Hope Bancorp Inc Q4 FY2020 Earnings Call

Good day and welcome to Hope Bancorp's 2020 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. 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, Sarah. Good morning everyone and thank you for joining us for the Hope Bancorp 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 two, 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 operates. 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 annual report on Form 10-K for the year ended December 31, 2020 could differ materially from the financial results being reported today. Additionally, 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 reconciliation 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?

Thank you, Angie. Good morning everyone and thank you for joining us today. Let's begin on slide three 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 pretax 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 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 $7.5 million gain on sale of securities and the $3.6 million FHLB prepayment penalty in the preceding third quarter, our pretax 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 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 improvements we recognized in our 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. While we are making excellent progress on our long-term initiatives, our near-term financial results continue to be impacted by elevated provision expenses resulting from the ongoing effects of the pandemic. During the fourth quarter, we continued 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 four. We ended 2020 with our highest level of loan production during the year, which resulted in 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 payoffs 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, 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 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 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 six. 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 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 throughout 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 onto 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 limitations of the pandemic. Now I will ask Alex to provide additional details on our financial performance for the fourth quarter. Alex?

Thank you, Kevin. Starting with our net interest income, it reached $120.8 million, up 3% from $117.6 million in the previous third quarter. This increase was mainly due to a significant drop in interest expenses resulting from lower deposit costs, redeploying excess liquidity, and higher average loan balances. In the fourth quarter, we recognized $2.4 million in net PPP loan fees, compared to $2.6 million in the previous quarter, with a remaining $6.4 million to be recognized. We experienced our second consecutive quarter of net interest margin expansion, which grew by 11 basis points to 3.02%. This growth was mainly driven by reduced deposit costs and the strategic redeployment of our excess liquidity into loans and investment securities. When excluding purchase accounting adjustments, our net interest margin expanded by 15 basis points quarter-over-quarter in the fourth quarter of 2020. We see further opportunities to decrease our deposit costs, with $1.6 billion in time deposits maturing in the first quarter at an average weighted rate of 107 basis points and $1.1 billion maturing in the second quarter at an average rate of 80 basis points. This could allow us to continue realizing margin expansion in the first half of this year. Next, our non-interest income was $11.4 million for the fourth quarter of 2020, down from $17.5 million in the preceding third quarter, largely due to a $7.5 million gain on the sale of securities recognized in the previous quarter. Excluding these security gains, our non-interest income increased by $1.4 million, mainly from a $2.9 million rise in other income and fees, driven by increased swap fee income and a favorable fair value adjustment in derivatives. This increase was partially offset by lower net gains on loan sales, with $52.6 million in residential mortgage loans sold in the fourth quarter compared to $104.5 million in the previous quarter. Our non-interest expense for the fourth quarter was $71.1 million, reflecting a 3% decrease from the prior quarter. This amount included $2.4 million in restructuring charges related to consolidating five branches, while the preceding quarter included a $3.6 million prepayment penalty. Excluding these items, our non-interest expense decreased by $1.1 million, primarily due to variances related to OREO costs, although this was partially offset by a $252,000 increase in salaries and employee benefits, mainly from higher group insurance costs. Regarding our deposit trends, we continue to reduce higher-cost time deposits and replace them with lower-cost transaction deposits through our business development efforts. In the fourth quarter, our noninterest-bearing demand deposits rose by 7%, and our money market deposits increased by 10%, while time deposits decreased by 10%, leading to an overall deposit increase of 2% from the previous quarter. Addressing our asset quality, we noticed some negative shifts in our portfolio during the fourth quarter, with nonperforming loans climbing by $17 million and criticized loans increasing by $80 million. The rise in criticized loans was mostly due to further deterioration in debt coverage ratios that we proactively identified. This increase was expected given the ongoing impacts of pandemic-related shutdowns and restrictions on certain industries where we have significant exposures. About $30 million of the quarterly downgrades came from retail credits, and roughly $20 million from hotels, with the rest spread across various industries. All these loans are currently paying as agreed or under modified terms. Notably, 82% of the new criticized loans have undergone modifications due to the pandemic's extended effects on borrowers' cash flow. These loans are well-secured, and we anticipate minimal loss expectations. Additionally, around $20 million of the criticized loans increase pertains to a relationship where we are in the process of exiting for nonfinancial reasons, which we expect to have minimal losses, if any. Regarding the increase in nonperforming loans, this involves two construction loans nearing completion that have exhibited some weakening due in part to the pandemic. We believe the specific reserves allocated for these loans are adequately sized to cover potential risks. Overall, we are observing minimal losses from our portfolio, with net charge-offs representing two basis points of average loans in the fourth quarter and seven basis points for the entire year of 2020. Our focus on early identification of potentially problematic loans has helped us maintain a low level of losses over the years, thus increasing our options for proactive workouts and strategies that mitigate loss exposure. As highlighted in our earnings release, we recorded a provision for credit losses of $27.5 million in the fourth quarter, raising our allowance for credit losses to $206.7 million as of December 31, 2020, from $179.8 million at the end of the third quarter. This reserve buildup was primarily directed toward the hotel and motel sector as we continuously evaluate the pandemic’s impact on this industry. Our CECL modeling process during the last quarter integrated the most current industry data for hotels and motels, leading management to conclude that it was prudent to further elevate reserve levels for this segment to 3.86% as of December 31, 2020, up from 3.01% on September 30, 2020, contributing $17.8 million to our fourth-quarter provision for credit losses. We also increased the allowance for our retail CRE portfolio to 1.5% as of December 31, 2020, from 1.17% as of September 30, resulting in an $8.1 million increase in reserves for this portfolio quarter-over-quarter. Conversely, improved fundamentals in our C&I portfolio resulted in a $5.1 million reduction in the allowance for credit losses for that portfolio, with the coverage ratio dropping to 94 basis points as of December 31, 2020, from 1.4% on September 30, 2020. As a percentage of total loans, our allowance for credit losses climbed to 1.52% as of December 31 from 1.37% at the end of September. Including purchase accounting discounts, our coverage ratio reached 1.7% of total loans, or 1.76% when excluding PPP loans. We believe this reserve level adequately addresses any potential losses during this uncertain period. However, it is crucial to emphasize that with effective vaccines being rolled out and additional government stimulus programs expected, we foresee a quicker path to recovery and are beginning to see positive signs ahead.

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 31, 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 continued to increase shareholders' equity with our book value per share and tangible common equity per share increasing quarter-over-quarter. As of December 31, 2020, we continued to maintain a meaningful amount of excess capital above the amount required to be classified well-capitalized. And given our strong capital and liquidity positions, we maintained our quarterly dividend at $0.14 per share. With that 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 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. More importantly, our deposit composition improved dramatically with non-interest-bearing deposits increasing from 25% at December 31, 2019 to 34% at December 31, 2020. Despite a 9% year-over-year growth in total assets, we had minimal increase in non-interest expense. 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 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. Again, we achieved these goals. As we mentioned earlier, at December 31, 2020, loans receivable increased year-over-year by 10% or 7% excluding PPP loans. The increase in our loan portfolio was almost entirely in commercial loans resulting in a much more diversified loan portfolio. 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 extension in the second half of the year as a result of the significant reduction in our deposit costs. 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. 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. 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 for 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 more normalized level. With the rollout of the vaccines proceeding, 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. 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 decline in modifications, 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 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 and 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 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 pretax pre-provision growth. 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 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 2021. With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.

Thank you. We will now begin the question-and-answer session. Our first question comes from Chris McGratty with KBW. Please go ahead.

Hi. Great. Hey, Kevin. I 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 large you'd like it to be and kind of where more new yields are coming on? Thanks.

Okay. Let me respond to that. Our non-CRE loan growth is coming primarily from our corporate banking group. Our corporate banking group has three different business lines, one of which is warehouse lending business line. 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 the average yield for Q4 was 2.2%. We expect 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 in our business. The total warehouse lending business line will have more commitments and higher ending balances. Another unit of corporate banking is the middle market lending group, where we have different industry verticals and we are also seeing significant growth from that unit.

That's great color. Thanks. If I could ask one more just on the balance sheet. I'm interested in how you're thinking about deposit growth in 2021. Obviously, it 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.

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

Great. And if I could just ask 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.

Sure. We have recognized a total of $3.6 million in Q4. That includes 1% of interest income as well as net deferred loan fees, and the remaining is a net deferred loan fee of $6.4 million. We expect to start forgiveness of this PPP in Q1, but much more in the second half of the year.

Hi. Good morning.

Good morning, Matthew.

Maybe just as a follow-up question on the warehouse. Can you give us a sense for the number of relationships you have there, the number of broker relationships? What percentage of those relationships are you considering the primary line of credit?

Yes. I can provide some additional details. Most of our warehouse lines are quite significant, typically ranging from around $30 million to $100 million or $150 million, with our largest possibly reaching $200 million. Generally, these mortgage companies have several lines, and we are usually one of their main lines.

Yes. In terms of the number of customers we have a total of 13 warehouse customers which have $1 billion of outstanding balances as of year-end.

Okay. Great. Regarding the expense outlook, you provided specific guidance. However, when considering your expense to average asset ratio, when do you believe it can reach its lowest point? When do you think it will stop decreasing?

That's a good question because there are many factors at play. However, I can provide some expectations for the next two to three quarters. We don't anticipate significant deviations from our current situation. We expect to benefit from the branch restructuring, which should result in approximately $2.4 million in annual savings. This will help us maintain our efficiency ratio and keep our non-interest expense-to-average asset ratio stable. However, we also foresee a slight rise in professional fees and other expenses. Therefore, we expect to maintain a similar expense level, around $70 million, for the next two to three quarters. Beyond that, we anticipate an increase as we continue to invest in technology and compliance; we’ve made significant investments so far. I hope to see improvements in efficiency and non-interest expense relative to average assets around the fourth quarter of 2022.

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 or is assuming releasing begins in the second half maybe too early based on what you know today?

In this uncertain environment, there are many pandemic-related factors beyond our control. However, we believe that in the fourth quarter we have appropriately established reserve levels for our hotel portfolio as it continues to navigate the pandemic. The use of vaccines and government stimulus programs, including the additional round of PPP funding, will significantly aid many of our customers in sustaining their operations. I think we are positioned well to begin seeing lower levels of provisions in 2021. It’s difficult to determine exact quarter-to-quarter outcomes, as we will need to monitor the surrounding circumstances. Nonetheless, we feel confident that we will start to observe lower provision levels or provision releases sometime in 2021.

Hi, thanks. I have a couple of questions. First, regarding the Hotel/Motel sector, was there anything unexpected in that portfolio during the fourth quarter? Some of your peers at other banks are reporting improving trends in Hotel/Motel or at least stabilization, while it appears you experienced some decline in operating trends in the fourth quarter. Can you discuss the occupancy levels and sponsor support in the Hotel/Motel portfolio?

Sure. What we experienced 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 than the general hotel industry. Our hotels as we mentioned in our prepared remarks are really geared towards the limited service hotels. We follow the industry data very closely right now. 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. What we are seeing is indication that both the industry in terms of limited service, which are most of our hotels and motels, and then our own hotel/motel performance have actually done better than industry averages in a sense starting with third quarter. Second quarter was a very down period. The third quarter saw a lot of recovery in terms of the hotel performances. Many hotels reached breakeven or were 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 for the hotel industry. We took it upon ourselves to continue to be in a reserve building timeframe for the hotel industry for the fourth quarter. But in our outlook right now, I would say that we feel very good. Our modification levels are probably higher than some of the peers that you may be looking at. Our modification programs from the very beginning of the second round were designed to be longer term in duration. We realized that the hotel industry was going to have a longer runway to a recovery. A typical three-month modification or deferment was not going to be sufficient to get them to the other side of the recovery. We believe with our modification program in place where we really did have many credit enhancements, we've taken as many opportunities as possible to shore up the credits. I know we're seeing some reserve builds here, but we feel that's appropriate for the level of uncertainty now. Our outlook as we move into 2021 with all the positive developments, particularly surrounding the vaccine, which we 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.

That's really helpful. Thanks for that. And then shifting gears to the mortgage warehouse business. You mentioned about how you're taking share. I guess a 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's 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 and that you're undercutting the competition? Just talk about how you're winning this business.

Well, David, we are focusing on the 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. The 2.2% average yield that I quoted for the fourth quarter is at the market rate. We are not really underpricing our lines or advances to the customers. 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. 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. That is the difference that our investment in developing a stronger commercial banking platform development shows. I expect that we will continue to see that expansion.

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?

Yes. That is excluding PPP loans.

Hi. Thanks 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. I was wondering if you could expand on sort of where your growth is outside of warehouse space or mortgage?

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. We have already established and are up and running for the financial services asset managers type of business vertical. We have a telecom business vertical and a mainstream large CRE loan group within that unit and we are currently building up a healthcare group. Those guys are industry experts. We are really expanding the geographic perspectives as well. We started this group from out of Dallas in the Southwest and we are now expanding to East Coast and Upper Midwest and the Chicago area. We also have a plan to expand into Northwest areas – Pacific Northwest Washington areas.

Thank you.

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

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.

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 Q4.

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

Thank you everyone again for joining us today. I hope everyone's today is healthy and safe and 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.