God morning, and welcome to United Community Banks' fourth quarter 2019 earnings call. Hosting our call today are Chairman and Chief Executive Officer, Lynn Harton, Chief Financial Officer, Jefferson Harralson, Chief Banking Officer, Rich Bradshaw, and Chief Risk Officer, Rob Edwards. United's presentation today includes references to operating earnings, pre-tax, pre-credit earnings and other non-GAAP financial information. For these non-GAAP financial measures, United has provided a reconciliation to the corresponding GAAP financial measure in the financial highlights section of the earnings release, as well as at the end of the investor presentation. Both of these are included on the website at ucbi.com. Copies of the fourth quarter's earnings release and investor presentation were filed last night on Form 8-K with the SEC. A replay of this call will be available in the investor relations section of the company's website at ucbi.com.
Please be aware that during this call, forward-looking statements may be made by representatives of United. Any forward-looking statements should be considered in light of risks and uncertainties described on page four of the company's 2018 Form 10-K, as well as other information provided by the company in its filings with the SEC and included on its website. At this time, I'll turn the call over to Lynn Harton.
Good morning, thank you all for joining our call. We are pleased with our results this quarter, once again, driven by a great team of bankers throughout our footprint. For the quarter, our return on assets was 150 basis points on both a GAAP and operating basis. We believe we have once again achieved our top quartile financial performance goal. Our earnings per share was $0.61, an increase of 7% year-over-year. Credit results continue to be solid with both Non-Performing Assets and net charge-offs remaining at historically low levels. We're excited about 2020. Our markets continue to be strong. We're fortunate to have a number of great bankers that have joined our team this past year. We have more in the pipeline. Our deposit base continues to be a strength, giving us ample funding at below peer cost.
We continue to invest in our delivery systems, and I'm already looking forward to another successful year. First, Jefferson, let's cover the details of the fourth quarter.
Thanks, Lynn. I am pleased to share the detail of our fourth quarter and 2019 full year results. We only had a nominal amount of non-operating items in the quarter, so the GAAP and operating results are essentially equal. We did have some unusual items in the quarter that netted out to a slight gain. First, we had a $1.6 million BOLI gain, and we also had about $900,000 in securities losses. Separately, we also took $700,000 in losses when we sold our remaining $103 million indirect auto portfolio at the end of the quarter. All three of those adjustments affected non-interest income, with the loss on sale coming in the gains and losses from other loan sales line item. As a note, the sale of our indirect portfolio is immediately accretive and accelerated our strategy to exit the business.
Starting with page five, our spread income declined as expected in the fourtq quarter, and our net interest margin compressed by 19 basis points. Of the 19 basis points, we estimate that about 10 basis points came from the impact of rate cuts. Another four basis points came from the expected decline in accretable yield after being unusually high last quarter. Five basis points of the decline I would call seasonal, as we have our seasonal inflow of public funds in the fourth quarter, leading to about $240 million of excess liquidity that we had throughout the quarter. This was earnings positive but hurt our NIM by about five basis points in the quarter. These five basis points should come back, however, by mid-year as the public funds seasonally flow out.
Moving to page six, I'll just say that our deposit base is very strong, with 32% of our funding in DDA and 55% in transaction accounts. This is the driver of us having one of the lowest cost of deposits in the Southeast at 61 basis points. Moving to page eight, this shows our loan growth in the quarter. We are very pleased with strong loan production in the quarter, which was at near record highs, but we also had near record high pay downs in the quarter, which offset. Average loans grew 2.5%, but ending balance loans declined with the indirect sale at the end of the quarter. On another topic, we have discussed in the past that we would begin selling a portion of our Navitas production in the fourth quarter, and we did just that.
We sold $20 million of Navitas loans in the quarter. You will notice $1.2 million of gain on sale of Navitas loans in fee income. This $1.2 million gain came in at about 6.5%, which was above our expectations. On page nine, you can see that our non-interest income came in at a record $30.2 million for the quarter. Mortgage was a driver of the strong fee quarter. The strong volume of Q3 extended into Q4. New rate locks did decline. The follow-through of originations and sales helped increase fee income versus last quarter, as well as an MSR gain of about $1.2 million. I also want to highlight the gains from other loan sales line item. We had seasonally strong SBA loan sales in the fourth quarter, the $1.2 million gain from Navitas loan sales, and the $700,000 loss on our indirect loans.
You'll notice that our SBA loan sale gains were down 25% in 2019 versus 2018 on our decision to keep more production on the balance sheet. Moving to page 10, our operating expenses increased by $1.2 million. With the rate cuts, our efficiency ratio was up compared to last quarter, but still down 91 basis points compared to last year. Moving to page 11, credit quality is stable, but we did see some slight increases in NPAs and net charge-offs. Excluding our indirect reserve release, our provision essentially matched our net charge-offs for the quarter. Moving on to page 12 and CECL. With our January 1st adoption, our current estimated day one reserve increase is about 13%, and we expect a modest adjustment to capital, which is just a handful of basis points. I'll close on page 13.
Our capital ratios grew and remain strong and continue to create opportunities for us in 2020. You will notice that the TCE and leverage ratios remain more flat with the excess liquidity on the balance sheet at the end of the year. With that, I'll pass it back to Lynn.
Thanks, Jefferson. This quarter demonstrated the multiple strengths that have been built into the company, which give us confidence in our ability to continue to perform at a high level. Our investments in SBA and mortgage continue to pay dividends, and I'm very pleased with the balanced performance of our Navitas team. As I've already mentioned, our hiring activity has been strong. Our pipeline of new bankers continues to grow. I would amplify Jefferson's comments on capital and point out that our capital strength and our rate of capital generation affords us multiple options to create shareholder value. Thanks once again for your interest and support of the company. At this time, we'd like to open up the call to questions.
As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question is from Catherine Mealor from KBW. Your line is now open.
Thanks. Good morning.
Morning.
Morning.
I wanted to start just on fee income. Can you give us any color as to what you're thinking about sustainability of the higher gain on sale volume that we saw this quarter and how you're thinking about that for 2020?
Yeah. This is Jefferson. I can start with that, Catherine. The gain on sale comes from a few different categories, and I think you're talking about the non-mortgage category, I think there?
Yeah.
Within that category is SBA. SBA is seasonally strong this quarter, is seasonally weak in the first quarter, and builds throughout the year, and we think that can be flat to slightly higher. On the Navitas loans, we think we're going to be selling $20 million-$30 million a quarter throughout 2020. That number should be relatively stable to slightly higher as well. Then going forward, we won't have the loss on the indirect sale.
Okay. Got it. That's helpful. All right. Thank you. On the margin guidance, it was helpful to break out the 5 basis points that's attributed to the excess liquidity, can you kind of talk us through what your outlook is for the margin this year, assuming no further rate cuts?
Thanks for that. With no further rate cuts, I think that the 10 basis points of margin pressure, core margin pressure that we had this quarter, I think that will reverse itself. I think in the first quarter, our margin's up two to five basis points. As we get towards the middle of the year, you'll see some of that excess liquidity come off. Some of those five basis points will come back and then should be fully back by mid-year. We think that with the mix change happening towards loans away from securities, with the ability to reprice CDs, you should see our margin decently higher in 2020.
Great. All right. Great. Thank you.
Thank you. Our next question comes from the line of Brad Milsaps from Piper Sandler. Your line is now open.
Hey, good morning, guys.
Good morning.
Good morning.
Lynn or Jefferson, you guys had another nice quarter of loan production. Obviously, paydowns are continuing to have an impact. One of your peers commented last night that they felt like maybe paydowns were slowing a bit as they kind of moved into this year. Just kind of curious how you guys feel about loan growth this year, given the new hires you've made, the opportunities in and around the Southeast to maybe improve upon the growth rate you've seen of late, particularly as you've got the indirect sale behind you.
Yeah. I'll start, and then I'll turn it over to Rich. We are blessed to be in some great markets. I would say business optimism, if anything, is slightly better now than it was over the last couple of quarters. The recession fears are kind of fading away. There's a lot of competition, a lot of non-bank competition, and so I do think payoffs will continue to be a headwind for us. In my mind, those two things kind of balance off each other, and our strategy is to continue to try to add new producers to drive the growth. Maybe Rich might want to talk about what he's seeing there.
Sure. Good morning, Brad. I agree with Lynn. The competition from non-banks out there is new and different. We are forecasting mid-single digit growth up from 2019 because we did a lot of hiring in 2019, but a lot of that took place in Q3 and Q4, and we're just seeing those benefits today. I will tell you that even early here in Q1, we're having some very serious good discussions, and so we're very optimistic.
Rich, can you just remind me how many new producers you did add in 2019 and how that might compare to sort of what you're thinking about adding in 2020?
Sure. We hired 29, a combination of both sales leaders and lenders, and probably expect less than that in 2020. We're going to be opportunistic when it's available in terms of both lenders and possible lift-out of teams.
That'd be great. Thank you, guys.
Thank you. Our next question comes from the line of Michael Rose from Raymond James. Your line is now open.
Hey guys, just circling back to the loan growth question. I think you guys have talked about mid-single digits last quarter. Going forward, you're not going to have that $25 million a year runoff from indirect auto. Comparing that with the hires, help me put together the pieces. Is mid-single digits still the right way to think about it? Where do you see the greatest opportunity? Is it from the new hires? Is it from existing clients, et cetera? Thanks.
Yes. As Lynn said, I think payoffs will continue to be high. That's a little bit of a headwind. The new hires are where we're seeing a lot of lift. We're seeing that from our existing. We talked about what's gone on, for instance, in Columbia, South Carolina, with that team, and how they really hit the ground running. We're really still optimistic about what's going on in Atlanta. We do see that continue forward. Again, we're having some good discussions, and so we remain optimistic.
Maybe switching gears a little bit to capital. Obviously continues to build a little bit here. You guys announced the $50 million buyback last quarter. How do I balance capital growth from here with the buyback and maybe some opportunities for M&A? Just how should we think about capital priorities from here? Thanks, guys.
Thanks, Michael. Our capital priorities remain the same. First organic growth, then M&A, and then dividends also very important to us, and buybacks are last in that, although it can be an important tool. We did not buy back shares in the fourth quarter. We have not bought back shares so far in the first. We're relatively optimistic that M&A can occur, and we're optimistic that some cash can be deployed in M&A. We were successful in 2019 and in 2018 in putting some cash into deals. That said, you are seeing our capital ratios increase, and they increased quite a bit this quarter. Our TCE was relatively flat, we also had the $250 million of excess liquidity on that should fall back again throughout the year. I think the TCE in a way is a little bit understated.
The combination of all those things leads us to, we do think we'll have M&A. We do think our pipeline is strong there. If we don't, look for us to use this authorization and get a little more aggressive in the buyback.
Okay. Just as a follow-up, just remind us, Jefferson, you guys are looking more at the in-market transactions, let's call it $2 billion or less as opposed to anything more transformational at this point.
Yeah, I would say, the priorities are really the threefold that we've always looked at. Clearly less than $2 billion. We like the smaller deals, better cultural fits. Existing markets first, anywhere we could get deeper. We would look at other high growth markets where we've got expertise as well. Finally, just like Navitas, we continue to look at where we could bring in new products or new expertise. Those are our three priorities. The size, you're spot on with. As Jefferson said, we continue to have meaningful conversations. We're hopeful that we get one done. Whether or not they materialize, it depends a lot, of course, on price, on diligence, all those items. Yeah, those are our focus areas.
Okay. Thanks for taking my questions.
Thank you. Our next question comes from the line of Jennifer Demba from SunTrust. Your line is now open.
Thank you. Could you just talk about specifically about the traction you're seeing in the Atlanta market and maybe how the hiring environment has changed in the last several months? You seem to have new entrants coming into at least the Atlanta market recently. Thanks.
Hi, Jennifer. This is Rich. As you know, this past year, we've invested a lot in the Atlanta market. We've hired seven new lenders there this past year, and I will tell you that we're looking at more for Q1. We feel like there is opportunity, both talent and particularly now with the different M&A activity that's really kind of coming to fruition, particularly with Truist. They just landed their regional presidents and their market presidents. We've just kind of seen the fallout really start coming right, call it the last 60 days.
Okay. Thank you.
Thank you. Our next question comes from the line of Christopher Marinac from Janney. Your line is now open.
Thanks. Good morning. Wanted to go back to the Navitas loan sale. I know, Jefferson, you mentioned the next couple of quarters. Do you have an idea if the gain will vary much, or do you think that the gain would stay similar? I'm curious if the buyers of your paper actually could increase as they have demand and cash to put to work beyond what you've just seen.
Thanks, Chris. The Navitas sale, I think, is going to be determinant on the greater rate environment. When we first started thinking about Navitas sales, we were thinking about the 4%-5% gain. We saw rates come down with the rate cuts. What you have here is a relatively long-term fixed rate loan. To the extent that rates go down, you might see it be a little better, to the extent that rates go up, you might see it be a little worse.
Okay. That's helpful. Thanks for that. Then just another kind of interest rate related question. Do loan floors, are they possible for you to get done today? Is that something that you're looking at at all for 2020 within your commercial contracts?
This is Rich. We're really not at this time. We have done a little talking about it, but we have not moved forward.
Great, Rich. Thanks very much, guys.
Thank you. Our next question comes from the line of Tyler Stafford from Stephens. Your line is now open.
Hey, good morning, gentlemen.
Good morning.
Good morning, Tyler.
Hey, congrats on a very impressive 2019. I just wanted to follow up on some of the hiring commentary that you've made and kind of looking to 2020, but in the context of expense growth and just how we should be thinking about expense growth, one, for the year, and then I guess part B to that would be just your ability to put up positive operating leverage and earnings growth this year with just some of the headwinds that are going to be persistent this year.
All right. Thank you, Tyler. For some thoughts on expenses. First, in the first quarter, I think flat to slightly down is what I'm thinking about for expenses. You have merit increases in Q2. We're thinking about low single digit from there. On operating leverage, it's year-to-year with the three rate cuts, could be relatively difficult. It's something that we're fighting. We're working through our budget. We're going to do everything that we can do to produce operating leverage in 2020 versus 2019. We do think from Q4 2019 to Q4 2020, that we will produce some relatively significant operating leverage there. I don't know if that answers your question. That's how we're thinking about it.
Yeah. No, that's great. Thanks for that, Jefferson. Just the expectation, switching over to Navitas, the expectation for just annual production out of that team, how are you thinking about that?
Yeah, annual production, I think of it as flat to slightly higher there.
Okay. Remind me what the duration of those loans are as I think about you guys kind of keeping a portion of those on balance sheet?
Yeah. We have four-year maturities on Navitas loans.
Okay, perfect. Thanks, Jefferson.
Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Lynn Harton, Chairman and CEO, for closing remarks.
Great. Well, I just want to thank you all for listening in and for your support of the company, and I hope you have a great day. Thank you so much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.