On March 31, 2009, Old National repurchased all of the $100 million in preferred, non-voting stock that was sold to the U.S. Department of Treasury as part of the Capital Purchase Program. Subsequent to quarter end, the Company submitted its notice of intent to repurchase the Warrant for up to 813,008 shares of the Company's common stock issued by the Company to Treasury on December 12, 2008. The Warrant was issued in connection with the Company's participation in Treasury's Capital Purchase Program. This repurchase will be the second and final phase required of Old National to end its participation in the Capital Purchase Program (CPP).
Net income for the first quarter of 2009 is $9.4 million, compared to $6.6 million and $19.3 million for the quarters ended December 31, 2008 and March 31, 2008, respectively. Results for the first quarter of 2009 were impacted by a $3.0 million charge for direct acquisition costs related to the acquisition of Charter One's Indiana franchise and net securities gains of $5.6 million, which were partially offset by other-than-temporary impairment of $2.4 million realized during the quarter. The first quarter of 2009 also includes $2.4 million of seasonal insurance contingency revenue. Net interest margin in the first quarter of 2008 was 3.63% compared to 3.96% during the fourth quarter of 2008, and 3.68% year-over-year. The margin retreated in the first quarter of 2009 despite a slight increase in average earning assets due to our shift to a more asset sensitive balance sheet, or a balance sheet in which assets re-price more quickly than funding costs. Management is taking action to reduce our asset sensitivity and increase asset yields.
Although we believe our conservative stance toward underwriting policies and real estate lending has positioned us well, the credit markets continue to be a challenge in 2009. We recorded provision expense of $17.3 million during the first quarter and are seeing credit quality starting to soften in expanded sectors. Non-accrual loans increased $13.4 million compared to the prior quarter, however, criticized and classified loans improved slightly. We remain cautious on consumer, construction and commercial real estate credit quality. As a percent of total loans, the allowance was 1.55% at March 31, 2009, compared to 1.41% and 1.54% at December 31, 2008 and March 31, 2008, respectively. Annualized net charge-offs were 1.07% of average loans in the first quarter of 2009 compared to 1.14% in the fourth quarter of 2008, and 0.52% year-over-year. Nonperforming loans totaled 1.67% of total loans at March 31, 2009, compared to 1.34% at December 31, 2008 and 1.50% a year ago.
During the remainder of 2009, maintaining our well-capitalized position will be our primary focus. On April 23, 2009, we announced our intent to reduce the second quarter dividend to $0.07 per share. Until the economy emerges from this challenging environment, we feel it is only prudent to conserve capital. Our ability to grow organically or through future bank acquisition opportunities will be predicated on our ability to remain a strong and profitable bank.

RESULTS OF OPERATIONS
The following table sets forth certain income statement information of Old
National for the three months ended March 31, 2009 and 2008:

                                              Three Months Ended
                                                   March 31,               %
         (dollars in thousands)                2009          2008       Change
         Income Statement Summary:
         Net interest income                $   59,198     $ 59,790        (1.0 )%
         Provision for loan losses              17,300       21,905       (21.0 )
         Noninterest income                     42,235       46,876        (9.9 )
         Noninterest expense                    77,464       70,936         9.2
         Other Data:
         Return on average common equity          3.43 %      11.51 %
         Efficiency ratio                        72.20        63.87
         Tier 1 leverage ratio                    7.30         8.03
         Net charge-offs to average loans         1.07         0.52

Net Interest Income
Net interest income is our most significant component of earnings, comprising over 58% of revenues at March 31, 2009. Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources and interest rate fluctuations. Other factors include prepayment risk on mortgage and investment-related assets and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally cost less than wholesale funding sources. Factors such as general economic activity, Federal Reserve Board monetary policy and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize our mix of assets and funding and our net interest income and margin.
Net interest income and net interest margin in the following discussion are presented on a fully taxable equivalent basis, which adjusts tax-exempt or nontaxable interest income to an amount that would be comparable to interest subject to income taxes using the federal statutory tax rate of 35% in effect for all periods. Net income is unaffected by these taxable equivalent adjustments as the offsetting increase of the same amount is made to income tax expense. Net interest income includes taxable equivalent adjustments of $5.9 million and $4.4 million for the three months ended March 31, 2009 and 2008, respectively.
Taxable equivalent net interest income was $65.1 million for the three months ended March 31, 2009, up from the $64.2 million reported for the three months ended March 31, 2008. The net interest margin was 3.63% for the three months ended March 31, 2009, compared to 3.68% for the three months ended March 31, 2008. The increase in net interest income is primarily due to the increase in interest earning assets being greater than the increase in interest-bearing liabilities. The decrease in net interest margin is primarily due to a change in the mix of interest earning assets and interest-bearing liabilities. The yield on average earning assets decreased 98 basis points from 6.25% to 5.27%. The cost of interest-bearing liabilities decreased 105 basis points from 2.98% to 1.93%.
Average earning assets were $7.177 billion for the three months ended March 31, 2009, compared to $6.974 billion for the three months ended March 31, 2008, an increase of 2.9%, or $203.5 million. Significantly affecting average earning assets at March 31, 2009 compared to March 31, 2008, was the increase in the size of the investment portfolio combined with the reduction of the size of the loan portfolio. During the three months ended March 31, 2009, $836.9 million of investment securities were purchased and $191.2 million of investment securities were called by the issuers or sold. In addition, commercial and commercial real estate loans have been affected by continued weak loan demand in our markets, more stringent loan underwriting standards and our desire to lower future potential credit risk by being cautious towards the real estate market. Year over year, the investment portfolio, which generally has an average yield lower than the loan portfolio, has increased as a percent of interest earning assets.

Also affecting margin was an increase in noninterest-bearing demand deposits and time deposits. Included in deposits at March 31, 2009 are $89.8 million of noninterest-bearing deposits and $162.8 million of time deposits from the Citizens Financial branch acquisition. During 2008, $137.6 million of high cost brokered certificates of deposit were called or matured and $100.5 million of retail certificates of deposit were called. A $50 million bank note matured in the first quarter of 2008 and $100 million of medium-term notes matured in the second quarter of 2008. In addition, $51 million of FHLB advances matured in the last half of 2008 and a revolving credit facility with $55 million outstanding was paid off in the fourth quarter of 2008. During the first quarter of 2009, $65.0 million of high cost brokered certificates of deposit were called and $50.9 million of retail certificates of deposit were called. In addition, $25.0 million of FHLB advances were prepaid in the first quarter of 2009. Year over year, brokered certificates of deposit, which have an average interest rate higher than other types of deposits, have decreased as a percent of interest-bearing liabilities. Borrowed funds have increased as a percent of interest-bearing liabilities, due to our ability to obtain low-cost short-term borrowings. Year over year, noninterest-bearing demand deposits have increased as a percent of total funding.
Provision for Loan Losses
The provision for loan losses was $17.3 million for the three months ended March 31, 2009, compared to $21.9 million for the three months ended March 31, 2008. Included in the 2008 provision is $17.0 million associated with the misconduct of a former loan officer in the Indianapolis market and subsequent deterioration of these credits. See the discussion in "Allowance for Loan Losses and Reserve for Unfunded Commitments" in the Risk Management section of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.
Noninterest Income
We generate revenues in the form of noninterest income through client fees and sales commissions from our core banking franchise and other related businesses, such as wealth management, investment consulting, investment products and insurance. Noninterest income for the three months ended March 31, 2009, was $42.2 million, a decrease of $4.7 million, or 9.9%, from the $46.9 million reported for the three months ended March 31, 2008.
Net securities gains were $3.2 million for the three months ended March 31, 2009, compared to net securities gains of $4.5 million for the three months ended March 31, 2008. Included in the first quarter of 2009 is a $2.4 million charge for other-than-temporary-impairment on three pooled trust preferred securities. The 2008 net securities gains were primarily the result of securities which were called by the issuers.
Wealth management fees were $3.8 million for the three months ended March 31, 2009 as compared to $4.6 million for the three months ended March 31, 2008. Trust fee income has declined as a result of lower market values of managed assets.
Revenue from company-owned life insurance was $0.7 million for the three months ended March 31, 2009 compared to $2.8 million for the three months ended March 31, 2008. During the third quarter of 2008, the crediting rate formula for the 1997 company-owned life insurance policy was amended to adopt a more conservative position and improve the overall market to book value ratio. This change resulted in lower revenues in the first quarter of 2009 and we anticipate these lower revenue levels to continue in future periods.
Fluctuations in the value of our derivatives resulted in a gain on derivatives of $0.5 million in the first quarter of 2009 as compared to a loss on derivatives of $0.6 million in the first quarter of 2008.
Other income decreased $1.5 million for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The decrease was primarily as a result of a $1.5 million gain associated with the redemption of class B VISA shares recorded during the first quarter of 2008. Noninterest Expense
Noninterest expense for the three months ended March 31, 2009, totaled $77.5 million, an increase of $6.5 million, or 9.2%, from the $70.9 million recorded for the three months ended March 31, 2008. Included in noninterest expense for the first quarter of 2009 is approximately $3.0 million of one-time expenses related to the Citizens Financial branch acquisition.

Salaries and benefits is the largest component of noninterest expense. For the three months ended March 31, 2009, salaries and benefits were $42.7 million compared to $42.3 million for the three months ended March 31, 2008. Included in the first quarter of 2009 is an increase of approximately $0.8 million for pension expense and $0.4 million for higher medical insurance expenses. Partially offsetting these increases was a $1.0 million reversal of performance-based incentive compensation expense.
Occupancy expense increased $0.9 million for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, primarily as a result of an increase in rent expense. Utilities expense and real estate taxes also increased for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The increase in rent expense is related to the sale leaseback transactions discussed in Note 16 to the consolidated financial statements and the additional 65 branches acquired from Citizens Financial. Professional fees increased $1.0 million for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. Increases in legal and other professional fees related to the Citizens Financial branch acquisition were the primary reason for the increase.
FDIC assessment expense was $2.1 million for the three months ended March 31, 2009, compared to $0.3 million for the three months ended March 31, 2008. The increase is primarily due to the increase in the rates banks pay for deposit insurance. The FDIC implemented a special assessment of 20 basis points taking effect on April 1, 2009 that will apply to assessments for the second quarter of 2009 and thereafter. We anticipate a significant increase in our assessment expense in 2009 as a result of both the increase in the assessment and the expiration of our one-time assessment credit. It is possible that certain legislation, if passed in the future, could reduce the special assessment to 10 basis points or lower.
Other expense for the three months ended March 31, 2009, totaled $4.1 million, an increase of $1.9 million compared to the three months ended March 31, 2008. The provision for unfunded commitments increased $0.8 million for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. Included in the first quarter of 2009 is approximately $1.0 million of one-time expenses related to the acquisition of the retail branch banking network of Citizens Financial Group.
Provision for Income Taxes
We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes. The major difference between the effective tax rate applied to our financial statement income and the federal statutory tax rate is caused by interest on tax-exempt securities and loans. The provision for income taxes, as a percentage of pre-tax income, was (41.0)% for the three months ended March 31, 2009, compared to (39.9)% for the three months ended March 31, 2008. The main factor for the decrease in the effective tax rate for the three months ended March 31, 2009, was that the tax-exempt income comprised a higher percentage of pre-tax income in the three months ended March 31, 2009 than at March 31, 2008. See Note 14 to the consolidated financial statements for additional information.
FINANCIAL CONDITION
Overview
At March 31, 2009, our assets were $8.356 billion, a 8.2% increase compared to March 31, 2008 assets of $7.723 billion, and an annualized increase of 24.5% compared to December 31, 2008 assets of $7.874 billion. On March 20, 2009, Old National completed its acquisition of the Indiana retail branch banking network of Citizens Financial Group, which increased assets by approximately $424.7 million. The increase in investment securities in the past twelve months more than offset the decrease in the loan portfolio and cash and cash equivalents. Year over year, deposits have increased, primarily due to the Citizens Financial branch acquisition, and to a lesser extent, increases in organic core deposit growth. Borrowed funds have increased due to our ability to obtain low-cost short-term borrowings.

Earning Assets
Our earning assets are comprised of investment securities, loans and loans held for sale, and money market investments. Earning assets were $7.528 billion at March 31, 2009, an increase of 8.9% from March 31, 2008, and an annualized increase of 25.7% since December 31, 2008. Investment Securities
We classify investment securities primarily as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements. However, we also have some 15- and 20-year fixed-rate mortgage pass-through securities in our held-to-maturity investment portfolio.
At March 31, 2009, the investment securities portfolio was $2.844 billion compared to $2.147 billion at March 31, 2008, an increase of $697.6 million or 32.5%. Investment securities increased $578.6 million compared to December 31, 2008, an annualized increase of 102.1%. Investment securities represented 37.8% of earning assets at March 31, 2009, compared to 31.1% at March 31, 2008, and 32.0% at December 31, 2008. Funds received in the Citizens Financial branch acquisition have been invested primarily in investment securities. Commercial and commercial real estate loans have been affected by continued weak loan demand in our markets, more stringent loan underwriting standards and our desire to lower future potential credit risk by being cautious towards the real estate market. Stronger commercial loan demand in the future could result in increased investments in loans and a reduction in the investment securities portfolio. The investment securities available-for-sale portfolio had net unrealized losses of $57.0 million at March 31, 2009, an increase of $54.1 million compared to net unrealized losses of $2.9 million at March 31, 2008, and a decrease of $7.6 million compared to net unrealized losses of $64.6 million at December 31, 2008. A $2.4 million charge was recorded during the first quarter of 2009 related to other-than-temporary-impairment on three pooled trust preferred securities. Contributing to the volatility in net unrealized losses over the past twelve months are changes in interest rates and the financial crisis affecting the banking system and financial markets.
The investment portfolio had an average duration of 4.64 years at March 31, 2009, compared to 3.56 years at March 31, 2008, and 3.87 years at December 31, 2008. The annualized average yields on investment securities, on a taxable equivalent basis, were 5.45% for the three months ended March 31, 2009, compared to 5.07% for the three months ended March 31, 2008, and 5.62% for the three months ended December 31, 2008.
Residential Loans Held for Sale
Residential loans held for sale were $19.6 million at March 31, 2009, compared to $10.2 million at March 31, 2008, and $17.2 million at December 31, 2008. Residential loans held for sale are loans that are closed, but not yet purchased by investors. The amount of residential loans held for sale on the balance sheet varies depending on the amount of originations and timing of loan sales to the secondary market. The increase in residential loans held for sale from March 31, 2008, is primarily attributable to increased activity in residential lending in late 2008 and the first quarter of 2009.
We elected the fair value option under SFAS No. 159 prospectively for residential loans held for sale. The election was effective for loans originated after January 1, 2008. The aggregate fair value exceeded the unpaid principal balances by $0.6 million, $0.6 million and $0.2 million as of March 31, 2009, December 31, 2008 and March 31, 2008, respectively. Commercial and Commercial Real Estate Loans Commercial and commercial real estate loans are the largest classification within earning assets, representing 39.1% of earning assets at March 31, 2009, a decrease from 43.1% at March 31, 2008, and a decrease from 43.2% at December 31, 2008. At March 31, 2009, commercial and commercial real estate loans were $2.943 billion, a decrease of $32.3 million since March 31, 2008, and a decrease of $109.6 million since December 31, 2008. Commercial loans have increased $69.2 million since March 31, 2008 while commercial real estate loans have decreased $101.5 million since March 31, 2008. Weak loan demand in our markets continues to affect loan growth. Our conservative underwriting standards have also contributed to slower loan growth. We continue to be cautious towards the real estate market in an effort to lower credit risk.

Consumer Loans
At March 31, 2009, consumer loans, including automobile loans, personal and home equity loans and lines of credit, and student loans, increased $13.0 million or 1.1% compared to March 31, 2008, and decreased $21.2 million or, annualized, 7.0% since December 31, 2008.
Residential Real Estate Loans
Residential real estate loans, primarily 1-4 family properties, have decreased in significance to the loan portfolio over the past five years due to higher levels of loan sales into the secondary market, primarily to private investors. We sell the majority of residential real estate loans originated as a strategy to better manage interest rate risk and liquidity. We sell almost all residential real estate loans servicing released without recourse.
At March 31, 2009, residential real estate loans were $488.5 million, a decrease of $40.0 million, or 7.6%, from March 31, 2008. Goodwill and Other Intangible Assets
Goodwill and other intangible assets at March 31, 2009, totaled $205.6 million, an increase of $15.3 million compared to $190.3 million at March 31, 2008, and an increase of $18.8 million compared to $186.8 million at December 31, 2008. We recorded $19.8 million of goodwill and other intangible assets associated with the acquisition of the Indiana retail branch banking network of Citizens Financial Group, which is included in the "Community Banking" column for segment reporting. The remaining decreases were the result of standard amortization expense related to the other intangible assets. Assets Held for Sale
Assets held for sale were $2.0 million at March 31, 2009, a decrease of $1.0 million compared to $3.0 million at March 31, 2008. The sale leaseback transactions during 2008 were the reason for the decline. Included in assets held for sale at March 31, 2009 are four financial centers that are pending sale. We plan to continue occupying these properties under long-term lease agreements.
Other assets have increased $74.1 million, or 47.5%, since March 31, 2008, primarily as a result of an increase in deferred tax assets and fluctuations in the fair value of derivative financial instruments. Funding
Total funding, comprised of deposits and wholesale borrowings, was $7.492 billion at March 31, 2009, an increase of 9.8% from $6.822 billion at March 31, 2008, and an annualized increase of 33.9% from $6.907 billion at December 31, 2008. Included in total funding were deposits of $5.855 billion at March 31, 2009, an increase of $508.3 million, or 9.5%, compared to March 31, 2008, and an increase of $432.5 million compared to December 31, 2008. Included in total deposits at March 31, 2009 is $427.6 million from the acquisition of the Indiana retail branch banking network of Citizens Financial Group. In 2008, we called $100.5 million of retail certificates of deposit; and $137.6 million of high cost brokered certificates of deposit were called or matured. During the first quarter of 2009, $65.0 million of high cost brokered certificates of deposit were called and $50.9 million of retail certificates of deposit were called. Noninterest-bearing deposits increased 20.7% or $178.2 million compared to March 31, 2008. Time deposits increased 22.2% or $384.2 million compared to March 31, 2008. Year over year, we have experienced a shift into lower cost deposit types.
Effective January 1, 2008, we elected the fair value option under SFAS No. 159 prospectively for certain retail certificates of deposit. The carrying value of these retail certificates of deposit was $6.0 million, $49.3 million and $41.4 million as of March 31, 2009, December 31, 2008 and March 31, 2008, respectively. The carrying values at March 31, 2009, December 31, 2008 and March 31, 2008 were comprised of contractual balances of $5.9 million, $48.5 million and $41.1 million and fair value adjustments of $0.1 million, $0.8 million and $0.3 million, respectively.
We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position. At March 31, 2009, wholesale borrowings, including short-term borrowings and other borrowings, increased $161.7 million, or 11.0%, from March 31, 2008 and increased $152.6 million, or 41.1%, annualized, from December 31, 2008, respectively. Wholesale funding as a percentage of total funding was 21.9% at March 31, 2009, compared to 21.6% at March 31, 2008, and 21.5% at December 31, 2008. Short-term borrowings have increased $186.6 million since March 31, 2008 while long-term borrowings have decreased $24.9 million since March 31, 2008. We purchased $380.0 of million low-cost FHLB advances during 2008. In addition, $100 million of medium-term notes matured in the second quarter of 2008, $51.0 million of FHLB advances matured in the last half of 2008 and a revolving credit facility with $55.0 million outstanding was paid off in the fourth quarter of 2008. During the first quarter of 2009, $25.0 million of FHLB advances were prepaid.

Capital . . .