First Hawaiian, Inc. (NASDAQ:FHB) Q3 2020 Earnings Conference Call - Final Transcript
Oct 23, 2020 • 01:00 pm ET
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 re-opening 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 increase 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 6 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. I'll turn it over to Ralph to discuss asset quality, provisioning, and loan deferrals.
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 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 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 aligns 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