Hawaiian Electric Industries, Inc.

Good day, and welcome to the second quarter 2020 Hawaiian Electric Industries, Inc.' 's earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Julie Simulinski, Director of Investor Relations. Please go ahead.

Thank you, Anita. Welcome, everyone, to Hawaiian Electric Industries' second quarter 2020 earnings call. Joining me today are Connie Lau, HEI President and CEO, Greg Hazelton, HEI Executive Vice President and CFO, Scott Hsu, Hawaiian Electric President and CEO, Rich Wacker, American Savings Bank President and CEO, and other members of senior management. We're continuing to follow social distancing procedures, so our executives are in different locations today. Please bear with us again if we have any delays or mixed audio quality during the call. On the call, we'll use non-GAAP financial measures to describe our operating performance. Our press release and presentation are posted in the investor relations section of our website and contain reconciliations of these measures to the comparable GAAP measures. Forward-looking statements will be made on today's call. Factors that could cause actual results to differ materially from expectations can be found in our presentation, our SEC filings, and on our website. And now Connie will begin with her remarks.

Thanks, Julie, and aloha to everyone. Thank you very much for joining us today, and we hope that you are safe and well and your families are as well. I am very proud of the performance of our companies and our employees today. during this COVID-19 pandemic. While all of us face uncertainties regarding the trajectory of the virus and its implications for our pace of economic recovery, what is clear is the strength and resilience of our businesses, the dedication of our employees, and our commitment to supporting our customers and our economy throughout this period. On last quarter's call, we talked about the strengths that would help our company navigate through COVID-19, our long history of providing essential services for most of our state, our strong liquidity across our enterprise, the stabilizing effect of decoupling and other regulatory mechanisms at our utility, and our bank's conservative approach to risk, low-risk loan portfolio, low-cost core deposit base, and strong capital position. This strong foundation, coupled with other factors that benefited earnings, enabled us to deliver solid financial results for the second quarter, 45 cents per share compared to 39 cents per share in the same period last year, while achieving important progress on our long-term goals. I'll start with an update on the virus and economic conditions in Hawaii Before turning to an update on our companies, then Greg will review our financial results and outlook. We're fortunate that Hawaii continues to have the nation's lowest COVID-19 mortality rate. While cases per capita in Hawaii have generally been lower than other states throughout the pandemic, we have seen an uptick in cases recently, which our state is working to address. We're seeing the effects of reopening of our local economy and unprecedented federal stimulus, which is estimated to have delivered approximately $7.7 billion in funding to our state thus far. Hawaii's unemployment rate improved to 13.9 percent in June, after peaking at 23.8 percent in April. At our utility, while sales were 11.6% below the same quarter last year, we've seen sales improve in some areas, such as shopping centers and retail, since opening of our local economy began. We've also seen areas that have maintained stability throughout the COVID period, such as our federal government and military presence. Residential real estate values have remained strong and are up from last year, showing continued strength for the collateral that secures much of our bank's lending. A key question for Hawaii's economy is when Trans-Pacific travel and tourism can resume. Hawaii currently plans to allow travelers with a negative COVID test to forego the mandatory 14-day quarantine beginning September 1st. Recognizing Hawaii's prudent management of COVID-19, Japan announced Hawaii's addition to a list of 12 global destinations deemed safe for Japan residents to resume travel. This will help restart tourism, although it may take some time before we see tourism near pre-COVID levels. Of course, all of these plans are subject to the actual course of the virus, and the effectiveness of mitigation. While tourism and federal stimulus developments will have a significant impact on the pace at which our economy rebounds, our state does have the ingredients for a solid recovery. We continue to benefit from a robust federal government presence here as host to the U.S. Indo-Pacific Command, from which the U.S. watches 52% of the world's surface. and all component service commands. We also believe the unique environment and experience we offer here will continue to make our state a very attractive place for tourism. There is a new energy to economic diversification efforts here as well, and our companies are actively supporting those efforts. Turning to our companies, at our utility, Solid regulatory foundations have served both the company and our customers well and enabled us to be a source of strength for our community during this unprecedented time. Our decoupled regulatory structure has provided accrued revenue stability despite reduced sales in the second quarter. On June 30th, our commission approved our request to defer COVID-related costs to be considered for potential recovery in a future proceeding. To help customers during this time, we extended our suspension of disconnections through September 1st and have offered a range of payment plans to help customers manage their bills. Working closely with customers is a key focus for us. Ensuring our services are affordable is also a key focus now even more than ever. Customer bills are lower now than last quarter due to lower fuel costs and a reduction in the RBA component of the bill due to higher than projected electricity sales in 2019. A customer using 500 kilowatt hours of electricity in July paid 14% less for that energy than in March. We are also working to become a highly efficient utility. And as of June 30, we recorded $7.2 million in a regulatory liability account related to ERP benefits, amounts that are to be returned to customers as a reduction in O&M expenses included in rates. We've also secured significantly lower and fixed-priced renewable energy plus storage contracts through our recent RFPs. which will help lower and stabilize customer bills once those come online. Last week, the PUC issued a final decision in the Hawaii electric light rate case. Results were consistent with the interim decision maintaining current effective rates. In recognition of financial challenges our customers face in this COVID period, in late May, we and the consumer advocate filed a settlement with the PUC to hold base rates flat in Hawaiian Electric's 2020 Oahu rate case. You may recall that the PUC had commissioned a management audit as part of the rate case. The audit report highlighted areas for improvement, including several we had identified and were working to address. In response to the audit and as part of the settlement, we committed to ramp up to $25 million in annual savings by year-end 2022 to be delivered to customers beginning by 2023. We have proposed to deliver those savings to customers through PBR. An interim decision on the settlement is scheduled for October. In addition, we are no longer planning to file a Maui Electric 2021 rate case. To offset the lack of a base rate increase and achieve our $25 million by year-end 2022 commitment, we're developing and have begun implementing plans to reduce costs, including through overtime reductions, better scheduling and coordination, managed reductions of our workforce, and reducing lower priority work. And in the second quarter, we already began to see some of these savings. As we advance these important cost reductions, we, our Commission, and other stakeholders continue to ensure that the renewable and regulatory transition moves forward. There is great interest in our state in doing everything we can to make Hawaii's economic recovery a green and sustainable recovery. Performance-based rate-making, or PBR, continues on track for PUC decision this December, which we believe will lay out the core mechanisms and performance incentive mechanisms, or PIMs. A new step in the schedule has been added thereafter to enable development of tariffs to implement the new and changed mechanisms The Commission will determine when the new changes will be effective in 2021. We continue to aggressively advance efforts to help move our state towards 100% renewable energy and carbon neutrality. These efforts will also help provide jobs and construction activity to help our state recover from the impacts of COVID-19. This includes pursuing new sources of renewable energy through Hawaii's largest renewable procurement. In May, we announced the final selection of projects for our Stage 2 Renewable Energy RFP. We're excited to have 14 projects, all solar plus storage or storage only, from the original 16 selected moving forward through the contract negotiation and community engagement phase. If all are completed, they could add about 450 megawatts of solar and about 3 gigawatt hours of storage to our system. Two of the projects are company self-built storage projects on Maui and Hawaii Island. Stage 1 RFP projects also continue to advance. While some developers provided force majeure notices as a preventive measure given the possibility of COVID-19 interruptions, So far, all Stage 1 projects are still moving forward. Last month, the Commission approved our application to rebuild the Puna Geothermal Venture, or PGV, transmission line. This will allow us to bring PGV back onto our system under the existing PPA while awaiting approval of our amended PPA. With land at a premium in Hawaii, We'll need to use both open land and as many rooftops as are available to reach our renewable energy goals. We're gathering information on parcels as small as one acre and rooftops of at least 3,200 square feet for future grid-scale solar and wind projects and community solar projects. We also continue working to help reduce carbon emissions from the transportation sector. To help accelerate this transition, we filed a pilot project for eBus Make Ready infrastructure. And just this week, Hawaiian Electric announced its commitment to convert its entire fleet of light duty vehicles across the islands, nearly 400 sedans, SUVs, small vans, and light trucks, to be electric by 2035, leading the state of Hawaii in electric vehicle fleets. Turning to our bank, In the second quarter, we stayed focused on doing the right things during this difficult time, ensuring employee and customer safety and well-being, supporting our customers, managing risk, and controlling costs. We've ramped up sanitation efforts and the use of PPE at all of our locations and workspaces, and we've rolled out a new contactless card for all of our debit card holders to keep them safe. We've been able to help our customers manage economic uncertainty, offering fee suspensions and loan deferral and forbearance options, and providing Paycheck Protection Program or PPP loans. Our team worked aggressively to secure and deploy PPP funding, delivering $370 million in loans for approximately 4,100 small businesses that represent roughly 40,000 jobs in our state. This accounted for the bulk of our loan growth in the quarter. At the bank, we have a front row seat to the effects of federal stimulus, with federal stimulus checks leading to significant deposit growth, 24% on an annualized basis. This excess liquidity gives us added cushion during this COVID period, although it does pressure net interest margin. The bank's net interest margin was also impacted by the lower interest rate environment and PPP loans. A core focus has been prudently managing our risk. Our team has been working closely with commercial customers to understand their financial condition and ensure we provision at the right levels. And we're controlling costs despite additional COVID-related expenses. We're also taking advantage of new opportunities that this period presents. As an example, we've seen rapid customer adoption of self-service options such as online banking and ATMs. This allows us to accelerate our plans for optimizing our branch footprint. We've also started implementing our planned replacement of our ATM fleet with smart ATMs, which will be the newest in Hawaii and will give customers even more capabilities outside the branches. Now Greg will review our results for the quarter and our outlook. Greg?

Thank you, Connie. Turning to our second quarter results on slide seven, consolidated earnings per share were 45 cents versus 39 cents in the same quarter last year. At the utility, timing and management of expenses and the PUC's grant of deferral treatment for COVID-19-related expenses had a positive impact. At the bank, strong mortgage production and a gain on sale of securities helped offset tighter lending margins and higher provision. At the holding company, while costs were well in line with plan, We did see a slight increase due to an acceleration and increase in our charitable giving during the quarter to support our local community organizations and those impacted by COVID. Consolidated 12-month ROE remains healthy at 9.4%. Utility ROE increased 10 basis points versus the same time last year to 7.9%. Bank ROE, which we look at on an annualized rather than a trailing 12-month basis, was 8% for the quarter, down from last year due to economic impacts of COVID-19. Turning to the next slide, utility earnings were $42.3 million compared to $32.6 million in the same quarter last year, reflecting in part savings due to process improvements and targeted cost reductions. The most significant drivers of the variance were $7 million lower operations and maintenance expenses, primarily due to fewer generating unit overhauls, less generating station maintenance work associated with overhauls, the reclassification of COVID-19 related bad debt expense from the first quarter of 2020 to a regulatory asset as a result of the PUC approval to defer these expenses, and lower labor costs due to lower staffing levels and reduced overtime. The lower generation overhauls and station maintenance work represented approximately 4 million of the 7 million O&M variants and are largely timing related as some of that work will be performed later this year or next year. Earnings also reflected a $5 million revenue increase from $4 million higher RAM revenues and $1 million for recovery of Westlock project and grid modernization projects under the MPIR mechanism. $1 million higher net income due to an unfavorable adjustment in 2019 related to reliability performance incentives and $1 million lower interest expense due to debt refinancing at lower rates. These items were slightly offset by the following after-tax items. $1 million lower allowance for funds used during construction as there were fewer long-duration projects in construction work in progress. $1 million higher cost savings from ERP system implementation to be returned to customers. And $1 million higher depreciation due to increasing investments to integrate more renewable energy, improve customer reliability, and strengthen system efficiency. Turning to the drivers of the utility's financial performance for the remainder of the year, the Public Utility Commission issued its final decision for Hawaii Island Utility, confirming Hawaii Electric's 9.5% allowed ROE and 58% equity capitalization with no change to base rates. Separately, if the PEC approves our settlement with the consumer advocate in the Hawaiian electric rate case for Oahu, we should see a similar outcome. No increase in base rates with 9.5% allowed ROE and 58% equity capitalization. The utility's multi-year strategy for greater operational efficiency and cost reductions should help offset the lack of base rate increases. The PUC order approving deferral of COVID-related expenses covers expenses incurred from March 17th to year end. In the second quarter, we reclassified a pre-tax amount of $2.5 million in bad debt expense and incurred in the first quarter to a regulatory asset. COVID-related costs have been $6.5 million to date. A separate application will be filed to request recovery of such costs in the future. Although sales were down 11.6% versus the second quarter of last year, due to decoupling revenues, we were not significantly impacted. Substantial decreases in fuel prices have been positive for both the utility and customers. Fuel prices were down close to 30% in the quarter, and the average customer bill declined by over $20 monthly since the pandemic began. The utility may qualify for rewards this year under the fuel cost risk sharing mechanism as well. On slide 10, we continue to forecast approximately 360 million of CapEx during 2020. Last quarter, you may recall, we indicated the potential for up to 30 million below the forecast given potential COVID impacts. After a full quarter in the COVID environment, we have confidence in achieving the 360 million we forecast for the year. We're maintaining our longer-term CapEx and rate-based guidance. In 2021 to 2022 period, we still expect CapEx to average approximately 400 million per year or about two times depreciation. As you know, with capital projects, the timing of a specific project spend can sometimes shift between years, and the chart at the bottom left reflects some modest updates. Those updates don't change our overall guidance in the bar chart on the top left. We continue to expect the utility to be able to self-fund its forecasted CapEx through 2020 via retained earnings and access to the debt capital markets. Turning to the bank, Americans' net income was $14 million, down from $15.8 million in the prior quarter and $17 million in the same quarter last year. Net interest income was $56.7 million compared to $61.1 million in the linked quarter and $61.5 million in the second quarter of 2019. The decrease was primarily due to lower asset yields given the lower interest rate environment. Higher amortization of premiums within the mortgage-backed securities portfolio also impacted investment portfolio yield. Net income was also impacted by a higher provision for the quarter. ASB took an additional $7 million in credit reserves related to COVID as well as an additional $4 million for unfunded commitments. On the net income, non-interest income side, gains on sales of securities contributed positively to net income. We realized $7.1 million gain related to the sale of Visa Class B restricted shares and $2.2 million gain on the sale of investment securities as we sold some legacy positions to reduce credit risk and yield volatility in our investment portfolio. There were additional COVID related expenses and savings within non-interest expense. American incurred $3.7 million in COVID related expenses consisting of additional pay to frontline employees, the payout of excess vacation days for employees unable to use vacation while working through the pandemic, purchases of PPE and sanitation supplies, and employee meals purchased to promote employee safety and support small business restaurants. These higher COVID related expenses were largely offset by lower travel, business development, and marketing expenses. On slide 12, ASB's net interest margin declined to 3.21% this quarter from 3.72% in the first quarter. On the upper right, we've detailed the elements of that decline. The lower interest rate environment was the largest driver of the net interest margin compression, comprising 34 basis points of the decline. Much of this reflected anticipated repricing in Q2 of most of our adjustable and floating rate portfolios. Four basis points was related to low yielding PPP loans. FAS 91 amortization was also a large factor, reflecting a faster rate of prepayments due to lower rates at the long end of the curve. This accounted for 15 basis points of compression. We also realized strong deposit growth from federal stimulus and unemployment benefits that added to cash deposit balances. While bolstering our liquidity and low-cost funding base, the temporary excess liquidity is low yielding and pressured margins. As noted, we did realize benefit from lower deposit costs, which contributed eight basis points to net interest margin. Turning to bank drivers for the remainder of the year, we expect continued margin pressure, but at a more moderate pace than in the second quarter. In the second quarter, NIM compression compressed quickly as variable rate loans repriced after the Fed lowered its benchmark rate to near zero in March. Approximately 93% of our variable rate portfolio have now repriced, and indices to which those variable rates are tied are at or near their floors. Thus, we don't expect that part of our loan book to have materially impacted be materially impacted by further NIM compression. We do expect continued refinancing of our fixed-rate loan portfolio, such as home mortgages, as customers take advantage of historically low rates. This type of repricing is more gradual. Aside from continued low interest rates, we expect increased amortization in the investment portfolio to continue to impact net interest margin. As a reminder of how that impacts NIM, we purchase bonds for the investment portfolio at a premium or discount, and that premium or discount is amortized over the expected life of the bond's cash flows. For mortgage-backed securities, which comprise 90% of this portfolio, the amortization increases if prepayments accelerate. We see this occur in low interest rate environments as refinance activity increases. We expect excess liquidity to continue to pressure margins at similar levels to those realized this quarter as well. Given these factors, we now expect net interest margin to be in the 335 to 325% range for the year. Turning to the provision, As mentioned, we did have an additional provision in the quarter related to COVID-19. The total provision recognized during the quarter was $15.1 million, as reflected on our income statement, which also included $4.3 million allowance related to unfunded commitments. As noted on the slide, reserves for unfunded commitments are recorded in other liabilities on the balance sheet rather than the allowance for credit losses. We believe we have approximately, we have appropriately provided for future credit losses as of June 30. The provision outlook for the balance of the year is dependent on the economic conditions, which at this point remain uncertain. We are not currently providing full year bank provision guidance given the uncertainty created by the impacts of COVID-19 on our economy. Slide 15. provides an update on what we're seeing in our loan portfolio. Overall, we have a high quality loan book that remains healthy, with only 3% of our borrowers requesting or qualifying for additional deferral thus far. Our residential book comprises approximately 60% of the loan portfolio, and the loan to value of that portfolio remains conservative at 52%. Only a small portion of that portfolio roughly 8%, have requested payment relief. In consumer loans, which make up just over 4% of the overall portfolio, we've seen a high volume of deferment requests but at low balances. While curtailment of supplemental unemployment benefits could result in increased deferment requests, we're closely monitoring what happens with additional federal stimulus. We have moved all commercial markets and CRE loans with payment deferrals to what is called special mention, meaning that those are subject to enhanced monitoring. These loans will be reevaluated for upgrade after successful resumption of payments. Given the enhanced monitoring we have implemented for the commercial markets and CRE loans, as well as the overall quality of our loan book, we feel we are well provisioned as of June 3rd. ASB continues to maintain ample liquidity and healthy capital ratios despite the challenging economic condition. The bank has strong liquidity with over $3 billion available from a combination of FHLB and unencumbered securities. ASB's 2-1 leverage ratio of 8.4% was comfortably above well-capitalized levels at the end of the second quarter. As a reminder, the bank is self-funding and we don't expect to see a scenario in which it would need capital from the holding company. Turning to our consolidated liquidity, we are well positioned to withstand the impacts of COVID through the remainder of the year and beyond. As of June 30, we had $425 million of undrawn credit facility capacity consisting of $150 million at the holding company and $275 million at the utility with just $16.5 million in commercial paper outstanding, all at the holding company. The utility paid off $14 million in long-term debt when it matured in July, with no other long-term debt maturities until 2022. As of June 30, it had $65 million in unrestricted cash balances. In 2021, the utility has $50 million in short-term bank loan maturity and expects to access the debt capital markets to help fund its capital investment program. At the holding company, we have 50 million long-term debt and 65 million short-term bank term loan maturing in the first half of 2021. And we are currently planning refinancing options for those maturities. On slide 18, We expect our dividend from an equity investment in the utility to be consistent with our earlier projections as the utility continues to perform in line with plan and has sufficient retained earnings to support its capital investment requirements and adequate liquidity to support growth in the customer account receivable balances and payment programs for customers that are impacted by COVID-19. Although the dividend from ASB is lower than our pre-COVID outlook, bank dividends received to date are sufficient to maintain HEI's strong consolidated capital structure and liquidity. On Tuesday, the Board approved our quarterly dividend of $0.33 per share at an annualized rate of $1.32 per share. We expect to maintain our external dividend and do not expect the need for additional equity at this time. We've talked through the key drivers for the utility and the bank, and on slide 19, you'll see our resulting guidance for the year. At the utility, we're reaffirming our guidance range and expect to be within the low end of the range. At the bank, we are continuing to provide pre-tax, pre-provision income guidance, which includes net interest income, non-interest income, and non-interest expense to range from 90 to 110 million. We now expect mid-single-digit earning asset growth compared to low to mid-single-digit growth we previously forecasted. Given the current low interest rate environment and excess liquidity, we expect interest margin in the 325 to 335 range. Our holding company guidance is unchanged at 27 to 29 cent loss. Since it is still too early to determine bank provision, we are unable to provide consolidated EPS guidance at this time. I'll now turn it back to Connie for her closing remarks.

Thanks, Greg, and mahalo again. Thank you to everyone for joining us today. Although this continues to be a difficult time for our community, We are proud of our companies and teams for stepping up to help our state navigate this crisis. The pandemic has highlighted how strong the foundation our company has built over many decades, and that has positioned us well to weather this storm. And now we look forward to hearing your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. The first question today comes from Jackie Bowen with KBW. Please go ahead.

Hi. Good morning, everyone.

Good morning, Jackie. Hi, Jeff.

Good morning. I thought I had lots of questions today for you, Rich. I thought I'd start off with PPP, and just looking at the million in expected loan fees, it says you've loaned $950,000 to date, and I think that information is very helpful. I just want to double-check if that implies... Hey, Jackie.

Jackie, you were breaking up on that question. Could you repeat? Okay.

Sorry, let me take off my headset. I see them work remotely a little better.

Yes.

Okay, great. Sorry about that. I just wanted to see the PPP fees. So the expected this year and the $950,000 realized in the second quarter. So just doing the math on that, that means you expect another $2 million to come through this year, right?

No, we're a little higher than that. So that, you know, The timing of those loans was mid-quarter, right? So you only had a partial quarter. If it's just amortization, you'd expect to see about three, three and a half in the second half. And then depending on the speed of forgiveness, we could get more.

Okay. So that's just the pure amortization. It doesn't take into account if you are having those loans forgiven and accelerating that, right?

Correct.

OK, and what do you have your total expected fees to receive from PPP loans?

So roughly 4% of our outstanding of the loans we produced was our was our fee rate. So that would be close to 13 and a half to 14.

OK, and is that growth of FAS 91?

Uh. Yes. Okay.

That's the fee.

Sorry, I cut you off. Go ahead.

Yeah, no, that's the fee amount that we'll receive from the SBA.

Okay. And did that have a large impact on compensation this quarter?

No, none.

Okay. Okay. Okay. And then I guess just in conversations that your bankers have been having with customers, what kind of a sense does that give you for how many will ultimately qualify for forgiveness?

We feel pretty good. I mean, you know, our book, our production really targeted, really hit the target of what the program was set out to achieve. So, you know, we have only – A couple handfuls of loans bigger than $2 million. We have a large amount that were under the $150,000 threshold that they're talking about for potential, you know, broad forgiveness. So we feel pretty good about it. And the way people are using it in the discussions that we've had with them, you know, They are either marshaling them, shepherding them, which is why we've got some excess liquidity, or they use, but intend to use it for payrolls, or, and now with the additional time to use it for payrolls, we would expect they would broadly qualify.

Okay. Okay, that's helpful. Thank you. And just, I know this is a really challenging question. But with all the moving parts that you have with excess liquidity not related to PPP and then the PPP deposits and forgiveness and everything else, how are you thinking about the ebbs and flows of balance sheet size? I know that you've provided mid-single-digit expectation growth for earning assets, but I guess what are things that could cause that to be higher or lower from there?

You know, I think we need to decide – how much mortgage production we want to sell versus put on book, that can affect it. Mortgage production is pretty strong. Rates are pretty low. You know, there's always a tradeoff of selling versus putting it in the portfolio. The mix of how that comes in, whether it's, you know, it would end up being saleable production or not. And then, you know, I think there's still activity that's out there and we just, we need to make sure our risk appetite is in line with the opportunities that are in the market. So there is some good volume that's out there for projects that we think are worthwhile, but we got to triple check our assumptions now, right? It's not a normal environment. But at the same time, we want to be constructive for economic activity here, right? So You know, those are probably the biggest variables.

Okay. Okay, no, that's helpful to keep that in mind. And then just one last one, and then I'll step back. In terms of the decision to sell versus portfolio mortgages, correct me if I'm wrong on this, but I'm assuming that the gain on sale that you're seeing in the market has some impact on that decision. Are you still seeing a pretty good gain on sale margin as we're, you know, in the beginning of the quarter?

Yes, we are. Yeah, I think it's still a healthy margin, and so that factors in, as you said, to the considerations.

Okay. Okay, thanks, Rich.

Okay. Hey, Jackie, this is Connie. I would just add, you know, we're having lots of those discussions that you just raised about the optimal size of the balance sheet, and the nice thing about American being part of the HEI holding company is that we probably have more levers that we can pull than, you know, a standalone bank could. So you can be sure that we will be carefully balancing future growth because, as Rich said, we definitely want to support the economic recovery here. And as you heard me in my comments, you know, we do believe that we're going to pull through this. And certainly if, you know, there's a vaccine or therapeutic treatment that would really accelerate things. But even in the meantime, as we noted, the real estate values have been holding up here. And that's always been very good economic activity for Hawaii.

OK. So interpreting that, then I would say outside of customer behavior and deposits and all of that, more likely that the balance sheet you could see more growth than mid-digits rather than less growth. Is that a fair assumption?

No, you could actually see it go both ways, either way. But it would be that we will look at smart growth. So we'll be looking to, you know, carefully at that NIM going forward to put on the kinds of loans that can help bolster that, but for the long term. Okay. Okay.

Understood. Thank you.

The next question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Aloha. Aloha, Paul. Aloha, Paul. So I wanted to, and I apologize if I just missed this, but what What was the difference between what you guys were thinking last quarter and this quarter that changed the NIM forecast for this year? What was it that, of all those factors that you outlined in great detail, was what you weren't expecting, I guess?

The biggest factor was the There were two. The biggest factor was the repricing of the adjustable and floating rates. And those indices really moved a little bit farther than we expected during the quarter. So you got down to floors. But it moved quickly, and so that was part of it. And then secondly, as we were coming in, the PPP, the dilution effect of the PPP as that came in, and the ongoing dilution effect of that, again, depending on how fast they forgive or pay off, that's still a variable that we've got to watch as we go forward. But from where we were sitting at the kind of end of April, the biggest mover in there was the drop in those benchmark indices against which the adjustable rate loans price.

Okay. Fair enough. And then with respect to the Visa sale and the other securities, Are there more opportunities you see in that, or how should we think about that going into for the remainder of this year and potentially for next year, the benefits associated with that?

So we've sold out our visa position, so that's all gone. We felt pretty good about where the prices were and thought it was a good time to be able to exit that, and that gives us some capital reinforcement. The other security sales, so, you know, we had planned in our year to probably have $3 million, $4 million of sales. There's roughly, you know, those happen based on portfolio repositioning and other things like that that are normal course. We've gotten $3 million of that in the first half. We don't see a lot of other repositioning right now based on where rates are and where our holdings are, but that can change depending on what happens with any individual security that we're in and Dane's desire or CFO's desire to stay in or out of a security. But you wouldn't expect it to be a big factor.

Okay. And then I guess next year it's going to be sort of opportunistic. Is that how we should sort of think about it, or is this sort of the three-ish kind of numbers?

Yeah, that's probably a normalized number. Any year you'd see a little bit of that.

Okay. And then just, and again, the rearage level customers on the utility side, how many customers are current with their – with their electric bills or how many or not, I guess.

The percentage. Yeah.

Sorry. I didn't hear that.

I apologize. Yeah. No, Tane is going to answer.

Oh, okay. I'm sorry.

Yeah, I call. This is Tane. You know, we've seen the amount of folks paying later increasing in the, you know, 30 to, 60, 60 to 90, and greater than 90 days. It's increased slightly, but, you know, for the most part, you know, people have been, you know, paying their bills. I would say that, you know, the moratorium on disconnection for nonpayments has been extended through September 1st, and, you know, proactively we've gone out to reach out to our customers with those arrearages to work out payment plans.

Okay, great. Well, thanks a lot, and hang in there.

Thanks, Paul.

Thanks, Paul.

Again, if you have a question, please press star, then 1. The next question comes from Charles Fishman with Morningstar. Please go ahead.

Well, hopefully I won't embarrass myself asking a bank question here as a utility analyst, but I'm still not getting this name. Okay. Just trying to make it simple. I mean, you knew the NIM was coming down. I mean, you took it down first quarter, you're taking it down again. So, you know, it's just more, obviously we're dealing with an unprecedented event. I'm not beating on you. It's more than you thought, but in simplified language, it's this, this flow of money came in from the PPP, the deposits, maybe even more than you thought. And again, there really isn't the opportunity to invest it because I mean, in the way a bank makes money, obviously isn't is loaning out and taking money in at a lower rate, but you, you knew the money was, those deposits are going to go out pretty soon. So it really tied your hands on what to do with it. And therefore there wasn't an opportunity to invest it. Plus you had all the costs associated with the administration of this. Is that, a simplified idea of what went on here with the NIM?

Yeah. Well, that's for roughly that 10 basis points of excess liquidity that we talk about, right? Yeah. Because to your point, when we get the funds and those PPP monies are deposited into customers' accounts, we don't know how fast they're going to spend them because this is uncharted territory. So we keep it very available, right? If they're going to spend it. And a lot of them were targeted to spend initially, as you know, in the quarter in order to get forgiveness, the, the original guidance was spend it all by June 30th. Right? So we kept it, we kept it available in cash like, uh, instruments so that on a moment's notice, Customers are spending it. The cash is there. So we had the cost side, to your point, and very little income against them. So you dilute down the return on the overall book because you have a lot at near zero net interest margin.

Okay. Then as far as the uncertainties that are remaining with the bank, it sounds like the mortgage portfolio is in pretty good shape. And it sounds like you have a handle on this NIM. I mean, obviously, again, an unprecedented event. Is the issue still out there, your comfort with the reserves you've taken, especially on small businesses that are dependent on tourism, realizing that's a fairly small part of your portfolio, but certainly the most uncertain part?

Sure, and I wouldn't just say small, but, you know, it cuts across, right? And to your point, I think we've given you guys kind of a view of the portfolio and the various exposures. So, you know, we are less exposed to the riskier segments. We have, you know, reasonably modest exposure to the hospitality industry and some of the other riskier ones. But the reality is our local economy, you know, is not – these are not hermetically sealed sectors, right? So when one area is suffering, even though we don't have a direct exposure to it, the community does. And so it affects the level of economic activity across the community. And so, you know, Connie described sectors that are strong, right? But right now our biggest sectors are weak, and that – means the general business environment is challenging. And so the ability of companies to maintain their cash flows, to cut costs in order to stay viable, they're doing a great job so far. But we don't know when we're going to open up so that the economy can grow broadly. and support them. So we can't call. We can't really develop a very confident call on which companies are going to be able to endure the necessary time period. Does that answer your question, Charles?

Yeah, that helps. You know, it's something I'm struggling with. Let me move to the utility just real quick.

Yeah, go ahead. Before you move on, I'll just point out – The slides that Rich was referring to that have a lot of detail on the loan portfolio start in the appendix at slide 39. And then on your question on reserving, the way the reserving is done now under CECL is that every quarter at quarter end when the bank puts up its provision, It's got to make a judgment call, and for the commercial loans, that is actually loan by loan as to what the potential expected losses would be over the life, the remaining life of the loan. So, you know, we feel good about the provision that we've taken as of the second quarter, but come September 30th and the end of the next quarter, we got to make that determination again And we've got to take into account, now that it's over the expected life of the loan, what may happen in the economy going forward. So that's the difficult part of setting the provision every quarter, given the uncertainty of recovery.

Well, that helps. Let me look at those slides, and I'll call your IR people if they have any questions. And then on the utility... Just one question. Are you counting on any of this fuel reward market, you know, the sharing of the fuel savings to get you to the lower end of utility guidance? I mean, will you be able to book that before the end of the year? And is that built into your guidance?

No, we've maintained a neutral position on that as we roll through the year. So our guidance is largely driven by our ability to offset the lack of revenue increases through cost reductions overall, which we've seen good progress on and we have confidence in achieving this year.

Okay. Thank you very much. You probably, of all the utilities I cover, have one of the more difficult situations, so hang in there. Thank you.

Thanks, Charles.

Thanks, Charles.

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

Thank you all for joining us today. We hope you stay safe and well. And, of course, please do reach out to me directly if you have any questions, and we'll be happy to get back to you. Thank you.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.