United Western Bancorp, Inc. Q3 2008 Earnings Call Transcript

United Western Bancorp, Inc. (UWBK)

Q3 2008 Earnings Call Transcript

November 12, 2008 11:00 am ET

Executives

Scot Wetzel – President and CEO

Linda Selub – VP, Corporate Affairs

Dennis Santistevan – CFO of United Western Bank

William Snider – CFO

Analysts

James Abbott -- FBR Capital Markets

Jason Werner -- Howe Barnes Hoefer & Arnett

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to United Western Bancorp, Inc.’s 2008 Third Quarter Conference Call. At this time all participants are in a listen-only mode. Following today’s presentation instruction will be given for the question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today, Wednesday, the twelfth day of November, 2008.

With us today from management, we have Mr. Scot T. Wetzel, President and Chief Executive Officer; Mr. William D. Snider, Chief Financial Officer; and Mr. Dennis R. Santistevan, Chief Financial Officer of United Western Bank. Please go ahead, Mr. Wetzel.

Scot Wetzel

Thank you, today, and good morning to everyone and another group on the call this morning I see. Thanks for joining us today for United Western Bancorp’s third quarter 2008 conference call. Before I begin my remarks this morning, Linda Selub, our Vice President of Corporate Affairs is going to read our forward-looking statement disclaimer. Linda, go right ahead.

Linda Selub

Thanks, Scot. This conference call and oral statements made from time-to-time by our representatives contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to significant risks and uncertainties. Forward-looking statements include information concerning our future results, interest rates, loan and deposit growth, operations, development and growth of our community bank network, and our business strategy. Forward-looking statements sometimes include terminology such as may, will, expects, anticipates, predicts, believes, plans, estimates, potential, projects, goal, intends, should or continue or the negative of any such terms or other variations thereon or comparable terminology. However, a statement may still be forward looking even if it does not contain one of these terms. As you consider forward-looking statements, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those in the forward-looking statements.

These factors include, but are not limited to, the successful implementation of our community banking strategies and growth plans; the timing of regulatory approvals or consents for new branches or other contemplated actions; the availability of suitable and desirable locations for additional branches; the continuing strength of our existing business, which may be affected by various factors, including but not limited to, interest rate fluctuations, level of delinquencies, defaults and prepayments, general economic conditions, and conditions specifically related to the financial and credit markets, competition, legal and regulatory developments, and future additional risks and uncertainties currently unknown to us.

Additional information concerning these and other factors that may cause actual results to differ materially from those anticipated in forward-looking statements is contained in the 'Risk Factors' section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, and in the Company’s other periodic reports and filings with the Securities and Exchange Commission. The Company cautions investors not to place undue reliance on the forward-looking statements contained in this conference call.

Any forward-looking statements made by the Company speak only as of the date on which the statements are made and are based on information know to us at that time. We do not intend to update or revise the forward-looking statements made in this conference call after the date on which they are made to reflect subsequent events of circumstances except as required by law. Our risk factors are discussed in greater detail in Item 1A Risk Factors in the Company’s Form 10-Q for the quarter ended September 30, 2008, and the Company’s Form 10-K for the year ended December 31, 2007.

Scot Wetzel

Great, thanks again, Linda. Well good morning again. Thanks everybody for joining us this morning. We appreciate your continued interest in our Company. I am going to begin today by providing an overview of our quarterly banking performance. Our Chief Financial Officer for United Western Bank, Dennis Santistevan, is going to visit with you to review our consolidated financial performance for the quarter in detail. I am going to conclude our call with an update on the continued execution of our overall community banking business plan and an economic and general outlook for the balance of the year. And we look forward to taking your questions at the end of our call.

For the third quarter ended September 30th, 2008, United Western Bancorp generated record core operating income of $4 million, or $0.57 per diluted share since starting our community banking business plan at the beginning of 2006. We are exceptionally proud of this core operating performance especially considering the difficult economic and operating environment for banks right now.

Our Company reported net income of $1.5 million, or $0.21 per diluted share for the quarter versus $3.1 million of net income or $0.43 per diluted share for the second quarter of 2008. In the third quarter we incurred a non-cash other-than-temporary impairment write-down on two of our non-agency mortgage backed securities. This non-cash impairment charge totaled $2.5 million net of related income tax impact. With this charge, we have written the effective securities by 44% of their amortized cost. And each security did receive a rating decline.

Taking into account reasonable judgment given the relative dislocation and illiquidity of the trading markets, this information together with our analysis of the magnitude and duration of these declines in fair value and the potential for declines in expected future cash flows resulted in the conclusion that the securities were other-than-temporarily impaired within the meaning of GAAP. Now, it’s important to note that all principal and interest payments have been made to-date in accordance with the terms of each of these securities, and that we’ve experienced no defaults in that regard. Dennis is going to spend some time briefing you on our securities portfolio in more detail in a few minutes.

Now, I would like to spend some time discussing in more detail our core operating business, which remains fundamentally strong. We are pleased to report another quarter of positive results and strong and steady operating growth in which our community bank loans increased $121 million, or 13%. Our community bank deposits increased $73 million, or 67%, and our net interest margin expanded, all completely counter to the general experience of our industry during the quarter. We are awfully proud of that.

As I previously mentioned, excluding the OTTI charge already discussed, the Company would have generated net income of $4 million, $0.57 per basic and diluted for the third quarter. This compared to $2.7 million, or $0.37 per basic and diluted share in the third quarter of 2007. This represents a year-over-year earnings increase of approximately 54%.

Our net interest margin for the third quarter was 3.99%, which represents a seven basis point increase from the previous linked quarter and 35 basis point increase over the comparable third quarter of 2007. The increase in net interest margin between the linked quarters was the result of continuing balance sheet transition per our plan and as our average community bank loans increased $132 million in the third quarter as compared to the second quarter of 2008.

Total new community bank loan growth for the first nine months of 2008 was $349 million. Total community bank loans are now $1.06 billion. As of today, we are officially revising our guidance on total community bank loan production for 2008 from $300 million to $375 million.

We will discuss market dynamics contributing to our overall loan growth, the composition of our loan growth, and future prospects later in the call. I am very pleased to discuss the deposit growth we achieved in the quarter. As I mentioned in our second quarter 2008 earnings call, we launched our first brand and message centered deposit gathering program in early August. This marked the first time we conducted a concerted bank-wide deposit gathering program since we began our community banking business plan.

Now that our branch distribution system is maturing and we actually have six branches opened and operating in the communities that they serve, we are in a position to use our critical mass and growing reputation as a Colorado banking leader to launch this first deposit-centered campaign.

In the third quarter of 2008 our community bank deposits reached $182 million, growing by almost 70% for the year in the third quarter alone. Specific initiatives that resulted in this increase included a general safety and soundness, certificate of deposit, and money market campaign, a deposit branding campaign in specific geographic submarkets we consider to be opportunistic due to dysfunction by competitor and deposited obtained by marketing the Certificate of Deposit Account Registry Service or CDARS program.

At September 30^th of 2008, total deposits are approximately $1.6 billion, which represents overall deposit growth of $198 million, or 14% from year-end. We expect to launch further deposit campaigns in the near future as our distribution system continues to grow and to capitalize upon banking consolidation occurring in Colorado that I will visit with you about later in the call.

We now have six full service banking locations open in Colorado’s Front Range plus a regional loan production office that covers Aspen and the Roaring Fork Valley. Our Longmont location opened October 20^th of this year and our new location in South Denver on Hampden Avenue is scheduled for completion in the next six weeks. In addition, our Denver Tech Center office, south of our Hampden location, should open by the spring of 2009. We look forward to apprising shareholders in more detail about these locations and their results in our future earnings calls.

With regard to our operating subsidiary, Sterling Trust, we grew the total number of accounts in the third quarter of 2008 by 3800. Accounts totaled 68,510 at September 30^th of 2008. Client deposits left in the United Western Bank were $372 million, which represented a $3 million decline from June 30^th of 2008.

For the third quarter, revenues at Sterling were $2.5 million or approximately the same as the third quarter of 2007. Revenues for the first nine months of 2008 reached $7.7 million compared to $6.2 million for the first nine months of 2007. We continue to be focused on the potential for growth at Sterling and as a result we recently named Paul Maxwell as Chief Executive Officer, whom we expect will apply his 25 years of industry experience to expanding the business. We welcome Paul to the Company. We look forward to his contributions and to his focus on creating increased synergies between Sterling and our category banking strategy going forward.

At this time I am going to turn the call over to Dennis, our Chief Financial Officer of United Western Bank, and he is going to walk you through the financial performance for the Company in detail. Go ahead, Dennis.

Dennis Santistevan

Thanks, Scot, and good morning everyone. As Scot previously mentioned, net income for the third quarter of 2008 was $1.5 million, or $0.21 per diluted share. And that compares with $3.1 million, or $0.43 per diluted share in the second quarter of 2008. For the year ago quarter in 2007 the Company made $2.7 million, or $0.37 per diluted share.

In comparing the results for the third quarter of 2008 to the second quarter of 2008, there were several items that I would like to highlight. In the linked quarters, net interest income before provision for credit losses increased by $1.2 million and that was mainly due to continued community bank loan growth. The average community bank loans increased $132 million during the quarter, which added $1.8 million of additional interest income.

Interest income from wholesale assets declined by $143,000 due to continued run-off. Premium amortization on purchased SBA loans and securities declined by $292,000 in the third quarter of 2008 to $700,000 as compared to $992,000 for the second quarter. These factors contributed to the net interest margin increase of seven basis points as Scot has already pointed out.

In the third quarter of 2008 the yield on our interest earning assets was 5.51%, which was an 11 basis point increase from the 5.40% for the second quarter. The increase in yield is attributable to the wholesale assets, which increased 20 basis point in yield between the periods. This was due to the lower premium amortization on purchased SBA assets and higher yields from payment resets on residential loans and mortgage-backed securities.

Community bank loans yielded 6.19% in the third quarter as compared to 6.35% for the second quarter, which reflected the full quarter impact of the rate declines that occurred in the first half of the year.

We continue to effectively manage our interest bearing liabilities in the third quarter. The overall cost of interest bearing liabilities increased two basis points in the third quarter to 1.73% compared to 1.71% for the second quarter of 2008. This modest increase in the cost of our liabilities was due in part to our successful marketing efforts that resulted in an increase of $93 million in community banking deposits in the period as well as our continued use of short-term borrowings from the Federal Home Loan Bank.

In the third quarter of 2008, provision for credit losses was $2.6 million compared to $2.1 million for the second quarter. The provision expense for the third quarter was the result of adding $121 million of net growth in the community bank loan portfolio as well as the provision associated with increasing the impairment on one loan and adding an impairment provision on three residential loans, which, in total, was $767,000. Provision for credit losses also included $600,000 added to the allowance for loans in which our credit administration team lowered the rating of the loan based on current condition.

The provision for credit losses in the linked second quarter was principally the result of the $114 million of net growth in community bank loan portfolio during the period and the provision taken on a $2.9 million loan.

Non-interest income was $1.1 million in the third quarter due to the other-than-temporary impairment charge of $4.1 million. Excluding the OTTI charge, non-interest income was $5.3 million in the third quarter, which represented an increase of $701,000 for the second quarter amount of $4.6 million. The major difference excluding the OTTI charge quarter-to-quarter was a dividend of $540,000 from our approximate 7% ownership in a mutual fund clearing and settlement company. Also included in the third quarter of 2008 was a gain on sale of loans of $418,000 as a result of selling $12.2 million of originated SBA loans. These loans are periodically sold to manage industry exposures, interest rate risk as part of our normal business practice.

Sterling Trust made its usual contribution to our net interest income generating over $2.5 million of revenues during the quarter.

Non-interest expenses were $18.9 million for the third quarter and that compares to $18 million for the linked second quarter. The increase was attributable to higher expenses related to compensation, occupancy, and within the other expense categories. Compensation and employee benefits increased $670,000 to $8.3 million as a result of increased levels of incentive compensation tied to loan production.

A large component of the increase in occupancy between the periods was the receipt in the second quarter of 2008 $81,000 of refunds related to 2007 common area maintenance charges at our headquarters location. The increase in the other expense category was related to the $245,000 charge we incurred to reduce the carrying value of wholesale residential loans held-for-sale to the lower of cost or fair value.

Balance sheet grew $145 million in the third quarter of 2008 due to strong community bank loan demand as well as the slowing repayments of our wholesale assets. Total assets were $2.2 billion at September 30^th, 2008.

In the community bank loan portfolio, during the third quarter, we added $53 million to our commercial real estate portfolio, another $36 million to our construction and development portfolio, and $21 million to our consumer portfolio.

Contributing to the increase in commercial real estate loans, the Company continued to expand its national footprint through our SBA division with both SBA 504 and 7(a) lending activities. Our entry into the mountain communities of Aspen and the Roaring Fork Valley also contributed to this growth as well as our effort to diversify the portfolio into other components, including owner-occupied commercial real estate.

At September 30^th, 2008, construction and development lending represented 34.6% of our community bank loan portfolio, which was down from 35.3% at June 30^th, 2008. At September 30^th, 2008, approximately $243 million of the C&D portfolio was comprise of construction loans and approximately $122 million was in land loans. We feel the Colorado marketplace has held up reasonably well and has not seen the stress in real estate values like certain other markets such as Nevada, Florida, Arizona, and California. We have three performing C&D loans that total $16.9 million in Arizona and California, and no C&D exposure to Nevada or Florida.

Shareholders’ equity declined in the third quarter to $100 million as compared to $10.3.5 million at June 30^th, 2008, due to the OTTI charge as well as temporary declines in other available-for-sale investment securities, which were partially offset by core earnings.

Our leverage ratio was 4.48% at September 30^th, 2008, compared to 4.76% at June 30^th, 2008. Using the guidelines for bank holding companies, the Company’s total capital ratio would have been 6.76% at September 30^th, 2008. At United Western Bank, the quarter-end Tier 1 capital ratio was 9.8% and the total risk-based capital was 10.6%.

At September 30^th, 2008, asset quality in the loan portfolio continues to be satisfactory in this very challenge environment. In total, community bank non-performing loans were $6.2 million, or 58 basis points of the community bank loan portfolio at September 30^th, 2008, compared to $4.1 million, or 44 basis points at June 30^th.

At September 30th, 2008, the allowance for credit losses in the community bank loan portfolio was 1.32% versus 1.28% at the previous quarter-end. The wholesale residential non-performing loans increased by $510,000 in the third quarter, which was generally consistent with the increase in mortgage delinquencies that has occurred nationally.

At September 30th, 2008, total non-performing wholesale residential loans were $8.2 million, which represented 2.3% of the residential loan portfolio of $351 million. At September 30th, 2008, this portfolio is on average over seven year seasoned and to-date our loss histories track favorably when compared to national averages. We believe the risk of loss associated with our residential portfolio is lower than losses associated with portfolios consisting of more newly originated residential loans.

Net charge-offs in this portfolio were an annualized 31 basis points in the third quarter versus 13 basis points for the second quarter of 2008. We increased the allowance for credit losses on this portfolio to 55 basis points as of quarter-end compared to 45 basis points at June 30^th, 2008.

The overall non-performing asset to total asset ratio was 75 basis points at September 30th, which was a seven basis point increase from the second quarter.

The ongoing crisis in the financial market and the national economy resulted in further declines in certain securities in our investment portfolio during the third quarter of 2008. The OTTI charge occurred primarily as a result of the weakening or the continuing weakness in the residential real estate markets and the potential for declines in expected future cash flows for the affected securities accompanied by overall illiquidity in the market for mortgage-backed securities.

Our investment portfolio of approximately $556 million when you exclude guaranteed SBA securities, consists largely of investment-grade mortgage-backed securities. 79% of the portfolio is comprised of AA-, AAA-rated or agency securities and approximately 9% are single A rated securities. Another 6% are BBB-rated securities, and the remaining 6% of the securities are below investment grade. These ratings are based on the lowest ratings received.

Based on highest rating received approximately 98% of the portfolio is investment grade. Based on our review and the extensive analysis we have performed, we believe the remaining decline in the fair value of our securities is due to temporary conditions in the marketplace.

Thank you. And now I will turn the call back over to Scot.

Scot Wetzel

Great. Thanks, Dennis, good work. I am first going to spend some time now talking about the competitive banking landscape in Colorado and then I am going to provide you with our thoughts on Colorado’s economy and our outlook for the state. And I will conclude my remarks today with a general outlook for our Company for the fourth quarter of 2008.

Colorado has been a unique banking marketplace for the last 25 years, which I am sure many of you know. It’s important to remember that we were the last state in the U.S. to allow branch banking and that spawned an era of unprecedented banking consolidation resulting in a few super regional banking companies controlling almost 70% of the deposit market share in Colorado’s major population center, which is know as the Front Range. Our market is again experiencing unprecedented consolidation and we believe this is going to create a greater opportunity for us.

Four of the largest super regional banking companies in the U.S., each of whom held a sizeable portion of overall deposit market share in Colorado are now inwardly focused on their consolidation in our state. Wells Fargo, the larges deposit market share bank in Colorado, is in the process of acquiring Wachovia. Wachovia’s presence recently became substantial in Colorado following their acquisition of World Savings and Golden West. Just a few short months ago, Wachovia changed the signs on their World Savings branch banks to Wachovia. In a few more months we expect those same locations will likely wear the Wells Fargo monitors.

Furthermore, JPMorgan Chase, one of the other top deposit market share super regionals with a presence in Colorado, announced that it would acquire Washington Mutual. Washington Mutual had just completed a 40-branch expansion plan in Colorado and it too had a sizable deposit market share in our state. We expect the WaMu signs to be coming down in those location and the Chase signs to be going up in their place.

The end result is that customers in these giant banking companies aren’t entirely sure who their bank is on any given day. We suspect that as these behemoth banking organizations rationalize operations and service, consolidate facilities, and generally try to figure out their new business plans, we will have an opportunity to quietly capture loan and deposit market share with our small but well positioned branch distribution system and through our exceptional veteran banking leadership team. We intend to capitalize on this opportunity and build our banking business organically as we have since inception, one quality customer at a time.

Colorado’s economy remains stronger than the majority of other state economies in the U.S. as well. We’ve created approximately 45,000 new jobs so far this year. Our state is a beneficiary of substantial growth in the energy sector with oil, gas, and wind power leading employment expansion. Healthcare, aerospace, and bioscience have additionally contributed to the state’s diversified economy.

As we continually emphasize, Colorado has one of the nation’s most highly educated workforces. This generally means that our working population either finds employment in weaker economic environments or creates it by starting new businesses. Our state is affordable relative to cost of living and our 300 plus (inaudible) favorable corporate tax environment make Colorado an attractive place to do business. It’s important to note, however, that if the general U.S. economy continues to suffer, and if job creation in Colorado slows, our economy too could experience some contraction.

Our outlook for the state’s economy suggest a very flat 2009 with housing inventories staying relatively flat, but continuing to be absorbed, and greater vacancies in commercial office space. New business and job creation could likely revolve around energy and aerospace as well as transportation and infrastructure in the next year. We think we are well positioned to capture market share from any growth in these segments.

Overall, our borrowers are generally depended upon a healthy state economy for the success of their own businesses. While we continue to believe our state will fair better than most other states, if Colorado experiences greater effects from recessionary environment, those pressures could affect our customers in 2009 and beyond.

Additionally, if we experience economic contraction in Colorado, it will be more difficult for us to find new quality business lending opportunities, which could impact our ability to grow.

Asset quality as of September 30th, 2008, in our community bank remained stable and we believe our emphasis on recourse lending and doing business with people we know and markets we understand is the reason for our success. We will continue to utilize the same prudent underwriting criteria for new lending, going forward.

Finally, as referenced in our earnings release, the Company is considering participation in the U.S. Treasury’s Capital Purchase Plan, or CPP. The Board of Directors of United Western Bancorp, Inc. authorized the Company to make application to our regulator, the Office of Thrift Supervision. We have determined that our Company will qualify for proceeds of between $16 million and $48 million based upon the Treasury’s formula allocated to total risk-weighted assets of a minimum of 1% and a maximum of 3%. Any decision to accept such proceeds should the Company qualify for and receive an allocation, will be predicated upon on analysis of our ability to deploy the proceeds for an adequate return to Shareholders under the spirit of the TARP legislation given the current forecasted economic environment.

In conclusion, we are again proud of our quarterly operating performance. Record earnings form core operation and a disciplined focus on qualitative growth are becoming the hallmark of our banking company, which we have every intention of perpetuating.

While the economic environment and general market dislocation will likely present interim challenges to us, we remain focused on our business plan of building Colorado’s most vibrant community banking platform for the long term.

At this time, we’d be happy to take your calls or take your questions. Go right ahead.

Question-and-Answer Session

Operator

Thank you, Mr. Wetzel. (Operator instructions) Our first question is from the line of James Abbott with FBR Capital Markets. Please go ahead.

James Abbott -- FBR Capital Markets

Hi, good morning.

Scot Wetzel

Good morning, James.

James Abbott -- FBR Capital Markets

Couple of questions on the construction side of things and maybe if you could also – maybe start off with a little view since oil has come down so much and how sensitive the job growth or job creation has been due to energy and maybe as that’s changing a little bit how sensitive is that. And then comments on the sales rates within the construction projects that you have. Have you seen a decline, is it stable, is it increasing? I know that Denver is one of the only markets in the country to have home price appreciation over the last three to six months.

Scot Wetzel

I am going to take the last part of your question, first, James, if that’s okay, and just talk about the sales rates. Then we’ll give you some general guidelines on the construction portfolio. You broke up a little bit on your question there, so I may have to add you give us some more clarity on the first part of your question here.

Let me start with kind of the overall market and absorption. We did actually see appreciation in residential housing, which is we are one of the few markets that actually experienced that in the past quarter. It was slight, but it was noticeable. We saw our first absorption of a material nature roughly 1% this past quarter and what’s happening is that you really don’t have much new construction going on. You have permits staying relatively flat and the permits that have been issued that are representative of projects that are under construction finishing out and then those inventories are being absorbed right now.

We – our experience with our – with the customers that we’ve got in the residential end of the spectrum was that we still see slower absorption than we did obviously in the last two years, but we did notice in the past quarter an uptick in absorption in certain product points. Those product points tend to be the less – the more discretionary purchase product points, above $0.5 million product point for residential homes versus the entry level end of the spectrum. What we think is happening at the entry level is that folks are either trading up and out of apartments or trading out of their over-levered single-family residence into apartments on the other end. And so we actually saw some of the apartment projects that we financed absorb more fully in the past quarter as well..

I’ll let Bill and Dennis answer your question just in specificity about – in terms of the construction portfolio and if – yes, something else (inaudible) rephrase that or ask it again because you broke up, I’d appreciate it.

William Snider

Yes, James, we lost the first sentence I think and some static, if you want to repeat that again.

James Abbott -- FBR Capital Markets

Sure yes, any other detail that you want to give on the housing feel free as well, but the first part of my question was has – obviously the price of oil going up certainly helped to create some jobs in the energy sector and now that it’s come down substantially how sensitive is the job market to the oil industry? Should we – are you bracing for a loss in jobs and how will that affect your – ultimately, how does that affect your construction portfolio?

Dennis Santistevan

So, that’s a good question. With regard to the energy sector in general, the first and most important part of this is to understand that the Roan plateau has recently been opened here in Colorado and that inherently creates jobs just because that was access to reserve that weren’t available before. And so the fact that those reserves aren’t necessarily very difficult to get to and the fact that oil is still at a $60 to $70 a barrel price versus a $25 a barrel price relative to the way that oil comes out probably dictates that – same for gas in that location – probably dictates that we continue to create jobs in that particular geographic submarket around that business.

One of the other interesting things that you may or may not have seen that I talked about in the last quarter’s call is that a large Dutch wind turbine manufacturer relocated part of its business here and is creating a significant number of jobs around wind turbine engine – energy generation. They are actually building the wind turbines and wind blades here in Colorado. We see alternative energy and technology around alternative energy continuing to create jobs in our state. We have a great research base at our state-funded universities and they continue to focus on the energy sector too.

So I think our outlook on energy is flat to slightly up relative to job creation. We don’t see a huge job loss given the prices of oil and gas out there right now. And frankly, I think that it’s highly likely that given the new political administration that we may see job creation in infrastructure in U.S. and more focus on aerospace potentially. And of course Colorado has a great aerospace economy too with some of the largest aerospace companies having major, major operations here that could be the beneficiary of potential government projects.

William Snider

James, I might just throw in one thing and the ideas that the commodity price declines and how sensitive Colorado’s labor force is to the commodity price fluctuations, as Scot said, the solar and wind or longer term kind of capital intensive projects are underway, I don’t see them stopping in the middle of those. And the oil and natural gas, the same thing. So I think these commodity prices would have to stay low for some period of time before it would impact the current labor force. It may slow down the appreciation of that somewhat but near to intermediate term I guess we wouldn’t see much impact on the current commodity price structure.

James Abbott -- FBR Capital Markets

Okay, that’s very helpful. We have heard other companies comment that around $60 a barrel is what -- $50 to $60 a barrel is what the energy companies are hiring based upon. In other words, as long as oil stays above those levels they don’t expect job losses, but – and so I think you’ve sort of answered that question in a helpful manner.

Scot Wetzel

We’d agree with that analysis, James.

James Abbott -- FBR Capital Markets

So you are not hearing anything different that people are banking are banking on oil shale – in order to make oil shale economical it has to be $90 or $100 a barrel and so those jobs would be lost.

Scot Wetzel

No, no, not this state again. We are not hearing that.

James Abbott -- FBR Capital Markets

Okay. And then my other question, recognizing that I’ve already taken a lot of time with the first question, but the second question is regarding a common capital raise, what’s a key variable if you could identify one for us, that you would be looking at , a key ratio, before you decide to raise common equity – I think we are recognizing that TARP capital is a very – not the most strong source of capital in terms of what shareholders – common shareholders have access to or support the common shareholder anyway. And so we are just looking at what you’d be looking for before starting to raise common equity recognizing that United Western’s common equity ratio is relatively low compared to the industry.

Scot Wetzel

Well, James, let me first say that the – it’s very hard, obviously for our Board to stomach an additional equity raise at a 70% price tangible book right now. That dilution is pretty significant when we look at doing that. We are trying to take into account all the alternatives that are available to the Company to fund our growth, including just letting our core earnings fund our growth going forward and managing to the expectation of our earnings. One thing that I think is important to know is that the holding company has an additional availability of liquidity and we actually access on that liquidity in the fourth quarter and we’ve published – we’ve taken action in the holding company authorizing an investment of an additional $6 million down into the Bank, which boosted our risk-based capital ratio up over 11% and our core capital to over 7.30%. So, I think there is no clear kind of so to speak to use a securities industry phrase, bright line, to when or how we would raise equity. The company also has substantial, what we believe to be substantial off balance sheet equity in the form of some of its assets in the Company that it is looking at potentially monetizing. Some of that we’ve talked about before, you know the relative dislocation and illiquidity of the markets comes back, gives us the ability to potentially sell some of our single-family residential loans or mortgage-backed securities. There are other things we are considering strategically relative to the core operations of the business that may help us with our capital strategy. And then we need to just take our time and analyze the access to the government’s program and whether that makes sense for us at this stage of the game. I can tell you, relative to the restriction that go along with the capital from the government, that’s kind of a non-event for us. That’s the right thing for shareholders and we think we can deploy it ad get growth to shareholders’ advantage in the least dilutive fashion. That’s the right answer. And our Board will consider that in full faith and form. Again, there is no hard and fast rule on this and we are looking at all the avenues and most importantly we are focused on trying to minimize shareholder dilution and take advantage of growth at the same time.

James Abbott -- FBR Capital Markets

Okay. Thanks.

Scot Wetzel

You bet. Thanks, James.

Operator

Thank you. Our next question is from the line of Jason Werner with Howe Barnes. Please go ahead.

Jason Werner -- Howe Barnes Hoefer & Arnett

Good morning.

Scot Wetzel

Good morning, Jason, how are you?

Jason Werner -- Howe Barnes Hoefer & Arnett

Good. My first question goes to the credit quality. It appears that the increase in non-accruals in the quarter came out of the construction portfolio. I think it was just one credit. Can you give us a little more detail on what that credit was, where it was, and why it went bad?

William Snider

Yes, Jason, Bill Snider. Yes, the modest increase in those non-performing loans was one construction loan here – between here and Boulder. And it really had to do with a family enterprise and one of the family leaders passed away, so there is an estate work going on there. The underlying project is strong and the overall resources on the recourse are strong too. So it’s more of a legal estate matter right now than it is a real credit quality, so that I guess you could call it a little unique in terms of (inaudible) one loan involved there.

Scot Wetzel

Yes, this wasn’t a case, Jason, default in absorption relative to a construction project or what have you. This is an issue with a family’s estate where a janitor passed away.

Jason Werner -- Howe Barnes Hoefer & Arnett

But this (inaudible) credit isn’t part of the increase in provision as you stated for a handful of credits that we say got weaker.

William Snider

Yes.

Scot Wetzel

Yes, it is, absolutely.

Jason Werner -- Howe Barnes Hoefer & Arnett

Oh, is one of them?

Scot Wetzel

Yes, it is. Absolutely, yes.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay. So what kind of a specific reserve you have given this?

Scot Wetzel

Do we break that, I don’t know--

William Snider

I don’t think we disclose that, but it’s – it would be up in the probably the 10% range of something. The other part of that provision too was the other project we talked about in the first and second quarters, Jason, which is a construction loan and we’ve put up some additional provision on that one as well. But we talked about that in the last two conference calls.

Jason Werner -- Howe Barnes Hoefer & Arnett

Right, okay. And I guess what can you tell us about -- I mean is there – you had mentioned a handful of credit that kind of got a little weaker. Did you expect that (inaudible) to deteriorate at this point or what’s your kind of thoughts kind of going forward next couple of quarters for credit quality?

Scot Wetzel

Well, I think, Jason, the short answer there is you know how conservative we are in all forms of managing our business and the approach that our management team takes to looking at things and so we look at every credit – obviously, as I’ve talked about in previous calls, we tend to be focused on originating loans to borrowers that we know and so just as a potential for general changes in industry dynamic or changes in submarket economic conditions or what have you cause us to place credits on our watch list and cause us to take action proactively. And so you can't help to think given the economic – the overall economic environment out there right now that we should be more cautious on some of these credits. And so if we wind up having dialogs with some of our borrowers that lead us to conclude that at some point next year there may be a problem that’s how we approach it. And I think the specific reserve and the additions to our non-performers this quarter are predominantly a reflection on our outlook and expectation of the overall real estate market for the next 12 to 24 months.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay. I got on the call late, I apologize if anything I ask you’ve already talked about. But the other question I had in terms of the loan growth, obviously a very strong quarter growth wise an it’s a little more than I was expecting. I guess kind of curious as to what the outlook is kind of going forward. You anticipate similar types of growth or do you expect to be a little slower than that?

Scot Wetzel

Jason, good question. We actually revised our guidance at the beginning of the call. We had a $300 million number that we guided shareholders and investors to for this year for total community bank loan growth. We revised that to $375 million for the year, again, roughly $349 million as of the end of the third quarter. So, another $25 million roughly for the fourth quarter. One of the things that we are focused on right now is trying to manage our loan growth. There are plenty of opportunities out there. They are becoming less qualitative and so we have to really pick and chose what makes sense for us like we always have, but one of the things we have to do is manage to the growth that our earnings will allow right now because I think we are fairly comfortable where our capital ratios are and without continued run-off in our single family residential portfolio creating more availability for us to make more loans, without our ability to at some point maybe de-lever some of our mortgage-backed securities portfolio, we are going to have to just manage the growth around the earnings of the Company for the time being. And so the $375 million is a reflection of us kind of staying at the capital ratios that we are operating at right now and that’s probably what shareholders should expect.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay. What can you tell us about pricing for loans given what you kind of talked about some of the disruptions in the market, consolidation, and so forth, and financial condition throughout the country? Are you guys seeing better pricing--?

Scot Wetzel

Yes, we absolutely are. As you can imagine, I mean this is an environment where borrowers are more focused on obtaining credit than they are the price they pay for. Obviously that always – price is always a consideration, but I think more important is that the willingness of banks to put money to work in good businesses in the Colorado economy. And so there are fewer and fewer banks that are willing to do that. I think as I’ve talked about before, most of the large super regional banks that are here make their decisions on credit outside of this market back in kind of I guess I’d call it headquarters markets. And there has just been an absolute and complete total freeze in their willingness to make decisions right now while they all try and figure things out. And that is driving, without question, potential borrowers into the folds of the bigger community banks here in Colorado. And I think if you talked to my peer CEOs at other community banking organizations, what you discover is that we are probably flooded with request right now, but the quality of the request and our ability or willingness to put money to work in those requests is changing given the economic environment and market conditions. Pricing for us – obviously we talked about this last quarter. We started instituting floors in our credits in the first quarter of this year. That helped us with the margin this last quarter. You saw our margin expand. That was one of the reasons for that. We are fairly disciplined and sophisticated when it comes to pricing. We don’t take fixed rate risk on our balance sheet for the most part. We are a floating rate financier and we’ve – I think done a pretty good job of commanding a premium out there relative to previous quarters and previous years. We were a pricing leader in Colorado. When it came to changing given what we saw as a changing dynamic in the marketplace I think the rest of the banks followed pace right behind us. And we’ll continue to be very disciplined in the use of our capital and getting returns for shareholders in that regard.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay. You mentioned putting in place floors, that sort of thing. I am kind of curious what you think the margin might look like kind of going forward given the fact you’ve had two rate cuts since the quarter ended.

Scot Wetzel

Well, for us this really becomes as decision about the borrower in conjunction with the yield and obviously you chose your yield and your return based upon your risk. So we are more focused right now – I think that kind of sized up this – but we are more focused right now on finding good quality borrowers than we are necessarily just yield alone. That becomes a secondary conversation. I can tell you that we have kind of a minimum threshold ROE, which I am not sure we’ve disclosed externally. We use a model for our community bank pricing that is relationship driven -- it’s credit driven and it’s relationship driven, and we have a minimum threshold ROE on all relationships to even get into the approval queue for a consideration. And that threshold continues to go up.

William Snider

Jason, I might – Bill Snider – I might throw in something too, but if you are trying to look forward to the net interest margin, to the Fed rate cuts that we’ve had and the ones we expect, on the liability side like other community banks we are asset-sensitive. So it has a negative impact on net interest margin. What happened in the third quarter was the – some of the floors on the new production – and in the new production itself offset that, so the net interest margin – if you adjust to the SBA neutralized for that quarter-to-quarter was pretty constant, up a little. So – but – and if rates come down some more as we expect they will, they will have a negative impact, but I think these floors will offset most of that, so we are not giving projections here but I think we started putting those in February I think in March and so I would expect most of those to offset one another, plus or minus.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay. Okay, and my last question, again, you guys might have mentioned this early on, but in regards to the two securities you took the OTTI on, could you guys provide some more color on those securities why they were (inaudible) impaired and I know that step wasn’t – and kind of give me your thoughts on the securities portfolio in general.

William Snider

Yes, good question, Jason, let me give you some background. In the held-to-maturity portfolio, we have about 90 securities or not about – we have 90 bonds in there, and these were two of those 90. We for our internal cash flow projections use two models. One is kind of a reference base model, which is loan level model, the other is a more pessimistic stress model. When you use those two models, the reference base case that show no impairment of principal over the whole life of those securities on the stress model in the out years, seven to 15 years, you can see may be there is some probability of some reduction of principal. That coupled with the ratings downgrades -- and those two are rated DDB -- we thought it was – it triggered the OTTI.

So then the question is what about the other 88 bonds in the portfolio, and there is only two others in there that even would be on the same ballpark as these and by the way the two that triggered, one was a 2005 IndyMac’s bond and one was a 2006 early [ph] bond itself. If you look at the current performance of those are quite strong. They have – now you have support tranches in the 8% to 10% and you would have charge-offs after 3.5 years in the 1% to 2% range. So nothing in the current statistics would justify that but we thought it met the accounting test for that.

The other two that would be in the ballpark are even stronger if you looked at the numbers like those two. The two we took it on would have collateral in California over 50%, but the other two I mentioned that have split ratings investment grade non would have – one of them has like 37% California, the other one has I think below 50 as well.

So the rest of the portfolio doesn’t look like these two and it depends on which cash flow model you look at for those securities and we determined that those probably met the test of OTTI.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay. And until you took this charge did they expert ratings too or is it – that are --

William Snider

You started cut out there I missed that expert rating.

Jason Werner -- Howe Barnes Hoefer & Arnett

Until you took this charge on, did they expert ratings too--

William Snider

They were double BB in both cases and then we got two in there among the 90 that have split ratings, investment grade in the A category, BBB1, and non-investment grade on the other.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay.

William Snider

One of them has a 10% support tranche and the latter two. I think the charge-offs are over 3.5 years since this is an ’05 issue then about 1%.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay. And at this point the available-for-sale – the five securities that were backed by the option ARMs are those at this point you’re still seeing – you don’t see any impairment there obviously.

William Snider

We don’t. Applying the same test, we don’t see that and when you go to the Q we’ve in footnote three we break out a lot of detail on that. And most of those five option ARMs have been run through the capital through the OCI and they don’t meet the test that we applies to these two. And then additionally, as Dennis said in his remarks on the overall ratings of the portfolio, in addition to footnotes three in the Q, I think back on like Page 43 we break out the whole portfolio by rating. We as others don’t place a lot on ratings these days because the market participants don’t really look at those but if you can only give one high level indicator of a portfolio you start with ratings because it’s a first indication of quality. So--

Jason Werner -- Howe Barnes Hoefer & Arnett

Looking at that table, you had that investment will be 5.3 that’s what you think growth will sink down to, at those two right there, correct?

William Snider

Yes.

Scot Wetzel

That’s correct.

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay.

William Snider

Yes, we wrote them down 44%, s the yield on those are going to be quite high going forward. So, if you want to know in these whether there is going to be a loss and some until the end of the pool like others you probably won't know for seven or eight years (inaudible).

Jason Werner -- Howe Barnes Hoefer & Arnett

Okay. And the two that you were talking about that are in the same ballpark what was the dollar amount of those two total?

William Snider

I think it’s around $10 million on those two, maybe a million or two over that.

Operator

(Operator instructions) Our next question is a follow-up from the line of James Abbott with FBR Capital Markets. Please go ahead.

James Abbott -- FBR Capital Markets

Yes, just a couple of other quick thoughts on the CD portfolio or the CD campaigns that you did this quarter. Could you give us an approximate estimated cost of the CDs as you marketed them?

Scot Wetzel

I don’t think we broke that out actually. And there were three separate tranches of pricing. Some of it geographic specific for competitive purpose, James. So, at this stage all I can tell you is that it’s in the margins for the quarter, obviously.

James Abbott -- FBR Capital Markets

Was the timing early, mid, late?

Scot Wetzel

It was throughout the quarter. It was – there were three different pricing tranches that were for three different markets throughout the quarter. So, I guess we launched the program, Tom, was it – yes, August 1^st, to give you some perspective.

James Abbott -- FBR Capital Markets

There might be some pressure on the margin as that fully rolls into the margin for the fourth quarter but not too much you don’t think.

Scot Wetzel

Yes, I think it probably be modest.

James Abbott -- FBR Capital Markets

Okay. And where do you stand on – circling back on the construction versus capital I just – I notice that the construction loan as a percentage of (inaudible) common equity--

Scot Wetzel

Right.

James Abbott -- FBR Capital Markets

-- has ratcheted up to about 3.6 times now. And can you give us a level that you are comfortable with on that? Is that a ratio you monitor at all?

Scot Wetzel

Well, the way we look at it is kind of percentage of our total loans and total assets and we talked about in the call 35% or less is really our target. We don’t want to be more than that as opposed [ph] to construction and development financing. And so basically if the balance sheet doesn’t grow we just have the ability to replace what – if we can't do with earnings rather equity we have the ability to replace exactly what we’ve got on the balance sheet right now as it runs off and then grow at that same ratio relative to what our earnings will allow right now given where our capital ratios are. So you shouldn’t expect a ballooning in our construction finance any time soon. And we also think it’s going to be more difficult to find just frankly good quality construction loan opportunities for the next six to 18 months. In reality the situation though is we do like real estate in this Company. We think tangible collateral is important when we land. We like to analyze the worst case downside whatever it is on that tangible collateral and we’ll continue to be a tangible collateral lender going forward. That’s just our niche. We are not a levered cash flow financier. We are not a – we are just a – this is not what we do. We predominantly focus on tangible asset financing and real estate play a role in that. So, relative to the construction, again, expect to stay right now with the ratios that we’ve got right now.

James Abbott -- FBR Capital Markets

I think you’ve talked about on previous calls what the loan-to-value ratio is on your – on various different or at least underwriting standards are. Can you remind us of that?

Scot Wetzel

Yes, our policy is traditionally 75% or less loan-to-value, up to 80% of cost depending upon what type of real estate we are talking about obviously whether it’s residential or commercial real estate. I think it’s reasonable to assume that we have ratcheted in our expectations right now for the types of loans that we are making. As an example, in the Aspen marketplace I think if you looked at that portfolio our average would be somewhere in the neighborhood of 55% to 66% loan-to-value on all of our financing in aggregate in that marketplace. So it’s kind of it’s geographic, submarket specific. Some of it is just policy driven and I will tell you right no that for the foreseeable future irregardless of what our policy says we are going to be conservatively opportunistic given the outlook for the economy.

James Abbott -- FBR Capital Markets

And then residential construction versus – oh actually I think that was in the 10-Q. I remember it now.

Scot Wetzel

It is. Yes, sir, it’s in there.

James Abbott -- FBR Capital Markets

Yes, I remember reading that. I’ve just seen too much data I think at this point—

Scot Wetzel

Yes, we are going to generating data--

James Abbott -- FBR Capital Markets

Thank you again for your time.

Scot Wetzel

Yes, thank you, James. Appreciate it. Do we have any other questions?

Operator

No further questions, sir.

Scot Wetzel

Okay, well folks, thanks so much for joining us today.

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