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United Community Banks Inc (UCBI 0.57%)
Q4Â 2019 Earnings Call
Jan 22, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good 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 and 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 4 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.
And at this time, I'll turn the call over to Lynn Harton.
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Well, good morning and 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 the GAAP and operating basis and 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 continued 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 and we have more in the pipeline. Our deposit base continues to be a strength, given us ample funding at below peer cost. We continue to invest in our delivery systems and I'm really looking forward to another successful year, but first Jefferson, let's cover the details of the fourth quarter.
Jefferson Harralson -- Chief Financial Officer
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 a loss on sale, coming in the gains and losses from other loan sales line item. As a note, this sale of our indirect portfolio is immediately accretive, accelerated our strategy to exit the business.
Starting with Page 5, our spread income declined as expected in the fourth quarter and our net interest margin compressed by 19 basis points. Of the 19 basis points, we estimated that about 10 basis points came from the impact of rate cuts, another 4 basis points came from the expected decline in accretable yield after being[Phonetic] unusually high last quarter. And 5 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 5 basis points in the quarter. These 5 basis point should come back however by mid-year as the public funds seasonally flow out.
Moving to Page 6, I'll just say that our deposit base is very strong with 32% of our funding in DDA, and 55% in transaction accounts. And this is the driver of us having one of the lowest cost of deposits in the Southeast at 61 basis points.
Moving to Page 8, 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 down as 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 and 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 9, 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 and the strong volume of Q3 extended into Q4; new rate locks did decline, but the follow-through of origination 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 will 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. And 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 1 adoption, our current estimated day one reserve increase is about 13% and we expect a modest adjustment of capital, which is just a handful of basis points. I'll close on Page 13, our capital ratios grew and remained strong, and continue to create opportunities for us in 2020. You will notice that the TCE and leverage ratios remained more flat with the excess liquidity on the balance sheet at the end of the year.
And with that, I'll pass it back to Lynn.
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
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 continued 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.
And 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, and at this time, we'd like to open up the call to questions.
Questions and Answers:
Operator
[Operator Instructions]
And our first question is from Catherine Mealor from KBW. Your line is now open.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Thanks, good morning.
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Good morning.
Jefferson Harralson -- Chief Financial Officer
Good morning.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
I want 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?
Jefferson Harralson -- Chief Financial Officer
Yeah, this is Jefferson. I can start with that, Catherine. So, the gain on sale comes from a few different categories. And I think you're talking about the non-mortgage category, I think there.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Yes.
Jefferson Harralson -- Chief Financial Officer
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 to $30 million a quarter throughout 2020. So, that number should be relatively stable to slightly higher as well. And then, going forward, we won't have the loss on the indirect sale.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Okay, got it. That's helpful. All right, thank you. And then on the margin guidance, it was helpful that break out the five debts that's attributed to the excess liquidity. But can you kind of talk us through your outlook as for the margin this year, assuming no further rate cuts?
Jefferson Harralson -- Chief Financial Officer
Thanks for that. So, 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 was up 2 basis points to 5 basis points. Then, as we get toward the middle of the year, you'll see some of that excess liquidity come off. So, some of those 5 basis points will come back and then, it should be fully back by mid-year. So, we think that the -- with the mix change happening toward loans away from securities with the ability to reprice CDs, you should see our margin decently higher in 2020.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Great. All right, thank you.
Operator
Thank you. Our next question comes from the line of Brad Milsaps from Piper Sandler. Your line is now open.
Brad Milsaps -- Sandler O'Neill & Partners, L.P. -- Analyst
Hey, good morning guys.
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Good morning.
Brad Milsaps -- Sandler O'Neill & Partners, L.P. -- Analyst
Lynn or Jefferson, you guys had another nice quarter of loan production. Obviously, pay downs are continuing to have an impact. One of your peers commented last night, they felt like maybe pay downs were slowing a bit as they kind of moved into this year. Just kind of curious kind of 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 kind of that growth rate you've seen of late, particularly as you got the indirect sale behind you?
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Yeah. So, I'll start and 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, recession fears are kind of fading away, but we do have -- 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. And so, 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.
And so, maybe, Rich, might want to talk about kind of what he see in there.
Richard W. Bradshaw -- Chief Banking Officer
Sure. Good morning, Brad. And I agree with Lynn, that the competitions with 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. And I will tell you that even early here in Q1, we're having some very serious good discussions. And so, we're very optimistic.
Brad Milsaps -- Sandler O'Neill & Partners, L.P. -- Analyst
And 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?
Richard W. Bradshaw -- Chief Banking Officer
Sure. We hired 29 combination of both sales leaders and lenders, and probably expect less than that in 2020. But it's, we're going to be opportunistic when it's available in terms of both lenders and possible lift-out of teams.
Brad Milsaps -- Sandler O'Neill & Partners, L.P. -- Analyst
Okay, great. Thanks guys.
Operator
Thank you. Our next question comes from the line of Michael Rose from Raymond James. Your line is now open.
Michael Rose -- Raymond James & Associates, Inc. -- Analyst
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, I mean is -- how may I put together the pieces, I mean, is mid-single digits still the right way to think about it? And then, where do you see the greatest opportunities are from? Is it from the new hires, is it from existing clients, etc? Thanks.
Jefferson Harralson -- Chief Financial Officer
So yes. As Lynn said, we've had -- I think payoffs will continue to be high. So, that's a little bit of a headwind, but the new hires are where we're seeing a lot of lift. So, we're seeing that from our existing. We talked about what's going 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. So, we do see that to continue forward. Again, we're having some good discussions. And so, we remain optimistic.
Michael Rose -- Raymond James & Associates, Inc. -- Analyst
Okay. 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.
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Yeah, thanks, Mike. So, our capital priorities remain the same. First, organic growth and M&A, and then dividend is also very important to us. And buybacks are less than 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, and putting some cash into deals.
That said, are you seeing our capital ratios increase? And they increased quite a bit this quarter. Our TCE was relatively flat, but we also had $250 million of excess liquidity that should fall back again throughout the year. So, I think the TCE in a way is a little bit understated. So, the combination of all of those things leads us to -- we do think we'll have M&A, we do think that our pipeline is strong there. And if we don't, that look for us to use this authorization and get a little more aggressive in the buyback.
Michael Rose -- Raymond James & Associates, Inc. -- Analyst
Okay. And just as a follow-up, just remind us Jefferson, you guys are looking more at in-market transactions, let's call that $2 billion or less as opposed to anything, more transformational at this point?
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
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. But we would look at other high-growth markets, where we've got expertise as well. And then, finally just like Navitas, we continue to look at where we could bring in new products or new expertise. So, those are our three priorities of the size, you're spot on with.
And 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. But yeah, those are our focus areas.
Michael Rose -- Raymond James & Associates, Inc. -- Analyst
Okay. Thanks for taking my questions.
Operator
Thank you. Our next question comes from the line of Jennifer Demba from SunTrust. Your line is now open.
Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst
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, assume you have new entrants coming into the, at least the Atlanta market recently? Thanks.
Richard W. Bradshaw -- Chief Banking Officer
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. So, 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 TouristOn[Phonetic]-- they just landed their regional presence and their market presence. So, we've just kind of seen the fallout really start coming right, call it the last 60 days.
Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst
Okay, thank you.
Operator
Thank you. Our next question comes from the line of Christopher Marinac from Janney. Your line is now open.
Christopher Marinac -- Janney -- Analyst
Thanks, good morning. Wanted to go back to the Navitas loan sale, I know, Jefferson, you mentioned the disc of[Phonetic] the next couple of quarters. Do you have an idea that the gain will vary much or do you think that the gain would stay similar? And I'm curious if the buyers of your paper actually could could increase as they have demand and cash to put to work beyond what you've just seen?
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Yeah. Thanks, Chris. So, the Navitas sale, I think is going to be determinant on the greater rate environment. When we first started thinking about Navitas sales, we're thinking about the 4% to 5% gain. Then, we saw rates come down with the rate cuts. So, what you have here is a relatively long-term fixed-rate loan. And so, to the extent that rates go down, you might see it be a little better. And to the extent that rates go up, you might see it be a little worse.
Christopher Marinac -- Janney -- Analyst
Okay, that's helpful, thanks for that. And then, just for -- kind of interest rate related question. Do your loan floors, are they possible for you to get done today? Is that something that you're looking at it all for 2020 within your commercial contracts?
Richard W. Bradshaw -- Chief Banking Officer
This is Rich. We're really not at this time. We have done a little talking about it, but we have not moved forward.
Christopher Marinac -- Janney -- Analyst
Great. Rich. Thanks very much guys.
Operator
Thank you. Our next question comes from the line of Tyler Stafford from Stephens. Your line is now open.
Tyler Stafford -- Stephens, Inc. -- Analyst
Hey, good morning gentlemen.
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Good morning.
Richard W. Bradshaw -- Chief Banking Officer
Good morning, Tyler.
Tyler Stafford -- Stephens, Inc. -- Analyst
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?
Jefferson Harralson -- Chief Financial Officer
All right, thanks. Thank you, Tyler for some thoughts on expenses. So, in the first quarter, I think flat to slightly down is what I'm thinking about for expenses. You have merit increases in Q2. And then, we're thinking about low-single digits from there. On operating leverage, it's year-to-year with the three rate cuts, it could be relatively difficult. But it's something that we're fighting. We have -- we're working through our budget and 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 '20 that we will produce some relatively significant operating leverage there. So, I don't know if that answers your question, but that's how we're thinking about it.
Tyler Stafford -- Stephens, Inc. -- Analyst
Yeah, that's great. Thanks for that, Jefferson. And then, just the expectation -- switching over to Navitas, the expectation for just annual production out of that -- out of that team, how are you thinking about that?
Jefferson Harralson -- Chief Financial Officer
Yeah. So, we -- annual production, I think of it as flat to slightly higher there.
Tyler Stafford -- Stephens, Inc. -- Analyst
Okay. And in the duration -- remind me what the duration of those loans are as I think about you guys kind of keeping those -- portion of those on balance sheet?
Jefferson Harralson -- Chief Financial Officer
Yes. So, we have four-year[Phonetic] maturities on Navitas loans.
Operator
At this time, I'm showing no further questions. I would like to turn the call back over to Lynn Harton, Chairman and CEO for closing remarks.
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Great. Well, I just want to thank you all for listening and for your support of the company. And I hope you have a great day. Thank you so much.
Operator
[Operator Closing Remarks]
Duration: 21 minutes
Call participants:
H. Lynn Harton -- President, Chief Executive Officer, Chairman of the Board
Jefferson Harralson -- Chief Financial Officer
Richard W. Bradshaw -- Chief Banking Officer
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Brad Milsaps -- Sandler O'Neill & Partners, L.P. -- Analyst
Michael Rose -- Raymond James & Associates, Inc. -- Analyst
Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst
Christopher Marinac -- Janney -- Analyst
Tyler Stafford -- Stephens, Inc. -- Analyst
