Eagle Bancorp, Inc. (NASDAQ:EGBN) Q4 2019 Earnings Conference Call - Final Transcript
Jan 16, 2020 • 10:00 am ET
Susan G. Riel
the fourth quarter.
The very difficult interest rate environment we are operating in has caused decreasing net interest margin across the entire industry. It certainly impacted us as LIBOR rates dropped during the quarter. The second factor which impacted our net interest margin during the quarter was a change in our asset liability composition during the quarter, which led to an unusually high level of liquidity and lower asset yields.
The final item which hindered net income was the continued elevated level of legal expenses related to the ongoing government investigation. Since we measure and try to optimize all of the performance indicators, we are pleased to note that on the positive side, we had a very strong quarter of non-interest income, driven primarily by gains on the sale of residential mortgages.
We continue our disciplined approach to expense management and maintained a very favorable efficiency ratio, even when including the elevated legal expenses. We also continued to benefit from our sound credit quality.
Let's talk first about the margin, which decreased 23 basis points to 3.49% for the fourth quarter as compared to 3.72% in the third quarter of 2019. The decrease was due primarily to a change in our asset liability mix during the quarter as we saw robust growth in average deposits during the quarter of $398 million or 5.4%. The growth in average deposits for the quarter outpaced loan growth, which drove down the average loan to deposit ratio and led to a change in the asset mix to a lower percentage of loans and higher levels of liquidity. Our deposit levels were very fluid during the quarter, and on average, we had about $317 million in excess liquidity for the quarter.
We attribute approximately 15 basis points or 71% of the decline in the margin to the impact of this excess liquidity. The second factor impacting the margin in the fourth quarter was the interest rate environment. As evidenced by the average 30-day LIBOR, which was 39 basis points lower than the third quarter of 2019. Given that 40% of our loan portfolio is indexed to the 30-day LIBOR rate, the impact of the decrease in that rate, together with the competitive market that we saw loan yields decline from 5.39% in the third quarter of '19 to 5.18% for the fourth quarter.
We also achieved a decrease in the cost of funds. So we attribute approximately 8 basis points or 29% of the decrease in the margin to a lower spread on the loan book. We were able to reduce deposit costs during the quarter due to our deposit levels and the falling rate environment. As compared to the third quarter, we were able to reduce the rates paid on interest-bearing deposits by 20 basis points and the composite cost of funds by 13 basis points during the quarter.
We are pleased by the growth of the deposit base over the last year, while the point to point growth from year-end 2018 to December