Q2 2021 Eagle Bancorp Inc Earnings Call

[music].

Good day, and thank you for standing by and welcome to the Eagle Bancorp second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone please see.

Be advised that today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your Speaker today, Chief Financial Officer, Charles Levingston, Sir. Please go ahead.

Thank you Michele good morning. This is Charles Levingston, Chief Financial Officer of Eagle Bancorp before we begin the presentation and I would like to remind everyone that some of the comments made during this call maybe 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 on.

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 and 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 on our website for the.

Cts web site.

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 our thoughts on loans and credit quality matters, and then I'll return to discuss our financials in more detail at the and all 3 of US will be available to take questions I would now like to turn it over from our president and <unk>.

Susan Thank.

Thank you Charles Good morning, everyone and welcome to our earnings call for the second quarter of 2021 and.

And I'm pleased to report another great quarter for the bank similar to last quarter earnings again are at record levels.

<unk> 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 660 million, but it breaks the downward trend.

Focusing on earnings first earnings for the quarter were 48 million.

Million or $1.50 per share. This was up 168% return on average assets and a $16.2 5% 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 from 35 per diluted share. These earnings.

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 Npa's were 50 basis points of assets and.

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 and informed our decision to make a second conservative reversal from our allowance for credit losses and reserve for unfunded commitments with the 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 132% of loans, excluding PPP loans and.

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 and our approach to expense management.

For example, this quarter, we closed our Roslyn, Virginia branch as it had an expiring lease and our customers can be served from other northern Virginia branches that.

The combined annual pre tax cost savings from rental expense will be about 263000, and there was no write offs of leasehold improvements as fees had been fully amortized upon the exploration of beliefs.

We are also pleased that all of the employees working up the brands 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 team.

Our residential mortgage team had another great quarter.

With lot 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.

And our FHA team also did well generating trade premiums of 2.6 million that are included in non interest income the.

And the revenue stream from the FHA Division is not smooth from quarter to quarter comparatively the FHA division has larger transactions and less volume and the mortgage division, which has smaller transactions and higher value.

In regard to loans last quarter on this earnings call I said Eagle bank and tends to more assertively pursue loan opportunities.

This past quarter, our funding for new loan originations and advances increased while payoffs and Paydowns decrease as a result loans, excluding loans held for sale and PPP loans increased by $60 million Jean will talk in more detail about <unk>.

This later.

While still talking about loans during the quarter, we made a decision to sell a $170 million of our our PPP loans, which generated nearly $4.7 million and accelerated net deferred fees and costs.

Into interest income.

And the sale was to a well regarded firm with significant expertise and the ongoing servicing and processing associated with PPP loans. Additionally, just below a $160 million and loans were forgiven during the second quarter.

The PPP loans retained totaling $238 million with 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.

And regards to our market, we serve is 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.

Little systems, and a long list of universities.

Our home market continues to seek companies open hotels are doing more business tourists have returned and many of the restaurants are full and.

Internally Eagle Bank, which has been operating remotely where possible since the beginning of the pandemic will have its workforce return and a hybrid environment on September 13.

And we also have a legal update we are pleased to have initiated discussions with commission staff about a potential resolution or settlement regarding the commissions investigation, which we first disclosed in July 2019, we hope to resolve the commissions and investigation.

As it relates to the company within the next few months.

This would be a welcome development for Eagle Bank 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 investigation.

We also hope to resolve the federal reserve Board's investigation as it relates to the company and a timely manner.

We also disclosed in yesterday's press release that our CFO, Charles Livingston received a wells notice and connection with the ongoing FCC investigation.

Charles made a submission.

And to the SEC and response to the wells notice and is cooperating with the FCC's investigation.

Charles is continuing to serve and his capacity as CFO.

While we can't comment on the allegations against Charles I want to stress that and 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 advisors and.

Including our independent auditors the board's top priority is as it always has been to act and the best interest of the company and the company's stockholders and we and the board remains confident and the company's disclosure controls and accuracy of its financial and 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 companies outside disclosure counsel and other advisers and consultants to ensure that the company maintains strong internal controls over <unk>.

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 employees and directors 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 <unk>.

Share up 12% from a year ago.

We also increased the quarterly dividend to <unk> 35 per share.

This is up from 25% from the prior quarter and 22 cents per <unk>.

Quarter before that based on recent stock prices for Eagle a dividend of <unk> 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.

Additionally, we remain committed to a culture of respect diversity and inclusion and 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.

And I would like to speak to the modest uptick and loan balances exclusive on PPP and loans held for sale that Susan mentioned earlier on.

Credit has improved and with a large portion of PPP loans solid on moving through the forgiveness stage.

On the focus more of our effort on quality opportunities, we see on the market. In particular, we are focused on opportunities that offer good risk adjusted returns, having said that the pricing of loans continues to be a factor and our appetite for net loans.

Of course, there is always going to be a time lag between identifying and securing lending commitments and ultimately and loan funding some of the uptick and loans may also be related to the timing on fundings for new loans originated in the past several quarters book and funding.

And loan originations last quarter, we're on the lower side. However, we did have a few large loans with significant funding this quarter.

1 of the larger loans and towards the more than $80 million multifamily financing and the Montgomery County, and housing opportunities commissions and 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 house and opportunities to our community.

We are 526 million per the redevelopment on another very well located property and northwest Washington D C. During the quarter.

And regards to the reversal of the 4.6 million from the allowance for credit losses, and reserves for unfunded commitments and <unk>.

Reverse comp, primarily resulting from the improved outlook for the economy and employment forecast as well as improvement and our loan portfolio credit metrics and the unemployment rate from the Washington area, which was 5.8% in February and <unk>.

4.9% and May at period end June 30 loans 30 to 89 days past due fell from 3.9 million on that.

At this level, we have seen and more than it does and year.

With the reversal of the allowance for credit losses to total loans, excluding PPP loans was 132% down 15 basis points from the prior quarter and.

Even with our lower allowance for credit losses, our coverage ratio was stable with coverage of nonperforming loans.

187%, which remains in the 180% to 200% range, where it's been from the last 6 quarters.

At quarter, and NPA to assets were 50 basis points down 1 basis point from the prior quarter and and.

And dollars NPA for $54.5 million down from 57, 3 million and the prior quarter and the decline in and Pls was primarily from pay offs of nonperforming loans are return to accrual status for some lines, which exhibited sustained performance.

<unk> and charge offs net.

Net charge offs for the quarter were $5.6 million the largest charge off was a partial charge off related to a note sale.

The tiered by a smaller suburban office property at $3.5 million the net.

Net sales first and early in July.

The other charge offs consisted of apart from charge offs of 1 other CRE land now fully resolved.

And as smaller C&I loans, principally in the restaurant industry and 1 small SBA credit.

With that I'd like to turn it over to Charles <unk>, Our Chief Financial Officer. Thank you Jan net income for the second quarter of 2021, and the second quarter of 2020 reflects operations and 2 very distinctly different environments. As the current quarter contains a reversal from the allowance for credit losses and accelerated any.

Come from the PPP loan sale, whereas in the second quarter of 2020, we were still building those as COVID-19 reserves.

And the and the earnings release to adjust for the impact of the PPP sale. We added a table for net interest margin, which backs out the $4.7 million of accelerated net fees and costs from net interest income and we also carry the adjusted net interest income down into the PPE and our table, while adjusted <unk> for the second.

<unk> 2021 declined in comparison to the second quarter of 2020, it was little changed from the prior quarter and 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 margin to $2.88 on an adjusted basis.

This down from 2 <unk>.

Prior to quarter's.

Noninterest income was up $338000 from the prior quarter, while mortgage gain on sales were down on a linked quarter basis, FHA III 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 and salaries and expenses and FDIC fees offset by increasingly and increases in legal and professional fees overall adjusted PPE and are absent the PPP accelerated income was down $1 million from the prior quarter.

And this quarter deposit inflows finally, abated and deposits at quarter and were $9 billion.

Down $180 million from the prior quarter.

This resulted and the reduction of excess liquidity as we continue to slowly and prudently building investment portfolio.

Investment Securities at the end of the second quarter were $1.7 billion.

Up $311 million from the prior quarter and 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 and the investments this quarter, we invested $300 million and 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 and the second quarter of 2021, Cvs with a total balance of $200 million and a weighted average rate of $1.2 1% mature. These Cds at a weighted average term of 16 months and issuance.

Overall, our cost of funds and the first quarter of 2021 decreased to 37 basis points down from 42 basis points and the prior quarter.

Moving 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% and the second quarter, which translates into pretax cost savings of $7.5 million on on annual basis, and $1.9 million on a reported.

And this redemption, however will accelerate about $1.3 million and deferred costs. So the impact on the third quarter will be minimal.

To fund the repayment, we made a dividend of $100 million from the bank to the Bancorp early on the third quarter.

The redemption of debt as 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 we will reduce our capital at the bank level, even with this reduction we have enough capital to fund future loan growth as well as from large commercial projects.

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

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 vulnerability, but before we open up.

And for questions I would like to say that the bank posted its second consecutive quarter of record earnings and our 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 a $150 million and sub debt the bank is doing well.

We will now open up the call for your questions.

Thank you as a reminder to ask any questions and we'll need to press star 1 on your telephone to withdraw your question. Please press the pound key.

First question comes from the line of Casey Whitman with Piper Sandler. Your line is open. Please go ahead.

Hey, good morning.

Good morning, and Basi.

Wondering maybe if you could start with just the Pvp related question Paul.

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.

And that remaining $238 million of our balanced and.

Also like what's your best guess for the timing of forgiveness for for the remaining balance.

Yeah, I'll take the Atwood Casey.

Left on the balance sheet, and we've got about $3 million or so a little less and $3 million and net deferred fees.

On the GP.

Portfolio, the $238 million left in terms of timing.

I guess is as good as mine and they've been moving along at a pretty good clip.

And I imagine they are going to be some stragglers at the end if they waited this long.

And they may have their own challenges and gathering that information but.

I would expect over the next couple of quarters, we will see a meaningful.

The decline and those PPP loans, but.

Time will tell the tale.

Helpful. Thank you and nice to see the loan growth. This quarter you mentioned just some of the pressure on on the yields but do you have the numbers around where new production was.

Coming on this quarter versus last maybe.

Yeah. So.

And as you can see obviously the on on adjusted basis R. R.

Yields for the quarter on total loans is just above $4.50 to $4.52.

Production is coming on weighted average coupon rate.

During the impact of the deferred fees and costs of right around just below 4% or so on a weighted average basis.

Where we were coming in on the.

And the second quarter, so obviously, that's going to if.

If that trend continues we will create a little bit of a drag.

On the on the asset on.

On the assets on the balance sheet.

Understood.

Last question I'll, let someone else jump on but just on capital you've raised your dividend and number of times recently.

How are you guys ultimately thinking about the rate level with as you mentioned your yields on and now more in line with peers is there sort of a target payout ratio range and we should we should think about or how do you think about the level.

Yes.

Obviously, we do hold a significant amount of capital I think that the rock and hard place of it for US is really that ADC CRE concentration number.

And we do if you stack 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.

And prudent about debt capital management, we want to make sure that we're being good stewards of the capital that we're holding and and.

Return it to our shareholders where appropriate.

Understood and do you have that ADC capital level, now or should we wait for the California.

Yes, I would I would wait for the call reports haven't finalized, but its going to be slightly improved from the prior quarters My expectation.

Alright, thanks, Thanks for the call.

Thanks, Steve.

Thank you and our next question comes from the line of David Bishop with Seaport Research Partners. Your line is open. Please go ahead.

Okay. Thank you Hey, good morning, guys. How are you on.

Good morning, Dave.

Hey, Susan and I think.

You mentioned and the.

The earnings there to.

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 and competition or just the quality of your tenure of loans Youre seeing and the market just maybe some commentary in terms of the outlook for average loan size, how you see that playing out.

I think our appetite has definitely increased but we also are seeing that and the market and as you know the market is tight.

The pricing is tight and.

And there's a lot of competition. So we are out there and our.

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.

It seemed to have an incredible amount of equity in them.

And think there's still a lot of money sitting around and looking for a place to deploy now.

The credit metrics on these larger deals has been especially strong.

On the other hand, the pricing is pretty darn guide on them. So it's a balancing act.

Just curious if you have any commentary what the what the loan pipeline looks.

Currently relative to last quarter.

I'm sorry, the loan pipeline.

Have.

And probably commitments of.

On.

And just under $2 billion.

And currently.

Slightly elevated from where we were.

And last quarter, which was closer to $1.9 billion I believe.

Got it and then Charles maybe from a credit perspective, obviously.

Obviously, the numbers moving and the right direction here, but when you get to a point, maybe look out and the future where we start to see the positive loan growth just curious.

If you could give us a sense, where you think you see the the.

And the ACL moving back to <unk>.

And update us what the day, 1 ratio was and maybe what you'd be reserving new loan growth.

Right our day, 1 calculation was right about 110 basis points.

I believe and.

Obviously here, we are sitting at a 128 basis points 132, when you exclude PPP.

There is there is.

If we assume that that day, 1 as a normal environment rate every environment is a little different.

And then there is a little bit more room to drift down.

And you can get back there.

Got it.

The commentary on the securities.

If you do continue to see some excess liquidity and the market that doesn't bundle into.

And for loans, you see that debt ratio of investment that that's creeping creeping up again, I think it's about 12 or 13%.

Currently.

Yeah.

And it certainly likely rate 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 that's where that's the answer today absent essent and loan growth.

Yes.

Got it and then I think you had mentioned.

On the CD book this quarter and yes.

In terms of repricing opportunities on Michael ahead, while I had third and fourth quarter.

Right, yes, so those Cds that I mentioned $200 million came off with a weighted average rate of 121 basis points 16 months and term.

And had some of that replace reprice.

And I think it was about $85 million repriced at about 12 basis points.

With the weighted average maturity of 12 months or.

So you are seeing obviously those funding costs continue to grind down as those Cds roll off and I think theres, a little more opportunity for that you can see the weighted average rate and we have 4 time deposits.

That we have in the and the press releases.

136 basis points, so theres still some room to drift.

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.

We continue to look for opportunities to improve funding costs again, the $150 million.

And sub debt is going to be called on August 1 we will have a significant impact flow from liquidity standpoint rate. If you think every $100 million or so of excess liquidity means about 3 basis points on the balance sheet and and.

And the absolute cost associated with that to rate that 5% rate on that $150 million is a hefty price for excess liquidity. So those savings makes 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.

And today, it clearly very very attractive prices so.

But right now the need and isn't necessarily there so probably more information than you wanted but hopefully that answers your question.

Do you have the schedule book CD maturities.

And the third quarter and fourth just a dollar amount maybe rate.

Not not offhand non offhand I do have that.

Do have that in my mind.

No I'm not sure it's something that we're.

Publishing.

Got it okay.

Jump off the Alon and I'll, let someone else ask some questions.

Thank you and our next question comes from the line of Catherine Mealor with <unk>. Your line is open. Please go ahead.

Thanks, Good morning.

And Catherine.

Maybe just a follow up on the on the deposit and kind of excess liquidity conversation would you expect from here for deposit.

To continue to shrink like we saw this quarter on average basis or are you kind of for your pipeline as loan growth improved CEC.

And even modest deposit growth.

Yes.

I see deposits relatively flat as far as I can see at this point there is.

There's still a lot on liquidity sloshing around out there and looking for a home.

And from that.

And still achieve from some narrow spreads on on some of that liquidity win.

When we find when we find it at the rate price so on.

I see them being relatively flat at this point.

Okay. That's helpful and then how about on.

On on loan growth can you talk a little bit.

Just had a question on this earlier, but it is.

The pipeline continues to improve what.

What type what kind of level of growth rate do you feel like is appropriate for eagle at this point Eagle historically kind of a double digit grower and.

And then some changes and kind of risk appetite and maybe on balances of the amount of construction loans and do you want to keep on the balance sheet.

Over a kind of a longer period of time, what type of growth rate do you feel like is rate for your company.

Okay.

I would say and Katherine and that we've.

Really do have a renewed appetite and.

Our being more.

And grasses and going out into the marketplace and looking at different types of loans, we have looked.

Much more favorably on certain types of construction lending and I think that number will be increasing and the future.

Based on what we've seen so far we're not averse to it at this point and time and feel like the economy and much better spot and it was 2 and a half years ago.

Yes, again pricing is a challenge we've clearly got plenty of liquidity to deploy.

We don't want to compromise on credit.

And so the question and that Venn diagram, as I channel, our president and our commercial banking.

And that.

What are we willing to do on the pricing front.

So that that's the gating factor there.

Deal flow seems to be pretty good.

We here and there is opportunities out there. It's just there's a lot of money chasing.

Fewer deals.

Yeah, Okay, and maybe 1 last 1 on just on the on the buyback.

You increased your dividend and significantly this quarter, which was great to see pause on the buyback would you expect to be more active on the buyback and the back half of the year.

We're we're going to continue to evaluate that.

And.

And.

We certainly want to make sure that we are.

Buying it at a reasonable price and.

Obviously there is.

You want to rely on the metrics rate.

There clearly is a little bit of a sticker shock from where we initially.

Debt.

Net share repurchase plan in place, but we want to rely on the metrics and look for a reasonable way to.

To repurchase shares and and.

Do what's best for the shareholder be it.

And any more changes to the dividend or repurchases.

Of additional shares something we'll continue to look at.

Great. Thanks, so much.

Please go ahead.

Thank you and our next question comes from the line of Brody Preston with Stephens, Inc. Your line is open. Please go ahead.

Hey, good morning, everyone.

Good morning.

Charles I just wanted to follow up on.

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.

And I think excluding PPP, you're talking about close to 60% just under 60% is variable rate.

On that.

And that's about $4 billion or so.

And just.

Just under $3 billion have floors on them.

About $2.8 billion.

Okay, and do you know of those excuse me of those floors.

What amount is is currently at their floor levels.

It is a significant portion.

Give me a second I will give you that answer if you wanted to ask another question.

Yes, yes, that'd be great I'll ask Jana question Jan.

There's been a couple of articles and the commercial observer lately about increased vacancies that are some office buildings in D. C and so I just wanted to ask and I think there was a small.

A small office property that you guys may be charged off or had to issue. This quarter. So I. Just wanted to ask is are any of those vacancy issues kind of making its way and to your portfolio and if it.

And could just provide some I guess, maybe some broader color on what youre seeing and the broader office market.

I think theres a lot of and.

Uncertainty out there with what's going to happen and the office market longer term and.

And then near term, we don't really have we have 1.

Office project that was.

Yeah.

Substantial rehab and new construction.

That is in D C.

And Lisa and has been seeing increased activity lately.

Everything.

Alex that we had on the office side and DC is really an income producing and we haven't had any.

Significant lift and performance and the leases roll over a fairly long period of time.

No.

And there's probably if theres going to be and impact, it's not going to be a need and.

And maybe 3 years or so.

Lease rollovers starts hitting and I think that.

We're in and pretty comfortable loan to values and reduce stress gastar income.

<unk> and CRE.

More significant declines and operating income increases and cap rate et cetera. So it's an area, where we're treading lightly, but we think leases in place to offer a BOP her on a period of time to work through and things.

There are a number of repositioning projects.

On a really more and close in suburbs and then they are.

And D C proper, but thats certainly something were starting to see here as you've seen and other areas and our country.

Okay, great. Thank you for that.

And <unk> just to get back to so it looks like of the 40% or so of the portfolio that it.

Is it floors at $2.87 billion.

It's floors, it's only about $208 million that are.

That are at currently at the floor.

Okay.

Okay, great. Thank you for that and then.

And my last question.

Susan I appreciate the update that you gave on the investigations, both on the call and and the release and I hear you loud and clear.

This was the first time, you gave a little bit of a timeline I guess on a potential resolution and.

And so feel free to give me the stiff arm on on this question, if you need to but I do feel compelled to ask what 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 has just been increased discussion.

Yes that we have had with both the SEC and the federal reserve and that's where we're coming from those responses.

Alright, great. Thank you very much for taking my questions I appreciate it.

Thanks Bruce.

And then.

Thank you and our next question comes from the line of Christopher Murray and Act with Janney Montgomery Scott. Your line is open. Please go ahead.

Thank you and good morning.

And 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 a special mentioned substandard loans and kind of how you think risk grades will play out and the next few quarters.

Well I do think we're good at.

B.

Seeing the loans that we automatically shifted on to the watch list because of deferrals.

Art to come off because at the end.

Next quarter and substantially all of the deferrals, which have been completed now.

As we see and Eastlands, having sustained performance on going to contractual terms will be pulling them off on the left as far as special mention and sub standard go.

And given.

The state of the portfolio right now and the level.

Past dues that we had debt.

And microscopic.

And not seeing knock on wood and countless.

B, a prediction and I'm not seeing any change currently.

That would give me reason to think that and we haven't wanted to have increases in classified loans.

Okay, Great and then just a follow up has to do with sort of pre pre sold on a construction within the book and how often are you seeing.

Homes or other properties kind of pre pre sold on the final item is that still a kind of high characteristic and quite a D C market.

Okay and this is on and the residential side.

Yes, I think primarily residential.

Well the residential market here is.

Fire Hot and I have never seen it like this before people are.

Definitely and inventory shortage and things are moving a lot faster we've had a number of our filters.

And come in and because the level of their pre sales and sell high and we have them and you know kind of locked into.

1.2 spec situation and.

And number of pre sales and now Theyre really looking tangible increase that size of that availability because of the number of pre sales and the prices continue to increase.

Zinc.

And now it's tough to say for sure, but the 10 year seems to be amazingly low so.

And.

And I'm thinking that.

And I don't see and and insight for this right now Charles is a better predictor of the 10 years and I am.

Right yes.

Obviously, the seems to be a very high correlation with how that 2 new tracks and the kind of activity, we see in our risk.

<unk> and <unk>.

Clearly with the dips that we've had over the last couple of weeks.

We think that May drive another.

Another strong.

Couple of periods for them so.

Yep.

Okay, great. Thank you for that color and then just a final question. So you get back to you and <unk>.

On these legal matters that you disclosed should we expect to see an update and the 10-Q and a few weeks or will it take longer than that to kind of provide any incremental information on the batteries a day.

We really can't tell at this point.

And if something happens obviously, we will update.

But we can't predict that at this time.

And then is there any visibility on our legal expenses from here, but would it be presumably higher this next quarter or is it too early to say.

Yes, I think.

It's a little too too early to say and clearly as we approach a resolution on these matters. The legal activity is going to increase so.

That's something to be mindful of interest you are thinking about it.

Sure Okay.

Thank you very much and I appreciate it.

Sure.

Yes.

Thank you and our next question comes from the line of David <unk> with Seaport Research Partners. Your line is open. Please go ahead.

Yeah, Hey, and just had a quick quick follow up Susan and terms I think you mentioned and the preamble, yet and opportunity to participate and I think with the.

The Mako affordable housing program on the larger credit I know of.

And Howard County, that's a real issue in terms of housing affordability are you seeing on.

Opportunity and maybe explore that or take advantage of that.

And that drumbeat and maybe some of the other dnb counties around here.

Surrounding <unk> and northern Virginia, just curious if there's maybe some other opportunities to participate with some of the account and governments to build out some of the afforded 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 and daily.

And looking to bring those on board.

And in terms of.

Our loan yield and all that just just curious on any sort of pricing and <unk>.

Discussion you can provide on those and those types of opportunities, but thanks for the call here.

Okay.

I can't really give you pricing information on specific credit assets there.

In general and Theres, a lot of price competition for strong deal.

And.

And I think we're seeing that and we just try and make sure that we are and the mix with the correct risk adjusted pricing and.

And.

Moving forward with.

Increasing the size of the portfolio at <unk>.

Acceptable rate levels right.

I think Charles said before Dan we're not compromising on credit.

Alright.

<unk> is is tough.

Holding tight on our credit requirement and another factor it through and there is on.

Obviously with all the liquidity that both we and as an institution and a lot of our competitors have.

Both size and.

And both Susan and Jan said support matter.

And as transactions and those deals get pretty competitive.

And they're large like that with healthy sponsors.

Understood I appreciate the color is great. It's 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 new on that throws our way on <unk>.

Thank you your card.

I will definitely take that under consideration.

Yeah.

Sure.

Thank you 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 wanted to say and 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 and 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.

[music].