Oct 27, 2008
Executives
Robert G. Jones - President, Chief Executive Officer, Director Christopher A.
Wolking - Senior Executive Vice President, Chief Financial Officer Daryl D. Moore - Executive Vice President, Chief Credit Officer Barbara A.
Murphy - Senior Executive Vice President, Chief Banking Officer Lynell J. Walton - Vice President - Investor Relations [Joe Kissell] – [Corporate Controller]
Analysts
Erika Penala - Merrill Lynch Brian Hagler – Kennedy Capital Management Charlie Ernst - Sandler O’Neill & Partners L.P.
Operator
Welcome to the Old National Bancorp third quarter 2008 earnings conference call. This call has been recorded and has been made accessible to the public in accordance with the SEC’s regulation [SC].
The call along with corresponding presentation slides will be archived for twelve months on the Investor Relations page at www.oldnational.com. A replay of the call will also be available beginning at 1:00 p.m.
central today through November 10. (Operator Instructions) At this time the call will be turned over to Lynell Walton, Vice President of Investor Relations for opening remarks.
Lynell J. Walton
Good morning to all of you. We appreciate you joining us for Old National Bancorp’s third quarter 2008 earnings conference call.
Joining me today are Old National Bancorp management members Bob Jones, Chris Wolking, Daryl Moore, Barbara Murphy and [Joe Kissell]. Before we begin our presentation 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 the company’s filings with the SEC. Slide 4 contains our non-GAAP measures information.
Various numbers in this presentation have been adjusted for certain items to provide more comparable data between periods and as an aid to you in establishing more realistic trends going forward. Included in the presentation are the reconciliations for such non-GAAP data.
We feel that these adjusted metrics provide a more meaningful look at our current performance as well as our performance going forward. As we did in our second quarter earnings call, we will focus on three key areas that are top of mind in this environment; credit quality, capital and the investment portfolio.
We have continued to provide balance sheet data for our banking regions and new financial centers as well as significant non-interest income and expense items and these slides are included in the Appendix to the presentation. We will not be covering these specific slides in detail during our prepared comments, we will be happy to answer any questions on these items during the Q&A session.
Turning to Slide 5 is our agenda for the call. First, Bob will comment on our third quarter earnings results, providing analysis on the major categories of the balance sheet and income statement.
Daryl will then lead the discussion of our credit quality metrics providing granularity of our loan portfolio including of our non-accrual loans and delinquency trends. Next, Chris will detail the movement in our net interest margin, provide commentary on our capital position and the holdings within our investment portfolio.
Bob will then conclude with our earnings guidance for 2008 and the underlying assumptions driving this range and then we will open the call for your questions. I’ll now turn the call over to our CEO Bob Jones.
Robert Jones
Thank you Lynell and good morning everybody on the phone. Let me apologize up front.
I am fighting a cold and hopefully my voice holds out here. I apologize for the squeak.
I’m going to begin my remarks on page 7. This morning we were pleased to announce earnings for the third quarter of 2008 of $17 million or $0.26 per share.
This compared to $19.5 million or $0.30 per share for the second quarter of 2008 and $22.6 million or $0.36 per share in the third quarter of 2007. While the third quarter of 2008 earnings did decline $2.5 million from last quarter it was primarily the result of lower net interest income due to a smaller investment portfolio and our planned reduction in our commercial real estate portfolio.
We did have higher provision expense for the quarter and this quarter we had almost no security gains as compared to $2.1 million last quarter. We did see this quarter the benefit of $2.1 million in reversals of performance based compensation mostly related to sureing up our long-term incentives.
In addition, as you compare this quarter to the third quarter 2007 you will see we had no loan loss provision expense in the third quarter 2007 versus the $6.8 million we had this quarter. Additionally in the third quarter of 2007 we did get the benefit of a $1.6 million recovery of interest on a commercial real estate loan as well as a $1.8 million release of a portion of unrecognized tax liability.
Our net interest margin in the third quarter of 2008 was 3.79% as compared to 3.85% in the second quarter of 2008 and 3.37% in the third quarter of 2007. Our margin did remain strong despite the slight decline in average earning assets and as we previously disclosed the shift to a more neutral balance sheet position.
Chris will give you more details in his presentation. We were very pleased to see good growth in our targeted commercial loan category of CNI loans this quarter.
Year-to-date we had growth of 6.2% while the trends if you look at them will show overall slowing of that growth this quarter as you look at the market-by-market performance in the Appendix we provided you you can see that absent two markets that had large negative performance we continue to see the same positive trends in the majority of our markets. As it relates to those negative trends, our Terre Haute market saw a $43.8 million decline largely as the result of seasonal pay downs related to gain elevator loans and the pay off of a short-term loan to a medical facility.
You will also note that we saw a $40.8 million decline in the category called “other.” This is related to loans we keep in our treasury group which are mostly capital market related transactions and a large portion of that pay down was the long-term financing that paid off the construction facility that was used to construct the new Lucas Oil Stadium in Indianapolis.
Our growth in commercial loans was offset by a continuing decline in commercial real estate assets. As we have noted for two plus years we have been very cautious towards this segment and have not added many new relationships and we continue to watch this portfolio very closely and aggressively manage it at the same time.
Core deposits on average grew almost $50 million for the quarter as compared to last quarter. We continue to see positive growth in our demand deposit outstandings, this quarter growing on average $17 million.
In addition, we saw growth in savings and CD’s. We have seen and continue to see positive inflows in our branches during these turbulent times as we have emphasized to our clients our strength and stability.
We have over 174 years of serving our clients and in being focused on being their partner and it does appear to be paying off. In addition, we have sent letters to our clients’ homes to educate our branches on how to deal with customer angst.
When compared to the third quarter of last year our revenue was up 6% and our expenses have been well maintained with the only significant growth coming in our occupancy line. You’ll remember this is related to our sale lease-back transaction and is offset more than enough by the improvement in our net interest margin.
Our capital position does remain strong. Our tangible common increased for the quarter to 6.83% from 6.75% last quarter and all of our regulatory capital ratios remain well within our guidelines and well above the minimums for a well capitalized institution.
Probably everyone on the phone is wondering about our participation in the direct capital purchase program. We have applied for participation and upon receiving a decision we will evaluate our further participation.
As I noted earlier our provision for the quarter was $6.8 million versus charge off’s of $5.5 million which resulted in an increase to our reserve coverage for the quarter which we feel is very prudent given the economic uncertainty that exists. While we were very pleased to see our non-performing assets remain almost equal to last quarter, we did see enough movement in the other categories to concern us.
This would be consistent with what we said on last quarter’s call that we believe we are quarters and not months away from seeing positive economic growth. We believe that 2009 may be more challenging for our industry than 2008 because of the impact of commercial real estate and the effects that the slowing economy will have on our consumer.
Our focus on this call, as Lynell said, will be much like last quarter. We will be focusing on asset quality, our investment portfolio and capital.
Overall we are very pleased with the quarter given the unprecedented environment we are facing. We feel we continue to see positive momentum in our banking franchise and that the initiatives we have worked on the last four years continue to position us very well.
To give you more insight into our credit performance let me turn the call over now to Daryl.
Daryl Moore
I’d like to begin my part of the quarter presentation reviewing the charge off’s for the quarter shown on slide nine. Charge off’s totaling 46 basis points, our best all in quarterly performance in what has been a fairly volatile year from a charge off perspective.
If you back off the losses associated with the Indianapolis fraud incident, loss rates have been 26 basis points, 42 basis points and 32 basis points respectively for the first three quarters of the year. While the annualized loss rate through the end of the third quarter was 78 basis points with the fraud losses included, without the fraud loss related write downs the loss rate would have been 34 basis points.
If you recall, our guidance in this area when we began the year was 25-35 basis points. The provision for loan losses through the first three quarters of the year totaled $34.4 million, with charge offs of $27.4 million for the same period.
This has resulted in a year-to-date increase in the allowance for loan losses to $7 million. As slide ten reflects, non-accrual loans increased slightly in the quarter from 1.43% to 1.46% of total loans.
This represents $400,000 in increased non-accrual balances and came as the result of increases in the retail area more than offsetting increases in the commercial area. Obviously non-accrual levels continue to be at higher than desired levels.
Unfortunately given our outlook on the economic environment we believe it may be difficult to move these levels down in the near term. Slide 11 gives a little more color on the exposure we have in our largest non-accrual relationships.
While the number of non-accrual loans with exposure over $2 million increased by one in the quarter, total outstandings and associated impairment all were lower in the third quarter as compared to second quarter levels. As you can see at the end of the third quarter we had nine relationships in non-accrual with exposure of $2 million or greater.
The exposure in these relationships totaled $33.2 million and the impairment associated with those relationships was $9.2 million. Breaking out these largest non-accrual exposures you can see from the slide that the balance is without question centered in the commercial real estate portfolio.
In terms of geographic distribution of these largest non-accrual loans, $17.4 million or more than half of the outstandings were originated out of our Indianapolis area. Of this $17.4 million total, $9.9 million of those loans are associated with the fraud incident.
As slide 12 shows we continue to manage our 90+ delinquent loans well. While the rate increased one basis point to four basis points in the third quarter I believe these levels would compare favorably to most peer groups against which you might measure us.
As the next slide shows, real estate owned and repossessed property as a percent of total loans remained level during the quarter at seven basis points. Moving to slide 14, classified loans, which include non-accrual loans rose during the quarter to 3.7% of total period ending loans.
This increase of 54 basis points from the second quarter represents a significant $24.1 million increase in this category with classified loans now standing at $173.8 million. With regard to our largest classified loans not in non-accrual there was a fair amount of movement in the quarter with five of the ten largest loans in this category having been added in the current quarter.
Of these five large downgrades, four are involved with commercial real estate related activities. This particular industry segment continues to show significant stress and we would expect it to continue to do so over a number of quarters to come.
Slide 15 shows our criticized loan trends. Criticized loans increased to 2.44% of total loans in the third quarter, up from the 2.06% level at the end of the second quarter.
In terms of dollars this represents a $16.9 million increase in the current quarter. In addition to the overall increase in this category it is noted the aggregate exposure in our top 20 criticized loans also rose in the quarter, up 10% over second quarter end levels.
Because we believe that changes in the levels of criticized loans can be a leading indicator of future credit risk trends we continue to monitor this category very closely. Looking forward, given the significant increase in the quarter coupled with our concerns with the health of the economy as a whole we could continue to see increases in criticized loans over the immediate term.
Another leading credit indicator is our 30+ day delinquency rate. As the next slide shows, since the beginning of 2007 our overall delinquencies have remained fairly constant running in the 60-70 basis point range.
With regards to specific segment delinquencies, slide 17 shows our 30 day and greater delinquencies in the commercial real estate, residential real estate and home equity line of credit portfolios. As you can see, while commercial real estate delinquencies declined 24 basis points in the current quarter they are 12 basis points higher than levels at the end of the third quarter last year.
Up until the current quarter, delinquencies in the residential real estate portfolio reflected a decreasing trend. This trend was reversed in the third quarter with delinquencies reaching 9 basis points but still a respectful 143 basis points.
Home equity line of credit delinquencies fell to 77 basis points at the end of the quarter as the result of slightly lower delinquency dollars combined with the modest growth of outstandings in the quarter. As a note, we have restated the home equity line delinquency this quarter to remove non-accrual loans and OREO the totals to make the calculation more consistent with the way we report delinquencies for the other portfolios.
As you can see from the chart at the bottom of the slide, our commercial real estate and residential real estate exposure as a result of total outstandings have fallen over the last four quarters. Interestingly our home equity line of credit portfolio has shown growth in 2008, albeit very modest, as the result of an increase in loans as well as an increase in line utilization.
I think it is important to remind everyone that our first mortgage residential real estate portfolio consists mainly of legacy-type loans as in recent years the majority of production has been originated for sale in the secondary market. The home equity line portfolio is obviously a portfolio we are all watching very closely as loss rates are up from 2007 levels.
As you can see on slide 18 we have broken out our home equity line of credit portfolio for you into loan-to-value bands. It remains that roughly 35% of our current commitments are in line with the original loan-to-value ratio of 80% or greater.
With regard to actual outstandings approximately 42% of outstandings at quarter end are on lines where the original loan-to-value ratio is equal or exceeding 80%. Moving to slide 19, large dollar exposures in our home equity line both are broken out for your review.
As you can see, commitments of $500,000 or greater represent only 3% of both commitments and total commitments of $100,000 or greater including those of $500,000 or more collectively represent only 26% of total commitments. So the individual exposure levels in this portfolio are fairly granular.
The final slide in the credit section shows Old National’s commercial real estate exposure as a percent of capital compared to community, mid-sized and large bank group averages as provided to us by the SEC. As has been the case over some quarters, our exposure continues to be lower than that of both the mid-sized and community bank sects.
Maybe more importantly in this environment the level of commercial real estate exposure as a percent of the ever increasing and important to capital levels continues to gradually decline. I’ll wrap up my section of the presentation with the comment that it is indeed our opinion we are only at the beginning of this credit cycle and that we continue to expect to see challenges across virtually every portfolio through 2009.
With those remarks I will turn the call over to Chris.
Christopher Wolking
Thanks Daryl. I will begin on slide 22.
Our net interest margin was 3.79 in the third quarter down six basis points from our margin in the second quarter of 2008. At 3.79%, our net interest margin is 42 basis points higher than the margin in the third quarter of 2007.
Net interest income declined $1.4 million and average earning assets declined $51 million during the quarter. Our investment portfolio declined $41.9 million during the quarter due in part to lower market valuation of our available for-sale portfolio.
Average loans declined $9.2 million during the quarter. The largest contributor to our lower loan portfolio was a decrease of $36.4 million in average commercial real estate loans.
Commercial loans and leases increased to $28 million in the third quarter which follows our strong second quarter increase in commercial loans and leases of $62.6 million. Slide 23 illustrates the monthly trend in our fully taxable equivalent net interest margin beginning in September 2007.
Our net interest margin was 3.35 in September 2007 and increased to 3.88 by May 2008. As we have told you in previous conference calls, during this period we benefited both from a liability sensitive balance sheet and margin as interest rates declined and a strong effort from our banking managers to reduce deposit costs.
During the second and third quarters of 2008, we reduced our liability sensitive through the addition of longer maturity borrowings and deposits. Additionally, the targeted federal funds rate and our prime lending rate stabilized during the second and third quarters.
During the third quarter we reduced our average short-term borrowings $111.2 million and increased our other timed deposits, primarily CD’s under $100,000, by $101.1 million. Other timed deposits were approximately 173 basis points higher than short-term borrowing costs during the quarter but we believe shifting our funding mix was prudent both to continue to reduce our liability sensitivity and to reduce liquidity risk.
Much of this shift occurred during September. Slide 24 shows the impact to our margin from the change in our asset yields, funding mix and earnings asset volume.
The change in margin due to the decline in asset yields of negative six basis points is primarily a result of declining loan yields during the quarter. Loan yields declined 17 basis points during the quarter due to our increase in commercial loans and leases which tend to be floating rate loans and a decline in our commercial real estate loans which are largely fixed rate loans.
Commercial loan and lease yields averaged 5.63 during the quarter compared to the yield on commercial real estate loans of 6.01%. The shift in the mix of our funding was the major driver of the negative six basis point impact the margin related to mix volume other.
As I noted earlier, we reduced our short-term borrowings which had an average rate of 1.79% during the quarter and increased our other timed deposits, primarily comprised of CD’s. The other timed deposit rates averaged 3.22 during the quarter, significantly higher than the cost of short-term borrowings which they replaced.
Slide 25 shows the quarterly trend that our cost of interest bearing deposits compared to our peer group. During the second quarter 2008 our interest bearing deposit costs including the cost of brokered certificates of deposit were 35 basis points lower than our peers.
Our deposit costs were stable from second quarter to third quarter even though total average CD’s including brokerage certificates increased to $175.3 million. We don’t yet have peer group deposit costs for the third quarter but the spread to our peers may have decreased slightly due to the change in our deposit mix.
We expect our margin to continue to be in the range of 3.75 to 3.80 for the fourth quarter. The high Libor rates during September and October will benefit us slightly but will be offset if we continue to extend the maturity of our retail deposits.
We are also evaluating the opportunities in the Treasury Capital Purchase Program and the FDIC Temporary Liquidity Program. The degree to which we participate in these programs may also impact our margin in the fourth quarter.
On slide 26 note that tangible common equity as a percent of tangible assets increased to 6.83% while tangible equity as a percentage of tangible assets decreased to 6.06% in the second quarter. Tangible common equity increased $3.6 million during the second quarter while tangible assets declined $32.2 million by September 30.
The difference between the market value and book value of September contributed to a decrease of $16.3 million in other comprehensive income for the quarter. This accounted for nearly all the decline in our tangible equity/tangible assets ratio.
We continue to believe that maintaining capital ratios at higher levels than we have maintained traditionally is a prudent course of action during this period of extraordinary volatility in the financial markets. As I noted in last quarter’s call, 95% of our investment portfolio is treated as available for sale.
So most of the unrealized loss in the portfolio is reflected in our tangible equity to tangible assets ratio. Slide 27 is intended to give you a better understanding of our investment portfolio including some insight as to where our investment portfolio is valued relative to our current book value.
Our definition of book value is the cost of the security plus any accretion of discount, amortization of premium or pay down’s of principle since the purchase of the bond. Our federal agency fixed income portfolio is comprised totally of senior diventures.
We do not own the subordinated debt or preferred stock of the federal agencies. At September 30, 2008 the market value of our agency security portfolio was $319.8 million.
At September 30 the book value of our agency security portfolio was $320.4 million. The unrealized loss in this portfolio is approximately $600,000.
The market value of our mortgage security portfolio was $1.203 billion at September 30, 2008. The book value of this portfolio at September 30 was approximately $1.242 billion.
The unrealized loss on this portfolio at September was approximately $38.6 million. $230.6 million of our mortgage securities are non-agency CMO’s.
Our non-agency CMO’s are all rated AAA by the various debt-rating agencies and are all comprised of fixed rate jumbo or fixed rate alt-A mortgage collateral. Our corporate securities portfolio consists of two major components.
The market value of our portfolio of trust preferred securities totaled $29.6 million at September 30. Of the remaining $112.7 million in corporate securities, $96.7 million is managed by an outside investment manager unaffiliated with Old National Bancorp.
The $29.6 million of trust preferred securities includes $19.5 million of pool trust preferred securities made up of nine different issues. We have no real estate investment trust exposure in our pools and the issuers in our securities are primarily banks but the pools do include a limited number of insurance companies.
The corporate security portfolio managed by the outside manager is managed to the Lehman intermediate corporate bond index. All of the holdings are investment grade and by policy no single company exposure can exceed 4% of the value of the manager’s total portfolio.
In this portfolio at September 30, we had exposure of $56.6 million in book value or $51.4 million in market value of exposure to the financial sector. The investments we are monitoring most closely are Goldman Sach’s with a book value of $2 million and a market value of $1.7 million, Morgan Stanley with a book value of $2 million and a market value of $1.7 million and American General Finance with a book value of $1.5 million and a market value of $1.1 million.
We did not incur other than temporary impairment on our investment portfolio in the third quarter. Of all of our portfolios we are monitoring our pool trust preferred securities and the above-mentioned exposure to the financial sector most closely for other than temporary impairment.
Seven of our pool trust preferred securities totaling $12.3 million in market value at September 30 are rated lower than AA and subject to the guidance of EITF 9920. Of these securities, trust preferred securities with a book value of $13.8 million and a market value of $3.4 million were downgraded to BA1 by Moody’s during the quarter and are the securities most susceptible to OTTI.
We are rigorously modeling and stress testing the cash flows of these securities for possible impairment. The current defaults and deferrals and our outlook for defaults and deferrals in the pools do not warrant OTTI in the quarter.
As we continue to monitor these securities it is possible we may have OTTI in these securities in future quarters. All of our trust preferred securities are considered available for sale on our balance sheet.
As such the impact of the market value adjustments of these securities is reflected in our third quarter tangible equity and tangible equity ratios. We are also monitoring our bank owned life insurance.
We adjusted our crediting rate and reduced the amount of the cash value increase we will recognize in income for the fourth quarter of 2008. We expect a reduction in our bank owned life insurance revenue of approximately $2 million in the fourth quarter and believe the adjusted crediting rate could reduce net income by $2.8 million in 2009.
Recognizing less of our cash value increase into income for 2008 and 2009 should keep us within the protection of our stable value wrap. The stable value wrap ensures that we are protected from having to recognize changes in market value [inaudible] to our income statement.
In the appendix of the conference call slides you will note that income from fees, service charges and other declined $2.7 million from the second quarter. Other income declined $2 million due primarily to lower gains from the sale of OREO and fluctuations in the fair value of certain retail CD’s.
Salary and benefits declined $2.7 million from the second quarter due primarily to a one-time reduction in previously accrued expenses of $2.1 million for restricted stock and other performance based compensation. I’ll turn the presentation back to Bob for final comments.
Robert Jones
Thank you Chris. I’m going to close on page 29 by giving revised guidance for the full year 2008.
We are reducing our guidance by approximately $0.03 for the year. Our new range is $1.10 to $1.15.
There are really two key items that affected our original guidance. First our provision for the third quarter was larger than we had in our original forecast.
Also as Chris noted this quarter we took some conservative actions related to our [bully] investment. The net result of those actions will mean a reduction in net income for the fourth quarter of $0.02 per share and $0.028 in 2009.
We felt that to be true to our strategic imperatives we need to reduce the risk in this investment and to provide you with as much consistency in our earnings as possible. We obviously hope to be able to close as much of that gap towards our original guidance as possible but given the current credit and economic environment it may be difficult.
At this time we will be happy to answer any questions you may have.
Operator
(Operator Instructions) The first question comes from Erika Penala - Merrill Lynch.
Erika Penala - Merrill Lynch
My first question is for Daryl. You mentioned that commercial real estate was the catalyst for the increase in special mention in problem credit.
Is there an asset class that is giving you more trouble than the rest? How does it break down in terms of your identified problem credit between construction and income creep?
Daryl Moore
I would tell you that as we looked at it obviously your guidance on commercial real estate we are seeing our portfolio act much like you would expect everybody’s to act. Our residential development, which we have a very small piece, obviously is like everyone else showing strain.
We are also beginning to see some strain in our retail commercial and that is predominately where we have seen this, other than development, some of this creep into our credit size as well as our substandard. I think going forward we are going to watch those very closely and as you know we have reduced our commercial real estate exposure but I would say those two segments right now are the segments that concern us the most.
We don’t, as I think all of you will recall, we have not originated hotel credits in a number of years so that exposure for us is small. There is a second part to your question and I may not have answered it.
Erika Penala - Merrill Lynch
I think the first part was of the problem credit how much of it was income versus the development loans.
Daryl Moore
Of the increase in the problems, most of it was income from commercial real estate because we recognized our development several months prior. We are not having significant downgrades in that portfolio at this point in time because we previously recognized those issues.
Erika Penala - Merrill Lynch
Do you have a sense if the problems escalate in this portfolio particularly on the retail side and you may force a developer to try to sell the properties, do you have a sense how the valuations would come in?
Daryl Moore
I think the combinations of the higher tax rates and the lower net operating income for most of these projects is going to drive value significantly lower and so if we can work with a project holder either to move it out over time we would much rather have that kind of approach rather than just simply liquidation because I think that we will see values over the next 3-4 quarters not be very good in those aspects.
Erika Penala - Merrill Lynch
Are you seeing any issues in your CNI portfolio at this time?
Daryl Moore
We have not seen what we probably would have anticipated at this point in time. We have not seen significant downgrades other than those areas that are showing similar weakness, anything that has to do with residential construction or trucking.
Those are the two areas we have seen some weakness but the balance of the portfolio we have not seen significant weakness in yet.
Operator
The next question comes from Brian Hagler – Kennedy Capital Management.
Brian Hagler – Kennedy Capital Management
Just following up on the last question and maybe it is on the supplemental slides, I haven’t gotten through them all yet, but what is the size of your retail oriented commercial real estate portfolio?
Daryl Moore
Just south of $150 million.
Brian Hagler – Kennedy Capital Management
My other question had to do with slide 18 where you break out the home equity portfolio. I appreciate the amount of detail you guys give.
Could you just talk about is that based on original loan-to-value or are those kind of most recent updated appraisals? What is the input on that slide?
Daryl Moore
Unless we have renewed those loans they would be the original loan-to-value ratios. We don’t go back in and do reappraisals over the whole portfolio on a term basis.
Those are origination or last renewal.
Brian Hagler – Kennedy Capital Management
Lastly, you mentioned the Treasury Capital Plan and it sounds like you are applying and kind of waiting to go through the process. Can you talk about obviously you are a well-capitalized bank at the moment and this will just be supplemental capital.
Just talk about your thoughts on putting that capital to work as far as new loans or potential acquisitions. Just your thoughts there would be great.
Robert Jones
All of the above. Really what we would look to do is to accelerate our strategic plan particularly as it relates to growth in some of our existing markets.
That would be through additional lending opportunities as well as continuing to invest in those growth markets and to be frank we would also love the ability to participate in M&A. We think we are well positioned today.
Should we be approved we think this would position us in even better shape. So really for us it would be growth within the current franchise.
Brian Hagler – Kennedy Capital Management
I’m not sure when you applied or if you have done that but any idea how long it will be before you hear back? Is it a few weeks?
Robert Jones
They tell us it shouldn’t take that long. We would hope to hear fairly soon.
As you saw over the weekend there was a few banks already approved and our application was submitted around the same time so we should be able to hear something fairly soon.
Operator
The next question comes from Charlie Ernst - Sandler O’Neill & Partners L.P.
Charlie Ernst - Sandler O’Neill & Partners L.P.
The rates cuts, I know you are extending liabilities, can you just say at this point is it still beneficial as it has been before have you done enough that you really won’t see a change?
Christopher Wolking
I don’t think in hindsight we anticipated rates would stay this low and projection is for lower rates. We feel pretty good about where we are now from a balance sheet standpoint.
I mentioned liquidity is also very important to us from a risk management standpoint so some of those extensions are reviewed and we will continue to reduce liquidity risk but rate risks we are feeling pretty good about where we are right now.
Charlie Ernst - Sandler O’Neill & Partners L.P.
Should I interpret that to be sort of a neutral impact?
Christopher Wolking
Yes, I think so.
Charlie Ernst - Sandler O’Neill & Partners L.P.
The original face value of the trust, can you say what that was?
Christopher Wolking
That should all be on the slide. We tried to give you a pretty good idea of that.
The trust preferred balance hasn’t obviously changed that much so if we look at our…we have it here in total at $179 million. For the trust preferred securities I don’t have that split out on the slide but the individual trust preferred securities that we are watching fairly closely is that component that is $12.9 million in book value as I recall and about $3.4 million to $3.6 million in market value.
Those are the ones we are watching most closely.
Robert Jones
If you need more detail on that just let us know.
Charlie Ernst - Sandler O’Neill & Partners L.P.
To date there have not been any OTTI impairment charges?
Christopher Wolking
Right.
Charlie Ernst - Sandler O’Neill & Partners L.P.
The salary line that is something that should go back up in either fourth or first quarter once you…
Christopher Wolking
That one adjustment of $2.1 million this quarter (third quarter) was related to incentives and long-term performance incentives.
Operator
The next question is a follow-up question from Erika Penala - Merrill Lynch.
Erika Penala - Merrill Lynch
I was hoping to pick your brain for a second. You mentioned you applied for the TARP capital program around the same time everybody did.
If I look at the smattering of banks that announced they have definitely gotten it or have gotten preliminary approval it seems like the list is a little bit more random in terms of how healthy they are. Have you gotten any feedback from your regulators or any other CEO’s as to what they are looking for?
Robert Jones
We haven’t. It is a bit of a mystery.
The short answer is no. We were encouraged to apply and we applied and we are waiting to hear.
Operator
There are no further questions at this time.
Robert Jones
Obviously if there are any other questions please feel free to contact Lynell. Thank you all for your time.
We look forward to talking to you at the end of the fourth quarter.
Operator
This concludes Old National’s conference call. (Operator Instructions) Thank you for your participation in today’s conference call.
You may now disconnect.