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 2008 earnings conference call.
This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD.
The call, along with the 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 p.m.
central time today through February 9.
To access the replay dial 800-642-1687, conference ID code 80127832.
Those participating today will analysts and members of the financial community.
At this time all participants are in a listen-only mode.
Later 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, Director of Investor Relations, for opening remarks.
Miss Walton?
Lynell Walton - SVP, IR
Thank you, Tieri.
Good morning to all of you.
We appreciate you joining us for Old National Bancorp's fourth-quarter 2008 earnings conference call.
Joining me today are Old National Bancorp management members Bob Jones, Chris Wolking, Daryl Moore, Julie Williams, 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 reconciliation for such non-GAAP data.
We feel that the adjusted metrics do provide a meaningful look at our current performance as well as our performance going forward.
If you turn to slide five, you will find our agenda for the call.
First, Bob will provide our perspective on the economy and its impact on the financial services industry.
He will then review our fourth-quarter earnings and other significant events of that quarter, one being our announced Charter One acquisition.
At which time [Julie Williams], Director of Merger Integration, will give you an update.
Daryl will then provide commentary on various credit quality metrics and granularity of our loan portfolio.
Next, Chris will detail the movement in our net interest margin, provide commentary on our capital position, and the holdings and areas of risk within our investment portfolio.
Bob will conclude with our financial outlook for 2009 and then will open the call for your questions.
Just as a reminder, our appendix does include regional balance sheet data as well as major items impacting our non-interest income and expenses for the quarter that may be helpful to you in analyzing our results.
With that I will turn the call over to our CEO, Bob Jones.
Bob Jones - President & CEO
Thank you, Lynell, and welcome to all of you on the phone and listening via our webcast.
I hope that you all had a wonderful holiday season, though I'm sure if it's anything like me, it seems like it was an awfully long time ago.
Before I start, if you would just allow me a little bit of company news, based on input from many of you and what we view as one of the best investor relations professionals in our space we are pleased to promote Lynell Walton to Senior Vice President at our last board meeting.
So I'm sure that all of you join me in congratulating Lynell.
Before I begin our formal presentation I thought it would be important to give you our perspective on the economy and the industry.
Our view of both is -- quite frankly is the same.
It is bad and it's going to get worse.
At the end of the third quarter we told you that in our opinion any recovery was quarters and not months away, and we still believe that.
Our opinion is that the economy is in a very deep and long-lasting recession and that the earliest we could see any positive trend is the third quarter of this year.
But more than likely, any recovery will be in the first part of 2010.
The economic slowdown moved very quickly in the fourth quarter to those sectors not previously impacted, most notably the consumer, commercial, and industrial and small business as well as other areas.
The impact of this economic uncertainty in our industry will be an elongated, negative credit cycle.
What began in the summer of 2007 and exploded in the September of 2008 was what I have termed as synthetic credit crisis driven by financial institutions inability to move illiquid assets off their balance sheet and the corresponding effect that illiquidity had on the housing market.
Now in addition to those toxic assets, in the second half of 2008 we saw the beginning of a traditional negative credit cycle that aggressively accelerated in the fourth quarter.
As an industry we are seeing credit issues broaden, again, to the consumer, small- and medium-sized businesses, along with real estate.
This trend we believe will continue through most of 2009.
Old National's strategy is rooted in consistency.
We will continue to focus on the basic fundamentals of the business, now is not a time to deviate from our core strategies.
We feel it is an appropriate response to increase our reserves given the economic environment and elevated credit challenges, and to rely on the investment we have made into risk management to position ourselves to weather the storm and to more importantly emerge stronger and able to benefit quickly from the recovery.
Now if you will turn to slide seven I would like to begin our review of the quarter and the year.
The message I would like for you to take away from the quarter and the year, quite frankly, is that 2008 was a very good year for Old National in terms of the significant improvements in our basic operating fundamentals.
For the quarter, we reported net income of $6.6 million or $0.10 per share.
As we had noted in the 8-K we filed on January 13, the quarter results were affected by the write-off of $6.3 million related to our previously disclosed check fraud and a $17 million allocation to loan loss provision.
The check fraud is related to a single business client.
The individual responsible for the fraud has been arrested, and we continue to work with the authorities to ensure that justice is accomplished.
The business continues to operate.
It is being run by other members of the family and we continue to look at potential means of restitution, including any insurance coverage though we believe that any recovery is a long layoff thus the decision to recognize the loss at this time.
To my earlier point of the improving fundamentals, the quarter saw commercial loan growth of 5.5% over the prior quarter and non-interest DDA growth of 5.1%.
All a reflection of the improved sales fundamentals that are in place in our banking franchise.
We also continue to see margin improvements this quarter.
Our net interest margin expanded 17 basis points over last quarter.
As a result of the large provision that we took this quarter, we were able to improve our allowance coverage of non-performing loans increasing that very important number from 93% last quarter to 105% this quarter.
This benefited us well by our non-performing assets for the quarter.
As Chris will discuss later, we remain well-capitalized and our liquidity position is strong.
A few words about TARP.
During the fourth quarter we did make the decision to participate in the Direct Capital Purchase Program and we did sell $100 million of non-voting preferred stock and warrants to the government.
Our view of these funds is that you have to look at the effect of this capital injection over a period of time rather than just today.
I understand the appropriate scrutiny that this investment deservedly receives, but if you believe as we do that the economy is going to get worse before it gets better, the additional capital that we receive from the government will be very important to our ability to prudently land at the same pace we did in the quarter that we received the funds or the fourth quarter.
We are actively measuring the impact the TARP funds has on the Old National, and as is our tradition, we will be very transparent with all interested parties.
Let's move to slide eight.
Old National's annual performance reflects much of the same story as their quarterly performance.
Commercial loans for the year grew 12%, the best growth trajectory in my four years with the Company.
More importantly, these credits have all been underwritten within our enhanced credit culture.
Non-interest DDAs for the year grew 3.9%, and probably the most important operating fundamental we saw improve was our net interest margin which expanded 54 basis points for the year.
2008 saw our net interest income increase 11.1% over 2007.
This was accomplished through a combination of enhanced sales and the discipline that we utilize in managing our net interest margin.
I'm going to close on slide nine for this part of my presentation.
I spoke of our decision to participate in the TARP program, but an even more transforming event in the quarter was our announced decision to acquire the 65 branches of Citizens Financial's Indiana franchise, which as you know operates under the brand Charter One.
As you all know, when you make a decision to partner with a company it's driven mostly by the economics of the deal, as it should be.
Subsequent to the announcement you get a chance to focus on all of the intangibles, mainly culture and people.
Today because of the high quality of the people we have worked with involved in the deal, we are excited -- we are more excited than ever before about this partnership and what it means to Old National.
You should note that I have been out and visited almost all of the branches and have seen about 95% of the employees.
I continue to be very, very impressed with the quality of the folks at Charter One.
I would like to turn the presentation over briefly to Julie Williams who is our Integration Executive and working full-time on the transaction, to give you an update.
I should note that Julie is fighting off a cold and this is her first ever presentation so bear with her.
Julie?
Julie Williams - Director of Merger Integration
Thank you, Bob.
As you may recall on November 25, 2008, Old National entered into a purchase and assumption agreement to acquire the Indiana retail branch banking network of Citizens Financial Group, which consists of 65 Charter One branches.
Subject to regulatory approval, the transaction is anticipated to close in the first quarter of 2009.
The integration for the 65 Indiana Charter One banking centers began in earnest in late November.
As the Director of Merger Integrations, I am leading the project office for this integration effort.
A structured, discipline project management approach is being used for the project to coordinate all team tasks and communications.
We are using a week-by-week calendar with milestones and specific required deliverables to organize our timeline.
The integration activities involve 15 teams representing various functional areas of our company, such as retail administration, operations, information technology, and human resources to name a few.
One of the largest integration components is training over 350 new associates.
We are accomplishing this task by training 58 associates every day for seven weeks.
Additionally, the planning for retrofitting 69 ATMs and outfitting 65 banking centers with wiring and equipment is being coordinated to work in concert with facilities, marketing, physical security, and retail administration as they plan to ready the new centers for the changes coming in March.
The teams meet weekly and report their progress at biweekly project leader meetings.
This structured approach ensures all necessary activities are being coordinated, linked, and aligned across the organization.
With a goal of March 21, 2009, as the integration conversion date, all teams' activities are in full swing and all milestones are being closely monitored to track the progress of the project and verify that we are on track with our due dates.
In closing, I echo Bob's earlier comments; all of our teams are excited to have such a talented professional group of associates joining our bank.
I would like to now turn the presentation over to Daryl Moore, our Chief Credit Officer.
Daryl Moore - EVP & Chief Credit Officer
Thank you, Julie.
I would like to begin my part of this quarter's presentation reviewing the charge-offs for the quarter as shown on slide 11.
Charge-offs in the quarter were $13.4 million or 114 basis points of average loans.
Decreased losses were noted both in the commercial and commercial real estate business lines as well as the retail lending area.
In the commercial area losses were $4.6 million with $3.1 million of that write-down associated with the commercial lease that was written off in full prior to year-end.
The velocity at which this borrower's financial condition deteriorated was astounding.
As of June 30, 2008, it exhibited cash flow sufficient to service all debt obligations and by December it had stopped making payments and is currently being sued by multiple creditors.
This unfortunately may be a reflection of a rapidly deteriorating economy.
It could just be an indication of things to come.
In the commercial real estate portfolio, losses of $4.7 million were booked with $3.2 million of those losses associated with the Indianapolis fraud incident identified in the first quarter of the year.
Retail losses were elevated in the quarter at $3.9 million, which is roughly $1 million higher than third quarter retail write-downs.
If you back out the losses associated with the Indianapolis fraud incident, the loss rate for the entire year was 46 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 for the year totaled $51.5 million with charge-offs of $40.8 million for the same period.
The allowance for loan losses increased $10.6 million, or 19% in 2008.
As slide 12 reflects, non-accrual loans fell slightly in the quarter from 1.46% to 1.34% of total loans.
This represents $4.4 million in decreased non-accrual balances and came as a result of decreases in the commercial real estate and residential mortgage areas more than offsetting increases in the commercial and retail lending areas.
Obviously, non-accrual levels continue to be higher than desired levels.
Unfortunately, given our outlook on the economic environment, we believe that we will see increases in this category in 2009.
Slide 13 gives a little more color on the exposure we have in our largest non-accrual relationships.
The number of non-accrual loans with exposure over $2 million decreased by 2.25.
Total exposure, total outstandings, and associated impairment all were lower in the fourth quarter as compared to third-quarter levels.
As you can see at the end of the fourth quarter, we had seven relationships in non-accrual with exposure of $2 million or greater.
The exposure in these relationships totaled $26 million and the impairment associated with those relationships was $6.7 million.
In breaking out these largest non-accrual exposures, you can see from the slide that the composition of these largest non-accruals is more heavily weighted to the commercial real estate loans, although percentage of commercial loans making up this category did increase slightly from last quarter's levels.
In terms of geographic distribution of these largest non-accrual loans, $15.8 million or more than 60% of the outstandings were originated out of our Indianapolis area.
Of this $15.8 million total, $5.6 million of those loans are associated with the Indianapolis fraud incident.
It is important to note, again, that we do not believe that this declining trend in non-accrual will continue in 2009.
In fact, we would expect non-accrual totals to increase in the coming year.
As slide 14 shows, although our 90-plus delinquent loans increased by $1 million in the quarter, we continued to manage our 90-plus delinquent loans well.
While the rate increased two basis points to six basis points in the fourth quarter, I believe that these levels would compare favorably to most peer groups against which you might measure us.
All of the increase in 90-day-plus delinquencies came in the retail lending area.
As the next slide shows other real estate owned and repossessed property as a percent of total loans fell one basis point in the quarter to six basis points.
However, as commercial real estate default rates increase we would anticipate that outstandings in the other real estate owned category would also increase.
Moving to slide 16, classified assets, which include non-accrual loans, rose during the quarter to 4.9% of total period ending loans.
This increase of 79 basis points from the third quarter represents a significant $40.8 million increase in this category with classified assets now standing at $214.7 million.
It is important to note that of the $40.8 million increase in the quarter, $34.5 million represents investment securities held by the bank that fell below investment grade during the quarter.
Without the addition of the investment securities, classified assets to total loans at year-end would have been 3.77%, only slightly above the prior quarter's 3.70% level.
With regard to our largest classified loans not in non-accrual, there was a fair amount of movement in the quarter with three of the 10 largest loans in this category having been added in the period.
Of these three large downgrades all are from the commercial and industrial portfolio.
Slide 17 shows our criticized loan trends.
Criticized loans increased to 2.61% of total loans in the fourth quarter, up from the 2.44% level at the end of the third quarter.
In terms of dollars, this represents a $10.5 million increase in the current quarter.
In addition to the overall increase in this category, it is notable that the aggregate exposure in our largest 20 criticized loans also rose in the quarter, up 31% over third 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 increase in the quarter coupled with our concerns with the health of the economy as a whole, we would expect to see increases in criticized loans over the intermediate term.
Another leading credit indicator is our 30-plus-day delinquent loans.
In the next slide -- 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 until this quarter when they increased to 84 basis points.
With regard to specific segment delinquencies, slide 19 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 delinquencies were up across the board in the quarter.
While the commercial real estate delinquencies at quarter's end fell in the general range for 2008 results, the same cannot be said for the commercial portfolio where the 58 basis point level was the highest posted at any quarter and in 2008.
With regard to the residential real estate portfolio, up until the current quarter delinquencies had hovered in the 140 basis point range.
In the fourth quarter delinquencies rose 38 basis points to 1.81% total loans.
Home equity line of credit delinquencies rose slightly to 83 basis points at the end of the first quarter.
While the increase was not significant on its face, it is important to note that outstandings in this portfolio continue to increase which can tend to mask increasing delinquency trends.
Actual delinquent dollars were up 12% in the quarter.
You can see from the chart at the bottom of the slide our commercial real estate and residential real estate exposures as a percentage of total outstandings have both fallen over the last four quarters.
The home equity line portfolio was obviously a portfolio that we are all watching closely as loss rates are up from 2007 levels.
As you can see on slide 20, we have broken out our home equity line of credit portfolio for you into loan-to-value bands.
It remains that roughly 34% of our current commitments are in lines with original loan-to-value ratios of 80% or greater.
With regard to actual outstandings, approximately 41% of outstandings at quarter's end were on lines where the original loan-to-value ratio equaled or exceeded 80%, which is relatively consistent with the results from last quarter.
Credit bureau scores remain generally unchanged.
Moving to slide 21, 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.
I would note that the average credit bureau score in the greater than $0.5 million category is lower this quarter as one very large exposure with a credit score of 807 left the portfolio and was for all practical purposes replaced by two other borrowers carrying lower credit scores.
The final slide in the credit section shows Old National's commercial real estate exposure as a percent of bank capital compared to community, midsize, 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 midsized and community bank sets.
Maybe more importantly in this environment is the level of commercial real estate exposure as a percent of the ever-increasing in importance capital level continued as a declining trend during the most recent quarter.
I will wrap up my section of the presentation with a statement that simply reaffirms Bob's prior comments that at this time we expected deep and prolonged economic difficulties throughout 2009 and into 2010.
With those remarks, I will turn the call over to Chris.
Chris Wolking - Senior EVP & CFO
Thanks, Daryl.
I will begin on slide 24.
Our net interest margin was 396 in the fourth quarter, up 17 basis points from our margin in the third quarter of 2008.
At 396 our net interest margin is 40 basis points higher than fourth quarter of 2007.
For the full-year 2008 our net interest margin was 382, 54 basis points higher than our margin in 2007.
Net interest income increased $3.5 million from the third quarter of 2008 driven by the improved margin and the $64.4 million increase in average earning assets during the quarter.
Average loans increased $18.2 million and the average investment portfolio increased $46.4 million during the quarter.
Average commercial loans and leases were up $32.7 million for the quarter, while average commercial real estate loans declined $14.1 million.
Average commercial loans and leases were $156.2 million higher in the fourth quarter 2008 than in the fourth quarter of 2007.
Importantly, average non-interest-bearing deposits increased $19.9 million and total average core deposits were up $28.2 million over the third quarter of 2008.
Slide 25 shows the quarterly trend in our net interest income since the fourth quarter of 2005.
Note the increase in fourth quarter 2008 net interest income compared to the decline in net interest income in the third quarter.
As I said earlier, average earning assets and core deposits grew and the mix of assets and funding improved during the fourth quarter.
Additionally, we were able to reduce our deposit and wholesale borrowing costs in response to the dramatic decline in short-term rates during November and December.
Our trend in monthly net interest margin on slide 26 tells a similar story to slide 25 for the fourth quarter of 2008.
Net interest margin was 375 in September 2008 and increased to 404 in December of 2008.
As we told you in last quarter's conference call, during the second and third quarters of 2008 we reduced our liability sensitivity through the addition of longer maturity borrowings and deposits.
In the fourth quarter, however, we added short-term borrowings and longer maturity investments, primarily investments in municipal securities.
Short-term borrowings increased $26 million on average during the fourth quarter and municipal securities investments increased $64.6 million.
While we don't believe that this changes our rate sensitivity materially, it did help lift our margin in the fourth quarter.
Also, as Bob said, the Treasury's $100 million investment in ONB preferred stock closed in December and this helped the increase in our December net interest margin by increasing our non-interest-bearing funding.
As slide 27 shows, the most important contributor to our improved net interest margin continues to be our ability to maintain our relatively low cost of deposits.
From the third quarter to the fourth quarter of 2008, we lowered our cost of interest-bearing deposits 21 basis points.
Our cost of interest-bearing deposits was 28 basis points lower than that of our peers in the third quarter of 2008 and we believe we sustained or widened this relative spread in the fourth quarter.
Slide 28 summarizes the drivers of the improvement in our net interest margin from the third quarter of 2008 to the fourth quarter.
The change in margin due to the change in asset yields of negative five basis points is primarily a result of declining loan yields during the quarter.
Loan yields declined 14 basis points to 597 from 611 during the quarter due to the decline in our home equity loan and commercial loan and lease yields.
Yields on these loans, which are primarily floating rate, decreased as prime rate and LIBOR declined during the fourth quarter.
The decline in loan yields was offset by 22 basis point increase in the investment portfolio yield during the fourth quarter.
As I noted earlier, the cost on total interest-bearing deposits including brokered CDs declined 21 basis points to 183 from 2.04 during the quarter.
This combined with the 39 basis point decline in wholesale funding costs lifted our margin 22 basis points during the fourth quarter.
On slide 29 you can see that tangible common equity as a percentage of tangible assets decreased to 6.51% while tangible equity as a percentage of tangible assets increased to 7.08% in the fourth quarter.
Tangible equity increased $96.4 million while tangible common equity decreased $3.6 million during the quarter.
The preferred stock issued to the Treasury was the primary reason for the increase in tangible equity, while our lower earnings and fourth quarter dividend of $0.23 per share drove the decline in tangible common equity.
Tangible assets were $307.1 million higher at December 31 compared to September 30 due to the strong loan growth and larger investment portfolio in the quarter.
While the $100 million preferred stock investment lifted our tangible equity, our tangible common equity ratio of 6.5%, which we monitor closely, at December 31 is still well within our guideline of 6% to 7%.
As you saw in our press release last week, the Board declared a dividend of $0.23 per share payable in March.
While we believe our current capital ratios are appropriate for the risk inherent in our balance sheet and our growth outlook, there are many variables in our earnings outlook.
Decisions regarding future dividends will be made by our Board on a quarter-by-quarter basis.
Because approximately 95% of our investment portfolio is treated as available for sale and the market value of our portfolio can have a significant impact on our equity ratios, slide 30 is intended to give you a better understanding of our investment portfolio including some insight as to where our 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 pay down of principle since the purchase of the bond.
Our federal agency fixed income portfolio is comprised totally of seniored ventures.
We do not own the subordinated debt or preferred stock of the agencies.
At December 31, 2008, the market value of our agency portfolio was $389.3 million and the book value of our agency portfolio was $381.6 million.
Unrealized gain in this portfolio was approximately $7.7 million at December 31.
The market value of our mortgage-backed security portfolio was $1.17 billion and the book value of this portfolio was approximately $1.22 billion at December 31.
The unrealized loss on this portfolio at December 31 was approximately $44 million.
$216.9 million of our mortgage securities were non-agency CMOs.
Just a little more information on our non-agency mortgage-backed portfolio.
One non-agency CMO with a market value of $10.5 million was downgraded to below investment grade in the fourth quarter.
This security has a book value of $11 million.
Two other non-agency CMOs with a total market value of $31.8 million and a book value of $46 million were downgraded from AAA during the fourth quarter, but remain investment grade.
Our remaining non-agency CMOs are rated AAA by the various debt ratings agency.
All of our non-agency CMOs are comprised of fixed-rate jumbo or fixed-rate Alt-A mortgage collateral.
Our corporate securities portfolio is comprised of two significant components.
One component, our portfolio of trust preferred securities, had a market value of $28.6 million at December 31 and a book value of $60.7 million.
The remaining corporate securities had a market value of $115.8 million at December 31.
$101.5 million of our corporate securities portfolio are managed by an outside investment manager unaffiliated with Old National.
This portfolio is managed Barclays Intermediate Corporate Bond Index.
All of the holdings are investment grade and buy policy no single company exposure can exceed 4% of the value of the manager's total portfolio.
Slide 31 lists the notable exposures to the financial sector in this portfolio at December 31.
The $28.6 million portfolio of trust preferred securities includes nine different pooled trust preferred securities with a total market value of $19.7 million as of December 31.
These nine securities had a book value of $50 million.
We have no real estate investment trust exposure in our pools.
The issuers on our securities are primarily banks, but the pools do include a limited number of insurance companies.
We did not incur other-than-temporary impairment on our investment portfolio in the fourth quarter.
Of all of our portfolios, we are monitoring our portfolio pool of trust preferred securities and our recently downgraded non-agency CMO most closely for other-than-temporary impairment.
Seven of our pooled trust preferred securities totaling $12.5 million in market value at December 31 are rated lower than AA and are subject to the guidance of EITF 9920.
At year-end four of these trust preferred securities with a book value of $23.5 million and a market value of $6 million had below investment grade ratings ranging from Ba1 to Caa1 from Moody's 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 OTT on the fourth quarter, but we continue to monitor these securities as additional credit deterioration in future periods could result in OTTI.
Remember that all of our trust preferred securities are considered available for sale on our balance sheet, and as such the impact of the market value adjustments of these securities is reflected in our fourth quarter tangible equity and tangible equity ratios.
As Darryl noted, the securities that had ratings below investment grade at 12/31 are included in our portfolio of classified assets.
These securities had a market value of $16.4 million and a book value of $34.5 million.
The book value of $34.5 million is the amount carried in the classified asset portfolio.
We also continue to monitor our bank-owned life-insurance.
We adjusted our crediting rate and reduced the amount to the cash value increase we recognized into income for the fourth quarter of 2008.
We expect a reduction in our bank-owned life insurance revenue of approximately $7.5 million in 2009 compared to 2008.
As we all have seen in the recent earnings releases of a number of financial institutions, goodwill and intangible asset impairment is an area of concern for many companies.
We currently have approximately $159 million of goodwill and $27.6 million of other intangible assets on our balance sheet.
We continue to monitor events or circumstances that could reduce the fair value of our acquired businesses.
As of December 31 we don't believe that anything has occurred which would cause the fair value of any of our reporting units to fall below their carrying amounts.
And we do not believe it is necessary to do additional tests for goodwill impairment at this time.
I will turn the presentation back to Bob now for final comments.
Bob Jones - President & CEO
Thank you, Chris and Daryl.
Before we take your questions I want to close our presentation beginning on slide 33 by providing you with insight into the significant drivers of our 2009 financial outlook.
We will not be giving you our traditional earnings guidance because of the uncertainty surrounding the deteriorating economy and its potential effect on our credit portfolio.
As you will see, we will be providing you with a wide range for our provision expense because of that economic uncertainty, and again we do not feel we can give you a more precise range at this time.
On slide 33 there is a list of items that should impact our 2009 financial expectations.
As we noted on our call regarding the acquisition of Charter One, we will incur one-time costs of approximately $9 million related to the acquisition.
In addition, like all banks, Old National Bank's FDIC assessment will increase by approximately $5.8 million for the year.
As Chris previously noted to you, we have restructured our BOLI investment.
We have successfully executed that transaction during the fourth quarter of 2008 and there will be a reduction in income from our BOLI investment of approximately $7.5 million for the year.
Finally, the cost of capital through the direct capital purchase program is $5 million.
Turning to slide 34, let me discuss the significant drivers of our 2009 financial performance beginning with the balance sheet.
We see commercial loans and leases growing at -- should grow at a mid-single-digit rate for 2009.
We would define these as our C&I loans and small-business loans.
Total commercial loan should be flat for the year.
The offset to our commercial loan growth is the planned continued decline in our commercial real estate loans.
Total consumer loans should grow low single-digit percentages.
The growth opportunities in this portfolio are in the direct and indirect loans and not the home equity portfolio.
Residential loans are estimated to grow in the low single-digits and total core deposits should be flat year-over-year though we do see growth in our non-interest DDA in low single-digits.
On slide 35, I will discuss the earnings drivers of our income statement.
Non-interest income could see a reduction of mid single-digits in 2009 based on the previously disclosed BOLI charges -- changes and our view of the ongoing pressure in the equity market and its effect on our fee-based businesses.
Expenses could grow in the low single-digits with the largest components of growth being those items that we disclosed on slide 33 along with the continued and strategic investments in our distribution system.
We do plan on opening two new branches in northern Indiana 2009 as well as an investment in our technology platform.
Finally, our net interest margin should be in the range of 3.85% to 3.95% for the year and in the range of expectations for our provision expense is $40 million to $60 million.
At this time, Tieri, we would be happy to take questions from the phone.
Operator
(Operator Instructions) Scott Siefers, Sandler O'Neill.
Scott Siefers - Analyst
Just had a few different questions.
Bob, I appreciate the provision guidance for '09.
I am just curious if you would be comfortable suggesting how you guys see charge-offs comparing to the provision for the full year?
Daryl Moore - EVP & Chief Credit Officer
Scott, this is Daryl.
We would think that charge-offs would be a little less than provision.
In terms of guidance on charge-off, we are going to be in the mid probably 70 basis point range.
Bob Jones - President & CEO
Scott, I would just carry on Daryl's comment.
As we said in the opening, we see building the reserve as an important tool in 2009.
Scott Siefers - Analyst
Okay, perfect.
Thank you.
Chris, maybe a little more color on the margin.
I guess given where the fourth-quarter margin was versus the range that you have given for '09, it looks like we are sort of at the top end of the range currently.
What kind of factors might be at play that would potentially cause the margin to come under some pressure?
Chris Wolking - Senior EVP & CFO
Scott, as we have said that our improvements in margin have come from our ability to continue to lower our deposit rates relative to our peers and the way the market has moved.
We are probably as low as they can go on a relative basis just given where market rates are right now.
That is probably the most important driver into 2009.
Unidentified Company Representative
We do think we have got some ability, Scott, at the top end with our asset pricing, particularly on the loan side, to maybe become a little more efficient.
We are seeing more opportunities based on the disruption in the marketplace and we are able to get a little better pricing for the risk.
Scott Siefers - Analyst
Okay.
Then, I guess, last question probably also for you, Chris.
Just on the trust preferred and the unrealized losses that you guys have and then I guess with the non-agency CMOs as well.
Just I guess given where we are today what additionally would have to happen in your mind to potentially trigger an OTTI and how does market pricing, ultimately, factor in to that decision for you guys as well?
Chris Wolking - Senior EVP & CFO
If you look at the market value of those securities, they really haven't changed much since the third quarter, Scott.
It's that same set of pooled trust preferred securities that we are looking at fairly closely.
I think, as I noted, we have to look outward at possible deferrals in those pools and additional credit deterioration.
Those will continue as we monitor those assets, and we do a pretty good job of looking deeply into those pools at the individual securities.
We also have engaged a third party to help us evaluate those.
So as we dig deeper into that collateral and watch the performance of the underlying securities in those pools that is really what is going to dictate whether or not that happens.
We do a pretty good job at it.
Scott Siefers - Analyst
Okay, terrific.
Thank you very much.
Operator
Erika Penala, Merrill Lynch.
Erika Penala - Analyst
My first question won't come as a surprise, it's for Daryl.
In terms of when you are looking at that 70 basis point charge-off number, what categories -- you know I always appreciate the specific comments that shows you have been cautious on retail term for a while.
But specifically what do you think will be the greatest contributors to either NPAs or charge-offs in '09?
Daryl Moore - EVP & Chief Credit Officer
I think charge-offs we would -- it's easier probably to give you definitively.
I think that charge-offs in the retail area are going to be higher without question.
It becomes a little more lumpy in the commercial and commercial real estate just simply because what large relationships might come on and what kind of losses we would have and those that we really don't know today.
So I think clearly retail is a big issue for us.
The other driver for us, Erika, in the provision is we would expect to see, as I said in my comments, increases in criticized and classified.
And in our provision model those drive a fair amount of provision need.
So I think between the two of those you are seeing that larger than some might expect -- the $40 million to $60 million of expected provision.
Erika Penala - Analyst
I think in the past you have talked about concerns on the C&I portfolio with businesses related to auto and in the term [free] portfolio those with you know retail rent rolls, right?
Daryl Moore - EVP & Chief Credit Officer
That is right.
Erika Penala - Analyst
Is there any other category within those two buckets that worry you, ex-auto and ex-retail?
Daryl Moore - EVP & Chief Credit Officer
I would say that we are beginning to see a little softness in the -- not a lot -- but a little softness in the office commercial real estate.
That would be something that we are going to continue to watch pretty closely.
We don't have much exposure and haven't done loans in the hotel/motel industries for two or three years.
That would be a segment that what little bit we have remaining would be a concern to me.
On the commercial side, right now we have seen most of the deterioration somehow associated with building, so it would be your lumberyards, those types of things.
But we are also seeing it spill over into transportation.
I would think, generally, we are going to see the lack of consumer spending touch most of those commercial customers that we have in some way or another.
So when you looked at our special mention and classified increases in the C&I portfolio, they probably had the biggest jump this quarter.
They had a bigger jump this quarter than what we saw in our commercial real estate, so we are beginning to see it spill over into that C&I portfolio.
Erika Penala - Analyst
And switching over to deposit volume trends in the quarter, was there anything unusual going on?
Or I guess what was behind your ability to attract that much volume even though you were able to rationalize your retail deposit costs very well?
Unidentified Company Representative
You know I think, Erika, as we have talked about for a while it's really the sales culture that our banking group has built.
I think there has been a bit of flight to quality from some of our depositors that are looking for banks that maybe aren't in the headlines as much as others.
But really I would say it's these sales culture that Barbara has built into the banking environment.
Erika Penala - Analyst
My last question, I guess -- I don't want to misread into the prepared comments.
But in the past I think management has always been adamant about defending the dividend where it is.
I don't know if I am reading this incorrectly, but it sounds like given that we are in a completely different environment than even three months ago that at least looking at the dividend is on the table.
Is that a fair assumption to make?
Bob Jones - President & CEO
Well, it's a fair assumption.
I think it's prudent on our part to be always looking at it.
I think our Board takes their fiduciary role very importantly.
Saying that, we do feel we are well within the guidelines and as we look forward to we just think it's quarter-by-quarter depending on how bad the economy gets.
And I think the message is, one, we want to be very prudent about it.
Two, we don't view TARP as part of that decision that we really viewed tangible common as where we will drive the decision for dividends in the future.
Again, as Chris said, we are very comfortable in the range and we are very comfortable as we look forward on our outlook.
But I think it's just prudent banking at this stage.
Erika Penala - Analyst
Okay.
Thank you for taking my questions.
Operator
Mirsat Nikovic, Integrity Asset Management.
Mirsat Nikovic - Analyst
Good morning.
How do you guys -- I know this is a ways off -- but how do you plan to pay back that TARP money?
Chris Wolking - Senior EVP & CFO
You bring up a very important point and I think the opportunities really to do that still haven't played out yet.
But we -- as Bob said, we don't view TARP as part of -- obviously, as a part of our permanent capital structure so as we look forward it's something we will continue to look at and look at opportunities.
But I think the answer to that remains to be seen.
But it's something we are watching and continue to think about.
Mirsat Nikovic - Analyst
Okay.
Operator
David Darst, FTN Midwest Securities.
David Darst - Analyst
Looking at the securities portfolio growth and then your expectations for the liquidity to increase deposits coming in the first quarter, would you consider any of those purchases as kind of a pre-purchase taking advantage of the markets in anticipation of this liquidity?
Chris Wolking - Senior EVP & CFO
That is a good catch, David.
We certainly wouldn't expect our portfolio to increase at the same rate that we saw in the fourth quarter.
The opportunities were there and we do know, of course, with the closing of the transaction in March that we will have close to $400 million in new deposits.
But the opportunities in the investment portfolio are very real.
There are some good opportunities in the municipal securities market so we chose to take advantage of those in the fourth quarter.
David Darst - Analyst
Should we assume maybe $200 million of additional securities growth or balance sheet growth in the first quarter rather than the full amount?
Unidentified Company Representative
Hard to say.
I think we will get back to you on that.
We have gotten ahead of it a little bit.
We would expect it to be a component of our earning asset growth that Bob talked about, just given the outlook and the steepness of the curve and all of those things that make investment portfolio assets on a relative basis pretty attractive right now.
David Darst - Analyst
And then I guess beyond the first quarter would we expect to see the balance sheet relatively stable to declining as you pre-deploy that liquidity?
Chris Wolking - Senior EVP & CFO
I think that is fair.
Again, with the numbers that Bob provided in his guidance you get a feel that the new funding from the branches that the acquisition will be an important part of our funding going forward.
It's an element of the funding mix.
We don't necessarily expect that that will drive significant increase in the size of our balance sheet.
David Darst - Analyst
Okay.
Then where did you accrue your TARP dividend?
I didn't see it broken out.
Bob Jones - President & CEO
I don't know if you have your trend sheets, but it was such a small portion.
I think it was only [200 and some thousand] for the quarter because we didn't get the money until mid-December.
We are going to do a better job of breaking that out in our trends as we go forward, but it is on the trends in terms of in the retained earnings area.
We will break it out better as we talked about in my presentation, be a little more transparent.
But given it was only a couple of hundred thousand for the quarter it didn't really matter.
Much more material next quarter.
David Darst - Analyst
And then the Charter One one-time expenses, will those be broken out over several quarters or will those all occur in --?
Bob Jones - President & CEO
The vast majority of those will all be first-quarter expenses.
It's important as you are building your models that those will be first-quarter expenses and then some return to normalcy from there.
You will remember in our Charter One presentation we viewed Charter One as basically flat to earnings after the one-time expenses.
David Darst - Analyst
Okay, thanks.
Operator
Eileen Rooney, KBW.
Eileen Rooney - Analyst
Good morning, everyone.
Quick question on the tax rate, it looks like you guys used some tax credits this quarter.
Just wondering if you had any left and also what you expected for the tax rate in 2009.
Chris Wolking - Senior EVP & CFO
I think the biggest driver of our tax expense this year was our first-quarter recovery.
Probably end of 2009 it's really a mix of assets in the components of taxable income versus income that is not taxed.
Depending on where we land in the range of provision expense you could probably expect to see a tax rate in that 12% to 15% range, 10% to 15% range, Eileen.
Eileen Rooney - Analyst
Okay.
And this quarter's tax rate?
What was going on there?
That negative 2.5.
Chris Wolking - Senior EVP & CFO
It's really driven by the large provision, just the impact on reported taxable income.
Of course that will -- it really becomes a credit, a deferred tax asset subject.
Of course, it would be subject to AMT.
Does that help, Eileen?
Eileen Rooney - Analyst
Okay, so that is just because you had non-taxable interest income?
Chris Wolking - Senior EVP & CFO
Right, right.
We have always carried a pretty high percentage and then of course as you have seen our effective tax rate has historically been pretty low.
Eileen Rooney - Analyst
Right.
Okay.
Operator
Brian Hagler, Kennedy Capital.
Brian Hagler - Analyst
Appreciate the detail you have in the slides.
I was just hoping to get a little more comment on the Indianapolis market which I guess with the fraud was a little over 60% of your NPAs and without it it's still about 40%.
Is that just because you have more retail commercial real estate there or is it just one of your maybe weaker markets?
Unidentified Company Representative
I think if you look at the Midwest, Indy would be a market that would more resemble Ohio or Michigan in terms of got a little overheated and they are starting to pay for that a little bit, particularly as you look at housing both on apartments and residential.
I think you are seeing the effect on those builders as well as on their suppliers.
So it's really just the most challenging market we have from an economic standpoint right now.
Brian Hagler - Analyst
And I am assuming that that obviously accelerated or the stress on that market accelerated this quarter?
Bob Jones - President & CEO
It has, though we have -- as you look back at our calls, we have always said that is a market we are concerned with even absent the fraud, because again those that go up very fast tend to come down and those are pretty steady stay steady.
Indy is, again, one of those markets in the Midwest you have to keep your eye on.
Saying that, we are still very committed to the market.
Brian Hagler - Analyst
Okay.
Thanks, Bob.
Operator
There are no further questions at this time.
Ladies and gentleman, do you have any closing remarks?
Bob Jones - President & CEO
Well, no, just thank you for your time and diligence.
And as always our new Senior Vice President of Investor Relations is available to answer your calls and we will get right back to you.
Thank you very much.
Operator
This concludes Old National's 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 800-642-1687, conference ID code 80127832.
This replay will be available through February 9.
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.