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Operator
Welcome to the Old National Bancorp third quarter 2008 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's regulation SC. The call, along with corresponding presentation slides, will be archived for 12 months on the Investor Relations page at www.oldnational.com. A replay of the call will also be available beginning at 1:00 p.m. Central today through November 10. To access the replay, dial 1-800-642-1687; conference ID code 32127217.
Those participating today will be analysts and members of the financial community. At this time, all participants are in a listen-only mode. Then we will hold a question-and-answer 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. Ms. Walton?
Lynell Walton - VP of IR
Thank you, Dixie, and good morning to all of you. We appreciate you joining us for Old National Bancorp's third quarter 2008 earnings conference call.
Joining me today are Old National Bancorp management members Bob Jones, Chris Wolking, Daryl Moore, Barbara Murphy, and Joan Kissel.
Before we begin, I would like to refer you to slide three, and point out that the presentation today contains 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 four contains our non-GAAP financial measures information. Various numbers in this presentation have been adjusted for certain items to provide more comparable data between periods and as an aid to you in establishing more realistic trends going forward. Included in the presentation are the reconciliations for such non-GAAP data. We feel that these adjusted metrics provide a more meaningful look at our current performance as well as our performance going forward.
As we did in our second quarter earnings call, we will focus on three key areas that are top-of-mind in this environment -- credit quality, capital, and the investment portfolio. We have continued to provide balance sheet data for our banking regions and new financial centers, as well as significant non-interest income and expense items. And these slides are included in the appendix to the presentation. While we will not be covering these specific slides in detail during our prepared comments, we will be happy to answer any questions on these items during the Q&A session.
Turning to slide five is our agenda for the call today. First, Bob will comment on our third quarter earnings results, providing analysis on the major categories of the balance sheet and income statement. Daryl will then lead the discussion of our credit quality metrics, providing granularity of our loan portfolio, including our non-accrual loans and delinquency trends.
Next, Chris will detail the movement in our net interest margin, provide commentary on our capital position and the holdings within our investment portfolio. Bob will then conclude with our earnings guidance for 2008 and the underlying assumptions driving this range, and then we'll open the call for questions.
I will now turn the call over to our CEO, Bob Jones.
Bob Jones - President and CEO
Thank you, Lynell, and good morning to everybody on the phone. And let me apologize right up front, I'm fighting a cold and hopefully, my voice holds out here. So I apologize for the squeak.
I'm going to begin my remarks on page seven.
This morning, we were pleased to announce earnings for the third quarter of 2008 of $17 million or $0.26 per share. This compared to $19.5 million or $0.30 per share for the second quarter of 2008 and $22.6 million or $0.34 per share in the third quarter of 2007. And while the third quarter of 2008 earnings did decline $2.5 million from last quarter, it was primarily as a result of lower net interest income due to a smaller investment portfolio and our planned reduction in our commercial real estate portfolio.
We did have higher provision expense for the quarter, and this quarter, we had almost no security gains as compared to $2.1 million last quarter. We did see this quarter the benefit of $2.1 million in reversals of performance-based compensation, mostly related to truing up our long-term incentives.
In addition, as you compare this quarter to the third quarter of 2007, you will see that we had no loan loss provision expense in the third quarter of 2007 versus the $6.8 million we had this quarter. Additionally, in the third quarter of 2007, we did get the benefit of a $1.6 million recovery of interest on a commercial real estate loan as well as a $1.8 million release of a portion of unrecognized tax liability.
Our net interest margin in the quarter of -- the third quarter of 2008 was 3.79% as compared to 3.85% in the second quarter of 2008, and 3.37% in the third quarter of 2007. Our margin did remain strong despite the slight decline in average earning assets, and as we previously disclosed, a shift to a more neutral balance sheet position.
Chris will give you more details in his presentation.
We were very pleased to see good growth in our targeted commercial loan category of C&I loans this quarter. Year-to-date, we have growth of 6.2%, while the trends when you look at them would show an overall slowing of that growth this quarter. As you look at the market-by-market performance in the appendix we provided you, you can see that absent two markets that had large negative performance, we continue to see the same positive trends in the majority of our markets.
As it relates to those negative trends, our first, our Terre Haute market, saw a $43.8 million decline, largely as a result of seasonal paydowns related to grain elevator loans and the payoff of a short-term loan to a medical facility.
You will also note that we saw a $40.8 million decline in the category labeled Other. This is related to loans we keep in our treasury group, which are mostly capital market-related transactions, and a large portion of that paydown was the long-term financing that paid off the construction facility that was used to construct the new Lucas Oil Stadium in Indianapolis.
Our growth in commercial loans is offset by a continuing decline in commercial real estate assets. As we have noted for two-plus years, we have been very cautious towards this segment and have not added many new relationships. And we continue to watch this portfolio very closely and aggressively manage it at the same time.
Core deposits on average grew almost $50 million for the quarter as compared to last quarter. We continue to see positive growth in our demand deposit outstandings, this quarter growing, on average, $17 million. In addition, we saw growth in the savings and CDs. We have seen and continue to see positive influence in our branches during these turbulent times, as we have emphasized to our clients our strength and stability. We have over 174 years of serving our clients and being focused on being their partner, and it does appear to be paying off.
In addition, we have sent letters to client's homes and have educated our branches on how to deal with customer angst. When compared to the third quarter of last year, our revenue was up 6.6%, and our expenses have been well maintained, with the only significant growth coming in our occupancy line. And you will remember that this is related to our sale leaseback transaction and is offset by more than enough by the improvement in our net interest margin.
Our capital position does remain strong. Our tangible common increase for the quarter to 6.83% from 6.75% last quarter, and all of our regulatory capital ratios remain well within our guidelines and well above the minimums for a well-capitalized institution. Probably everyone on the phone is wondering about our participation in the direct capital purchase program. We have applied for participation and upon receiving a decision, we will evaluate our further participation.
As I noted earlier, our provision for the quarter was $6.8 million versus charge-offs of $5.5 million, which resulted in an increase to our reserve coverage for this quarter, which we feel is very prudent given the economic uncertainty that exists.
While we were very pleased to see our non-performing assets remain almost equal to last quarter, we did see enough movement in the other categories to concern us. This would be consistent with what we said on last quarter's call, that we believe we are quarters and not months away from seeing positive economic growth. And we believe that 2009 may be more challenging for our industry than 2008, because of the impact of commercial real estate and the effects that the slowing economy will have on the consumer.
Our focus on this call, as Lynell said, will be much like last quarter. We will be focusing on asset quality, on our investment portfolio, and on capital. Overall, we are very pleased with the quarter, given the unprecedented environment we are facing, and feel that we continue to see positive momentum in our banking franchise; and that the initiatives we have worked on over the last four years continue to position us very well.
To give you more insight on our credit performance, let me turn the call over now to Daryl.
Daryl Moore - EVP and Chief Credit Officer
Thank you, Bob. I'd like to begin my part of this quarter's presentation reviewing the charge-offs for the quarter as shown on slide nine. Charge-offs in the quarter were (technical difficulty) [46] basis points, our best all-in quarterly performance in what has been a fairly volatile year, from a charge-off perspective.
If you back out the losses associated with the Indianapolis fraud incident, loss rates have been 26 basis points, 42 basis points, 32 basis points, respectively, for the first three quarters of the year. While the annualized loss rate through the end of the third quarter was 78 basis points with the fraud losses included, without the fraud loss related write-downs, the loss rate would have been 34 basis points. If you recall our guidance in this area as we began the year was 25 to 35 basis points.
The provision for loan losses through the first three quarters of the year totaled $34.4 million with charge-offs of $27.4 million for the same period. This has resulted in a year-to-date increase in the allowance for loan losses of $7 million. This slide 10 reflects non-accrual loans increased slightly in the quarter from 1.43% to 1.46% of total loans. This represents $400,000 in increased non-accrual balances, and came as the result of increases in the retail lending area more than offsetting decreases in the commercial lending area.
Obviously, non-accrual levels continue to be at higher than desired levels. Unfortunately, given our outlook on the economic environment, we believe it may be difficult to move these levels down in the near-term.
Slide 11 gives a little more color on the exposure we have in our largest non-accrual relationships. While the number of non-accrual loans with exposure over $2 million increased by one in the quarter, the total exposure, total outstandings and associated impairment all were lower in the third quarter as compared to second quarter levels.
As you can see, at the end of the third quarter, we had nine relationships in non-accrual with exposure of $2 million or greater. The exposure in these relationships totaled $33.2 million, and the impairment associated with those relationships was $9.2 million. In breaking out these largest non-accrual exposures, you can see from this slide that the balances are without question centered in the commercial real estate portfolio.
In terms of the geographic distribution of these largest non-accrual loans, $17.4 million, or more than half of the outstandings were originated out of our Indianapolis area. Of this $17.4 million total, $9.9 million of those loans are associated with the fraud incident.
As slide 12 shows, we continue to manage our 90-plus delinquent loans well. While the rate increased 1 basis point to (technical difficulty) [4] basis points in the third quarter, I believe that these levels would compare favorably to most peer groups against which you might measure us.
As the next slide shows, of the real estate owned and repossessed property, [8%] of total loans remained level during the quarter at 7 basis points.
Moving to slide 14, classified loans, which include non-accrual loans, rose during the quarter to 3.7% of total period ending loans. This increase of 54 basis points from the second quarter represents a significant $24.1 million increase in this category, with classified loans now standing at $173.8 million.
With regard to our largest classified loans not in non-accrual, there was a fair amount of movement in the quarter with five to 10 largest loans in this category having been added in the current quarter. Of these five large downgrades, four are involved with commercial real estate-related activities. This particular industry segment continues to show significant stress, and we would expect it to continue to do so over a number of quarters to come.
Slide 15 shows our criticized loan trends. Criticized loans increased to 2.44% of total loans in the third quarter, up from the 2.06% level at the end of the second quarter. In terms of dollars, this represents a $16.9 million increase in the current quarter. In addition to the overall increase in this category, it is notable that the aggregate exposure in our top 20 criticized loans also rose in the quarter, up 10% over second quarter end levels.
Because we believe that changes in the levels of criticized loans can be a leading indicator of future credit risk trends, we continue to monitor this category very closely. Looking forward, given the significant increase in the quarter, coupled with our concerns with the health of the economy as a whole, we could continue to see increases in criticized loans over the immediate term.
Another leading credit indicator is our 30-plus day delinquency rate. As the next slide shows, since the beginning of 2007, our overall delinquencies have remained fairly constant, running in the 60 to 70 basis point range.
With regard to specific segment delinquencies, slide 17 shows our 30-day and greater delinquencies in the commercial real estate, residential real estate, and home equity line of credit portfolios. As you can see, while commercial real estate delinquencies declined 24 basis points in the current quarter, they are 12 basis points higher than the levels at the end of the third quarter last year.
Up until the current quarter, delinquencies in the residential real estate portfolio reflected a decreasing trend. This trend was reversed in the third quarter with delinquencies increasing 9 basis points to a still respectable 143 basis points.
Home equity line of credit delinquencies fell just 77 basis points at the end of the quarter as a result of slightly lower delinquency dollars combined with modest growth in outstandings in the quarter. As a note, we have restated the home equity line delinquencies this quarter to remove non-accrual loans and OREO from the totals, to make the calculation more consistent with the way we report delinquencies for the other portfolios.
As you can see from the chart at the bottom of this slide, our commercial real estate and residential real estate exposures as a percent of total outstandings have fallen over the last four quarters. Interestingly, our home equity line of credit portfolio has shown growth in 2008, albeit very modest, as a result of both an increase in new loans as well as an increase in line utilization.
I think it's important to remind everyone that our first mortgage residential real estate portfolio consists mainly of legacy-type loans, as in recent years, the majority of production has been originated for sale in the secondary market.
The home equity line portfolio was obviously a portfolio that we're all watching very closely, as loss rates are up from 2007 levels. As you can see on slide 18, we have broken out our home equity line of credit portfolio for you into loan-to-value fans. It remains that roughly 35% of our current commitments are in lines with original loan-to-value ratios of 80% or greater. With regard to actual outstandings, approximately 42% of outstandings at quarter's end were on lines where the original loan-to-value ratio equaled or exceeded 80%.
Moving to slide 19, large dollar exposures in our home equity line book are broken out for your review. As you can see, commitments of $0.5 million or greater represent only 3% of total commitments. And total commitments of $100,000 or greater, including those of $0.5 million or more, collectively represent only 26% of total commitments. So, the individual exposure levels in this portfolio are fairly granular.
The final slide in the credit section shows Old National's commercial real estate exposure as a percent of capital compared to community, mid-size, and large bank group averages as provided to us by the OCC. As has been the case over some quarters, our exposure continues to be lower than that of both the mid-size and community bank sets. Maybe more importantly in this environment, the level of commercial real estate exposure as a percent of the ever-increasing and importance of capital level continues to gradually decline.
I'll wrap up my section of the presentation with the comment that it is our opinion that we are only at the beginning of this credit cycle, and that we expect to continue to see challenges across virtually every portfolio through 2009.
With those remarks, I'll turn the call over to Chris.
Chris Wolking - Senior EVP and CFO
Thanks, Daryl. I will begin on slide 22. Our net interest margin was 3.79 in the third quarter, down 6 basis points from our margin in the second quarter of 2008. At 3.79%, our net interest margin is 42 basis points higher than the margin in the third quarter of 2007.
Net interest income declined $1.4 million, and average earning assets declined $51 million during the quarter. Our investment portfolio declined $41.9 million during the quarter, due in part to lower market valuation of our available for-sale portfolio.
Average loans declined to $9.2 million during the quarter. The largest contributor to our lower loan portfolio was a decrease of $36.4 million in average commercial real estate loans. Commercial loans and leases increased to $28 million in the third quarter, which follows our strong second quarter increase in commercial loans and leases of $62.6 million.
Slide 23 illustrates the monthly trend in our fully taxable equivalent net interest margin beginning in September 2007. Our net interest margin was 3.35% in September 2007 and increased to 3.88% by May of 2008. As we have told you in previous conference calls, during this period, we benefited both from a liability sensitive balance sheet and margin as interest rates declined and a strong effort from our banking managers to reduce deposit costs.
During the second and third quarters of 2008, we reduced our liability sensitivity through the addition of longer maturity borrowings and deposits. Additionally, the targeted federal funds rate and our prime lending rates stabilized during the second and third quarters.
During the third quarter, we reduced our average short-term borrowings $111.2 million, and increased our other time deposits, primarily CDs under $100,000, by $101.1 million. Other time deposits were approximately 173 basis points higher than short-term borrowing costs during the quarter, but we believe shifting our funding mix was prudent both to continue to reduce our liability sensitivity and to reduce liquidity risk. Much of this shift occurred during September.
Slide 24 shows the impact to our margin from the change in our asset yields, funding mix, and earnings asset volume. The change in margin due to the decline in asset yields of negative 6 basis points is primarily a result of declining loan yields during the quarter. Loan yields declined 17 basis points during the quarter, due to our increase in commercial loans and leases, which tend to be floating rate loans, and a decline in our commercial real estate loans, which are largely fixed rate loans. Commercial loan and lease yields averaged 5.63% during the quarter compared to the yield on commercial real estate loans of 6.01%.
The shift in the mix of our funding was the major driver of the negative 6 basis point impact to the margin related to mix/volume/other. As I noted earlier, we reduced our short-term borrowings, which had an average rate of 1.79% during the quarter and increased our other time deposits, primarily comprised of CDs. The other time deposit rates averaged 3.52% during the quarter, significantly higher than the cost of short-term borrowings, which they replaced.
Slide 25 shows the quarterly trend in our cost of interest-bearing deposits compared to our peer group. During the second quarter of 2008, our interest-bearing deposit costs, including the cost of brokered certificates of deposit, were 35 basis points lower than our peers'. Our deposits costs were stable from second quarter to third quarter, even though total average CDs, including brokered certificates, increased to $175.3 million. We don't yet have peer group deposit costs for the third quarter, but the spread to our peers may have decreased slightly, due to the change in our deposit mix.
We expect our margin to continue to be in the range of 3.75 to 3.80 for the fourth quarter. The high LIBOR rates during September and October will benefit us slightly, but will be offset if we continue to extend the maturity of our retail deposits. We are also evaluating the opportunities in the Treasury Capital Purchase Program and the FDIC Temporary Liquidity Program. The degree to which we participate in these programs may also impact our margin in the fourth quarter.
On slide 26, note that tangible common equity as a percentage of tangible assets increased to 6.83%, while tangible equity as a percentage of tangible assets decreased to 6.06% in the second quarter. Tangible common equity increased $3.6 million during the second quarter, while tangible assets declined $32.2 million by September 30.
The difference between the market value and book value of the portfolio at September contributed to a decrease of $16.3 million in Other Comprehensive Income for the quarter. This accounted for nearly all the decline in our tangible equity to tangible assets ratio. We continue to believe that maintaining capital ratios at higher levels than we have maintain traditionally is a prudent course of action during this period of extraordinary volatility in the financial markets.
As I noted in last quarter's call, 95% of our investment portfolio is treated as available for sale. So most of the unrealized loss in the portfolio is reflected in our tangible equity to tangible assets ratio. Slide 27 is intended to give you a better understanding of our investment portfolio, including some insight as to where our investment portfolio is valued relative to our current book value. Our definition of book value is the cost of the security plus any accretion of discount, amortization of premium, or paydowns of principals since the purchase of the bond.
Our federal agency fixed-income portfolio is comprised totally of senior debentures. We do not own a subordinated debt or a preferred stock of the federal agencies. At September 30, 2008, the market value of our agency security portfolio was $319.8 million. At September 30, the book value of our federal agency security portfolio was $320.4 million. The unrealized loss in this portfolio was approximately $600,000.
The market value of our mortgage security portfolio was $1.203 billion at September 30, 2008. The book value of this portfolio at September 30 was approximately $1.242 billion. The unrealized loss on this portfolio at September 30 was approximately $38.6 million. $230.6 million for our mortgage securities are non-agency CMOs. Our non-agency CMOs are all rated AAA by the various debt ratings agencies, and are all comprised of fixed rate jumbo or fixed rate Alt-A mortgage collateral.
Our corporate securities portfolio consists of two major components -- the market value of our portfolio of trust preferred securities totaled $29.6 million at September 30. Of the remaining $112.7 million of corporate securities, $96.7 million is managed by an outside investment manager unaffiliated with Old National Bancorp. The $29.6 million of trust preferred securities includes $19.5 million of pooled trust preferred securities made up of nine different issues.
We have no Real Estate Investment Trust exposure in our pools, and the issuers are -- in our securities, are primarily banks, but the pools do include a number of limited number of insurance companies.
The corporate security portfolio managed by the outside manager is managed to the Lehman Intermediate Corporate Bond index. All of the holdings are investment grade, and by policy, no single company exposure can exceed 4% of the value of the manager's total portfolio.
In this portfolio at September 30, we had exposure of $56.6 million in book value or $51.4 million in market value, of exposure to the financial sector. The investments we are monitoring most closely are Goldman Sachs, with a book value of $2 million and a market value of $1.7 million; Morgan Stanley, with a book value of $2 million and a market value of $1.7 million; and American General Finance, with a book value of $1.5 million and a market value of $1.1 million.
We did not incur, other than temporary impairment, on our investment portfolio in the third quarter. Of all of our portfolios, we are monitoring our pooled trust preferred securities and the above-mentioned exposures to the financial sector most closely for other-than-temporary impairment. Seven of our pooled trust preferred securities totaling $12.3 million in market value at September 30 are rated lower than AA and subject to the guidance of EITF 9920. Of these securities, trust preferred securities with a book value of $13.8 million and a market value of $3.4 million were downgraded to BA1 by Moody's during the quarter, and are the securities most susceptible to OTTI.
We rigorously model and stress-test the cash flows of these securities for possible impairment. The current defaults and deferrals and our outlook for defaults and deferrals in the pools did not warrant OTTI in the third quarter. As we continue to monitor these securities, it is possible that we may have OTTI in these securities in future quarters.
All of our trust preferred securities are considered available for sale on our balance sheet. As such, the impact of the market value adjustments of these securities is reflected in our third quarter tangible equity and tangible equity ratios.
We are also monitoring our bank-owned life insurance. We adjusted our crediting rate and reduced the amount of the cash value increase we will recognize in income for the fourth quarter of 2008. We expect a reduction in our bank-owned life insurance revenue of approximately $2 million in the fourth quarter, and believe the adjusted crediting rate could reduce net income by $2.8 million in 2009.
Recognizing less of our cash value increase into income for 2008 and 2009 should keep us within the protection of our stable value wrap. The stable value wrap ensures that we are protected from having to recognize changes in market value BOLI through our income statement.
In the appendix of the conference call slides, you will note that income from fees, service charges and other declined $2.7 million from the second quarter. Other income declined $2 million, due primarily to lower gains from the sale of OREO and fluctuations in the fair value of certain retail CDs.
Salary and benefits declined $2.7 million from the second quarter, due primarily to a one-time reduction in previously accrued expenses of $2.1 million for restricted stock and other performance-based compensation.
I'll turn the presentation back to Bob for final comments.
Bob Jones - President and CEO
Thank you, Chris. I'm going to close on page 29 by giving revised guidance for the full year of 2008. We are reducing our guidance by approximately $0.03 for the year. Our new range is $1.10 to $1.15.
There's really two key items that affected our original guidance -- first, our provision for the third quarter was larger than we had in our original forecast. And also, as Chris noted, this quarter, we took some conservative actions related to our BOLI investment. The net result of those actions will mean a reduction in net income for the fourth quarter of $0.02 per share and $0.028 in 2009. But we felt that to be true to our strategic comparators, we need to reduce the risk in this investment and to provide you with as much consistency in our earnings as possible.
We obviously hope to be able to close as much of that gap towards our original guidance as possible, but given the current credit and economic environment, it may be difficult.
Dixie, at this time, we'll be happy to answer any questions they may have.
Operator
(Operator Instructions). Erika Penala.
Erika Penala - Analyst
I guess my first question is for Daryl. You mentioned that commercial real estate was the catalyst for the increase in special mention and problem credits. I mean, I guess, is there an asset class that has given you more trouble than the rest? And how does it break down in terms of your identified problems -- the [RE] credits between construction and income [CRE]?
Daryl Moore - EVP and Chief Credit Officer
Erika, I would tell you that, as we looked at -- obviously your guidance on commercial real estate, we're seeing probably our portfolio act much like you would expect everybody's to act. Our residential development, which we have a very small piece, obviously is, like everyone else, showed some strains. But we're also beginning to see some strains in our retail commercial. And that's predominately where we've seen some of this other than the development, some of it creep into our criticized as well as our substandard.
I think that going forward, we're going to watch those very closely. We, as you know, have reduced our commercial real estate exposure. But I would say those two segments right now are the segments that concern us the most. We don't -- as all of you, I think, would recall -- we have not originated hotel credits in a number of years, and so that exposure for us is small.
There's a second part to your question, Erika, I may not have answered it -- did I give you what you need?
Erika Penala - Analyst
I think the first part was -- of the problem credits, how much of it was income CRE versus the development loans?
Daryl Moore - EVP and Chief Credit Officer
Of the increase in the problems?
Erika Penala - Analyst
Yes.
Daryl Moore - EVP and Chief Credit Officer
Most of it was income, commercial real estate, because we've recognized our development several months prior. We're not having significant downgrades in that portfolio at this point in time, as we previously recognized those issues.
Erika Penala - Analyst
Do you have a sense if the problems escalate in this portfolio, particularly in the retail side, and you may force the developers to try to sell the properties, do you have a sense of how the valuations would come in?
Daryl Moore - EVP and Chief Credit Officer
Well, I think that combinations of the higher cap rates and the lower net operating income for most of these projects are going to drive values significantly lower. And so if we can work with a project holder either to move it out over time, we would much rather have that kind of approach than just simply liquidation, because I think that we'll see values over the next probably three or four quarters not be very good because of those aspects.
Erika Penala - Analyst
And are you seeing any issues in your C&I portfolio at this time?
Daryl Moore - EVP and Chief Credit Officer
You know, we have not seen what we probably would have anticipated at this point in time. It's not been -- we've not seen significant downgrades, other than those areas that are showing a little weakness. Anything that has to do with residential construction or trucking -- those are the two areas that we've seen some weakness. But the balance of the portfolio, we've not seen significant weakness in yet.
Erika Penala - Analyst
Thank you for your time, gentlemen.
Operator
(Operator Instructions). Brian Hagler, Kennedy Capital Management.
Brian Hagler - Analyst
Just had a couple of questions for Daryl also. Well, one, just following up on the last question and maybe it's in the supplemental slides; I haven't got through them all yet. But what is the size of your retail-oriented commercial real estate portfolio?
Daryl Moore - EVP and Chief Credit Officer
It's just south of about $150 million.
Brian Hagler - Analyst
Okay. Great. And then my other question had to do with slide 18, where you break out the home equity portfolio. And by the way, I appreciate the amount of detail you guys give.
Can you just talk about it -- is that based on original loan-to-value? Or are those kind of most recent updated appraisals? Or what's the input on that slide?
Chris Wolking - Senior EVP and CFO
Yes, those are -- unless we've renewed the loans, they would be the original loan-to-value ratios. We don't go back in and do reappraisals over the whole portfolio on an interim basis. There is an origination or last renewal.
Brian Hagler - Analyst
Okay. All right, perfect. And then maybe lastly for Bob, you mentioned the capital, Treasury capital plan. And it sounds like you're applying and then kind of waiting to go through the process.
Can you just kind of talk about -- obviously, you're a well-capitalized bank at the moment and then this would just be supplemental capital. Just talk about your thoughts on putting that capital to work as far as new loans or potential acquisitions? Or just your thoughts there would be great.
Bob Jones - President and CEO
Yes, all of the above. Really, what we would look to do, Brian, is to accelerate our strategic plan, particularly as it relates to growth in some of our existing markets. That would be through additional lending opportunities as well as continuing to invest in those growth markets. And to be frank, we'd also look at the ability to participate in the M&A.
We think we're well-positioned today. Should we be approved, we think this would position us in even better shape. So really, for us, it would be growth within the current franchise.
Brian Hagler - Analyst
Okay, great. And I'm not sure when you guys applied or if you've -- have done that yet, but any idea, like how long it will be before you kind of hear back? Within a few weeks or --?
Bob Jones - President and CEO
They tell us that it shouldn't take that long. We would hope to hear fairly soon. As you saw over the weekend, there was a few banks that were already approved. And our application was submitted around the same time, so we should be able to hear some time -- something here fairly soon.
Brian Hagler - Analyst
Okay, thanks a lot, guys.
Bob Jones - President and CEO
Thanks, Brian. Welcome to the call.
Operator
Charles Ernst, Sandler O'Neill Asset Management.
Bob Jones - President and CEO
You're getting slow, Charlie. You're third this time.
Charles Ernst - Analyst
That's right. Just a couple quick questions. The rate cuts -- I know that you're extending liabilities. Can you just say at this point, is it still beneficial to have cuts? Or have you done enough that you really won't see much of a change?
Daryl Moore - EVP and Chief Credit Officer
It's a good question, Charlie. I think -- I don't think in hindsight we anticipated that rates would stay this low in the projection is obviously for lower rates. We feel pretty good about where we are now from a balance sheet standpoint.
I also -- I mentioned that liquidity is also very important to us from a risk management standpoint, so some of those extensions were to due to continue to reduce liquidity risk. But from a rate risk standpoint, we feel pretty good about where we are right now.
Charles Ernst - Analyst
So should I interpret that to be sort of a neutral impact or --?
Daryl Moore - EVP and Chief Credit Officer
Yes, I think so.
Charles Ernst - Analyst
Okay. And then the original face value of the true-ups, can you say what that was?
Daryl Moore - EVP and Chief Credit Officer
Yes, that should all be on the slide here. Let me turn to the page. Yes, we tried to give you a pretty good idea of that. The trust preferred balances obviously haven't changed that much. So if we look at our -- well, I guess we've got it here total at $179 million.
For the trust preferred securities, I don't have that split out on this slide. But for the individual trust preferred securities that we're watching fairly closely, it's that component that's at about $12.9 million in book value, as I recall, and about a $3.4 million -- $3.6 million in market value. Those are the ones we're watching most closely.
Bob Jones - President and CEO
Charlie, if you need more detail on that, just let us know.
Daryl Moore - EVP and Chief Credit Officer
We'll get you some more detail.
Charles Ernst - Analyst
And to date, there have not been any OTTI impairment charges, is that right?
Daryl Moore - EVP and Chief Credit Officer
Right. Correct.
Charles Ernst - Analyst
And then the salary line -- that is something that should come back into -- should go back up in either fourth or first quarter, I guess, once you've --?
Daryl Moore - EVP and Chief Credit Officer
Right. Yes, that one adjustment of $2.1 million this quarter or third quarter was related to incentives and long-term performance incentives.
Charles Ernst - Analyst
Okay, great. Thanks a lot.
Operator
Erika Penala, Merrill Lynch.
Erika Penala - Analyst
I was hoping to pick your brain for a second. You mentioned that you applied for the TARP capital around the same time that everybody did. It sounds like -- if I look at the smattering of banks that announced that they've definitely gotten it or gotten preliminary approvals, it seems like the list is a little bit more random in terms of how healthy they are. Have you gotten any feedback from your regulators or any other CEOs as to what they're looking for?
Bob Jones - President and CEO
We haven't. It's a bit of a mystery. So, the short answer is no. I mean, we just -- we were encouraged to apply and we applied, and we're waiting to hear.
Erika Penala - Analyst
Thank you.
Operator
(Operator Instructions). There are no further questions at this time.
Bob Jones - President and CEO
Great. Well, obviously, if there's any other questions, please feel free to contact Lynell. And thank you all for your time and we look forward to talking to you end of the fourth quarter.
Operator
This concludes Old National's conference call. Once again, a replay along with the 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 1-800-642-1687, conference ID code 32127217. This replay will be available through November 10.
If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call. You may now disconnect.