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Operator
Welcome to the Old National Bancorp fourth quarter 2006 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. The call, along with corresponding presentation slides, will be archived for 12 months on the shareholder relations page, at www.OldNational.com. A replay of the call will also be available beginning at 1 PM Central today through February 12. To access the replay, dial 1-800-642-1687, conference ID code 5961380. Those participating today will be analysts and members of the financial community. (OPERATOR INSTRUCTIONS). At this time the call will be turned over to Lynell Walton, Vice President of Investor Relations, for opening remarks.
Lynell Walton - VP, Investor Relations
Thank you, Judy. And again, welcome to Old National Bancorp's fourth-quarter earnings conference call. With me today are Old National Bancorp's President and Chief Executive Officer, Bob Jones; our Chief Financial Officer, Chris Wolking; our Chief Credit Officer, Daryl Moore; our Corporate Controller and Chief Accounting Officer, Joan Kissell; and Jennifer Rice, who is our Assistant Controller -- our Assistant Treasurer -- Sorry, Jennifer.
Before we begin I'd like to refer you to slide 3 and point out that the presentation today contains forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual future results to materially differ from those discussed today. 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 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 appendix of this presentation are the reconciliation for such non-GAAP data. We feel these adjusted numbers provide for more meaningful comparisons and a better picture of financial trends, as most of these are calculated as if hedge accounting had been allowed in 2005 and, thus, consistent with 2006 presentation. We will be using these adjusted numbers throughout our presentation today.
Slide 5 is our agenda for the call. First, Chris Wolking will detail our fourth-quarter earnings results, including commercial loan and core deposit growth within our various banking regions and the deposit-generating performance of our newer financial centers, along with the drivers of our net interest margin changes during the quarter. Daryl Moore will then lead the analysis of continued improvement in the quality of our loan portfolio. Bob Jones will discuss the upcoming integration of St. Joseph Capital Corporation, the bank acquisition we announced in October of last year. Bob will then discuss the financial impact of strategic initiatives taken both in the fourth quarter of '06 and those planned for the first quarter of '07, aimed at further enhancing the performance of the Company, which will then put into context our focus areas and our financial outlook for 2007.
Before Chris begins, I'd like to direct your attention to slide 6, where I've provided an overview of Old National's performance for the fourth quarter. I would characterize this quarter as a good quarter for Old National.
First is the continued improvement in our risk profile, which led to nonaccrual and net charge-off levels not seen since 2002. The fourth quarter also included growth in our commercial loan portfolio and strong core deposit growth, including good growth in our focus area of non-interest-bearing DDA balances. Also included in the fourth quarter, as I previously mentioned, were strategic actions. And again, we will be discussing those taken during the first quarter of '07, as Bob will discuss later.
With that I'll turn the call over to our CFO, Chris Wolking.
Chris Wolking - CFO
Thank you, Lynell. Good morning, everyone, and thank you for joining us for our fourth-quarter earnings conference call.
Beginning on slide 8, note that earnings for the quarter were $0.27 per share. As Lynell mentioned, and as you will see in my later slides, there were several items driving our fourth-quarter results that pleased us, most notably our strong deposit and noninterest revenue growth.
Non-interest expenses were up 6.6 million from the third quarter. The largest contributor to this increase was $1.7 million related to our decision to consolidate seven of our financial centers. The cost was roughly equally divided between impairment expense on the financial center real estate and severance charges.
Also, we incurred $1.4 million in pension settlement expense in the fourth quarter. We experienced several large lump sum distributions from the retirements of long-term associates this year, which contributed to the high pension settlement expense. Also, I will remind you that salary and employee benefit expense was lower in the third quarter due to our decision to reverse previously accrued expense related to performance-based restricted stock grants. It was determined at that time that company performance would not allow those grants to vest.
Continuing on slide 9, you will see that our net interest margin declined to 3.09% for the quarter, compared to 3.15% in the third quarter. The decline in the margin was primarily driven by higher deposit costs in the quarter. Fees, service charges and other revenue was up 1.4 million from the third quarter 2006. Particularly noteworthy is the fact that the fourth quarter was our best quarter in 2006 for service charges on deposit accounts. Service charges on deposit accounts increased $500,000 from the third quarter and were up 1.2 million compared to the first quarter of 2006.
Like the third quarter of 2006, we incurred no provision expense in the fourth quarter, expect for the $400,000 provision for unfunded commitments we noted in an earlier slide. The provision for unfunded commitments is accounted for as an other expense in our financials. Important inputs to the model we used to determine -- we use to determine our allowance for loan losses are the historical loss rates for our credit grades. We continue to benefit from lower historical loss rates as loans generated under our improved underwriting processes season. This is, of course, reflected in our model outputs. Complementing our modeled allowance requirement were the facts that nonaccrual loans declined to $41.5 million by the end of the fourth quarter, from 44.9 million at September 30, 2006, and that net charge-offs for the year declined to 32 basis points of average loans. Both of these metrics are at their best levels in several years.
On slide 10, I've noted a couple of important statistics regarding our loan portfolio. Total loans declined 15.6 million at December 31, 2006 compared to September 30. Most of this decline came in our commercial real estate portfolio. Commercial real estate declined 20.5 million compared to September 30, 2006, but commercial loans and leases increased 31.8 million. We continue to be cautious regarding commercial real estate lending.
The next slide, slide 11, gives you a breakdown by region of our commercial loan growth during the quarter. These are period-end balances. As you would expect, we had strong growth in our Louisville, Kentucky market, where commercial loans grew $19.1 million during the quarter. We also had strong commercial loan growth in our more mature markets, most notably North Central Indiana, Southern Illinois and Evansville. Indianapolis' commercial loans declined during the quarter by 6.4 million, but it is important to note our Indianapolis market experienced shrinkage of approximately $15 million in commercial loans due to customer selling of businesses. So, clearly, an unusual quarter from that perspective.
On slide 12, I've highlighted our strong deposit growth during the fourth quarter. Total core deposits increased 243.8 million, or 4.2%, compared to September 30. We are particularly pleased with the $33 million increase in non-interest-bearing checking accounts, but interest-bearing transactions savings account balances also increased nicely, increasing 203.1 million compared to September 30, 2006. We experienced a declined in our total checking accounts during the quarter, but we have added a net of 3543 checking accounts since we began measuring this statistic in the second quarter of this year.
Slide 13 highlights the changes in non-interest-bearing checking account balances in our markets during the quarter. Again, Louisville had a strong quarter, but we also saw increases in South Central Indiana, Northwest Indiana and Evansville. Indianapolis saw a sharp decrease in period-end balance compared to September 30, due primarily to a single customer high balance at the end of September.
As you will see in slide 14, however, total core deposit growth was strong in our Indianapolis retail financial centers during 2006. All of our Indianapolis retail financial centers had core deposit growth in 2006. We're particularly happy with the deposit growth in our Clay Terrace and Broadripple centers after their relatively slow start on opening in the summer of 2005. Our newest Indianapolis financial centers, Geist and Greenwood East, are meeting their growth targets.
The Shelbyville Road office in Louisville, the second financial center in Louisville, but our first true retail center in the market, exceeded our target in 2006 with core balances of 12.1 million by December 31. We opened our third financial center in Louisville this month.
The branch in Lafayette, Indiana, the community where Purdue University is located, opened late in 2006 and had $6.1 million in core deposits by December 31. A significant component of the Lafayette core deposit growth was due to the acquisition of a large public sector relationship soon after the branch opened.
On slide 15, you will note our currently planned financial center expansion. We have two additional centers planned in 2007, one in Lafayette and another in Louisville, Kentucky, and we expect to see strong performance from these financial centers and their teams of associates as well.
Slide 16 shows the change in our tangible equity and tangible common equity ratios. Both ratios are within our target range of 6 to 7%, the decline in the fourth quarter due to our larger balance sheet. Recall that the St. Joseph Capital transaction is an all-cash acquisition, and we expect our tangible equity ratios to decline below our 6% target in March.
You will see on slide 17 that the decline in our net interest margin was due to the rates of our interest-bearing liabilities rising faster than the rates on earning assets during the quarter, and most of the increase was due to higher deposit costs in the quarter. Clearly, the strong increase in core deposits was a benefit from the higher rates during the quarter.
You can see, though, on my last slide, slide 18, that we have made excellent progress bringing our interest-bearing deposit costs in line with our peers. When fourth-quarter peer group paid data is released, we expect that the data will show our peers experienced similar increases in deposit costs during the quarter.
Again, thanks for joining us today. I'll now turn the presentation over to Daryl Moore.
Daryl Moore - Chief Credit Officer
Thank you, Chris. If you turn to slide 20, you can see that nonaccrual loans at quarter's end were $41.5 million, down 3.3 million from the end of the third quarter. This $3.3 million represents a decrease in nonaccruals in the quarter of roughly 7.6%. For the year, nonaccruals fell by $14 million, or 25%.
With respect to our largest nonaccruals, at the beginning of 2006 the exposure in our 20 largest nonaccrual credits stood at $35.4 million. Today our largest 20 nonaccrual relationships totaled $27.5 million, reflecting a reduction of exposure in our largest nonaccruals of $7.9 million, or 22%, for the year. The single largest nonaccrual exposure currently in the portfolio is $6.5 million.
To give you just a little more color on the work we continue to do in this nonaccrual area, of the commercial nonaccrual loans on the books at January 1, 2006, 65% of the dollar exposure associated with those loans had been resolved and was off the books at the end of the year.
As slide 21 shows, classified loans rose during the quarter, showing an increase of approximately $25.4 million in the period, and now stand at $153.2 million. Roughly 65% of the increase came from commercial real estate or residential acquisition and development loans. We have seen a slowing of real estate absorption rates in our markets, and this movement in classified loans seems to be a reflection, at least in part, of that fact.
As a side note, we have moved our concentration of construction and land development loans to capital down to 26%, and our total commercial real estate secured concentration down to 150% of capital at December 31. As you know, heightened attention is advised by the regulatory agencies when commercial real estate concentrations as a percent of capital reach 100% and 300% in these categories, respectively.
As you can see from slide 22, we saw virtually no movement in criticized loans in the quarter, with loans in that category increasing just $600,000 during the period.
Just to comment before we move on to the next slide, we feel that over the past two years we have strengthened the early warning indicators of our portfolio risk and try to be very transparent with regard to the disclosure of credit risk trends. In this regard we continue to share our trends in criticized and classified assets with you so that you can better judge the movements and risk in our portfolio before the [timed] loans migrate into the underperforming category. While the recent increases in our criticized and classified loans have led us to intensify the scrutiny of our more marginal loans, we remain comfortable at the present time with the overall risk in the portfolio, especially in light of our continued downward trend in nonaccrual loans.
Turning to slide 23, net charge-offs for the quarter were $3.8 million, or 32 basis points. For the full year we posted an annualized loss rate of 37 basis points, which was an improvement of a significant 23 basis points over 2005 results. As Chris indicated earlier, in accordance with our prescribed allowance methodology, we did not make a provision for loan losses in the quarter.
You may have noticed that in the fourth quarter both our gross charge-offs and recoveries were higher than in the previous three quarters. We changed our policy with regard to smaller loan charge-offs in the fourth quarter, and now charge-off in full any loans scored through our business banking center which have been either moved to nonaccrual status or have become 90 days or more delinquent. This is all without regard to collateral. We've also taken a much more aggressive posture with regard to charging off smaller commercial loans. Increasing write-downs in the quarter (indiscernible) this change in policy was offset by a somewhat large recovery of a previously charged off commercial real estate loan.
For 2007, given what we know today and anticipate for the coming year, we expect provisions for loan losses to fall in the $9 million to $10 million range. As we do every quarter, we will reevaluate the level of our allowance for loan losses in the first quarter of 2007 and take whatever actions we feel are appropriate given the information at that time.
As you've heard every quarter for some time now, we are very focused on continuing to improve our credit quality numbers. We continue to work hard at identifying loans that are showing deterioration early on in the cycle so that they can either be rehabilitated in the short-term or moved out of the Bank. This is particularly important in these times, when we believe we're seeing increasing signs that credit quality may be weakening.
As we said last quarter, and as Chris mentioned earlier, we also continue to watch commercial real estate very closely. While we continue to originate loans for the category, we (inaudible) review all new underwriting requests very closely and continue to be aggressive in encouraging borrowers with marginal projects to seek other lending sources. This stance towards commercial real estate, however, does not come without a cost related to loan growth. Again, only time will tell if we are being prudent in our consciousness.
With that update, I will turn it over to Bob for his closing comments.
Bob Jones - President and CEO
Thank you, Daryl Moore. I'm going to begin on slide 25, and I thought I'd begin my presentation by giving a brief update on our acquisition of St. Joe. We do expect the transaction to close on February 1st. And in fact, their shareholders are meeting as we speak to, hopefully, approve the transaction. As we think about integration, we've had multiple teams working on the integration process, and both John Rosenthal, CEO of St. Joe, and myself, remain very, very pleased with the efforts.
As it pertains to the clients, we've had focus groups with clients to ascertain their concerns or any issues they may have, and we've put plans in place to address those. We've also conducted numerous communication activities with both associates as well as the clients, and we continue to feel very positive about the receptivity of the markets to this deal. We've had no associates [attrite], and we do expect to have a systems conversion on March 24th.
And probably most importantly, all of the leadership of St. Joe has agreed to stay on. As we probably have previously mentioned, John Rosenthal will be named Regional CEO for what will become Old National Bank's New Northern Indiana region. John's responsibilities will include driving performance in the existing St. Joe markets, plus, probably more importantly, leading our expansion efforts into other parts of Northern Indiana. Once John and his team have had a chance to finalize those plans, we'll share them with you.
Alex Strati will be named the new Michiana market President. For those of you not familiar with Northern Indiana, it is termed Michiana, which is right on the Michigan border, and then combine that with Indiana. So, we don't take any credit for that name; it's one that's used in the market. Alex's primarily responsibilities will be to drive the existing franchise at St. Joe. Alex has done just a great job of building our team up there.
Amy Mauro, who was the Chief Credit Officer at St. Joe, will assume the same responsibility with Old National. She will report to both John and to Daryl Moore, and her knowledge of the clients will be invaluable as we continue to grow that book of business.
As you think about an acquisition, one of the key measures of success for the deal will be the ability to bring the broader Old National Bank product set to St. Joe and, probably more importantly, at the same time, not burden the St. Joe team with the potential bureaucracy that can often happen as you think about deals of this sort. So, we're very pleased to name Jim Ryan, a name familiar to many of you in his prior role as Treasurer of Old National, to the Northern region management team. We think this is a great growth opportunity for Jim to learn life outside of the corporate headquarters, to understand what it's like to work in the geography, and we also think it's a great role for Jim up in the Northern area. Jim and his family will move to the South Bend area sometime early summer. Jim's responsibilities will be, amongst other things, driving our consumer businesses, leveraging Old National and making sure we ensure that all the products that currently do not exist get sold in the new franchise, and also pushing away that bureaucracy that can often creep into these types of deals.
Joining Jim in the Northern region will be Rob Edwards from our Terre Haute market. Rob will be responsible for running the wealth management business for John and his team. Rob and his family will also relocate to Northern Indiana; in fact, Rob already has client calls set up for this week with a number of our potential new partners.
Let me turn to slide 26. As Lynell and Chris talked about, we took a number of actions in the fourth quarter and we'll be taking some actions in the first quarter to further improve the operating platform for Old National. All of these actions are designed to allow us to achieve our ultimate goal of consistent quality earnings.
In the fourth quarter, as Chris previously pointed out, we took $1.7 million in charges related to our previously announced branch consolidations. 900,000 of this was related to the severance associated with the positions that were being eliminated, and the remaining 800,000 was related to the impairment on the real estate. I remind you as you look at our models, $1 million pre-tax equals roughly about $0.01 in earnings on a per-share basis.
Also in the fourth quarter, we did execute our sale leaseback. We're very pleased with the execution of that. It will have a positive impact to both earnings and our net interest margin, as we explained previously. And everything that transpired in that transaction was in line with what we've talked to you about before.
To further enhance our performance, in conjunction with the integration of St. Joe's balance sheet along with Old National's, in the first quarter we will take a number of actions to restructure our balance sheet to improve our net interest margin. These actions will include reducing our wholesale funding, as well as terminating a number of low-yield investments. The total cost of these actions will be somewhere between $6 million and $7 million. And again, remind you that $1 million pre-tax does equal about $0.01. So, the total charge for the first quarter will be roughly $0.09. The full extent of that cost, along with the corresponding benefit, will be driven by the interest rate environment. We will be able to give you a complete recap after we complete the actions, and would anticipate doing that during our first-quarter earnings call in April. We do believe these actions to be very prudent and consistent with our turnaround. We clearly recognize that our margin needs to improve for us to achieve our goal of consistent quality earnings. And at the end of the call, Chris and I will be happy to add additional comment to these actions.
Now turning to slide 27, as you think about 2007 and beyond, the story for Old National is really one of execution. As we continue to evolve in our turnaround, we will continue to work to enhance and improve our sales process and sales management. I will be honest with you -- I've been very pleased with the initial results I've seen from Barbara Murphy in her new role as Chief Banking Officer and her ability to drive performance in our regions.
Chris and our treasury team, led by Jennifer Rice, will continue to look for ways to improve the net interest margin, because, clearly, we understand that's an area of weakness for us. We believe our actions in the fourth quarter and the first quarter will clearly have benefit, but we know we do have work to get done to get to peer levels. We'll continue to look at our distribution system and it will continue to evolve as we look to make investments into higher-growth markets and continue to leverage our presence in existing markets. Credit quality will continue to be of the utmost importance to us, and we remain very committed to reaching our targets, as well as continuing to look for ways to evolve our expense base.
Finally, as you turn to slide 28, as we look to both the first quarter and the full year of 2007, we're comfortable with guidance of earnings for the first quarter of $0.15 to $0.18 for the quarter on an earnings per share basis. Understand that's with the knowledge that our charges will equal approximately $0.09, and they're included in that range. Our guidance for the full year is $1.11 to $1.17, again, with the knowledge the charge is $0.09 and is included in that range. Also within that range is the full $0.02 accretion for the St. Joe deal that we discussed at the time the deal was announced.
In closing, as Indiana's largest based bank, and on behalf of our 8000 Colts Kids Club Savings Account holders, I'd be remiss if I didn't take this opportunity to say go Colts. And at this time, we'd be happy to answer any questions you might have.
Operator
(OPERATOR INSTRUCTIONS). Scott Siefers, Sandler O'Neill.
Scott Siefers - Analyst
Just a couple of questions. I think these are going to prove to be interrelated. But Chris, maybe if you could give a little bit more color to the extent possible on the anticipated size of the balance sheet restructuring and the anticipated impact to the margin. And then, the second question is -- just looking at the guidance for the first quarter and the full year, it implies a pretty significant ramp, following the first quarter. Is most of that going to be due to kind of leverage you achieve from the balance sheet restructuring? I guess, broadly, what would be the major assumptions that go into the guidance for '07?
Bob Jones - President and CEO
Let me take the second question -- part of that question, and Chris will take the first. As you look at the first quarter, that does include a $0.09 charge. So, the ramp really does become from the improved margin, as well as some of the growth we'll begin to get from St. Joe, as well as Louisville kicking in with its new branches, and In Indy. I will mention that this year we worked very, very hard on the budget process and drove the budget down to the branch level. They built their budgets up. So, these are numbers that have been vetted through those folks. If you add that $0.09 back in, I think, the ramp up is not as significant as you might see. Chris, you want to cover the first part?
Chris Wolking - CFO
In terms of margins, we're currently working with the right margin decisions related to that charge. And I think that you can expect that, as Bob said, that change will help us, give us a lift going forward. We have a couple things we're looking at; clearly, deposits -- pardon me -- clearly, the investments, as well as our wholesale funding, plus there's opportunities related to some of the interest rate swaps that we have on the books. So, I think, Bob is right. I think that the actual benefit of that will be much clearer once we get through the transactions, and I feel like it's probably most appropriate to talk about that after the fact, when we talk about first-quarter results.
Scott Siefers - Analyst
Chris, just separately on the margin, you talk about higher [funding] costs (multiple speakers) pressure from third quarter to fourth quarter. What's your sense for how well that takes into the run rate? You noticed that pricing now seems to be pretty much in line with peers. So, is most of that kind of through this mix, so to speak? How would you be thinking about things exclusive of any restructuring of the balance sheet?
Chris Wolking - CFO
That's a great, great question. I think that that last slide clearly shows the work that we've done to get our deposit costs in line with our peers. And while that number was a little high in terms of the impact to the margin in the fourth quarter, it was clearly done very deliberately. And I think the result, those higher deposits, really showed the benefits. So, I feel like that the work that we've done in 2006 and the benefit we saw at the end of the quarter is, clearly, consistent with future expectations. We do want to increase those deposits, but we realize that we can't simply do that by increasing rates. We'll clearly have that same kind of discipline that we've seen in the second and third quarters of this year. And hopefully, as we see the peer group data come out, we will have experience in the fourth quarter. So, I think, we're clearly on our way there.
Operator
Troy Ward, A.G. Edwards.
Troy Ward - Analyst
Just a couple quick ones, and then, Daryl, I've got a credit issue. On the tax equivalent adjustment, it was quite a bit lower in this quarter. Was there anything significant that happened maybe in the munis portfolio to lower the adjustment on the FTE?
Chris Wolking - CFO
We did see -- we did -- as part of our work that we did in the fourth quarter, we did reduce the size of some of our longest duration securities, which, as we have talked about in the past, tend to be our municipal securities, given that kind of barbell portfolio that we've always carried. So, it was largely due to our continued belief that reducing the duration of the portfolio is important, and, certainly, reducing the size of the portfolio is consistent with our desire to be an efficient user of capital. So, that's a good catch, and that truly did occur. And I think you'll see that the balances, as we've split them out in the earnings trend, that we clearly had a lower municipal portfolio than we did at the beginning of the year.
Troy Ward - Analyst
I guess the other kind of related question would be, if you lowered the munis, but the overall securities went up in the quarter for the first time in several quarters, what are you buying? What are you seeing out there on the curve that you like?
Chris Wolking - CFO
The answer to that is not much. The securities -- the reason for the increase in the securities portfolio was driven largely by short-term investments that came as we saw that nice deposit growth in the fourth quarter. So, we didn't take a lot of duration risk or, frankly, a lot of option risk with those investments. Clearly, our mission is still to improve the mix of our earning assets to drive that margin higher. You won't -- you won't see us spending an awful lot of money on investments like we have in past kind of leverage, plus, of course, the yield curve doesn't give us a whole heck of a lot of advantage to that.
Troy Ward - Analyst
I guess I'm still not -- in the write-up in the release, you mentioned the increase in the short end of repos and such; that accounted for about half of the increase from Q3 to Q4 in the ending balance of the securities portfolio, but then there was also a remix. So, it sounds like to me there's -- you added 300 million, call it, in the quarter, plus you took away some munis. How much did you sell out of the muni bucket?
Chris Wolking - CFO
I don't have the numbers clearly at my fingertips, but (multiple speakers)
Troy Ward - Analyst
(multiple speakers) put in the 10-Q, I assume?
Chris Wolking - CFO
Yes. I'd have to look closely at those numbers. But, most of the transactions that we had were very short-term repurchase agreements [that fund] that kind of thing in the fourth quarter.
Troy Ward - Analyst
Maybe I'll look [at it on the] --
Chris Wolking - CFO
I don't -- Jennifer, is there --?
Jennifer Rice - Assistant Treasurer
We can follow-up with you.
Chris Wolking - CFO
We'll follow up with that, and I'd be happy to provide you some more detail on that.
Bob Jones - President and CEO
We'll have Jennifer get in touch with you.
Troy Ward - Analyst
And then, on the -- the average loans were slightly higher than the ending balance. How should we be looking at earning assets going into the first quarter, excluding, of course, the St. Joe transaction?
Bob Jones - President and CEO
Relatively flat, slight growth. Again, because of our commercial real estate rundown, you're not going to see significant growth; you'll see something in the low-end of the 1 to 5% range.
Troy Ward - Analyst
And then, if you could comment, is there any seasonality in Q4 related to any public funds, tax receipts, anything like that we might look for seasonality in the deposit franchise?
Chris Wolking - CFO
As we've discussed before, that's always an opportunity for us. But, I think, as we've talked about throughout 2006, historically we've paid an awfully high price for that money. And, I think, as you saw, a lot of that -- those deposits moved away from us as we became more disciplined in 2006. We, clearly, didn't do that at the end of 2006. So, I think that our expectation, clearly -- we still will have to see how first quarter transpires -- but our expectation is that these are more solid relationship-driven deposits then perhaps high rate driven deposits that we've seen occasionally at the end of the fourth quarter.
Bob Jones - President and CEO
I think as you look back to '05's fourth quarter compared to '06, these are much more sticky deposits than we had last year, and clearly priced much more effectively than we were a year ago.
Chris Wolking - CFO
I think the DDA balance increase is a good manifestation of that also (multiple speakers) wouldn't expect that from public sector relationships.
Troy Ward - Analyst
One last question for Daryl. Daryl, could you just, I guess, repeat what you said, maybe add a little color to the change in the policy related to the charge-offs in Q4?
Daryl Moore - Chief Credit Officer
Sure. When we look at our small-business loan portfolio, the piece that is actually scored with our scorecard, we really look at that more as a retail portfolio than a commercial portfolio. And what we have decided to do is really treat it from a charge-off perspective as a retail portfolio. So, any loan that becomes 90 days or more past due, or any loan that goes into non-accrual, regardless of the collateral, was charged off and will be charged off going forward. As we continue to collect those loans, collect on our collateral or if the borrower gets better, we will take those in as recoveries. There's another small piece to that is on our commercial loan side, we decided that our smaller commercial loans, those less than $250,000, that carry pretty much complete impairment as we measure it -- we're going to go ahead and charge those off, and then any recoveries we get going forward will just blow back into the allowance.
Troy Ward - Analyst
How much of this 9.6 in gross charge-offs was related to the change?
Daryl Moore - Chief Credit Officer
2.3 [million].
Troy Ward - Analyst
Okay. And you said you had a large recovery in the quarter. Could you give us a little color on what that was and how much it was?
Daryl Moore - Chief Credit Officer
It was a commercial real estate project that we charged off many years ago. We worked with the borrower and took an assignment of the proceeds from a lawsuit. They won the lawsuit in the third quarter, and the recovery for us was $3 million.
Operator
Charlie Ernst, Sandler O'Neill.
Charlie Ernst - Analyst
Back to the tax rate, can you just say what you feel like a normal tax rate is for you guys going forward?
Chris Wolking - CFO
From an effective tax rate standpoint, Charlie, we've been in the 16% range for quite some time. Given the natural kind of opportunities that we've had over the year with our large losses, if you call it opportunities, and things of that sort, our projections -- and they're certainly just projections -- are that these would be consistent going forward. (multiple speakers) simply just projections for us. And a lot of that, of course, is driven by the taxable income we can generate from an approved earning asset mix. So, it's awfully hard to pin that down.
Charlie Ernst - Analyst
And then the insurance line this quarter -- can you explain the jump there in fee revenue?
Chris Wolking - CFO
Good question. There was a -- we've been involved, and we've talked about this several times, in some consolidation of the back-office of our insurance company. And in this particular case, as we were consolidating that, we moved some large pieces, chunks of income, late in the quarter from other income up into the insurance revenue line, as we were able to account for those things on a consolidated basis. So, you should see those accounted for in that line item going forward. So, really, there was a re-class of income there from other income to insurance revenue.
Charlie Ernst - Analyst
And then, within your guidance on 2007, is there any color that you can give in terms of what your charge-off and provision assumptions are?
Daryl Moore - Chief Credit Officer
As I said earlier, the provision expectation is $9 million to $10 million.
Bob Jones - President and CEO
Charge-offs would be not a whole lot dissimilar to where we are this year. You know we lowered our target. So, somewhere from where we are to our target would be a good thing to build in your model for charge-offs.
Daryl Moore - Chief Credit Officer
I think our target is 25 (multiple speakers)
Operator
David Konrad, KBW.
David Konrad - Analyst
First of all, I'd like to thank you for taking questions from a Bears fan.
Bob Jones - President and CEO
Next question.
David Konrad - Analyst
Actually, Charlie just got a couple of my questions. But, I guess, the last remaining question I had was about the charges expected in the first quarter, roughly 7 to 9 million. Can you help me just reconcile that back with when we were first talking about the St. Joe's transaction, I think you were talking about transaction charges totaling about 6.1 million pre-tax at that time. I'm not sure how much of that was going through the income statement. I'm just trying to figure out if there are more St. Joe (multiple speakers) charges than --
Bob Jones - President and CEO
No. Really, 6 to 7 million of this is really related to the balance sheet restructuring. The difference in that range would be some severance related to some restructuring we've had. There's -- not much of this is really included as the St. Joe; less than $1 million of this is related to St. Joe.
David Konrad - Analyst
So, then, we may have more charges coming, more (multiple speakers)
Bob Jones - President and CEO
No.
Chris Wolking - CFO
I think the point there is that given the fact, as Bob mentioned, that virtually all of the senior executive team is staying with the Company, and kind of the ongoing due diligence is part of that process, I think it's fair to say that the integration will go pretty well.
David Konrad - Analyst
So, what was the 6 million pre-tax charge originally posted for St. Joe's? You seem to be coming in below that, then.
Chris Wolking - CFO
For the life of me, I cannot remember that number. I will be happy to go back and kind of do a re-brief on our release from the St. Joe announcement and see if I can't reconcile to that number. I'll be happy to call you back on that.
David Konrad - Analyst
It was on the slide show of the St. Joe's deal. So, what we're looking at (multiple speakers) -- so what we're looking at with the 7 and 9, we should consider that, from what you know, all the charges coming through?
Bob Jones - President and CEO
Absolutely.
Chris Wolking - CFO
Absolutely.
Operator
(OPERATOR INSTRUCTIONS). Kevin Timmons, CL King & Associates.
Kevin Timmons - Analyst
Most of my questions were answered. A couple more, though. The change in other expenses -- is that core change of the Q4 number, roughly, the number to use going forward, or were some of the charges in there?
Chris Wolking - CFO
Some of the charges were in that number. And I'm looking around here to my accountants. I believe the (multiple speakers)
Bob Jones - President and CEO
(multiple speakers) 400,000 included in that number -- I think after that, you can -- you get closer to a run rate.
Chris Wolking - CFO
That unfunded commits number was $400,000.
Kevin Timmons - Analyst
The core run rate for compensation looking forward -- if I go through Q4, I assume the pension charge and the severance is in that line. So, if [I] take out, I'd be at 39.5 million. If I look back at Q3, if I take the 36.8 and add back the reversal, I get 38.3. Are we talking Q1 compensation, excluding the acquisition, being in that range, 38, 39 million?
Bob Jones - President and CEO
I think that's a fair assumption.
Kevin Timmons - Analyst
Okay. And the question before about the munis and the tax rate -- [60]%, roughly, is where you think things look up to you at this point?
Chris Wolking - CFO
Yes, and I have to -- obviously, that number will be part of our Q -- or our K. And I just -- I believe that that's close. I don't expect to see any significant changes here in '06, and particularly since most of those transactions were very late in the day or late in the year. We will begin to share that kind of outlook with you a little more clearly here going forward. It's clearly, obviously, an issue that you guys are interested in.
Kevin Timmons - Analyst
Actually, that's why I was wondering what the timing was. If the timing was late, that could have an impact on the (multiple speakers). And then, the insurance revenue and other income, the changes on those two line items -- those are the only components, basically just that shift; there weren't any other unusual items (multiple speakers)
Chris Wolking - CFO
No. The insurance company continues to perform as we would expect. And as we've said before, they're very focused in 2006 on consolidating back offices and improving their operating margins.
Operator
[Stephen Gian], Stifel Nicolaus.
Stephen Gian - Analyst
Just a couple of questions. The first one, just an update on the branch consolidation. I know that you went through a [few] the last couple quarters or so; also, that you're going to be reviewing some numbers again in Q1. And then also, the second question -- commercial banking realignment. You had the 60% relationship managers, going to 60%, 40%, the realignment of the credit service area and compensation plans -- just kind of an update on where those are.
Bob Jones - President and CEO
Branch closures are on track to close in February. We still are very optimistic with our consolidation plans, and feel very comfortable with where we are in the process. Barbara will continue to look at all of our distribution system. Nothing to announce at this stage, but she continues to review that.
Our 60% small-business realignment, commercial banking realignment is -- a portion of which [is] included in the severance charges for the first quarter. That has been completed for the most part and reaction has been very positive. So, we feel good about where we are with that. The third question was related to the credit side of that? I'm sorry.
Stephen Gian - Analyst
The compensation plan.
Bob Jones - President and CEO
Compensation plan -- we're almost complete. We would ask that you allow us to communicate it to our troops before we communicate it to you, but I think it will be very consistent with what we talked about at the analyst day.
Operator
At this time there are no further questions. I will now turn the call back over to CEO Mr. Bob Jones for any closing remarks.
Bob Jones - President and CEO
I think we've covered an awful lot. We've got a couple follow-ups, but again, appreciate your questions. And again, we would characterize it as a good quarter with good trends going into 2007. And again, go Colts for all of you except for Mr. Konrad. Thank you.
Operator
This concludes Old National's call. Once again, a replay along with presentation slides will be available for 12 months on the shareholder relations page of Old National's Web site, at www.OldNational.com. A replay of the call will also be available by dialing 1-800-642-1687, conference ID code 5961380. This replay will be available through February 12. 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 disconnect at this time.