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Eagle Bancorp Inc (EGBN) Q1 2019 Earnings Call Transcript

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Eagle Bancorp Inc  (NASDAQ: EGBN)
Q1 2019 Earnings Call
April 18, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to The Eagle Bancorp First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions for how to participate will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's conference, Mr Charles Levingston, Chief Financial Officer. Sir, you may begin.

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Thank you, Jimmy. Good morning, this is Charles Levingston, Chief Financial Officer of Eagle Bancorp. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements. Our Form 10-K for the 2018 fiscal year, our quarterly reports on Form 10-Q, and current reports on Form 8-K identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning.

The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments. Our periodic reports are available from the Company or online on the Company's website or the SEC website. I would like to remind you that while we think that our prospects for continued growth and performance are good, it's our policy not to establish with the markets any earnings, margin, or balance sheet guidance.

Now, I would like to introduce Norman Pozez, the Chairman of Eagle Bancorp.

Norman Pozez -- Chairman

Thank you, Charles. Welcome everyone to our earnings call this morning. I'd like to start by thanking all of the people, who have extended so many wishes, thoughts, and prayers to Ron Paul. Ron and his family are very appreciative of your support. All of us miss Ron. However, it is important to realize that while Ron was at our Company, it was not totally expected that he would be leaving. Ron did a wonderful job leading Eagle for many years. Under his guidance, he built a strong organization, including a very capable senior management team.

We have done our succession planning and the Board is very comfortable that this management team led by Susan Riel can continue the growth and success of the Bank. Prior to Ron's retirement, many people outside the organization did not understand that all of the business lines and support divisions in the Bank have reported directly to Susan for the past five years. We have a strong management team, which together with our 482 employees has built one of the leading community banks in the Washington Metropolitan area and one of the most profitable community banks in the United States.

We will continue to execute our proven strategy as a commercially oriented bank and as an active lender in the Greater Washington D.C. area. We expect that our unique credit culture and the customer service delivered through our relationships first philosophy will continue to drive our organic growth in one of the most attractive markets in the country. I am proud to lead an independent Board of Directors that are seasoned business professionals in our community. Many are very knowledgeable in the commercial real estate market.

I have been in the business here for the past 35 years. Additionally, most Board members have been with Eagle Bancorp for many years. I joined the Board in 2008 and was Vice Chairman prior to Ron's decision to retire. Before I turn this call over to Susan Riel, our Interim President and CEO, I wanted to mention that Charles Levingston, our Chief Financial Officer; and Jan Williams, our Chief Credit Officer are also here with us and will be available later on for questions.

Susan, I'll turn it over to you.

Susan G. Riel -- Interim President and Chief Executive Officer

Thanks, Norm. Hello to all the analysts and the investors on the call. As the Interim President and CEO, I am happy to discuss with you our first quarter financial performance. We are pleased to announce that GAAP earnings for the first quarter of 2019 were $33.7 million and earnings per share for the quarter -- for the first quarter was $0.98. As reported, both the net income and the earnings per share are decreases from the first quarter of 2018 results.

However, as described in the press release issued last night, the announced first quarter GAAP earnings include one-time non-recurring charges of $6.2 million related to share-based compensation awards and the retirement of our former Chairman and CEO, Ron Paul. Excluding these one-time non-interest expenses, net income for the quarter would have been $38.2 million, which represents a 7% increase over $35.7 million in the first quarter of 2018. Adjusted for these non-recurring items, earnings per share would be $1.11, a 7% increase over $1.04 per fully diluted share in the first quarter of 2018.

I would also like to state that we appreciate the attention and details that you all give to our press releases and other reports. As you saw in our release last night, there were a number of unusual items, which occurred in the first quarter of 2019. For this period, you couldn't just look at the tables or the bottom line numbers in the press release, you had to read the entire document. We will cover all of the details during the call this morning, but to start at a summary level, I would like to say that we are pleased with the results of the first quarter.

The highlights of the quarter and the key drivers of profitability were continued strong net interest margin, improving asset yields, and growth in earning assets, both loans and securities. We had elevated credit cards that still have a very clean portfolio and we are well reserved. And as I mentioned, we recorded the one-time non-interest expenses due mostly to Ron's retirement, but aside from that impact maintained a very favorable efficiency ratio.

We continue to be highly profitable for the first quarter of 2019, return on average assets was 1.62%, 1.83%, excluding non-recurring items, and the return on average tangible common equity was 13.37%, 15.17% excluding non-recurring items. We are very proud of the quality of our earnings and the level of profitability, which are significantly above industry and peer group averages. The consistently high levels of profitability continually strengthen the balance sheet.

We are proud to note that over the 12-month period ending March 31, 2019, while total assets had grown by 9%, our tangible book value increased by 18% to $30.20 per share. The increase in top-line revenue for the first quarter was driven by growth in net interest income, which increased 7% over the first quarter of 2018 and was only slightly lower as compared with the fourth quarter of 2018.

The higher net interest income was derived from growth in the loan portfolio, higher average loan yields, and balance sheet management in accordance with our disciplined ALCO process. Total revenue, net interest income plus non-interest income increased 8% over the first quarter of 2018, as we also saw a slight increase in non-interest income. The net interest margin was 4.02% for the first quarter of 2019, which was in line with expectations, while the margin was down from 4.17% in the first quarter a year ago that was improved from 3.97% in the preceding fourth quarter of 2018. We expected a rebound in the margin in the first quarter and did accomplish that due to the slightly improved yield as compared to the fourth quarter 2018 on both loans and our securities portfolio, and a change in the earning asset mix. At the same time, we effectively controlled deposit costs.

For the first quarter, the average loan yield was 5.62%, and our overall asset yields increased by 8 basis points. While the composite cost of funds increased only 3 basis points, the earnings power of this differential was also strengthened by our ability to maintain average DDAs of 32.5% of total assets. Our high level of DDA deposits continues to be a major strength of the bank.

Profitability in the first quarter of 2019 also benefited from our continued focus on maintaining strong operating leverage. Total revenue for the first quarter increased 8% over the same period in 2018. Excluding the non-recurring compensation related expenses, non-interest expense for the quarter was $32.1 million, which was up 3%, as compared to the first quarter of 2018 and only a 1% increase from the fourth quarter of 2018.

We continue to have strong credit quality statistics even with an increase in both charge-offs and non-performing loans in the first quarter of 2019. Net charge-offs annualized were 19 basis points of average loans for the quarter, an acceptable level, but increased from a very minimal level of 6 basis points for the first quarter of 2018, and 5 basis points for the fourth quarter of 2018.

At March 31st, non-performing assets were $41.7 million and as a percentage of total assets were 50 basis points, as compared to 19 basis points a year ago and 21 basis points at the December 31, 2018. Non-performing loans at quarter end were $40.3 million, and as a percentage of total loans were 56 basis points, as compared to 20 basis points at March 31, 2018 and 23 basis points at March 31, 2018.

As I mentioned in the press release last night, there was good news regarding the status of non-performing assets. The increased level of both non-performing loans and charge-offs during the first quarter were due substantially to one non-performing loan, which had a balance of $17.5 million at March 31st. This loan was secured by residential condominium projects that was sold to third-party at full closure in the first quarter, but the sale was not ratified by the court until April 8, 2019. So, consistent with GAAP, the loan remained in non-performing status at March 31, 2019.

The good news is that the closing of the foreclosure sales is expected in early May and no additional losses are anticipated from this transaction. A separate non-performing loan in the amount of $1.5 million was paid in full, shortly after quarter end. Excluding these two credits, totaling $19 million, non-performing assets, as a percentage of total assets would have been 27 basis points, as of March 31, 2019, closer to our longer term quarterly trend.

The allowance for loan losses declined to 98 basis points of total loans at the end of the first quarter, as compared to 1% at both March 31 and December 31, 2018. Since the large net charge-off in the first quarter was previously reserved in the allowance allocation. Overall credit quality remain solid. Consistent application of our reserve methodology, consideration of the level of charge-offs, classified loans and loan growth resulted in a modestly lower allowance to total loans.

At March 31, 2019 the coverage ratio was 174% of non-performing loans, excluding the two credits totaling $19 million that have been addressed, the coverage ratio would have been 329%, as compared to 491% at March 31, 2018, and 429% at December 31, 2018. At these levels we believe the bank is adequately reserved.

For the first quarter of 2019, average loan balances were 9% greater than the first quarter of 2018. We achieved loan growth during the first quarter of 2019 of $182 million or about 2.6%. Average loan balances for the quarter were 2% higher than during the fourth quarter of 2018. The largest increase during the quarter were an income producing CRE loans and owner-occupied CRE loans.

While we saw decreasing construction loans, we view owner occupied loans as the commercial loan product and a key part of relationship banking. Together, owner occupied loans and C&I loans make up 35% of our portfolio. Over the last 12 months, we have grown that segment of our loan book by 12%, while CRE and construction loans have grown only 7%. Our loan pipeline continues at a very good level and we continue to see loan demand throughout the Washington Metropolitan region.

Total deposits declined by $292 million during the first quarter of 2019, as we experienced seasonally low total deposits, as compared to balances at December 31, 2018. Average deposit balances were up about 15% in the first quarter of 2019 over the first quarter in 2018, and were higher by 0.5% over the fourth quarter of 2018. Additionally, we feel we effectively managed deposit levels and rates to keep our overall cost of funds at a reasonable level. With the decrease in deposits and the healthy loan growth, we saw an increase in the loan to deposit ratio to an average of 101% for the quarter and 107% by quarter end. This certainly helped the net interest margin for the quarter that is at a higher level then where we wanted to be in the long term.

We continue to focus on maintaining a high level of DDA deposits, which were 32.5% of average deposits during the quarter, and 33.1% at the end of the period. Growing and maintaining core relationships is key to our strategic goal of maintaining a strong interest margin. We continue our disciplined approach to pricing of both loans and deposits. We remain committed to maintaining a strong net interest margin and see no value in growing the balance sheet, just for the sake of growth. Our primary focus will always be on growth in earnings per share.

Non-interest income was $6.2 million for the quarter, as compared to $5.31 million in the first quarter of last year, a 16% improvement over the first quarter of 2018. The increase in revenue was driven primarily by the gain on sale of securities. Gains on the sale of both residential mortgages and SBA loans were slightly lower than the first quarter of 2018.

Service charge income was $1.7 million for the quarter, an increase of 5% over the first quarter of 2018. We've recognized the modest $55,000 in revenue from the FHA Group, as compared to $48,000 in the first quarter of 2018.

The GAAP efficiency ratio was 43.90% for the first quarter in 2019. Excluding non-recurring items, the ratio was 36.85%, as compared to 38.38% a year ago, and only slightly higher than 36.09% in the fourth quarter of 2018.

As we have discussed before, we are very attuned to operating leverage and how it drives long-term profitability. It is a key reason that we believe in our commercially oriented business model. The expense savings we have achieved with our branch-light strategy allows us to make investments in technology and recruit skilled dedicated bankers. We are also able to make the necessary enhancements in our infrastructure, as we grow toward the $10 billion asset level. We actually began that process about two years ago and have a project team that meets regularly to assure smooth transition, as we approach the $10 billion asset mark. That task force is co-chaired by CFO, Charles Levingston, who you know, and by our Chief Risk Officer, Susan Kooker.

We will continue to maintain the sound infrastructure needed to ensure quality of operations, meet all compliance requirements, and provide superior customer service. We maintain a modest level of interest rate risk in the current interest rate environment. From a policy standpoint, we still have a relatively neutral position for asset and liability sensitivity and maintain a short duration of loan, investments, and deposits.

The repricing duration of the loan portfolio is only 18 months. Variable and adjustable rate loans now comprise 61% of the portfolio. We continue to see an active vibrant economy in the Washington Metropolitan area. The region produced growth of 35,000 net new jobs during 2018. As you know, Amazon is rapidly proceeding with the development of their HQ2 campus in Crystal City in Northern Virginia, which will add 25,000 new high-income jobs over the next few years.

In addition, we are seeing growth and hiring by other tech firms like Google and Microsoft in Northern Virginia. We are once again seeing growth in the biotech sector in Montgomery County, Maryland. The most significant job growth continues to be in business services, healthcare and education. The growth in the private sector is more than offsetting the slight decreases we have seen in federal employment over the last few years.

Federal government spending makes up about 31% of the local economy with the gross regional product of $529 billion. The percentage of the local economy driven by the federal sector is expected to drop to about 25%, as the private sector continues to expand. As expected, the partial government shutdown during the first quarter had very little effect on the regional economy.

While there continues to be healthy loan demand, the market is competitive in getting more so. The key to our success over the years has been our knowledge of the individual sub-markets throughout the Metropolitan area, and so we continue our careful underwriting of loans by industry, location, and project types. We also are adhering to our disciplined pricing methodology, as in many markets we are seeing new competitors like the debt fund being very aggressive with both pricing and terms, but we will maintain our discipline.

Our Board has confirmed its commitment to being a financially sound, well-capitalized institution. Our consistent high level of profitability has led to continued additions to retained earnings, which contribute to the strength of our capital ratios. At March 31, 2019, the total risk-based capital ratio was 16.22%, increased from 16.07% at December 31, 2018 and 15.32% at March 31, 2018. The tangible common equity ratio improved from 11.57% a year ago to 12.59% at March 31, 2019, and as compared to 12.11% at December 31, 2018. These levels are well above peer averages and even with these capital levels, we have very strong return on equity ratios.

Based upon that, we are giving consideration to reinstituting a cash dividend and/or share-based plan. We appreciate the support of our shareholders and those of you on the call. I would like to remind you that our annual shareholders meeting will be held at 10 A.M. on May 16th at The Bethesda Marriott Hotel. We hope to see many of you at the meeting.

That concludes my formal remarks. We will be pleased to take any questions at this time.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Catherine Mealor with KBW. Your line is now open.

Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thank you. Good morning.

Susan G. Riel -- Interim President and Chief Executive Officer

Good morning, Catherine.

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Good morning, Catherine.

Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst

I thought I would start with the margin and so, it was great to see the margin back up above 4%. But Susan your point, the loan to deposit ratio is now at 107% at an end of period basis. So, I guess, as I think about, the deposit growth that you're expecting over the rest of the year, do you believe that you can still keep that margin above 4% even as you build back the deposit base? And maybe the better question within that is how you're expecting deposit betas to react this year in a flat rate environment? Thanks.

Susan G. Riel -- Interim President and Chief Executive Officer

I would say, Catherine, by having the good loan growth in the first quarter of 2019 together with mitigating some of the high cost of funds, we got back to the 4% and we expect to stay around the 4%. The NIM increase we expected after falling just below 4%, we were able to get it back up. So, going forward giving our substantial level of non-interest bearing deposits together with the Federal Reserve guidance on the rate, the lack of the rate increases, we expect our net interest margin to remain close to the 4%.

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Now I just to add on to that, Catherine, I mean that, in terms of the deposit growth we -- the first quarter had typically been seasonally a little weaker in terms of deposit gathering for us as we saw in the first quarter of last year. In the middle of the year, second and third quarters have tended to show a little bit more strength in terms of when and how we're growing deposits.

I think the deposit growth -- the market for deposit growth here while not quite as frenzied, as it was in the middle of last year, is still what I'd characterize as pressured. So, you're still going to see some upward drift, as I'd mentioned previously in other meetings that -- in some of those costs. But those betas, I think, are in check and have ideally normalized given the Fed outlook and where short-term rates have remained in recent months.

Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. That makes sense. Thank you. And then on the deposit side, do you feel like there is a big decline in the savings and money market this quarter? How much of that do you feel is seasonal versus customer behavior? And would you expect that to continue to trend down or bounce back throughout the year?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Yes, I think again that's a seasonal nature of the deposits, as it relates to that decline. I think we get some of that mix back, and of course, we're coming off pretty high level toward the end of the year as well. So, looking at a more normalized trend over a period of time, I think we get back to where we had to, and of course, result of the DDA non-interest bearing deposits, which we've been able to maintain at about a third of our deposit mix for quite some time now and we expect to be able to continue to do that.

Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. That's great, makes sense. And then maybe one question on credit, could you talk a little bit about the increase in classified assets that we saw at year end? Certainly one of those increases seem to have moved to drive the charge-offs this quarter, and so are there any other larger credits within your classified bucket that you foresee close to working out or maybe could have more of a credit event this year? And then maybe if you could give us an update on classified assets for this quarter as well that would be helpful? Thank you.

Susan G. Riel -- Interim President and Chief Executive Officer

Sure. Catherine, I think we have seen the increase that we had coming off the September 30, 2018 numbers to 12/31. Most of that was attributable to this particular condo loan that we have worked through the process and had purchased by a third-party at foreclosure. The $19 million represented by that and the other non-performer paid in full in the first week of April reduced the balance considerably. And then in addition, we have, you may recall, a group of loans that were under a receivership based on one of our customers, who have some legal issues.

We were able to successfully remove a $24 million credit. It was released from the receivership earlier this month and expect that to transition out of substandard and back to the non-criticized portfolio. So, at that point, we'll be dropping back down to around the $50 million mark, which is fairly close to where we were back in September within $1 million or $2 million. So, I think this has been an aberrational period.

We did place a particular receivership asset into the sub-standard category based upon an issue at the timing of receipt and not really, as to whether we ultimately would suffer a loss. So, I'm not anticipating any kind of a problem there.

When I take a look at the non-performing assets, excluding the $19 million we talked about, the largest credit in non-performing status is $3 million. We have about 50 loans that are non-performing, so it's pretty well stratified. When you're looking at the size of these non-performers, they are much smaller than the one aberrational condo deal. I feel pretty comfortable with where we are in terms of the asset quality.

Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst

That's great. Thank you for all the color.

Operator

Thank you. And our next question comes from Austin Nicholas with Stephens. Your line is now open.

Austin Nicholas -- Stephens Inc. -- Analyst

Hey, good Morning.

Norman Pozez -- Chairman

Good Morning, Austin.

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Good Morning,

Austin Nicholas -- Stephens Inc. -- Analyst

Thanks for taking my questions. I guess just maybe the first one on growth, the loan growth came in pretty nicely this quarter, and I guess as you look out through the remainder of the year, is there any reason that we should be above or below the kind of high single-digit range that we saw in 2018?

And then I guess more broadly any changes where -- and where you would expect the composition kind of incremental loan growth to come from? That would be helpful.

Susan G. Riel -- Interim President and Chief Executive Officer

I would say we're experiencing strong competitions, but our loan growth pipeline seems to be pretty good. And we expect to meet the high low single-digit numbers and our pipeline indicates we can do that.

Austin Nicholas -- Stephens Inc. -- Analyst

Okay. And then maybe on the -- in the release, Susan, you mentioned kind of rightsizing the SBA and FHA initiatives. I know on the FHA side that that's been kind of in the pipeline for a while. I guess can you maybe elaborate on what was done to right-size those businesses? And when that happened?

And then maybe just more broadly on -- some more specifically on the FHA business, any thoughts on that business kind of for the remainder of the year?

Susan G. Riel -- Interim President and Chief Executive Officer

There has been a reduction in the cost of those areas and we've done some reduction in staff to rightsize. The FHA continues to be a challenge for us to say we're not disappointed with the status we have right now would be incorrect. We had -- they seem to have a good pipeline and there seems to be some opportunities coming in toward the third quarter of the year and we're very optimistic about that. But we're cautiously optimistic.

Austin Nicholas -- Stephens Inc. -- Analyst

Understood. And then maybe just one last one on the $10 billion kind of approach, can you just give us an idea of what needs to be done between now, and that point which maybe happen sometime in 2021 and kind of what the incremental spend needs to be just from an expense perspective kind of as you're approaching that event?

Susan G. Riel -- Interim President and Chief Executive Officer

A lot of the focus is on building out the first -- the second line of defense. So, we expect a lot of the cost to be in personnel costs, and we will be, at the end of this year, what we budgeted -- with what we budgeted and what we will be bringing -- the people will be bringing in, should hit about a third of the overall expense. Charles you want to add anything?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Yes, in terms of incremental expense, I mean as we look at people add -- as Susan said, a third of the people we're bringing on, you could attribute those folks to the growth and development of our overall enterprise risk management infrastructure and next year in 2020, I'd expect it to be 25% of the people and then following that 15% to 20% in 2021. There is still some adds that need to be made in terms of IT infrastructure as well, and we'll see that later in over the next couple of years. But all-in-all, I think,of an efficiency ratio in the 38% -- 37% to 38% is still a safe set as we kind of grow into what that -- what's going to be needed for $10 billion.

Austin Nicholas -- Stephens Inc. -- Analyst

Understood. Thanks, great. Well, thanks for taking my questions today.

Operator

Thank you. And our next question comes from Casey Whitman with Sandler O'Neill. Your line is now open.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Good morning.

Susan G. Riel -- Interim President and Chief Executive Officer

Good morning Casey.

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Good morning Casey.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Maybe just to follow on to Catherine's questions on margin, just curious are you starting to see deposit pricing pressure at least ease in the market with the pause in rate hike fear? Or is it still, as competitive as last year?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

It's steady. And again, not as frenzied as it was in the middle of last year. The kind of the graph for CDs has dissipated a fair amount. But yes, I would say -- I would say, it's still steady, yes.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Okay. And maybe --

Susan G. Riel -- Interim President and Chief Executive Officer

Those deposits are our challenge.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Got it. And maybe just a few more for you Jan. If we could just talk more about the large residential condo project, I'm assuming that that was in market, and then, how much of a specific reserve did you guys have established for going to the quarter?

Janice L. Williams -- Executive Vice President

It was in market. It was in Bethesda. It originated as a $50 million loan. Construction was complete. This was just for selling out the unit. Over a couple of years, we've worked through the sell-out of about $30 million and we're remaining with $20 million. Absorption flowed considerably toward the last six month or so. I think we were fortunate to be able to get the kind of result that we did, albeit with $3.5 million loss.

We were able to sell it to a third-party, and make a business judgment in terms of whether it was going to cost us to hold it and carry over the likely sell-out period. I think that was a good result for us. I haven't seen any weakness in general in the condominium market, in fact, has been pretty strong. But this was a high-end or super high-end luxury building and it just didn't sell as quickly as we thought it would.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Okay, and maybe -- you touched a little bit on your largest non-accrual, but what about -- what's your largest performing relationships on the books today?

Janice L. Williams -- Executive Vice President

The largest relationship in any risk category.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Sure.

Janice L. Williams -- Executive Vice President

Okay. We do have some loans that are over $120 million but they're generally broken up in terms of relationships that have a number of different projects associated with them. We do have some larger loans that we're looking at right now that are part of cash flowing performing income producing commercial real estate. That's really been more of our focus over the last six months or so as we manage concentrations and work toward maintaining a strong position should we get to an end of cycle situations, so we're trying to sell out and get in front of that.

Have some office, the trophy that -- for example, one property that's a block and a half from the White House that we did a complete rehab on. It's leased up; it's in great shape. It will probably be exiting us shortly to go into the PERM market. We will try and compete with the offers that we, however, received, and hopefully be able to retain some of that business. We haven't been as active on the construction side, and Susan had indicated that in her prior remarks. So, we're definitely following cash flow at this point in the cycle.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Okay. Helpful. Thank you guys.

Operator

Thank you. Our next question comes from Steven Comery with G. Research. Your line is now open.

Steven Comery -- G. Research, LLC -- Analyst

Hey, thanks for taking my question.

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Sure, thank you Steve (ph).

Steven Comery -- G. Research, LLC -- Analyst

So, in prior quarters, we have talked about sort of the payoff levels and how those have impacted loan yields. Maybe -- just wondering if maybe you guys could give us some idea how that worked out in Q1 2019?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Yes, it was a little lighter in terms of payoffs this quarter. I think we' announced in the last call earnings call, a significant payoff. It was upwards around $356 million in the fourth quarter of 2018. In the first quarter of 2019, it was much lower, about $126 million in terms of those payoffs.

Steven Comery -- G. Research, LLC -- Analyst

Okay. And do you think there was anything specific that drove that? Or was it just sort of this is what happens sometimes?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Yes, the nature of our business and even with commercial relationships, you just -- you have some of these kind of lumpy quarters where things come in at argument's time. So, I think it was just a matter of normal course of business, but it can be lumpy.

Steven Comery -- G. Research, LLC -- Analyst

All right. Very good. Thanks. And then, I know in the prepared remarks, you called out relatively neutral asset liability sensitivity. If rates were to move downward through fed policy or through market rates, how would that kind of strategic positioning change and sort of what's the thinking behind that?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Yes, I mean we endeavor to remain interest rate risk neutral, and we've been slightly asset sensitive for quite some time now. I think strategically we would look to tip the balance a little bit more to the liability side should that happen. But again, low-single digits in terms of the interest rate risk associated with 100 basis points, do lead the way is kind of our MO.

Steven Comery -- G. Research, LLC -- Analyst

Okay. So, it's sort of like asset neutrality is sort of a policy position that you'll stick to either way?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

That's right. We -- I don't want to make our money being -- with me being a fund manager, I want to make our money-making loans. So, that's what we are trying to do.

Steven Comery -- G. Research, LLC -- Analyst

Okay. Very good, makes sense. And then finally from me, another comment from the prepared remarks was thoughts about the dividend and/or buyback, wondering if maybe you guys could go through the puts and takes between those two options? And then, sort of on the same topic, what level of capital is sort of appropriate or would you guys be comfortable with?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Yes, so, I think as we look -- obviously, as Susan mentioned in her remarks, we are accumulating capital at a faster clip than the balance sheet is growing, and we recognize that. We have been considering a dividend or a share repurchase. For the dividend, as you say, puts and takes, once you start that dividend, you want to make sure that you can keep it going; you want to make sure that you're starting at an appropriate level.

So that's certainly part of the discussion. As it relates to the share repurchase, obviously we're looking at that as a -- as we would the acquisition of a -- of another -- of another bank essentially and what the earn back on that. So, we want to make sure that we -- that the earn back given that the price that we are repurchasing is reasonable given what the market would expect. So, it's some of that -- some of the thinking there on that. Obviously -- and also, with the capital position, we have to consider our -- we have to consider the capital levels that relate to the regulators, the ABC concentration that we have. So that's another consideration in part of the calculus of how we're considering those moves.

Steven Comery -- G. Research, LLC -- Analyst

Okay, very good. Thank you.

Operator

Thank you. And our next question comes from Christopher Marinac with FIG Partners. Your line is now open.

Christopher Marinac -- FIG Partners -- Analyst

Thanks. Just one more question on asset quality. So, when we saw the increase in substandard commercial real estate at year-end in the 10-K, does that now back down given what's occurred this quarter, just kind of curious on just the confirmation there.

Susan G. Riel -- Interim President and Chief Executive Officer

Yes. It will, Chris.

Christopher Marinac -- FIG Partners -- Analyst

Okay. So, those numbers right size from what we saw last quarter? So, there is nothing else changing on that?

Janice L. Williams -- Executive Vice President

Yes.

Christopher Marinac -- FIG Partners -- Analyst

Great. And then Susan for you, can you remind us sort of how you use data analytics to kind of do more business with your existing customers, as well as generating new business with new customers in the footprint?

Susan G. Riel -- Interim President and Chief Executive Officer

We, -- I would say we are working to build up the data analytics capabilities and that we're working on hard to get that. So, right now we're more limited. With that, we do have the capabilities of pulling in all of the relationships and we do a lot of the maneuvering on and tracking of products for customer and how many customers we have and what their relationship totals are, and what products they are using? What other products we can build into that relationship. So that is something that we're doing now, but we look down the road to expanding the capabilities of doing that.

Christopher Marinac -- FIG Partners -- Analyst

Okay. But for a long-time, you've been focused on that as a source of new business though from existing customers. You may not been a formal analytic exercise, it was still something you did internally?

Susan G. Riel -- Interim President and Chief Executive Officer

Absolutely. We have been outstanding at expanding our relationships. We have relationships that start at a small level and we have been -- our relationship managers are very good at expanding those relationships, and that's been a core skill set for us.

Christopher Marinac -- FIG Partners -- Analyst

Great. And then one last one. With the government shutdown kind of distraction in the first quarter, is there any sort of natural catch-up effect that occurs this current quarter in 2Q, just curious if that's at all something we should watch for?

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

We didn't see much of an impact as a result of the shutdown, there were marginal things, but it was not significant. So, I wouldn't expect that to change the results in the second quarter going forward.

Christopher Marinac -- FIG Partners -- Analyst

Okay, great. Thanks for the feedback here.

Susan G. Riel -- Interim President and Chief Executive Officer

Thank you.

Operator

Thank you. And I am showing no further questions in the queue at this time. So, I would like to turn the call back over to Charles Levingston for any closing remarks

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Thank you everyone for joining the call. We'll look forward to speaking with you again next quarter. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program and you may all disconnect. Everyone have a great day

Duration: 48 minutes

Call participants:

Charles D. Levingston -- Executive Vice President & Chief Financial Officer

Norman Pozez -- Chairman

Susan G. Riel -- Interim President and Chief Executive Officer

Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst

Austin Nicholas -- Stephens Inc. -- Analyst

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Janice L. Williams -- Executive Vice President

Steven Comery -- G. Research, LLC -- Analyst

Christopher Marinac -- FIG Partners -- Analyst

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