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Old National Bancorp  (NASDAQ:ONB)
Q4 2018 Earnings Conference Call
Jan. 22, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Welcome to the Old National Bancorp Fourth Quarter and Full Year 2018 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com, and will be archived there for 12 months.

Before turning the call over, management would like to remind everyone that as noted on slide two, certain statements on today's call may be forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results to differ from those discussed. The Company's risk factors are fully disclosed and discussed within its SEC filings.

In addition, certain slides contain non-GAAP measures, which management believes provides more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of the performance trends. Reconciliations for these numbers are contained within the appendix of the presentation.

I'd now like to turn the call over to Bob Jones for opening remarks. Mr. Jones?

Robert G. Jones -- Chairman and Chief Executive Officer

Great. Thank you, Dorothy, and nice job. Thank you so much. Good morning and thank you all for joining us for Old National's fourth quarter earnings call. I'm going to cover the highlights of the quarter and for the full year and let Jim Ryan provide more detail. Jim and I are joined this morning by Jim Sandgren, Brendon Falconer, Daryl Moore and John Moran.

Upfront, I would characterize the year as a highly successful with our adjusted net income of over $200 million, a record for the Company. Likewise, I would characterize the quarter one consistent with both prior quarters and our stated strategy. We saw some anticipated noise in the quarter associated with the Klein closing and the sales of 10 branches in Wisconsin, but our fundamentals continue to look solid. Klein represented a continuation of our measured growth strategy, and as Jim will cover later, our enthusiasm for the Twin Cities continues to build. The sale of the 10 Wisconsin branches is consistent with our desire to constantly focus on improving operating leverage and our focus on increasing the average deposits per branch.

As a reminder, since 2010 we have consolidated or closed 201 branches and increased our average branch size from $34 million to $74 million. We do view average deposits per branch as a proxy for revenue per branch. Our performance for the quarter was highlighted by strong deposit growth with a low deposit beta of less than 15% through the cycle, as we continue to take advantage of our strong deposit market share and our great customer focus.

We were particularly pleased with the impact it's had on our net interest margin expansion. But much like last quarter, the trend of loan pay-downs continued this quarter. We saw over $300 million in paydowns for the quarter. Let me add some color to those paydowns. 33% were because of businesses or real estate projects that were sold. 23% were the result of CRE loans going to the secondary market. And 21% were loans that we exited for credit reasons.

Loan competition does remain strong. But while there are pockets of silliness, for the most part structure and pricing is logical. Credit remains benign and any issues are one-off credits. We do not see any sector weaknesses. We do, however, remain cautious toward certain sub-sectors in CRE and, much like we spoke about last quarter, senior housing, retail and certain segments of multi-family.

Business optimism remains high as evidenced by our second-best quarter of commercial loan production in the history of the Company. While this optimism is high, there is a sense it is beginning to feel the effects of the noise coming out of Washington. Some portions of our clients are directly impacted by the tariff wars such as agriculture, as well as some areas of manufacturing and housing that have shown some softness at the margin.

The impact of the government shutdown has been minimal in our markets to date. We do not have a large employee base that is affected. But while it's minimal, it is real for some of our clients, and we have responded in time by developing a 0% interest rate loan for those impacted as well as waivers of payments, et cetera. We do not believe this will have any financial impact on ONB, and more importantly, it is just the right thing to do.

I must admit I've been very pleased with the most recent comments coming from the Federal Reserve. There appear to be a possible disconnect between the data points that Fed was using in their analysis and the realities of the markets we serve. Their recent comments regarding full employment and reduced concerns about inflation are more consistent with the feedback we get from our clients. Obviously, with the potential for slower increase in the short end of the curve, we do hope that the long end begins to move. I don't need to tell you the challenges of managing the balance sheet in the current flat yield curve environment.

Overall, I'm very pleased with our performance for the full year and the fourth quarter. We remain very committed toward our basic bank strategy, which Jim Ryan was the architect. Our view of M&A has also not changed. We will remain an active looker in our target markets and a highly selective buyer and allow me to do my moralism for the day. We will not break the discipline box.

In closing, I appreciated the kind emails that I received from many of you. Please accept my apologies for not returning them. I must admit I was slightly overwhelmed with the reaction to my announcement and I could not respond to the multitude of communication. A common theme throughout each communication was that while people were happy that I was moving into the next phase of my life, they were more than happy that Jim Ryan was selected as my successor by the ONB Board. I absolutely share that excitement. Jim is the perfect person to fill my very small shoes. His intellect and his strong leadership skills will take our Company to the next level. I'm thrilled for him and for our Company.

And finally to each of you, let me say thank you. You have made a better CEO by your questions, your challenges and your input. I've been the beneficiary of your collective knowledge and our relationship, and I truly appreciate all that you've taught me. Thank you very much.

Now it's my pleasure to turn the call over to Jim Ryan.

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

Thank you, Bob. And for the record, those are not small shoes to fill; more like LeBron James size shoes. I'm honored to have been selected as Old National's next leader and extremely humbled to follow Bob. I know I speak for all of us when I say we are very excited to continue to build upon the momentum we've established under your leadership.

Turning to the quarter on slide five. GAAP earnings per share were $0.28 and our adjusted earnings per share were $0.32. While adjusted earnings per share excludes the items noted on the slide, it does include $7.6 million pre-tax and incentive compensation true-ups and medical benefit accruals that were well above our normal quarterly run rate. Those adjustments trimmed approximately $0.04 per share from the quarter. As you build your models and think about expense run rates into 2019, these accruals are worth bearing in mind. We would suggest that the quarter would have been closer to $0.36 without these higher than run rate accruals.

Moving to slide six. Adjusted pre-tax pre-provision net revenue was 16% higher year-over-year and 18% higher on a full year basis. This result was driven by increased yields from our recent partnerships, maintaining our strong low-cost deposit base and a continued focus on expense management. We also improved operating leverage by 215 basis points year-over-year. Further adjusting for the $7.6 million in incentive comp and medical benefit true-ups, adjusted pre-tax pre-provision would have increased almost 30% year-over-year, while operating leverage would have improved 400 basis points.

Next, on slide seven. As Bob already referenced, we had the second-best quarterly production in the Company's history this quarter. While our overall balance sheet growth was muted by a large number of payoffs and commercial real estate loans being refinanced through the secondary market, we remain very pleased with both the production and pipelines.

The commercial engine is alive and well here and we are seeing good activity across the footprint. We are especially enthusiastic with what we're seeing in the Twin Cities, as we bring Anchor and Klein together, and are now several quarters past the Anchor conversion.

Our loan yields improved from higher interest rates and higher accretion income from Klein, which was partially offset by lower than normal levels of interest collected on nonaccruals.

Slide eight demonstrates our year-over-year change in earning assets. Again, this is very consistent with our stated strategy and ongoing balance sheet remix objectives. As a percentage of total earning assets, commercial loans were up almost 4%. Less productive earning assets, including indirect loans, continue to decline as a percentage of the total balance sheet.

After three years of hard work, we are approaching a more optimal mix, and at the same time, Chris Wolking, our former CFO, has done a great job of improving the profitability of the indirect portfolio. We've added earning asset yield information to the slide. Excluding accretion income, overall asset yields were up 11 basis points in the quarter. We have seen our asset yield increase nicely over the last several quarters.

Moving to slide nine. We continue to believe that stable, low-cost core funding creates a sustainable competitive advantage. This is the hallmark of our franchise. Our deposit beta is now just under 15% current cycle to date, while our cost of total deposits at just 40 basis points.

Next, on slide 10. Our net interest margin exceeded our expectations. Excluding accretion, it was 3.37%. Asset repricing positively impacted our margin as did well-controlled deposit cost. Accretion increased 8 basis points from the third quarter, mostly due to the Klein partnership, but remains less than 6% of total revenue. We have provided the normal schedule for accretion in the appendix, which now includes the Klein partnership.

Slide 11 shows adjusted noninterest income. Klein contributed $2.8 million for the two months of operation. Mortgage followed normal seasonal softness in the fourth quarter, while capital markets revenue declined from exceptionally strong third quarter. Other fees were stable. We have included the purchase versus refi percentage for the mortgage business, and as you would expect, refis were only 19% of our volume. If posted rates reach 4.25%, we may see a modest lift in refi activity.

Next, slide 12 shows the trend in adjusted noninterest expenses. Klein contributed $7.4 million for the two months of operation. It's also important to note that these adjusted numbers include the $7.6 million in incentive compensation and benefit true-ups previously mentioned. Again, we would suggest you exclude this as you build your 2019 estimates as we do not expect these levels going forward.

Our adjusted efficiency ratio for the third quarter was 63.31%, a 27 basis point improvement from the fourth quarter of 2017. Again, this result was clouded by the incentive and healthcare true-ups that would have been well under 60% on a run rate basis. As Bob said, expense control is an important part of our culture and we remain committed to generating positive operating leverage.

Slide 13 has our credit metrics. We recorded $3.4 million in provision expense during the fourth quarter, while posting net charge-offs of just $0.6 million. For the full year, we recorded $7 million in provision, while posting net charge-offs of just $1.9 million. With 62 basis points against organic loans and 349 basis points on loan marked against the acquired loans, we believe we have adequate reserve coverage.

Slide 14 provides some key takeaways from our 2018 performance. We are very pleased with our results for the year, driven by good execution against our strategic objectives. We maintained our strong low-cost deposit base with a low 14.7% deposit beta through the cycle. We continue to have a disciplined approach to credit risk management, resulting in net charge-offs of just 2 basis points for the year. We had the highest production yield in the Company's history and we continue to have a strong pipeline. Lastly, we are driving positive operating leverage, improving our efficiency ratio and increasing profitability metrics.

Turning to slide 15. We will provide some thoughts around our outlook for 2019 and fourth quarter starting points. We expect strong production to continue. Commercial activity was skewed toward C&I versus commercial real estate, but we remain open for business in both asset classes. Net interest margin, excluding accretion income, is expected to continue benefiting from low-cost deposits and improving asset yields, but the yield curve presents a challenge. We remain modestly asset sensitive but are very thoughtful about the possibility of lower rates. As you all know and appreciate, we manage the balance sheet relatively neutral most of the time.

As the slide suggests, fees and expenses should follow normal seasonal patterns, and we remain very focused on increasing total revenue faster than total expense, thereby continuing to drive positive operating leverage. On a full year tax rate -- our full year tax rate is expected to be approximately 24% on an FTE basis and approximately 21% on a GAAP basis. Tax credit amortization is expected to be de minimis in 2019. Lastly, we remain very optimistic about our opportunities in Minnesota. Our cost saves remain on track, with the Klein integration planned for the second quarter, and employee retention has been strong.

With that, we're happy to answer any questions that you might have. And as Bob already mentioned, we do have the rest of the team with us.

Robert G. Jones -- Chairman and Chief Executive Officer

Dorothy, go ahead and open the lines for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Scott Siefers from Sandler O'Neill.

Robert G. Jones -- Chairman and Chief Executive Officer

You're as predictable as the sun come up in the morning, Scott.

R. Scott Siefers -- Sandler O'Neill -- Analyst

Yeah. I try. I try. Thank you. Well -- and first of all, Bob and Jim both, congratulations to both of you. Very well deserved. Bob, calls will be different without you, so it won't be the same.

Robert G. Jones -- Chairman and Chief Executive Officer

Well, Moran has put a damper on most everything now. So it just isn't as fun anymore.

R. Scott Siefers -- Sandler O'Neill -- Analyst

I know that's not the case, but. I guess a few questions. So just on the level of payoffs, so just as you look at net growth anticipations into '19, what kind of levels are -- levels of payoffs are you anticipating? I noted in the outlook you talked about production, but not necessarily overall growth. So just curious as to your thoughts on how it'll all fall to net growth.

Robert G. Jones -- Chairman and Chief Executive Officer

Yeah. Hard to predict, Scott, paydowns, because obviously some of them driven by the rate environment and other things. But I would just say that early indicators in '19 are positive. Pipeline continues to build; our pull-through has been good. We have not experienced the paydowns we've had in the past, but sometimes you get surprised. But all things being equal, I don't think we'll be that far off what we've historically talked about in terms of growth. But I think, again, the unknown is just the weird environment, particularly in the secondary market and some of these other things. But I think part of it is I've talked to clients is they've had such a buildup of cash that they're really starting to do some things differently. But we'll see over time.

R. Scott Siefers -- Sandler O'Neill -- Analyst

Okay. All right. Thank you. And then just on the true-offs -- pardon me, true-ups. I get that they typically come in end of year. But just curious as to why that level ended up hitting in the fourth quarter as opposed to being something that you might have accrued a bit more meaningfully for throughout the course of the year?

Robert G. Jones -- Chairman and Chief Executive Officer

Yeah, great question, same one as I asked. A lot of it's medical related and some of that just can't predict. When you have certain large claims that come through, they come through as they come through. And the incentives is a traditional true-up for us and we're pleased that we had to do it, but the unknown is the medical true-ups and those just happen when they happen. So...

R. Scott Siefers -- Sandler O'Neill -- Analyst

Yeah. Okay. Perfect. And then if I can sneak one final one in. The tax rate in the fourth quarter, the 11.7%, I guess, I know you guys have given full year guidance previously. But I guess I felt like it implied a higher tax rate in the fourth quarter. Did that number come in lower than you guys thought as well or did I -- did I just sort of miss something along the way?

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

I think it came in as we expected, Scott.

R. Scott Siefers -- Sandler O'Neill -- Analyst

Okay. All right. Perfect. All right, I guess that does it for me. So thank you guys very much.

Robert G. Jones -- Chairman and Chief Executive Officer

Great. Thanks, Scott.

Operator

Your next question comes from the line of Chris McGratty from KBW.

Robert G. Jones -- Chairman and Chief Executive Officer

Hello, Mr. McGratty.

Christopher McGratty -- KBW -- Analyst

Hey, Bob. Good morning to -- morning, everyone. First of all, congrats to the -- to both of you on the exciting news. If I could follow Scott's question on the expenses. Understanding the volatility in the accrual in the quarter, and you have two months of Klein. For -- as we look into 2019, I know you have an expense -- or a guidance slide. It was a little bit light on specifics. I'm not sure if that was intentional, but if we take the $127 million or $128 million in this quarter and take out the $7.5 million, and then fully give the Klein in for the fourth quarter, is it fair kind of growing the expense base at kind of inflation 2% to 3%? And kind of maybe any help on the -- on the trajectory of the cost saves? Because that was a pretty big variance this quarter.

Robert G. Jones -- Chairman and Chief Executive Officer

Yeah. I'd say the high end inflation -- obviously, we're going to continue to look for ways to improve operating leverage. But I would just say, if you look at the guidance we gave for the back half of '18, we were right on that number and there's no reason we would be off as we go forward. The anomalies of the medical claims -- you got early births, et cetera, that we just can't control.

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

I just -- as you know, Chris, the first and second quarters are always a little bit higher than the third and fourth quarters because of FICA (ph) true-ups and the raises and merits that happen in the second quarter for us.

Christopher McGratty -- KBW -- Analyst

Okay. So you're not -- so there's no change in messaging for the outlook for expenses?

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

Not all, not at all.

Christopher McGratty -- KBW -- Analyst

Okay. Maybe we could go to the credit just for a moment. You called out two specific I think credits in the quarter, two specific reserves. Wonder if you could, number one, speak to those. And number two, I assume most of the migration and classifieds is just bringing on Klein, but wanted to make sure that was just the -- just the fact. Thanks.

Daryl D. Moore -- Senior Executive Vice President, Chief Credit Executive

Yeah. Chris, Daryl. Yeah, the two credits, one is actually a loan we made in the quarter to bridge us over with the Klein. We have every expectation that that credit will be paid in full probably in the first quarter. The second is one that we've been working with for quite a while. The client is in the process of hopefully getting some capital infusions. If so, that will take care of it. But that one is a little -- probably more in question than the first one. So truly, those two credits are just one-offs in the quarter. With respect to the Klein, yeah, a good share of those increases were associated with Klein, although we did have some increases in substandard and the special mention in the quarter as well. But the good share -- most of that came through the Klein.

Christopher McGratty -- KBW -- Analyst

Okay. And just do you know if I -- have you the size of those two credits and any kind of industry you could talk to? Thanks.

Daryl D. Moore -- Senior Executive Vice President, Chief Credit Executive

Yeah. The one that will probably get resolved was a $1 million credit and it is really kind of commercial real estate related. It will get paid off through the sale of a property. The other one was a more technical kind of pharmaceutical client, about $9.3 million.

Christopher McGratty -- KBW -- Analyst

Okay. Great. Thank you.

Operator

Your next question comes from the line of Nathan Race with Piper Jaffray.

Robert G. Jones -- Chairman and Chief Executive Officer

Morning, Nathan.

Nathan Race -- Piper Jaffray -- Analyst

Hi, guys, good morning. Congratulations, both Bob and Jim, on the news. Well deserved. Going back to Klein for a second. It looks like if we look at June 30 balances versus what you guys brought on, on November 1, Klein was down about 2%. I know the credit market is in there as well. So just curious to get an update on retention and any attrition that you're seeing across the Klein team at this point.

Robert G. Jones -- Chairman and Chief Executive Officer

Yeah. We've actually seen very little attrition. We added a mark and maybe a couple exit credits, but we've retained the full team. So very, very good about where we are with the book of business as well. And, as Jim said in his comments, we're -- every day, we get more excited about the opportunities in the Twin Cities.

Nathan Race -- Piper Jaffray -- Analyst

Okay, got it. And then just kind of the expense guidance for 2019, does that include any hires that you could -- affect in -- in the Twin Cities or is that kind of just natural inflationary pressures that you expect to see?

Robert G. Jones -- Chairman and Chief Executive Officer

Well, I would just stick to the inflationary. Any hires we have we would reallocate reductions from other areas. One of the things that Jim Ryan is really good at is if you want to hire somebody, you got to find it somewhere else. So we will -- I think the word reallocate, some of our slower growth markets as we have opportunities to reallocate costs I think would make sense. So I wouldn't change your guidance from kind of an inflationary number for expenses.

Nathan Race -- Piper Jaffray -- Analyst

Okay, got it. And then if I could just ask one last one on capital. Obviously, with Klein coming on board, you guys are going to be accreting capital at pretty healthy clips through the back half of 2019. So just curious, with some of the volatility that we've seen in the space, if that kind of causes you guys to kind of reorganize or reprioritize any of your capital return priorities between buybacks, dividends and so forth?

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

Yeah. We've obviously seen a lot of banks take a different look at that here in the fourth quarter and certainly we'll continue to examine that opportunity as well. But organic growth remains a priority for us and we think about capital return, maybe second or third relative to partnerships. As -- we didn't really talk that much about partnerships, but they become more challenging in this kind of environment as we think forward. But we think that organic growth is our first priority.

Nathan Race -- Piper Jaffray -- Analyst

Okay, got it. I appreciate all the color. And congrats again, guys.

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

Thank you.

Robert G. Jones -- Chairman and Chief Executive Officer

Thanks, Nate.

Operator

Your next question comes from the line of Terry McEvoy with Stephens.

Robert G. Jones -- Chairman and Chief Executive Officer

Hey, (inaudible).

Terence James McEvoy -- Stephens Inc. -- Analyst

Hi, good morning. And -- and like Scott said, these calls are going to be different without you Bob. And congrats to both of you.

Robert G. Jones -- Chairman and Chief Executive Officer

You guys got to blame Moran for that. He's the one who put the damper on the Dane because if he hadn't done that I'm going to stick around five more years.

Terence James McEvoy -- Stephens Inc. -- Analyst

So maybe start with just -- just stock market volatility. Your stock's, $19 to $14 back to $16 or $17 (ph). Could you just talk about how the movement in your stock price has maybe impacted potential M&A transactions and whether we need to see some stability and/or a higher stock price to get something done in '19?

Robert G. Jones -- Chairman and Chief Executive Officer

Obviously, you get the volatility. It changes both sellers' and buyers' expectations and I think you've seen some pause, potentially, Terry. I think as you -- who knows where the market is going to go, but we're always going to do what's right for the investors. It goes back to the discipline box. We've been pretty forthright about where our earnback needs to be, the markets we need to serve. We can get there in this volatile market. We'll get there. If not, then there's other uses of capital.

Terence James McEvoy -- Stephens Inc. -- Analyst

Thank you. And then the 21% of the paydowns or credit kind of credit reasons so that $60 million, any consistency in terms of industries, markets where you're kind of finding a new home for these -- for these borrowers?

Robert G. Jones -- Chairman and Chief Executive Officer

No. I would say there is no specific industry or geographic. It's just -- when you get this late in the cycle, you got a lot of people chasing the bus, and every so often we are lucky that somebody catches that bus and we can exit at 6% (ph) or 7% (ph) or a 9% (ph) credit, and we're going to do it. And Jim's done a nice job of working with the team to do that.

Terence James McEvoy -- Stephens Inc. -- Analyst

And then just maybe as a last question. If I look at the last few years, fee income has been a little bit soft. Maybe not every year, every quarter, but there seems to be a downward trend in certain -- certain items. I guess my question is, are you fully optimizing all of your fee businesses, and if not, what is the kind of the plan for maybe some improvement in terms of the underlying growth trends within fee income?

Robert G. Jones -- Chairman and Chief Executive Officer

Yeah. Great question, and we would share your -- your analysis that we have opportunity to get better. I think as I look across those, I think wealth management, it's an area we're putting a lot of focus on. I think, Terry, we've got to move from a traditional fiduciary shop to being a fully bred (ph) wealth. Mortgage is volatile, but I think our investments and treasury management and capital markets could clearly have some upside. We're getting very close to rolling out a new treasury management system. And with the ability to go into the Twin Cities and Madison and Milwaukee with that, I think there's some great upside. Yes, I think you're absolutely right. Service charges, they are kind of -- I don't want to say they are what they are, but I wouldn't -- I wouldn't see a lot of growth in those. And just to bring up one of my quips from years back, service charge is a little like crack cocaine. It's an industry we got addicted to. We need to get off of those, look for other ways to drive fee income.

Terence James McEvoy -- Stephens Inc. -- Analyst

Great. Thanks again. Take care.

Robert G. Jones -- Chairman and Chief Executive Officer

Thanks, Terry.

Operator

Your next question comes from the line of David Long with Raymond James.

Robert G. Jones -- Chairman and Chief Executive Officer

Hey, David.

David Long -- Raymond James -- Analyst

Good morning, everyone. And just to echo everyone else's comments, Bob, you will be missed and Jim, congratulations, and we're looking forward to seeing you put your stamp on these calls to the extent that John Moran will allow. Just a couple of things. Following up on the fee income, wealth management revenue was up a bit in the quarter, and given what we saw in the markets, just curious how that was up, given the decline we saw in the equity markets. And maybe if you could talk about how that market gets priced and how the revenue is generated.

Daryl D. Moore -- Senior Executive Vice President, Chief Credit Executive

Yeah. We had a trust mature. It's really the fee that came in in the wealth side. You know that, whenever you have a trust mature, unfortunately the death of one of your clients, you get a large estate fee. So that's really the issue. They're priced much like in any book of business. It's a fee based on the value of the book. We are -- unlike a lot of shops, we have a little more propensity to fixed income versus equity. So you get a little bit steadiness there, but the volatility of that business will come from whenever we have estates mature.

David Long -- Raymond James -- Analyst

Got it. And then as a follow-up, Bob, you mentioned some pockets of silliness in the marketplace. Can you give a little bit more color and where you think competition maybe getting a little bit out of whack?

Robert G. Jones -- Chairman and Chief Executive Officer

Yeah. I'd say Northern Indiana is an area that we continue to see it -- obviously, parts of Michigan, we're seeing some of that silliness. And it's really unlike the last pre-crisis challenges. It's really the smaller guys that are playing that silliness versus the larger guys or gals. And you see pockets of it, but really the most of it's been Michigan and Northern Indiana.

David Long -- Raymond James -- Analyst

Got it. Thank you, guys.

Robert G. Jones -- Chairman and Chief Executive Officer

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Robert G. Jones -- Chairman and Chief Executive Officer

Hello, Arf.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey, good morning. Congrats to both of you. A question on the margin. In terms of just the starting point, would you say there's anything unique in the margin this quarter other than maybe some elevated accretion and would you say there's maybe natural momentum in the margins where it can increase from here?

Brendon Falconer -- Senior Vice President and Treasurer

Yeah, this is Brendan, Jon. Yeah, we think we have some opportunity for asset yield accretion. Really our investment book -- new business opportunities investment book are well above the runoff yields. We think we have some room to grow with the last rate hike. So we'll get some continued benefit from that. As far as the rest of the noise other than interest collected on accrual being down, I think we're -- I that's pretty much it.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. So that's -- the 3.64% number, I guess is what I'm trying to get at. Do you feel that's elevated a bit for the quarter or do you feel like that's a -- that's a decent run rate for you guys?

Brendon Falconer -- Senior Vice President and Treasurer

I think that -- I think that's pretty much a decent run rate, including -- including accretion.

Robert G. Jones -- Chairman and Chief Executive Officer

Yeah. I think, Jon, the only variable would be accretion, which is never predictable. But I think the number you've got is a good starting point. Accretion has become a little more predictable, if that's the right word. But you can always get nuances if Daryl does a really good job in a quarter.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yeah. Okay, good.

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

Jon, just one last comment about range (ph). If you always look back at our net interest income sensitivity, the year two is where we benefit the most versus year one. So I think we're starting to get kind of that point where Brendon was explaining with about our assets are being repriced and take advantage of some of those higher interest rates.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Good. Thank you for that. And then loan balance outlook, your guidance slide -- on slide 15, I think it points to some optimism, but I'm just curious, you might have a little bit of runoff on Klein, maybe, maybe not. It feels like commercial is strong but maybe running off some other categories as well. Just bigger picture, what you guys think is possible in terms of organic loan growth for 2018?

Robert G. Jones -- Chairman and Chief Executive Officer

John, we're optimistic, to be honest with you. I -- given the granularity of the Klein book and the fact that Jim's been able to retain the producers and just kind of feel up there, I feel -- I feel very good about the Twin Cities. We are starting to see former Anchor's pipeline build. They're -- they're kind of fully engaged now. The unpredictable is the paydowns. But the activity level is very, very good. The pipeline continues to build. As Jim's talking to his troops, they feel very good about it. You know the damper could potentially be the shutdown or tariffs or -- but for the most part, our clients just kind of move forward. We feel pretty good.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Very good. Then one -- one last one, a bigger picture on the efficiency ratio. Jim, I think you talked about how, excluding the noise, it could be or was below 60%. Did I hear that -- did I hear that right?

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

Yeah, right, yeah. Just -- just slightly below 60%.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, got it. And then in terms of longer-term opportunities, I mean you have some cost takeouts from Klein, but kind of the same bigger picture question is loan growth. What do you think is possible for your efficiency ratio longer-term?

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

Well, I'm not going to start sort of to give any specific guidance, but you know that it's a focus of ours. It remains a focus. It's a part of how we think about running the Company, so how we get paid and -- and it's something I spend an awful lot of time on each and every day.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. Thanks, guys.

Operator

And you have a follow-up question from the line of Chris McGratty with KBW.

Robert G. Jones -- Chairman and Chief Executive Officer

Hey, Chris.

Christopher McGratty -- KBW -- Analyst

Hey, thanks. Just want to go back to the expenses for a minute. If we go through the quarter again and adjust for the accruals, you kind of starting from a -- the kind of low 120s number. Then obviously we need to add another month for Klein. So that would, if my math's right, get to you kind of that mid-120s. And then you talked to, I think, Jim, about the Q1 seasonality. So I guess the question is from these levels at $128 million roughly in the quarter, we should assume some level of build in Q1, and then as the synergies get realized and the seasonality works in your favor, kind of declining toward that low-to-mid 120s. Is that -- do I capture that about right?

Robert G. Jones -- Chairman and Chief Executive Officer

I see a lot of heads nodding in the room, Chris. I think you did it very well.

Christopher McGratty -- KBW -- Analyst

Okay. So a little bit up and then synergies over the balance of the year. Okay. Got it.

Robert G. Jones -- Chairman and Chief Executive Officer

Absolutely. And continued focus as well, so...

Christopher McGratty -- KBW -- Analyst

Okay. Thanks for the clarification.

Robert G. Jones -- Chairman and Chief Executive Officer

Thanks, Chris.

Operator

And there are no further questions at this time. I'll turn it back over for closing remarks.

Robert G. Jones -- Chairman and Chief Executive Officer

Well, thank you all so much. Again, appreciate all your kind comments. But I can assure everybody that my optimism for the Company is extraordinary right now with Jim's leadership and the tools that we've got in place. So I appreciate all your support. Thank you.

Operator

This conclude Old National's call. Once again, a replay along with the presentation slides will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com. A replay of the call will also be available by dialing 1-855-859-2056, conference ID code 5499497. This replay will be available through February 5th. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call. You may now disconnect.

Duration: 34 minutes

Call participants:

Robert G. Jones -- Chairman and Chief Executive Officer

James C. Ryan -- Senior Executive Vice President, Chief Financial Officer

R. Scott Siefers -- Sandler O'Neill -- Analyst

Christopher McGratty -- KBW -- Analyst

Daryl D. Moore -- Senior Executive Vice President, Chief Credit Executive

Nathan Race -- Piper Jaffray -- Analyst

Terence James McEvoy -- Stephens Inc. -- Analyst

David Long -- Raymond James -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Brendon Falconer -- Senior Vice President and Treasurer

More ONB analysis

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