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spk01: Ladies and gentlemen, thank you for standing by, and welcome to the first Hawaiian, Inc., third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's call is being recorded. If you require additional assistance, you may press star then 0 to reach an operator. I would now like to turn the call over to Kevin Haseyama. Please go ahead.
spk13: Thank you, Michelle, and thank you, everyone, for joining us as we review our financial results for the third quarter of 2020. With me today are Bob Harrison, Chairman, President, and CEO, Ravi Malela, CFO, and Ralph Misik, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the investor relations section. During today's call, we will be making forward-looking statements, so please refer to slide one for our safe harbor statement. We will also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob.
spk11: Good morning, and thank you for joining us as we review our third quarter results. I'd like to start with an update on the current situation here in Hawaii, if you can look at slide two. As we reported on our last call, the local economy reopened in early July, and following a rise in the number of new COVID cases in late July and August, the island of Oahu went into a second stay-at-home order in early September. Oahu began reopening in late September under a new four-tier reopening strategy with quantitative criteria for loosening and tightening restrictions. The island started at Tier 1, the most restrictive tier, and moved to Tier 2 yesterday as we were successful in holding down the number of new daily cases and had a low positivity rate. Another important step in the reopening of the Hawaii economy was the start of the pre-travel testing program on October 15. The program allows Trans-Pacific travelers to bypass the state's 14-day quarantine if they test negative for COVID-19 within 72 hours of traveling to Hawaii. Over the last few days, we've seen the number of visitor arrivals in the 2,000 to 4,000 per day range. This is an important step in restarting the tourist industry, which is the main reason for the state's unemployment rate, which remained high in September at 15.1%. At the bank, we have begun the process of reopening the branches that were closed as a result of the pandemic. But after further evaluation, we decided that four of the branches will remain closed permanently. In July, we launched our online mortgage origination portal, enabling borrowers to apply for a mortgage digitally. We also started helping PPP borrowers prepare to apply for loan forgiveness. We have hosted several webinars in conjunction with the SBA to educate borrowers on the forgiveness process, and we have already begun submitting applications for forgiveness to the SBA. Now, if you turn to slide three, I'll go over the third quarter highlights. We had a solid quarter. Our results reflect increased economic activity from the reopening of the local economy, careful balance sheet management, and improved asset quality. Third quarter pre-tax, pre-provision net revenue increased 11.3% over the second quarter to $91.3 million. We had net interest income and non-interest income increased while holding expenses flat. In the quarter, we were also able to improve our deposit mix as consumer and commercial deposits increased by $166 million, and we reduced public deposits by $630 million. As a result, our total cost of deposits declined six basis points to 13 basis points, and this contributed to the 12 basis point improvement in net interest margin. Asset quality improved in the third quarter, and our current economic outlook remains relatively unchanged from the second quarter. As a result, we did not need to add much to our allowance for credit loss, and our provision expense was $5.1 million for the quarter. We finished the quarter with strong liquidity and capital, and the Board maintained the dividend at $0.26 per share, a 52% dividend payout ratio. And now I'll turn it over to Ralph to discuss asset quality, provisioning, and loan deferrals. Thank you, Bob.
spk02: Slide 4 provides some highlights on asset quality. With little change to our reserve estimate, the provision this quarter was minimal. Loan recoveries exceeded charge-offs, and the level of non-performing and criticized loans fell as we executed on plans to manage higher risk credits. For the quarter, the provision was $5.1 million, down from $55.4 million in Q2. We showed a small net recovery in Q3 compared to net charge-offs of $23.4 million in the prior quarter. Recoveries of $4.9 million exceeded charge-offs by $84,000. Assets non-performing or 90 days past due fell $28.4 million from $43.4 million. We transferred about $14.6 million in non-accrual loans to held for sale. They were subsequently sold in early October, resulting in a gain of about $7 million. Criticized commercial loans decreased approximately 17% to $619 million, from $742 million in the second quarter. Past due loans, both accruing and on non-accrual status, decreased slightly from the last quarter to $35.7 million, or approximately 26 basis points on total loans and leases. On slide five, you see a roll forward of the allowance for the quarter by disclosure segments. The reserve increased by about $3.8 million to $195.9 million, which is 1.4% of all loans and 1.6% excluding PPP loans. The smaller increase reflected a relatively unchanged view of the economy, a smaller balance sheet, and an improvement in the risk profile of the portfolio. Our economic forecast closely aligned to the base case of the current University of Hawaii Economic Research Organization, or UHERO, forecast. The forecast for 2020 projects local unemployment to average in the low teens, personal income to decline about 4%, and a 12% drop in real GDP. A rebound in these measures is not expected until the middle of 2021, and a stronger recovery not until 2022. We continue to rely on a qualitative overlay to support default expectations not embedded in the loan portfolio. At the quarter end, this amounted to about 20% of the reserve. Around 80% of that overlay can be attributed to COVID. Turning to slide six, you see a snapshot of the outstanding loans that had received deferrals at the start of the pandemic, and a recap on how these loans have since performed. We granted 90-day deferrals to most borrowers, except for residential mortgages and some who had loans tied to SBA programs, where we provided up to six months relief. About 77% of the loans by balance have completed their deferral period. Around 96% of those loans have returned to payment, with a small portion offered a second deferral based on additional considerations. The bulk of the loans remaining under the original deferral are related to residential mortgages. These are well collateralized, with only 3% of the balances showing a loan to value ratio over 80%. Moving to slide seven, we show the composition of our commercial portfolio by risk rating at quarter end. Last quarter we mentioned we had completed a review of loans assuming a delayed recovery to identify higher risk credits needing active management. This quarter we focused on implementing strategies to manage these credits taking actions to support retention, rehabilitation, or exit objectives. During the quarter, we saw a net reduction in special mention loans of $121 million and substandard loans by $2 million. These numbers reflect reductions in the non-accrual loans that were under contract for sale and sold after the quarter. On slide 8, you see a recap on the impacted industry slide we have presented in the past. Our exposure here remains modest, but it is an area of focus as we look to stay ahead of potential credit issues. About 60% of our criticized loans are in these industries. Hospitality companies and hotel properties continue to be impacted by the reduction in global travel. Our borrowers have been able to bolster their liquidity reserves and cut expenses to manage through this time. We expect some modest reductions in our portfolio, largely through recapitalizations. As we had mentioned in previous calls, lending in this space has always been targeted to ensure that we have stronger credit profiles that mitigate the inherent volatility in the business. As well, we continue to track retail businesses and properties to assess their ability to adjust to current conditions. We anticipate property loans in this space could experience additional stress should they see tenant-related vacancy or collection issues. Finally, I would note that our dealers have reopened and are experiencing a rebound in demand. We anticipate that balances here will continue to decline as their inventory levels fall, partly because of a disruption in new vehicle production. Now I'll turn the call over to Robbie to go over the balance sheet and income statement.
spk04: Thank you, Ralph. Turning to slide 9, period end loans and leases were $13.5 billion. down $264 million, or 1.9% versus the prior quarter. CNI balances declined $253 million in Q3 due to paydowns in the shared national credits portfolio, declines in dealer flooring that occurred in the early part of the quarter, and a number of smaller credits that took the opportunity to pay down their balances. In Q3, we saw solid growth in construction and commercial real estate. We also saw strong origination volume in our mortgage portfolio due to low rates and an active residential real estate market. Mortgage loan originations were over $300 million in the quarter. Turning to slide 10, total deposit balances ended the quarter at $18.9 billion, a $464 million decrease versus the prior quarter. consumer and commercial deposit balances grew by $166 million. As we had planned, public deposit balances declined by $630 million as $853 million in public time deposits matured and rolled off. We expect public deposits in Q4 to trend slightly down as stimulus money gets deployed before year end. Our cost of deposits fell to 13 basis points in the quarter. Turning to slide 11, net interest income was $134 million, a $6.2 million increase versus the prior quarter. The increase was primarily due to $4.9 million in lower interest expense and a $2.8 million increase from the investment portfolio due to higher balances. These were partially offset by lower interest income from the loan portfolio. Net interest margin was 2.70%, a 12 basis point increase from the previous quarter. The increase in margin was primarily due to the reduction of about $550 million of excess liquidity, a full quarter's benefit from lower FHLB balances, and lower deposit costs. Going forward, we continue to face headwinds from the low interest rate environment. However, we anticipate that NIM in the fourth quarter will remain relatively stable. Turning to slide 12, non-interest income was $48.9 million, $3.2 million higher than the prior quarter. The increase in non-interest income in the third quarter was driven by higher levels of customer activity following the gradual reopening of the local economy that started in early July. non-interest expenses were $91.6 million, essentially flat to the previous quarter, and the efficiency ratio was 50%. And now I'll turn it back to Bob.
spk11: Thank you, Ravi. So to wrap up in the third quarter, the local economy reopened. We had a recovery in activity-based revenue and an improvement in asset quality. Our overall outlook on the economy hasn't changed significantly since the second quarter, and we continue to actively manage our credit risk. It's still early days for the economy in Hawaii, as we only began the pre-travel testing program for Trans-Pacific travel a week ago. Hopefully, this will be the first step on the road to recovery for the visitor industry. And now we'd be happy to take your questions.
spk01: As a reminder, to ask a question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Our first question comes from Steve in Aliceapolis of J.P. Morgan. Your line is open.
spk05: Hi, everybody. Hi, Steve. Hi, Steve. Let me start maybe, Bob, with a big-picture question just regarding the travel resuming back into Hawaii. I know it's only a week. But when you mentioned 2,000 to 4,000 visitors per day, how did that compare to the initial expectations, and where does that need to go to to take pressure off the local economies?
spk11: Yeah, that's an excellent question, Steve. And, you know, we didn't have a lot of expectations. We thought it would start out slow, and it has. And there's still a few, you know, kinks that are working out at the airport, quite frankly, and checking people, and did you download the app, and has it got the right provider or partner that the state has identified to qualify for pretesting? Is it the correct you know, all those things we tried to message, we being the state, tried to message out very well to the visitor industry and the airline partners have done a fantastic job getting the word out. But they're still, you know, kind of working through the process. And I think that's what is good about starting slow is we get to work all that out as we start to see a build for the holidays. My thought would be that we won't really have a good idea of what the volume and comfort level people will have with traveling until we get to the Thanksgiving and Christmas holidays. This period of time between now and then will allow us to, my very unscientific way of saying it, work out the kinks in the process and get people moving again. As far as what we need is a level to kind of return to normalcy, you know, I think you see that in the AHERO forecast that they see the tourism industry industry building over time, over the next six months. And that's why we have a pretty conservative outlook on that. Okay.
spk05: That's a helpful way to think about it, Bob. On the margin, Ravi, it's funny when you were talking about NIM, it sounded like you were pretty cautious, but then you got it to flat and 4Q. Can you maybe talk about what you see supporting NIM near term? And is that just a temporary support and then you expect pressure afterwards?
spk04: You know, certainly I think there'll be pressure on the asset side. You know, new securities yields are obviously, you know, grinding down lower. And we're going to see refinancing activity, you know, primarily in our mortgage portfolio. And we'll, you know, continue to see paydowns. I think, you know, the upsides, you know, are frankly on the interest expense. I'll maybe name three areas. In Q3, we had 200 million of FHLB maturities roll off the balance sheet, but that actually occurred at the end of July, and so we'll pick up a little bit more in Q4. I think there's a little bit of room on the deposit side. We were at 13 basis points for the quarter, but maybe there's a little bit of room on the deposit side, not a whole lot, but some room for deposit costs to go down. And then, you know, certainly we don't control the amount of liquidity that comes onto the balance sheet. We could see commercial and consumer deposits coming back and increasing. But I think when we think about our, you know, our public deposits, we feel given what we know about the trending in those deposits, we see potentially those deposits declining over the course of the quarter and giving us some sense that the NIM will be stable for the quarter, but certainly there are downside pressures.
spk05: So just to wrap up, you know, most investors I think are getting comfortable, at least over the near term, on credit. It's more, okay, what can you do over the next year on pre-tax, pre-provision growth? And if we think about NIM being flattish to down, you know, Bob, maybe talk about what should the expectations be on pre-tax, pre-provision growth? Is flat a good assumption, you know, from here moving forward? Is there anything we should be thinking about that could drive a little bit better growth? Thanks.
spk11: Yeah, good question, Steve, and I'll look at it from this standpoint, and really it's going to be loan balances that are going to help us to recover and protect that pre-provision net revenue. And really what it comes down to there is a couple different things. One, we're going to see a continued churn in the residential portfolio. Teams are working full speed to keep up with the volume, and so you'll see that. We have been selling much of that production. We're putting some of that more on balance sheets, so there might be some growth in that area from that line item. Also, the dealer balances are down several hundred million from the end of the year. Obviously, it's a surprise, I think, virtually all of us of how strong the sales have been. And as production in the manufacturers gets back online, you'll see, I think, a gradual build from that line item as the dealers start to rebuild their inventories, which are very low right now. And they'll do that cautiously. They're going to be careful about it. But I think those are the two lead items. And then thirdly, in our commercial real estate portfolio, there are a number of construction projects that are now funding deals that we've put together over the last, what, Ralph, 12 to 18 months. Of course, all the borrowers' equity is in there first, and now we're starting to see some fairly significant draws, as we saw in the quarter that just ended. So I think those are three areas we could look to for loan growth. Robbie, anything you'd like to add?
spk04: You know, maybe I'd just add a couple of comments on the expense side. You know, we've been fortunate to be able to hold expenses flat. You know, certainly we've slowed down some of our discretionary spending, but, you know, we – you know, there – There will be some pressure, you know, looking forward. We expect those to tick up a little bit. We're continuing to invest in the business itself. We're working on our core platform implementation. We're investing in the businesses. And as we start to open up, we'll start to see maybe some more expenses related to, you know, incentive comp as the economic activity starts to pick up. Just wanted to provide that qualification on the expenses side related to PTPP.
spk11: And maybe one last thing is, as we do continue the reopening, we didn't see a full quarter of activity-related type income, you know, credit and debit card fees, merchant processing. It's still, while much better than Q2, it's still not at the normal run rate. And as the economy reopens and visitors return, we'll see some activity there as well, which should be beneficial.
spk05: Terrific. That's a very helpful color. Thanks for taking my questions.
spk11: You're welcome.
spk01: Our next question comes from Ibrahim Poonawalla of Bank of America Securities. Your line is open. Hey, guys. Good morning.
spk13: Good morning. Good morning.
spk08: Just a little follow-up on credit. I mean, I think... I'm sorry.
spk11: Ibrahim, could you speak up a little bit? We can hardly hear you.
spk08: Yeah. Is it any better now? Hello?
spk11: A little bit. Yeah, go ahead. Thank you.
spk08: Yeah, I just wanted to follow up on credit for a second. I guess from a distance, there's still a lot of concern around recovery in Hawaii. And when we look at sort of the reserving this quarter, just talk to us in terms of your comfort level, Bob, after six months of this pandemic and lockdowns around the portfolio. And does it feel that based on the review you've done, you are adequately reserved despite expectation for losses? Or does this just feel like a pause in the middle before you actually start having a better sense around credit risk and credit losses?
spk11: Excellent question. And maybe I'll start and then turn it over to Ralph. I guess to start with, We've spent a lot of time with our commercial borrowers, certainly the larger commercial borrowers, and we feel we have a very good handle on what's going on in that portfolio. Residential is still very strong, so we have very little concerns in that area. The unknown, candidly, is around the consumer. The consumer is performing much better than we would expect and much better than guys like Ralph and I, after 30 years in the business, have seen in previous cycles. because with the 15% unemployment, you would not expect to see the very, very low level of delinquencies and the strong return to payment. I think that's certainly been positively impacted by the government stimulus, and that's been a huge help. And if there's additional stimulus before full recovery in Hawaii, that would help. But we just don't know yet. I think that As far as how we look at our provision and our allowance for credit loss today, we've taken all that into account in looking at the model. And as Ralph mentioned, I'll let him speak to, we also have a qualitative overlay in that area just for that reason. But Ralph?
spk02: Sure. You know, I guess I would say if you look at the composition of the portfolio between special mention and substandard, the substandard loans probably are the ones that are really the smaller companies, the ones that we would have anticipated having difficulty. And then I think as we look at the larger companies, by and large, they have been able to reposition their businesses. And so I think from my standpoint, I think the business side is they're repositioning. I think one of the questions really is to the extent that they're laying off employees, what would that mean to the consumer book? And then I think secondarily, looking at our landlords. Right now, we haven't really had a lot of issues around, you know, I mean, I think they've been collecting rents and they've been able to work with their tenants, but that's one area that we'll continue to watch. So, you know, we have a number of credits that we put on special mention just for that purpose.
spk11: Does that address your question, Bibi?
spk08: Yeah, it does. And I guess just follow up to that means I'm going to see if you're sort of out of the woods, right? I mean, I think Stocks trading at a 6% dividend yield at relatively cheap valuation relative to your history. And just trying to get a sense, like when I listened to the airlines, Hawaiian Air increasing flights into Hawaii, we heard the same from Alaska recently. It seems like a lot of things are coming back into motion. Is it fair to assume that the worst in terms of credit costs is likely behind? And as we look forward into next summer, I know that's not part of your baseline forecast, but a fair amount of normalcy should have returned as we think about next year, middle of next year?
spk11: That's pretty far to forecast. I think that's what we have included, you know, really the base case and the UHERO forecast as far as our base case for our provisioning. There is certainly uncertainty, and that's why we've added that qualitative overlay. We're very comfortable with where we're at with the allowance, but we will see more issues come up within the portfolio, but we think we're adequately reserved at this time.
spk08: Good.
spk01: Thanks for taking my questions. Our next question comes from Alex Matters of Goldman Sachs. Your line is open.
spk03: Hi, good morning. Morning.
spk13: Morning.
spk03: So obviously this is a very strong quarter for credit results given the environment. We saw criticized and non-performers down materially. First, I'm just wondering if you could comment on what the embedded assumptions for credit migration up to this point would have been earlier in the year, and then second, as an add-on to that, if we continue to see metrics remain benign, you know, in the near term, at some point, does that start to reduce your expectations for through the cycle losses and sort of over what timeframe would you think about that?
spk02: Yeah, I would say, you know, we're operating under the assumption that we're early days into this. We have reserved for what we think is appropriate given the composition of the portfolio. I think over time, you know, you're, If we do see, we're going to expect to see, you know, some deterioration in asset quality metrics in the portfolio. But if the provision can, you know, stay relatively, you know, benign, and, you know, maybe we would change our outlook. But right now, I think our expectation going into this with the consumer was that we were going to have a lot more people having issues. But as it turned out, the return to pay has been fabulous.
spk11: Maybe just to follow up on the second part of your question, this is Bob. I would say that if we're looking to when we'd feel comfortable to make a call on when the worst is behind us, that's too early to tell right now. I think it would be at least one to two more quarters before we'd have a good idea of what the Hawaii economy is in full recovery and what the impact of the recession has had on the Hawaii economy.
spk03: Okay, thanks. That's helpful. And then maybe just a quick follow-up on the NII side, and particularly your mortgage portfolio. Could you comment on what drove the step up in the reported yields this quarter versus last quarter, and sort of where you're seeing new production this quarter?
spk04: Yeah, I'll comment on that, Alex. This is Ravi. I think what we saw in Q3 was really you know, came from an accrual that we put in Q3 that maybe should have been booked in Q2. So if you want to think forward and look forward to sort of where that line would look, you know, I would start with where our yields, average yields were in Q2. I think they were 3.88% in Q2, and you would build from there. Certainly, we're seeing a lot of refinancing activity in that space, and But I think 388 is a good starting point for you to look at going forward for Q4.
spk03: Okay, I appreciate it. And do you have a sense of where new loans are coming on currently?
spk04: I don't think we provide that information out as public.
spk03: Okay, thanks for taking my questions.
spk01: Our next question comes from Jackie Bolin of KBW. Your line is open.
spk07: Hi, good morning, everyone.
spk12: Good morning, Jackie.
spk07: I just wanted to talk a little bit about the non-performer sale that you had in October. That's a pretty sizable gain on the balance. Was that something that you'd already taken a credit mark on?
spk02: Yes, that's the credit. Actually, there are a number of credits when we did the re-grading project that actually had some weakness before COVID, and so we placed those on non-accrual. We did an impairment analysis took some charges on that. And, you know, we ended up, you know, getting a price on those loans much better than what we had anticipated. So that was where the gain came in.
spk07: Okay. And what line, just for geography purposes, what line item do you expect to run the gain through next quarter?
spk02: Yeah, I'll defer to Robbie, but I think it's going to be a gain as opposed to a recovery.
spk04: Yeah. I think that goes through the other income line, but we'll get back to you.
spk07: Okay. Okay. Thank you. And then just based on looking at point-to-point balances, and then recalling our discussion from last quarter as well with the commercial and the commercial real estate, was there any commonality between these loans in terms of either balance or industry, anything like that?
spk11: I'm sorry, Jackie, this is Bob. Just to clarify, which loans you're referring to, the ones that we had the recovery on?
spk07: Yeah, the ones that are the non-performers that are sold. I'm just wondering if there's more to come down the pipeline in the future as workouts continue.
spk02: Well, no, those, as I said, these were credits that we had on the books for a while that had challenges. They were classified. And we were actively sort of looking at strategies to get out of those deals. So As it turned out, you know, we were able to affect that.
spk11: And as far as geography, they were in the CNI and the commercial real estate portfolios.
spk07: Okay, so everything that you were looking to get out of, you've since gotten out of.
spk11: Well, I mean, it's a large portfolio. We still have non-performers, so we're actively working all of those credits.
spk02: Yeah, so every credit is going to have an asset plan, and, you know, for the most part, I think... we'll either retain or exit credits depending on the situation.
spk07: Okay. Okay. And then switching gears and looking at expenses, you mentioned that you're going to permanently close four branches. What kind of an offset does this provide to some of the investments that Robbie was discussing?
spk11: Well, we've been, yeah, it's not a direct dollar amount. What we've been doing is managing our personnel quite closely, quite frankly, given how many branches we had closed. As I mentioned in previous calls, we repositioned a lot of those people in other areas of the bank where they were needed. And you have your natural attrition. So as that kind of works through and you work to restaff the branches, there's been quite a mix in the personnel for the retail side of the bank. But, Ravi, anything, further comment? No.
spk07: Okay. Okay, thank you. I'll step back.
spk11: Thank you, Jackie.
spk01: Our next question comes from Andrew leash of Piper Sandler. Your line is open.
spk09: Hi, good morning, everyone. I just want curious about the securities book right here that increased the last few quarters and obviously the opportunities to invest liquidity into loans a little more challenging than in the past, but I'm just curious, like the average yield is only down seven basis points. What have you been adding to keep the yield up near this level?
spk04: I mean, I think maybe I'd characterize it a little differently, Andrew. I'd say they're sort of coming to a low point, if you will, when you're thinking about it. But certainly what we're seeing out in the marketplace is, you know, somewhere close to about 1% in terms of yield. So there's, you know, what we're buying in the book has been pretty big. It's, you know, we were at 5.1 billion, I believe, in Q2. And so there's a lot of momentum in that book already built up that is keeping it relatively flat. I mean, the way I would characterize the investment portfolio, really our strategy there is, you know, not only are we trying to deploy excess liquidity and sort of low risk-weighted assets that we feel comfortable with and that provide liquidity to us. But also, we're looking to extend the duration of that portfolio to offset a little bit of asset sensitivity. If you look at that book at the beginning of the year, I believe that the duration on that portfolio was about two and a quarter, and I think we're a little bit above 3.5 now. So, You know, we've been buying some very specific types of securities that have embedded duration in them. And as a result, we really feel good about the portfolio and where it's heading.
spk09: Okay. That's really helpful. And then just in the presentation reference that started the PPP forgiveness process, just curious what updates you can provide there. How is the process going there? and any sort of timing or early results that you've seen on loans being forgiven by the SBA?
spk11: Sure. We've submitted, you know, well over 100 and have heard back on zero of them so far, so it's still early. I think that's pretty common. What I've seen nationally is there's been a fair amount of loans submitted, but not a lot have been forgiven yet. I think everybody's just working through the process, as you know, that the Treasury Secretary Mnuchin changed, or through the SBA, they changed the requirement for the $50,000 and under loans. And so we were really holding off contacting those borrowers, hoping for something like that to happen. So we have to redo the documentation a bit, redo our process a bit, and then we'll be doing a broader outreach to that borrower group as well. But it's early in the process, and it looks like it's going to take some time. It's not a simple process. There is a fair amount of education we're trying to do with the borrowers to get them ready and get their paperwork in order, but it will take some time. The idea of a quick turnaround on that, I think, is not going to happen.
spk09: Understood. Yeah, I've heard similar comments. Thank you for taking my questions. I will step back.
spk01: Our next question comes from Brock Vandervliet of UBS. Your line is open.
spk12: Hey, guys, this is Vilas Abraham for Brock. I just wanted to walk through the provisioning by segment that you disclosed on slide five. It looks like directionally there was some variance there with CNI and CRE provision being negative and others being positive. It sounds like there's some qualitative differences maybe, but just specifically wanted to know if there's anything we should be aware of there.
spk02: No, the provision was fairly small. The portfolio composition in terms of risk rate improved. We did put a little bit more on the side for smaller business credits as far as a qualitative overlay. And we continue to hold a pretty substantial amount related to the consumer book, although we're not really seeing that stress yet.
spk12: Okay. I'm keeping going with credit. The cure rate looks like it's been pretty high thus far, but for any deferrals that don't return to current by year end, can you just talk about what your approach would be there in dealing with those? Would it be a longer-term modification under the CARES Act or something else?
spk02: Yeah, I think we pretty much, I think going forward, we're looking at this like we would in any recession. So we're going to, if it's a commercial credit, we're going to treat it like a workout, and we're going to work through that process. If we end up modifying the credit, we'll probably be putting it on a TDR status. And then I think with regard to the mortgage lending side, We have a moratorium until, I think, January here on foreclosures. So right now, even, you know, although we've given them longer periods for modification, I think, you know, there'd be very little that we would be able to do at this point anyway.
spk12: Okay. And just lastly, can you remind us on the LTVs on the retail and on the hospitality portfolios and just how comfortable you are there with the actual loss content that could eventually come out of it.
spk02: We haven't updated LTVs for the purposes of providing information, but I can tell you that as we look at the credits, one of the things we are doing if it's a property loan is we're doing an evaluation. In a lot of cases, we're assuming quite a bit of stress in the first couple of years. Some of these properties are treating them like they're you know, new construction and not stabilized and need to go through, like, a lease-up. And that is kind of informing the risk rate of the credit.
spk12: Okay, great. Thanks, guys.
spk01: Our next question comes from Jared Shaw of Wells Fargo Securities. Your line is open.
spk10: Hey, good morning, guys. Morning, Jared. Good morning. Just to circle back on credit, in the past you've said that the provision and allowance is really model-driven based on the U-Hero projections, but in September, the new U-Hero forecast came out and was pretty significantly weaker compared to what was happening earlier in the summer, and certainly weaker compared to an improved Moody's forecast for the broader U.S. economy. I guess I'm surprised we didn't see a bigger provision this quarter, especially since The allowance XPPP at the end of the quarter is at or just below the mainland peers. So, I mean, is the model going to be updated for the September UHERO, or was that included in the third quarter provision level?
spk11: This is Bob. I'll start off and then maybe hand it over to Ralph. What we had in the previous UHERO model was we had the pessimistic view of the three views, and that's what we used for our model for fusel modeling. And then as they updated that to the current outlook, very close to the end of the quarter, and we looked at it, and our view was not that different than the base model, their base outlook, and we feel very comfortable with that. So, Ralph, do you want to?
spk02: Yeah, I don't really have a lot more to add. You know, last quarter, the pessimistic case was sort of where we landed, and this quarter, you know, they've pretty much transitioned to, that case is their base case. And we think that's where we believe today is the appropriate place to be.
spk11: And honestly, what we're seeing in the portfolio supports that. Okay, great. Thank you.
spk01: Our next question comes from Lori Hunsicker of CompassPoint. Your line is open. Yeah, hi.
spk06: Good morning. Good morning, Lori. Just wanted to start on slide six, which just looks absolutely beautiful. And I want to make sure that I'm understanding this the right way. So if I'm looking at your commercial, your commercial deferrals, you were up at $2.1 billion. And then as of September 30, you're down to $70 million. And then I guess your second deferral would be sometime in October. October, that takes it down to $56 million in the commercial. Am I reading this the right way? Mm-hmm.
spk02: So the credits that are under deferral right now would be the 70 plus the 56.
spk06: Okay. So 126 million. That's unbelievable. Okay. That's helpful. And then on slide eight, I was hoping you could give us a refresh on deferrals since they're so massively down for each of those categories, the hotel, retail, auto, transportation, food service, and leverage.
spk02: Yeah, I don't have that for you, but I can tell you that it's pretty small numbers and no really large credits in the hospitality space.
spk11: And we did have a number of deferrals, as we talked about, in the auto space in the past.
spk02: Yeah, we're off of that.
spk11: So those all return to current pay.
spk02: And for the other thing I was mentioning, The other thing I'd mention, too, is on the commercial deferral. So the extent that they're getting a deferral, they're giving us something at this point.
spk06: Okay. So I guess just kind of looking at that, so that bucket last quarter was $1.2 billion on deferral out of your total commercial deferrals, $2.1 billion, right? And now you're down to $126 million. So... Could we maybe extrapolate and say of the 126 million, 60% or so are in those highlighted categories? Is that a good way to think about it?
spk02: Yeah, I actually don't have that number, Lori. I'm sorry.
spk06: Okay. You know what? I'll follow up with you. I'll follow up with you offline. Just one more question. The PPP fees that were remaining as of September 30, I'm thinking they're right around 20 million. Just didn't know if you had a tighter number on that.
spk11: What we've done is when we booked them, we booked them for the term of the loan, and so they're being brought into the income statement over the term of each of those specific loans.
spk06: Right. I'm just wondering how much remains. So you had $24 million as of last quarter. Okay. You know what? I'll follow up with you offline. That's it for me. Thank you.
spk00: Okay.
spk01: There are no further questions. I'd like to turn the call back over to Kevin Haseyama for any closing remarks.
spk13: We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional questions. Thanks again for joining us, and have a good weekend.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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