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Operator
Welcome to the Old National Bancorp first-quarter 2008 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC Regulation FD. The call along with corresponding presentation slides will be archived for twelve months on the investor relations page at www.oldnational.com. A replay of the call will also be available beginning at 1 PM Central time today through May 12.
To access the replay dial 1800-642-1687 conference ID code 3212-7117. Those participating today will be analysts and members of the financial community. At this time all participants are in listen-only mode and then we will hold a Q&A session and instructions will follow at that time. At that time the call will be turned over to Miss Lynell Walton, Vice President of the Investor Relations for opening remarks. Miss Walton you may begin.
Lynell Walton - VP, IR
Thank you and good morning to all of you on the call. We appreciate your joining us for Old National Bancorp's first quarter 2008 earnings conference call. With me today are Bob Jones, Chris Wolking, Daryl Moore, Barbara Murphy and John Kissel. Before we begin I would like to refer you to slide three and point out that the presentation today does contain 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 today. These risks and uncertainties include but are not limited to those which are contained in this slide and in our filings with the SEC.
Slide four contains our non-GAAP financial measures information. Various numbers in this presentation today have been adjusted for certain items to provide more comparable data between periods and as and aid to you in establishing more realistic trends going forward. Included in this presentation are the reconciliations for such non-GAAP data. We feel these adjusted metrics provide a meaningful look at our first-quarter performance as well as our performance going forward.
If you turn the slide five you'll see our agenda for the call. First Bob Jones will comment on our first-quarter earnings results which demonstrate a continuation of many of the positive trends from 2007. Daryl Moore will then lead the discussion of our credit quality metrics and how we're preparing to manage this risk in the year to come. Next Chris Wolking will detail our expanding net interest margin and the major components affecting non-interest income and expenses and resulting improvements in our efficiency ratio during quarter. Bob will then conclude with guidance for earnings and other financial metrics and then we will open the call up for your questions. With that, I will turn the call over to Bob Jones.
Bob Jones - President and CEO
Thank you Lynell and good morning to everybody on the call. I'm going to begin my remarks on slide seven. Today as you all know we were pleased to announce earnings for the first quarter 2008 of $0.29 per share. This $0.29 represented an 81% increase over the first quarter of 2007 earnings of $0.16 per share.
In the first quarter of 2007, we did execute a number of strategic initiatives that focused on improving our net interest margin and reducing our overhead. That resulted in $7.7 million in pre-tax charges for the quarter all of which have contributed to the improved fundamentals that are evident is in our previous quarters.
We're particularly pleased with this quarter's performance because as we announced on April 7, Old National did have two items that had a material effect on this quarter's earnings -- fraud related charges of $17 million related to the actions of a former commercial lender in our Indianapolis market and a $6.6 million reversal of an income tax liability that partially offset at fraud related charge. This quarter we also had $4.5 million in security gains and like a number of other banks we did receive the redemption of our Visa Class B shares which resulted in a $1.5 million gain.
The highlights for the quarter include commercial loan growth of $45.6 million over the fourth quarter of 2007 and we do find this noteworthy given the economic slowness in some of our markets and particularly given our internal focus on credit quality. We continue to be very pleased with the expansion of our net interest margin.
Same factors continue to drive this expansion -- improved discipline on our deposit pricing, the benefits of our sale leaseback transaction and our slightly liability-sensitive position of our balance sheet. This benefit -- the balance sheet position benefits our margin because of the fed rate cuts.
Overall revenue was up $20.3 million or 22% over the first quarter of 2007 driven in a large part by our performance in fees, service charges and other revenue which was up 15.1%. Reflecting the power of that revenue increase our efficiency ratio for the quarter did drop to its lowest levels since 2005 to 63.87% which is in line with our stated goal of 60 to 65%.
But as noted earlier, our revenue did include both the security gains and the Visa Class B settlement. Excluding these items our efficiency ratio would've been slightly higher. As promised, on April 7 at the end of the call I will be updating you on our guidance for the year and those areas affected by our lender's misconduct but as we said in our earnings release we are pleased to affirm our full year's earnings guidance. We continue to expect our 2008 earnings to be in the range of $1.13 to $1.19 per share.
Moving to slide eight we showed the reconciling items for the quarter. When you adjust our GAAP earnings with the items shown on this slide our non-GAAP adjusted earnings would've been $0.31. I point this out only for purposes of assisting you in building your models.
On slide nine I will begin my review of our geographic performance for the quarter and I will begin with a review of our commercial lending growth. Our growth for the quarter in commercial loans and leases is noteworthy because we saw positive momentum in the markets that have not traditionally grown, Bloomington and Muncie. We made management changes in both of these markets and we're seeing the benefit of the renewed enthusiasm driven by that leadership.
As it pertains to Indianapolis, we did move the credits related to our previously disclosed event along with a few other workout credits from Indianapolis into a separate cost center. This will allow for stronger management oversight as well as better tracking purposes. These are shown on this chart in the other category which shows a $26.9 million increase. Combining this number with the Indianapolis number will give you better sense for the growth in the the Indianapolis market. We saw positive growth of $13.1 million or 4.7%.
In our Western Kentucky and Northern Indiana markets the decrease in outstandings are related to in Northern Indiana we had a $1.3 million tax anticipation warrant that paid off and we also had paydowns on $1 million in nonperforming loans. In Western Kentucky there's really a variety of reasons ranging from a line paydown to customers who refinanced credits and the payoff of nonperforming loans. No single large relationship was affected.
Let's turn to slide 10 so that we can quickly review our consumer loan performance for the quarter. First quarter is traditionally a very slow time for consumer loan originations and for growth for Old National and this quarter was no exception and we see it as compounded but what we see is a decline in consumer confidence.
Our three growth markets of Louisville, Indianapolis and Northern Indiana were our top performers as you would expect. We will be increasing our focus on consumer loans in the second quarter with various marketing initiatives.
Slide 11 reflects our continued improving performance in DDA growth. Net new checking account openings were a positive 1308 for the quarter. This growth in new account openings was yet another indicator of the sales discipline that has been stalled in our retail system.
Overall we saw a slight growth in our non-interest DDA balances for the quarter highlighted by the positive growth in Northern Indiana and Indianapolis. Evansville and Louisville were impacted by a variety of issues. For example we had clients tht paied down their lines or we had clients that moved money to off-balance sheet investments.
Slide 12 shows the performance of our recently opened branches in Indianapolis, Louisville and Lafayette. But as I mentioned on the last quarter's call the growth in these markets is affected because we are no longer paying the above market interest rates on deposits. Though it is safe to say we are generally pleased with our performance in these branches.
In the second quarter we will be opening our first retail facility in Ft. Wayne as well as another new facility in Lafayette and we will report on these two facilities on next quarters call. In addition we will be opening our fourth facility in Louisville in the third quarter. Let me now turn the presentation over to Daryl Moore to review our credit trends.
Daryl Moore - EVP and Chief Credit Officer
Thank you, Bob. I would like to begin my part of this quarter's presentation reviewing the trends in our nonaccrual, classified and criticized loans. As slide 14 reflects nonaccrual loans rose $29.4 million in the quarter to a level of $70.2 million. Of that $29.4 million increase $23 million is associated with the problems identified with our former Indianapolis loan officer and additional deterioration of these loans during the quarter.
$6.4 million increase not associated with the Indianapolis event can mainly be attributed to two commercial real estate loans which were downgraded during the quarter. To give you a sense of which portfolio is most challenged at this time approximately 61% of our total nonaccrual loans at quarter's end came from our commercial real estate portfolio.
With respect to our large nonaccruals at the end of this past quarter we now have six loans with exposure $2 million or greater.
As slide 15 shows classified loans which include nonaccrual loans rose during the quarter showing an increase of slightly less than $39 million in the period and now stand at approximately $154 million. Eliminating the effects of the Indianapolis loan officer related credits, total classified loans increased in the quarter approximately $18.5 billion. Included in this $18.5 million total is the $6.4 million nonaccrual increase mentioned in my remarks on the first slide.
Not including the nonaccrual additions the $12.1 million increase in this category was across a broad segment of industries including the ag, hotel, retail auto and building supply industries. Slide 16 shows our criticized loan trends over the last 17 quarters. As we have discussed in prior calls, our trendline showed good progress resulting from our efforts to reduce criticized loans up until the third and fourth quarters of 2006 where we posted elevated levels.
We continued the improving trend in 2007 up until the fourth quarter when criticized loans increased approximately $24 million. We stabilized the level of criticized loans in the first quarter 2008 with an increase of less than $1 million posted in the quarter. Obviously our goal is to make sure that as few of these credits as possible find their way into the classified or nonaccrual categories in the future.
As slide 17 shows we maintained our ninety-plus delinquencies at three basis points of total outstandings. As I would again point out this quarter we have historically managed our ninety-plus delinquencies very well and our results compare very favorably to our peer group's average of 15 basis points.
Turning to slide 18 net charge-offs for the quarter were $6.1 million or an annualized 52 basis points of average loans. Of that $6.1 million $3 million was attributable to the Indianapolis situation. Eliminating the the write-downs associated their charge-offs would've been 26 basis points. While we certainly do not know for sure what further losses will be recognized in 2008 related to the Indianapolis incident Bob will provide you with some projected charge-off guidance as he wraps up the slide presentation this morning.
As communicated earlier in the quarter, we did increase significantly our provision for loan losses in the first quarter providing $21.9 million. As noted in our communications $17 million of that provision related to the Indianapolis situation netting a $4.9 million provision for the quarter absent those events.
Finally, turning to slide 19 we graphically depict where Old National stands in terms of commercial real estate exposure as a percent of total risk-based capital and compare our level of exposure to the concentration level of banks of several different sizes. As you can see at 164% of risk-based capital, we compare very favorably in this category to other midsized banks and community banks. While this fourth quarter 2007 graph shows a slight increase in our percentage last quarter the increase was solely a function of reduced capital as we reduced our commercial real estate exposure in that quarter.
With the combination of further reductions in commercial real estate exposure and the increase in risk-based capital in the first quarter of 2008 we should continue to compare very favorably to peers when first quarter comparisons are published. There appears to be little doubt in many minds that credit will continue to be a focus for some time to come.
If you back out the loans related to the Indianapolis misconduct you'll still see that Old National is participating with the industry at least to some degree in recognizing that increased risk in our different loan portfolios. However, we believe that because of the more conservative stance we began to take sometime back as well as te investment we've made in our credit risk management platforms the effects on Old National may be less severe than what plays out for some of our competitors. With that I'll turn the call over to Chris Wolking.
Chris Wolking - Sr. EVP and CFO
Thank you, Daryl. I will begin on slide 21. As Bob said, our net interest margin increased to 3.68% in the first quarter. At 3.68 our net interest margin is 12 basis points higher than our fourth quarter margin and 68 basis points higher than our first quarter 2007 net interest margin. Importantly, net interest income increased $2 million to $64.2 million from $62.2 million in the fourth quarter of 2007 even though average earning assets declined slightly during the quarter.
Slide 22 illustrates the monthly trend in our fully taxable equivalent net interest margin beginning in March 2007. In May and August 2007 we recovered $1 million and $1.6 million, respectively from the collection of two separate commercial real estate loans which lifted our net interest margin 17 basis points in May and 27 basis points in August 2007.
Much more margin improvement in the third quarter of 2007 was due to the effort of our banking managers to reduce deposit costs. The cost of our interest-bearing deposits not including brokerage CDs declined 14 basis points during the third quarter of 2007. From September 2007 through December 2007, our margin continued to benefit from our focus on managing deposit costs as well as our sale leaseback transactions and the decline in short-term interest rates.
During the first quarter of 2008, we were able to sustain our deposit pricing discipline plus our margin continued to benefit the sale leaseback transactions we executed last year. The primary driver of our improved net interest margin during the first quarter however was the 200 basis point decline in the federal funds rate between late January and mid-March. As we've discussed in past calls our balance sheet and our net interest income are slightly liability sensitive.
Slide 23 details the impact to our margin of our sensitivity to falling rates during the first quarter. Our margin declined 34 basis points due to lower asset yields during the first quarter while lower cost of interest-bearing liabilities raised the margin by 50 basis points.
Changes in mix and volume primarily of funding reduced our margin by three basis points one less day in the first quarter 2008 compared to the fourth quarter 2007 reduced our margins by one basis point. Our investment portfolio yield declined 11 basis points during the quarter while our loan portfolio yield declined 42 basis points. These declines accounted for the 34 basis point impact on margin from declining asset yield.
Of significant note the yield on our federal agency security portfolio declined 51 basis points during the first quarter due to the $282.7 million of agency securities that were called during the quarter. Interest-bearing deposit costs including the cost of brokerage certificates and deposits declined 52 basis points during the first quarter. Excluding brokerage certificates of deposits interest bearing deposits declined 53 basis points so our banking managers were able to continue to reduce deposit rates during the quarter as short-term interest rates declined.
Our borrowed funding costs declined 82 basis points during the first quarter. The lower-than-expected interest rates during the quarter allowed us to regain $108.2 million in expensive wholesale funding through calls and maturities. Much of the redeemed funding was replaced with federal funds purchased and federal home loan bank advances at interest rates lower than the funding which we replaced.
We added $200 million in federal home loan bank advances during the quarter with maturities from two to five years which while costing more than short-term borrowings in the near-term reduced our liability sensitivity and should help stabilize the margin when interest rates begin to increase.
Slide 24 shows the quarterly trend in our cost of interest-bearing deposits. When brokerage CDs are included in our deposit costs, deposit costs declined 52 basis points from the fourth quarter 2007. In the fourth quarter of 2007, our deposit costs were 32 basis points below the deposit costs of our peer group. This spread widened from 11 basis points in the third quarter and negative seven basis points in the second quarter of 2007.
We expect our margin to be in the range of 360 to 370 for the remainder of 2008. While our March margin was 377 there are several factors that may negatively impact our margin to remainder of 2008. One, we expect to continue to introduce our liability sensitivity by lengthening the repricing maturity of our wholesale funding. Because of the steepness of the yield curve this should reduce the rate of decline in our wholesale funding costs or increase the cost of our wholesale funding depending on the direction and magnitude of interest rate changes for the remainder of 2008.
Two, we may not be able to reduce the costs of our deposits if interest rates continue to fall due to competitive pressures on deposit pricing. And three, if credit quality spreads tighten in the capital markets we may get further redemptions in our investment portfolio and reinvestment rates will likely be lower than the rates of the called investments. Our investment portfolio yields may decline as a result of accelerated redemptions and lower reinvestment rates.
On slide 25, note that tangible equity as a percentage of tangible assets increased to 6.44 and tangible common equity as a percentage of tangible assets increased to 6.55% for first quarter. We accrued our first quarter 2008 dividend in December 2007 when the Board declared a dividend on December 18. Therefore, we did not record a dividend during the first order. The dividend was paid to the shareholders in March 2008 of course but because we accounted for the dividend in December 2007, we recorded a 0% dividend payout in the quarter.
Tangible common equity increased by $20.6 million during the quarter and total assets declined $122.6 million at March 31, 2008 from December 31, 2007. Lower negative other comprehensive incomes due to improved market value in our investment portfolio lifted tangible equity slightly but the primary contributors to the improved capital ratios were decreased common equity and lower total assets.
Our tangible common equity ratio target is 6 to 7%. And we feel the current uncertainty in the economy warrants a tangible common ratio in the upper half of our range. We did not buy back shares in the open market during the quarter nor do we expect to buy back shares in the open market for the remainder of 2008.
On slide 26, you will note that first quarter non-interest income not including securities gains and derivative losses was down $0.6 million compared to the fourth quarter of 2007. The fourth quarter of 2007 included $4.3 million in upfront gains from the sale leaseback of 47 financial services facilities. First quarter 2008 noninterest revenue included $1.5 million in proceeds from the redemption of Visa Class B shares and $2.4 million in profit-sharing revenue in our insurance brokerage business unit.
Profit-sharing revenue is normally recognized in the first quarter and is paid to us by the companies the agency represents based on loss experience in the prior year. Profit-sharing revenue was $1.2 million higher than the first quarter 2007 due to better loss experiences in 2007 compared to 2006.
2007 was a challenging year for insurance agency due in large part to the lower profit-sharing revenue in the first quarter of 2007. In addition to the $43.1 million in non-interest revenue we reported in the first quarter, we generated $4.5 million in securities gains $0.7 million in derivatives losses.
$3.4 million of the securities gains came as a result of the early redemption of the (inaudible) agency securities I discussed earlier in the call. These securities were held on our balance sheet at values lower than par. The gains were generated when the securities were redeemed at par value.
On slide 27 note that non-interest expenses declined $0.1 million compared to the fourth quarter of 2007 and $2.1 million compared to the first quarter of 2007. As Bob previously mentioned, Old National incurred $7.7 million in expenses related to restructuring the balance sheet, the consolidation of financial services facilities and other productivity improvement initiatives.
$3.4 million of this expense was reflected in non-interest expense in the first quarter of 2007. Occupancy expenses in the first quarter of 2008 were $9.6 million and include a full quarter's lease expense associated with our sale leaseback transactions.
In our 8-K released on April 7 we announced that in the first quarter 2008, we reversed and an income tax liability of $6.6 million associated with an uncertain tax position. This reversal was as a result of a favorable tax court ruling related to tax-exempt income in our Indiana Old National insurance subsidiary. This reversal will reduce our expected effective tax rate in 2008 to approximately 11%. Going forward our annual effective tax rate should remain at approximately 20%.
Finally, on slide 28 I have highlighted our efficiency ratio trends since first quarter 2005. Our first quarter 2008 efficiency ratio of 63.87% continues the downward trend we've experienced since the first quarter 2007. As I noted earlier in the call, non-interest expenses decreased slightly during the quarter and total revenue was up $4.8 million or 4.5% over the fourth quarter.
Subtracting the $4.5 million in securities gains and $27 million in derivatives losses from total revenue, our efficiency ratio would've been slightly higher than the 63.87% reported for the quarter. I'll turn the presentation now back to Bob for final comments.
Bob Jones - President and CEO
Thanks, Chris. I'm going to close our presentation on slide 30 by updating our outlook for 2008. As I said early on in the call we're very pleased to reaffirm our full year guidance at $1.13 to $1.19 per share. Given the challenges that exist in the economy and the much, much discussed situation in Indianapolis, this confirmation is a validation of the sound operating fundamentals that been built over the last four years of at Old National. We've been consistently focused on our three strategic imperatives. That laserlike focus has positioned us well to do with both external and internal challenges.
In Daryl's update he supplied you with the background analysis that we use to update our guidance of both our loan loss provision and in our net charge-offs. As you noted a large driver of the variance from our original guidance is the situation in Indianapolis but there's also a portion that is tempered by the overall weakness in the economic climate that exist in our markets.
Our guidance for net charge-offs assumes that we will be in the high-end of our original guidance of 25 to 35 basis points for the year and then further assumes a 50% loss on the impairment associated with the Indianapolis event the net result as we are revising our guidance for net charge-offs to a range of 55 to 65 basis points. The provision guidance of 27 to $33 million reflects the incremental addition of the $17 million related to Indianapolis to the guidance that we gave you last quarter.
Chris already gave you a good perspective on our outlook for net interest margin. Our improved operating fundamentals allow us to increase our margin guidance for the year to 360 to 370. At this time all of us will be happy to answer all your questions.
Operator
(OPERATOR INSTRUCTIONS) Scott Siefers, Sandler O'Neill.
Scott Siefers - Analyst
Let's say -- I guess, Daryl, first question is for you. I just want to make sure I'm thinking about things right. You suggested that CRE is (technical difficulty) the area where most of the nonperformers are coming from. Is that all either directly or indirectly related to either housing, construction or are you seeing any weakness in nonhousing related areas of CRE?
Bob Jones - President and CEO
Scott, most of it is in the housing related either acquisition development or construction projects, condos, those types of things. I will tell you though we're beginning to see some of it spill over into the commercial retail area. We're seeing some weakness there especially in our Indianapolis market. So far it is been mostly residential related but we do see some spillover into that retail area.
Scott Siefers - Analyst
I'm not sure if my next question would be more appropriate for you or Bob but I guess I'm just curious as to what kind of if any pricing power you guys are getting on the asset side, in other words approved loan spreads just given kind of your general repricing of risk systemwide.
Bob Jones - President and CEO
We're not really seeing it, Scott. We wish we were. We still have some irrational pricing going on on the asset side. I think it's a little bit reflective in the consumer side and on the commercial side. We just haven't seen that risk-based pricing elevate the spreads to what they should be at this time. Time will tell whether that would change over the next couple of quarters.
Operator
Charles Ernst, Sandler O'Neill.
Bob Jones - President and CEO
Charlie, Scott beat you in today. You didn't get to be first.
Charlie Ernst - Analyst
I know, I'm going to have to do something about that. Can you guys just talk a little bit about the other fee line and actually -- maybe I included something in there -- no, I think it's pretty clean -- and just say whether that is a good run rate now? It's hard to look at it given all the increase in fees I think from the deferrals. So are we at a good run rate now on that line?
Chris Wolking - Sr. EVP and CFO
I think that it's fair if you begin to subtract out the -- certainly subtract out the securities gains and remember too that our Visa gains were in there as well as the quarterly lift from our insurance agency. That typically is a one-quarter event. But I think the one-quarter event this year is more representative than the lower number we had a year ago in the first quarter.
Charlie Ernst - Analyst
And then can you remind me how long the deferred gains are going to last?
Chris Wolking - Sr. EVP and CFO
Well the deferred gains will be parsed out over the life of the actual transactions and those go from 10 to 20 years so it will be spread out for quite a while.
Charlie Ernst - Analyst
And then the February margin that dipped, was that just from the from fewer days?
Chris Wolking - Sr. EVP and CFO
Yes.
Charlie Ernst - Analyst
And could just remind me why your March margin is so much higher than your guidance? You said there was some federal home loan bank borrowings that you've extended --
Bob Jones - President and CEO
I think I pointed to the significant decrease in rates that we had and the benefit that our balance sheet and income stream gets from being liability sensitive. So I would point to that as being a very strong lift and it really played out obviously at the very end of the quarter as those rates all came -- those decreases and rates all came together. We still believe that there's challenges from repricing the investment portfolio, what happens to short-term rates going forward and the challenges that we are all having with deposit rates.
Chris Wolking - Sr. EVP and CFO
I think the other thing, Charlie, is that we are of the opinion that we're getting fairly close to the bottom of the cycle of rate cuts and we do think it's time to begin to reposition our balance sheet to become a little more neutral from a slight liability sensitive -- I don't think you'll ever see us become asset sensitive but we want to get closer to neutral and we're going to take some steps over the next few quarters to do that to prepare us for what we believe will be some upward pressure in interest rates.
Charlie Ernst - Analyst
If we do go down a couple more times why wouldn't you think about becoming asset sensitive?
Bob Jones - President and CEO
I like neutral to slightly liability sensitive as a fairly consistent approach. That has really been our long-term philosophy and I think it's one that works well. You have a lot more flexibility on the liability side to be able to make changes than you do on the asset side.
Charlie Ernst - Analyst
Okay and then just your provision guidance obviously implies a pretty material drop-off in the final three quarters of the year. So, I just want to make sure that it's -- you're basically saying you've put in the big NPA and over the year you're expecting charge-offs from that but you're not going to match the charge-offs with your provision?
Bob Jones - President and CEO
Well no, because any charge-offs would come from the 17 we've already taken in the provision (multiple speakers)
Charlie Ernst - Analyst
(multiple speakers) that you provided a lot of the charge-off guidance that you're giving.
Bob Jones - President and CEO
Right, exactly.
Charlie Ernst - Analyst
Okay great. Thanks a lot you guys.
Operator
Erika Penala, Merrill Lynch.
Erika Penala - Analyst
(multiple speakers) I had a question on the CNI book. Given your caution surrounding housing have you gone through your CNI credits to look for borrowers whose fortunes may be directly or indirectly tied to the housing market?
Daryl Moore - EVP and Chief Credit Officer
You know obviously we have looked through all of our portfolios and downgraded some of those borrowers who are related to retail markets or retail housing markets. We have done that kind of across the board with all of the segments we see weakness in. We would have done the same thing with those segments that have a lot of sensitivity to petroleum prices.
I can't share with you what those dollars are. We haven't quantified them but we've gone back and reviewed the asset quality ratings for customers in those industries. Some of those obviously as they begin to see weakness from the topline are being downgraded. But we do that on an individual basis. So the long answer to question is yes, we're looking through our portfolio and trying to understand how those dynamics will play on our CNI customers.
Bob Jones - President and CEO
You know and it's fair to say we started that process almost two years ago as we began to foresee the challenges in the real estate market. So we've tried to be fairly proactive in that case.
Erika Penala - Analyst
What do -- I'm particularly curious on the consumer side but what are early stage delinquencies looking like?
Chris Wolking - Sr. EVP and CFO
You know delinquencies on the consumer side as we look at current period versus period last year are up. Losses are up. They aren't up as significant quite frankly as I thought they would be at this point in time. And so we are pretty pleased where we are. It's a bit surprising but they are up but they're well controlled at this point in time.
Erika Penala - Analyst
Okay, and on the fee income side what are you assuming for insurance -- the growth of your insurance business that when you came up with $1.13, the $1.19 number?
Bob Jones - President and CEO
Well I think and I'm sure we've talked about this in previous calls, property and casualty business is still a challenging business for us right now. As you know it's challenging industrywide. Insurance costs continue to get pushed down as underwriting losses are down. So, I think if you look at our numbers we would expect flattish kind of performance for 2008 but as I mentioned we get much better performance in the contingency revenue line item in the first quarter than we had last year.
Unidentified Participant
It's an interesting business. Renewals are at an all-time high but commissions are at an all-time low because the renewal rates have actually decreased in terms of price. But for the balance of the year we see that business as being flat in revenue.
Erika Penala - Analyst
One last question. On the expense side is this a good run rate to assume going forward or is there any cost rationalization that you are planning to do?
Bob Jones - President and CEO
There's no cost rationalization built into the guidance we gave you. We do plan on getting -- we do plan on doing as we have said before cost rationalization but none of that is included in our guidance.
Erika Penala - Analyst
Thank you for taking my call.
Operator
(OPERATOR INSTRUCTIONS) Stephen Geyen, Stifel Nicolaus.
Stephen Geyen - Analyst
This is probably a question for Daryl. Just wondering, residential development book of loans, just wondering if those loans are spread across the entire book (inaudible) for the bank or is there some concentration in the (inaudible) area?
Daryl Moore - EVP and Chief Credit Officer
Actually they are spread across the footprint but the concentration if we had one would not be in Evansville. It would actually be in Indianapolis.
Stephen Geyen - Analyst
Okay, and if you can talk a little bit about the housing market in Indianapolis what that looks like?
Bob Jones - President and CEO
I would say, Stephen, that in the Midwest clearly Cleveland and Detroit lead the pack in terms of weakness but then I would say there's a tier two weakness that exists in Indianapolis and Columbus. We are as we have said on previous calls concerned about that weakness in the Indianapolis market.
Stephen Geyen - Analyst
Last question -- you said you're expecting to open a branch in the third quarter in Louisville. I'm just wondering if we can expect some kind of [bulging] in costs or if those costs are going to be spread over (inaudible) quarters?
Chris Wolking - Sr. EVP and CFO
It would be capitalized over the life of the lease. You shouldn't see any significant uptick in cost out the Louisville market.
Stephen Geyen - Analyst
Any other branch plans for 2008?
Bob Jones - President and CEO
Not for 2008. Well we've got a consolidation down in our Madisonville, Kentucky market where we are -- we sold our main office and we're closing another facility and we're going to consolidate into one facility. Those are existing markets and it's really a cost save for us.
Operator
Charlie Ernst, Sandler O'Neil.
Bob Jones - President and CEO
You didn't get in first so you've got to come back for two, right?
Charlie Ernst - Analyst
Exactly, I will get him somehow. The occupancy expense line, I know that's been ramping because of all the sale leasebacks. Are we on a good run rate there now?
Bob Jones - President and CEO
Yes.
Charlie Ernst - Analyst
So we shouldn't see any big step-ups at this point?
Bob Jones - President and CEO
That really is the first full quarter of our lease expense for the sale leaseback.
Operator
There no further questions at this time. Do you have any closing remarks?
Bob Jones - President and CEO
Any other questions, I think everybody knows just to contact Lynell directly. We're happy to answer any and all questions. Particularly as it may pertain to our tax issues Doug Gregurich is available to help explain further the reversal. But we do appreciate everybody's interest and look forward to talking to you soon.
Operator
This concludes Old National's call. Once again a replay along with presentation slides will be available for 12 months on the investor relations page of Old National's website at www.oldnational.com. A replay of the call will also be available by dialing 1800-642-1687 conference ID code 3212-7117. This replay will be available through May 12. If anyone has additional questions please contact Lynell Walton at 1-812-464-1366. Thank you for your participation in today's conference call.