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First Commonwealth Financial Corp (PA) (NYSE:FCF)
Q3 2019 Earnings Call
Oct 30, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the First Commonwealth Financial Corporation Third Quarter 2019 Earnings Conference Call and Webcast. [Operator Closing Remarks].

I would now like to turn the conference over to Mr. Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Ryan M. Thomas -- Vice President, Finance and Investor Relations

Thank you, Alison. As a reminder, a copy of today's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page, we have also included a slide presentation on our Investor Relations web page with supplemental financial information that may be referenced throughout today's call. With me in the room today are Mike Price; President and CEO of First Commonwealth Financial Corporation and Jim Reske; Executive Vice President and Chief Financial Officer.

After brief comments from management, we will open the phone call for your questions. For that portion of the call, we will be joined by Jane Grebenc; Chief Revenue Officer and President of First Commonwealth Bank. Brian Karrip, our Chief Credit Officer and Mark Lopushansky, our Chief Treasury Officer.

Before we begin, I'd like to caution listeners that this conference call will contain forward-looking statements, please refer to our forward-looking statements disclaimer on page 2 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.

A reconciliation of GAAP to non-GAAP operating measures can be found on page 13 of today's slide presentation. And now I would like to turn the call over to Mike Price.

Thomas Michael Price -- President and Chief Executive Officer

Hey, thank you. Ryan. Good afternoon and thank you all for joining us today. The third quarter 2019, core net income excluding merger costs was $29.6 million and was $2.3 million over the second quarter. Core earnings per share of $0.30 for the third quarter was up $0.02 from the last quarter, producing a core return on assets of 1.46% and core efficiency ratio of 55.73%.

Our financial tailwinds included a net interest margin that increased 1 basis point to 3.76%. Non-interest income of $22.2 million and well controlled expenses. Also adding third quarter results was the successful closing and conversion of our previously announced acquisition of 14 Santander branches over the weekend of September 6th, which provided low cost deposits, which were then used to pay down higher cost short-term borrowings.

At this acquisition is accretive for earnings profitability and efficiency. Some headwinds to third quarter financial performance however included hospitalization expense and slower loan growth stemming from higher levels of commercial real estate loan payoffs.

As an aside, commercial loan production remains healthy. Additionally mortgage, indirect auto lending, and SBA lending continue to contribute meaningfully to growth while helping to offset margin headwind from lower interest rates. Loan growth year-to-date in 2019 of $334 million were 7.7% through September is within our mid-single digit Investor guidance and 5.4% even when acquired Santander balances are excluded. Encouragingly, loan growth in 2019 is more equally yoked between our commercial and retail segments enabled by our investments in the mortgage and indirect lending businesses several years ago.

As expected, our Ohio markets continue to deliver the largest share of our loan growth, specifically in the third quarter, we saw strong commercial loan growth in Cincinnati in Northern Ohio as well as strong indirect auto loan production all across Ohio led by Cincinnati.

Mortgage portfolio growth was strongest in our Pittsburgh region, but in total was still stronger for us in Ohio and Pennsylvania as a whole. I should also mention that deposit growth continued at a healthy pace in the third quarter growing at 5.8%, even without the influx of Santander deposits.

Deposit growth was particularly strong in commercial banking in Ohio. A comparison of year-to-date financial results compared to the same period last year shows how the earnings capacity of the company continues to improve. In the first nine months of last year, we realized approximately $8.1 million in security gains; excluding those gains, core earnings per share in the first nine months of 2019 was up 9% from the same period a year ago.

We're on a track to substantially grow our earnings per share in First Commonwealth for the seventh consecutive year. Also consider the significant improvement in returns and efficiency over this time period, core EPS and ROE for example were only $0.43 and 68 basis points respectively in 2013 and our efficiency ratio was 67.1%.

It's taken us an enormous effort of a whole group of good people over the seven years including things like a core system conversion in 2014, the transformation of our retail branch network in 2016, significant investment in our digital tools, a significant investment in a De Novo mortgage operation revamping our SBA platform to where we now are the number two and number three SBA lender respectively in Pittsburgh and Cleveland.

We thoughtfully expanded our indirect lending efforts and intentionally created a more granular less risky commercial loan book of business and added five well executed acquisitions. We believe the financial results as a product of these strategic initiatives speak for themselves.

As I mentioned earlier, we closed and converted our branch acquisition in the third quarter and early results are promising. Post conversion weekend on September 9, team had converted 44,838 Santander deposit accounts with $471 million in aggregate deposit balances.

As of yesterday, deposit balances had increased $477 million, that's an increase on the back end of an acquisition, the planning and execution of this branch acquisition was superb. More importantly First Commonwealth now has over 24,000 additional checking accounts in 14 branches stretching from State College to Williamsport and Central Pennsylvania with some wonderful college town sprinkled in between.

As we look ahead to 2020, a few thoughts follow to simply share our current vantage point and priorities for the year ahead. First, our core retail and commercial businesses as well as mortgage, our First Commonwealth Advisors, Our Insurance Agency indirect consumer lending and SBA businesses have performed well but must continue to get stronger each one of them.

Our digital approach must continue to get better every quarter to enable us to compete against non-banks, big banks, FinTech and big retail. Third, as always maintaining the highest of credit standards will be key to our ongoing success, particularly through our next credit cycle. Increased focus on managing costs, particularly in light of expected margin pressure. And fifth, we plan to continue to see smart growth opportunities via M&A and prepare for recession, which just might be the time to [Indecipherable] due to depressed valuations.

And with that, I'll turn it over to Jim Reske, our CFO.

Jim Reske -- Executive Vice President and Chief Financial Officer

Thanks, Mike. As Mike mentioned, core earnings per share of $0.30 resulted in financial performance metrics that were all strong for the quarter. Third quarter financial results benefited from the Santander branch acquisition in which were used to low-cost deposits we acquired to pay off higher cost borrowings.

As a result, our net interest margin expanded at a time when most of the industry is suffering from margin contraction. Beyond the margin, third quarter non-interest income benefited from approximately $225,000 in seasonal tax preparation fees in our trust business, non-interest expense was impacted by $524,000 increase in hospitalization expense over the prior quarter.

For the year to date hospitalization expense is running about $2.7 million more than the prior year period. Now for some guidance, we typically provide guidance as to our forward earnings expectations in the first quarter, but given recent events, we thought it might be helpful to provide some measure guidance today.

First of all, two thoughts for the remainder of this year. First, if the Fed cuts rates today, as expected, we would expect the net interest margin to hover in the mid [Indecipherable] in the fourth quarter. Fourth quarter, we'll get the full benefit of the new low-cost deposits. But on the other hand, each Fed cut typically results in about 4 basis points of NIM contraction for us.

Secondly, fee income will be affected by some seasonal slowdown in areas such as mortgage originations and there is the potential for a negative mark on our mortgage pipeline hedged in a falling rate environment.

Looking beyond this year, we can provide some measured guidance as to our expectations for 2020. We expect that our long-term loan growth will continue to be in the mid-single digit range with an increasing contribution from consumer loan categories.

Deposit growth will likely trail loan growth as newly acquired deposits allow us to implement more cost effective deposit pricing strategies. And our forecasts incorporate one rate cut either today or if not today before the end of the year and then a relatively stable rate environment in 2020 with the 10-year treasury hovering around 1.75% in our expectations.

In this context, our net interest margin would be expected to drift down to the mid 360s over the course of next year. We will of course update this guidance as appropriate.

And with that, we'll take any questions you may have.

Ryan M. Thomas -- Vice President, Finance and Investor Relations

Questions, operator?

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Our first question today will come from Steve Moss with B Riley, FBR. Please go ahead.

Steve Moss -- B Riley, FBR -- Analyst

Hey, this is actually Nick to follow stepping in for Steve Moss. How are you?

Thomas Michael Price -- President and Chief Executive Officer

Good.

Steve Moss -- B Riley, FBR -- Analyst

Good. So in terms of your payoffs here on commercial loans, just wanted to get some color around what you're seeing and in particular on the C&I business?

Thomas Michael Price -- President and Chief Executive Officer

Yeah, we, the payoffs were primarily on the commercial real estate. We did have some in C&I, those were actually, we exited three credits in the C&I side of the business totaling about $25 million when we just felt the leverage was a little high and one was [Indecipherable] retailer, and so a little bit of that was just credit control.But we're also seeing a little bit of strain on construction as well. We do feel like the pipelines in the production in the three quarters was pretty even, although looking on the surface the growth was much better in the first two quarters. We are not stretching for credit and we are beginning to see some more strain, particularly on certain types of deal with the higher loan to value perhaps some non-recourse and some slimmer spreads.

Steve Moss -- B Riley, FBR -- Analyst

Okay, thanks for that. I have another question on margin. It just clarity around the deposit impact going forward. A lot of non-interest deposit growth this quarter outside of the Santander acquisition, could you talk a little bit more about what drove that and what you're seeing there?

Thomas Michael Price -- President and Chief Executive Officer

They are primarily Commercial Banking and Commercial Banking more specifically in Ohio and really just good sales execution and asking for the business, Jane do you want to expand on that at all?

Jane Grebenc -- Chief Revenue Officer and President

Thank you. I think it would become much better creating true commercial relationships -- true corporate banking relationships rather than just buying the credit and so -- credit to the sales force.

Steve Moss -- B Riley, FBR -- Analyst

Okay, thank you. I'll jump back in the queue.

Operator

Our next question today will come from Russell Gunther of DA Davidson. Please go ahead.

Russell Gunther -- `DA Davidson. -- Analyst

Good afternoon, guys.

Thomas Michael Price -- President and Chief Executive Officer

Good afternoon.

Russell Gunther -- `DA Davidson. -- Analyst

I wanted to circle back to the loan growth discussion. I appreciate the comments on the dynamics in the quarter as well as your outlook for 2020 and here that consumer will take a bigger piece of that, a bigger driver, but curious if you could share growth dynamics from a geographic perspective?

Thomas Michael Price -- President and Chief Executive Officer

Yeah, I mean this would be a bit of a swag. But I think when we look back, probably two-thirds to three quarters of the growth is happening in our newer markets. I suspect that will continue. Interestingly, a lot of our deposit growth happens in our more traditional market.

So it's really a nice balance. Particularly in community Pennsylvania which might surprise a lot of folks. And on the business side, again there, so you might think of it as Pennsylvania seems to be funding the balance sheet that is growing in Ohio, but also as we -- seen our Ohio franchise, particularly this past quarter were pretty good deposit gathers.

Russell Gunther -- `DA Davidson. -- Analyst

Thank you for that. And then switching gears on to the expense side of things, a bit of a ticky tacky question for you guys. But the net occupancy number around $4.5 million for the quarter, could you give us a near-term guidance how that will trend now with the Santander deal closed or is that fully reflected in the third quarter results?

Thomas Michael Price -- President and Chief Executive Officer

No, it's not fully reflected in the third quarter results. Third quarter results would have only reflected by about one month, [Indecipherable] 24 days worth of Santander occupancy expense, we'll get the full -- have a full cost of the occupancy expense in the fourth quarter, our numbers. So we had given previous guidance on its total cost and revenue expectations for the Santander branches and I think the total amount of expense to be about $2 million quarter and I think that the -- on top of that you'd have intangible amortization costs of about -- [Indecipherable] million a quarter.

Russell Gunther -- `DA Davidson. -- Analyst

Okay, great. Thank you, Jim. I appreciate the clarification there. And then, just as you look out to 2020 appreciate the thoughts that you shared. I would imagine the top-line environment still remains a bit challenging and so I'm curious as to any efforts or thoughts around what you could do on the bottom line from an expense perspective to maybe offset some of the pressure there?

Jim Reske -- Executive Vice President and Chief Financial Officer

We're pretty good grinders and we have lived with operating leverage in every budget. So the extent that there is strain on the top-line, we actively look for opportunities, and we're working through our budget season here in the fourth quarter with that topic at the top of our list. And how do we continue to create nice operating leverage. So we have, I don't think our -- I don't think our earnings-per-share growth has been below 10% adjusting for acquisitions for the last five or six years.

So I'm trying to just maintain that nice trajectory of earnings-per-share growth and expenses will be key.

Russell Gunther -- `DA Davidson. -- Analyst

Very good. Thanks, Mike. And then last one, guys, bigger picture. Just curious to get your thoughts on M&A here $10 billion in assets, how you're thinking about that. And so your appetite from a depository perspective, but also done a nice job with branch deals in the past and you think you might get an opportunity along those lines as well?

Jim Reske -- Executive Vice President and Chief Financial Officer

Well, at our current trajectory of just organic growth and then the size of acquisitions we've been doing and we're still probably three years away. And we're thinking critically about that, we like the deals we've done, we've looked at 25 to 30 to do five. So we're pretty picky, it has to work for us financially and strategically, we like rural depositories, we're pretty good at putting in commercial franchises in metro markets and enabling the growth there, but we just need to fund them with low cost deposits. We have a nice mix of deposits and Jane and the team have really [Indecipherable] up a good depository gathering kind of mechanism on the commercial side, which really helps us.

Russell Gunther -- `DA Davidson. -- Analyst

Very good. All right, guys, thanks so much.

Thomas Michael Price -- President and Chief Executive Officer

Thank you.

Operator

And our next question today will come from Steven Wong of RBC Capital Markets. Please go ahead.

Steven Wong -- RBC Capital Markets -- Analyst

Hey, good afternoon guys.

Ryan M. Thomas -- Vice President, Finance and Investor Relations

Good afternoon.

Steven Wong -- RBC Capital Markets -- Analyst

Hey, I apologize, I'd -- what was the fourth quarter NIM guide. I think I missed it?

Jim Reske -- Executive Vice President and Chief Financial Officer

Mid 370s.

Steven Wong -- RBC Capital Markets -- Analyst

Mid 370s. Okay, great. And do you expect that deposit cost peaked at this quarter and should kind of grind its way down after today?

Jim Reske -- Executive Vice President and Chief Financial Officer

Yeah, we do, I mean that's, it's a little bit like slowing down a ship in the ocean. I mean it'll take some time for the changes to take effect. So, but we do expect to trend down from here.

Steven Wong -- RBC Capital Markets -- Analyst

Got it. And can you remind us generally what your deposit beta was the last cycle and do you expect it to be something similar this cycle?

Jim Reske -- Executive Vice President and Chief Financial Officer

We -- deposit beta on the way up was in the 20s and probably we would expect it to be similar.

Steven Wong -- RBC Capital Markets -- Analyst

Okay great.

Jim Reske -- Executive Vice President and Chief Financial Officer

We were fairly successful in keeping deposit cost low through nine rate hikes. So there isn't that much room for us to go down, but I think we're going to be pretty disciplined in terms of deposit pricing and the recently acquired deposit acquisition [Indecipherable] pay off our borrowings and need to loan to deposit ratio down to below 90. So it gives us a lot of room to execute in deposit pricing strategies.

Steven Wong -- RBC Capital Markets -- Analyst

That's great to hear. And then you guys had a pretty big gain in sale and the mortgages, is this going to kind of rightsize itself in the fourth quarter?

Thomas Michael Price -- President and Chief Executive Officer

We really had to throughout the quarters in a row and the pipeline remains strong. I don't know it will be as high as the second and third quarter. But we've built a really, the team has built a really nice business there that's pretty broad based across for metro markets now and a lot of rural geography and we really have some good producers, so it's good foundation there for us.

Jim Reske -- Executive Vice President and Chief Financial Officer

In the guidance I was giving on that front was really based on what we typically expect every season in the fourth quarter, toward the holidays. There's always a slowdown in mortgage originations.

Steven Wong -- RBC Capital Markets -- Analyst

Right. And then just last one from me. Your efficiency ratio guidance that 55% mark basically looking at a fourth quarter run rate given where rates are coming in, do you guys still expect to hit that 55% mark in the fourth quarter?

Thomas Michael Price -- President and Chief Executive Officer

Goal. That's a long-term goal. We've set it out there two years ago. We're within [Indecipherable] distance of it. But indeed, we'll have some headwinds to that, I think, short term, but longer term, we want to get at 55 or less.

Steven Wong -- RBC Capital Markets -- Analyst

Got it. Thanks again for answering the questions and congrats on a great quarter.

Thomas Michael Price -- President and Chief Executive Officer

Thank you.

Operator

And our next question today will come from Collyn Gilbert of KBW. Please go ahead.

Collyn Gilbert -- KBW -- Analyst

Thanks, good afternoon guys.

Thomas Michael Price -- President and Chief Executive Officer

Good afternoon.

Collyn Gilbert -- KBW -- Analyst

Jim, maybe just following back up on the funding discussion and the opportunities that you have ahead of you as it relates to kind of mix shifting what you've acquired from Santander. Can you dig into that a little bit more in terms of what your plans are kind of near-term that you can do on the funding side?

Jim Reske -- Executive Vice President and Chief Financial Officer

Yeah, I'll just give you like an anecdote or two. Like for example, we have like everybody else we had CD specials, we don't really plan to offer a lot of those in the future because we don't really need to and our deposit book is not particularly dependent on time deposit funding at this point to begin with, but just a quick story. We had a CD special that was coming due and we decided to see what the rollover rate would be on that without offering any kind of special to retain those deposits and we're pleasantly surprised at the retention rates are pretty high, which leads us to think that maybe the rate seeking that have been going on in the rate cycle as the rates are going up is slowing down a little bit and that takes a little pressure off on our deposit funding.

In other angle we have seen some of the smaller banks that have really high -- the deposit ratio still pretty aggressive in their pricing. But we have so much liquidity we can afford on the margin to loss on the deposits to go.

Hope it helps.

Thomas Michael Price -- President and Chief Executive Officer

Yeah. And Collyn. I also like what Jane in the regional presidents have done, they probably have to deposits we gather a commercial on the non-interest bearing side.

Collyn Gilbert -- KBW -- Analyst

Okay. And do you, can you remind me about your commercial. I'm sorry, you're municipal deposit exposure, do you guys have a big slug of that?

Thomas Michael Price -- President and Chief Executive Officer

It's about 10% of total deposits.

Collyn Gilbert -- KBW -- Analyst

Okay. all right, that's helpful. And then just still on the NIM discussion. I appreciate the loan growth outlook, just within that two questions. One is, are you -- I know it's hard to predict, but just given some of the behavior you've seen so far and what you're seeing in the market, are you anticipating paydowns to kind of stay at this elevated level, number one. And then number two, just curious what some of the blended loan origination and yields are that you're seeing in the pipeline and here in the book today?

Ryan M. Thomas -- Vice President, Finance and Investor Relations

I think we can lay our hands on the blended -- we have a pricing meeting right after this one, do you have this?

Yeah, the blend of new origination rates are coming in the mid fours.

Collyn Gilbert -- KBW -- Analyst

Okay.

Jim Reske -- Executive Vice President and Chief Financial Officer

So some of it just think it -- It all depends on the mix of originations. So, and this is some of the consumer categories where we've had some net positive growth in the third quarter, some of the origination rates and those are really holding up pretty well. So, that always goes into the mix, but that's what we're seeing right now.

Collyn Gilbert -- KBW -- Analyst

Okay. And then...Just go ahead. Mike.

Thomas Michael Price -- President and Chief Executive Officer

Yeah. I do expect that we'll have a little strange short term on heightened payoffs. -- we have a nice pipeline here as we approach the fourth quarter and a little downdraft in the third. We just feel good about the guidance we've given and first two quarters, we were in the higher end of that guidance, but I think we'll settle in mid-single digits for the year.

And I also like the fact that it's more equally yoked between commercial and consumer and at the same time we're not stretching on credit, because we don't have to. And so it just feels good.

Collyn Gilbert -- KBW -- Analyst

Okay, that's helpful. Along those lines. Just in terms of the Resi growth. The Resi mortgage increase this quarter. Maybe that was partly due to Santander. I'm not sure, but just curious. I presume the appetite is still to sell a lot of the Resi production or just curious as to how you're thinking about the Resi book. As we go forward?

Thomas Michael Price -- President and Chief Executive Officer

Yeah. This past quarter we sold [Indecipherable] over 60% and kept about 35 to 40, and that's a little less than we portfolio probably over the last year.

Jim Reske -- Executive Vice President and Chief Financial Officer

Yeah. We just long-term kind of guidance or maybe more near term kind of guidance. I suppose we do like reaching some that mortgage production because it gives us a little [Indecipherable] duration of the loan portfolio, so a 50-50 split of sold to portfolio is probably right for us [Indecipherable], keeps the fee engine growing for the gain on sale income but also but also [Indecipherable] portfolio, you mentioned the acquired loans from Santander. Some of those are wonderful [Indecipherable] family, but out of $100 million that we acquired about $60 million was from equity lines of credit and just under $10 million was one of our family mortgage. That might help us to look at the numbers.

Collyn Gilbert -- KBW -- Analyst

Yeah. That's helpful. Okay, great, thanks for that. Jim. And then just to clarify on the FDIC expense, do you anticipate a similar credit in the fourth quarter and then normalizing in the first quarter of next year, how should we think about that trending?

Jim Reske -- Executive Vice President and Chief Financial Officer

we do expect to use a quarters worth of credit. So the FDIC expense for us. As you can notice from our income statement is about $0.5 million a quarter and so we expect to offset that almost entirely in the fourth quarter. As of today, there is about $1.3 to $1.4 million left. So we use $0.5 million in the fourth quarter and the remainder of that in the first and part of the second quarter of next year.

Collyn Gilbert -- KBW -- Analyst

Okay. That's helpful and then just it looked like there was a little bit of a bump up in criticized loans during the quarter, was there anything in particular driving that?

Thomas Michael Price -- President and Chief Executive Officer

No, I think it was modest. The -- hands on it, just a second, Brian, do you want to speak to that.

Ryan M. Thomas -- Vice President, Finance and Investor Relations

Sure, Mike. Yeah, we had two credits that we moved OEM, we watch it closely. And [Indecipherable] manage and monitor our portfolio, our numbers are very reasonable relative to our peers.

Collyn Gilbert -- KBW -- Analyst

Yeah. Okay. And then just finally, Jim, on tax rate. Any update for what I think by 19%, maybe as what you had guided to before. Is that still the right tax rate?

Jim Reske -- Executive Vice President and Chief Financial Officer

Yeah, the exact number [Indecipherable] 19.54%.

Collyn Gilbert -- KBW -- Analyst

Okay. Great. All right, that's all I have. Thanks guys.

Thomas Michael Price -- President and Chief Executive Officer

Thank you.

Operator

And our next question today will come from [Indecipherable] Boenning & Scattergood. Please go ahead.

Scott Beury -- Boenning & Scattergood -- Analyst

Hey, good afternoon guys.

Thomas Michael Price -- President and Chief Executive Officer

Good afternoon.

Scott Beury -- Boenning & Scattergood -- Analyst

Most of my questions have been answered, but just two. First, could you provide what the purchase versus refi breakdown was for your residential mortgage production?

Jane Grebenc -- Chief Revenue Officer and President

It was. Jane?

Today we're at about 80 point to refi. What's terrific about our mortgage business is that because it was De Novo in 2014, there is very little in the book to be refinanced. So it's all new stuff. Second strategic advantage is there is a really nice construction loan program. So when we book a loan, we're still going to have additional fundings that occurred throughout the life of the [Indecipherable] construction firm. So it's going to be a nice business for us and I think that construction business will help smooth out any seasonal bump that you might see in a typical traditional season mortgage portfolio.

Scott Beury -- Boenning & Scattergood -- Analyst

Actually, that's very helpful color. And then kind of lastly, I was just wondering if you could give any thoughts on kind of what the dynamics you're seeing since the closing of the Santander deal. Has there been any material attrition of the deposit accounts or any other developments that would be important to note there?

Thomas Michael Price -- President and Chief Executive Officer

It's been very positive. I think we acquired and disclosed $471 million of deposits, and we have 477 as of yesterday. So we've actually grown them through the acquisition. We like the action we're seeing already on the commercial side and with our commercial calling efforts, both on the loan and the deposit side.

So it's very positive. We haven't lost, there's a lot of talented branch managers up there which are very important to us and we've been able to secure a lot of the talent, and we're really well led with a good market leader up there that came from Santander.

Scott Beury -- Boenning & Scattergood -- Analyst

Excellent. That's very helpful. I appreciate the color guys and congratulations on a good quarter.

Thomas Michael Price -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] . Our next question today will come from Frank Schiraldi with Sandler O'Neill. Please go ahead.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Good afternoon. I just wanted to, just a follow-up on the margin. You probably saw since we've been on the phone here, the Fed has cut rates again today. And did you say that you had one more rate cut baked in over the next 12 months?

Jim Reske -- Executive Vice President and Chief Financial Officer

We did, so in our internal plan. We had one that was going to happen before the end of the year. So that's today, but in our go-forward planning there is no more after that. So our plan it -- hope this could change and we'll update guidance as appropriate. But for now, we think there is stability in the Fed funds rate. And Mike, I'm saying in my prepared remarks and we think the 10-year will be around 1.75 and in that context, is really important as you think about our NIM guidance going forward.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay. So I guess it's just in terms of getting down maybe I think you said to the mid 360s by the end of 2020 of that, I guess would be driven by the shape of the yield curve?

Jim Reske -- Executive Vice President and Chief Financial Officer

Yeah. And really driven by loan replacement yields. Not, by expectations of further rate cuts.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay and then just the best -- what do you think the best way to model if you were to put another rate cut or assume another rate cut, is it basically a step function down, you mentioned 4 basis points. So in another rate cut. Is that a pretty reasonable assumption for further contraction to them?

Jim Reske -- Executive Vice President and Chief Financial Officer

Yes, I think that's a pretty reasonable guide. In any given quarter dependent like today, it depends when the Fed does it in a quarter. So as they do at the beginning of the quarter

Frank Schiraldi -- Sandler O'Neill -- Analyst

quarter. And then there is some follow-on effects in subsequent quarters. But a lot of the replacement yields story is driven by, like you said by the shape of the yield curve out to that. So obviously the Fed's action happened while we are on the call today. So I haven't seen what the announcement that it so much depends, not just on the actual cut on the forward guidance figures because of their reputation of future rate cuts as we all know LIBOR start to respond to that.

And then, so our LIBOR index loans will start responding based on expectations of future rate cuts and not just that the current cut in [Indecipherable] quarter and all those in the next.

Okay and then just one follow-up on efficiency ratio, you mentioned, and you've talked about in the past. Your goal of 55% just as we look at 2020 and given some margin compression at least seems to be in-store, given your guidance, do you think it would be -- do you expect to be a challenge to move the efficiency ratio lower in 2020 and get operating leverage in 2020 or do you think there is enough flexibility elsewhere on the expense line that that's going to continue to be a goal year-over-year here?

Jim Reske -- Executive Vice President and Chief Financial Officer

We're in our second of probably three budget runs this year as we plan 2020 and beyond. And I have a better answer for you in 30 or 60 days. But we're -- But we're going to maintain operating leverage and continue to improve the company. The other thing is, as we have, we've a nice broad base of key businesses and in a broader base of now consumer businesses. And so we feel good about that. That's a little -- it's a little bit more expensive. Those, some of those key businesses have higher efficiency ratios.

But we also have a good portion of our business now becoming were not interest income, which I think longer-term is important.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Great, thank you.

Jim Reske -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Mike Price, President and CEO for any closing remarks.

Thomas Michael Price -- President and Chief Executive Officer

I always say this, but we're just grateful for your coverage and your interest in our company, it's meaningful, and it makes us better and we thank you for your input from time to time. And the good folks that you introduce us to. Thank you so much.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Ryan M. Thomas -- Vice President, Finance and Investor Relations

Thomas Michael Price -- President and Chief Executive Officer

Jim Reske -- Executive Vice President and Chief Financial Officer

Jane Grebenc -- Chief Revenue Officer and President

Steve Moss -- B Riley, FBR -- Analyst

Russell Gunther -- `DA Davidson. -- Analyst

Steven Wong -- RBC Capital Markets -- Analyst

Collyn Gilbert -- KBW -- Analyst

Scott Beury -- Boenning & Scattergood -- Analyst

Frank Schiraldi -- Sandler O'Neill -- Analyst

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