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West Coast Bancorp (NASDAQ:WCBO)

Q3 2008 Earnings Call Transcript

October 21, 2008 11:00 am ET

Executives

Bob Sznewajs – President and CEO

Dick Rasmussen – EVP, General Counsel and Secretary

Anders Giltvedt – EVP and CFO

Xandra McKeown – EVP, Commercial Banking

Hadley Robbins – EVP and Chief Credit Officer

Analysts

Matthew Clark

Jeff Rulis – D. A. Davidson & Co.

Joe Morford – RBC Capital Markets

Ross Haberman – Haberman Fund

Lewis Feldman – Wells Capital Management

Operator

Good morning. My name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the West Coast Bancorp third quarter 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator instructions).

Thank you Mr. Sznewajs, you may begin your conference.

Bob Sznewajs

Well, thank you very much; and welcome and good morning to everybody. I would like to introduce the people who are with me today. I have Xandra McKeown, who is responsible for Commercial Lending and Commercial Real Estate Lending; Anders Giltvedt, our CFO; Hadley Robbins, our Chief Credit Officer; and Dick Rasmussen, our General Counsel.

And Dick, I'll turn it over to you.

Dick Rasmussen

Thank you, Bob. In today’s call we will make statements regarding future events, performance or results that are forward-looking statements. These statements regarding loan, deposit, integral market competition, credit quality, provision and allowance for credit losses, other real-estate owned capital, expenses, key financial ratios, tax rates, stock buybacks, the housing markets and the economy.

Our actual results could be quite different from those expressed or implied by our forward-looking statements. Please do not place undue reliance on the forward-looking statements. They are not guarantees. They speak only as of the date they are made and we do not undertake any obligation to update them to reflect changes that occur. Some of the factors that may cause our actual results to differ from our expectations, please refer to our SEC filings, including our most recent reports on Forms 10-K and 10-Q. In particular, we direct you to the discussion in our 10-K of certain risk factors affecting our business.

We may, during the course of this call, refer to certain non-GAAP financial measures. Those measures are explained and reconciled to GAAP financial measures in our most recent earnings release, which can be found on the Investor Relations section of our Web site wcb.com.

This call is being recorded and may be accessed to replay later today by going to the Investor Relations section of our Web site.

Bob, back to you.

Bob Sznewajs

Thanks, Dick. I'm going to make a few brief comments and then we are going to follow our traditional rotation through the people on the various topics.

Obviously, the quarter was heavily influenced by the OTTI charges. That was approximately $6.6 million and about $0.27 a share; and Anders will go through the details of some of that. Our capital ratios improved again in the third quarter from the previous quarter despite the OTT charges that we took. As we talked in the last quarterly call, the residential construction, developers are still being strained in the awful market and it has obviously impacted housing sales and we have some updated information that we are going to share with you about that as well.

We have portfolios that are performing very well for us. Our commercial construction portfolio continues to perform at a high level. Our largest portfolios in terms of dollar amounts the term commercial real estate and the C&I portfolios are also performing very well at this point. And the home equity portfolio continues to perform at a high level.

According to the recent FDIC deposit data which came out as of June 30, 2008; it shows that we continue as we did in the previous year to have the number one deposit market share of any bank in the state in the Willamette Valley of the Salem area in addition to having the largest deposit market share in Lincoln County. And also, we have the largest deposit market share of any community bank in the Portland/Vancouver area. So we have maintained these positions with respect to deposit market share for two consecutive years now, and I think that is a credit to our people working in this environment and we are grateful for the work they have done as well as with our customers. A key part of that growth are maintain the market share as we continue to grow our checking accounts, checking account growth, we have now reached in excess of 91,000 checking accounts, which is an increase from 52,000, four and a half years ago, which represents a 13.5% compounded annual growth rate. We are very comfortable with the high-performance checking for both small business and the consumer, and with the turmoil in the market we have continued to experience really good growth.

Our people are focused, as always, on customers. This is an interesting time in banking. We are continually educating our people about all the new alternatives associated with the change in the FDIC coverage as well as educating our customers. We view this as an excellent opportunity for us to talk with customers, explain to them about the changes that have occurred and take that as an opportunity for us to continue to grow our deposits. We are also very cognizant of our expenses. We have various projects underway to reduction and controllable expenses. We have adopted a moniker of ‘Go Green’, which we have talked about throughout the company as a way to improve expenses, reduce energy, reduce paper, and things that will benefit both customers and ourselves. We have identified cost savings in excess of $2 million, which will benefit us over the next 12 months.

With respect to the two-step, we are going to share with you information about the sale of houses and we provided you details of that. As we indicated in the press release, it appears to us that the non-performing loans in this category have peaked, and we are going to go into detail about that. Over the last two quarters, the provision for the two-step, losses for two-step have remained constant, and we continue to aggressively revalue the inventory through the valuation adjustments and the OREO gain or loss, which again, we will go through in more detail. We have a very dedicated team in the company managing the two-step program. I think we are making great progress and we hope to share some of that with you today in a lot more detail.

So with that, I'm going to turn it over to Anders.

Anders Giltvedt

Thank you, Bob. Good morning.

Let me start with the balance sheet. As we noted in the earnings release, due to the $177 million or 64% decline in the two-step portfolio, total loans contracted 3% over last 12 years. Beyond the two-step loans, the total loan portfolio grew 5% or relatively consistent with what we had expected. The total construction portfolio contracted to less than 16% of total loans at the end of the third quarter compared to 24% a year ago. And if you exclude the two-step loans the construction component now represents about 11% of the total portfolio at September 30.

The two-step loan balance was $98 million at the end of the third quarter and that is down 64%, from $275 million 12 months ago. As a consequence, two-step loans now represent under 5% of the total loan portfolio compared to 13% a year ago. At 9/30, the remaining unfunded commitments was only $2 million and down from $124 million 12 months ago. Since this program was discontinued approximately a year ago, total two-step commitments have declined about $300 million or 75% from $399 million to approximately $100 million.

Moving to mortgage category, which includes single family residential mortgages, non-standard mortgages, and home equity loans and lines grew $84 million over the past 12 months. The home equity portfolio increased $40 million or 18% over the same period, and at September 30, the home equity portfolio stood at approximately $265 million. The non-standard residential mortgage portfolio associated with two-step clients, that were moderated to retain their homes, stood at $33 million at the end of the third quarter, about $2 million over the past 90 days.

And with that, I would like to hand it over to Xandra, who will go into more detail on the commercial and commercial real estate portfolios.

Xandra McKeown

Thank you, Anders, and good morning everyone. I will first make a couple of comments about loan production over the quarter. New loan commitments booked during the third quarter of $110 million decreased 43% from the prior quarter, a similar quarter over quarter trend that we have seen in prior years. The quarter over quarter decrease was reflected in all categories. The term commercial real estate down $29 million, 41%; followed by C&I down $26 million or 39%; mortgage down $21 million or 53%; and construction down $7 million or 57%.

While the linked quarter trend in new loan production is similar to many prior years, the magnitude was certainly greater this quarter due to first of all, continuing decline in construction due to credit risk factors in this sector, increased field expectations in some of our loan categories, which slowed the pace of new investor term commercial real estate loan volume to the lowest quarterly level this year, economic factors and lagging consumer confidence causing business owners to curtail spending in investments, and lastly the administrative focus of our bankers in managing risks in their portfolios.

The breakdown of the $110 million in new loan commitments booked during the quarter is as follows – 38% or $42 million of that was in term commercial real estate origination, which was split fairly evenly between owner occupied and non-owner occupied. This compares to 37% in the second quarter. 37% or $41 million was in C&I origination versus 35% in the second quarter; 17% or $19 million within residential mortgage versus 21% in the second quarter; and 5% or $5 million within construction origination, versus 6% in the second quarter.

I will make a few comments on the growth of the loan portfolio, which excludes two-step balances. The bank’s loan portfolio grew $3.6 million on a linked-quarter basis, while demonstrating year over year growth of $103 million or 5.4%. Declines in the commercial and the non two-step construction categories were offset by growth in the real estate mortgage and term commercial real estate portfolios. The decline in the commercial category was attributable to paydowns from two large commercial borrowers, as well as the payoff of one large loan, which was for the purpose of property improvement. This loan was carried into commercial category due to non-real estate collateral, and it was repaid by the owner as originally planned.

Overall line of credit utilization was slightly less than the prior year. Even with new loan production in the term commercial real estate book declining on a linked quarter basis and more prominently in the investor portion of this book, the balance outstanding in the term commercial real estate portfolio grew on a linked quarter basis due to a slowing pace of prepayments.

As we look at the pipeline, the pipeline declined 12% from the prior quarter, and currently sits at the lowest level in many years, indicative of current market conditions. It is important for me to share with you that the pipeline contains no loans in the residential construction category, and the loans that are currently reflected in the pipeline are appropriate, given the types of loans that we are not pursuing at this moment due to market conditions. I will provide you with more color on that shortly.

While Hadley will provide an in-depth analysis of the make up of the construction loan portfolio, I'll share a couple of highlights with you, which exclude any reference to the two-step portfolio. Total, again non two-step construction commitments declined $34 million or almost 9% on a linked quarter basis, with a year-to-date decline of $97 million or 21.5%. All primary segments within this portfolio declined quarter over quarter. As I reflect back on the previous quarter, only one fairly-typical quarterly pattern continued, and that is the linked quarter decline in new loan production, that does typically come during the summer months. All other aspects of the quarter presented unique challenges that our bankers continue to step up to.

Continued weakness in the housing sector caused additional stress for builder and developer clients within our footprint. The lack of any strength in the summer sales season and declining values for homes put continued pressure on their cash and equity position. This resulted in a significant amount of time and energy from our bankers and our credit administration colleagues dedicated to working with these borrowers to oversee project financing and monitor credit facilities.

Impact to our C&I clients has been primarily those that have direct or indirect ties to the housing industry, with the largest sector of stress felt by the nursery segment of our agricultural portfolio, and even more specifically, nurseries which supply bare root and shade tree products to residential developers. The primary focus for our C&I clients over the past quarter was a heightened sensitivity to FDIC insurance coverage. In general, clients have increased the conversation level. They have with their banking team as they respond to frequent media coverage regarding the financial services industry. Our teams have done a superb job working with our clients to review regulatory changes to FDIC insurance coverage, and how this impacts the alternatives they have in structuring their deposit accounts to balance their need for earnings in FDIC coverage.

Given the current economic condition of our markets, we are providing the following guidance to our bankers for the types of lending opportunities that we will and will not entertain and I thought I would share that with you this morning. First of all, with our commercial real estate team. We do intend to remain visible and engaged in our markets, because ultimately, the weakness will cycle through. However, at this time, we are not pursuing any new residential or condo construction, whether that be land development or vertical, any new commercial construction projects are highly dependant upon the specific product as well as the specific submarket. As an example, retail office in suburban markets with high housing inventory overhang would be avoided. Hospitality with no track record of sustained occupancy would be avoided, others evaluated very selectively. Convalescent and assisted care facilities are considered on an exception-basis only due to concentration limits. And there are opportunities for properties such as light industrial in some submarkets or multi-family in many of our markets as they provide more favorable credit fundamentals.

In regards to our agricultural team, no expansion of the nursery segment due to concentration limits, as well as weakness experienced by the bare root shade tree growers. And lastly with our C&I team; while there are more opportunities for us to grow this segment of our portfolio, particularly in light of the depth of our expertise, we are first of all proceeding with caution, for borrowers that have any exposure to residential housing, we are proceeding with caution for contractors.

And in all cases, and in all elements of our business, it is clearly within the confines of favorable historical financial performance, strong management teams, sponsorship, as well as other solid credit fundamentals. Our culture and our strategy has always been one of strong engagement, and remaining both for the client, now more than ever this is being called upon as clients seek advice and counsel on a variety of financial topics.

And with that, that concludes my comments and I'll turn it back to Anders.

Anders Giltvedt

Thank you, Xandra. Let me go onto the deposit side and (inaudible). Third quarter average total deposits were down 1% for Q3 2007 with really only minor changes in deposit mix. With exception of the categories within the CD portfolio were the 100 K [ph] CDs decreased and 100 K category increased over the past year.

Average non-interest DDA held steady at 24% of average total deposits and that is a key, key measure for us, given our strategy. Business non-interest DDA accounts represented about 90% to our total non-interest DDA balances and over the past 12 months, the net account growth in the business DDAs were 6%. However, the average balance for accounts continued to decline in Q3, causing the total business DDA volume to remain relatively flat. For interest-bearing DDA deposits, the consumer segments represents about 88% of the balances, and year over year Q3, the total balance grew about 4%, with a 10% increase in the number of accounts being partially offset by the decline in average balance. The good news is that we are continuing to grow the account base for both business and consumers.

I should also note that despite the reported loss in quarter, the bank total capital measured approximately 10.78% at September 30, up from 10.57% a year ago. With the strong economic headwinds we have seen, we have managed our total risk rated assets very tightly over the past few quarters.

Okay, let me turn over to the income statement, and before I go into the specific details, let me spend a couple of minutes on the two-step portfolio, which we are managing and tracking separately from the rest of bank. At 9/30, as I mentioned, the total commitment had declined to $100 million, or negative 60% from – or over 60% from $158 million at June 30. The 32 OREO and short sales we completed in Q3 totaled approximately $9.3 million and came in very close to our sales forecast. At this point, we feel very good about this sales momentum. We are seeing interest in the properties across geography, price range, and completion status. During the third quarter, total two-step NPAs increased a modest $2 million, non-accruals declined 16 (inaudible) properties came into accrual, and OREO increased by $18 million, and we took ownership of more properties.

The overall impact to the income statement from the two-step portfolio, excluding the cost of carrying the NPAs was approximately $5.1 million in the third quarter. That is the impact essentially quite similar to the impact we had in both Q1 and Q2 of 2008. Let me go into the key drivers of the impact. First, the provision for the two-step loans, as Bob mentioned, was $2 million in the quarter. As noted in the earnings release, the probability of default and severity of loss upon default increased slightly compared to the model assumption we established at year-end 2007. Given there is only $15 million in two-step accruing loans at September 30, 2008 however, the default rate is not expected to have a material impact on future provisional requirements.

The actual loss rate, based on 19 pending and 58 closed two-step sales as of September 30 also trended up slightly. However, it is important to understand that the provision for the two-step portfolio to date does reflect that we have re-appraised 70% of the $128 million in two-step non-performing assets at the end of the quarter. Those gains over process, all properties are re-appraised within 45 days of such property expected for closed space. If current market trends hold, there may be additional fruition for re-appraised properties in Q4. Consistent with GAAP and our fast practice, there is no general valuation allowance in the loan loss model, since all the non-accrual two-step loans have already been individually impaired. The second impact came from interest reversals, which amounted to $0.5 million in Q3. Such interest reversals are expected to continue to decline in the future.

Thirdly, the combined Q3 OREO evaluation adjustment and OREO loss impact was approximately $1.4 million and this consisted of $1.1 million in write-down from offset [ph] re-appraisals within the total $45 million OREO portfolio, and a $0.3 million loss on the completed sales of 19 OREO properties. The minor OREO loss on sales indicates that the write-down of the portfolios are reasonable, relative the actual sales price obtained for properties. While it is speculative to project future condition of the housing market at this point, they (inaudible) on the forecast for a number of re-appraisals to be completed in Q4, we might additional OREO valuation adjustments to continue in the fourth quarter.

Fourth, and finally, the collection and disposition expenses directly associated with two-step loan and OREO portfolios amounted to approximately $1.2 million in the quarter, and this included legal, personnel, and operating costs. This was up slightly from Q2. We expect the number of properties taken into OREO and the associated collection – and disposition expenses to peak in Q4 moderately above Q3 numbers. At this point, looking globally at the impact of the two-step portfolio, we believe that the quarterly negative run rate earnings impact to trail off as we move into 2009.

Our current pending sales activity indicates that property sales volume will continue to improve in Q4. This combined with fewer properties defaulting than in prior quarters indicate that the two-step balance has peaked in Q3. Within the two-step NPAs, we expect about $40 million to move from non-accruals to OREO in Q4, increasing the number of properties we are able to sell and move up our balance sheet.

Okay, let me turn to the income statement. The net interest income declined $6 million from the same quarter in 2007, as the construction portfolio declined, and then our margin contracted approximately 92 basis points to 402. As noted in the earnings release, the value of non-interest bearing deposits reduced the margin by approximately 4 basis points, while the spread contracted 52 basis points. And the spread was impacted by lower construction fees, which reduced the margin at spread at about 16 basis points, interest reversal and cost to carry of the two-step NPAs affected the margin about 23 basis points.

Finally, a very competitive environment for deposits in our market also affected our view to client deposit rates with the current market interest rates. The financial market turbulence and the reaction by the financial services industry locally was very evident in the deposit pricing surveys in the later stages of Q3. I think the market headlines have affected both how businesses and consumers thanks about their short term cash on investments. We are at this point hopeful that the governmental latest actions will return pricing to more normal spreads to fund et cetera looking forward. A linked quarter, the net interest income was substantially flat at lower earning average earning assets was offset by lower interest reversal, the latter being the main source of the linked increase in our margin.

In terms of fee income, as Bob mentioned, we recorded $6.3 million pretax OTTI charges in the quarter. As announced on September 10, we recorded an OTTI charge on the Freddie Mac preferred stock, and the final pretax charge was $2.8 million. The $0.4 million [ph] OTTI charge on the Lehman bonds. In addition to the OTTI charges on the Lehman and Freddie Mac bonds, we also took a $3.1 million OTTI charge for two securities backed by pools of bank and insurance company trust preferred debt. The market for these bonds has become extremely illiquid. It’s only sporadic and potentially for sale which made a very complex valuation for us. We utilized a third party pricing provider to provide a fair value estimates, which resulted in impairments of 59% and 47% for those two bonds. It should be noted however, that first, neither of these two securities are been downgraded. One is A minus, the other one is AA. The cash flow from the securities has not changed from our initial forecast. We had a significant cushion of both bonds to subordinated instruments.

And we also believe that our capital purchase program recently announced by the Treasury could provide a substantial support to majority of the banks in the pools. Needless to say, the determination of whether an OTTI exist, it is very subjective under the current fluid circumstances. However, we are determining consultation with our independent auditors to take an OTTI charge on these two trust securities at the magnitude and duration of the impairment made it difficult for us to project the full recovery within the reasonable time.

Okay, to rest of the (inaudible) business, as a result of the Freddie account growth in both business and consumer transaction accounts and cards associated with opening accounts, our business account deposit surcharges grew a very strong 30% or over $1 million from the same quarter a year ago. The transaction volume expanding at a trend northward. Our payment system business also continued to perform very well with revenues up $0.2 million or 10% from Q3 last year. Year-over-year gains from sales were around 30%, and trust funds and investment revenues declined 25%. Both these businesses were clearly affected by the term loan in the credit and equity market. As noted previously, we recorded a (inaudible) evaluation adjustment on properties in the two-step portfolio and a $0.3 million loss on disposition on OREO properties, both of which are recorded as an offset to (inaudible) income.

Total non-interest expense declined slightly from the same quarter in 2007, and that was due to significantly lower performance pay expense, which also drove total personnel cost down 17% or $2.3 million from the same quarter last year. This was partially offset by salary increases and materially lower deferred cost for salary reimbursements, which contracted over 50% or $1 million from the same quarter last year, and that was due to the substantial drop in loan origination in the construction segment. The decline in personnel costs was also partially offset by $1.2 million in collection and disposition expense related to the two-step program and a $5.5 million increase in FDIC insurance premium. Linked quarter total non-interest expense fell by $1.1 million or 5%.

With that I would like to hand it over to Hadley to discuss our credit side.

Hadley Robbins

Thank you, Anders. Good morning everyone. My comments this morning will focus on the two-step residential construction portfolio, followed by a separate overview of the bank’s non-two-step portfolio.

I’ll start with the two step portfolio. My comments will be brief given the extensive coverage on this topic by Anders. At September 30, 2008 there was about $98 million in outstanding loan portfolio for two-step loans. Accruing loans were $15 million and non-accruing loans were $83 million. The two-step allowance for credit losses at September 30 was $1.5 million or 10% of accruing loan balances.

The level of our reserve has continued to remain reasonably consistent as a percentage of the accruing loans averaging about 11% since December 31, 2007, when the two-step reserve was established. To a large degree, this reflects the consistent application of assumptions that drive our reserve model. It is important to remember that our reserve model for calculating the two-step allowance for credit losses is linked to the performing loans or accruing loans within the portfolio. The population of non-accrual loans is excluded from the allowance calculation. Separate process is used for capturing loss exposure associated with non-accrual loans. At the time a loan moves from performing to non-performing status, the loan is placed on non-accrual. When the loans are classified non-accrual, they are measured individually for impairment as collateral-dependent loans. This process involves a loan-by-loan assessment of impairment or loss based on the fair value of collateral, net of selling costs. When fair value of collateral is less than the loan amount, the difference is promptly charged off against the allowance for credit losses.

Through September 30, $17.5 million in charge-offs had been processed against the two-step allowance for credit losses related to the $83 million in non-accrual two-step loans. This represents a charge off percentage of approximately 18% relative to the original loan balance for impairment.

At this point, I’d like to provide a few brief observations about the two-step loan portfolio activity during the quarter. At quarter end, there were 313 two-step loans with outstanding commitments of $100 million, down from 480 loans and a $158 million in commitments at June 30, 2008. As Anders mentioned earlier, we believe the two-step NPA peaked. We are also at the point where we are shifting emphasis for managing the collection of active loans to managing the disposition of OREO properties. During this transition, non-accrual loans will decline and OREO properties will build. This transition started to accelerate, as Anders mentioned, in the third quarter.

Third quarter net charge-offs were $5.8 million versus $8.5 million in the second quarter, largely because a lower number of new loans were added to non-accruals.

I would like to talk now about the non-two-step portfolio. At September 30, 2008, outstanding non-two-step loans in the bank’s portfolio were $2 billion or approximately 95% of total bank loans. Delinquency in the non-two-step portfolio defined as loans 30 days to 89 days past due increased 7 basis points during the third quarter and 47 basis points at June 30 to 54 basis points at September 30. The increase in delinquency is primarily related to residential construction loans, which had delinquency at about 38% or 38 basis points of non-two-step loans.

During the third quarter we continued to experience a negative risk rating migration in our C&I and residential development and construction portfolios. Within the bank’s C&I category, borrowers closely tied to the housing industry demonstrated the most weakness; examples include wholesale distributors of building materials and nurseries specializing in landscaping products for new residential development. Most residential developers and builders continue to battle unfavorable market conditions during the third quarter. Developers report that it is extremely difficult to sell lots, common things that the buyers are delaying purchases during growing level of economic uncertainty and builders report that construction financing is simply not available.

As the downturn in housing continues, an increasing amount of pressure will be placed on remaining cash and collateral resources of builders and developers to hold properties. Until housing market conditions, improve these circumstances will place significant financial pressure on both builders and developers.

At September 30, the bank’s total outstanding loans in residential construction were $169 million. This portfolio consists of $24 million in land, site developments of $71 million and vertical construction of $74 million. Overall delinquency in the residential construction portfolio as a percentage of outstanding residential construction loans was 4.6%, up from 1.1% at June 30.

Non-accrual loans were 15.6% of outstanding residential construction loans, up from 4.5% in the previous quarter. At September 30, the bank’s commercial construction loans totaling $109 million were performing satisfactorily. This portfolio consists of land at $21 million, site development of $77,000 and vertical construction of $88 million. Delinquency in the commercial construction portfolio as a percent of outstanding commercial construction loans was 74 basis points, as compared 7 basis points at June 30. This time, no commercial construction loans have been place on non-accruals.

Our term commercial real estate loans represent the largest component of the bank’s real estate portfolio. At September 30, outstanding term real estate loans totaled $867 million representing about 43% of all non-two-step loans. The properties in this portfolio are primarily located in three counties within Oregon – Multnomah, Marion, and Washington County. Property types are mixed with office and medical buildings representing the most significant product types. And at September 30, loans 30 to 89 days past due were about 3 basis points of the term real estate portfolio.

Our H&Q [ph] portfolio also continued to perform satisfactorily. At quarter end, outstanding loans were $266 million, delinquency was 24 basis points, non-accruals were 24 basis points, and year to date charge offs were 3 basis points. Line utilization increased slightly from 53% at June 30 to 54% at September 30.

Non-two-step non-performing assets increased $34 million from $22 million at June 30 to $56 million at September 30, or 2.16% of total non-two-step NPA. The third quarter jump in NPA is principally linked to an increase in non-accrual loans of $32 million and a $2 million increase in OREO. The increase is OREO is tied to taking ownership of the three residential construction projects that include about 12 individual properties. The $32 million increase in non-accrual loans is largely driven by higher levels of non-accrual loans in both the non-standard residential mortgage program and in the residential construction portfolio.

During the third quarter, non-accrual residential development and construction loans increased about $18.4 million to $26 million at September 30. These loans are mainly located in Clark County in the state of Washington and Marion and Deschutes counties in the state of Oregon.

Non-standard mortgage loans, which represent mortgages provided to previous two-step borrowers from the motivated retainer properties, totaled $33 million at September 30. During the third quarter, non-accrual non-two-step mortgage loans increased approximately $6.2 million to $11.8 million. We expect the level of non-standard loans and non-accrual non-standard loans to peak in the fourth quarter and decline thereafter, which follows the runoff of maturing two-step loans.

Delinquent non-standard loans 30 to 89 days past due are about $800,000 or 2.5% at quarter end. At September 30, 2008, all non-two-step related non-accrual loans had been measured for impairment and written down to the fair value of collateral less expected selling cost.

Non-two-step charge offs were $5.9 million in the third quarter or about 1.1% of annualized average loans. This compares to $2.9 million or 54 basis points at June 30. The higher level of charge off activity was largely related to $4.2 million in net charge offs associated with residential construction models. The total non-two-step provision for credit losses was higher in the third quarter at $7.1 million, as compared to $4 million in the second quarter. Discrediting downgrades in net charge offs were the primary elements contributing to third quarter provision expense. Provision expense exceeded net charge offs by $1.2 million, which contributed to increasing allowance for credit losses percentage about 4 basis points. At September 30, the allowance for credit losses associated with the non-two-step bank portfolio was $33 million or about 1.64% of outstanding non-two-step loans compared to 1.58% at the end of the second quarter.

Overall, the combined two-step and non two-step allowance for credit losses is $34.4 million or 163 basis points of the total outstanding loans. At this time, we believe the allowance for credit losses is adequate to cover losses inherent in the total loan portfolio. However, the continuation of economic uncertainties may require increasing the level of reserves in future periods.

Some looking-forward statements regarding the two-step portfolio. Looking forward the fourth quarter of 2008, the number of homes the bank will take ownership will continue to increase and accelerate. During the fourth quarter, we expect to book anywhere from 105 to 130 properties in OREO. By the end of the fourth quarter, we expect the number of OREO properties to range between 240 and 270 properties with a book value of approximately $80 million to $90 million.

We expect non-accrual balances to drop below 45 million and accruing loans to decline about $4 million. The non two-step portfolio, at this point, we are not looking for materially improvement in the residential housing sector through 2009. As mentioned previously, these conditions will continue to put financial pressure on our builders and developers and C&I businesses dependent upon residential home activity.

I expect fourth quarter provision expense to be largely driven by the deterioration of residential construction and site development loans in our portfolio. Overall, it is likely that fourth quarter provision expense will approach or exceed levels seen in the third quarter.

Back to you, Anders.

Anders Giltvedt

Thank you, Hadley. Just a couple of observations on the local economy and the housing market. The seasonally adjusted Oregon non-farm payroll employment declined 0.7% in September from the year ago, with the drop off largely occurring over the past two months, pushing the unemployment rate to 6.4% up from 5.5% at the end of June and 5.4% 12 months ago. The negative year over year comparisons are in residential housing related with products manufacturing and the residential construction employment sectors as well as transportation, retail trade, and real estate.

These areas were partially offset by growth in education, healthcare and governmental employment sectors year over year. With respect to the local housing statistics that I referred to a couple of times in the past, the September 2008 monthly inventory in the counties where we are doing business was up 20% year over year, to a 12 month inventory, which is approximately flat from the month of June. This was caused by a 16% decline in sales volume and a 4% increase year over year in the absolute number of units sold, both those two variables are the best we have seen for the last two and a half years.

During the third quarter, the total inventory actually declined by 4% versus an increase in the inventory of 5% in the same quarter in 2007. And I think that is clearly a reflection of the inflow of new listings coming down materially.

With respect to the company outlook for 2009, with help of local economy and the impact on the housing market is the key driver. As noted before the Pacific Northwest is now moving into its historically slow home selling season and a large number of two-step properties, as Hadley indicated, are expected to come into OREO. So, we are planning to carry a sizable number of properties in our portfolio into to 2009. And our final loss on disposition of such properties and the timing of those sales will be dictated by the condition of the housing market. But as I previously mentioned, the current sales momentum is favorable.

The other important variable is how the non-construction portfolio will hold up, as Bob indicated, both C&I, term commercial real estate, and home equity is holding up well at this point. But the economy has certainly influenced the collateral provision for future credit migration within those portfolios.

Including the drop-off in the two-step portfolio and the shift of non-accrual two-step loans into OREO, we anticipate the total loan portfolio to decline at about the 5% range for the full year of 2008, which is not all that different than what we believe is going into the year. We project the net-term interest margin in the 3.80% to 4% range and that range again reflects lower construction balances and fees. And we also expect to see continued strong competition for core deposits, especially as the financial market turmoil continues.

We do, however, hope that the recently enacted unlimited insurance annulment screen account will help our DDA balances, given our trend in account growth and what our business focus is, we have a very nice base of customers with non-interest bearing accounts and we hope to leverage off that as we look forward.

In context of the environment and potential for further slowing, as Bob indicated, we are managing our expense very tightly, and particular opportunity to do so without affecting our strong customer relationship. We do anticipate some positive operating leverage from the locations we have added, particularly in the Portland Vancouver area, where we only have a 3% market share over very large market with, what I would say, surely very well placed locations in the market.

And with that, I would like to turn it back to Bob.

Bob Sznewajs

Okay, thanks Anders. Just few closing thoughts and then we will open up for questions. As you can imagine, we have tremendous communication with our people during these times because to the management team, it is very important that our people understand the environment around and the challenges we face so they can answer questions from customers. And I am very pleased with the reaction of our people with the customer because all the management teams have virtually daily contact with customers at some level and it is clear to me that the message – the messages that we are giving to our people are filtering through to the customers and I think our people are doing a terrific job. It is becoming clear from a year ago when we first talked about the two-step to now that it is much more defined. There is much more certainty about what we are dealing with. And I think it is fair to say that a year from now, the impact of the two-step will be dramatically different than what it has been in 2008 and for the better, obviously.

The decline in the two-step will give us the opportunity to continue lending into the markets as we redeploy those assets that are now identified as non-performers or OREO and as those pay down and mature, that capital will be redeployed into the marketplace. The experience of our lending people, the strength of franchise, our historic commitment to C&I lending, which drives the large core of demand deposit – business demand deposits we have is still intact. And so we are going to be more than ready to meet the market demands and to continue to take market share as we redeploy our capital and use the experienced lenders that we have in the marketplace.

So, the amount of capital is now tied up relative to the two-step will be clearly redeployed into the marketplace. And as evidenced by the FDIC data that I talked about earlier we have retained our number one deposit share capabilities in some very important markets – of any financial institutions in the state, and then as Anders mentioned in Portland, while we are number one community bank we only have 3%. So, from my perspective we got to ways to go to leverage the franchise and to execute our strategy, which I think, even though we are in different economic times, it still allows us to be successful in the marketplace. So, we are excited about the opportunity to redeploy the capital in the marketplace and to continue to execute our plan and to keep in mind the cautiousness that Xandra pointed out in certain segments which we are going to be obviously careful about and until the market turns, we are going to continue to exercise that discretion.

While clearly the residential construction area is in its – having its troubles, I think it is well to keep in mind that the rest of our portfolios are performing very well. Clearly, there is going to be things along the way, but systemically, our home equity portfolio has shown very well compared to the industry. Hadley covered what is happening in term commercial real estate, which is a vast majority of our book. And so I feel very good about that. And as we work through the economic issues that we face, the local issues, and the remaining piece of the two-step, I believe we are well poised to actively participate in this economy and to continue to grow our business consistent with our historic business plan.

So, with that, I am going to open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Matthew Clark. Your line is open.

Matthew Clark

Hey, good morning guys.

Bob Sznewajs

Good morning.

Matthew Clark

Can you just hone in on that mortgage – that the real estate mortgage loans that are other than non-standard in terms of the non-accruals in the quarter, you know from going from 2 million to 7 million, can you give us, I guess, how many relationships are in there, what type of deterioration or what type of credit is that and maybe the related size of that portfolio?

Hadley Robbins

This is Hadley. Well, that is the non-standard portfolio and as I mentioned, we have about $33 million in outstanding loans in that particular portfolio and that portfolio was secured by single family residences. And we got non-accruals increased over second quarter about 6 million and are about 12 million of accruals there. The non-standard program we don’t anticipate to see much growth. It is going to peak and start to decline, both in terms of dollars and outstanding dollars relative to loans and non-accrual balances. That program was established as an alternative permanent or bridge financing arrangement for two-step borrowers and it was our effort to assist these people towards paying our loans. And I think that a little activity frankly has occurred in that portfolio since May.

Matthew Clark

I am sorry. I guess I was getting to the other than non-standard mortgage loans in terms of the non-accruals they are going from $2 million to $7 million, anything in particular there?

Hadley Robbins

Well, no. There is one property that is primarily driving that. And we don’t believe have exposure on that.

Matthew Clark

Okay, thank you. And then, can you update us on your – can you maybe just hit on – I don’t know if this number came across during the call or not, but the C&I delinquency rate in the quarter – this quarter versus last and then if you can address your nursery exposure overall and the related problems there to date?

Hadley Robbins

Well, the level of delinquency is slight relative to the overall C&I portfolio in terms of the change and the delinquency is primarily driven by loans that are related to the housing sector directly, primarily and to some degree less impacted as they are indirect. The most significant with our portfolio has been the nurseries. The nurseries have been impacted as they attempt to work down inventories associated with bare root stock designated to shift to ultimately to be put into subdivisions. And so as that activity has slow down their ability to generate revenue has slowed down their ability to achieve margins, the profit they would achieve as this (inaudible) been consequently have had some difficulties. I do believe that overall, the delinquency levels are fairly low and we believe that we have good plans in place for those that have demonstrated a bit of difficulty at this point.

Matthew Clark

Okay. And then finally, your expectations of loss, I guess, what’s your confidence in – you have had some pretty good experience so far in terms of revaluations and subsequent disposition of properties in the two step portfolio. I am just curious about I think there was some guidance given, at least in the upcoming quarter and going forward. But as it relates to further OREO re-vals, and write-downs, which is again I guess your increased confidence in those numbers as we enter the winter months, and you will have a lot more inventory.

Hadley Robbins

Yes, well, what we have seen, Matt, over the last month and a half, despite all the things that have been occurring in the financial markets, we have seen a lot of interest in the properties. And, you know, as I indicated the sales momentum, it is quite favorable as we speak right now, also into the fourth quarter. I think that because of the number of properties going into OREO in the fourth quarter, there could be some additional provision on those and also as the sales and number of appraisals increases going forward, there maybe some additional evaluation allowance. Overall, I would say the trend is probably similar to slightly higher from an overall impact in the fourth quarter, and again as Bob indicated, the first quarter and second quarter of 2009, the impact from the various components should trail off significantly as we see it right now.

Matthew Clark

Okay, and then, if I may, one quick one, with the TARP program, it sounds like you are alluding to redeploying capital and talking about your strong market shares so I assume you are setting yourself up to at least apply for the TARP. Can you update us there in terms of your appetite to take-on capital there?

Bob Sznewajs

Let me deal with that. What I was referring to is as we did in 2008 where we had close to $300 million of commitments and that work just played down to close to $100 million, we were able to use that reduction in commitment to expand lending in other areas and the non two-step portfolio year over year loan portfolio I think is up around 3% to 5%. With further contraction in the two-step commitments, primarily in the non-performing through the next 12 months there are also capability to lend. Specifically with regard to capital, that is something that we are looking at all the time, we are going to evaluate every option that is available to us.

Matthew Clark

Okay thanks.

Operator

Thank you. Our next question comes from Jeff Rulis, your line is open.

Jeff Rulis – D. A. Davidson & Co.

Good morning.

Bob Sznewajs

Good morning.

Jeff Rulis – D. A. Davidson & Co.

With the loss this quarter just sort of a basic question looking at the total risk based capital ratio at the bank and that improved in the quarter, how are you accomplishing that? Is it just that you are managing your risk-weighted assets or you are down streaming any capital from the holding company?

Anders Giltvedt

No. What we have seen over the last 12 months, if you look at the specific portfolio types, construction both in two-step and non two-step, the unused commitments have declined immaterially. Just to give you a flavor, in total, the unused commitments declined by about $230 million of the total portfolio substantially all of that was in the construction, and that was a combination of two-step and a non two-step. Obviously the loan origination on non two-step had been and continued to be significantly lower than what we experienced last year. So the utilization rate on the risk-weighted assets is much, much higher. That’s the prime driver.

Jeff Rulis – D. A. Davidson & Co.

Then just a follow-up on the TARP program, I don’t know if it was all that clear, I guess in your discussions a research of the program would you have any reason to believe that you would not be eligible for that capital?

Bob Sznewajs

I think I would just stand by my previous comments to Matt, Jeff. We are looking at and evaluating it and I will just stand by those comments.

Jeff Rulis – D. A. Davidson & Co.

Okay. Just a quick follow-up for Hadley, I think I missed the detail on – you expect non-accrual balance for the two-step loans to be below what level in Q4?

Hadley Robbins

I think that’s $4 million. Hang on a minute; we have got the wrong number here. The non-accrual number, we expect it to be below $45 million and the accruing loans below $4 million.

Anders Giltvedt

Due to the movement of a substantial portion of the non-accruals into OREO obviously.

Jeff Rulis – D. A. Davidson & Co.

Got it. Thank you.

Operator

Thank you. Our next question comes from Joe Morford; your line is open sir.

Joe Morford – RBC Capital Markets

Thanks. Good morning everyone.

Anders Giltvedt

Good morning.

Joe Morford – RBC Capital Markets

I guess first I just wondered if you could get a little more details on the inflows into the non-performing category and the residential construction development portfolio and the number of projects, the types of projects and the problems that you are experiencing and just if you could the range of write-downs kind of taken in the quarter, is there movement in non-performing?

Hadley Robbins

As I mentioned in my comments in the construction section of it, most of the problems that we have got in the non-accrual market referring in the Clark County, Marion County, and the Shoots County [ph], and as far as the Shoots County exposure beyond what we have got today, it is not great. Most of our construction and development activity is in the Portland metropolitan area which includes Clark County. And the problems that developers throughout the region are experiencing are simply the activity for home sales is down. As a consequence that puts a squeeze on their ability to generate sales which allows them to successfully move through their development either at selling lots or building homes. Each of the loans that we have got in our group of loans that we track very closely and are working, we have got people assigned to them, that have action plans associated with each one of those credits, and we believe that for the most part we have got good cooperation from each of the borrowers in finding good solutions. I have mentioned that charge-offs by and large in the quarter were related to these particular loans and that I expect the continued pressure on these builders particularly through the fourth quarter and probably the first half of 2009. So, we’ll work through this portfolio with the builders with the concept of trying to find mutual solutions that work through these struggles that we have.

Joe Morford – RBC Capital Markets

Okay, fair enough. Is this just specific to this quarter, is it a handful of projects that were coming into non-performing, I am just trying to get a bit of sense of the magnitude of the –

Hadley Robbins

Yes, they were let’s call it a handful of projects that moved in and I think that that is the probably the best way for me to describe it at this point.

Joe Morford – RBC Capital Markets

Okay. Then the other question I had I guess for Anders, I think you said the near-term margin expectations were in the 3.80% to 4% range and is that largely just a – you mentioned deposit pricing but also taking into account the latest rate cut, are you expecting much in the way of further interest reversals there –

Anders Giltvedt

I think it is a combination – given what we are seeing lately there has not been a lot of movement on the deposit pricing side despite what other interest rates have been doing and it is just very hard for us to tell whether that is going to continue or not. We obviously are not a price setter in the portfolio [ph] market which is a big market for us. We just have to adjust to what other people are doing. The other impact though is the higher level of carrying non-performing non two-step loans which has impacted obviously the margin as well.

Joe Morford – RBC Capital Markets

Great, thanks very much.

Anders Giltvedt

You are welcome.

Operator

Thank you. (Operator instructions) Our next question comes from Ross Haberman, your line is open.

Ross Haberman – Haberman Fund

Good morning gentlemen, how are you?

Bob Sznewajs

Fine, Ross.

Ross Haberman – Haberman Fund

A quick question for Anders, I think you said on the two-steps you sold 19 units and I was wondering the ultimate price you got was within the – I think you said 17% or 18% charge-offs which you had marked them down to, if my recollection is right?

Anders Giltvedt

No. What Hadley was referring to was the average write-down on the non-accruals to date is around 17% I believe. The sales, the final sales price, it is actually very, very hard and difficult to come up with a general assessment of the sales and there are a number of reason for that. One is that, the most important one is that some of the sales have been on incomplete properties where it is difficult to assess really what you are comparing against. So, if you compare it against the regional appraised value of the completed home, you obviously have a large discount and then you have to, you know, perform a subjective [ph] adjustment to what the adjusted appraisal might have been. So the percentage loss calculation is somewhat meaningless and also the weighted average price relative to what we had in the metrics is different as well in terms of properties pending or sold relative to the total in the universe. You have a lot of things going on in there. I think the most meaningful way to think about this is that overall in the portfolio, we had an approximately 2% provision against the overall portfolio in the quarter and approximately 1% impact while of a large amount of re-appraised loans within the quarter which is the valuation adjustment we referred to. The bottom line measure from my perspective is to look at the gain/loss that we get on the final sale and so far from my perspective that have been modest, which tells me that our appraisal process that we have in place now, which I indicated is re-appraising all individual properties within 45 states are going to OREO is working well for us.

Ross Haberman – Haberman Fund

How can we feel some comfort that this 17% – I guess the 18% which you marked down the two-steps is sufficient? What can we look at or can you give us some flavor that that 18% I guess which you marked down from the original to the non-accrual two-steps is turning out to be as good a guess as you can make?

Anders Giltvedt

I think again, the experience you have seen to date Ross is that when we re-appraise the properties we have seen some additional deterioration in the appraisals from what we had originally. So, that has not been I would say significant in terms of a percentage change. There has been some and that again is reflected in the ongoing provision for the loan side which is generated by either short sales or by re-appraisals on properties prior to them going into OREO and then secondarily within the OREO portfolio, as we get new appraisals on those, that we get the valuation adjustment. So I think you would have to look at those two numbers to assess kind of the current trends I guess in the appraisals in the market.

Ross Haberman – Haberman Fund

I think you said that the two-step OREO was going to go up from about $44 million I think you said to somewhere between $80 million to $90 million over the next quarter or so.

Anders Giltvedt

Well, obviously that will depend on the sale but that is probably at the range.

Ross Haberman – Haberman Fund

Yes. Now when you say $80 million or $90 million, is that going to be carried out or is that going to be marked down to what you call a bulk sale price or how do you mark that down when it goes from the non-accrual into the OREO?

Anders Giltvedt

All the OREOs are individually marked down to appraised value less expected sales cost at the time they are moving to OREO.

Ross Haberman – Haberman Fund

How do you consider the bulk sale of that and would those prices be another 20% or 30% below what you accounted at?

Anders Giltvedt

What I'm trying to say, Ross, is that we have had a number of interested parties in segments of the portfolio, but what our results say is that due to the diversity in products and locations it is hard to bulk them because there are different scenarios playing out in each market.

Ross Haberman – Haberman Fund

Some are half-filled, some are lots, some are fully built and so on and so forth.

Anders Giltvedt

Yes and a lot of them are individual homes in a separate location; they are not part of a development so it is difficult for a bulk seller. Although we did not preclude that opportunity maybe at some point in the future but given what we are seeing in terms of the sales interesting the properties right now, I do not think that is really a viable solution.

Ross Haberman – Haberman Fund

Okay. One final question for Bob, could you address the going away of Washington Mutual and how you see that affecting you guys both on the loan and the deposit side?

Bob Sznewajs

I would say a couple of things. On the loan side, probably not very much, on direct loans to customers because their C&I business was very modest I guess, to state the least, because you recall three or four years ago they actually kind of exited that business and they were making some moves to try to get back but I don’t think that ever really materialized. On the deposit side, I think we are going to see JPMorgan Chase price consistent with their pricing philosophy and their balance sheet needs and I don’t know this for a fact but I would speculate that as they reduce the balance sheet of what they acquired, that will take pressure off their funding needs and they will also have the ability to raise funds at a lower cost than what Washington Mutual did and we have already seen some signs of favorable pricing associated with the change in ownership there.

Ross Haberman – Haberman Fund

Will that take overall pressure off of the Portland deposit market because you don’t have the state behemoth giving away the deposits or –?

Bob Sznewajs

I think it will help it but overall, as Anders pointed out, the traditional spread between like money market rates and Fed funds that has not returned to historic levels in a general sense and we are hopeful that as the financial markets improve and more liquidity with reference made to the TED spread and all that, that will have a return to more historical spreads or pricing relative to where Fed funds is and we are hopeful also that the recent actions taken by the FDIC will have a favorable impact as well as there being less activity with construction lending that that side of the balance sheet should be reduced and which we will expect then less pressure on the liability side. So I think it is going to take a little bit of a while but that would be, I don’t know if it is a hope or an expectation at this time.

Ross Haberman – Haberman Fund

Okay, thanks guys.

Bob Sznewajs

Okay.

Operator

Thank you. (Operator instructions) Our next question comes from Lewis Feldman, your line is open.

Lewis Feldman – Wells Capital Management

Thank you. Let me start with a question about the provision. Given all the other charges, why did you take a provision that did not cover your overall charge-offs?

Hadley Robbins

One way to think about the provisioning in the quarter is to kind of think about it in terms of first, we have got reservable loans that are captured by our allowance for credit losses and allowance included in that is a flat-to-down slightly. Secondarily, there are impaired loans and the level of impaired loans has increased both in terms of normal [ph] and dollar amount outstanding. In the process as we discussed in the impairment is to evaluate them relative to fair market value and these are collateral dependent impaired loans as are in fact selling costs and if a loss results, we then process that loss. I am not talking about non two-step at this point, alright?

Lewis Feldman – Wells Capital Management

Yes. You only provided $2 million for two-step most of your provision, the $7 million, was for the non two-step.

Hadley Robbins

That is right. And it is important to make this distinction between what is under the ACL provisioning process and what is under the impairment process and most of the provisioning has been driven by the impairment process. There is approximately – these are impaired loans that we have had charge-offs with and it is an approximate number, about $70 million and impaired loans with about $9.5 million in charge-offs associated with it. And those charge-offs are running through the provision of course and we are replacing it but we are not holding it within the provision. So, that pretty much, is one way to think about it.

Lewis Feldman – Wells Capital Management

Okay. Kind of a follow-up on that, given the late arrival of the press release, was there any moving around of any of those numbers late until yesterday afternoon and evening in terms of –

Bob Sznewajs

No, I can respond to that, thank you for noticing. I had to go to bed Anders, it was late. I think PR News hadn’t issued a number of tables.

Lewis Feldman – Wells Capital Management

Okay. In terms of the two-step program, in breaking down non-performing and still performing, can you break it down as to how many of those have started, have moved to actual vertical construction? How many actual houses do you have within that or how many actual lots? Can you break that out?

Hadley Robbins

Was that two-step?

Lewis Feldman – Wells Capital Management

Within the two-step.

Anders Giltvedt

Okay. In terms of dollars, very little, the lot pieces are very, very minor. In terms of a completion percentage, what we are seeing is that we are actually seeing a lot of interest in incomplete homes. We believe that it is a result of many of the smaller builders in our market looking for projects. And so, that has been a good thing. I don’t think – going into this, we thought that may be a negative aspect that at least as of lately it has actually turned around to be different. As I also indicated earlier in terms of the housing inventories that I actually just received this morning, the number of new homes coming on the market is very insignificant compared to what it was last year at this time and we should expect that to continue. So I think both with respect to incomplete homes that they (inaudible) interest getting some work and the people moving into are again are in a lot of these areas looking for new homes, the number of new homes being available to them is shrinking and that appears to be a nice support for us now. So, the completion percentage overall is continuing to increase because we are selling actually more incomplete homes.

Lewis Feldman – Wells Capital Management

So should we infer that most of the remaining within what you have divided between the two categories are incomplete as opposed to actual finished homes?

Anders Giltvedt

No. I think at this particular point in terms of dollar volume, over 80% is completed.

Lewis Feldman – Wells Capital Management

Okay, alright. Shifting back to the non two-step for the builders and the suppliers, how far down the food chain are you in terms of claims? Are you being impacted by other participants, other lines, are you behind anybody or are you in front in terms of your ability to recover some of your credit lines?

Hadley Robbins

Generally, we are the primary bank. That is really kind of the mode that we have taken is to be the primary bank in relationship so that we control the relationship, the documentation, the collateral perfection and our ability to work out the credit. So, that applies to a predominant portion of our portfolio.

Lewis Feldman – Wells Capital Management

Okay and then one last tough one and probably I am going to send this one to you, Bob. Given the probable overall slowdown in general economic activity, can you touch on your thoughts for what kind of activity you would see within your payment systems going forward? Do you expect continued growth due to market share gains or will there be other factors impacting it?

Bob Sznewajs

Well, I think the rate of increase will decline because we have ramped up, we have grown like a 30% compound annual growth rate and that growth rate will decline in a – a lot of this is governed by a number of new accounts, Lewis. So, we continue to see on our mailings that we do pretty consistent success rate on those mailings and so we expect that the number of net new accounts will grow, but will be at a slower rate than what it has been in the past. So combined with our ability to continue to grow in the C&I market, which we have from my perspective this outstanding group of people in this very attractive marketplace even though we have segments that are non-optimal at this point in time, I view the payment business as a pretty consistent revenue stream for us but at lower growth rates than we had because the denominator is getting bigger and the growth rate will slow down but absolute growth I see and it is one of the things that I like about the business because it will tend to be pretty steady. Now, as the consumer reacts through a consumer recession if in fact we have them, then that could be an offset to that. But I am pretty confident in our ability to continue to add net new accounts given the length of time we have been doing those and the degree of measurement we have of doing the mailings and because our cost continued to stay relatively constant at about $100 per account for a business checking account, small business checking account; at around $70 to $75 acquisition cost for the consumer account; and the business checking accounts throws off almost $1000 of revenue annually and the consumer account throws off between $300 and $400 revenue annually and those accounts have somewhere around a four year to five year life. So, I am pretty confident in it growing, but at a slower rate.

Lewis Feldman – Wells Capital Management

Okay, thank you very much.

Operator

Thank you. There are no questions at this time.

Bob Sznewajs

Okay. Thank you everybody for participating in the call and we will talk to you next year.

Operator

This concludes today’s conference call. You may now disconnect.

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