Eagle Bancorp Inc (EGBN) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Eagle Bancorp's Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Chief Financial Officer, Charles Levingston. Sir, please go ahead.

Thank you, Michelle. 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. While our growth and performance over the past quarter has been positive, we cannot make any promises about future performance, and it is our policy not to establish with the markets any formal guidance with respect to our earnings. None of the forward-looking statements made during this call should be interpreted as are providing formal guidance.

Our Form 10-K for the 2020 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. Eagle Bancorp does not undertake to update any forward-looking statements as a result of new information or future events or developments unless required by law.

This morning's commentary will include non-GAAP financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from Eagle online in our website or the SEC's website.

This morning, Susan Riel, the President and CEO of Eagle Bancorp, will start us off with a high-level overview. Then Jan Williams, our Chief Credit Officer, will discuss her thoughts on loans and credit quality matters. Then I'll return to discuss our financials in more detail. At the end, all 3 of us will be available to take questions.

I would now like to turn it over to our President and CEO, Susan Riel.

Thank you, Charles. Good morning, everyone, and welcome to our earnings call for the second quarter of 2021. I'm pleased to report another great quarter for the bank. Similar to last quarter, earnings again are at record levels. Equity has risen to an all-time high. Asset quality remains high with favorable credit trends and efficiency remains a strength. A key difference from last quarter is that there was an increase in total loans, excluding loans held for sale and PPP loans. It was a modest increase of almost $60 million, but it breaks the downward trend.

Focusing on earnings first. Earnings for the quarter were $48 million or $1.50 per share. This was a 1.68% return on average assets and a 16.25% return on average tangible common equity. The larger items impacting earnings this quarter included $4.7 million of accelerated interest income from the sale of PPP loans and $4.6 million reversal from the allowance for credit losses on loans and reserve for unfunded commitments.

Earnings over the last 4 quarters, which includes the third quarter of 2020, when the nation was still locked down, totaled $171.7 million or $5.35 per diluted share. These earnings continue to build our common equity, which at the end of the quarter was $1.3 billion or 11.92% of assets.

Turning to asset quality. At the end of the quarter, NPAs were 50 basis points of assets. And for the quarter, annualized net charge-offs were 30 basis points of average loans. These asset quality ratios, combined with an improved economic outlook nationally and locally, informed our decision to make a second conservative reversal from our allowance for credit losses and reserve on funded commitments. With a reversal of $4.6 million for the quarter, the total reversal for the first half of 2021 was $7.4 million. After the reversal, our reserves were 1.32% of loans, excluding PPP loans.

In terms of operating efficiency, we continue to be a leader with an efficiency ratio of 37.1% for the quarter. We are always prudent in our approach to expense management. For example, this quarter, we closed our Rosslyn, Virginia branch as it had an expiring lease and our customers can be served from other northern Virginia branches. The combined annual pretax cost savings in rental expense will be about $263,000, and there was no write-off of leasehold improvements as these have been fully amortized upon the expiration of the lease.

We are also pleased that all of the employees working at the branch have filled or will be filling positions within the company. Additionally, given the bank's robust capital levels, we requested and received Board and regulatory approval to redeem $150 million of subordinated debt issued in 2016. Charles will have more details on this later.

Before discussing loans, I would like to once again mention the contributions of the residential mortgage and FHA teams. Our residential mortgage team had another great quarter with locked loans of $248 million and a gain on sale of mortgage loans of $3.5 million. Even with mortgage volume off slightly from last quarter, we expect the residential mortgage division will continue to contribute meaningfully to the bottom line.

Our FHA team also did well generating trade premiums of $2.6 million that are included in noninterest income. The revenue stream from the FHA division is not smooth from quarter-to-quarter. Comparatively, the FHA division has larger transactions and less volume than the mortgage division, which has smaller transactions and higher value.

In regard to loans, last quarter, on this earnings call, I said EagleBank intends to more assertively pursue loan opportunities. This past quarter, our funding for new loan originations and advances increased, while payoffs and pay downs decreased. As a result, loans, excluding loans held for sale and PPP loans, increased by $60 million. Jan will talk in more detail about this later.

While still talking about loans, during the quarter, we made a decision to sell $170 million of our PPP loans, which generated nearly $4.7 million in accelerated net deferred fees and costs into interest income. The sale was to a well-regarded firm with significant expertise in the ongoing servicing and processing associated with PPP loans.

Additionally, just below $160 million in loans were forgiven during the second quarter. The PPP loans retained totaling $238 million were those that had already started the forgiveness process on our platform or those that we decided to retain for customer service reasons. The sale of the PPP loans and with the remaining loans moving through the forgiveness process will enable us to free up personnel to focus on originating new business and to continue to provide a high level of service to our clients.

In regards to our market, we serve a strong and robust market, anchored by the federal government and government contracting, a growing technology presence, which includes Amazon's HQ2, many substantial domestic and international firms, several large hospital systems and a long list of universities. Our home market continues to see companies open. Hotels are doing more business. Tourists have returned, and many of the restaurants are full. Internally, EagleBank, which has been operating remotely where possible since the beginning of the pandemic, will have its workforce return in a hybrid environment on September 13.

We also have a legal update. We are pleased to have initiated discussions with Commission staff about a potential resolution or settlement regarding the Commission's investigation, which we first disclosed in July 2019. We hope to resolve the Commission's investigation as it relates to the company within the next few months. This would be a welcome development for EagleBank and its shareholders.

In addition, we are also pleased to have initiated discussions with the staff of the Federal Reserve Board about a potential resolution or settlement regarding the Federal Reserve Board's investigation. We also hope to resolve the Federal Reserve Board's investigation as it relates to the company in a timely manner. We also disclosed in yesterday's press release that our CFO, Charles Levingston, received a Wells Notice in connection with the ongoing SEC investigation. Charles made a submission to the SEC in response to the Wells Notice and is cooperating with the SEC's investigation. Charles is continuing to serve in his capacity as CFO.

While we can't comment on the allegations against Charles, I want to stress that in making the decision to have Charles continue to serve as CFO, the Board evaluated the circumstances, considered a number of factors and consulted with members of management and external advisers, including our independent auditors. The Board's top priority is, as it always has been, to act in the best interest of the company and the company's stockholders. And we and the Board remain confident in the company's disclosure controls, accuracy of its financial reporting and the professionalism of the company's finance function and personnel.

We work closely with other members of the company's management, the company's disclosure controls committee, the company's independent auditors, the company's outside disclosure council and other advisers and consultants to ensure that the company maintains strong internal control over financial reporting. Given that the investigation is ongoing, we obviously cannot speculate or comment further on these developments at this time nor are we able to speculate or comment on former employee's and director's potential interactions with the SEC. Accordingly, we cannot answer any questions about the investigation during our Q&A.

Before turning it over to Jan, I would like to reiterate that we remain focused on building stockholder value. Book value rose to $40.87 per share, up 11% from a year ago; and tangible book was $37.58 per share, up 12% from a year ago. We also increased the quarterly dividend to $0.35 per share. This is up from $0.25 from the prior quarter and $0.22 the quarter before that. Based on recent stock prices for Eagle, a dividend of $0.35 per share puts our dividend yield more in line with our peers.

I would like to thank all of our employees for their hard work and their commitment to support our clients. Additionally, we remain committed to a culture of respect, diversity and inclusion in both the workplace and the communities we serve.

With that, I would like to turn the speaking duties over to Jan Williams, our Chief Credit Officer.

Thank you, Susan, and good morning, everyone. First, I'd like to speak to the modest uptick in loan balances, exclusive of PPP and loans held for sale that Susan mentioned earlier. As credit has improved and with a large portion of PPP loans sold or moving through the forgiveness stage, we're able to focus more of our efforts on quality opportunities we see in the market. In particular, we're focused on opportunities that offer good risk-adjusted returns.

Having said that, the pricing of loans continues to be a factor in our appetite for new loans. Of course, there's always going to be a time lag between identifying and securing lending commitments and, ultimately, loan funding. Some of the uptick in loans may also be related to the timing on fundings for new loans originated in the past several quarters. Booked and funded loan originations last quarter were on the lower side. However, we did have a few large loans with significant funding this quarter.

One of the larger loans was an $80 million multifamily financing for the Montgomery County Housing Opportunities Commission in economically strong Bethesda, Maryland. As a community bank, we're very pleased to be able to offer support for these local efforts to bring affordable housing opportunities to our community. We also funded $26 million for the redevelopment of another very well-located property in northwest Washington, D.C. during the quarter.

In regards to the reversal of the $4.6 million from the allowance for credit losses and reserves for unfunded commitments, the reversal primarily resulted from the improved outlook for the economy and employment forecast as well as improvement in loan portfolio credit metrics. The unemployment rate for the Washington area, which was 5.8% in February, fell to 4.9% in May. At period end June 30, loans 30 to 89 days past due fell to $3.9 million, the lowest level we have seen in more than a dozen years.

With the reversal, the allowance for credit losses to total loans, excluding PPP loans, was 1.32%, down 15 basis points from the prior quarter end. Even with our lower allowance for credit losses, our coverage ratio was stable, with coverage of nonperforming loans at 187%, which remains in the 180% to 200% range, where it's been for the last 6 quarters.

At quarter end, NPAs to assets were 50 basis points, down 1 basis point from the prior quarter end. In dollars, NPAs were $54.5 million, down from $57.3 million in the prior quarter end. The decline in NPAs was primarily from payoffs of nonperforming loans, a return to accrual status for some loans, which exhibited sustained performance and charge-offs.

Net charge-offs for the quarter were $5.6 million. The largest charge-off was a partial charge-off related to a note sale secured by a smaller suburban office property at $3.5 million. The note sale closed in early July. The other charge-offs consisted of a partial charge-off of one other CRE loan now fully resolved; a few smaller C&I loans, principally in the restaurant industry; and one small SBA credit.

With that, I'd like to turn it over to Charles Levingston, our Chief Financial Officer.

Thank you, Jan. Net income for the second quarter of 2021 and second quarter of 2020 reflects operations in 2 very distinctly different environments as the current quarter contains a reversal from the allowance for credit losses and accelerated income from the PPP loan sale, whereas in the second quarter of 2020, we were still building those COVID-19 reserves.

In the earnings release, to adjust for the impact of the PPP sale, we added a table for net interest margin, which backs out at $4.7 million of accelerated net fees and costs from net interest income, and we've also carried the adjusted net interest income down into the PPNR table. While adjusted PPNR for the second quarter of 2021 declined in comparison to the second quarter of 2020, it was a little changed from the prior quarter end.

On a linked-quarter basis, the net interest income, absent the PPP sale, was down $2.7 million from the prior quarter. This primarily reflects the decline in margins to 2.88% on an adjusted basis, down from [2.98%] in prior 2 quarters.

Noninterest income was up $338,000 from the prior quarter. While mortgage gain on sales were down on a linked-quarter basis, FHA trade premiums of $2.6 million more than made up for the difference. Noninterest expenses were down $1.3 million from the prior quarter. Most of the decline was in salaries and expenses and FDIC fees, offset by increased -- the increases in legal and professional fees. Overall, adjusted PPNR, absent the PPP accelerated income, was down $1 million from the prior quarter.

This quarter, deposit inflows finally abated and deposits at quarter end were $9 billion, down $180 million from the prior quarter. This resulted in the reduction of excess liquidity as we continue to slowly and prudently build the investment portfolio. Investment securities at the end of the second quarter were $1.7 billion, up $311 million from the prior quarter end. Investments this quarter, like last quarter, primarily 20-year, 2% agency mortgage-backed securities and callable agency bonds.

Additionally, while it doesn't show up in the investments, this quarter, we invested $300 million in a reverse repurchase agreement with a well-regarded nationally known investment bank to get some additional earnings on our cash. Also, higher cost CDs continue to run off. In the second quarter of 2021, CDs with a total balance of $200 million and a weighted average rate of 1.21% matured. These CDs had a weighted average term of 16 months at issuance. Overall, our cost of funds in the first quarter of 2021 decreased to 37 basis points, down from 42 basis points in the prior quarter.

Going forward, our cost of funds will be positively impacted by the redemption of $150 million of our 2016 subordinated debt on August 1, which is our first opportunity to call the debt. The debt had a rate of 5% in the second quarter, which translates into pretax cost savings of $7.5 million on an annual basis and $1.9 million on a quarterly basis. This redemption, however, will accelerate about $1.3 million in deferred costs, so the impact in the third quarter will be minimal.

To fund the repayment, we made a dividend of $100 million from the bank to the Bancorp early in the third quarter. The redemption of debt is possible because our earnings have consistently generated capital that has outpaced the need for capital to cover risk-based assets. The redemption of debt will not impact our Tier 1 or tangible capital at the Bancorp, but will reduce our capital at the bank level. Even with this reduction, we have enough capital to fund future loan growth as well as fund large commercial projects.

With that, I'll hand it back to Susan for a short wrap up. Susan?

Thanks, Charles. As we move into the second half of 2021, we will continue our efforts to deliver positive operating and performance results, and we will continue to strive to serve both our investors and our community to the best of our ability.

But before we open up for questions, I would like to say that the bank posted its second consecutive quarter of record earnings. NPAs are 50 basis points on assets. Loans past due 30 to 89 days are under $4 million. Common equity is almost 12% of assets. Total risk-based capital is almost 18%. We just raised the dividend, and we got approval to redeem $150 million in sub debt. The bank is doing well.

We'll now open up the call for your questions.

(Operator Instructions) Our first question comes from the line of Casey Whitman with Piper Sandler.

Wondering maybe if we could start with just a PPP related question. Following the sale of the portion of the PPP and accelerated fees, how much is remaining in the PPP processing fees that have yet to be realized on that remaining $238 million balance? And also like what's your best guess for the timing of forgiveness for the remaining balance?

Yes, I'll take that one, Casey. Left on the balance sheet that we've got about $3 million or so, a little less than $3 million in net deferred fees on the PPP portfolio of the $238 million left, in terms of timing, your guess is as good as mine. They've been moving along at a pretty good clip. I imagine there are going to be some stragglers at the end. If they've waited this long, they may have their own doing challenges in gathering that information. But I would expect over the next couple of quarters, we'll see a meaningful decline in those PPP loans, but time will tell the tale.

Helpful. And nice to see the loan growth this quarter. You mentioned just some of the pressure on the yields, but do you have the numbers around where new production was coming on this quarter versus last maybe?

Yes. So yes, as you can see, obviously, the -- on an adjusted basis, our yield for the quarter on total loans is just above 4.50%, at 4.52%. New production is coming on a weighted average coupon, right? So ignoring the impact of the deferred fees and costs of right around just below 4% or so on a weighted average basis is where we were coming in the second quarter. So obviously, that's going to -- if that trend continues, we'll create a little bit of a drag on the asset side of the balance sheet.

Understood. Last question, I'll let someone else jump on. But just on capital, you've raised your dividend a number of times recently. Just how are you guys ultimately thinking about the right level with, as you mentioned your yield kind of now more in line with peers? Is there sort of a target payout ratio range we should think about? Or how do you think about the level?

Yes. Obviously, we do hold a significant amount of capital. I think the rock and hard place of it for us is really that ADC-CRE concentration number. We do -- if you stack us up against a larger peer group, appear to have larger capital, but we want to be mindful of those ADC and CRE concentration limitations. So that is somewhat of a gating factor.

But we're going to be judicious about and prudent about that capital management. We want to make sure that we're being good stewards of the capital that we're holding and return it to our shareholders where appropriate.

Understood. And do you have that ADC capital level now? Or should we wait for the call report?

Yes. I would wait for the call report to have it finalized, but it's going to be slightly improved from the prior quarter is my expectation.

And our next question comes from the line of David Bishop with Seaport Research Partners.

Susan, I think you mentioned in the earnings narrative, the opportunity to originate loans for larger commercial projects. Just curious, has your appetite increased or to do larger deals here just given the strength of capital or maybe pullback in competition or just the quality or tenor of loans you're seeing in the market, just maybe some commentary in terms of the outlook for average loan sizes, how you see that playing out?

I think our appetite has definitely increased. But we also are seeing that in the market. And as you know, the market is tight, the pricing is tight, and there's a lot of competition. So we are out there, and our teams are aggressively pursuing deals. And we've had a good deal of success recently.

I would agree with that. I would also say that the larger opportunities that are coming through seem to have an incredible amount of equity in them. I think there's still a lot of money sitting around, looking for a place to deploy. So the credit metrics on these larger deals has been especially strong. On the other hand, the pricing is pretty darn tight on them. So it's a balancing act.

Just curious if you have any commentary what the loan pipeline looks currently relative to last quarter?

I'm sorry?

The loan pipeline. We have unfunded commitments of just under $2 billion currently. It's slightly elevated from where we were last quarter, which was closer to $1.9 billion, I believe.

Got it. And then, Charles, maybe from a credit perspective. Obviously, the number is moving in the right direction here. But when you get to a point, maybe look out in the future, where we start to see the positive loan growth. Just curious if you can give us a sense where you think you see the ACL moving back to? Just update us what the day 1 ratio was and maybe what you'd be reserving new loan growth at.

Right. Our day 1 calculation was right about 110 basis points, I believe. And obviously, here, we are sitting at 128 basis points, 132 when you exclude PPP. So there's -- if we assume that day 1 is a normal environment, right, every environment is a little different, then there's a little bit more room to drift down, if we can get back there.

Got it. I appreciate the commentary and the securities. If you do continue to see some excess liquidity in the market that doesn't funnel into loans, do you see that ratio of investments to assets creeping up again? I think it's about 12% or 13% currently.

Right. Yes. It's certainly likely, right? That's the place to go if you can't get to the loans. So again, we want to be -- I'll use the word judicious again about it, but that's where -- that's the answer today, absent the loan growth.

Got it. And then I think you had mentioned the run-off in the CD book this quarter. Any update in terms of repricing opportunities that might go ahead in third and fourth quarter?

Right. Yes. So those CDs I mentioned, $200 million came off with a weighted average rate of 121 basis points, 16 months in term. We had some of that replace -- repriced. I think it was about $85 million repriced at about 12 basis points with weighted average maturity of 12 months. So you are seeing, obviously, those funding costs continue to grind down as the CDs roll off. And I think there's a little more opportunity for that.

You can see the weighted average rate that we have for time deposits that we have in the press release is 136 basis points. So there's still some room to drift down there if those continue to reprice. We also did bring down just slightly our deposit pricing on our rate sheet just by a couple of basis points, but we continue to look for opportunities to improve funding costs.

Again, the $150 million in sub debt, it's going to be called on August 1, will have a significant impact. But from a liquidity standpoint, right, if you think every $100 million or so of excess liquidity means about 3 basis points on the balance sheet and the absolute costs associated with that, too, right, that 5% rate on that $150 million is a hefty price for excess liquidity. So those savings make a lot of sense.

And obviously, if the need for capital returns at some point, we feel comfortable that we can reengage the capital markets and today, clearly, at very attractive prices. So -- but right now, the need isn't necessarily there. So probably more information than you wanted, but hopefully, that answers your question.

Yes. Do you have the schedule of CD maturities in the third quarter and fourth, just the dollar amount and maybe rate?

Not off hand, not off hand. I do have that in my notes. So I'm not sure it's something that we're publishing now.

And our next question comes from the line of Catherine Mealor with KBW.

Maybe just a follow-up on the deposit and kind of excess liquidity conversation. Would you expect from here for deposits to continue to shrink like we saw this quarter on an average basis? Or would you -- as you account for your pipeline as loan growth improves, do you see an even modest deposit growth?

Yes. I see deposits relatively flat as far as I can see at this point. There's still a lot that could be washing around out there and looking for a home. And we still achieve some narrow spreads on some of that liquidity when we find it at the right price. So I'd see them being relatively flat at this point.

Okay. That's helpful. And then how about on loan growth, can you talk a little -- I mean, sort of a question on this earlier, but is -- as the pipeline continues to improve, what type -- what kind of level of growth rate do you feel like is appropriate for Eagle at this point? You're historically kind of a double digit grower. There have been some changes in kind of, I think, risk appetite and maybe balances of the amount of construction loans that you want to keep on the balance sheet. So what -- over kind of a longer period of time, what type of growth rate do you feel like is right for your company?

I would say, Catherine, that we really do have a renewed appetite and are being more aggressive in going out into the marketplace and looking at different types of loans. We have looked much more favorably upon certain types of construction lending. And I think that number will be increasing in the future based on what we've seen so far. We're not averse to it at this point in time and feel like the economy is in a much better spot than it was 2.5 years ago. Charles?

Yes. Again, pricing is a challenge. We've certainly got plenty of liquidity to deploy. We don't want to compromise on credit. So the question in that Venn diagram, as I channel our President of Commercial Banking, is that what are we willing to do on the pricing front. So that's the gating factor there.

Deal flow seems to be pretty good, as we hear it. There's opportunities out there. It's just there's a lot of money chasing fewer deals.

Yes. Okay. And maybe one last one then just on the buyback. You increased your dividend significantly this quarter, which was great to see, paused on the buyback. Would you expect to be more active in the buyback in the back half of the year?

We're going to continue to evaluate that. It's -- we certainly want to make sure that we are buying at a reasonable price. And obviously, there's -- you want to rely on the metrics, right? There clearly is a little bit of a sticker shock from where we initially put that share repurchase plan in place, but we want to rely on the metrics and look for a reasonable way to repurchase shares and do what's best for the shareholder, be it any more changes to the dividend or repurchase of additional shares, something we'll continue to look at.

And our next question comes from the line of Brody Preston with Stephens Inc.

Charles, I just wanted to follow up on the loan portfolio. Could you just give us a reminder what percent of loans are floating rate? And what percent of the floating rate bucket is currently at floor levels?

Yes. So we have about -- I think, excluding PPP, you're talking about close to 60% -- just under 60% is variable rate. That's about $4 billion or so and just under $3 billion have floors on them, about $2.8 billion, l believe, is the number.

Okay. And do you know of those floors, what amount is currently at their floor levels?

It is a significant portion. If you give me a second, I will give you that answer. If you want to ask another question, I can get to it.

Yes. Yes, that would be great. I'll ask Jan a question. Jan, there's been a couple of articles in the commercial observer lately about increased vacancies at some office buildings in D.C. And so I just wanted to ask, I think there was a small office property that you guys maybe charged off or had an issue with this quarter. So I just wanted to ask is, are any of those vacancy issues kind of making its way into your portfolio? And if you could just provide some, I guess, maybe some broader color on what you're seeing in the broader office market?

I think there's a lot of uncertainty out there with what's going to happen in the office market longer term. In the near term, we don't really have -- we have one office project that was substantial rehab, new construction that is in D.C. that is in lease-up and has been seeing increased activity lately.

Everything else that we have on the office side in D.C. has really been income producing. So we haven't had any significant blip in performance and the leases roll over a fairly long period of time. So there's probably -- if there's going to be an impact, it's not going to be immediate, maybe 3 years or so as lease rollover starts hitting. But I think that we're in a pretty comfortable loan to values, and we do stress test our income-producing CRE for significant declines in operating income, increases in cap rates, et cetera.

So it's an area where we're treading lightly, but we think leases in place do offer a buffer in a period of time to work through things. That said, there are a number of repositioning projects that are really more in enclosing suburbs than they are in D.C. proper, but that's certainly something we're starting to see here, as you see it in other areas of the country.

Okay. Great.

And Brody, just to get back to you. So it looks like of the 40% or so of the portfolio that it is at floors, that $2.87 billion that is at floors, it's only about $208 million that are currently at the floor. There's more room to get.

Okay. Great. And then my last question. Susan, I appreciate the update that you gave on the investigations, both on the call and in the release, and I hear you loud and clear. But this was the first time you gave a little bit of a time line, I guess, on a potential resolution. And so feel free to give me the stiff arm on this question, if you need to, but I do feel compelled to ask. Was there something that changed this quarter relative to last quarter that made you feel comfortable going to the Federal Reserve and asking them for a potential resolution?

I would say there's just been increased discussion that we have had with both the SEC and the Federal Reserve, and that's where we're coming from with those responses.

And our next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

Jan, I just wanted to drill down a little bit more on credit quality. Just curious on kind of trends that we might see coming soon on sort of special mention, substandard loans and kind of how you think risk grades will play out in the next few quarters?

Well, I do think we're going to be seeing the loans that we automatically shifted on to the watch list because of deferrals start to come off because at the end of next quarter, substantially, all of the deferrals would have been completed. So as we see these loans having sustained performance under contractual terms, we'll be pulling them off of the list.

As far as special mention and substandard go, given the state of the portfolio right now and the level of past dues that we had that are really microscopic, I'm not seeing, knock on wood and some of it be prediction, but I'm not seeing anything currently that would give me reason to think that we're going to have increases in classified loans.

Okay. Great. And then just a follow-up has to do with the sort of presold construction within the book. And how often are you seeing homes or other properties kind of presold on the front end? And is that still a kind of high characteristic in greater D.C. market?

I think this is on the residential side?

Yes. I think primarily residential.

Well, the residential market here is fire hot. I have never seen it like this before. People are definitely in inventory shortage. Things are moving a lot faster. We've had a number of our builders who've come in and because the level of their presales is so high and we have them kind of locked into 1, 2 spec situation and a limited number of presales.

Now they're really looking to increase that size of that availability because of the number of presales and the prices continue to increase, I think it's tough to say for sure, but the 10 years seems to be amazingly low. So I'm thinking that I don't see an end in sight for this right now. Charles is a better predictor of the 10 year than I am.

Right. Yes. I mean, obviously, there seems to be a very high correlation with how that tenure tracks and the kind of activity we see in our residential growth operation. Clearly, with the dips that we've had over the last couple of weeks, we think that may drive another strong couple of periods for them. So...

Yes. Okay. Great. And then just a final question. Susan, back to you, is on these legal matters that you disclosed, should we expect to see an update in the 10-Q in a few weeks? Or will it take longer than that to kind of provide any incremental information on that matters would be?

I -- we really can't tell at this point. If something happens, obviously, we will update. But we can't predict that at this time.

And then is there any visibility on a legal expense from here? Would it be presumably higher this next quarter? Or is it too early to say?

Yes. I think it's a little too early to say. I mean, clearly, as we approach the resolution on these matters, the legal activity is going to increase. So that's something to be mindful of as you're thinking about it.

And our next question comes from the line of David Bishop with Seaport Research Partners.

Just had a quick follow-up, Susan, in terms, I think you mentioned in the preamble, yet an opportunity to participate, I think, with the MoCo affordable housing program with the larger credit. I know if you're in Howard County, that's a real issue in terms of housing affordability. Are you seeing opportunity to maybe export that or take advantage of that drumbeat and maybe some of the other DMB counties around here surrounding MoCo in Northern Virginia? Just curious if there's maybe some other opportunities to participate with some of the county governments to build out some of the affordable housing initiatives that are being pushed?

We're constantly looking at that as a possibility. So there are opportunities, and our people are out there in dealing and looking to bring those on board.

And in terms of loan yields on that, just curious, any sort of pricing and yield discussion you can provide on those types of opportunities? That's all I had.

Well, I can't really give you pricing information on a specific credit. Is there -- in general, there's a lot of price competition for strong deals. I think we're seeing that. And we just try to make sure that we're in the mix with the correct risk-adjusted pricing and move forward with increasing the size of the portfolio at acceptable rate levels.

Right. And as I think Charles said before, Jan, we're not compromising on credit.

Right said.

Pricing is tough, but we're holding tight on our credit requirements.

The other factor I'd throw in there is, obviously, with all the liquidity that both we, as an institution, and a lot of our competitors have both size and as both Susan and Jan said support matter in those transactions, and those deals get pretty competitive when they're large like that with healthy sponsors.

Understood. Appreciate the color.

It's a great work. It's a great type of lending. And we do enjoy being involved in our community and working with our constituencies to really bring that sort of thing home. So if you've got an opportunity in Howard County and you want to throw it our way, I'm happy to take your call.

I will definitely take that under consideration.

And I'm showing no further questions at this time. And I would like to turn the conference back over to CEO, Susan Riel, for her closing remarks.

Just want to say in closing, we appreciate your questions and all of you taking the time to join us on the call. We hope everyone is enjoying the summer, and we look forward to speaking to you again in a few months. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.