Hope Bancorp, Inc. (HOPE) Q4 2020 Earnings Call Transcript

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Hope Bancorp, Inc. (HOPE -0.90%)
Q4 2020 Earnings Call
Jan 27, 2021, 12:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Hope Bancorp's 2020 Fourth Quarter Earnings Conference Call. [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.

Angie Yang -- Senior Vice President, Director of Investor Relations and Corporate Communications

Thank you, Sarah. Good morning, everyone, and thank you for joining us for the Hope Bancorp's 2020 fourth quarter investor conference call. As usual, 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 are listening in through the webcast, you should be able to view the slides from your computer screen as we progress through the presentation.

Beginning on Slide 2, let me 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, forecasts, projections and management assumptions 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 US 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 Annual Report on Form 10-K for the quarter 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 2020 fourth quarter earnings release for the reconciliations of GAAP to non-GAAP financial measures.

Now, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, 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?

Kevin S. Kim -- President and Chief Executive Officer

Thank you, Angie. Good morning, everyone, and thank you for joining us today.

Let's begin on Slide 3 with a brief overview of our financial results. In the fourth quarter, we were able to deliver upon the stronger commercial banking platform we have developed, another positive quarter of quality loan and core deposit growth, as well as further improvement in our net interest margin and efficiency ratio. These positive trends resulted in another solid quarter of earnings and pre-tax pre-provision income. We generated net income of $28.3 million or $0.23 per diluted share in the fourth quarter compared with $30.5 million or $0.25 per diluted share in the preceding third quarter.

We had $61.1 million of pre-tax 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 $7.5 million gain on sale of securities and the $3.6 million FHLB prepayment penalty in the preceding third quarter, our pre-tax pre-provision income in the 2020 fourth quarter was up 10% from the preceding quarter, which reflects a significant increase in our core earnings power 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. Our success in attracting new commercial customers has had a very positive impact on our deposit composition, causing a reduced 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 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 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 our deposit mix. Our non-interest bearing deposits increased from 25% of our total deposits at the end of 2019 to 34% of the total deposits at the end of 2020, 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 recognized in our net interest margins.

The positive trends in our commercial loan growth and the shift in our deposit mix confirm 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.

While we are making excellent progress on our long-term initiatives, our near-term financial results continue to be impacted by elevated provision expense resulting from the ongoing effects of the pandemic. During the fourth quarter, we continue to build our allowance coverage primarily to increase our level of reserves held against the hotel/motel portfolio, which we will discuss in more detail later in our call.

Moving on to Slide 4, we ended 2020 with our highest level of loan production during the year, which resulted in an annualized loan growth in excess of 13.5%. On a year-over-year basis, loans receivable at December 31 of 2020 increased 10%, or 7% if you exclude 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 2020 fourth 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 C&I 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 pay-offs during the quarter and resulted in modest growth in this portfolio. But the primary driver of our 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, commercial 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 asset classes with historically low loss ratios.

Now, moving on to Slide 5. 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 modified loans from 25% of total loans in Phase 1 of our modification program to 13% in Phase 2. 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 accounting for 20%.

So moving on to Slide 6, we have provided updated information on the type and duration of modifications being granted under Phase 2 of our 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 1 of our 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 position 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 with our portfolio distinctly show that these properties have been performing better throughout the pandemic and will be the first to see the most benefit as the vaccines more widely distributed throughout the country and consumer confidence is restored.

Now moving on to Slide 7, at December 31, we had approximately 15% of our retail CRE portfolio under modifications, which is down substantially from 36% in Phase 1 of our modification program. Most of our retail tenants are now collecting partial or full rents. 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?

Alex Ko -- Executive Vice President and Chief Financial Officer

Thank you, Kevin. Beginning with Slide 8, I will start with our net interest income, which totaled $120.8 million, an increase of 3% from $117.6 million in 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 deposits, the redeployment of access to liquidity and higher average loan balances.

During the fourth quarter, we recognized $2.4 million of net PPP loan fees compared with $2.6 million in the preceding third quarter and have a net $6.4 million remaining to be recognized in the future. In the fourth quarter, we had our second consecutive quarter of net interest margin expansion, which increased 11 basis points to 3.02%. This was primarily driven by the lower deposit cost that Kevin mentioned and redeployment of our access to liquidity into loans and investment securities. Excluding purchase accounting adjustment, our net interest margin expanded 15 basis points quarter-over-quarter in the fourth quarter of 2020.

We continue to have additional opportunities to bring our deposit costs down as we have $1.6 billion in time deposits maturing in the first quarter at an average -- weighted average rate of 107 basis points and $1.1 billion in time deposits maturing in the second quarter at a weighted average rate of 80 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 9, our non-interest income was $11.4 million for the 2020 fourth quarter, down from $17.5 million in the preceding third quarter, primarily due to the $7.5 million gain on the sale of securities that we recognized in the preceding quarter. Excluding the security gains, our non-interest income increased $1.4 million. The increase was largely due to a $2.9 million increase in other income and fees, resulting primarily from an increase in swap fee income and a positive fair value adjustment in derivatives. This was partially offset by lower net gains on sale of loans as we sold $52.6 million of residential mortgage loans in the fourth quarter, down from $104.5 million sold in the preceding third quarter.

Moving on to non-interest expense on Slide 10. Our non-interest expense was $71.1 million in the 2020 fourth 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 FHLB prepayment penalty. Excluding these items, our non-interest expense decreased by $1.1 million from the preceding third quarter, largely reflecting variances related to OREO cost. This was offset in part by $252,000 increase in salary and employee benefit expense, partially driven by higher group insurance expense.

Now moving on to Slide 11, I will discuss some of our key deposit trends. We continue to run-off higher cost time deposits and replaced them with lower cost transaction deposits through our business development efforts. During the fourth quarter, our non-interest bearing demand deposits increased 7% and our money market deposits increased 10%, coupled with a 10% decline in time deposits, resulting in total deposit increasing by 2% from the end of preceding quarter.

Now moving on to Slide 12, I will review our asset quality. During the fourth quarter, we had some negative migrations in our portfolio with non-performing loans increasing $17 million and criticized loans increasing $80 million. The increase in criticized loans was primarily due to further deterioration in DCRs, or overall financial capacity that we proactively identified during the fourth quarter. This was not a surprise as we are fully aware of that pandemic-related shutdowns and stay-at-home orders are continuing to have a widespread impact on certain industries where we have large exposures. Approximately $30 million of downgrades in the quarter were related to retail credits and approximately $20 million related to hotels, with the remainder spread across a variety of industries. All of these loans are paying as agreed or under the modification terms. And it is worth noting that 82% of nearly criticized loans are, or have been modified due to the prolonged impact of the pandemic to the borrower's cash flow. But these loans are well secured and we believe exhibit minimal loss expectations.

In addition, approximately $20 million of the increase in criticized loans represent a relationship with the bank currently in process of exiting due to non-financial reasons for which we anticipate minimal losses, if any. In terms of the increase in non-performing loans, this is related to two construction loans that are near completion but have shown weekend portions in part due to the pandemic. We believe specific reserve allocated for these loans are sufficiently adequate to cover the potential risk. Overall, we continue to experience minimal losses from our portfolio with net charge-offs representing 2 basis points of average loans in the fourth quarter and 7 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 the identification of potentially problematic loans. This increased our option for proactive work outs and active strategies that minimize our loss exposures.

Now moving on to Slide 13. As we 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 to $206.7 million as of December 31st, 2020 from $179.8 million at the end of the third quarter. The buildup of our reserves in the fourth quarter was largely driven by additional allocations made to the hotel and motel portfolio as we continue to assess the pandemic-related shutdowns that are heavily impacting this industry.

As our CECL modeling process in the fourth quarter incorporated the most readily available industry data for hotel and motels, management believe it's prudent to continue to build a reserve level for this segment to 3.86% as of December 31st, 2020 from 3.01% as of September 30th, 2020. This contributed $17.8 million to our provision for credit losses for the fourth quarter of 2020.

We also increased the allowance for credit losses for our retail CRE portfolio to 1.5% as of December 31st, 2020 from 1.17% as of September 30th, 2020, which had the effect of increasing the reserves for this portfolio quarter-over-quarter by $8.1 million. On the other hand, improving fundamental for our C&I portfolio resulted in a reduction of allowance for credit losses of $5.1 million for that portfolio as the coverage ratio was reduced to 94 basis point as of December 31st, 2020 from 1.4% as of September 30th, 2020.

As a percentage of total loans, our allowance for credit losses increased to 1.52% at December 31st from 1.37% at September 30th. When purchase accounting discounts are included, our coverage ratio increased to 1.7% of total loans or 1.76% of total loans if we exclude PPP loans. We believe this reserve level adequately covers any potential losses that may remain during this period of uncertainty. It is paramount to note however that with a highly effective vaccines now being distributed and with the support of additional government stimulus program currently anticipated, we believe a faster path for recovery is on the way. And we are clearly beginning to see the light at the end of the tunnel.

Now, moving on to Slide 14, let me provide an update on our liquidity position and capital ratios. Our overall liquidity position remains very strong as of December 31st, 2020. Our primary source of funds continued to be customer deposits and 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 1 common equity ratio and Tier 1 capital ratios, all stable quarter-over-quarter. We also continue to increase shareholders' equity with our book value per share and tangible common equity per share increasing quarter-over-quarter. As of December 31st, 2020, we continue to maintain a meaningful amount of excess capital above the amount required to be classified well capitalized. And given our strong capital and the liquidity positions, we maintained our quarterly dividend at $0.14 per share.

With that, let me turn the call back to Kevin.

Kevin S. Kim -- President and Chief Executive Officer

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 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 deposit composition improved dramatically with non-interest bearing deposits increasing from 25% at December 31 of 2019 to 34% at December 31 of 2020. And despite a 9% year-over-year growth in total assets, we had minimal increase in non-interest expense. And as a percentage of average assets, non-interest expense declined from 1.86% for 2019 to 1.72% for 2020.

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 these goals. As we mentioned earlier, at December 31 of 2020, loans receivable increased year-over-year by 10%, or 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 delivered on this front. But even beyond these priorities, we achieved even more with NIM expansion in the second half of the year as a result of the significant reduction in our deposit cost. The implementation of CECL and the additional buildup of our reserves, given the impact of the pandemic on the hospitality and retail sectors, unsurprisingly weighed heavily on our bottom line. But at the end of the day, as a result of the achievements we made and the challenges that 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 a relationship bank. Although 2020 was a difficult 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, let me provide a few comments about our outlook and priorities for 2021. First and foremost, while we remain in the midst of the pandemic, 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 to our 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 -- 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 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 believe this should lead to a much more meaningful declines in modifications and 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 program and we'll 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 come in our non-CRE loan portfolio, which should help us to continue making progress in 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 projected to be down this year, we believe we can see growth in origination volumes as we execute better and take market share. We will also continue to tightly manage our expense levels. We will 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 and the balance sheet continuing to grow, we believe we are in a good position to drive revenue growth this year. Combined with relatively flat expense levels, this should result in more operating leverage and a solid year of pre-tax pre-provision growth. And if the year plays out as expected and we see a stronger economic recovery that positively impacts credit quality and reduces our provision expense, then they 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 2021.

With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Chris McGratty with KBW. Please go ahead.

Chris McGratty -- KBW -- Analyst

All right, great. Hey, Kevin. Wanted to dig into the loan growth a little bit, if we could, the comment in the outlook about non-CRE growth. I'm interested in your comments about the warehouse business that you've been growing, maybe some numbers around how big it is, how buyers you'd like it to be and kind of where new yields are coming on. Thanks.

Alex Ko -- Executive Vice President and Chief Financial Officer

Hey. Let me respond to that. Our non-CRE loan growth is coming primarily from our corporate banking group. And our corporate banking group has three different business lines, one 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 limit -- commitment was $1.5 billion. And 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. I think we will continue to gain more relationships into our business. So, I think, the total warehouse lending business line will have more commitment and higher ending balances.

And another unit of corporate banking is the middle-market lending group -- middle market C&I lending group. And we have different industry verticals that we are concentrating within that group and we also see significant growth from that unit.

Chris McGratty -- KBW -- Analyst

That's great color. Thanks. If I could ask one more, just on the balance sheet. I mentioned how you're thinking about deposit growth and 2021 obviously was pretty strong this year. Should we expect some further remixing of the earning asset base out of cash and bonds into loans, but any thoughts on the balance sheet growth would be great?

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure. Chris, our balance sheet will continue to grow, because as we delivered our strong growth in 2020, main increase resulted from non-interest-bearing deposits as well. So we have good liquidity position. And actually we -- even we reduced excess liquidity in Q4. When we need it we have sufficient liquidity. So I don't anticipate any challenges to support our loan growth that Kevin indicated earlier in the remarks. So it will be fine. And secondary, kind of allocation to investment security, those are the alternatives, if we have still excess liquidity after we funded our loans. So we would expect mid-90s of loan-to-deposit ratios for 2021.

Chris McGratty -- KBW -- Analyst

Great. And if I could just one more on the PPP, could you just, Alex, remind me what was in the quarter in terms of fee recognition and what's left from round one? Thanks.

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure. We have recognized in Q4 total $3.6 million we recognized that include 1% of interest income as well as net deferred loan fees. And the remaining still to be recognized is net deferred loan fee of $6.4 million. We would expect to have forgiven this PPP starting this Q1, but much more in the second half of the year.

Chris McGratty -- KBW -- Analyst

Great. Thank you.

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure.

Operator

[Operator Instructions] Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark -- Piper Sandler -- Analyst

Hi, good morning.

Kevin S. Kim -- President and Chief Executive Officer

Good morning.

Matthew Clark -- Piper Sandler -- Analyst

Maybe just as a 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 and what percentage of those relationships are you considered the primary line of credit?

Kevin S. Kim -- President and Chief Executive Officer

Yes. Maybe I can add a little bit of color. So most of our warehouse line, I don't have an exact number of count here, but most of our warehouse lines are quite sizable, so anywhere from, say, on the lower end maybe $30 million, upwards of $100 million to $150 million and our largest maybe $200 million. And typically -- and so, I think with that, we're probably looking at that number, I'm not sure, maybe 10 to 20 meaningful relationships there. And I think, in terms of primary lines, generally speaking, these mortgage companies maintain multiple lines. So we are generally one of their primary lines.

Alex Ko -- Executive Vice President and Chief Financial Officer

Yeah. And in terms of number of the customers, we have a total of 13 relationship -- the warehouse customers, which have $1 billion of outstanding balances as of year-end.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. And then, just on the expense outlook. You obviously gave some pretty explicit guidance. But when you look at your expense to average asset ratio, I guess, when do you get -- where do you think that can bottom? When do you get to a point where you don't think it can go any lower?

Alex Ko -- Executive Vice President and Chief Financial Officer

That's a good question because there are so many moving parts here. But I think, if I may give you kind of an expectation for next two, three quarters, I think it will not deviate too much. We would expect to realize the benefit from the branch restructuring cost, which we expect about $2.4 million of annual savings. It will help to maintain the efficiency ratio and those non-interest expense over average asset ratio to be maintained. But we also expect to see some minor increase in the professional fees and other [Phonetic] expenses. And so, with that, I think we would maintain the similar level, let's say, of $70 million level for next two, three quarters. And after that, I think we can -- we can't say that it will increase because we will continue to invest on technology and compliance on those. But I think we have invested quite a bit so far, so I'm hoping to see margin -- I'm sorry, the efficiency and non-interest expense to average asset ratio to be meaningfully improve maybe Q4 of 2022.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. And then, just on reserving, is it fair to assume that we'll continue to see build reserves here maybe for the next couple of quarters before you start to release or assuming releasing begins in the second half maybe too early based on what you know today?

Kevin S. Kim -- President and Chief Executive Officer

So, obviously in this uncertain environment, there's a lot of pandemic-related variables that are still out of our control. But we do feel that the fourth quarter, we have really embedded the appropriate reserve levels for what we're seeing in the hotel portfolio as it continues to progress through the pandemic. And so, I think, with the vaccine use and the stimulus programs that the government is currently working on and the additional round of PPP funding that will really help a lot of our customers extend their bridges here, I think we're in a very good position to start seeing some lower level of provisions in 2021. It's hard to pinpoint exactly in a quarter to quarter, we'll 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 or provision release sometime in 2021.

Matthew Clark -- Piper Sandler -- Analyst

Okay. Thank you.

Operator

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

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. Couple of questions. And really starting off with what you guys were 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 with hotel/motel, or at least stabilization, where it seems like you guys, s 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?

Kevin S. Kim -- President and Chief Executive Officer

Sure. What we experienced, I think, in the fourth quarter was really diving into the CECL modeling process where we really looked at the industry data in the hotel area and we saw a lot of things there. To answer your question about our portfolio, we had a few cases where we identified some downgrades, but our portfolio itself, we believe, is actually performing consistently and consistently better, I think, than that general hotel industry. So, our hotel that we mentioned in our prepared remarks are really geared toward the limited service hotels. And we follow the industry data very, very closely right now. So what we do is, we look at the industry data for the particular region 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 is indication that both the industry in terms of limited service, which are -- most of our hotels and motels and then our own hotel and motel performance have actually done better than industry averages in a sense, starting with the third quarter, second quarter was a very -- as everyone knows, it was a very down period. The third quarter saw a lot of recovery in terms of the hotel performances. Many hotels reached breakeven or we're very close.

Fourth quarter, we're going to be entering a period here. We are picking up data based on the impact of the virus spread and the prolonged recession, in a sense, for the hotel industry. We took it upon ourselves to continue to be in a reserve building 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 noticed, 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 were designed to be longer-term in duration. And we realized that the hotel industry is going to have a longer runway to a recovery and a typical three-month modification or deferment, we believe, we felt at that time was not going to be sufficient to get them 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 probably one of the states that are most impacted by the pandemic. But as we see recovery, we're seeing lots of signs of hope right now. We know that California State is opening up, 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, payment reserves and things of that nature, we took advantage and/or we took as many opportunities as possible to shore up the credits as you went through that process. So, in the overall perspective, right now we are seeing some reserve builds here, but we felt -- we feel that that's appropriate for the level of uncertainty now, but our outlook, as we move into 2021, with all the positive developments particularly surrounding the vaccine, which I think is going to be a game changer for this industry, particularly for this limited service in 2021, we feel fairly optimistic or cautiously optimistic.

David Chiaverini -- Wedbush Securities -- Analyst

That's really helpful. Thanks for that. And then, shifting gears to the mortgage warehouse business, you mentioned about how you are taking share. I guess, multi-part question, just curious who you're taking share from. Are there any big banks that are pulling back, because it seems like there is 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 2.2%. Is that a competitive rate in that you're undercutting the competition? Just talk about how you're winning this business.

Kevin S. Kim -- President and Chief Executive Officer

Well, David, we are focusing on top 100 largest mortgage originators in the country. And each one of those top originators have multiple relationships with many other banks. So, we are one of the many relationships that our customers have with multiple banks. And the 2.2% average yield that I quoted for the fourth quarter is the market rate. We are not really underpricing our lines or advances to the customers and the corporate banking group. We were able to attract a lot of good experienced originators and managers, and they were really making the difference in 2020. And because this is revolving lines of credit and used for short-term financing, I think this is the type of business that we can really expand without much of the risk accompanied with the growth. So, I think that is the difference that our investment in developing a stronger commercial banking platform development shows. And I expect that we will continue to see that expansion.

David Chiaverini -- Wedbush Securities -- Analyst

Great. Thanks for that. And then, the last one is more of a clarification. On the loan growth outlook for 2021, the mid to high-single digit, is that including PPP or excluding PPP?

Kevin S. Kim -- President and Chief Executive Officer

Yeah, that is ex-PPP loans.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. Thanks very much.

Kevin S. Kim -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Larry Ring with Mutual of Omaha. Please go ahead.

Larry Ring -- Mutual of Omaha -- Analyst

Hi. Thank you for the call. I've been very interested in the questions and comments about warehouse lending. I don't think I'm going to beat that horse anymore, but I think you said you might have been growing in middle-market lending as well. And I was wondering if you could expand on sort of where your growth is outside warehouse lending.

Kevin S. Kim -- President and Chief Executive Officer

Yes. As I mentioned, we have three different business lines under our corporate banking group and middle-market lending is one of the three. Our growth strategies in the middle-market is really on the specific industry verticals. And as I mentioned, we have already established and up and running for the financial services asset managers type of business vertical. We have telecom business vertical. We have mainstream large CRE loan group within that unit. And we are currently building up a healthcare group. And those guys are industry experts and we are really expanding the geographic perspectives also. We started this group from out of -- from Dallas in the Southwest and we are now expanding to East Coast and upper Midwest and Chicago area. And also we have a plan to expand into Northwest areas -- Pacific Northwest Washington areas.

Larry Ring -- Mutual of Omaha -- Analyst

So help me understand the view increased lending to, say, financial services, what does that look like? Who are those customers? And what does that look like?

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure. Maybe I can add a little color. So, in the financial institutions, it's a pretty broad area, in a sense, there are going to be a variety of different types of customer bases there. As we look at lending to asset managers, fund managers, direct or indirect lenders, we have capital call lines. There is all sorts of different 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 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 some industries. And so, through our process of building these verticals, we have been able to pinpoint areas where we feel the opportunities to grow safely and meaningfully are there. And definitely we have the lenders now. I think we have very strong lenders in the marketplace that have good relationships to build this new growth level.

And I think, as we have proven not only in the mortgage warehouse space but also now in the middle market space over the last few years, we are definitely building our experience and reputation as an actual player in this market -- in the true middle-market area. So we are excited about the growth opportunities here. And I think we'll see more success as we move forward.

Larry Ring -- Mutual of Omaha -- Analyst

Okay. Terrific. Thank you.

Angie Yang -- Senior Vice President, Director of Investor Relations and Corporate Communications

Thank you.

Operator

Our next question is a follow-up from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark -- Piper Sandler -- Analyst

Hey. Do you just happen to have the end-of-period PPP loan balance as well as the average for the fourth quarter? I didn't see it in the deck or the release.

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure. The PPP balance at the end of the quarter was $459 million. And we had $473 million, so the average balance is not much different from the quarter end balance. In fact it's $10 million higher at -- $470 million was our average balance for the Q4.

Matthew Clark -- Piper Sandler -- Analyst

Thank you.

Operator

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

Kevin S. Kim -- President and Chief Executive Officer

Thank you everyone again for joining us today. And I hope everyone is today healthy and safe and we look forward to talking to you again in three months. So long everyone.

Angie Yang -- Senior Vice President, Director of Investor Relations and Corporate Communications

Thank you.

Alex Ko -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Angie Yang -- Senior Vice President, Director of Investor Relations and Corporate Communications

Kevin S. Kim -- President and Chief Executive Officer

Alex Ko -- Executive Vice President and Chief Financial Officer

Chris McGratty -- KBW -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

Larry Ring -- Mutual of Omaha -- Analyst

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