During the first three quarters of 2007, we continued to encounter an overly exuberant market where the normal relationship between risk and return was disregarded. This made it challenging for our risk adverse bank to find loans and investments where we felt we were being adequately compensated for the risk they presented. I am pleased to tell you that our bank maintained its disciplined low-risk approach to lending and investing choosing to forgo interest income rather than sacrifice credit quality. During the year, $500 million in new loans and leases were booked, which gave rise to a 13% increase in the lending portfolio. However, despite this increase in loans, net interest income was down 7% compared to the previous year due to the reduction in net interest earned on loans and investments in order to maintain credit quality. This situation, of course, dramatically reversed in the fourth quarter, when banks and investors suddenly became aware of how much risk they were really taking for relatively little compensation. We are now again able to charge reasonable rates for the risk that our loans and investments present, and I expect our net interest margins to increase back to historic levels.
During the year we reached a very important agreement with EllisDon Corporation to be their construction financing partner for certain Ontario hospital projects. To date, we have arranged the financing for the Sarnia Bluewater Hospital's $214 million dollar project and the Hamilton General Hospital $198 million dollar project. We are looking forward to arranging the financing for many more hospital and other public sector projects in Ontario and throughout Canada. Financing Public Sector Entities has always been Pacific & Western's primary lending focus and we continue to believe that it will provide us with an opportunity for substantial low-risk growth.
On April 5th we announced the creation of Versabanq Innovations Inc. Versabanq was created to provide reliable and versatile information technology solutions for financial institutions. It is particularly focused on providing our state-of-the-art commercial banking software to the U.S. market. I continue to believe this is a huge opportunity to take advantage of the software we have developed for our own use to provide an additional significant new revenue stream. During 2007, we were approved to issue a Visa card, which we are planning to market through one or more large Canadian retailers. We believe our bank is uniquely and ideally positioned to provide this banking product and we are hopeful that we will be able to reach an agreement with a suitable partner this year.
October 31st, 2007 marked the completion of our fifth year operating a Schedule 1 Canadian Bank. It was also a year that will no doubt go down in our industry's history as a moment of truth. It was a time when many financial institutions became painfully aware that their lending and investment models were no longer viable. However, our low-risk lending and investing model that utilizes new technologies and existing distribution channels was validated, and I look forward to a future of rapid and profitable growth.