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Operator
Welcome to the Old National Bancorp third-quarter 2009 earnings conference call.
This call is being recorded and has been made accessible to the public and according to the SEC's Regulation SE.
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 9.
To access the replay dial 1-800-642-1687, conference ID code 343-06-905.
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, Director of Investor Relations, for opening remarks.
Miss Walton?
Lynell Walton - SVP of IR
Thank you, Dixie, and good morning to all of you on the phone.
We appreciate you joining us for Old National Bancorp's third-quarter 2009 earnings conference call.
With me today are Old National Bancorp management members, Bob Jones, Chris Wolking, Barbara Murphy, Daryl Moore and Joan Kissel.
Before we begin I would like to refer you to slide 3 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.
These risks and uncertainties include, but are not limited to, those which are contained in this slide and in Old National's filings with the SEC.
Slide 4 contains our non-GAAP financial measures information.
Various numbers in this presentation have been adjusted for certain items to provide 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 these adjusted metrics to be helpful in understanding Old National's results of operations and core performance trends.
Turning to slide 5 you'll find our agenda for the call.
First, Bob will discuss the strategic events of the third-quarter, the highlight of which was Old National's successful equity offering.
All of these items were executed with the long-term success of the Company in mind.
In addition, Bob will review our third-quarter earnings highlights.
Daryl will then provide commentary on our credit quality trends and our continued cautious outlook on these trends going forward.
Next, Chris will discuss in detail Old National's focus on strong capital management, items impacting our net interest margin for the quarter, and the areas of risk within our investment portfolio.
Finally, Barbara will provide a state of the banking business update, including loan and deposit activity, Charter One branch updates, and plans for new banking locations in our footprint.
After that time we'll be happy to open the line and take your questions.
I will now turn the call over to our CEO, Bob Jones.
Bob Jones - President, CEO
Great.
Thank you, Lynell, and good morning, everyone.
I'm going to begin my remarks on slide number 7 by reviewing the significant strategic actions that we took in the third quarter.
As a context for these actions our focus has been on building for the long-term, particularly as we continue to navigate through these challenging times.
As we have said many times, we may be willing to sacrifice some short-term earnings if we believe that our actions will create long-term consistent benefit to our shareholders, and many of the strategic actions we took this quarter fit into that context very well.
Obviously the single most important event for the quarter was our successful capital raise in September of approximately $196.4 million.
This capital raise, along with some other actions that we have taken this quarter, has increased our tangible common ratio to 8.53%, which is significantly higher than last quarter's 5.51%.
More importantly, the capital we have raised will allow us to prudently take advantage of opportunities as a result of the market disruption that is currently occurring and that we believe will continue to occur in our industry.
In addition to the capital raise, as we foreshadowed last quarter, we did sell $258 million of municipal leases late in the third quarter.
These were approximately 70% of the leases that we had moved to held for sale last quarter and they represented the majority of the municipal leases that were in that portfolio.
This transaction is important for a number of reasons.
First, it does reduce a portion of our tax-free income at a time when we are in an AMT position and cannot gain use of all the benefit of the tax-free income.
In addition, the transaction frees up approximately $15 million in capital.
To achieve both of these goals, the net cost to us on a pretax basis was $1.4 million.
This is consistent with my earlier point of our willingness to forgo some short-term benefit for a sounder long-term strategy.
It also should be noted that we did see a negative impact on our net interest margin as well as net interest income from this transaction.
But again, this was tax-free income and the benefits of reducing our alternative minimum tax credit and our deferred tax asset on our balance sheet outweighed whatever short-term benefit we would have received.
It should also be noted that because the transaction closed late in the quarter we were not able to execute all of the positive margin related activities until the fourth quarter and Chris will review those with you later in his presentation.
Consistent with the strategic financial goals of the municipal lease sale, we also sold $66.3 million of municipal bonds for the quarter.
These sales were strategic in nature and designed to give us the same benefit as the lease sale.
While not strategic in nature, our message to you has been consistent in that our focus has been on capital and credit as we continue to believe that a strong balance sheet will be vitally important for those institutions that emerge as the winners from the turmoil we are all facing.
As noted, we did a great deal to improve our capital position over the quarter and we will continue to look for these types of opportunities in the upcoming quarters.
As for credit, the third-quarter metrics for our credit also exhibit that same type of focus.
On an absolute level our credit metrics have seen slight improvement over last quarter; this is in face of what we still see as a difficult economy.
Our nonperforming loans declined from $77.7 million to $73.7 million and at the same time our classified loans declined from $191 million to $175 million.
We were also able to increase our allowance to nonperforming loans for the quarter.
One item that I'm absolutely positive about is that Daryl will give you all of the proper caveats to these numbers.
But let me state up front that we do not believe that we are at the bottom of the credit cycle.
It is still our position that we have some time to go before all of the issues flush through the system.
Our hope is that we'll begin to see some positive traction in the latter half of next year.
Our position is based on a couple of factors.
One, our experience in banking challenges tend to be a lagging indicator.
And while we may not still be in a recession, our belief is that the recovery will be slow and it will be long.
More importantly, we spend a great deal of time talking with our clients and there does not seem to be much optimism in their minds.
Loan demand is very soft, capital expenditures for our clients are down for 2010 and we have not seen our clients doing much hiring as of yet.
All this leads us to believe we have some time to go before we can declare a bottom to the credit cycle.
I'll now turn to slide 8 to review the earnings for the quarter.
We announced earnings per share of $0.06 this morning.
There are a number of factors that affected this quarter, the biggest of which is, as I noted earlier, we are seeing a sharp decline in loan demand across all markets in all segments which has affected our net interest income.
In addition for the quarter, while we did have OTTI of $5.1 million, this was offset by security gains as Chris will note later.
And as previously noted, a loss on the sale of the municipal leases of $1.4 million plus the effect that that lease sale had on our net interest margin.
To wrap up my portion of the call, we remain very pleased with our position relative to credit and capital and also believe that we continue to take the necessary steps to position our company to the inevitable turn in the economy.
Whether that be in terms of positioning our balance sheet as slightly asset sensitive for what we would believe will be a rising interest rate environment or by not taking undue risk in our investment portfolio just to bolster short-term earnings or by stretching for credit to offset the soft loan market.
Our belief is and will always be a long-term view and one that has our shareholders' interests at heart.
Let me now turn the presentation over to Daryl.
Daryl Moore - EVP, Chief Credit Officer
Thank you, Bob.
I'd like to begin my part of this course presentation reviewing the charge-offs for the quarter as shown on slide 10.
Net charge-offs in the quarter were $12.7 million or 117 basis points of average loans, compared to $13.6 million or 118 basis points of average loans last quarter.
In comparing net charge-offs in the quarter to second-quarter results, we saw a decline in loss rates in the C&I portfolio, but observed increases in the commercial real estate portfolio as well as the consumer loan portfolio.
Losses in the C&I portfolio were $5 million compared to write downs of $7.1 million in the portfolio last quarter.
While the trends were down in the quarter loss levels remained high and we would expect this portfolio will continue to see challenges over the coming quarters.
Losses in the commercial real estate portfolio were up roughly $1.1 million from last quarter's write downs.
Offsetting in part gross losses and this portfolio in the quarter was a $3.1 million insurance settlement recovery.
The recovery related to a commercial real estate loss taken as part of our Indianapolis fraud write-down in 2008.
The three largest losses in the quarter involved a multifamily real estate project, a one-to-four family residential investment property relationship and a residential real estate developer.
Consumer loan losses were $2.9 million in the just ended quarter, up slightly from the $2.7 million in losses in the second quarter.
Year to date we've seen a material increase in losses in our consumer portfolio with write downs through the first three quarters of this year up $2.5 million or roughly 40% over last year's same period totals.
In the one-to-four family residential mortgage portfolio losses remain relatively well controlled with the third-quarter annualized loss rate continuing in the 15 basis point area.
With respect to our allowance for loan and lease losses, the provision expense for the quarter was $12.2 million, charge-offs in the quarter were $12.7 million.
If you recall at the beginning of the year, we gave full-year provision guidance of $40 million to $60 million, so our current run rate is at the higher end of that range if you annualized the $41.5 million provision for loan losses expensed through the first three quarters of the year.
With net charge-offs of $38.9 million for the first three quarters of the year the allowance for loan losses has grown by $2.6 million since the end of 2008.
This growth combined with lower loan-loss outstandings has resulted in allowance to total loan coverage of 1.72% at September 30, up 31 basis points from the 1.41 level at the end of last year.
As slide 11 reflects, nonperforming loans were lower in the quarter falling $4 million from last quarter end levels.
However, because of the decline in loan outstandings in the quarter, partially due to the $258 million lease sale transaction, nonperforming loans as a percent of total loans actually increased 9 basis points from 1.71% to 1.80%.
Decreases in nonperforming levels in the commercial real estate portfolio were offset in part by increases in the C&I, the one-to-four family mortgage and the consumer loan areas.
As Bob pointed out in his remarks, given our current outlook on the economic environment, as well as the trends we are seeing in our borrowers' finance results, we believed that we could see continuing increases in this category throughout the balance of 2009 and into 2010.
Slide 12 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 fell by 2.25 with total exposure, total outstandings and impairment associated with these loans all lower in the quarter.
As you can see, at the end of the quarter we had seven relationships in non-accrual with exposure of $2 million or greater.
The exposure in these relationships totaled $24.7 million and the impairment associated with those relationships was $4.5 million.
In looking at the loan type composition of these largest non-accrual exposures you can see from the slide that the mix between commercial and industrial and commercial real estate outstandings was roughly the same at the end of the third quarter.
Last year at the end of the third quarter commercial real estate comprised roughly 70% of this category.
In terms of the geographic distribution of these largest non-accrual loans, $8.7 million or roughly 38% of the non-accrual outstandings of $2 million or greater were originated out of our Indianapolis area.
As slide 13 shows, our 90 plus delinquent loans rose $400,000 in the quarter and now stand at 7 basis points of total loans.
90 plus delinquencies were up in both the C&I as well as the consumer portfolios in the quarter with reductions noted in each of the other lending areas.
Even with the 2 basis point increase in the quarter we continue to believe that these levels compare favorably to our peers.
As slide 14 shows, other real estate owned and repossessed property decreased again in the quarter falling slightly more than $500,000 during the period.
While we welcome the decrease in OREO and repossessed property in the quarter, as we have cautioned before, if default rates in the commercial real estate segment continue to climb, we would anticipate that other real estate owned and repossessed asset levels may also increase.
Moving to slide 15, the dollar level of classified loans, which include non-accrual loans, fell $16.6 million in the quarter to $174.7 million.
However, because of the declining loan outstandings the percent of classified loans to total loans increased from 4.21% to 4.25% in the quarter.
Non-investment-grade securities with the book value of $174.6 million which are categorized as classified assets are not included in these totals.
With regard to our largest classified loans not in non-accrual, there was a fair amount of movement in the quarter again with five of the 20 largest loans in the category having been added in the period.
Within these five large downgrades there was a mixture of both commercial real estate and C&I loans.
Slide 16 shows our criticized loan trends.
Criticize loans increased to 2.3% of total loans in the third quarter, up from the 2.22% level at the end of the second quarter.
In terms of dollars, there was actually a decrease in the quarter of $6.4 million, but again the drop in outstandings served to drive up the percent of criticized loans to total loans.
In this category too there was a fair amount of movement in the quarter with seven of the 20 largest loans having been added in the period.
Of these seven large downgrades, three are from the commercial real estate portfolio and four are from the C&I portfolio.
One leading credit indicator that we all watch closely is our 30 day plus delinquency rate.
As slide 17 shows, since the beginning of 2007 our overall delinquencies have remained fairly constant running in the 60 to 70 basis point range.
In three of the last four quarters, however, delinquencies have risen into a range of more than 80 basis points and increased to 94 basis points at the end of the third quarter.
With regard to specific segment delinquencies, slide 18 shows our 30-day and greater delinquencies across the different portfolios.
As you can see with the exception of the commercial portfolio all of the categories posted some increase in the quarter with notable jumps in the retail related loan portfolios.
If you compare third-quarter 2009 delinquencies with third-quarter 2008 delinquencies, you clearly see that we have had notable increases over that time.
As you can see from the bottom half of the chart on the slide, there was a slight shift in the commercial area with C&I loans declining as a percent of total loans.
The shift was due in great part to the sale of the significant portion of our lease portfolio mentioned previously which we classify in these slides as commercial type loans.
If you move to slide 19, because the home equity line portfolio continues to be of interest to many, we have again provided some information on that portfolio for you.
As you can see, we have broken out our home equity line of credit portfolio for you into loan-to-value bands.
It remains that roughly one-third of our commitments are in line with original loan to value ratios of 80% or greater.
With regard to actual outstandings, approximately 40% of the outstandings at quarter end were on lines where the original loan-to-value ratio equal or exceeded 80%, which is relatively consistent with the results from the last several quarters.
Credit bureau scores in this portfolio have split slightly in the last quarter.
Large dollar exposures in our home equity line book are also broken out for your review.
As you can see, commitments at $500,000 or greater represent only 4% of total commitments and total commitments of $100,000 or greater, including those of $500,000 or more, collectively represent only 24% of total commitments.
So as we have pointed out previously, the individual exposure levels in this portfolio are fairly granular.
I'll wrap up my section of the presentation with the statement that we continue to expect challenges in credit quality in the fourth quarter and anticipate that they could persist well into 2010.
With those remarks I'll turn the call over to Chris.
Chris Wolking - Senior EVP, CFO
Thanks, Daryl.
Bob opened the call by noting the strategic actions we took during the quarter including our municipal lease sale and our equity raise.
Because solidifying our tangible capital and reducing our exposure to rising interest rates are so important as we position the Company to take advantage of likely growth opportunities, I'll provide more detail on these actions plus I will provide information related to the decline in our margin and details on our third-quarter OTTI charge.
I'll begin on slide 21.
In late September we issued 20.7 million shares in a secondary public stock offering.
We priced the shares at $10 a share, slightly better than 1.5 times our June 30 tangible book value.
As Bob said, the total capital raise was approximately $196 million.
The offering was well received by institutional investors and we feel like the timing and execution of the transaction were excellent.
I've listed several of our September 30 capital ratios on slide 21.
Slide 22 shows our tangible common equity as a percentage of risk weighted assets ratio compared to our peer group during the last two years.
The new common equity combined with a balance sheet that currently has a large investment security portfolio gives us a tangible common equity to risk weighted asset ratio well in excess of the average ratio of our peer group.
Investment securities, which have a lower risk weighting than loans as a percentage of total assets, increased to 37.5% at September 30 compared to 33.2% at June 30, 2009.
Slide 23 shows the tangible common equity ratio trend over the last two years.
The low points in our tangible common equity ratio trends were in the second quarter of 2007, just after we closed on the purchase of St.
Joe capital, and in the first quarter of 2009 when we closed on the purchase of the Indiana branches from Charter One.
Our September 30 tangible common equity ratio of 8.53% gives us the balance sheet capacity for additional acquisitions and organic loan growth as our economy improves.
As you can see on slide 24, additional items impacted our tangible common equity ratio during the third quarter.
Our investment portfolio increased in value compared to June 30 and the corresponding increase in other comprehensive income lifted the tangible common ratio by 43 basis points.
The municipal lease sale reduced leverage and lifted the tangible common ratio by 28 basis points.
Finally, because we deployed some of the cash from the sale of the leases plus the cash from the equity raise into short maturity treasury and federal agency securities, the increase in investments at September 30 compared to June 30 reduced our tangible common ratio by 32 basis points.
We expect to use the cash from the lease sale to reduce wholesale funding over the next several months.
I'll spend more time on the lease sale and our investment portfolio in my discussion of the changes in our margin.
Moving to slide 25, note that net interest margin declined 6 basis points to 3.53% in the third quarter from 3.59% in the second quarter.
Lower asset yields caused the margin to decline 10 basis points.
Yield on the investment portfolio declined from 5.12% in the second quarter to 4.90% in the third quarter.
Within the investment portfolio the yield on our treasury and agency book declined 37 basis points during the quarter because higher-yielding bonds were called in July and August and we purchased short duration bonds in September.
Total loan yield was flat compared to second quarter.
The rate on total interest-bearing liabilities was essentially unchanged during the quarter and had only a small negative impact on margin.
The change in the mix volume other of earning assets reduced margin by 20 basis points during the quarter.
Most of the impact was related to lower volume of earning assets as average loans declined $244.7 million during the quarter and average investments declined $156.2 million.
Commercial loans and leases declined $148.9 million on average from the second quarter much of the decline in loans was attributable to the municipal lease sale.
On a fully taxable equivalent basis the yield on the municipal lease portfolio sold was approximately 6.60%.
Direct and indirect consumer loans yielding 7.28% declined $33.7 million on average from the second quarter.
In the investment portfolio the average balance in the municipal bond portfolio declined $13.1 million during the quarter and, as Bob said in his opening remarks, we sold bonds from our municipal portfolio to further reduce our tax-exempt income and reduce the accumulation of alternative minimum tax credit.
Total decline in earning assets accounted for most of the negative margin variance due to mix volume other.
The change in the mix volume other of liabilities lifted net interest margin by 23 basis points.
Non-interest-bearing core deposits increased $20 million on average from the second quarter while interest-bearing core deposits declined on average $44.6 million.
Importantly, total borrowed funding, including brokered certificates of deposit, declined $341.9 million on average from the second quarter.
While much of the reduction in wholesale funding was in relatively inexpensive short-term borrowing with an average rate of 31 basis points, the significant decline in total wholesale funding still was the primary contributor to the lift in margin due to mix volume other of liabilities.
On slide 26 you'll see the trend in monthly net interest margin for the quarter.
August margin increased to 3.59% from June net interest margin of 3.54%, but in September margin declined to 3.43%.
The primary driver of the decline in the net interest margin in September was the lease sale.
As I said earlier, the fully taxable equivalent yield of the municipal lease book was approximately 6.60%.
We were unable to reduce long term borrowed fundings simultaneous to the lease sale at a reasonable cost in September; so much of the cash generated by the sale was reinvested into low yielding investments.
Because of this the impact on September net interest margin from the lease sale was higher than we had anticipated.
We expect to keep the borrowed funding through maturity, although we have restructured the funding to reduce the interest expense.
This should partially mitigate the impact on the net interest margin of the lease sale in the near-term.
It is important to note that the sale of the municipal lease portfolio in the third quarter has several benefits for the Company, notwithstanding the near-term negative impact on net interest margin.
As I mentioned earlier, the sale of the leases lifted our tangible common ratio by 28 basis points.
And additionally, like with the Muni Bond sale, selling the leases should help reduce further accumulation of alternative minimum tax credit.
Utilizing our power alternative minimum tax credit and reducing our deferred tax assets is something on which we are focused.
Finally, the municipal leases were long maturity fixed rate assets, so the sale of these assets is consistent with our desire to better position our balance sheet for rising interest rates.
On slide 27 you'll see that our bankers continue to manage deposit cost very well in a challenging environment.
Our average deposit costs were 23 basis points lower than our peers in the second quarter of 2009.
On slide 28 we track our average loan yields compared to the average loan yield of our peer group.
Historically we've tracked closely to our peers but note that in the first quarter of 2009 our average loan yield was 43 basis points lower than the average yield of our peer banks.
Recapturing this credit spread and the yield differential to our peers is an important goal of our banking business unit and we have seen some early progress.
Our average loan yield during the second quarter was only 15 basis points lower than the average yield of our peers.
Slide 29 recaps the major factors that impacted our margin in the third quarter.
Earning assets declined on average during the quarter with the largest impact coming from the $244.7 million decrease in average loans.
Decline in the investment portfolio also contributed to lower margin.
The impact from lower earning assets was offset partially by the $321.8 million decrease in average wholesale funding in the quarter and I would point out that we took $5.1 million in securities gains in the quarter and have taken $21.9 million in gains year to date while we've reduced and shortened our investment portfolio.
We expect margin in the fourth quarter to be in the range of 3.40% to 3.45% and 3.50% to 3.55% for the full year of 2009.
Like we said last quarter, we know that reducing the size and duration of our investment portfolio and selling our lease portfolio will likely reduce margin and net interest income in the near term, but we believe that this is the correct decision for the long-term.
My final slides provide you with an update of our investment portfolio.
This quarter we charged $5.1 million in other than temporary impairment to earnings compared to $7.9 million in OTTI in the second quarter and $2.4 million in the first quarter.
Recall that we adopted the FASB staff positions related to the recognition of (technical difficulty) in the first quarter of 2009.
These FSP's require us to isolate the credit and non-credit components of impairment for securities that we do not intend to sell.
The $5.1 million charge for the quarter is the realized credit loss of the total impairment.
The noncredit component of impairment continues to be included in other comprehensive income.
The OTTI for the third quarter is attributable to six of our pooled trust preferred securities and two non-agency collateralized mortgage obligations.
The six pooled trust preferred securities with OTTI have a book value of $18.8 million and a market value of $8.4 million at September 30.
The two non-agency CMO's with OTTI have a book value of $19.8 million and a market value of $12.7 million at September 30.
Recall that we define book value as our purchase price plus any accretion discount or amortization premium minus any credit write-down related to OTTI.
Slide 30 provides more detail in the securities that are included in our classified assets portfolio.
Bonds must be included in classified assets if one ratings agency considers the bonds non-investment grade.
The portfolio of investments treated as classified has a book value of a $174.6 million, up from $145.3 million at June 30.
The balance reported in classified assets reflects book value.
The amount of the classified asset portfolio attributable to non-agency mortgage-backed securities increased approximately $29.3 million in the quarter.
We continue to monitor our pooled trust preferred and CMO securities, particularly those included in the classified assets portfolio, closely for additional OTTI.
It is likely that we will have additional OTTI in future quarters.
Slides 31 and 32 provide detailed information related to our entire investment portfolio including the change in market value since June 30, 2009.
I added slide 32 with effective durations of our portfolio for September 30 and June 30.
You can see that for most classes of our securities in our investment portfolio our durations declined during the quarter.
Reducing the duration of the portfolio is consistent with our desire to continue to position our balance sheet to reduce the possible negative impact on earnings from rising interest rates.
I'll now turn the call over to Barbara Murphy, our Chief Banking Officer, for commentary on the performance of the banking business unit during the quarter.
Barbara Murphy - Senior EVP, Chief Banking Officer
Thank you, Chris.
As we review the state of our business on page 34, we are reconfirming that loan demand, which started to soften in second quarter with the exception of mortgage lending, remained weak through the third quarter and will likely remain so into fourth quarter.
Our pipelines continue to languish and for the first time our commercial lending discussion only component of the pipeline, this is the portion of the pipeline where we think there is at least client interest in doing a deal, has decreased.
Previously our proposed an accepted part to the pipeline had decreased.
Our commercial balances have held year over year with the exception of commercial real estate which we had planned to shrink and is working as expected.
And while demand for commercial loans is weak, we are taking the opportunity to step up our activity with emphasis on other product sales such as trust, investments, cash management and insurance products.
Just this past month we've seen six to seven new 401(k) plans added to our wealth group with some sizable books of business from $3 million to $5 million and a couple for $9 million as a result of this emphasis.
And we have other new cash management and insurance business that is materializing.
Our commercial loan risk weighted repricing initiative introduced last quarter is making nice progress as well.
Our risk grade 7 and 8 credits, those are special mention and the classified loans at the bank in region level, have seen raised spread in yields this past quarter.
Our spread on grade 7 loans is up 22 basis points and our grade 8's are up 40 basis points.
Likewise, our yields for grade 7's are up 40 basis points and our grade 8's are up 64 basis points.
Our consumer lending balances have also held year over year with the exception of our direct consumer lending balances -- those are the applications that are originated in the banking centers.
And these are down year over year by more than $57 million.
Applications in this area are down by about one-third throughout this year.
Our home equity line balances are up year over year, not because of new originations but (technical difficulty) pay downs and increased line usage which is now at 47.8%, up from 44.6% a year ago.
Mortgage volume continues to be our strongest loan volume product.
Purchased volume year to date is now at 32%, up from the first quarter when it was as low as 18%.
In September we also introduced two new balance sheet products, a 10 year fixed rate product and a seven year balloon product to gain more assets on books.
Our deposits on page 35 continue to grow even in this low rate environment and we continue to bring in the cost of these liabilities.
Our DDA savings and time deposits have seen strong growth year over year and we are pleased with the balances in non-interest checking for both personal and business accounts which are strong double-digit increases year over year.
Our decreases have occurred with money market accounts, some sweep accounts and jumbo CDs.
Money market accounts in particular have seen the greatest outflow and mostly as a result of the Charter One acquisition which had us acquire these accounts with a 3% rate.
Our Charter acquisition has also contributed to strong service charge revenue for overdrafts and ATM debit card fees which have seen an increase of $4 million in fees from third quarter of '08 to third quarter of '09.
As with most in our industry, we are reviewing our strategy and tactics in regard to these fees in determining our best options for changes over the next several months.
On page 36 you will note an update on our Charter balances.
We have seen a 20% attrition rate on these balances.
This was not unexpected as the money market accounts were at the 3% rate when they converted.
And there were $25 million of additional CDs that we absorbed at higher than market rates established right before conversion.
83% of the attrition is in the money market product but our other products have seen increases since March.
We've also closed 11 of the locations since March and announced two more closures for the second quarter of 2010.
We've not released any of the staff and have been able to absorb these associates while managing natural turnover in the regions.
And finally, during the quarter we also opened our first new additional full service facility with drive-through capability and seven day a week banking and our new Northern region in Grainger, Indiana which is an affluent suburb of South Bend.
This will be the first of two offices in South Bend -- of new offices in South Bend.
The other one will open in the first quarter of 2010 and will be directly across the street from the University of Notre Dame campus in South Bend.
We have two other locations opening soon, one opened this month in Harrisburg, Illinois and is a drive-through facility, and the other is a replacement for two consolidating centers in Paoli, Indiana.
We have no other planned new branch openings for 2010 at this time, though we continue to fill out our Fort Wayne and South Bend locations with some sites that we are reviewing today.
This concludes my comments on the quarter, thank you for your time and support.
And operator, we'll now open the call for any questions or comments.
Operator
(Operator Instructions).
Scott Siefers, Sandler O'Neill.
Scott Siefers - Analyst
Good morning.
Let's see, I guess three quick questions.
First, I wondered if you guys have any specific plans for the remaining leases that are still in the held for sale bucket?
Chris Wolking - Senior EVP, CFO
Scott, this is Chris.
Obviously I think we've got about $58 million still in held for sale, is it?
And it would still be our intention to continue to market those leases.
As you can tell by doing the arithmetic we did move some of the leases back into our portfolio.
But for the most part our municipal leases, the leases that are tax exempt, we'll continue to hold those out as an opportunity to sell.
Scott Siefers - Analyst
And then I guess, Chris, one more question for you.
I appreciated all the color on the margin and it looks like we'll probably stay in this 3.40% to 3.45% range that you ended up in in September.
I guess given the restructuring of the barrowed funding that went along with the leases, over what period of time do you think you might be able to get the margin back up to that mid-3.50's level that you were running at before the sale?
Chris Wolking - Senior EVP, CFO
That certainly is just one element of margin, I think, Scot, in terms of that particular piece, I'm confident that we'll recapture that as that wholesale funding matures and we eliminate that and really reduce the leverage that was associated, further reduce the leverage that was associated with that component of the balance sheet.
But as Barbara noted, loan demand is soft, we continue to keep the cost of funding pretty low.
So we'll continue to watch the margin very closely, but I'm not willing to commit at this time in terms of any increase in the margin.
Scott Siefers - Analyst
Okay.
And then just final question, I guess probably best for Daryl.
You talked about the 30-day plus delinquencies.
I wonder if you could give any more color on what you think is driving the increase in the consumer portfolios more specifically?
Is that something you're concerned about?
I only ask because I guess the prevailing wisdom is that delinquencies are flattening out and hopefully the consumer side is stabilizing, etc.
So just curious about any additional color you might be able to add.
Daryl Moore - EVP, Chief Credit Officer
Yes, Scott.
It's interesting, we have heard industry wide that people think that things are stabilizing and we see some choppy trends from month to month.
But we don't see anything in our trends that would clearly say that we're convinced over the next couple of quarters that they're going to stabilize.
We still obviously are operating in some areas where we're still having layoffs and that obviously has an impact on the delinquencies and the losses.
So we're just not, in the areas in which we operate, ready yet to call this thing stable and a victory going forward, we're still seeing some decline in the portfolios.
Now I would tell you with respect to the losses, they are up this year in the consumer loan area, but when you look at the third and fourth quarter run rate from last year and where we are third quarter of this year it's stabilized.
We just had a very good first half of the year last year with respect to losses and now we're running at about the same pace as third and fourth quarter last year were.
Scott Siefers - Analyst
Okay, perfect.
Thank you very much.
Operator
Eileen Rooney, KBW.
Eileen Rooney - Analyst
Good morning, everyone.
My first question is on the CRE portfolio.
I know you mentioned you're intentionally running that down a little bit.
Just wondering what a floor might be for that portfolio?
What are you targeting?
Bob Jones - President, CEO
Well, I don't know if we have a target in the floor.
It's really what's causing the portfolio to rundown is just lack of demand.
I don't know that we could give you a floor, Eileen; it would be awfully hard to do that.
We don't -- I'll answer it this way, we don't have a preconceived desire to have it at any certain point.
What we want to do is be judicious in adding assets to it and continue to work with those borrowers that are stressed and hopefully find either ways to restructure or exit the credit.
Eileen Rooney - Analyst
(technical difficulty) what was the amount of the tax exempt interest income that you gave up this quarter?
I'm just thinking about it for forecasting the tax rate going forward.
Chris Wolking - Senior EVP, CFO
You know, I don't have the numbers here going forward, Eileen, in my hands.
But I'd be happy to carve that up for you and get back to you on that with that number.
Eileen Rooney - Analyst
Okay, that's great.
Chris Wolking - Senior EVP, CFO
We could break it out, sure.
Bob Jones - President, CEO
Congratulations.
Eileen Rooney - Analyst
Thanks, Bob.
Operator
Mac Hodgson, SunTrust.
Mac Hodgson - Analyst
Good morning.
Just some questions about the loan demand.
Obviously you guys are seeing soft demand, which is not at all inconsistent with other banks.
Just curious on, just to get some color on what your borrowers are saying, what will drive the change in demand?
Are they waiting for clarity on taxes, healthcare, etc., what are some of the reasons for the (multiple speakers)?
Bob Jones - President, CEO
You know, Mac, I would tell you as I talk to clients and I was up in India on Friday and been in most all of our markets over the last two or three weeks.
And it's really more of fear and a real lack of belief that this thing has bottomed.
Our clients are saying they're not seeing demand from their clients.
So as they look at to 2010 and they prepare their forecasts and budgets any incremental growth in net income is coming from cost reductions.
And they are not forecasting much in the way of higher sales.
So I guess the overarching message would be one of just they are just still a afraid this economy, while it may have bottomed, the recovery is going to be long and tough.
And I have a lot of clients that are starting to talk about a "W", and they're afraid that we may head back into another, if not a recession, awfully close.
Mac Hodgson - Analyst
Are they generally -- are some clients building up cash position so that as the economy turns they probably won't borrow and they'll just use cash?
Bob Jones - President, CEO
Absolutely.
Our demand or our utilization of lines of credit is down and our cash positions on our commercial side is up nicely.
Mac Hodgson - Analyst
Okay.
What's maybe driving the expectation that demand returns, sounded like I think you said later next year?
Bob Jones - President, CEO
I think -- I hate to be patriotic that we are a cyclical economy and eventually things will turn.
I think there's just so much noise right now in Washington and so much noise in the markets that there's just a lack of understanding of when that turn happens.
Mac Hodgson - Analyst
Okay.
And then on the -- obviously the capital position is very healthy.
Bob, do you mind just talking about opportunities?
I know when we screen Indiana and I guess surrounding communities for potential stress and possibility for failed banks it doesn't appear like there are going to be a whole lot of failed institutions in the state.
I'm sure obviously there will be some.
But what opportunities are there that you're looking at that you envision coming up outside of assisted transactions if there are any?
Bob Jones - President, CEO
It's a great question, Mac.
I think there are really a couple.
I think one is the large regional banks that continue to evaluate markets.
We still believe that at some stage they'll decide that some of the markets we desire aren't strategic for them.
We continue to have conversations.
In addition, we're seeing an awful lot of demand increasing from, while not stressed banks, stressed boards in the smaller community banks that are just worn out, if that is the right description.
So we're having a lot of conversations with folks that their Boards are beginning to say, golly, these are difficult times and we don't see them turning quickly.
Now again, as we've used the word many times, and I use it in my presentation, we're going to be very prudent about all of those opportunities.
So even though we've got money in the checkbook it's not burning a hole in my pocket.
Mac Hodgson - Analyst
Okay, great.
I appreciate the color.
Thanks.
Operator
(Operator Instructions).
John Rodis, Howe Barnes.
John Rodis - Analyst
Good morning.
Chris, maybe a quick question for you on I guess revisiting the tax situation.
Can you just provide any other thoughts as to how we should look at forecasting the tax rate going forward?
Chris Wolking - Senior EVP, CFO
Good question.
Of course we report everything in our earnings release and in our trends on a fully taxable equivalent basis and you'll see a third-quarter number was down 11% to 12% range and year-to-date we're at 23%.
I think you can expect as we redo some of that tax exempt income that that number would come up a little bit.
I would tell you, John, it's probably somewhere in between the 23 and the 11.
So that will probably settle for the full year a little bit higher than the 23%.
But it's something we're going to continue to focus on and I think as I noted a looking forward, while we're very comfortable with our deferred tax asset position, we want to watch that and I think that we don't want to do anything -- we want to continue to manage that tax exempt income stream to the extent that we can and our AMT position is certainly with our large investment portfolio in municipal leases and tax-exempt leases something we can do.
So we're going to continue to watch that and manage that going forward.
John Rodis - Analyst
Okay, fair enough.
Another quick question, Chris, just on the $1.4 million loss I guess from the sale of the lease portfolio.
Did that go through other non-interest income?
Chris Wolking - Senior EVP, CFO
Yes, other income, right.
So it's a little hard to find geographically on the income statement, but it did go through other income as a negative.
John Rodis - Analyst
So it was part of that $2.1 million?
Chris Wolking - Senior EVP, CFO
Yes.
John Rodis - Analyst
Okay, okay.
And then maybe just another kind of big picture question, guys, on expenses.
Bob, you've talked about I guess opportunities and you brought some new -- or I guess you brought an individual in I think to --
Bob Jones - President, CEO
Yes.
John Rodis - Analyst
-- cut costs.
And I guess just my first question would be, other than the roughly $500,000 in conversion cost in the quarter, was the third-quarter expenses relatively core or were there any other kind of one time'ish items?
Bob Jones - President, CEO
Well, we had a loss on a derivative sale and some other things, John.
But I think for 2009 they would be core.
We'll be prepared in January to give you a better run rate for 2010.
And I continue -- well Jim continues to make good progress on our desire to become more efficient.
So I think more to come in the first-quarter or fourth-quarter call.
John Rodis - Analyst
Okay, and maybe just specifically, thought, one item in there, the salaries and benefits was up about $1 million.
Was there -- it's that kind of --?
Bob Jones - President, CEO
Yes, you'll remember in the second quarter we reversed some incentives and that showed -- that reduced that number, so the $46.5 million is actually a good core number because of that reduction.
If you go back to the release and then Chris's comments last quarter, we highlighted a reduction in a reversal of some incentives.
John Rodis - Analyst
Okay.
Thanks a lot, guys.
Bob Jones - President, CEO
Great.
Thanks, John.
Operator
There are no further questions at this time.
I would now like to turn the conference over to Mr.
Bob Jones for closing remarks.
Bob Jones - President, CEO
Well, as always, I'm sure you'll have other questions after you digest everything.
Please give Lynell a call and for those of you that are part of our new investment family, we appreciate your support and happy to answer any questions.
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 1-800-642-1687, conference IDE code 343-06-905.
This replay will be available through November 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.