Q4 2020 Hope Bancorp Inc Earnings Call
Good day and welcome to the hope Bancorp the 'twenty.
'twenty 'twenty fourth quarter earnings conference call.
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I would now like to turn the conference over to Angie Yang Director of Investor Relations. Please go ahead.
Thank you Sarah good morning, everyone and thank you for joining us for the Hope Bancorp, Inc. Fourth.
The fourth quarter of Investor Conference call as usual hope, we will be using a slide presentation to accompany our discussion. This morning, if you have not done so already please.
The presentations page of our Investor relations website to GAAP.
In light of copy of the presentation or if you are listening has for the webcast you should be able to view the slides from your computer screen as the progress to the the presentation.
Beginning on slide two let me begin with the 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 forecasts.
The protection and management of subjects about the future performance of the company, including any impact as a result of the COVID-19 pandemic 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 of 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.
The files periodically with the SEC.
Well as the Safe Harbor statements in our press release issued yesterday hope.
The corporate sector 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 annual report on form 10-K for the year ended December 31, 2020 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 2024th quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures now we have allotted one hour for this call.
Presenting for the management side today will be Kevin Kevin Hope.
Bancorp's, Chairman, President and CEO, and Alex Ko, our executive Vice President and Chief Financial Officer, Chief Credit Officer. Peter Koh is also here with us as usual and will be available for 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 on slide three with a brief overview of all of the financial results.
In the fourth quarter, we were able to deliver upon the stronger commercial banking platform. We have developed another positive quarter of call of the two loan and core deposit growth as well as for their improvement in our net interest margin and efficiency ratio.
These positive trends resulted in another solid quarter of earnings and pretax pre provision income.
We generated net income up $28 $3 million or 23.
<unk> per diluted share in the fourth quarter, compared with $35 million or 25 cents per diluted share in the pre.
Preceding third quarter.
We had $61 $1 million of pretax pre provision income in the fourth quarter of 2020.
Down slightly from $61 $7 million in the preceding quarter, but up from $56 $1 million for the fourth quarter of 2019.
Excluding the $2 $4 million in branch restructuring costs recognized in the fourth quarter as well as the seven 5 million dollar gain on sale of securities and the $3 6 million dollar S. H L. B prepayment penalty in the preceding third quarter, our pretax pre provision income in the 2000.
One of 24th quarter was up 10% from the preceding quarter, which reflects a significant increase in our core earnings power of quarter over quarter.
This increase is largely attributable to our continued progress with our strategic initiative of developing full banking relationships that provide both high quality loans with attractive risk adjusted yields and low cost transaction deposits.
All of our success in attracting new commercial customers has had a very positive impact on our deposit composition, causing a reduce the reliance on retail time deposits, while significantly lowering our cost of deposits, which have been the primary drivers of the margin expansion, we saw in the fourth quarter as well.
L as throughout 2020.
During the fourth quarter, our non interest bearing deposits increased by $326 million or 7% quarter over quarter.
Our money market accounts increased by $469 million or 10% quarter over quarter, and our time deposits decreased by $461 million or 10% quarter over quarter.
This growth in our non interest bearing deposits and money market accounts is coming from both new commercial new commercial customers and the expansion of the existing relationships with our corporate banking customers.
As we have gained traction with our sales efforts around our improved treasury management capabilities, we have seen a dramatic improvement in order of deposit mix our.
Our non interest bearing deposits increased from 25% of our total deposits at the end of 2019 to 34 per cent of the total deposits at the end of 2021.
While time deposits declined from 41% to just 28% over the same time period.
Year over year, our average cost of deposits declined more than 100 basis points from 2019 to 2020.
In the fourth quarter, our cost of deposits decreased 16 basis points contributing to the improvement we recognize the you know or net interest margin.
The positive trends in our commercial loan growth and the shift in our deposit mix confirmed the strong progress we have been making on building a more valuable and diversified franchise with a sustainable path to generating profitable growth and a higher level of returns over the long term.
Well, we are making excellent progress on our long term initiatives, our near term financial results continued to be impacted by elevated provision expense, resulting from the ongoing effects of the pandemic during the fourth quarter. We continued to build all of our allowance coverage.
Primarily to increase our level of reserves held against the hotel motel portfolio, which we will discuss in more detail later and all of a call.
Moving onto slide for.
We ended 2020 with all of our highest level of loan production during the year, which resulted in annualized loan growth in excess of 13, 5%.
The year over year basis loans receivable at December 31 of 2020 increased 10% or 7% if you exclude the PPP loans.
We funded $844 million of new loans during the fourth quarter, which was 8% higher than the preceding third quarter and nearly matched our record quarterly loan production.
For the 2024th quarter, we funded $340 million in commercial real estate loans $438 million of C&I loans and $65 million of consumer loans, primarily consisting of residential mortgages.
SBA loan production, which is included in the CRE and CNI fundings, just discussed totaled $25 million for the fourth quarter.
Our CRE loan originations increased from the prior quarter, which helped us to offset the spike in payoffs during the quarter and resulted in modest growth in this portfolio.
But the primary driver of our of loan growth in the fourth quarter was commercial loans, which increased by 12% from the end of the preceding quarter.
At the end of the year.
Moshe loans increased to more than 30% of total loans from up from 22% at the end of 2019 with that we made further progress in achieving a more diversified loan portfolio that we have identified as a key strategic initiative.
And we have accomplished this by adding high quality loans with strong commercial borrowers who have not been significantly impacted by the pandemic as well as by increasing our exposure to the asset classes with historically low loss ratios.
Now moving on to slide five.
Let me provide an update on the loan modification program, we implemented to assist our borrowers manage through the pandemic at December 31 of 2020, we had a significant reduction in margin in modified loans from 25% of total loans in phase one of our modification program.
213% in phase two.
Hotel motel and retail properties remain the two sectors of our portfolio that have been most impacted by the pandemic with hotel motel properties, representing 45% of all modifications and retail properties of the accounting for 20 per cent.
So moving on to slide six.
We have provided updated information on the type and duration of modifications being granted under phase two of other modification program for our hotel motel properties.
At December 31, the level of loans modified in this portfolio decreased to 50% of all hotel motel loans in our portfolio from 61% in phase one of other modification program.
The second wave of the pandemic spreading in the fourth quarter.
And the government shutdown orders, obviously had an impact on this industry during the typically slower winter season.
But we believe the modifications we had in place for our borrowers positioned them relatively well to overcome this temporary impact and return to normalized payments as soon as the economy recovers.
Particularly as it relates to the limited service hotel properties, which represents the vast majority of our hotel motel portfolio.
Industry data and our own assessment of our portfolio distinctly show that these properties have been performing better.
With the pandemic and will be the first to see the most benefit as the vaccines are more widely distributed throughout the country and consumer confidence is restored.
Now moving on to slide seven.
At December 31, we had approximately 15% of our retail CRE portfolio under modifications, which is down substantially from 36% in phase one of our modification program.
Most of the about retail tenants are now collecting partial or full guidance.
And with our strip center type of retail properties. Their performance has continued to stabilize as more and more retailers have found ways to adapt to the limitation of the pandemic.
Now I will ask Alex to provide additional details on our financial performance for the fourth quarter.
Alex.
Kevin.
Beginning with slide eight.
I'll start with our net interest income, which totaled $120.8 million, an increase of all of 3% from hundreds of 17 $6 million and the.
Preceding third quarter.
The growth in net interest income was primarily due to a significant reduction in interest expense as a result of the lower cost of the deposits.
The redeployment of excess of liquidity and the higher average loan balances.
During the fourth quarter.
We recognized $2 $4 billion of net P. P P of long space.
Compared with $2 $6 million and the.
The preceding third quarter.
And have a net $6 $4 million remaining to be recognized in the future.
In the fourth quarter.
Our second consecutive quarter of net interest margin expansion, which increased 11 basis points to 3.02 per cent.
This was primarily driven by the lower deposit cost of Kevin mentioned, and the redeployment of our access to liquidity into loans and investment securities.
Excluding purchase accounting adjustments, our net interest margin expanded 15 basis points quarter over quarter and the fourth quarter of 2020.
We continue to have additional opportunities to bring our deposit costs down as.
As we have $1 $6 billion in time deposits maturing in the first quarter at an average weighted average rate of hundreds of seven basis points and one point of $1 billion in time deposits maturing in the second quarter.
<unk> it.
At a weighted average rate of 83 basis points.
This should provide an opportunity to continue to recognize margin expansion through the first half of this year.
Now moving on to slide nine.
Our noninterest income was 11 $4 million for the 2024th quarter down from $17 $5 million in the preceding third quarter, primarily due to the $7 5 million dollar gain on the sale of securities that we recognized in the preceding quarter.
Excluding the security gains our noninterest income increased one point of $4 million.
The increase was largely due to a 2.9 million dollar increase in.
Other income and fees.
The all came primarily from the increase in swap fee income.
And a positive of fair value adjustment in derivatives.
This was partially offset by lower net gains on sale of the loans as we saw the $50 million to $60 million of residential mortgage loans in the fourth quarter down from Hyundai of $4 five millions of dollars sold in the preceding third quarter.
Moving onto non interest expense on slide 10.
Our noninterest expense was 71 point of $1 million in the 2024th quarter.
A decrease of 3% from the preceding third quarter.
Our fourth quarter expense included $2 $4 million in restructuring charges related to the consolidation of five branches.
While our third quarter expense included a $3 6 million dollar FHL it'd be a prepayment penalty.
Excluding these items.
Our noninterest expense decreased by one point of $1 billion from the preceding third quarter.
Largely reflecting variances related to our euro cost.
This was offset in part by 250 of $2000 increase in salary and employee benefit expense parse.
Partially driven by higher group insurance expense.
Now moving on to slide 11, I will discuss some of our key of deposit trends.
We continue to run off higher cost time.
Pauses and replace them with lower cost transaction deposits through our business development of airports.
During the fourth quarter, our noninterest bearing demand deposits increased 7% and our money market deposits increased 10%, coupled with a 10% decline of time deposits, resulting in total deposit increasing by 2% from Dan.
The preceding quarter.
Now moving on to Slide 12, our review of our asset quality.
During the fourth quarter, we had some negative migrations in our portfolio with nonperforming loans, increasing $17 million and criticized loans, increasing $80 million the.
The increase in criticized loans was primarily due to.
Further deterioration of D C ours or overall financial capacity that we proactively identified during the fourth quarter.
This was not a surprise.
As of we are fully aware of that the and that make related shutdowns and stay at home orders are continuing to have a widespread impact.
Or sort of industries, where we have large exposures.
Approximately $30 million of the downgrades in the quarter were related to retail credits and approximately $20 million related to hotels.
For the remainder of spread across the variety of industries.
All of these loans are paying as agreed or under the modification terms.
And it is worth noting that 82% of new of the criticized loans are or have been modified due to the prolonged impact of the pandemic to the borrower's cash flow.
This loss of are well secured and we believe exhibits minimal loss expectations.
In addition, approximately $20 million of the increase in criticized loans represent a relationship with the bank is currently in process of exiting.
The two of nonfinancial reasons for which.
We anticipate.
Minimal losses, if any.
In terms of the increase in non performing laws. This is the related to two construction loans there are near completion by the.
Have shown weekend portions in part due to the pandemic.
We believe specific reserve allocated for this loans are sufficiently adequate to cover the potential risk.
Overall, we continue to experience minimal losses from our portfolio with net charge offs, representing two basis points of average loans in the fourth quarter and seven basis.
Points of average loans for the full year of 2020.
We believe we have been able to maintain a low level of losses over the years because of our focus on all of the identification of potentially problematic loans.
This increase our options for proactive of workouts and active strategies that minimize our loss exposures.
Now moving on to slide 13.
It would be reported in our earnings release yesterday.
We recorded a provision for credit losses of $27 $5 million in the fourth quarter.
This provision increased our allowance for credit losses too.
$206 $7 million as of December 31st 2020.
From hundreds of $79.8 million at the end of the third quarter.
The buildup of our reserves in the fourth quarter was largely driven by.
The additional allocations made to the hotel.
And we'll tell portfolio.
As we continue to assess the pandemic related shutdowns that are heavily impacting this industry.
As our system modeling process in the fourth quarter incorporated the most readily available industry data for hotels and motels.
Management believes it is prudent to continue to build the reserve levels.
For this segment to 3.86% as of December 31, 2020 from 3.0 of 1%.
As of September 30th 2020.
This contributed.
$17 $8 million two of our provision for credit losses for the fourth quarter of 2020.
Okay.
We also increased the allowance for credit losses for our retail CRE portfolio to 1.5 per cent.
As of December 31, 2020 from one point of one 7% as of September 30th 2020.
Which had the effect of increasing the reserves for this portfolio of quarter over quarter by eight point of $1 million.
On the other hand.
Improving fundamental for our C&I portfolio of resulted in a reduction of allowance for credit losses of five point of $1 million for that portfolio as.
As the coverage ratio was reduced to 94 basis points as of December 31, 2020 from one point for person as of September 30 of 2020.
As a percentage of total loans, our allowance for credit losses increased to 1.52% at December 31st from 137% of September 30th.
When purchase accounting discounts are included our coverage ratio increased to one seven per cent of total loans.
Or $1 76 per cent of total loans, if we exclude PPP loans.
We believe this reserve level adequately covers any potential losses. They may remain during this period of uncertainty.
It is paramount to note, however that with a highly effective vaccines now of being distributed.
And the with the support of addition of government stimulus program currently anticipated we'd.
We believe a faster path for recovery is underway.
And we are clearly beginning to see the light at the end of the Turner.
Now moving on to slide for Chen, Let me provide an update on our liquidity position and capital ratios.
Our overall liquidity position remains very strong as of December 31, 2020.
Our primary source of funds continue to be customer deposits.
We recorded a significant increase in.
Non interest bearing demand deposits throughout 2020.
We continue to maintain a robust capital position with our total risk based capital ratio.
Tier one common equity ratio.
Tier one capital ratios.
All stable quarter over quarter.
We also continue to increase shows the equity with the.
Our book value per share and tangible common equity per share increasing quarter over quarter.
As of December 31, 2020, we continue to maintain a meaningful amount of of access capital.
The amount required to be classified well capitalized.
And the given our strong capital and the liquidity positions, we maintained our quarterly dividend at for 10 cents per share where the.
Let me turn the call back to Kevin.
Thank you Alex let's move on to Slide 15, as we wrap up I would like to first summarize what I see as a successful year of achievements against the backdrop of an extremely challenging year plagued by a global pandemic.
A year ago, I discussed our priorities and expectations for 2020.
First I said that we would be of highly focused on deposit gathering and controlling expenses. I believe you will all agree with me that we made tremendous progress on both of these fronts. The total deposits increased 14% year over year and more importantly, our departure.
The composition improved dramatically with non interest bearing deposits increasing from 25% of December 31 of 2019% to 34% at December 31 of 2020.
And despite a 9% year over a year of growth in total assets, we had minimal increase in non interest expense and as a percentage of the average assets non interest expense declined from 1.86% for 2019 to $1 seven 2% for two.
And in 'twenty.
Second we projected organic loan growth to range in the mid to in the low to mid single digits and said that our focus will be on generating profitable growth and expanding our lending capacity beyond our traditional core markets and again, we achieved the.
The schools.
As we mentioned the earlier at December 31 of 2020 loans receivable increased year over year by 10% of.
For 7%, excluding PPP loans.
And the increase in our loan portfolio was almost entirely in commercial loans, resulting in a much more diversified loan portfolio, but more importantly.
The value of the commercial relationships that we have won this year considering the related deposit relationships significantly enhances the profitability of this loan growth, which was largely led by our corporate banking group.
Third I said that we would remain committed to strong capital management and we have certainly the bluebird on this front.
But even beyond these priorities, we achieved the even more with NIM expansion in the second half of the year as the result of the significant reduction in around the power.
The costs.
The implementation of seasonal and the additional buildup of our reserves given the given the impact of the pandemic on the hospitality and retail sectors Unsurprisingly weighed heavily on all of our bottom line, but at the end of the day as a result of the achievements, we made and the challenges debt.
We overcame during the year, we are now a much stronger diversified organization.
We are now a much better commercial lender and we are now much more of the relationship bank.
Although 2020 was the difficulty year from many perspectives I'm very proud that our organization was able to overcome unprecedented challenges and continue our evolution to a more valuable franchise.
Now moving on to slide 16.
The it provide a few comments about our outlook and priorities for 2021.
The first and foremost while we remain in the midst of depend dynamic we will continue to operate in a conservative manner and maintain a high level of capital liquidity and reserves to continue supporting our customers throughout this crisis.
And we will continue to closely monitor the financial performance and condition of our borrowers that have been most significantly impacted by the pandemic.
As we have mentioned in the past the loan modification program that we have implemented two hour of hotel motel borrowers included some longer term modifications in order to provide the appropriate level of support until economic conditions have improved enough for their operations to return to a.
Normal a more normalized level.
With the rollout of the vaccines preceding the new stimulus program currently being proposed and another round of PPP funding as Alex mentioned the pathway to a stronger economic recovery later in the year is being created so.
When the loan modifications for all of our hotel and motel borrowers expire it should be at a time when the economic environment is more favorable and conducive to generating stronger cash flows.
Assuming the current path to economic recovery is sustained we.
We believe this should lead to a much more meaningful declines in modifications on.
An improvement in overall credit quality and a lower level of provisioning over the course of the year.
On the business development front, we expect to have another positive year of executing on the strategies that we have implemented to continue growing our commercial customer base developing full commercial banking relationships and further improving our loan and deposit base. We are also participating in the new PPP.
The program and will use this as another vehicle to develop new commercial customers that we can then expand into larger relationships over time.
Based on our current loan pipeline in our projections, we expect our total loan growth to be in the mid to high single digit range for 2021, we expect our growth to primarily coming out of non CRE pool loans portfolio, which should help us to continue making progress.
And diversifying our portfolio and reducing our CRE concentration.
Growing our residential mortgage origination business and driving higher fee income is another priority for 2021, we made operational and leadership changes in this business last year and since that time, we have seen stability and improved performance, while overall industry volume is.
<unk> to be down this year, we believe we can see growth in the origination volumes as we execute better and take market share.
We'll also continue to tightly manage our expense levels.
We'll begin to see some cost savings from the branch consolidations, which should help us to keep our total expense levels flat to slightly higher for the year. The cost savings we have generated from many of our expense management initiatives will enable us to continue investing in technology to.
Further enhance our digital platform and drive additional efficiencies and revenue generation opportunities.
With our net interest margin continuing to expand in the balance sheet continuing to grow. We believe we are in a good position to drive revenue growth this year.
Bind with relatively flat expense levels. This should result in more operating leverage and a solid year of pretax pre provision growth and if the year plays out as expected and we see a stronger economic recovery that positively impacts of credit quality and reduces our provision.
The expense then this should also result in significant growth in our net income and earnings per share overall, we are confident in our ability to successfully execute on our strategic initiatives and deliver another year of strong progress as we continue our evolution in 2000.
2021.
With that we would be happy to take your questions and add any additional color as the requested.
Operator, please open up the call.
Thank you we will now begin the question and answer the question.
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If youre using a speakerphone please pick up your handset before pressing the key.
So withdraw your question. Please press Star then the Kim.
At this time, we'll pause momentarily to assemble our roster.
Yeah.
Our first question comes from Chris Mcgratty with Keybanc capital. Please go ahead.
Alright, Great Hey, Kevin.
Wanted to dig into the loan growth a little bit if I could the comment on the in the outlook about non CRE growth.
You said in your.
Your comments about the warehouse.
This that you've been growing maybe some numbers around the how big it is how large you'd like it to be and kind of where for new yields are coming on.
Yeah.
Okay, Let me.
Let me respond to that.
Our non CRE loan growth is coming primarily from our.
From our corporate banking group and our corporate banking group has the three different business lines of one.
All of which is warehouse lending business line.
And at the end of 2020.
The ending balance of our warehouse lending unit was a little in excess of $1 billion.
The the limit our commitment was $1 $5 billion.
And the average yield for the Q4 was 2.2% and we expect a significant continued growth in warehouse lending although.
The market itself will not grow as a lot of people say Oh, I think we will continue to.
Again more relationships into our business. So I think of the total our warehouse lending business line.
We'll have more commitment and of higher ending balances and another unit of corporate banking is the the middle market lending.
Lending group of Middle market, C&I lending group and we.
We have different industry verticals that we are concentrating within that group and we also see a significant growth from that unit.
That's the that's great color. Thanks, if I could ask of more just on the balance sheet.
And much of higher I'm interested how you are thinking about deposit growth in.
In 2021, obviously was pretty strong this year.
Should we expect.
You know some further remixing of the earning asset base.
You know out of cash and bonds into loans.
But any thoughts on on the balance sheet growth would be great.
Sure Chris.
Chris our balance of will continue to grow the cause of that as we deliver with our strong Croft in 2020.
Main increase.
Relative to from noninterest bearing deposits as well so we have a good liquidity positions.
And actually be even if we reduce the access to liquidity is Q4, when we need it we have a sufficient.
Liquidity, so I don't anticipate any challenges to support our loan growth that Kevin indicated earlier on the remarks, so it will be fine and secondary kind of our allocation to investment securities are those.
All of the alternative if we have of steel.
Access to liquidity after we funded our.
Loans. So we would expect mid ninety's of loan to deposit ratio for 2021.
Okay.
Great and if I could just ask one more on the P. P. P could you just.
I'll just remind me what was in the quarter in terms of fee recognition and what's the what's left from round one.
Sure we haven't recognized in Q4.
Total of $3 $6 million.
And might that include.
1% of.
The net interest income as well as.
Net deferred loan fees.
And the remaining are we still to be recognized.
The net debt for a long feel of the $6 for millions of dollars and.
We would expect to.
Have a forgiveness of the PPP.
Starting this.
No Q1, but.
More in the second half of the.
Yeah.
Great. Thank you.
Sure.
Again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Okay.
Good morning.
Right.
Maybe just a.
The follow up question on the warehouse can you give us a sense for the number of relationships you have there number of brokerage broker relationships.
What percentage of those relationships are you considered the primary line of credit.
Okay.
Yes, maybe I can add a little bit of color. So most of our warehouse line I don't have the exact number of count here, but the most of our warehouse lines are quite sizable.
For anywhere from.
Say on the lower end, maybe 30 million of upwards of 100, 250, and all of our largest maybe 200 and it typically and so I think with that you know we're probably looking at.
Zach number I'm not sure maybe 10 to 20.
Meaningful relationships, there and I think in terms of primary of lines generally speaking these mortgage companies maintain multiple lines. So we are generally one of their primary lines.
Yeah in terms of a number of the customers we have a total of their channel relationship the.
The warehouse customers.
<unk> have a $1 billion of outstanding balances as of year end.
Okay great.
And then just on the.
Expense outlook.
You, obviously gave some pretty explicit guidance, but when you. When you look at your expense to average assets ratio I guess when do you get where do you where do you think that can bottom when do you get to a point, where you know you don't think of it can go any lower.
That's a good question because there are so many moving parts here, but I think if I may give you kind of a.
Expectations for next.
Next two three quarters I think it will not deviate too much.
We would expect to realize the benefit from the branch of restructuring cost, which.
Which we.
Expect about $2 $4 million of annual savings it will help to maintain the efficiency ratio and so as noninterest expense over average asset ratio to be maintained.
We also expect to see some.
Minor increase in the professional fees and the why are your expenses and so with that I think the real to maintain the similar level, let's say 70 million dollar level for the next two or three quarters and after that I think of weekend.
We can say that it will increase because of we will continue to invest on technology and the compliance on the dose, but I think in the we have invested of quite a bit.
So far so I'm, hoping to see a margin I'm sorry.
Efficiency and the non interest expense over average asset ratio to be a meaningfully improve maybe.
Q4, or 2020 true.
Okay, Great and then just on.
Reserving is it fair to assume that we'll continue to see you all.
Build reserves here, maybe for the next couple of quarters before you start to release for.
Or is it assuming releasing the gains in the second half maybe too early based on what you know today.
So there there is obviously in this uncertain environment. There's a lot of pandemic related variables that are that are still out of our control, but you know we.
We do feel that the fourth quarter, we have really are.
Embedded the the property.
The appropriate reserve levels for what we're seeing in the hotel portfolio as it continues to progress through the pandemic and so I you know I think with the vaccine used and instead of minutes stimulus programs that the government is currently working on them and the the the additional round of PPP funding and that will that will.
Really help a lot of our customers extend they're they're they're they're bridges here.
I think we're in a very good position to start seeing some lower level of provisions in 2021 of its hard to pinpoint exactly in the quarter to quarter, we will have to see the circumstances surrounding on all of these variables, but we do feel confident that we will start to see some lower levels of provision of our provision.
The release of some time in 2021.
Okay. Thank you.
Yes.
Thanks.
Our next question comes from David or any of them.
With the Wedbush Securities. Please go ahead.
Hi, Thanks, a couple of questions and really starting off with them. What you guys for just talking about with the hotel motel was there anything surprising to you in that portfolio in the fourth quarter. It seems like some of your peers. Some other banks are seeing improving trends.
The hotel motel or at least stabilization, where it seems like you guys. You know so I guess, some degradation or deterioration in operating trends in the fourth quarter can you talk about occupancy levels and sponsorship support in the hotel motel portfolio.
I'm sure you know what we experienced I think in the fourth quarter was really diving into the sea so modeling process, where we.
Really looked at the industry data in the hotel area and we saw a lot of things. There I you know to answer your question about our portfolio. We had a few cases, where we identified some downgrades, but any of our portfolio of itself. We believe is actually performing.
<unk> consistently and consistently better I think than the general hotel industry.
Our hotels as we mentioned in our prepared remarks are really geared towards the limited service hotels and we follow of the industry data very very closely right now so what we do is we we we look at the industry data for the particular regions that we service and then.
We also compare that to our actual performance of our hotels in those regions and what we are seeing actually as indication that growth the industry in terms of limited service, which are our most of our of our hotels and motels and then our own hotels the hotel performance have actually.
Done.
Better than industry.
Average is in the sense, starting with third quarter of second quarter was a very as everyone knows it was a very down period. The third quarter saw a lot of a recovery in terms of the hotel performances. Many hotels reached a breakeven.
Our or we're very close the fourth quarter, we're going to be entering a period here. We are picking up data based on the impact of the virus spread you know and the prolonged recession in a sense for the hotel industry.
You know we took it upon ourselves.
Sales to continue to be in the AR Reserve building a timeframe for the hotel industry for fourth quarter.
But in our outlook right now I would say that we feel very good actually as you can as you notice our modification levels are probably higher than some of the peers that you may be looking at but.
Our modification programs from the very beginning of the second round word design to be longer term in duration and we realized that the hotel of the industry is going to have a longer runway to of recovery and a typical three month modification of deferment.
We believe we felt at that time was not going to be sufficient to get them to.
To the other side of the recovery and I think that's how it's playing out now as you can see a lot of our exposure in the hotel area is in California, naturally and California is right now and are probably one of the the states that are most impacted by the pandemic, but as we see recovery you know where we are.
Lots of signs of hope right now we know the the California State is opening up of just recent announcements and so we believe that with our modification program in place.
Where we really did have as much credit enhancements, we talked about before additional collateral cash collateral of payment reserves. The things of that nature. We took the advantage in our op. We took as many opportunities as possible to shore up the credit as you went through that process. So.
And the overall perspective, I know, we're seeing some reserve builds here.
We felt we feel that that's appropriate for the level of uncertainty now, but our outlook as we move into 2021 with all of the positive developments, particularly surrounding the vaccine, which I think is going to be a game changer for this industry, particularly for the limited service in 2021.
We feel.
Fairly optimistic or cautiously optimistic.
That's really helpful. Thanks for that and then shifting gears to the mortgage warehouse business you mentioned about how your take.
Taking share I guess the multipart.
Question, just curious who you're taking share from are there any big banks that are pulling back because it seems like theres a few western banks that are talking about taking share in the mortgage warehouse business. So that's I guess the first part of the question and then the second part is really just from a competitive standpoint, how are you able to win the business.
From others, you mentioned about the average yield being two two per cent is that a competitive rate and that your undercutting. The competition just talk about how you're winning this business.
Well David.
We are focusing on top 100 largest mortgage origination originators in the country.
And each one of those top originators have multiple relationships with.
Many other banks are so we are one of the many relationships that our customers have with the.
Multiple things and the two 2% of average yield that I quoted for the fourth quarter is the market right. We are not really under pricing on where our lines of.
Or advances to the customers and.
The corporate.
Corporate banking group, we were able to attract a lot of good experienced originators.
And managers are and and they were really a you know.
Making the difference in 2020.
And because this is a revolving lines of credit and the used for short term financing.
I think.
This is the the type of business that we can really expand our without a much of the risk are accompanied with the growth. So I think that is the difference that our our.
<unk> in developing a.
A stronger commercial banking platform.
Element shows and I I I I I expect that we'll continue to see that expansion.
Okay.
Great. Thanks for that and then the last one is more of a clarification on the the loan growth outlook for 2021 of the mid to high single digit is that including the P. P P or excluding.
That is ex PPP loans.
Got it thanks very much.
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Again, if you'd like to ask the question. Please press Star then one at this time.
Our next question comes from Larry Wang with mutual of Omaha. Please go ahead.
Hi, Thank you for one of the call.
Very interested in the questions.
Comments about warehouse lending.
I don't think I'm going to beat that horse anymore.
But I think you said you might of been growing in the middle market.
Lending as well and I was wondering if you could expand for.
Non sort of where your growth is outside the warehouse.
[noise], yes, as I mentioned, we have three different business lines under our corporate banking group and the middle market lending is one of the three.
Uh huh.
Our growth strategies in the in the middle market is.
Is really are on the specific industry verticals.
And as I mentioned, we have already established and up and running for the financial services asset managers, a type of a business vertical though we have a telecom business vertical we have mainstream large CRE loan group within that unit and we are.
We're currently building up the health care group.
Group and and those guys are.
Industry experts AR and AR, we are really expanding.
The geographic perspectives.
Perspectives also we started the this grew from out of.
From Dallas are in the southwest and and we are now expanding to east coast and the upper Midwest in Chicago area and also we have a plan to expand into northwest areas of Pacific Northwest Washington areas.
So help me understand the view increased blending the say financial services.
What does that look like who are those customers and what does that look like.
Sure maybe I can add a little color. So in the financial institutions is a pretty broad area in the sense that there are going to be a variety of different types of of customer bases there.
As you know we have we look at lending to asset managers fund managers direct or indirect lenders, we have capital call lines. There's all sorts of different types of types of lending that we.
Focus on and I think one of the.
Great things about the corporate banking group right now is that we have shifted our focus I mean of prior to the pandemic to really focus on areas, where the pandemic is either not impacting as much or industries, where it's actually benefited from industries and so through our process of.
These verticals, we have been able to pinpoint areas, where we feel the opportunities to grow safely.
Safely and meaningfully or are there and I'm definitely we have the lenders now I think we have a very strong lenders in the marketplace that have good relationships to build this build these.
Of this new growth level, and I think as we have.
Proven not only in the the mortgage warehouse space, but also now in the middle market space over the last few years, we are definitely building a.
Our experience and reputation.
As an actual player in this market in the in the true middle market area. So we are excited about the growth opportunities share and I think we'll see more success as we move forward.
Okay terrific. Thank you.
Thank you.
Our next question of the follow up from Matthew Clark with Piper Sandler. Please go ahead.
Hey, do you just happen to of the end of period TPP loan balance as well as the average for the fourth quarter I see them the decorative lease.
Sure the PPP balance at the.
End of the quarter of $459 million.
We had of $473 million. So the average balance is not much different from the quarter and the balance in fact, it's a $10 billion higher at 407.
$70 million was our average balance for the Q4.
Thank you.
Yes.
Yeah.
This concludes.
A question and answer session I would like to turn the conference back over to management for any closing remarks.
Yes.
Thank you everyone again for joining us today, and I hope, everyone stay healthy and safe.
We look forward to talk.
We look forward to talking to you again in three months so long everyone. Thank you.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.