Hope Bancorp, Inc. (HOPE) Q2 2018 Earnings Report, Transcript and Summary

Good day and welcome to the Hope Bancorp Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

Thank you, Steven. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2018 second quarter investor conference call. We will be using a slide presentation to accompany our discussion this morning. If you have not done so already, please visit the Presentations page of our Investor Relations website to download a copy of the presentation. Or if you’re listening into the webcast, you should be able to view the slides from your computer screen as we progress through the presentation. Beginning on Slide 2, I would like to begin with a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding the future financial performance of the Company and future events. These statements are based on current expectations, estimates, forecast, projections and management’s assumptions about the future performance of the Company as well as the businesses and markets in which the Company does and is expected to operate. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We refer you to the documents the Company files periodically with the SEC as well as the Safe Harbor statements in our press release issued yesterday. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today’s call. The Company cautions that the complete financial results to be included in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 could differ materially from the financial results being reported today. In addition, some of the information referenced on this call today are non-GAAP financial measures. Please refer to our 2018 second quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. Now as usual, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp’s President and CEO; and Alex Ko, our Chief Financial Officer; Chief Credit Officer, Peter Koh is also here with us today and will participate in the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin?

Thank you, Angie. Good morning everyone and thank you for joining us today. Let's begin with Slide 3. We delivered a solid quarter highlighted by strong well diversified balance sheet growth. We continue to manage through a highly competitive market for deposit gathering while also continuing to invest in the infrastructure necessary to support a nearly $15 billion dollar institution. Also these factors pressured our bottom line results although we were still able to produce a significant increase in earnings per share and level of returns compared with the same period in 2017. We generated $47.5 million in net income during the second quarter, an increase of 17% over the prior year period. On an EPS basis, we reported $0.36 per diluted share, an increase of 20% year ago second quarter. Our earnings were lower relative to the preceding first quarter of 2018 primarily due to the positive impact we had last quarter from an increase in an equity investment. During the second quarter, we also successfully executed on a capital management strategy that created additional value for our shareholders. We issued $217.5 million in convertible notes, $100 million of the proceeds was allocated to a stock repurchase program, while the remainder was utilized to build capital at the bank level and reduce our non-owner occupied CRE concentration by approximately 29 percentage points to 319% of our total risk-based capital as of June 30, 2018. After evaluating all of our financing alternatives, we determined that the convertible offering coupled with the buyback provided the most attractive financing terms and financial flexibility. The cost of convertible was lower than straight debt and it provided an opportunity to consummate a meaningful share buyback in connection with the issuance. Moreover, we were able to repurchase the shares concurrently with the convertible issuance with no premium to the market. Through June 30th, we repurchased $79 million of our common stock at an average price of $18.10. This reduced our number of shares outstanding by 4.4 million shares as of quarter end. The Company repurchased an additional 256,000 shares after the quarter, so as of July 17th of 2018, repurchases and aggregate totaled $4.6 million or $83.5 million totaled 4.6 million shares or $83.5 million. We were very pleased with the strong demand we received for the offering and we believe the convertible issuance positions us well to continue executing our growth strategies while effectively managing our loan concentration. Moving on to Slide 4, we had a highly productive quarter of business development with $792 million in loan originations funded a new record for the bank. New loan commitments total $920 million. Our strong production resulted in net loan growth of $376 million in the second quarter of 2018 or 13% growth on an annualized basis. Over the first half of the year, our total loans have increased by approximately 5% putting us on track to meet or exceed the higher end of our targeted loan growth. With the strong pipeline we have built, we were able to quickly deploy the liquidity we added through the issuance of the convertible notes in June. As a result, a good portion of our new loans came on our books late into quarter, which should set us up to see a nice increase in interest income going forward. Overall, economic conditions in our markets continue to be relatively healthy and we’re seeing a higher level of confidence and optimism expressed by business customers, which is translating into stronger loan demand. Our loan production continues to be well diversified, which reflects the increased traction we are getting from our efforts to build our C&I and residential mortgage lending platforms over the past few years. Commercial real estate loans, including our SBA CRE originations comprised 41% of the total production in the quarter. Commercial loans including our SBA C&I production accounted for 36% and consumer loans comprised primarily of residential mortgage loans accounted for 23%. With the continuing diversification of our loan production, commercial real estate loans have now dropped below 73% of our total loans down from 77% in late 2016 when our merger was completed. It takes a lot to move the needle on a $50 billion institution particularly through organic business development alone and I'm very pleased with the way the team has executed on our diversification strategies. We had $284 million in new C&I originations in the second quarter. Together with some utilization of the large warehouse line of credit that we booked at the end of the first quarter, this resulted in fortune percent linked quarter growth in our commercial loan portfolio. Our corporate banking group had a particularly stronger quarter of business development after initially focusing on deposit gathering when this group was formed, we are now starting to see more loan productions from the larger entities that we target with this initiative. And given our desire to put the liquidity from the convertible issuance to work as quickly as possible, we were more active with our syndicated lending group which brought some attractive credits loan to our books. As of June 30, 2018, we had 2.77 billion in total credit commitments outstanding to commercial customers versus $2.67 billion at March 31, 2018. The overall utilization rate on our lines of credit increased to 55% at the end of the quarter from 48% at the end of the proceeding first quarter. Turning to residential mortgage origination which makes up the vast majority of our consumer loan, we continue to see strong production from this business. We had 182 million in originations which is an increased of 156% from our production in the same quarter last year. This underscores the growth we had said in this business despite the impact that rising rates have had on the refinancing market. The strong production drove a 15% increase in our consumer loan portfolio on a linked quarter basis and year-over-year this portfolio has increased by 89%. As we have grown this business over the past year, we have focused on adding purchase oriented retail loan officers. As a result unlike many of our peers in the mortgage industry, the decline in demand for refinancing has not impeded our overall growth. That being said, the purchase market has challenges of its own most notably a lack of inventory in many of our markets, but we are working on a number of initiatives to help to continue to drive growth in this business including training our branch personal, so that they can source more lending opportunities from our existing customer base. With the strong growth we're seeing in the C&I and residential lending areas, we have been able to rename selective in our CRE originations and disciplined in our pricing and underwriting criteria without impacting our overall origination volumes. As a result, we have been able to generate higher average yields in this portfolio with the rate on new CRE originations exceeding 5% in the second quarter. Overall, the average rate on new loan originations was 4.79% in the second quarter, up 15 basis point from 4.64% in the proceeding first quarter. Despite the higher mix of C&I and residential mortgages in our overall loan production which carry lower yields than CRE, we continue to see a positive trend in the average rate on new originations, as we have been able to selectively pass-through a good portion of the rate increases from the fed. We also had a strong quarter of SBA production which is included as part of the CRE and C&I volumes that we reported. We funded $87 million in SBA loans during the second quarter up from $78.2 million in the preceding first quarter. Now moving on to Slide 5, we continue to see a very competitive deposit pricing environment. During the second quarter, our total deposits increased by approximately 2%. Given the strong loan growth we are seeing, we have been marketing CDs in order to maintain our loan to deposit ratio within the targeted range. During the second quarter, our CD promotions brought in nearly $900 million at an average rate in the low 2% range. With that as an overview of our business development efforts, I will ask Alex to provide additional details on our financial performance for the second quarter. Alex?

Thank you, Kevin. As I review our financial results, I will limit my discussion to just some of the more significant items in the quarter. Beginning on Slide 6, I will start with our net interest income which increased by $2.8 million compared with the preceding first quarter. This was due to our higher levels of earning assets as well as higher yields on those assets. Our net interest margin declined by 5 basis points to 3.61%, the decline was almost entirely due to the interest expense incurred on the convertible debt issued during the quarter. Aside from this impact our margin was relatively stable, as the increase in our yield on the earning assets essentially offset the impact of higher deposit costs. The effect of purchase accounting adjustments on our margin was essentially the same as the preceding quarter. Excluding purchase accounting estimates, our average yield on loans increased 13 basis points to 4.84% from the preceding quarter. As we are seeing the benefit of the re-pricing in our variable-rate portfolio, the higher average loan yields essentially offset a 15 basis point increase in our average cost of deposits to 1.06%. The increase in our average cost of deposit reflects the impact of fed rate increases as well as an increase in time deposits within our overall mix of deposits. We anticipate seeing a further increase in average loan yields in the third quarter, resulting from the re-pricing of our variable-rate loans following the rate increase in June. We expect that this increase in average loan yields will substantially offset an increase in our cost of deposits and a full quarter impact of the convertible interest expense. As a result, we expect that our margin for the third quarter to be relatively stable. Now, before moving onto a discussion of non-interest income, I’d like to make a few comments about accounting for convertible notes transaction. The convertible notes were issued at a coupon rate of 2%. However, for accounting guidances, the convertible debt also has a non-cash interest component for the first five years based on the conversion option and issuance costs related to the convertible debt. This is what accounts for the differences in the coupon rate and yield. We recorded a discount on the convertible debt based on the present value of issuance, and our returning balance as of June 30, 2018 was $192 million which reflects a discount of approximately $25 million. Now moving on to Slide 7, we had two significant variances in non-interest income that accounted for a 23% decrease from the preceding first quarter. The most significant variance was a decrease in other income which reflects the positive impact we had last quarter from an increase in value of equity investment held by the Company. The second significant factor was a $765,000 decline in the net gain on sale of other loans, which for the more part consists of residential mortgage loans. The decline was due to decrease volume of loan sales and premium. Moving on to non-interest expenses on Slide 8, our non-interest expense increased by $3.2 million compared with the preceding first quarter. The increase was mainly due to two factors. First, we had a $1.2 million increase in salaries and benefits expense, which was driven by the full quarter in federal employees added during the first quarter and a higher growth in insurance cost. The second factor was a $1.4 million increase in professional fees. With these increases, our efficiency ratio ticked up to 51.87% for the first quarter of 2018. Looking ahead, we anticipate that our professional fees will increase in the second half of the year. As you may recall, we previously commented that we expected utilizing the majority of the benefits of the tax reform for shareholder returns and the reinvestment in the Company. During the past quarter, we were successful in recruiting new leadership in the areas of IT and internal audit. Both executives jointed Bank of Hope from much larger financial institutions where the infrastructure was more comprehensive with greater capabilities to support large organizations. Based on the assessments of these respective areas, we have recently approved a number of projects that we will be implementing in the second half of this year. These projects are centered on the enhancing and further improving our internal capabilities in IT and internal audit, as we continue to build our infrastructure for future growth. With the tax savings available to us, management believes that now is an opportune time to proactively reinvest and further enhance our infrastructure and risk management capabilities. And we believe this investment will not only support our growth but contribute to greater earnings potential longer term. As a result of these projects together with other investment we have discussed in the past, we now expect our efficiency ratio will trend slightly higher in the low 50s range for the 2018 third and fourth quarter before trending lower in 2019. Now moving on to Slide 9, since Kevin already discussed the major trends we saw in loans and deposits, our review, our asset quality. We saw favorable trends among a number of our problem loans, particularly credit in the special mention categories which resulted in a number of upgrades during the second quarter. We were also successful in getting some problem credit check at the bank through the payoff. As a result, we saw notable declines in criticize loans, non-performing loans and non-performing assets. Our total loss experience continued to be very low. We had a $1.3 million in gross charge-offs during the quarter. We also had a two successful resolutions from long-term workouts that resulted in $2.4 million and recovery. As a result, we are in a net recovery position quarter of $1.1 million. With the net recoveries and the direction improvements in our portfolio, we built a fairly modest loan loss provision experienced this quarter of $2.3 million. This provision kept our allowance to total loan ratio at 77 basis points. With that, let me turn the call back to Kevin.

Thank you, Alex. Looking ahead to the remainder of 2018, we expect to see a continuation of many of the positive trends we have since through the first half of the year. Our loan pipeline remains strong and we expect the mix of production to remain fairly consistent. With healthy levels of increases in our earning assets and yields, we believe we can keep our net interest margin relatively stable despite higher deposit costs. While the additional investments we are making in our organizations will temporarily keep us at a higher efficiency ratio that our longer term target of mid-40s. We believe the revenue growth generated from our larger balances sheet will lead to even greater earnings growth in the coming years. We expect to continue to produce a more diversified business mix. We will also continue to be proactive with our capital management strategies to further enhance the value of our franchise. Our board and management's confidence in executing our long-term growth strategies as one of the leading Asian-American banks in the country is underscored by the increasing our quarterly cash dividend announced yesterday afternoon our six consecutive annual increase. With that, let's open up the call to answer any questions you may have. Operator, please open up the call.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Aaron Deer with Sandler O’Neill & Partners. Please go ahead.

I guess I'd like to direct my first question toward Alex. I'd like to get some color on your margin guidance. The new loan production this quarter came on at 479, sounds like that the incremental deposits on it came on at 2 or a little higher that the spread between those two numbers is obviously below where your core margin is today. So, I was hoping if you could talk a bit about some of the balance sheet dynamics particularly in terms of what percentage of loans will re-price higher and I'd say less than 30 days? And also in terms of the new production, what percentage of those are variable rate?

Sure. Net interest margin as you mentioned, it is a function of the positive as well as the loan. The forecast for the net interest margin, as I indicated on the prepared remarks, we'd expect to have a stable. The reason for that is we do have about 45% of our portfolio is variable rate loans, in terms of dollar amount of 5.2 billion will be re-priced as the market rate we set. However, as we know, there is a regular pay-off and all those things and also additional loans that we originate. We have a loan origination for the long entire about like a 4.8% and excluding the accretion impact, the existing portfolio of the loan is above 4.8%. So going forward, we would expect to have additional loan replacement of the payoff will be at a 4.8% of the higher level, so it will help in addition to their existing variable rate loan to be re-priced as the market rate increase it. Related to the deposit side as we have noticed in the last two quarters specifically second quarter, we did have experienced of higher deposit cost. Our beta for the interest bearing deposit was a about 80% in the second quarter and then compared to Q1 about 56%. So, we didn't see the increase on the deposit cost, but we also didn’t see the loan data increase in last quarter of 22%, this quarter to 48%. However, the deposit beta exceeded loan beta, and I would expect to continue to see how your beta for those deposit cost given the competition and other lease this year. However, we have a very strong loan growth with the balanced the mix, so that increase on the earning assets will offset all our most of the deposit cost increases as well as convertible of that additional impact. We have about 4.6% effective interest rate on the convertible which will have about 7 basis point impact on the margin, but we will expect that includes on the earnings asset yield and the volume will be able to offset for both deposit and the convertible additional costs going forward.

And then maybe for Peter, in the prepared remarks, I think Alex or Kevin rather had mentioned the syndicated credits contributed to the production in the quarter. Peter, can you give a sense of how much of the production in the second quarter was syndicated credits and maybe what the nature of those are in terms of commercial real estate versus C&I? And are you guys the originators in that or you’re participating with other banks?

We did have about -- roughly about a 140 million in syndicated loans. I think they were pretty much well diversified in a lot of different industries and I think majority are participated out. So, we're slowly getting into the lead administrator vault and most of them are participations.

And then last one maybe, Kevin. It sounds like you were still a little active with the share repurchases here early in the third quarter. What are your thoughts in terms of using what's left on your under buyback authorization?

I think we will be able to complete the repurchase before the end of the year.

Our next question comes from Chris McGratty with KBW. Please go ahead.

Kevin in your question on the efficiency ratio, just want to make sure I heard you guys appropriately. You guys have been walking that a little bit higher in recent quarters due to some investments. I think this quarter you talked about some hires in IT and audit, but I am looking back at last quarter you've talked about potentially some declines in professional fees and I think now we’re seeing a little bit higher in professional fees, if I heard that. I am interested in kind of what’s really changed? And if I am getting the message right that there’s some more maybe regulatory spend that’s required or just kind of investments now that you’re kind of through the 10 billion, just added color would be great?

Well, I think most of the new professional fees that we first started to explain this quarter are more offensive in nature than defensive. We -- about a few quarters back, we said that the majority of the extra cash that will be coming from the tax cuts will be used to enhance the shareholder value and also will be utilized to enhance the capabilities of the institution. And with the addition of our new CIA and CIO, new Chief Information Officer and Chief Internal Auditor, both of whom came from bigger institutions than Bank of Hope, and they did the assessment of our current capabilities versus the capabilities that they would like to see for an institution which would like to grow into a $20 to $30 billion institution. They recommended certain enhancements that they would like to make at Bancorp Hope, and we believe that this is a good time, good opportune time for us to utilize the excess cash that resulted from the tax cuts and tax savings, and we did not include this in our budget at the beginning of the year because we didn't have the benefit of the interest from those two new executives. But I think still it will be beneficial for the corporation, for the institution and shareholders to invest in those two areas because it will give us the platform to grow in a very fast changing environment and especially the IT areas we see that we need to really step up in our IT capabilities to be more competitive in the market in the coming years.

Just if I could add one more on the efficiency, you say a low 50s in the deck I think this quarter is a shade under 52, given, I'm just trying to get a sense of it, 50, 51 or is it kind of 52, 53 over the back half? How should we be thinking about the build?

I think it is hard to give the exact number, but when we say low 50s I think it is in the range of 51 to 53.

Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

Maybe just on the CD re-pricing phenomenon, can you give us a sense for what's maturing here in the third and fourth quarter? And at what rate and what the new promotion is, at least currently?

Sure, as we indicated, we were able to gather a substantial amount of CD, and going forward specially Q3 and Q4, there will be total $2.3 billion. In Q3 about $1.2 billion, current rate is 1.2% and Q4 1.1 billion as well will be at a rate of 1.61%. Those are expected to be re-priced at a higher rate and currently the most recent promotion that we had was 2.25% for 12 month CD, and we will assess what the new campaign rate will be. So it will be re-priced at a higher rate, but the entire 1.2 billion Q3 and 1.1 billion Q4. I don't think they will be re-priced at a promotional much higher 2.3% ranges because we will be selective for hiring, offering those campaign rate to partly manage our deposit cost.

And then on the commercial real estate remaining flat this quarter, are you seeing any increased competition from the non-banks? Or is that just maybe more elevated payoffs and maybe just a little bit less of an appetite just trying to get a sense for growth in commercial real estate going forward?

Well, our intention is to remain disciplined in our CRE lending, given the trends that we're seeing in other areas of our lending, we believe we can still reach our growth target while keeping our CRE portfolio relatively flat. That does not mean that we are intentionally not growing as the CRE portfolio, but given the cycle of the economy and the current valuation of the CRE properties, we believe that it is more prudent to be selective and disciplined in our in our CRE lending, which gives us to sort balances in CRE portfolio.

Okay. So, your sense is you that portfolio to remain flat for the balance of the year?

I think the trends toward over the mix of our portfolio will be fairly consistent during the remainder of the year.

And then, can you start quantify how much in single-family resi mortgages were sold in the second quarter?

We see the industry is expecting for the construction in the rising rate environment, but for us we expect a relatively stable production. So very, very production in the second quarter -- in the second half as we make progress within the existing branch network.

Let me add a little bit more in terms of the dollar amount of the actual sales, we sold $20 million of residential mortgage loans, and I recognize the gain about $401,000 relatively not small amount compared to the previous quarter. That is mainly due to the lower our premiums. We would expect to have a kind of run rate for sale, it's hard for us to have a good production level because it really depends on the market, but we do believe the second quarter might be more of the run rate going forward.

Okay and then, can you just remind us how large that warehouse line was, the new warehouse line that contributed to the C&I growth? And what the rate was on it?

Sure. Our total outstanding balance for the warehouse line was up $293 and we have utilized about a 56%.

So, the particular line I think you’re looking for, the amount was 200 million, the pricing we just can't disclose for competitive reasons.

And then just last one from me, if I may on Stifel, any update their and kind of expectation for reserves in 2020?

No, we’re actively in the implementation phase of Stifel at his moment. We know that there is the impact coming through all of the banks in publicly at least traded bank I think in the first quarter of 2020. So, we’re preparing, I know the regulation is giving a lot of noise in terms of potential adjustments in the reserve requirements. So, we are looking at that actively and I think we are on track, but it's still little bit too early to talk.

Our next question comes from Gary Tenner with D. A. Davidson. Please go ahead.

Just wanted to ask another follow-up on the expenses, the CIO and Chief Internal Audit person you hired, were those individuals in the full run rate for the second quarter or they hired later on?

Yes, they were both hired into a later part in the second quarter, so that's why when we have presented and on the first quarter during the earnings call, we were not able to have those more specific additional projects they were thinking of.

I think to be more precise our CIA, Chief Internal Auditor was hired at the end of the first quarter or the beginning of the second quarter, and our Chief Information Officer was hired in May. So, it took a few months for them to do the assessment of where we are versus where we should be and it is the second -- during the second quarter that we were made recommendations for the enhancements that they would like to see made at Bank of Hope.

And the sequential quarter increase in professional fees in the second quarter versus 1Q was not inclusive of any of these investments, is that correct?

That is correct.

Okay. Thank you. So then just the last piece of that then, as we look into 2019, I guess what's the kind of term where you would be making this additional incremental investment on top of what you've done in the last couple of years? Does it leak into 2019? Are the investments and spend complete in the second half of 2018, how does that lay out?

Yes, those projects, is not years or up to 2 to 3 years of our projects. Now, it is a relatively short-term projects, so we are targeting to complete with the end of the year, so we would expect to after have that investment, I think we will be in a much better position compared to before their investment and our also earnings will increase, so our efficiency ratio we would expect to have a decrease. But again to answer your question, now, there is a number of the projects, but it's a more relatively short-term projects.

Okay and you were saying that your long-term efficiency ratio target is still mid-40?

Yes, that is our target. But to be further analyzed, the management is actually compiling all those in projects and we will be able to have better position to share with you, probably next quarter. But as of now, we would expect 2019 will be trending down from the elevated level in the second half of this year.

And our next question comes from Tim Coffey with FIG Partners. Please go ahead.

My first question has to do with kind of the expense build again and the project you are undertaking. Are they -- would they slowdown and any thoughts you have on M&A?

I don't think so, well, obviously M&A is something that, that will happen sometime in the future. And when the opportunity comes, we want to be prepared for that opportunity, but these investments are not specifically for M&A transactions.

Right, but they’re not so big that they would slow down any delay, any kind of M&A trends you might have, it sounds like what you…

Oh, no, no, no.

And then Alex, last quarter you kind of gave us some guidance or at least some indication rather than the -- looks like what we are seeing in terms of purchase accounting adjustments rolling in every quarter has started to stabilize, and that looks like that appeared again this quarter. Do you still feel comfortable with the idea that those accounts -- those adjustments will -- are stabilizing?

Yes, that's correct. As you mentioned, it was about $9 million, Q1 and Q2, nothing has changes and it will be slowly decreasing trends as the accounting will dictate, but there’s no noise that we experienced, and I don’t expect a big filtration going forward.

[Operator Instructions] And our next question comes from Don Worthington with Raymond James. Please go ahead.

In terms of the increase in CDs, 900 million, was that all new money? Or did you have an existing customer shift, say, money market deposits into CDs?

Yes, actually, those 900 million is all the new money, meaning there -- the total amount raised that our actual CD balance hasn’t increased that much, so we didn’t have exact figures, how much is shifted or from existing customers renewal at a higher rate. But we expect and we believe most of them is substantial portion of that money came from the new money -- new customer, I mean.

And then were there any interest recoveries that impacted the margin this quarter from the resolutions?

No, I don’t think so. There is a very-very small impact, if any.

And then just if you could provide any color on kind of the year-over-year decrease in deposit fees, down about 10% first half this year versus last?

Sure, we were most unlucky to give the waiver for the deposit fees. But there’s a -- those deposit fees mainly comes from DDA account and other transaction related to the deposits, but our DDA was a relatively small, and also we did have a kind of monitoring the depositories, how the risky they are and we did have some risky depositors we actually intentionally let go, and obviously they had -- they generated more deposit fees. But we do not have those high risky depositors any more. So, that is kind of the contribution of the decrease of the deposit fees.

Our next question comes from David Chiaverini with Wedbush Securities. Please go ahead.

I had a follow-up on the syndicated loans. Are these middle-market loans and are they within footprint or national?

These are combination, a large portion is middle-market lending, but we're also in the broadly syndicated space as well, and so, some of these are probably syndicated, some of these are leveraged, so it’s kind of a combination of those. The broadly syndicated, they tend to be much larger companies, many publicly traded and then so. So these are I guess across the areas and things, but the ones we due for middle-market are -- tend to be closer or within our servicing area.

And what percent of total loans are these syndicated loans?

We still have a fairly small portion, I think we're roughly a couple of hundred million dollars or so, so our balance sheet wise, this is less than I think 3% or 4%.

And strategically going forward, was this more of a -- you had a liquidity event with the convertible debt offering and you wanted to put some money to work quickly, but looking out, is this going to be something to pad loan growth to hit your targets? Or how do you think about utilizing syndicated loans going forward?

I think the syndicated loans, it's a good tool for us, I think that we built around, I think, yes, this second quarter we did have some liquidity that we wanted to deploy a little bit quicker and things. And so, that was a little bit unique to the quarter, but I do think the growth or the diversification strategy that we are trying to carry out at this time is kind of in line with all that. So, I do think volumes still will be there in that group, in those groups that are doing syndicated loans. But, yes, this quarter was a little -- I think a little bit higher than probably the run rate going forward just because we have a special kind of liquidity needs there or liquidity deployment.

Got it, and then shifting gears. Couple of quarters ago, you spoke about the institutional banking group and how they were looking to bring in and having some success in bringing in deposits. I was just curious as to, if you could provide an update with how that group is performing?

Well, we now call them corporate banking group, we're not using institutional banking group anymore because the term is kind of misleading. They are more focused on lending to financial services company like asset managers and broker dealers so far. And their lending, their production during the first quarter was about $40 million, and the second quarter I think, they produced about $80 million. And in terms of deposits your questions, they have been quite successful because a lot of customers that they have brought in are like the financial services companies, which attempt to carry a lot of deposits with the bank, deposits or institutions like us. And I think they have been really instrumental in the target growth during the first and second quarter of the year.

Our next question is a follow-up from Aaron Deer with Sandler O'Neill. Please go ahead.

Hi guys just a real quick call follow for me. Given the mix shift that you had in your production in recent quarters and the capital actions that you have taken, where has the commercial real estate as percentage of capital dropped to at June 30th?

Yes, I know we have a quite a success in terms of the droppings the CRE concentration ratio because that was one of the benefit that we anticipated and we will realize that. We decreased to the ratio of net CRE as a total capital about 319% that represents about 29% to 30% reduction from previous.

Percentage points reduction.

Yes.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, once again, thank you for joining us today, and we look forward to speaking with you again next quarter. Thanks everyone.