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Berkshire Hills Bancorp (NYSE:BHLB)
Q4 2019 Earnings Call
Jan 28, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Berkshire Hills Bancorp fourth-quarter earnings release conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dave Gonci, capital markets director. Please go ahead.

Dave Gonci -- Capital Markets Director

Thank you. Good morning, and thank you for joining this discussion of fourth-quarter results. Our news release is available on the Investor Relations section of our website, berkshirebank.com, and will be furnished to the SEC. Our remarks will include forward-looking statements, and actual results could differ materially from those statements.

For detail on related factors, please see our earnings release and our most recent SEC reports on Forms 10-K and 10-Q. In addition, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding our results and performance trends and should not be relied on as financial measures of actual results or future projections. A comparison and reconciliation to GAAP measures is included in our news release.

And with that, I'll turn the call over to CEO Richard Marotta.

Richard Marotta -- Chief Executive Officer

Thank you, Dave. Good morning, everyone, and thank you for joining us today for our fourth-quarter earnings call. With me this morning are Jamie Moses, our CFO; Sean Gray, our president; Georgia Melas, our chief credit officer; and George Bacigalupo, our commercial leader. I'll begin the call with a high-level overview of the quarter and then turn it over to Jamie to go deeper into our numbers.

We ended the year on a very strong note. We delivered $0.70 in core EPS. Our core profitability metrics were the highest of the year. Our GAAP EPS came in at $0.51, including merger and other identified noncore charges.

We completed the systems integration of Connecticut and Rhode Island operations from the SI Financial acquisition on time and on budget, and our integrated teams are working very well together. We made further progress with the four initiatives from our strategic review we set out earlier this year. We completed the sale of approximately $80 million of acquired non-relationship commercial loans, $50 million of which were aircraft loans. We continue to receive expressions of interest on the remaining balance of the aircraft portfolio, which was moved from our held for sale back into our C&I portfolio.

We released $300 million in less strategic investments in loans, and we used the proceeds to reduce higher-cost wholesale funding, which is down $900 million from the beginning of the year. Our efficiency project reduced core expense by 3% compared to the third quarter, and we repurchased 815,000 shares, keeping us on track with the utilization of our 2.4 million share buyback authorization. Our measures of capital liquidity improved steadily throughout the year. Our year-end asset quality numbers remained strong, and we believe that our asset quality is solid and properly diversified.

Our business focus is based on relationships, risk and return. Reduction in total loans is consistent with our strategy, and we're well-placed to serve existing and prospective relationships in our markets going forward. We promoted eight of our high-level officers to the new position of regional president to serve our eight regional markets. These proven leaders will drive our market positioning, enhance our performance and maintain active community leadership roles.

Reporting to bank President Sean Gray, in these roles, they will engage with community stakeholders and lead our top-priority efforts around our Be FIRST values and our commitment to being a 21st-century community bank. With that, I'll ask Jamie to take us through some of the numbers. Jamie?

Jamie Moses -- Chief Financial Officer

Thanks, Richard. Our $0.70 in core EPS was up quarter over quarter and year over year. We had $0.19 in net noncore charges for the quarter, resulting in $0.51 of GAAP EPS. I'll discuss the major noncore items later in my comments.

Our core ROA reached 108 basis points in the fourth quarter, and our core return on tangible common equity was a little over 13%. The GAAP ROA was 78 basis points and GAAP ROE was around 6%. We accomplished our goal to offset the operating EPS impact of lower purchase accounting accretion. We did this despite the unanticipated impact from three Fed funds interest rate cuts.

We've been modestly asset-sensitive and SI Financial was also asset-sensitive. I'll address the margin impact shortly. But just to note here that this has been another headwind that we faced in boosting our operating profitability through the year. Moving to the balance sheet.

Our assets declined in the fourth quarter as we pursued our strategic initiatives and reduced wholesale funding. Our original objective was to reduce footings by a little more than $1 billion over the medium-term by releasing investments in loans with less strategic value. We estimate that we've accomplished about $700 million of that asset reduction in 2019, including $300 million in the fourth quarter. These are assets with less relationship and return benefits, and we expect to see continued reduction toward our target in 2020.

Retail time deposits decreased modestly in the fourth quarter as interest rates declined. We're focused on managing our deposit costs and we won't retain excess deposits if they become uneconomic due to competitive factors. We're targeting modest retail deposit growth in 2020, excluding fluctuating payroll balances. Year-end 2019 payroll balances totaled $744 million, much of which was held overnight in short-term investments.

We reduced our average funding cost by nine basis points in the fourth quarter, including a seven-basis-point reduction in deposit costs. Wholesale funds were reduced by more than $400 million during the quarter, and by around $900 million for the year. We expect to further reduce our wholesale funding this year. Our capital metrics continue to improve, even as we repurchased around 815,000 shares in the fourth quarter, which brings our total buybacks to 1.7 million shares for the year.

At year end, we had an additional 700,000 shares remaining in our buyback authorization, which expires on March 31. On January 2, half of the outstanding preferred shares were converted to about 540,000 common shares based on the two for one formula in the shareholder agreement. This will have no impact on EPS and will slightly boost book value per common share. Moving on to the income statement.

Quarterly accretion benefit to EPS was equal to $0.07 in the most recent quarter, unchanged from the linked quarter and down from $0.13 on a year-over-year basis. We expect this benefit to decrease further as we move through 2020. Setting aside the impact of accretion, the net interest margin tightened by 12 basis points quarter over quarter and by 17 basis points year over year. The majority of the year's compression was due to the impact of lower rates on our asset-sensitive balance sheet along with the impact of competitive market pricing conditions.

Based on the current forward curve, we expect a margin before accretion to stabilize around current levels and expand from there as we continue to execute on our balance sheet strategies in 2020. Due to our asset reduction strategies, we expect the quarterly net interest income run rate to decrease in the low single digits compared to Q4 results. Fee income benefited from a strong quarter from our SBA lending team, which had a record year for sale premiums. Separately, we also recorded gains on the sale of a portion of our aircraft portfolio, as well as an acquired commercial portfolio from SI Financial.

Looking forward, we expect fee income to increase modestly in the back half of the year. Moving to the provision, as Richard noted, the loan portfolio's condition is sound. The major item for 2020 is the new CECL accounting standard. Now like most banks, we anticipate that the allowance for our performing loans will increase under this new standard under the new life of loan methodology with an offset to equity, but little regulatory capital impact.

As you know, due to our acquisitions and taking into consideration our acquired taxi medallion loans, we have a comparatively large discount on purchased credit-impaired loans. We expect that the gross loan balance will increase due to the removal of this discount with an initial offsetting increase in the allowance. This transfer may impact metrics related to revenue, margins, efficiency, loan risk classifications, loan charge-offs and regulatory capital. Purchase loan recoveries that are presently posted to net interest income will be posted to the allowance and generally are expected to reduce provision expense with little net impact to the bottom line.

We expect to have more guidance on these impacts after we complete our financial statements. Moving on to noninterest expense. We brought in further targeted cost saves in Q4, and we reduced total noncore expense by 3% quarter over quarter. Year over year, fourth-quarter core expense was essentially flat despite our acquisition of a $1.7 billion bank, which previously had a $10 million quarterly expense run rate.

Our efficiency ratio came in a little under 54%. And we expect to see some expense growth in 2020 as we invest in our team and franchise, and the FDIC insurance rebates that showed up in the back half of 2019 will not continue. We, therefore, expect the annualized run rate of expenses to increase over fourth-quarter levels, and we expect a tax rate in the area of 20% in 2020, compared to the 18% core tax rate in Q4. Looking forward, our Q1 EPS is expected to be down seasonally compared to our fourth-quarter run rate, which includes the impact of payroll taxes and higher winter occupancy costs.

Additionally, the benefit from the FDIC rebates and loan sale gains are not expected to repeat. Our first quarter 2020 core EPS may be flat or slightly down from last year's first quarter, and then we'll look for improvements going forward from there. Our core ROA was 93 basis points in 2019, we will improve on this in 2020, with most of the pickup anticipated in the back half of the year. Our national mortgage banking operations which are held for sale are classified as discontinued operations in the financial statements.

We continue to actively pursue sale options. These operations generated a loss in the fourth quarter, which is a seasonally lower quarter for residential mortgage volume. Moving to merger charges. These were related to the SI Financial acquisition and are complete.

These charges came in within our original estimates. The restructuring charges were mostly related to the strategic initiatives that we pursued this year. We consolidated eight branch offices during the year, including two in the fourth quarter. We don't anticipate that there will be noncore related items going forward, aside from discontinued operations until the sale is complete.

I'll close by summarizing that our profitability and conditions have improved following the first quarter, and we're ending the year positioned in line with the guidance and plans that we set out at the start of the year. Our strategies have generated higher quality, more sustainable earnings streams this year and will continue to do so. With that, I'll turn the call back over to Richard.

Richard Marotta -- Chief Executive Officer

Thanks, Jamie. I'll touch on a couple more topics to conclude our prepared remarks. Our company earned two very significant recognitions recently, that I'm very proud of: one, we received a U.S. Chamber of Commerce Award for Top Corporate Stewardship; and two, we were also added to the Bloomberg Equality Index, which tracks companies committed to supporting gender equality.

We also opened up our first Reevx Labs co-working space, which we located in the Roxbury neighborhood of Boston. We'll be gradually expanding the Reevx Labs in other urban markets with underbanked minority communities. We believe that our actions distinguish our team and enterprise. That our communities value a partner committed to building a just and prosperous future based on our values of diversity and inclusion.

Lastly, I'm pleased to note that our shareholders received a 26% total stock return in 2019. We increased our dividend by 5% in 2019 and are announcing now a 4% increase in 2020. We repurchased shares to return excess equity to our owners, we're gratified by these returns and we'll continue to focus on strengthening our franchise and building a 21st-century community bank with our focus on purpose-driven performance. With that, I'll ask the operator to open up the lines for any questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Mark Fitzgibbon with Piper Sandler.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Hey, guys.

Jamie Moses -- Chief Financial Officer

Good morning, Mark.

Mark Fitzgibbon -- Piper Sandler -- Analyst

I'm doing good. Thanks. One question, Jamie, that $1.35 million gain on business operations, was that related to the commercial aircraft business or something else?

Jamie Moses -- Chief Financial Officer

Yes. No. That's the $80 million in commercial sales that Richard spoke about, $50 million of which was the commercial aircraft.

Mark Fitzgibbon -- Piper Sandler -- Analyst

OK. Gotcha. And then on expense growth, I know you said you expected expenses to grow a bit in 2020 as you invest in the franchise, can you give us some sense of the magnitude of that growth? Is it 2%, 3-ish kind of percent?

Jamie Moses -- Chief Financial Officer

I think that's probably a good starting place, Mark. I think that's probably an area where we might be.

Mark Fitzgibbon -- Piper Sandler -- Analyst

OK. And I guess it looked like headcount was down about 12% year over year, are we at the bottom? And when do you think restructuring charges and sort of noise related to the restructuring is likely to be completed?

Jamie Moses -- Chief Financial Officer

Yes. So I think we are at the bottom of that. And the restructuring noise, especially in those lines there that you see on F-9 and 10, that's done. Fourth quarter is the last time we'll have that.

The only noncore things that we'll see in the future are the discontinued operations that we have on the balance sheet, and as soon as the FCLS sale is complete, and the FCLS employees are gone and off the books, then we'll have just sort of a very clean financials at that point.

Mark Fitzgibbon -- Piper Sandler -- Analyst

OK. And I know, Jamie, you said that you're going to give more color after the filings come out, but I'm just wondering if you can help us think about the provisioning line for this year. Any guidance at all you could provide would be really helpful.

Jamie Moses -- Chief Financial Officer

Yes. So I mean, I guess, I kind of -- think about it this way. We've been running like a $4 million to $5 million roughly, quarterly run rate in the provision. I expect the provision line to go down to around $2 million or so a quarter, maybe even just a little bit less than that.

But that's going to be due to the fact that accretion and recovery income that we've gotten in the past that showed up in net interest income goes directly to the allowance now, and so those will be offsetting things in the future.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Thank you.

Operator

Our next question comes from Dave Bishop with D.A. Davidson.

Dave Bishop -- D.A. Davidson Companies -- Analyst

Good morning, gentlemen.

Richard Marotta -- Chief Executive Officer

How are you?

Dave Bishop -- D.A. Davidson Companies -- Analyst

How are you doing, Richard?

Richard Marotta -- Chief Executive Officer

Good.

Dave Bishop -- D.A. Davidson Companies -- Analyst

Just a quick question from a holistic basis, the promotions you noted there. How should we think about that in terms of maybe just the overall operating strategy? Is there -- is that sort of a revamped focus on sort of the community banking efforts? And does that sort of change your view in terms of the types of loans and deposit relationships you're going after moving forward?

Richard Marotta -- Chief Executive Officer

I don't think I could have answered that question better than you just -- you kind of alluded to. I think it's getting back to the community bank roots. And so with the regional presidents and dealing with the stakeholders within the community, it's really going to drive us closer to the communities, and that will in itself start to move us into business banking, into deposits and those kinds of items. So it gets us more entrenched in our community.

Dave Bishop -- D.A. Davidson Companies -- Analyst

Got it. And as we think about just overall balance sheet growth. I think, Jamie, you said probably it has some additional runoff in the first quarter or so. Do you think we see growth in that footings in terms of loans by the end of the year?

Jamie Moses -- Chief Financial Officer

I think we -- I think that's possible, Dave. That's going to be determined on how well we can gather core deposits. As we've said, our core deposit growth is going to be sort of the governor on our loan growth. And so depending on how that goes will depend on the size of the balance sheet, really.

Dave Bishop -- D.A. Davidson Companies -- Analyst

Got it. And I think I heard you say, Jamie, that the current authorization expires the end of March, saw the dividend increase, do you think there's a good likelihood that you reup the share repurchase program following this?

Jamie Moses -- Chief Financial Officer

I think -- guys are looking at me, I'm probably not supposed to say this to you, I think that we -- I think there is a good chance, depending on conditions that we would actually pursue a further share buyback authorization.

Dave Bishop -- D.A. Davidson Companies -- Analyst

Yes. Thank you.

Operator

Our next question comes from Collyn Gilbert with KBW.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning, gentlemen. Jamie, if we could start with the NIM. I just want to make sure I'm understanding this all correctly.

So if you -- so if we exclude accretion income this quarter, it was like 2.91%. And when you're giving your NIM guidance for relative stabilization, it's off that 2.91% base, correct?

Jamie Moses -- Chief Financial Officer

So we have it as 2.94% ex accretion NIM, Collyn. But yes, that is the guidance off of that number.

Collyn Gilbert -- KBW -- Analyst

OK. So just curious, as you -- and you had indicated that you thought maybe in the back half of the year that that could start to expand. Can you just talk a little bit about some of the dynamics that you're seeing there? I know there's a lot of movement, which I don't know if I should ask my loan growth dynamic question first or the NIM question. But -- and then kind of, yes, so where you're seeing some of the asset yield settling out now that we back out the full effect of the accretion in those yields? And then kind of the trajectory on some of the funding pickup or improvement?

Jamie Moses -- Chief Financial Officer

Yes. Perfect. So the forward curve right now, we're anticipating the way we're thinking about it, there's no rate increases, more cuts expected over this year. And so the real dynamics that drive an accretive NIM are simply the strategies that we've laid out over the past year now, which is to get out of less strategic and non-relationship assets that are on our books, and by doing that, we also decreased our reliance on wholesale funding.

So I think as we're thinking about those things, that's really going to be the driver of the accretion to the NIM in the back half of the year. I also think that first quarter alluded to it a little bit, but I think first quarter is going to stabilize right around where we're at today, and then we should expand going forward. As we trim lower yielding, less relationship assets and pay down the wholesale funding that that's on the books.

Collyn Gilbert -- KBW -- Analyst

OK. So you're anticipating a benefit on both the asset and funding side going forward?

Jamie Moses -- Chief Financial Officer

Yes. I guess, I would say, I guess, it's mostly on the funding side of things, right? Rates are lower. So I'm not sure that we're going to see an expansion of asset yields. But I think that on the -- the reduction of the -- reduction of those assets should reduce our funding costs, which will be the driver of the NIM.

Collyn Gilbert -- KBW -- Analyst

OK. And before I move to the growth dynamics, let me just -- in terms of the results this quarter, I think on the core NIM fell a little bit short of where your guidance was. Was there -- just curious, was it the timing on the funding side? Or what caused sort of that variance from what you guys were thinking going into the quarter?

Jamie Moses -- Chief Financial Officer

The main variance between what we thought we were going to be and where we're at is, we have an increase -- a substantial increase in short-term investments that is generally driven by a change in the way the liquidity dynamics that we're employing as part of the payroll deposits. And so instead of taking down funding, we're actually funding short-term balances in the investment portfolio, which had essentially no effect on EPS, but did hurt the NIM by about four basis points. So we expect that -- we don't expect there to be a change in that going forward. So that reduction of four basis points sort of holds into this quarter, and then we'll expect to expand based on our strategies going forward.

Collyn Gilbert -- KBW -- Analyst

OK. OK. That's helpful. And then just on the loan side.

So it looks like held for sale went down. But did you put -- and you -- but you sold $80 million. Did you -- was there movement that came back into the balance sheet? And maybe just if we could give us a little bit of color as kind of when you talk about expectation for loan growth off of what number or what base?

Jamie Moses -- Chief Financial Officer

Yes, exactly. So we moved our $110 million of the aircraft portfolio back into the commercial line from the held-for-sale bucket. We are not actively marketing that portfolio at this moment. From time to time, as Richard noted in his comments, we still receive expressions of interest from people on that.

And so we are still open to selling portions of or the entire aircraft portfolio. But again, that will be economic driven versus just to say we're out of that business kind of thing. So we will make sure that we would expect to get a gain on anything that happened in that portfolio in terms of a sale.

Collyn Gilbert -- KBW -- Analyst

OK. And then your expectation for absolute growth going forward is what on the loan side?

Jamie Moses -- Chief Financial Officer

Well, like I said, I think, yes, I think we're still in a little bit of flat to down a little bit this year, as we're trying to trim our wholesale funding. We're down to just about -- just a little over $2 billion in wholesale funding right now. Goal is to minimize our wholesale funding as much as possible, and I think as I look at it big picture, it really continues to be a function of our ability to gather core deposits on whether or not the loan portfolio can expand.

Richard Marotta -- Chief Executive Officer

Yes. Collyn, this is Richard. It really isn't a product of not having a robust pipeline or our folks not having the connections in the community. It's really a function of us being more picky and choosy to get the wholesale funding piece of it down.

As we said before, as Jamie said before, it's really the wholesale funding that's really got to move and stabilize the NIM.

Collyn Gilbert -- KBW -- Analyst

OK. OK. And then just on OPEX, Jamie, I appreciate kind of the guidance here, but I just was curious about some of the moving parts of that. So this quarter, it looked like occupancy shot up quite a bit, and I know that usually, first quarter is seasonally higher with that line.

So just trying to understand the dynamic there. And then marketing expense, too, it seemed like that was a pretty big delta, but just curious as to what may have impacted those -- the quarter results on those two lines?

Jamie Moses -- Chief Financial Officer

Yes, sure. So what you see in the occupancy and equipment line going up that much. That was -- we had actually a reclassification quarter-over-quarter of some technology expenses in the $400,000 to $500,000 range. So that's really -- that's the large majority of that drive up in occupancy, in addition to the -- just -- occupancy just costs a little bit more in the winter months.

We had made some investments in technology in the fourth quarter. So that's where you're seeing the -- that's where you're seeing that the occupancy and equipment line going up like that. And then you have -- I'm sorry, you had -- there were other line --

Collyn Gilbert -- KBW -- Analyst

Marketing. I was just curious about marketing expense seemed like that there was a delta there and just the outlook on that line.

Jamie Moses -- Chief Financial Officer

Yes. I mean, I think that that marketing line is -- should be relatively stable, maybe up a little bit in Q1. But I think that should be relatively stable going forward. The occupancy expense in Q1 will be slightly higher seasonally as well.

So just wanted to mention that to you, too.

Collyn Gilbert -- KBW -- Analyst

OK. And then just lastly, on the first choice sale, do you have a sense of timing on that?

Jamie Moses -- Chief Financial Officer

That's a great question. I don't -- I mean, I don't think I can really give any more guidance than I have on that at this moment, other than to say that we continue to be engaged with potential partners in our attempts to get out of that business.

Collyn Gilbert -- KBW -- Analyst

All right. I will leave it there. Thanks, guys.

Operator

Our next question comes from Laurie Hunsicker with Compass Point.

Laurie Hunsicker -- Compass Point -- Analyst

Hi. Good morning. Just wanted to go back to, I guess, loan growths and loan goals, just to the extent that you can chat a little bit more about it. So a year ago, you lay out plans to sell the aircraft book.

Basically, I just want to make sure I heard you right. So the $110 million is back in the C&I that you're not actively marketing now for sale. So there is nothing else to sell in the aircraft book, is that correct?

Jamie Moses -- Chief Financial Officer

I wouldn't say it that way. I would say that we were able to execute on a chunk of that portfolio at the economics that we require in order for that to happen. And from time to time, we have other folks interested in it. So I don't think we're -- I'm not counting on selling the rest of that portfolio, but I wouldn't rule it out either.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. And then the indirect, can you just give us an update on where that balance is in FICO, if you have it? And I know you ceased originating, but how you're thinking about that book as we head into '20?

Jamie Moses -- Chief Financial Officer

Yes. So we're going to continue to run that balance down as we go forward. Yes, Sean. Go ahead, yes.

Sean Gray -- President

The current portfolio balance is $361 million. We saw about $45 million in Q4 net runoff, expect a three- to four-year total runoff time frame.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And your FICO on that, it's in the low sevens, is that right?

Jamie Moses -- Chief Financial Officer

Yes.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then the Taxi, where does that stand at the moment? I mean, I know it's small. Last we heard, it was around $24 million. Do you have an update on that?

Georgia Melas -- Chief Credit Officer

Yes, Laurie, it's Georgia. Taxi Medallion portfolio is about $22.5 million. So it's down another $1.5 million from last quarter.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. And are there any other loan categories that you're identifying when you think about loan growth as being flat to down? Are there any other categories that you're identifying and saying, hey, we have to run this down or this is not a focus? How should we think about that? Maybe asked a different way, I guess, what categories are we likely going to see growth in 2020? Where is the focus?

Richard Marotta -- Chief Executive Officer

Yes. I think you'll see growth in business banking just by definition of how we're approaching relationships and profitability. I think that would be the spot where you would see growth in 2020.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then do you have an update on the Firestone numbers? What the balance is? What the originations were? What the charge offs were? And then maybe also, generally, with CECL, are you thinking about that loan book any differently?

Georgia Melas -- Chief Credit Officer

Well, Laurie, it's Georgia again. The outstandings at the end of the quarter were $268 million. Firestone had about $43 million originations for the quarter, and net charge-offs for the quarter were just a little over $300,000.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. And then do you have the number of substandard? Comparatively, last quarter, your substandard loans stood at $166 million. I mean for the total loan book, not for Firestone.

Do you have a substandard number? And then...

Georgia Melas -- Chief Credit Officer

Yes. The substandard at the end of the year was $162 million.

Laurie Hunsicker -- Compass Point -- Analyst

OK. That's great. OK. And then just going back over to deposits.

Looks like your cost of core came down really nicely in the quarter, as did your total. How do we think about that in terms of, I guess, both growth and then how you're thinking about where you can bring that? And I guess, specifically, your loan-to-deposit ratio is now sitting at 92%, how are you thinking about that?

Jamie Moses -- Chief Financial Officer

Yes. So I think that the cost of deposits can and will continue to come down. As you know, it takes a little bit of time for the rate cuts to work through on the deposit side of things as specials roll off, as time deposits roll off, when rates come down. So I think we can improve that substantially on the deposit side of things.

And then -- and again, same for total funding costs as well. I think that that comes down pretty good over time. And then there was -- you had one other question there, Laurie, I'm sorry I --

Laurie Hunsicker -- Compass Point -- Analyst

I mean, I guess, just how we should be thinking about the growth in the deposit -- I mean I know you said, obviously, the growth in the loans is very tied to what you're doing in the deposits. I mean, I guess, asked another way, if we're looking at deposits, how would we expect to see deposit growth play out in '20?

Jamie Moses -- Chief Financial Officer

I think we're looking for modest core deposit growth in 2020. I think we're looking at 1% to 2% or so in 2020.

Richard Marotta -- Chief Executive Officer

We're going to continue to be disciplined in our approach, the same way we are with the loan side and we're going to continue to work our branch optimization strategy. So 1 of the things I think we executed well on is in closing 8 branches to maintain 95-plus deposits really drove that expense number down for us, allowed us to leverage our MyBanker program, which we feel we can continue to do.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. And then the last question I have is on expenses. I just want to go back to the guide you gave around Mark's question.

So the 2% to 3% that we're looking at for expense growth in 2020, what is the base you're using?

Jamie Moses -- Chief Financial Officer

That's off of -- that'd be off of the Q4 run rate, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

So the Q4 core run rate. So in other words, we're looking at basically a $60 million annualized. So call it, $241 million. That's the plus, obviously, plus the FDIC.

Is that how we're thinking about this the right way?

Jamie Moses -- Chief Financial Officer

Yes, I think that's right, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. I'll leave it there.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Richard Marotta for any closing remarks.

Richard Marotta -- Chief Executive Officer

Thank you for joining us today. We look forward to speaking again in April to discuss our results for the first quarter of 2020.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Dave Gonci -- Capital Markets Director

Richard Marotta -- Chief Executive Officer

Jamie Moses -- Chief Financial Officer

Mark Fitzgibbon -- Piper Sandler -- Analyst

Dave Bishop -- D.A. Davidson Companies -- Analyst

Collyn Gilbert -- KBW -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

Sean Gray -- President

Georgia Melas -- Chief Credit Officer

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