Old National Bancorp (ONB) 2005 Q4 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Welcome to the Old National Bancorp fourth quarter earnings conference call. This call is being recorded and has been made accessible to the public in accordance with SEC regulations FD. The call along with corresponding presentation slides will be archived for 12 months on the shareholder relations page at www.oldnational.com.

  • A replay of the call will also be available beginning at 5:30 p.m. central time today through February 14th. To access the replay dial 1-800-642-1687. Confirmation code 3913782. Those participating today will be analysts and is members of the financial community. At this time all participants are in a listen-only mode. Then we will hold a Q&A session and instructions will follow at that time.

  • At this time the call will be turned over to Lynell Walton, Vice President of Investor Relations for opening remarks. Miss Walton.

  • - VP of Investor Relations

  • Thank you, Tabitha, and again welcome everyone to Old National's fourth quarter earnings conference call. With me are Old National Bancorp's President and Chief Executive Officer, Bob Jones; our Chief Financial Officer, Chris Wolking; Chief Credit Officer, Daryl Moore; and our Treasurer, Jim Ryan.

  • Before we begin, I would like to refer you to slide 3 and point out that the presentation today does contain certain forward-looking statements that are subject to certain risks and uncertainties that could cause the company's actual future results to materially differ from those discussed. These risks and uncertainties include but are not limited to those, which are contained in this slide and in the company's filings with the SEC.

  • Slide 4 contains our non-GAAP financial measures information, various numbers in this presentation have been adjusted for certain items to provide a more comparable information and data between periods as an aid to you in establishing more realistic trends going forward. We have provided reconciliations for such data where appropriate or have referenced the location where such reconciliations can be found.

  • Slide 5 is our agenda for the call. We'll begin with Bob Jones who will provide an explanation surrounding our restatement relating to go FAS 133. He will then present an overall picture of our fourth quarter earnings results. Next, Jim Ryan will dig into our net interest margin and provide detail as to the various drivers impacting the margin for the quarter in areas management is focusing on for margin improvement during 2006. He will then conclude with details of our long-term capital strategy.

  • Daryl Moore will then lead an analysis of our continued improvement in credit quality and will provide details regarding the impact of the change in consumer bankruptcy laws on our overall credit quality picture. Finally, Chris Wolking will present our 2006 financial targets and our thoughts as we enter into the new year.

  • With that I will turn the call over to our CEO, Bob Jones.

  • - President & CEO

  • Thank you, Lynell, and good afternoon to all of you, and thank you for joining us on this call.

  • I'm going to start by just a couple of points as we think about the fourth quarter. Fourth quarter was a particularly complex quarter for Old National. While we are placed with the overall results we do acknowledge there were a number of actions that occurred that require explanation. Amongst those are the culmination of the sale of our Clarksville, Tennessee operations with a corresponding gain of 14.6 million in the expenses offsetting that gain as we continue to build our operating platform. In addition, in order to ensure compliance with FAS 133, we did make the decision to restate earnings for the full year 2000, 2003, 2004, as well as the first three quarters of 2005. I'll spend more time reviewing that with you very shortly.

  • Our goal on this call is pretty simple. It is to provide you with adequate information to gain insight into our forecasted earnings in growth rates for 2006. Chris will spend a majority of his time doing that, which is very consistent with our pledge of open and honest communication.

  • As you turn to slide 7, let me give you background on our decision to restate earnings for the previously mentioned time periods. As we began to see the spotlight raised on FAS 133, which just to remind you, which I am sure you're all aware of, provides standards for accounting, for derivative instruments and hedging activities. Chris asked that our controller and outside accounting firm review our practices for accounting for these transactions. The further we began to understand the interpretations, it became clear to us the best practice, again, consistent with our pledge of consistent quality earnings, was to restate our financials.

  • These hedges were related to brokerage CD's and junior subordinated debentures, which began to go on our books in 1999. The last one of these was put on our books in the second quarter of 2004. Throughout that period of time we used an accounting treatment known as the shortcut method. The more prudent methodology would have been the long haul method, included in your trends are the restated results.

  • Turning to slide 8, I want to spend a little time talking about earnings for the fourth quarter. On this slide you can see the results of both the fourth quarter as well as the full year 2005. These are earnings based on income from continuing operations, as well as the adjusted income from continuing operations after the adjustment we made for FAS 133. If nothing else, that statement alone tells you the complexity of this quarter. We believe that for comparative purposes, the $0.33 is best used for comparison to your estimates as we plan to redesignate these hedges, and they will continue to be highly effective.

  • For the full year, our earnings growth year-over-year, using the restated financials, was a growth of 33.7%. For the fourth quarter of 2005, we saw a quarter over prior year quarter growth of 21.7%, again on earnings from continuing operations on a restated basis.

  • The biggest challenge of this restatement is it our inability to use prior reported numbers for comparative purposes. We pledge to work with you to help you better understand this as we go forward. As I stated before, we are pleased with these results, but we also want to acknowledge there is still work to be done until we achieve our goal of consistent high quality earnings. Two areas of extreme focus for us will be the net interest margin, which Jim will spend more time with you on today, and continuing to focus on cleaning up our loan portfolio, which Daryl will review with you later. But ultimately our emphasis must be on revenue growth.

  • Turning to slide 9, this slide is intended to show our performance on an EPS basis, again based on continuing operations, both before and after the restatement. To take away I would urge all of you to see is the smoothing effect that the hedges gave us in prior periods. We make another important point is that for 2006, we will be able to redesignate our derivatives as hedges again using the long haul accounting method, and you will not see any significant effect on our 2006 earnings forecast from this restatement.

  • On slide 10, I thought I would spend a little bit of time highlighting a few of the major expenses that offset our gain on the sale of Clarksville. These expenses, as delineated on slide 10, are the major expenses associated with that. These expenses will also explain a slight growth in our non-interest expense for the fourth quarter. As we look at the fourth quarter operations, it's important to note that Clarksville's out of those earnings and just another number I would highlight is we did see a loss of $500,000 on service charge revenue from the sale of Clarksville.

  • As we open the call for questions after Chris' portion, we'll be happy to provide you with any further detail you may need.

  • Now I would like the turn the presentation over to Jim Ryan, our Treasurer, to give you more detail on our margin for the fourth quarter and more importantly our plans for 2006. Jim.

  • - Treasurer

  • Thank you, Bob.

  • I would like to start on slide 12. This slide demonstrates the impact of reclassifying net derivative payments out of net interest income into other income for the periods of the fourth quarter 2004, to the third quarter of 2005. Net interest income for the fourth quarter of 2005, also excluded net derivative payments. The reclassification of net derivative payments had the effect of lowering net interest income by $4.1 million in the fourth quarter of 2004, and the gap narrowed to $1.9 million by the third quarter of 2005. As short-term interest rates rose, the gap between originally reported and restated net interest income closed since the interest rate swaps on brokerage CD's and junior subordinated debentures were received fixed pay floating.

  • Net interest income declined by $2.1 million during the fourth quarter of 2005. The decline was the result of lower earning assets, higher interest bearing liability costs, lower loan fees, and costs associated with terminating certain wholesale borrowings. Further in the presentation I will provide a more detailed analysis of the balance sheet.

  • Next, slide 13 shows the reclassification of net interest income impact on the net interest margin. The reclassification of net interest income had the effect of lowering the originally reported margin by 21 basis points in the fourth quarter of 2004, and the gap narrowed to 10 basis points by the third quarter of 2005. Again, as short-term interest rates rose, the gap between originally reported and restated net interest margin closed. The net interest margin dropped seven basis points during the fourth quarter of 2005. Later in the presentation I will provide a reconciliation of the changes in the margin during the quarter.

  • Slide 14 shows the changes in the balance sheet since the third quarter. The investment portfolio was essentially flat during the fourth quarter. However, after excluding Fed funds sold, the portfolio would have been down 1.7%. After the strong third quarter of loan growth, the loan portfolio declined during the quarter from the sale of $114 million in loans from the Clarksville branches on October 7th, significant pay down's and lines of credit, intentional reduction in certain credits, and slower organic growth. Deposits declined as a result of the sale of $172 million deposits from the Clarksville branches and the sale of $23 million of non-interest bearing escrow balances sold with the servicing sale.

  • Despite these sales, low cost deposits saw healthy growth during the quarter. Non-interest bearing deposits increased by more than 8% on annualized basis from the end of the third quarter to the end of the fourth quarter. Despite the impact of the previously mentioned sales. This increase is a reflection of our continued focus and investment and low cost deposit generation activities.

  • Lastly, during the fourth quarter the company repurchased approximately 400,000 shares, reducing equity by more than $9 million.

  • Next, the margin analysis on slide 15. As previously mentioned, the net interest margin declined by seven basis points during the fourth quarter of 2005. As short-term interest rates rose during the quarter, increases in asset yields were not enough to out pace the impact of deposit rate increases. The deposit rate increases were not only driven by rising short-term interest rates but by intense Midwest regional deposit pricing and, admittedly, by a lack of management discipline on pricing on our part, which is something we rectified. Additionally, as organic loan growth slowed, fees associated with new production declined, impacting the margin by three basis points during the quarter.

  • Lastly, the net interest margin component of the early termination of wholesale borrowings cost the margin additional three basis points. Termination costs of, excuse me, the termination of high cost wholesale borrowings will positively impact the margin in 2006.

  • Next, slide 16 shows where other margin improvements are likely to come from in 2006. Continued focus on low cost deposit generation, especially from our small and corporate business customers, secondly, enhanced discipline around deposit pricing, consistent with our strategic imperative around management discipline. Thirdly, funding loan demand through reductions in the investment portfolio. Fourthly, reduced reliance on borrowed funds. And lastly, benefits from balance sheet restructuring initiatives undertaken during 2005.

  • We are intensely focused on improving the margin in 2006, which will help achieve our third strategic imperative of consistent quality earnings.

  • Lastly on slide 17, we wanted to update our capital management strategy from the last time we spoke about it at the 2004 analyst day. On December 12th, we announced increase in the quarterly cash dividend, rather than declare the usual annual 5% stock dividend. The first quarter of 2006 quarterly cash dividend will increase 10.5% to $0.21 per share. Long-term, we are targeting a 55 to 60% dividend pay out ratio, which is why we increased the dividend. Additionally, the board authorized the repurchase of up to six million shares of its common stock for the period beginning January 1, 2006, and ending December 31, 2008. Long-term we expect to repurchase amount consistent with 25% of net income.

  • The result of the new dividend pay out expectations and the expected stock repurchases results in the retention of 15 to 20% of net income. We believe this is sufficient to support organic growth of the balance sheet and maintain our tangible common equity to assets ratio between 6 and 7%. However, it is important to note that any potential acquisition could change our capital retention strategy.

  • Next, Daryl would like to cover credit quality trends.

  • - Chief Credit Officer & EVP

  • Thank you.

  • As you can see on slide 19, non-accrual loans at year-end were $55.6 million down 3.2 million from the September 30th levels of 58.8 million, but up slightly from the 54.9 million reported at December 31, 2004. While total non-accrual levels remain basically unchanged in 2005, the mix of the non-accruals changed somewhat during the year with commercial non-accruals declining roughly $3.8 million but retail non-accruals increasing roughly 4.6 million. We attribute much of the increase in non-accruals to the weakening consumer fundamentals in our markets, along with the associated flood of consumer bankruptcies just prior to the change in the consumer bankruptcy laws in October. To give you color on our commercial non-accruals, at year-end we had only two non-accrual accounts in the portfolio that had an excess of $5 million, and only an additional seven loans with exposure in excess of a million dollars.

  • On slide 20, allowance coverage of non-accrual loans, as shown, improved slightly from 138% September 30, to 142% at year-end. This was due entirely to the previously mentioned decrease in total non-accruals

  • As slide 21 shows, we continued our steady reduction of classified and criticized loans. Classified and criticized loans at year-end were $219.8 million down $28.9 million or 11% plus in the quarter. For the full year, criticized and classified loans were down 120.5 million or in excess of 35%. As I have said in the past we do continue to see progress made in the area of reducing classified and criticized loans, but we have not yet been able to prove meaningful reductions in the non-accrual area. We continue to work hard at identifying loans that are showing deterioration early on the cycle, so they can either be rehabilitated in the short-term or moved out of the bank.

  • We do continue to believe that this aggressive approach, along with the already proven reduction in the risk and classified criticized category, should yield benefits in the non-accrual category. The timing of that sustained reduction is still uncertain, especially in light of the spike in non-accruals in the retail [inaudible] we saw in the fourth quarter.

  • With that brief update, I will turn it over to Chris for his comments.

  • - CFO & EVP

  • Thanks, Daryl.

  • Because the restatement of earnings due to the disallowance of our hedges, makes it extremely difficult to use 2005 results to gauge future performance, I have provided our 2006 balance sheet net income outlook in quite a bit of detail.

  • On slide 23 I have listed our key balance sheet growth expectations for 2006. Our outlook for commercial and consumer loan growth is a modest 2.5% to 4% from average 2005 balances. Indianapolis and Louisville will continue to provide most of our growth in 2006. I think it is important to note here, too, that we anticipate further reductions as Daryl mentioned, are criticized and classified assets, and these are also built into our loan growth forecast. Total earnings assets will be flat to slightly lower in 2006, as we continue to use cash flows from the investment portfolio to fund loan growth. The investment portfolio is likely to remain in the range of 27 to 30% of total assets in 2006.

  • Core deposits will grow 1 to 2% in 2006, with most of the growth coming in commercial demand deposits in consumer transaction accounts. Compared to average balances in 2005, we expect growth of 3 to 4% in non-interest bearing demand accounts in 2006.

  • We've committed significant resources to corporate cash management retail deposit marketing, as Jim mentioned, to bolster our transaction account growth in 2006. Continued strong core deposit growth is really key to attaining our net interest margin target in 2006.

  • On slide 24, I provided additional information key to further understanding our outlook in 2006. Our net interest margin outlook, in the range of 3.25 to 3.4%, is consistent with 2.5% to 4% commercial and consumer loan growth. Flat earning assets and a funding mix that improves with growth in our core deposits. Our outlook, our forecast includes a federal funds forecast of 4.5 to 4.75% and a continuing flat yield curve.

  • Our provision for loan losses in the range of 12 to 18 million anticipates some release of reserves in 2006. You will note that we expect net charge-offs in the range of 40 to 50 basis points, which translates to 20 to $25 million for the year. As Daryl noted and as I mentioned, our criticized in classified assets improved significantly in 2005, and we expect them to continue to decline in 2006. This, combined with loan growth in the 2.5 to 4% range, should support a lower reserve for loan losses.

  • We anticipate that non-interest income will be in the range of 155 to $162 million for the year. Key to this number is the fact that we'll have a full year of JW Flynn insurance in our 2006 results. We also expect improved mortgage revenue in 2006.

  • Our efficiency ratio is expected to remain in the 63 to 65% range. We expect non-interest expenses to increase in 2006, driven primarily by increases in benefits and incentive related expenses. Additionally, as you know, we have seven new branching coming online in 2006.

  • While fourth quarter loan growth in net interest margin weren't consistent with the steady improvements we saw in the second and third quarters of 2005, we're confident that we'll get back on track in these areas. We continue to be committed to our long-term objectives of 6 to 8% earnings per share growth, 55 to 60% efficiency ratios, and 15 to 17% return on equity.

  • And finally, on page 25, you'll note our first quarter 2006, and our full year earnings outlook. For first quarter. we expect to earn between $0.29 and $0.32 per share and full year 2006 results will be in the rage of $1.35 to $1.40 per share. I think it's important to note here that we plan to continue to provide guidance, frankly, we think it's very important to be as transparent as possible to the analyst community, but, plus, we like the discipline that it provides our company and I think you can continue to expect this kind of information from us going forward. With that, that concludes really our formal presentation, and I'll turn the back over to questions -- Q&A or over to Q&A to Tabitha.

  • Operator

  • [OPERATOR INSTRUCTIONS]. Your first question is from the line of Troy Ward.

  • - President & CEO

  • Troy, how are you doing?

  • - Analyst

  • I am doing fine, guys. Good afternoon.

  • - President & CEO

  • Thank you.

  • - Analyst

  • Bob, could you, a year ago we sat here on the fourth quarter conference call and, obviously, we had a lot of questions and a lot of talk and slides about the Ascend program, which was about six months old at that time, and Mike provided a bit of a lowered expected benefits from your original expectation, about 12%, but the way I saw it, it was about $0.40 in 2005 still, and 67 in '06. Now, most of that time period in the rear view mirror, can you give an update on the effectiveness of that program, and what you see the benefits were, and what we can expect from '06 from that?

  • - President & CEO

  • Sure, Troy, thanks. One, we just actually completed all of our tracking on Ascend December 31 of '05, was the 18th month since we started the process, so we did complete it, and I think what we found, and it is consistent with what we said in the past, we're very comfortable that we got in excess of the committed expenses. I would tell you on the fee side, we probably will get somewhere between 80 and 90% of the fees, and as it turns to revenue growth ideas, Troy, I have to be honest with you and tell you, I don't know how we did on those ideas. Those three components of Ascend created the full $77 million benefit.

  • I think you've seen in our expense run rates, the reduction in the cost. I think as Chris out laid our forecast for 2006, we're very comfortable that we will exceed our expense forecast. I think the fee side gets a little bit of a challenge because of the changes we've made in the mix, with the sale of Terrell and the acquisition of Flynn and with the sale of Clarksville, and you get the run rates. So I guess I would tell you that the biggest benefit we got out of it was expense savings and more importantly, probably the discipline that it put in place around how we manage capital on the expenses.

  • - Analyst

  • Can you give just a, we saw the $5 million expense related to a foundation. Can you just give a little color on that, and what is that going forward? Is that a one-time deal?

  • - President & CEO

  • Well, I am looking at our controller because I can't tell you that -- I guess it would depend on earnings, Troy, as whether we continue to make donations to the foundation. It's certainly our intent to continue to fund the foundation. You know what, the core of the biggest change I would tell you that's happened over the last fourteen months is a reaffirmation that we are a community bank. In order to fully support that vision, we need to be philanthropic in our markets. And we believe the best way to put discipline around our philanthropic work is through the foundation. It's going to provide us better control and better leverage and consistency in our strategic thrust around the philanthropic efforts across our full footprint.

  • We were very, heavily Evansville-centric in our philanthropic giving, and what we've done is form a foundation that has representation from across our footprint from all of our employees. It's not management driven. It's really from everybody, and they will make the decisions to the areas that we support. Right now they're developing a strategic plan, and we think the Old National Bank Foundation has a great benefit for us in the long-term.

  • - Analyst

  • Okay, just one more, and I will let others get in. Jim, you talked about the net interest margin. As you move Florida, and of course, we see your expectation for the full year margin, let's call it 330, as you move and you're able to reuse the long haul method on your hedges, would we anticipate the restatement look like it brought down the [inaudible] margin about 10 bits, would we expect an immediate pick up in Q1 of that?

  • - President & CEO

  • Troy, I am surprised you wouldn't ask me to explain the long haul method.

  • - Treasurer

  • We expect that the long haul methodology will be very consistent with what we previously reported under the shortcut methodology, and therefore, would expect to see the pick up, if you will, in the net interest income. That line that got reclassified out of net interest income to other income, starting in the first quarter will be back into net interest income.

  • - Analyst

  • Okay. And can I assume that the reason your hedges were deemed not qualifying was because of the initial part of the hedge had value, is that what it was?

  • - Treasurer

  • Correct. The initial -- the fair value was not deemed to be zero at the time of inception or at the inception of the hedge. Therefore it was not did not qualify for shortcut accounting.

  • - Analyst

  • That's what I was talking about.

  • - Treasurer

  • On the brokerage CD's, though.

  • - Analyst

  • Thanks, guys.

  • - President & CEO

  • Thanks, Troy.

  • Operator

  • Your next question comes from the line of Charlie Ernst.

  • - President & CEO

  • Hey, Charlie.

  • - Analyst

  • Good afternoon. How are you guys doing today?

  • - President & CEO

  • Doing great.

  • - Analyst

  • Good. Looking at your net charge-off in your provision guidance, it seems like you're basically guiding to an under provision of say 10 to 15 million. Is that about right, do you think on the dollar amount?

  • - Chief Credit Officer & EVP

  • Charlie, this is Daryl. I am not sure I understand what you mean by under provision, help me here.

  • - Analyst

  • So your charge-offs are about 10 to 15 million greater than your provision assumptions during 2006?

  • - Chief Credit Officer & EVP

  • Yes, that would be true. We're expecting the 20 to $25 million range in charge-offs, and then you take that 12 [inaudible] on that range, you've that gap there.

  • - President & CEO

  • It's important, as you look at the methodology we use for our provision. It looks backwards, and as the portfolio quality continues to improve, we have a pretty robust process overlooking at what we should be providing, and we will continue to be guided by that, but I think what we'll be getting is the benefit of the hard work of the past that will help us with our provision.

  • - Analyst

  • Okay. And my next question is the tangible capital ratio, which is I think is what you all managed to, seems to be creeping down towards the lower end of your comfort range. Does that impact your bye back at all in the near term?

  • - Chief Credit Officer & EVP

  • I think as you saw from our capital management strategy, we continue to believe that 6 to 7% is a good range for us, and we'll be guided by that range, and our repurchase activity will be guided under that total range, but nonetheless, that amount consistent with 25% of net income would still put us squarely within that range.

  • - Analyst

  • Okay. And then lastly, on the fee income side, the range that you all are guiding to, I guess is 155 to 162, and if I look at this quarter, I think on a core basis you're around 142 or so annualized. So you're pretty comfortable that short of a 10% plus growth rate is achievable.

  • - President & CEO

  • I tell you, we get the full year benefit of JWFlynn. We continue to be very, very pleased with that acquisition, and I think it's just better management of our services charges. But really the full benefit comes from Flynn, as well as our capital markets. We had a very strong 2005 in capital markets, and we believe that business will continue to be enhanced.

  • - Analyst

  • Can you remind me, what quarter JWFlynn closed in.

  • - Chief Credit Officer & EVP

  • Closed in May, so one of the important things there, too, is the seasonal implications of insurance revenue generally the first quarter first, early second quarter is pretty significant for the insurance business.

  • - Analyst

  • Okay. Great. Thanks a lot.

  • - President & CEO

  • Thanks, Carlie.

  • Operator

  • Your next question comes from the line of David Konrad.

  • - President & CEO

  • Hi, David.

  • - Analyst

  • Hey, good afternoon. Question regarding the breakdown of expenses. I forget which slide it is. But you break down the 5 million, the 1 million.

  • - President & CEO

  • Yeah.

  • - Analyst

  • The balance sheet restructuring for 2.1 million, I was wondering if you could break that out? I was going through the press release, and I do see a .6 million charge for terminating federal loan bank advance, but I am not sure I understand the full details behind the 2.1.

  • - Treasurer

  • There were several pieces to that. .6 million did run through the margin with the termination of the federal home loan back advance. But an additional million dollars ran through other gains and losses associated with the termination of that federal home loan bank advance. That makes up about 1.6. We had some securities losses that added up to .3. We also sold some residential mortgages, which accounted for the difference.

  • - Analyst

  • Okay. Thank you.

  • - President & CEO

  • Thanks, David.

  • Operator

  • Your next question comes from the line of Fred Cummings.

  • - Analyst

  • Yes, good afternoon.

  • - President & CEO

  • Hey, Fred, how are you doing.

  • - Analyst

  • Great. Bob, can you touch on your loan growth by geographic region, in particular wanted to gets some sense for how you're doing in Indianapolis?

  • - President & CEO

  • Great question, Fred. If you had been here Monday morning, you would have gotten good color on it. To be honest, we're a little disappointed where we are right now in Indianapolis. I'm going to be honest with you. I think we saw in the fourth quarter, they closed a lot of deals. We had some pay downs on our lines of credits, but our pipeline, based on those closings, dropped down, and the pipeline is not where we want it to be. In fact, one of the reasons Mike is not on the call is Mike is up in Indianapolis having reminder session about building that pipeline.

  • On the other hand I would tell you the other eight regional markets were comfortable with where the pipelines are, particularly Louisville. We continue to make great end roads in the Louisville market, but I would be less than honest with you if I didn't tell you I was a little disappointed in Indianapolis, and I am hoping they listen to the recording of this call.

  • - Analyst

  • And, Bob, as it relates to targeted head count growth, what are your plans in terms of recruiting additional commercial lenders in '06?

  • - President & CEO

  • Heavy emphasis, Fred, in Louisville. We will continue to look for spot opportunities in Indianapolis. We're comfortable with our lenders across the other markets, and the other markets and really in Indianapolis and Louisville, will continue to look to upgrade talent if we have that opportunity.

  • - Analyst

  • Okay. And then just lastly, home equity, most banks have struggled with that in recent quarters, in your volumes and your portfolio was down as well. Does that reflect just weaker demand in your markets, or are you guys emphasizing that product less right now?

  • - President & CEO

  • Well, I think part of it's weaker demand, Fred. But part of it is we have a product gap against our competition here. Both fifth, third, and a couple of our other banks have what you call a loan-within-a-line, where you can fix a certain term product against your home equity loan. Unfortunately, we are systematically challenge and can't do that, and we are tending to lose business. We're working on some fixes with our vendor, and we're also working on some marketing fixes to cover that.

  • - Analyst

  • Okay. All right. Thanks, Bob.

  • Operator

  • Your next question comes from the line of Kenneth James.

  • - Analyst

  • Good afternoon.

  • - President & CEO

  • How are you doing?

  • - Analyst

  • Doing well. Wanted to touch on our outlook for expense growth. I believe you said the expense base would be growing again through 2006, given some branch expansion, et cetera,.

  • - President & CEO

  • Right.

  • - Analyst

  • In percentage terms, is that going to still be pretty tight, like low single digits, or do you think it could be higher than that?

  • - CFO & EVP

  • Well, Ken, this is Chris. I think it is fair to say that it will be low and consistent with those numbers, the efficiency ratio we provided. Largely, all of our operating expense growth, a very good portion of it is really coming from benefits and incentives we put back in for 2006, that were largely pulled from 2005 results. Of course, then the additional expenses associated with branches.

  • - Analyst

  • Okay. And then also if I could touch on the margin for a second here. Can you talk about what you're assuming from a write outlook in your margin assumption?

  • - Chief Credit Officer & EVP

  • Yeah. We've got 4.5% to 4.75 in the fed fund rates and a very flat yield curve. We obviously continue to model many scenarios. That's the one that seems most realistic for us right now.

  • - Analyst

  • Okay. Thank you.

  • - President & CEO

  • Ken, glad to have you on board.

  • - Analyst

  • Thank you. Glad to be here.

  • Operator

  • At this time there are no further questions.

  • - President & CEO

  • Obviously, we stand ready to answer any questions. Feel tree to call Lynell directly. As we said, it's a very complicated quarter, so we know that you may have questions as you have a chance to digest it. Thank you for your support, and we look forward to hearing from you. Thank you,Tabitha.

  • Operator

  • This concludes Old National's call. Once again, a replay along with presentation slides will be available for twelve months on the shareholder relations page of old national's website at www.oldnational.com. A replay of the call will also be available by dialing 1-800-642-1687. Confirmation code 3913782. This replay will be available through February 14th. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference.