First Hawaiian, Inc. Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the First Hawaiian Q1 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker, Kevin Haseyama. Please go ahead.

Thank you, everyone, for joining us as we review our financial results for the first 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 one for our Safe Harbor statement. We may also refer to 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 will turn the call over to Bob.

Thank you, Kevin. We will be changing our presentation this quarter. First, I’d like to address our response to the COVID-19 pandemic, and then we will do a deep dive on our loan portfolio, followed by an overview of the financials for the quarter before taking your questions. Our thoughts go out to those directly impacted by the COVID-19 pandemic, as well as the health care providers and all those on the frontlines providing essential services to our country and our state. Hawaii has never faced a situation like this before, and it will be difficult. Unemployment is high. The economy will be challenged until we can return to the new normal. The new normal will continue to be anchored by tourism and government spending, as the tourism, the allure of Hawaii, and the strategic nature of the military here in the Pacific will continue to play an important role for us. Sadly, 12 people have lost their lives here in Hawaii. The total cases have been just under 600 and it has been decreasing significantly over the last few days. Over the last seven days for the Island of Oahu, there have been less than seven cases a day and actually several days with zero cases. Our transmission rate as of yesterday was 0.45. There is a small group of state administrators, including the governor and one of his top aides, the Head of the Senate, the Head of the House, several people from the healthcare industry, myself, and another business person that are working on a plan to reopen Hawaii to both local residents and welcoming visitors to the state. This is really important to get our economy back online and begin the recovery process. First Hawaiian Bank has been serving Hawaii for 161 years, and we take this responsibility very seriously. We have enabled about half of our employees to work from home and employed social distancing and protection measures for those that need to come into the office or branch system. We have temporarily closed about 44% of our branches, 26 of them, and moved those employees to different projects to support high-volume areas such as PPP loan processing and call center volume. Teletransaction volume is down about 50%, and our mobile and ATM channels are experiencing record usage, all of which you would expect in a situation like this where most people are working from home. We have also established a separate operations center to maintain redundancy should anything happen. We have been very proactive about serving our customers; we processed just under 2,400 applications for the PPP program, totaling about $775 million, and we are geared up for the next phase, which should be starting very soon. We have reached out proactively to both our consumer and commercial customers regarding deferrals or forbearance based on their needs, and we will discuss that later. We established a portal on our website to simplify the process for our consumer customers, and that’s been very well received. Additionally, we have waived all check cashing fees for stimulus checks for non-customers to support those in greatest need, so they don’t have to visit check cashing businesses. Lastly, we have launched the Aloha for Hawaii Fund to support Hawaii’s restaurant industry while donating up to $1 million to certain nonprofits most directly affected by the pandemic. Moving to slide three, I want to talk a bit about the management team because while no one knows the severity and longevity of the virus’ impact on our economy, we enter this crisis with a strong balance sheet, ample liquidity, and high levels of capital. Our senior management team averages over 28 years of experience in the financial industry, and every single one of us went through the global financial crisis. Four of us have served or are currently serving as Chief Risk Officer and have broad experience in a number of lending areas, so risk is definitely part of our culture. We have participated in most of the large transactions in Hawaii and often play the role of structuring or arranging the transaction; we are the commercial bank for the State of Hawaii. The strength of our team, along with our strong consumer and customer relationships, will help us navigate through this crisis. Turning to slide four, I’d like to make a few comments before going through the slide. Our philosophy has always been to be a responsible lender and run the bank sustainably. We want to grow at a reasonable, if not spectacular rate, and deliver stable and consistent results over the long term. We maintain a balanced and diverse loan portfolio, focusing on areas in which we have expertise. This has worked well over the long term, and our loan portfolio reflects those values. The portfolio is balanced between commercial and consumer loans, roughly 55/45 right now, and features a good mix across loan categories. Our commercial book is balanced between small and large customers, while on the consumer side, about 75% of the portfolio is secured by residential homes, virtually all of which are in Hawaii. Another 15% is secured by automobiles. On the underscored loan side, particularly credit cards, we have extensive experience. We celebrated our 50th year of partnership with Mastercard last year, making us their longest continuous issuer of credit cards in the United States. This diversity across our lending businesses enables us not to be overly reliant on any single industry or segment. Regarding the Mainland, approximately 20% of our loan book consists of borrowers based in that market, primarily focusing on areas we understand and have performed well in historically: C&I, CRE, and dealer flooring. The C&I lending comprises two large corporate names, many of which are shared national credits. Our shared national credit customers typically have operations in Hawaii, and we serve as their Hawaii bank. Last summer, as you may recall, in Q3, we sold about $409 million of shared national credits, none of which had operations in Hawaii, which allowed us to better manage that book. Our Mainland CRE portfolio includes our best local customers, characterized by low leverage, good credit, and long investment horizons. The rest of our Mainland CRE portfolio is a niche strategy focused on large, well-capitalized sponsors with investment-grade real estate in supply-constrained gateway markets on the West Coast. Our dealer financing began over 30 years ago as an extension of our business segment we dominate here in Hawaii. I have personally been working with many of these customers since the late 1990s, and they are well-known to us. Most are large, multi-store operators; most have weathered the financial crisis. Some dealer credits are based in California, primarily the Los Angeles and San Francisco markets. We have a highly experienced team managing our Mainland CRE and dealer portfolios, with our two senior managers in those areas having exceptional backgrounds in similar operations at large national and super-regional banks. Overall, our balanced and sustainable approach has resulted in lower and stable credit costs. On slide five, I’d like to highlight that we are the largest commercial lender in Hawaii, focusing on corporate lending to SNC and C&I, currently totaling about $693 million with an average hold level of $15 million. You can see the geographic diversification: just over half is based in Hawaii, Guam, and Saipan, which are our core markets, while just under half is based on the Mainland. Our dealer portfolio has flooring balances of $875 million, with an average relationship duration of 18 years for our Hawaii dealers and just under eight years for our Mainland dealers, the longest being 32 years. This lower average is due to the fact that over the past several years, we have established new relationships on the Mainland, all of which our bankers have worked with in previous roles at other banks. Hence, these are not new relationships for us. The peak loss rate we have experienced in this portfolio over many years has been very favorable. Turning to slide six, I’d like to comment briefly on the exposures presented. Most are in Hawaii—just under 80%—and 22% on the Mainland. We have some hotel exposure here. The loan-to-value ratio across numerous properties is just over 50%. Our large office exposure comprises a mix of Honolulu's Central Business District and West L.A. properties, typically in multi-property pools with an average size of $35 million, and therefore we aren’t reliant on any single property. Our credit experience in this area has been outstanding, with few cycle losses amounting to 2 basis points and peak losses hitting 30 basis points, significantly outperforming national benchmarks. Moving to slide seven, I want to note that construction loans represent a smaller portion for us, just over 4% of our total loans and leases, and are roughly split between Hawaii and the Mainland. The focus in Hawaii is on for-sale multifamily housing, where all loan-to-value ratios are below 60%, except for certain retail constructions. The cycle losses observed have been low; peak losses were also manageable, making this portfolio a significant area for us as we heavily rely on the sponsors in this category. On slide eight, I'd like to draw attention to select industries that have garnered attention lately in relation to leveraged lending. In the hospitality sector, we hold 20 loans with a weighted average loan-to-value of 53%. Over 80% of those balances are associated with four-star resorts, ensuring we maintain strong property value through market fluctuations. We also have substantial exposures to larger global hospitality names, with whom we maintain robust relationships. In retail, we face challenges as well, but our top 20 loans average around $15 million, with 43% of the loans being less than $5 million and demonstrating low loan-to-value. Transportation mostly engages essential services or ground transport, with no direct exposure to air carriers. Our foodservice exposure amounts to just under $100 million now, primarily linked to multi-region franchise operators mainly within the QSR segment. Finally, our high-risk C&I is a somewhat subjective determination, with a total leverage loan portfolio sitting at $344 million, $160 million of which carries an investment-grade classification. Currently, the majority of this portfolio is performing well, while $28 million is criticized. Turning to slide nine, we can see our conservative lending practices in residential, HELOC, and consumer loans. Almost all home and home equity exposure is in Hawaii, as reflected in low loan-to-value ratios and high FICO scores averaging 764, predominantly in the prime and super prime categories. Charge-offs and through-the-cycle losses have been minimal. Most auto loans remain within our footprint, with roughly 10% of the portfolio carrying recourse, which is common in Guam and Saipan but non-existent in Hawaii. Our comprehensive understanding of these markets provides an advantage in asset management, offering better collateral access should the need arise. Our credit card program enjoys a long history with customers averaging over 13 years, functioning more as a transactional business rather than revolving credit, and customers rely on this for daily usage. Looking at slide ten, I want to emphasize our proactive outreach for deferrals, an essential strategy for managing risk and fostering relationships. We have made it simple for consumers to request deferrals. We reached out to inform them of our services, which resulted in 19,000 consumer deferrals—many linked to auto loans—and around 600 businesses opting for the same. We conducted numerous outbound calls to ensure they understood our offerings, with a focus on ensuring they reached their liquidity needs during this period of uncertainty. Auto dealers, in particular, were proactive, with virtually all opting to defer their commercial loans, which we deemed prudent. I will now hand the discussion over to Ralph.

Thank you, Bob. If you’d turn your attention to slide 11, rather than discussing asset quality in depth this quarter, I will focus on the provision and loss reserve. In the first quarter, our provision increased to account for anticipated credit costs associated with COVID-19, alongside the adoption of the new CECL reserve methodology. Our provision amounted to $41.2 million, reflecting a $37 million increase over the previous quarter following a net charge-off of 6.1 million in the first quarter. Transitioning to CECL raised the reserve by $52.1 million or 40% from year-end 2019. Around $35.5 million of this increase was allocated to the allowance for credit loss or ACL, resulting in an ACL balance of $166 million as of March 31st, representing an ACL ratio of 1.24%, up from 0.99% at the year-end. The remainder, $17.3 million, was allocated to the reserve for unfunded commitments. Our day-one adoption accounted for $17 million of this change, reflected as a one-time capital adjustment. The day-two provision was $41.2 million, heavily influenced by an overlay identifying potential impact from COVID-19. We employed a scenario-based migration analysis to estimate potential additional losses and adjust reserves by approximately $36 million. We believe this increase strengthens our position against anticipated credit deterioration, as many borrowers have received payment deferrals. However, as uncertainty persists regarding the duration and overall impact of the current shutdown, we might need to re-evaluate credit provisioning in the forthcoming quarters. I will now return the floor to Ravi.

Thank you, Ralph. Now, let’s examine the first quarter highlights presented on slide 12. Overall, our results for the first quarter were satisfactory, with significant financial disruptions from COVID-19 mainly appearing in March. Earnings per share were $0.30. With CECL adopted in the first quarter, we encountered a day-one capital hit of $12.5 million alongside a $41.2 million credit loss provision. We concluded the quarter well capitalized with a CET1 ratio of 11.65% and adequate liquidity, accessing a considerable amount of contingent liquidity. Moreover, preceding the disruption in late February and March, we successfully sold about $132 million of residential mortgage loans as part of our balance sheet management strategy. These actions, including the sale of $409 million of shared national credit loans, have fortified our balance sheet and positioned us better to support customers during these uncertain times. Turning to slide 13, our period-ending loans and leases reached $13.4 billion, reflecting a 1.3% increase of $169 million over the prior quarter. C&I loans expanded by $282 million, driven by roughly $300 million in corporate line draws. While residential loan production remained robust during the quarter, balances decreased by approximately $95 million due to the aforementioned loan sales. On slide 14, total deposit balances amounted to $17 billion, showing a $575 million increase compared to the last quarter, primarily due to an uptick of $555 million in public deposits, and public time deposits rose by $425 million during the quarter. Our cost of deposits dropped by 6 basis points to 38 basis points. For slide 15, net interest income in the first quarter was recorded at $138.7 million. The net interest margin for the fourth quarter stood at 3.12%, marking a 3 basis point decline from the prior quarter, while the margin fell to 3.01% in March due to lower average yields, higher cash balances, and reduced deposit costs. On slide 16, our non-interest income totaled $49.2 million, reflecting a $2.5 million increase from the previous quarter. In Q1, we experienced several one-time elements enhancing non-interest income, including mortgage sales and surges in investment income and swap fees. However, credit card and merchant processing fees dipped by $1.2 million due to February’s restrictions stemming from COVID-19, and we anticipate similar declines for these categories in Q2 moving forward. In terms of expenses for Q1, non-interest expense reached $96.5 million, approximately 6% higher than the quarter prior in line with 2020 guidance from our last call. Salaries and benefits escalated by $3.7 million this quarter, largely driven by the absorption of costs previously funded by BNPP reimbursements and seasonal increases. Consulting fees rose by $2.3 million in Q1—largely catching up from lower expected fees in Q4. We foresee moderating the run rate for consulting expenses later in 2020. Now, I’ll hand it back to Bob.

Thank you, Ravi. Just to conclude with a couple of comments, while the future appears uncertain and we cannot precisely predict outcomes, we do have a capable management team. Our market position remains strong with excellent credit quality and robust liquidity. You may have noted that we started reporting a U.S. modified LCR liquidity coverage ratio this quarter, a calculation we've utilized for years, hoping to clarify what we mean when we speak of strong liquidity. Our capital position remains solid, and we will discuss it further during the Q&A. The targets set previously are still intact, though they represent long-term objectives that we will reevaluate as the pandemic and recession unfold. We will continue supporting our employees, customers, and the broader community. With that, we welcome any questions.

Thank you. Our first question comes from Steven Alexopoulos with JPMorgan. Your line is open.

Hi, everybody. Thanks for all the color on credit. The slides are really helpful. On the CECL reserve build, can you walk through the economic assumptions underlying that—GDP, unemployment? I’d assume it's more local to the Hawaiian economy?

Yeah. Steve, this is Ralph. It was more localized to the Hawaiian economy, and as you know, the numbers keep changing as we get updates. They have changed significantly since we established the reserve. However, we looked at three different scenarios: a V-shaped scenario, a U-shaped scenario, and a more severe scenario. Ultimately, we adopted a U-shaped scenario that correlated well with the level of deferrals we have. Therefore, we believe the reserve at present is appropriate, yet we will closely review it this quarter as more information becomes available.

Just to add to that, Steve, when we review this, it fundamentally hinges on how rapidly we can reopen the economy and get people back to work, making it a key focus and reason for the time we are dedicating to this effort.

When we look at your reserve level, you're almost at 80% coverage based on the last DFAST you produced. I'm trying to understand because peers are in the 40% to 60% range. Are you looking to be more ahead of the curve, or do you think through-the-cycle losses this time could be worse than what you reported in that DFAST report?

That's a point-in-time look. As you know, we've approached CCAR systematically. I have to say we don't know what may come, but we want to be conservative in our estimate, and that's why we took a careful look from today, including various economic scenarios alongside the current level of deferrals. We were quite proactive in reaching out to customers. I also don't want to suggest that higher deferrals mean we are headed for a tougher time ahead; our approach is partly in response to how we’ve reached out to many people compared to perhaps what other organizations have done, remaining conservatively proactive.

On slide eight, you're identifying select industries currently impacted, and you seem to be somewhat conservative in your approach for each. Given that foodservice is an issue for everyone, what's most vulnerable for you looking ahead?

I'd wager it's likely retail. The landscape is evolving as we all remain home for an extended period, provoking unknown changes in consumer purchasing trends. While we maintain low loan-to-value ratios and strong investment-grade credits in those sectors, we still feel the uncertainty surrounding retail's future nationally, perhaps less so for Hawaii due to high visitor counts and shopping being a significant aspect of entertainment.

I agree with Bob. Retail exposure on the real estate side, particularly in certain malls, is an area that will require closer scrutiny, though we believe our strong sponsors will provide some cushion against challenges.

Our loan-to-value structure involves stronger sponsors, a characteristic that extends throughout our real estate exposure.

Thank you for all the insight.

Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Your line is open.

Good morning.

Good morning, Ebrahim.

Good morning.

Good morning.

For Ravi, can you discuss the margin trends? You noted the margin at 3.01% in March. Does that reflect the entirety of the rate cuts you experienced? What expectations do you have for the margin’s potential decrease in the near term before stabilizing?

It's a pertinent question, EB. As you pointed out, the March rate cuts occurred on March 3rd and March 15th, meaning we are observing only the partial effects during a partial quarter. A few points regarding our quarterly results: we anticipated a decline and worked actively with our customers to inform them of the changes. We were efficient in bringing down deposit costs, which decreased from 44 basis points to 38 basis points this quarter. In terms of what to expect moving forward, if rates remain stable, deposit costs could potentially cascade into the mid-20s, although that would be a gradual effect throughout the year. Shifting to the loan perspective, we need to note that the quarter reflects only partial data.

What's the weighted average rate on that FHLB maturity coming up?

The weighted average rate on the $400 million is around 2.8%, possibly slightly above that at approximately 2.83%.

Understood. Regarding expenses, could we potentially expect this mid-90s expense rate to persist for now?

Recapping the guidance from Q4, our core non-interest expenses measured just above $367 million. We expect to add roughly 5% to 6% to that total, aligning with your estimations of 96% to 97%.

In your thoughts on the Hawaiian economy, is there a breaking point where you feel federal or state help would be required if air travel remains significantly restricted?

That's an excellent question, EB. While we can’t predict the future, we’re continuously working as a broader group across the state. As I mentioned earlier, it’s going to take a comprehensive and scientifically guided approach to gradually reopen. We can’t do it all at once; it needs to be done with ongoing screening, testing, and quarantine if necessary. Hawaii maintains one of the highest per capita testing rates in the country, which is essential for restoring confidence in the local community and for welcoming visitors back. It’s critical to our economy as a significant portion relies on tourism. We are working closely with airlines, including Hawaiian Airlines, to find ways to instill confidence in both the visitors and our local residents, allowing for a timely and effective reopening process. This will take time and could span anywhere from 18 months to two years until we have a widely available vaccine or treatment for COVID-19. So to address your question, we're monitoring the situation daily while advocating for the gradual release of federal funds through July.

That’s quite helpful; I appreciate your insights regarding Honduras’s economic outlook.

You're welcome.

Thank you. Our next question comes from Jackie Bohlen with KBW. Your line is open.

Hi. Good morning, everyone.

Good morning.

I wondered if you could discuss the stability of line draws post-quarter. Thank you for sharing the data; it’s helpful to know the March 31st figures. What has been the behavior since then?

It hasn’t changed significantly. Interestingly, when we examine our portfolio overall, the utilization rate remains steady year-over-year. Where changes occurred were in the industries we anticipated, and I can’t report any noteworthy variance for consumers.

To add on that, Jackie, most of the C&I and the C&I national credit borrowings were realized before quarter-end, with very little activity afterward. On the consumer side, particularly HELOC, we haven’t observed significant utilization thus far, and credit card usage has seen a drop since year-end through the first quarter, which aligns with typical seasonal patterns in behavior.

So both consumer categories have remained stable, understood. Just to clarify—considering utilization is similar to the year-ago quarter—do you view the line draws as indicative of underlying trends, or were they seasonally fluctuating?

They’re reflective of what's currently happening.

Many corporates withdrew funds as a precaution, and those funds are now sitting in our checking accounts. We need to watch how that evolves throughout this quarter and the next.

As we tracked activities towards quarter-end, a significant factor influencing our customers' behavior was the implementation of the Fed program, which aided in capital market stabilization. Its effect has kept us closer to a normalized run rate regarding draws.

Thank you. That’s very helpful. I have a quick housekeeping question for you, Ravi—what gain did you realize from the real estate sale in the quarter?

I believe it amounted to $1.2 million.

So it was $1.1 million? Do you anticipate any additional balance sheet restructuring?

Not at this moment.

We have undertaken significant restructuring in previous years and are now comfortable with our balance sheet. In hindsight, we are glad to have brought down public time over the last few years. This facilitated our participation in the PPP program loans, enhancing our flexibility.

Just to clarify regarding waiving the rate to borrow option—were you referring to the transition period with CECL and regulatory capital? Is it correct that you do not plan to utilize that?

Yes.

That is indeed accurate.

Thank you. Our next question comes from Jared Shaw with Wells Fargo Securities. Your line is open.

Hi, good morning, everyone.

Good morning, Jared.

Hi, Jared.

Good morning, Jared.

Regarding the margin, would you share the March asset yields and funding costs as well as the blended margin?

I don’t have that information available, but we can certainly reach back out to you with it. Kevin can give you a call to discuss further.

Understood. When estimating additional pressure on the margin, should this not consider potential impacts from the PPP and any accelerated flows in Q3?

That’s a valid observation; expected impacts will unfold over time through the quarter. Significant factors will include the second installment of the stimulus programs.

Being liquid from a balance sheet perspective remains vital; we want to ensure we are readily available for our customers, maintaining a proactive approach. Currently, we hold slightly more cash than average, which, given the Fed’s target rates around 0 to 25 basis points, results in minimal earnings on that cash. This also affects our projections for net interest margins ahead.

Will you consider trends of declining floorplan balances as the appetite for inventory eases?

It's challenging to determine as consumer behavior will define these trends and their relationship with our inventory going forward.

Thanks a lot.

Thank you. Our next question comes from Laurie Hunsicker with Compass Point. Your line is open.

Hi. Thanks. Good morning.

Good morning.

Good morning.

I wanted to clarify that your total SNC book is now $693 million. Is that correct?

That number sounds correct but let’s clarify. The total shared national credit portfolio is $1.3 billion, with about 31% based in Hawaii and 69% on the Mainland. For corporate lending under SNC, we have that $693 million figure.

Got it.

The $693 million specifically pertains to Mainland SNC.

Perfect, thank you. Can you share what percentage of your CRE represents the Mainland?

On slide six, you can see that our diversified book is made up of 78% from Hawaii, Guam, and Saipan, and 22% from the Mainland within the $3.4 billion CRE portfolio.

If possible, I’d like to know the specific categories concerning Mainland assets?

The primary categories in our Mainland CRE portfolio correspond with those companies that have long-standing ties to Hawaii and have chosen to diversify beyond state lines. These clients often rely on us to support their various market endeavors. Additionally, many are auto dealers leveraging our financing for real estate development.

What types of properties do you primarily hold in your Mainland portfolio?

The primary focus for the Mainland portfolio is multifamily housing, particularly with some cases being office space. In brief, multifamily constitutes a considerable segment of that exposure.

Of your hotel book, can you provide data on how many loans are on the Mainland?

Most of the exposure rests locally in Hawaii, with perhaps just a couple of loans extending into the Mainland, closely associated with previous clients.

Can you provide insight into the main categories represented in your construction loans?

Most of the construction focus remains aligned with multifamily projects.

On slide eight, could you clarify the split between retail service versus retail shopping within your $737 million exposure?

Much of the exposure leans toward grocery-anchored shopping centers, alongside a few properties directly associated with retail fashion.

Thank you. Do you have a dollar amount or zero exposure in terms of oil exposure?

We maintain a de minimis exposure concerning retail gas stations based in Hawaii.

Thank you for clarifying. Moving on to consumer loans, can you discuss the breakdown of credit card and other consumer loans?

We do not acquire loans from fintech services; hence that number is effectively zero. As for credit cards, we transitioned our program years ago to establish our branded cards, with continued engagement within the local markets. I can't provide a precise percentage right now, but we maintain a strong presence.

What are the FICO scores for your portfolios? How many loans fall below the 660 mark?

I don’t have that specific data on hand, but we can compile that information and get back to you with it soon.

With respect to your initiative regarding the reopening of Hawaii, can you elaborate on your involvement? I read articles highlighting your position on the committee working on travel plans.

Absolutely. Hawaii collaborates closely with New Zealand to learn from their actions regarding the reopening process. Our committee is equipped with medical experts from major hospitals, alongside resources such as consulting firms like Boston Consulting Group. Notably, much of the plan centers on science and medicine, employing screening and testing methods, with respect to quarantine protocols if necessary. We’re working towards a systematic approach to reinvigorate Hawaii’s economy, which heavily relies on tourism, keeping in mind a timeline that may span years while ensuring safety for residents and visitors alike.

Thank you. Our last question from this session comes from Alex Matters with Goldman Sachs. Your line is open.

Hi, guys. Thanks for taking my question. I was wondering if you could provide more details about the PPP loans that you booked in the quarter, especially regarding the anticipated duration, associated fees, and expected impact on future expenses.

It has been quite a journey, and I think when looking back, we would choose a different route than the SBA for distributing funds to numerous small businesses. However, for the time being, I can't predict how long they will be on the balance sheet. From my discussions with clients, many aim to seek forgiveness by bringing back their employees under the current guidelines, suggesting high rates of forgiveness ahead. Regarding the fees, we've been focused on implementation thus far, but they typically range from 1% to 3%. We haven’t finalized those calculations yet.

Thanks for clarifying. I was curious how you anticipate the second round will unfold, based on client conversations?

There is a continued high demand, likely surpassing our capacity to process requests given time constraints. When the first round closed, so did our portal, and we don’t intend to reopen it until we can accommodate those requests presumably. Our processing capabilities are relatively strong for a bank of our scale, thanks to extensive automation. However, I suspect the second round will not meet all existing demand, leading to ongoing discussions about a potential third offering.

Thanks for addressing my questions.

Thank you. At this point, I will now turn the call back to your speakers for any further remarks.

Thank you for joining us today. We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional questions. Enjoy the rest of your day and have a nice weekend.

Ladies and gentlemen, this concludes this conference for today. Thank you for participating. You may now disconnect.