as well as continue to bring in new customers as well.

Jim Bradshaw - D. A. Davidson

Great. Appreciate your time. Thank you very much.

Operator

Our next question comes from Peyton Green, with FTN Midwest Securities. Your line is open.

Peyton Green - FTN Midwest Securities

Yes. I was wondering if you could comment maybe a little bit on the severity of downgrades in the loan portfolio. Does it -- maybe it’s non-performing, but in the potential problem loan side or they have gone 30 days past this if you are seeing any particular trend extend beyond the residential real estate related construction and when would you expect credit quality to finally bottom?

Patrick Dee

I don’t think we are seeing any general trends other than clearly the elevated delinquency and elevated non-performing levels of the residential construction component of the portfolio. That’s consistent across all of our marketplaces, with the exception of Arizona where as Chris pointed out we don’t have any non-performings and we have very limited exposure especially in that Phoenix market, the residential construction credits. What we are seeing is just a wide variety of a kind of one off issues with borrowers that have created some of the problems or potential problems that we have right now. In general, again other than the increased level of potential problem assets associated with that residential construction portfolio, we are seeing a little bit from all geographies again with very few if any out of Arizona, but consistent numbers coming at this point from New Mexico, Colorado and a little bit more from Utah. Historically Utah has been very, a very clean loan portfolio for us and we are seeing some deterioration there at this point, but there’s low trends in terms of industries. We don’t have a concentration of any loan significance again outside of that residential construction lending portfolio and the land development loans go with that. At this point we have not seen many problems in the land development or lot development arena, with a one notable exception of a couple of large land development loans in the Denver market. A lot of those that Chris referred to early days in OREO and it’s being liquidated over a period of time. The other one also in the Denver areas is a roughly $6 million relationship with -- we’re continuing to work with the Dawahare [ph] and it’s currently in the non-performing status. So, I think we feel very good about the diversity of our potential problem loans both in terms of the type of loan and the geography as well.

Peyton Green - FTN Midwest Securities

Okay. And then specifically I mean how much of your NPL stock and potential problem loan stock consist of residential construction and development, that land development?

Patrick Dee

I think Chris maybe go back to the slide that shows the break up out of our non-performing loans, in particular. Here what the slide shows in the commercial sector and this is commercial loans other than commercial real estate that accounts for about 11% of the non-performing loan totals. The commercial real estate portion is about 16%, the real estate one-to-four family other than construction loans is about a 11% and then, the large category being real estate construction 61%, and the vast majority of those are in the residential construction portfolio, a little bit coming out of the commercial real estate construction, but most of its single-family residential construction or a lot development loans and a very small portion of our consumer portfolio. We are really not an aggressive consumer lender, so we are not seeing much in the way of non-performing numbers there.

Peyton Green - FTN Midwest Securities

Okay and then I guess -- I mean it would seem that things kind of slowdown in terms of getting payoffs in the first quarter. Is that fair to say or did you actually see pretty good movement out. You just saw one movement in?

Patrick Dee

I think we are saying it both coming and going, still some good payoff activity. We still got a fair number of construction loans that are in the process of moving floored in or funding upwards and we will continue to see some of that. We have a fairly active construction lending, book of business in really three out of the four states through the later part of last year and we are still seeing some good opportunities going forward with quality builders in the right location with the right product. Clearly that volume is really off as what it was a year ago, but our markets -- and this is one thing that we would probably haven’t stressed enough, we would -- there continues to be good sales activity across the board in properties in all of our markets, both commercial and the residential. Some locations for the residential properties in particular are much better than others, but, we have good population growth, good job growth and a reasonable level of activity even in the residential housing market. So, clearly it is much less than it was in prior periods, but we are optimistic that over time we can continue to work some of those problem and potential problem assets down as we continue to see some of that sales activity. I think just about everyday somebody ask me, “have you reached the bottom yet of one loan?” and of course the bottle is not that good and again I think we expect to continue to see lot of migration into the non-performing category, but we are at the same time seeing the revolution of a fair number of those loans that gives us somehow that we can manage that increase going forward and eventually then see a reduction, but, it’s clearly a challenging market, that one in which we are still seeing activity across (inaudible) every price range within our market or within all of our markets and all types of buildings both residential and commercial.

Peyton Green - FTN Midwest Securities

Okay and then just I mean in terms of the current returns, I mean they don’t really support much of the way a double-digit balance sheet growth, if you intend to maintain the cash dividend. I mean, when do you -- kind of how do you balance the improved outlook for growth. It sounds like more of your competitors are pulled in their horns more than you all have and I was just curious as to how you can handicap -- changing your mind on what kind of capital you need versus tier-2 qualifying maybe some tier-1?

Patrick Dee

At this point we think what the future will shows us a little lower asset growth rate and improved profitability and you are right, we got to get back to a balance that we can generate the income necessary to support a reasonable amount of growth. We were -- quite frankly, quite surprised by the strong loan growth in the first quarter we don’t expect that to continue and if that were and we weren’t able to sustain profitability that would support that then we would have to look at curtailing our loan portfolio in some form. We got the potential to do that with some of our credits at this point in time. We don’t think that’s going to be necessary, but we absolutely have to manage that growth, so that we can maintain the dividend and get our profitability up to a level were we’ll support a reasonable amount of growth going forward. I think in the last six to nine months in particular we have gotten more selective about the type of lending that we are doing and we’re probably going to continue to get more selective as we go forward. Make sure that we are booking very high quality loans and there is got to be some business that we’re just going to have to let go and not worry about that. Our focus right now is to book high quality credits with the customers that maintain good deposit relationships and that’s really our focus going forward.

Peyton Green - FTN Midwest Securities

Okay. And then, I mean, is that achievable without margin expansion?

Patrick Dee

That’s clearly; if we see the margins stay where it is or decline a little bit further that that would be a big challenge for us. I think the one variable that we think that time should move back in our favor is the level of our provision for loan losses. So, there are several moving parts after this, but at the current margin levels we would probably absent some pickup in our deposit mix that improves that margin. I think we will have to look as we go further into the year at curtailing certain tax of lending activity even more than we are right now, but we are getting a little bit of relief on that already and there is very little with any activity in most of our markets in terms of land development lending and certainly a vastly reduced level of single payment residential construction activity. So, we are getting some help from the market and a fair amount of the growth that we saw in the first quarter came out of a commercial construction portfolio. Most of that came from existing credits that have been on the books for while, but are just in the process of funding. So we are not seeing at this point, necessarily the same volume of loans in that area, but there continue to be great opportunities for us to tap into that business, in all of our markets. So, it’s just -- it’s something that we are going to have to manage pretty carefully going forward.

Peyton Green - FTN Midwest Securities

Okay, alright great. Thank you.

Operator

And our next question comes Brad Vander Ploeg, with Raymond James. Your line is open.

Bradley Vander Ploeg - Raymond James

Thank you. Good afternoon.

Patrick Dee

Hi Brad.

Christopher Spencer

Hi Brad.

Bradley Vander Ploeg - Raymond James

I am just curious, if you have any other security pools or classes that you are concerned about in terms of valuations approaching a point where you might need to have a write down?

Christopher Spencer

Hi, Brad, this is Chris. Now, we are really down and as Freddie Mac preferred were something that were inherited from the acquisition of Heritage, but everything else that we have got even in the mortgage sector, there is no sub-prime. I think we may have about $6 million in Alt-A type mortgages, but other than that, no we don’t where we feel pretty good about the investment portfolio.

Bradley Vander Ploeg - Raymond James

Okay and I know you have been asked us a lot before, but just in terms of the Utah market and the deposit potential there, it just seem like it’s an untapped way to maybe, helps soften the margin below if there is someway to capitalize on that. I know you have other things on your plate, but is there now anything that you have got working to try to generate, some more deposits out of that market?

Patrick Dee

We are trying in particular to do a little bit more with our remote deposit capture product in that marketplace. We only have two locations, so our convenience from a depositor’s standpoint is an issue there but given our commercial focus we think the remote deposit capture product can help us overcome that. By having said that it’s probably one of the toughest places in the country, we too compete in that marketplace, because of the emphasis that that signs and (inaudible) have placed on that same product in that marketplace, so that’s a tough battle for us and clearly we haven’t been very successful with it to this point. We are going to continue to try, but we don’t expect significant deposit growth and how that felt like marketing the in UK.

Bradley Vander Ploeg - Raymond James

Okay and then lastly, you touched on this when answering one of the previous questions, but at a non-performing asset level of about 2.5% and then expecting charge-offs to go to maybe 25 to 35 basis point range, I guess that implies a pretty healthy rate of working out loans and curing them unless I am reading that wrong, but is that optimism something you are comfortable saying as there?

Patrick Dee

We think that really Brad on the overall make-up on that, both the potential problem loan portfolio and in particular the non-performing loans and clearly, we got some work to do with the more severe problems there. As I have mentioned we’ve got a little over $5 million in specific reserves on those non-performing loans of about $50 million. So, we satisfied specific reserves that will allow us in some cases to either work with the borrower to sell the underlying collateral or to give us the ability to cut a deal in some cases in selling the underlying notes and score in the event that we do end up having a full close on and to be able to price the property attractively to move it quickly. So, you are right we are assuming -- but again there continue to be a fair number of good things happen with some of those properties. Our focus is to try to exit them as quickly as possible and for that reason we have set up -- not just those specific reserves, but we have got some pretty substantial subjective reserves built into our allowance that we think will give us the flexibility to cut some deals, leave some loans, move some property and get that behind us. Our focus needs to be on continuing to generate good new business and not get back down in the problem credits what we have. We continue to evaluate on a very regular basis, the value of the underlying collateral because the markets are changing no doubt and we think, we know where the weakness are. I have got each month, each quarter, we take another one and allow these loans to make sure we’re being realistic about the value of the underlying collateral and so that we are not holding on to something in a market that’s moving South and not going to improve any time soon for us.

Bradley Vander Ploeg - Raymond James

Alright. That’s all I had. Thanks very much.

Operator

At this time, there is no further question.

Patrick Dee

Well, if there are no further questions, we certainly appreciate everybody’s time and their attention today. As we have said we’re are less than pleased with our results but we believe we have both the personal and the game plan to move forward, to improve our profitability and get back on track with the kinds of returns that our shareholders expecting and deserve. No doubt, it’s a challenging market, but we believe that the four states that we operate in are much better positioned generally than the rest of the country for a relatively quick recovery from some of the problems that we are seeing now and we will continue to adjust our strategy to focus on the problems that we are seeing, but at the same time keep our eye on the opportunities to bring in good new business to continue to take us forward and so we look forward to reporting our second quarter results and hopefully we’ll have a much better report to be able to make to you at that point. Thank you

Operator

This will conclude today’s conference call. You may now disconnect.

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Source: First State Bancorporation Q1 2008 Earnings Call Transcript
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