First Hawaiian, Inc. (FHB) CEO Bob Harrison on Q3 2020 Results – Earnings Call Transcript


First Hawaiian, Inc. (NASDAQ:FHB) Q3 2020 Results Conference Call October 23, 2020 1:00 PM ET

Company Participants

Kevin Haseyama – IR

Bob Harrison – Chairman, President and CEO

Ravi Mallela – CFO

Ralph Mesick – Chief Risk Officer

Conference Call Participants

Steven Alexopoulos – JPMorgan

Ebrahim Poonawala – Bank of America Securities

Alex Matters – Goldman Sachs

Jackie Bohlen – KBW

Andrew Liesch – Piper Sandler

Jared Shaw – Wells Fargo Securities

Laurie Hunsicker – Compass Point

Operator

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 speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that the call will be recorded. [Operator Instructions]

I will now turn the call over to Kevin Haseyama. Please go ahead.

Kevin Haseyama

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 Mallela, CFO; and Ralph Mesick, 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 1 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.

Bob Harrison

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 2.

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 state home order in early September. Oahu began reopening in late September under a new 4-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 transpacific 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 borrowersto apply for mortgage digitally.

We also started helping PPP borrowers prepared to apply for loan forgiveness. We have hosted several webinarsin 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 3, I’ll go over the third quarter highlights. We had a solid quarter. Our results reflect increased economic activity from the reopening of local economy, careful balance sheet management and improved asset quality. Third quarter pretax pre-provision net revenue increased 11.3% over the second quarter to $91.3 million. We had net interest income and noninterest 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.

Ralph Mesick

Thank you, Bob. 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 nonperforming 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 nonperforming are 90 days past due fell $28.4 million from $43.4 million.

We transferred about $14.6 million in nonaccrual 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 nonaccrual status, decreased slightly from the last quarter to $35.7 million or approximately 26 basis points on total loans and leases.

On Slide 5, 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 1.56%, 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 6. You see a snapshot of the outstanding loans that had received deferrals at part — 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 balance is showing a loan-to-value ratio over 80%.

Moving to Slide 7. 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 meeting 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 nonaccrual 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 the 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 balance 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 Ravi to go over the balance sheet and income statement.

Ravi Mallela

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. C&I balances declined $253 million in Q3 due to pay downs in the Shared National Credit 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 a 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. Noninterest income was $48.9 million, $3.2 million higher than the prior quarter. The increase in noninterest 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. Noninterest 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.

Bob Harrison

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 transpacific 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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Steven Alexopoulos of JPMorgan. Your line is open.

Steven Alexopoulos

Let me start, maybe, Bob, at 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 take pressure off the local economies?

Bob Harrison

Yes. It’s an excellent question, Steve. And we didn’t have a lot of expectations. We start — we thought it would start out slow, and it has. And there’s still a few — states are working out at the airport, quite frankly, and checking people and did you download the app? And has it got the right provider partner that the state has identified to qualify for pretesting? Is it the correct test?

All those things, we try to message — in the state, try to message out very well to the visitor industry and the airline partners have done a fantastic job getting the word out. But there’s still 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 with 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 — 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. I think you’ll see that in the UHERO forecast that they see the tourism industry building over time over the next six months. And that’s why we have a pretty conservative outlook on that.

Steven Alexopoulos

Okay. 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 guided to flat in 4Q. Can you maybe talk about what you see supporting them near term? And is that — is a temporary support and then you expect pressure afterwards?

Ravi Mallela

Certainly, I think there’ll be pressure on the asset side. New securities yields are obviously grinding down lower. And we’re going to see refinancing activity in our — primarily in our mortgage portfolio. And we’ll continue to see pay downs. I think the upsides 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 to — for deposit costs to go down. And then certainly, we don’t control the amount of liquidity that comes on to the balance sheet.

We could see commercial and consumer deposits coming back and increasing. But I think when we think about 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, they’re down some pressures.

Steven Alexopoulos

Okay. So — and just to wrap up, so 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 pretax pre-provision growth that if we think about NIM being flattish to down. Bob, maybe talk about what should the expectations be on pretax pre-provision growth? Is flat a good assumption from here moving forward? Is there anything we should be thinking about that can drive a little bit better growth?

Bob Harrison

Yes. Good question, Steve. And I won’t — 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 of 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 sheet. So there might be some growth in that area from that 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 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. 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 put together over the last, around 12 to 18 months. Of course, all the borrowers’ equity is in there first, and now we’re starting to see some fairly significant drop as we saw in the quarter that just ended. So I think those are three areas we could look to for loan growth. Ravi, anything you’d like to add?

Ravi Mallela

Maybe I’d just add a couple of comments on the expense side. We’ve been fortunate to be able to hold expenses flat. Certainly, we’ve slowed down some of our discretionary spending. But we — there will be some pressure 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 incentive comp as the economic activity starts to pick up. Just wanted to provide a qualification on the expenses side related to PPP.

Bob Harrison

And maybe one last thing is as we do continue the reopening, we didn’t see a full quarter of activity-related type income, whether that’s credit and debit card fees and 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.

Operator

Our next question comes from Ebrahim Poonawala of Bank of America Securities. Your line is open.

Ebrahim Poonawala

Just wanted to follow up on credit. I mean, I think…

Bob Harrison

I’m sorry, Ebrahim, could you speak up a little bit? We can hardly hear you.

Ebrahim Poonawala

Yes. Is this any better now?

Bob Harrison

A little bit. Yes. Go ahead.

Ebrahim Poonawala

Yes. 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 then 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 were adequately reserved despite expectations 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?

Bob Harrison

Excellent question and maybe I’ll start and then turn it over to Ralph. I guess to start with, we 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 of 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 is 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 and 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?

Ralph Mesick

Sure. 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. 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 we have a number of credits that we put on special mention, just for that purpose.

Bob Harrison

Does that address your question, EB?

Ebrahim Poonawala

Yes, it does. And I guess just a follow-up to that. I mean, I’m trying to see if you’re sort of out of the woods, right? I mean I think the stock is trading at a 6% dividend yield at relatively cheap valuation relative to your history. I’m 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 cost 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?

Bob Harrison

That’s pretty far to forecast. I think that’s what we have included really the base case in 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.

Operator

Our next question comes from Alex Matters from Goldman Sachs. Your line is open.

Alex Matters

So obviously, this was a very strong quarter for credit results given the environment, criticized and nonperformers 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 in the near term, at some point, does that start to reduce your expectations through the cycle losses and sort of over what time frame would you think about that?

Ralph Mesick

Yes. I would say 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’re — if we do see — we’re going to expect to see some deterioration in asset quality metrics in the portfolio, but if the provision can stay relatively benign and 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.

Bob Harrison

And maybe just a follow-up on the second part of your question, this is Bob. I would say that if we’re looking to — when we 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 what the Hawaii economy is in a full recovery and what the impact of the recession has had on the Hawaii economy.

Alex Matters

Okay. 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?

Ravi Mallela

Yes. I’ll comment on that, Alex. This is Ravi. I think what we saw in Q3 was really — 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, 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 3.88% is a good starting point for you to look at going forward for Q4.

Alex Matters

Okay. I appreciate it. And do you have a sense of where new loans are coming on currently?

Ravi Mallela

I don’t think we provide that information out as public.

Operator

Our next question comes from Jackie Bohlen of KBW. Your line is open.

Jackie Bohlen

Just wanted to talk a little bit about the nonperformer 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?

Ralph Mesick

Yes. I that’s the credit — actually, there are a number of credits when we did the regrading project that had actually had some weakness before COVID. And so we placed those on nonaccrual. We did an impairment analysis, took some charges on that. And we ended up getting a price on those loans much better than what we had anticipated. So that was where the game came in.

Jackie Bohlen

Okay. And what — just for geography purposes, what line items you expect to run the game through next quarter?

Ralph Mesick

That, I’ll defer to Ravi, but I think it’s going to be a gain as opposed to a recovery.

Ravi Mallela

I think that goes through the other income line, but we’ll get back to you.

Jackie Bohlen

Okay. Okay. And then just based on looking at point-to-point balances and then we’re calling our discussion from last quarter as well with the commercial and commercial real estate. Was there any commonality between these loans in terms of balance or industry, anything like that?

Bob Harrison

I’m sorry, Jackie, this is Bob. Just to clarify, which loans are you’re referring to, the ones that we had to recover?

Jackie Bohlen

Yes. The ones that are — the nonperformers that are sold, I’m just wondering if there’s more to come down the pipeline in the future as workouts continue.

Ravi Mallela

Well, no, those, as I said, these were credits that we had on the books for a while that had challenges. And we were actively sort of looking at strategies to get out of those deals. So as it turned out, we were able to affect that.

Bob Harrison

And as far as geography, they were in the C&I and the commercial real estate portfolios.

Jackie Bohlen

Okay. So everything that you were looking to get out of, you’ve since gotten out of?

Bob Harrison

Well, I mean, it’s a large portfolio. We still have nonperformers. So we’re actively working all of those credits.

Ralph Mesick

Yes. So every credit is going to have an asset plan. And for the most part, I think we’ll either retain or exit credits depending on the situation.

Jackie Bohlen

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 Ravi was discussing?

Bob Harrison

Well, we’ve been — 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 that 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 re-staff the branches, there’s been quite a mix in the personnel for the retail side of the bank. But Ravi, anything further comment?

Ravi Mallela

No.

Operator

Our next question comes from Andrew Liesch of Piper Sandler. Your line is open.

Andrew Liesch

Just curious about the securities book right here, it increased the last few quarters. And obviously, the opportunities to invest liquidity into loan.So a little more challenging than in the past. But I’m just curious, like the average yield was only down seven basis points. Just what — what have you been adding to keep the yield up near this level?

Ravi Mallela

Yes I mean I think they’re — 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 somewhere close to about 1% in terms of yield. So there’s — what we’re buying and the book has been pretty big. It’s — 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 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 2.25, and I think we’re a little bit above 3.5. So 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.

Andrew Liesch

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? And any sort of timing that — or early results that you’ve seen on those being sort of forgiven by the SBA?

Bob Harrison

Sure. We’ve submitted 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. And I think everybody is just working through the process is you know that treasury secretary munition 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. So 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.

Operator

Our next question comes from Brock Vandervliet of UBS. Your line is open.

Unidentified Analyst

This is for Brock. I just wanted to walk through the provisioning by segment that you disclosed on Slide 5. It looks like directionally, there was some variance there with C&I and CRE provision being negative and then 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.

Ravi Mallela

No. The provision was fairly small. The portfolio composition in terms of risk grade 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.

Unidentified Analyst

Okay. Okay. And just — 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 like a longer-term modification under the CARES Act or something else?

Ravi Mallela

Yes. No, 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 — although we’ve given them longer periods for modification, I think there’ll be very little that we would be able to do at this point anyway.

Unidentified Analyst

Okay. And just lastly, can you remind us on the LTVs on 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?

Ravi Mallela

Yes. No, we haven’t updated LTVs for the purposes of providing information, but I can tell you that as we look at the credits, one1 of the things we are doing, if it’s a property loan, is we’re doing an evaluation. And in a lot of cases, we are assuming quite a bit of stress in the first couple of years. So some of these properties are treating them like their new construction and not stabilized and need to go through like a lease-up. And that is kind of informing the risk grade of the credit.

Operator

Our next question comes from Jared Shaw of Wells Fargo Securities. Your line is open.

Jared Shaw

Just to circle back on credit. And in the past, you’ve said that the provision and allowance is really model-driven based on the UHERO projections. But in September, UHERO — the new UHERO 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 ex PPP 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?

Bob Harrison

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 the3 views, and that’s what we use for our model for . 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?

Ralph Mesick

Yes. I don’t really have a lot more to add. Last quarter, the pessimistic case was sort of where we landed. And this quarter, they pretty much transitioned to that case is their base case. And we think that’s where we believe today is an appropriate place to be.

Bob Harrison

And honestly, what we’re seeing in the portfolio supports that.

Operator

Our next question comes from Laurie Hunsicker of Compass Point. Your line is open.

Laurie Hunsicker

I’ll just start on Slide 6, 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 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 will be sometime in October, October, that takes it down to $56 million in the commercial. Am I reading this the right way?

Ravi Mallela

So the credits that are under deferral right now would be the $70 million plus the $56 million.

Laurie Hunsicker

Plus — okay, so $126 million, it’s unbelievable. Okay. That’s helpful. And then on Slide 8, 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.

Ravi Mallela

Yes. 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.

Bob Harrison

And we did have a number of deferrals as we talked about in the auto space in the past.

Ravi Mallela

Yes, we’re off that.

Bob Harrison

And so those all return to current pay.

Ravi Mallela

And the other thing I’d mention to you is on the commercial deferrals. To the extent that they’re getting a deferral, they’re giving us something at this point.

Laurie Hunsicker

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 of $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?

Ravi Mallela

Yes, I actually don’t have that number, Laurie, I’m sorry.

Laurie Hunsicker

Okay. You know what, 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. I just don’t know if you had a tighter number on that.

Bob Harrison

What we’ve done is when we book them we book them for the term of the loan. And so they’re being brought into the income statement overthe term of each of those specific loans.

Laurie Hunsicker

Right, I mean I’m just wondering how much remains. So you had $24 million as of last quarter. I’m just — okay. You know what, I’ll follow up with you offline. That’s it for me.

Bob Harrison

Okay.

Operator

There are no further questions. I’d like to turn the call back over to Kevin Haseyama for any closing remarks.

Kevin Haseyama

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.

Operator

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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