Hawaiian Electric Industries, Inc.

Q2 2021 Earnings Conference Call

8/9/2021

spk07: Good day and welcome to the Hawaiian Electric Industries second quarter 2021 earnings conference call. All participants will be in 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Julie Smolinski, Vice President of Investor Relations and Corporate Sustainability. Please go ahead.
spk06: Thank you, Andrea. Welcome, everyone, to Hawaiian Electric Industries' second quarter 2021 earnings call. Joining me today are Connie Mao, HAI President and CEO, Greg Hazelton, HAI Executive Vice President and CFO, Scott Hsu, Hawaiian Electric President and CEO, Ann Teranishi, American Savings Bank President and CEO, and other members of senior management. Our press release and presentation are posted in the investor relations section of our website. As a reminder, 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 in the investor relations section of our website. Now, Connie will begin with her remarks.
spk08: Thank you, Julie, and aloha, everyone. Mahalo. Thank you for joining us today. Second quarter consolidated financial results were strong as Hawaii's economy improved and as we advanced key priorities across our enterprise. Our consolidated net income per quarter was $63.9 million with EPS of 58 cents, 31% and 29% respectively above the same quarter last year. This followed a great first quarter, and for the first half of the year, our consolidated net income and EPS were up 56% compared to the first half of 2020. At the utility, our year-to-date results have benefited from our focus on cost management and efficiency, and from timing items expected to reverse in the balance of the year. We expect the utility to remain within its full-year guidance range announced in February. The improved Hawaii economy and strengthened credit quality of our bank loan portfolio were key drivers of our results year to date, and in the second quarter enabled the bank to release a portion of its reserves for credit losses, resulting in a negative provision for the quarter. We are again increasing our full-year bank and consolidated guidance, which Greg will cover shortly. We've seen strengthening in Hawaii's economy with the reopening of our local economy and rebound of tourism. However, we are closely monitoring the recent increase in cases due to the Delta variant, as well as how our community responds. More than 60% of Hawaii residents are now fully vaccinated, and we expect that that will increase as more employers, including state and county government, are requiring employees to be vaccinated or subject to frequent testing. Controlling virus levels will enable Hawaii to continue to be an attractive tourism destination, and that will help us keep our economy open. Daily visitor arrivals have increased strongly over the last couple of months, approaching and sometimes exceeding pre-pandemic levels. with most of our arrivals continuing to be from the U.S. mainland. In June, arrivals from the U.S. West region were approximately 15% above June 2019, and their spending was 33% higher. Unemployment declined to 7.7% in June, the fifth month of improvement. Hawaii real estate values and activity remain robust, For July, median prices of O'ahu single-family homes were up 22%, and sales volume was up 12% over last year. For condos, prices were up 8%, and sales were up 58%. As of the May forecast, UHERO, the University of Hawaii Economic Research Organization, expected state GDP to increase 4% in 2021, and 3.1% in 2022. While we've seen great progress on the economy, we're still taking a cautiously optimistic approach, particularly with uncertainty due to the Delta variant. At the utility, we remain focused on cost efficiencies as we make needed investments to continue to provide affordable, resilient, and reliable electricity to reach Hawaii's climate goals. The new performance-based regulation, or PBR, framework is now fully in effect as of June 1, and we've begun returning cost savings to our customers under the Management Audit Savings Commitment and Customer Dividend component of the ARA, or Annual Revenue Adjustment Mechanism. As we've discussed in the past, Performance incentive mechanisms, or PIMs, are an important part of the PBR framework. In May, the Hawaii Public Utilities Commission approved the final details of a suite of PBR PIMs, which are now in effect. The Commission has now started a process to consider and develop additional performance incentives. This includes PIMs and shared savings mechanisms relating to grid reliability, retirement of fossil fuel generation, interconnection of large renewable energy projects, and cost control for fuel, purchased power, and other non-ARA costs. We don't yet know when an additional performance mechanisms would come into effect or what the potential earnings impact could be. However, we always expected PBR would be a process of continued refinement, and we look forward to collaborating with stakeholders to develop new ways to align incentives with customer interests. As we've always said, reaching our collective clean energy and decarbonization goals must be done in a way that is equitable and involves everyone working together. A lot of the progress we're seeing now across utility scale and distributed renewable energy additions, grid modernization, and electrification of transportation are good examples of this. The Powering Past Coal Task Force convened by our Governor Ige has brought together a range of stakeholders to ensure Commission-approved projects on Oahu are successfully brought online as we prepare for retirement of Hawaii's only coal plant. We're pressing forward on Stage 1 and 2 renewable procurement projects with independent power producers. Three Stage 1 projects are now under construction, with others slated to start construction this year or early next year. Six of 12 Stage 2 projects now have approved PPAs, and the remaining six Stage 2 projects are pending approval. Last quarter, we sought clarification from the Commission regarding the interconnection docket and the Kapolei Energy Storage Battery Energy Storage Project. We appreciated the Commission's work to respond quickly in both matters. In the interconnection docket, the Commission clarified its intent for us to track costs to customers resulting from changes in project schedules rather than record such costs. and the Commission revised the conditions to its approval of the Kapolei storage project, enabling us to now work with the developer to advance that project. We're working to accelerate the addition of more distributed energy resources and are advancing programs to benefit all customers. As of this June, we surpassed 90,000 cumulative installed customer-sighted solar systems. which comprise most of the nearly 1 gigawatt of solar capacity on our grid. And now, the battery bonus program launched last month incentivizes customers to add storage and benefit the overall system by allowing the utility to use energy from those systems in the evening hours. Grid modernization is also progressing well, with advanced meter deployment accelerating with the Commission's approval to shift from an opt-in to an opt-out approach, enabling greater operational efficiencies and more customer options. Finally, we're encouraged by recent developments that will accelerate electrification of transportation here in Hawaii and across the country. In June, the Commission approved our eBus Make Ready Infrastructure Pilot Project, which is projected to provide savings for bus fleet operators while decreasing GHG emissions. Governor Ige signed into law bills to replace the state's light-duty vehicles with a zero-emission fleet by 2035, consistent with our utility's own fleet electrification goal, and to allocate 3% of oil barrel tax revenues to finance construction of EV charging stations. President Biden's recently announced goal of 50% of vehicle sales being electric by 2030 will also help accelerate our electrification efforts, which will benefit our customers, our environment, and our clean energy transition. Turning to the bank, ASB's strong results reflected the credit-driven reserve release and resulting negative provision for credit losses as the economy and credit quality improved. We believe our reserve levels are appropriate, taking into account ongoing pandemic uncertainty. The bank's margin improved compared to the first quarter, benefiting from fees related to ASB CARES or Payment Protection Program PPP loans, lower amortization of investment premiums, and a continued record low cost of funds of seven basis points. We're still seeing margin pressures due to low asset yields, and excess liquidity as strong deposit growth continues to outpace lending opportunities at present. Even so, earning asset growth is helping us grow net interest income consistent with our expectations, and we're starting to see more in the loan pipeline. with an uptick in home equity lines of credit, as well as continued strength in residential mortgages and commercial real estate. As ASB's digital banking transformation continues, we're focused on strategic investments to keep the franchise strong and competitive, expand service levels, and continue to deliver the personal touch that is a hallmark of who we are as a bank. Anne and the bank team are upgrading the bank's technology, data analytics, and operating model to allow our team members to transition away from processing tasks and focus more on customer relationships and satisfaction. We're getting great feedback from bank customers on our digital offerings so far. Nearly 50% of consumer deposits are now through our upgraded ATM fleet, or mobile platform, and customer satisfaction remains high. We've opened three digital centers to date, with a fourth opening today, and are excited to see how this new concept, which merges our digital platforms with our warm in-person presence, performs in the coming months. And now, Greg will discuss our financial results and our Outlook.
spk01: Thank you, Connie. Turning to our second quarter results, consolidated earnings per share was 58 cents versus 45 cents in the same quarter last year, a 29% increase quarter over quarter. Both the utility and bank performed well and contributed to our strong consolidated results. The utility delivered stable earnings even as quarterly results reflected higher O&M expenses driven by an expected uptick in generation overhauls. The bank delivered solid financial performance that was enhanced by the reduction of reserve for credit losses and resulting negative quarterly provision reflecting underlying improvements to the credit profile of its loan portfolio. And the holding company loss has remained in line with expectations. Compared to the same time last year, our consolidated trailing 12-month ROE improved over 100 basis points to 10.5%. And the utility realized return on equity increased levels of 100 basis points to 8.9%. As you may recall from our Q1 earnings call, we indicated the utility ROE expectations for the second half of 2021 would be impacted by the management audit savings commitment and customer dividend as O&M reductions that have improved earnings in the first half of 2021 are returned to customers under PBR starting June 1st. Also of note, bank ROE, which we look at on an annualized basis, more than doubled to 16.8%. On slide 8, utility net income of $41.9 million was comparable with second quarter 2020 results of $42.3 million. The most significant variance drivers were $6 million of higher O&M expenses compared to the second quarter last year. The main factors that drove higher O&M included $3 million due to more generating facility overhauls. These were largely timing-related as some of the overhauls budgeted for late last year and earlier this year took place on a delayed basis this quarter. We also had $2 million from lower bad debt expense in the second quarter of 2020. due to the recording of year-to-date amounts following a commission decision allowing deferral of COVID-19-related expenses last year. About $1 million from the write-off of a terminated agreement relating to a combined heat and power unit, and $1 million due to increase in environmental reserve. Of note, O&M increases were partially offset by $1 million from lower staffing levels and efficiency improvements. We also had about $1 million higher in depreciation. The higher O&M and depreciation were offset by $5 million in higher RAM revenues, Rate Adjustment Mechanism revenues, $2 million of this increase related to a change in the timing for revenue recognition within the year, with target revenues recognized on an annual basis remaining unchanged. One million from lower non-service pension costs due to the reset of pension costs included in rates as part of the final rate case decision. And one million lower expense, lower enterprise resource planning system implementation benefits to be passed on to customers as we have already fully delivered on our commitment to provide customer savings under this program for Hawaiian Electric. Turning to the drivers of utility performance for the rest of the year, all PBR PIMs from the December PBR order are now in effect. We expect no material upside from the PIMs this year and are now tracking the potential for reliability PIM penalties and expected downside sharing under the fuel cost risk sharing mechanism. We saw some reliability impacts related to prolonged repairs at one of our substations. which has been partially restored, and full restoration is expected to be completed soon. In addition, fuel costs have increased from our January benchmark, and thus we expect there will be some downside sharing of the fuel cost risk sharing mechanism. We currently have approximately $26 million of COVID-related costs, primarily estimated bad debt expense and a deferred regulatory asset account. The moratorium on customer disconnections expired on May 31st, and we've requested continued deferral of COVID-related costs until the end of this year. We will file for recovery once we get a better idea of actual bad debt or realized amounts. That requires some time so we can see how our work with customers on payment plans and other bill assistant alternatives plays out. As mentioned, our O&M expense this quarter was impacted by an increase in overhauls, including some that were previously delayed. We expect to incur more overhaul expenses in the second half of the year, and those are included in our guidance. The utility's ability to achieve the accelerated management audit savings commitment is an important driver of results this year. To date, we've been able to realize savings through increased efficiency and our cost management programs. The utility is on track to achieve savings to meet its annual $6.6 million commitment, which we started returning to customers on June 1st. Utility capital investments to date have been lower than planned due to productivity improvements and efficiencies that have reduced certain project costs. delayed from prolonged repairs of one of our substations, limiting work that could be done on other parts of the system, and some supply chain delays due to the pandemic. We now expect CapEx to be in the $310 to $335 million range for the year, compared to our prior CapEx guidance of $335 to $355 million. While this means our forecasted rate-based growth is now 3% to 4% from a 2020 base year, we don't expect this year's lower CapEx range to impact long-term earnings growth. That's because under PBR, earnings growth comes from three main sources, the annual revenue adjustment mechanism, which covers O&M and baseline CapEx, and our ability to manage our spending within that allowance. Separate capex recovery mechanisms such as EPRM and exceptional project recovery mechanism and our renewable energy recovery mechanism. And performance incentives. We still expect to realize 4 to 5% utility earnings growth, not including potential upside from PIMS starting in 2022. The first full year of PBR. Recovery of electrification of transportation and resilience projects could drive incremental growth from there. Turning to the bank, ASB's net income for the quarter was $30.3 million compared to $29.6 million last quarter and $14 million in the second quarter of 2020. The negative provision for credit losses was the most significant driver of higher income. American grew net interest income while non-interest income was lower compared to the same quarter last year, where we had higher gains on sale of securities, including a $7 million after-tax gain from the sale of Visa Class B restricted shares. Now I'll go through the drivers in more detail. On slide 12, ASB's net interest margin expanded slightly during the quarter to 2.98% from 2.95% in the first quarter. Fees related to PPP loans, lower amortization of investment premiums, and a record low cost of funds helped soften the pressure from the low interest rate environment and continued strong deposit growth. We recognized $5 million in PPP fees in the second quarter as ASB continues to actively assist customers through the forgiveness process. American anticipates a slight reduction in PPP fee recognition for the second half of the year and continued tapering in 2022 and thereafter. Total deferred fees as of June 30 were $9.6 million. Lower amortization of investment premiums this quarter was driven by a slower pace of repayments as a result of lower refinance activity. This quarter, we continue to see record low cost of funds at 0.07%. down one basis point from the linked quarter and 11 basis points from the prior year. Overall, we still expect that NIM for the year will range from 2.8 to 3 percent. However, we anticipate that that balance sheet growth should still lead to net interest income in line with expectations for the year, despite the continued low interest rate environment. Turning to credit, In the second quarter, the allowance for credit losses declined $13.5 million, reflecting the improved local economy and credit quality with credit upgrades in the commercial loan portfolio, lower net charge-offs, and lower reserve requirements related to the customer unsecured loan portfolio. The bank recorded a negative provision for credit losses of $12.2 million. compared to a negative provision of $8.4 million in the first quarter and a provision expense of $15.1 million in the second quarter last year. ASV's net charge-off ratio of 0.04% was the lowest since 2015. This compared to 0.18% in the first quarter and 0.49% in the second quarter of 2020. Non-accrual loans were 1.03%, up slightly compared to 1% in the first quarter and 0.86% in the prior year quarter. The increase in non-accrual loans was largely in the residential portfolio, which has very low historical loss rates and strong collateral positions. As of June 30, nearly all previously deferred loans have returned to scheduled payments. We believe we are appropriately provisioned in light of the ongoing uncertainty of the pandemic. Our allowance for credit losses to outstanding loans was 1.51% at quarter end. ASB continues to manage liquidity and capital conservatively, maintaining ample liquidity and healthy core capital ratios. The bank has more than $4 billion in available liquidity from a combination of reliable resources. ASB's Tier 1 leverage ratio of 8% was comfortable above well-capitalized levels. Given the current lower risk profile of our portfolio, we will continue to target a Tier 1 leverage ratio in the 7.5% to 8% range to ensure competitive profitability metrics and growth of the ASB dividend while maintaining a strong capital position. Regarding HEI's financing outlook for 2021, at the holding company, we expect higher bank dividends to HEI this year than reflected in our previous guidance, given ASB's year-to-date performance, improved outlook, and efficient capital structure. We now expect bank dividends of approximately 55 to 65 million versus the previously estimated 50 to 60 million. Consolidated capital structure and liquidity remain strong, and we do not anticipate the need to issue external equity in 2021 unless we identify significant additional accretive investment opportunities. And we remain committed to maintain an investment grade credit profile. Turning to our guidance, we're reaffirming a previously issued utility guidance, but expect to be in the lower half of the range due to headwinds from potential reliability PIM penalties and downside sharing under the fuel cost risk sharing mechanism. However, we're revising our bank and consolidated HEI guidance. Our revised bank guidance is $0.79 to $0.94 per share, up from our prior guidance of $0.67 to $0.74. This reflects our updated provision range of negative $15 million to negative $20 million. Given growing uncertainty due to the Delta variant, we have not included any potential additional provision credits for the balance of 2021 in our guidance range. However, we will continue to monitor the economic data closely and make future reserve decisions based on third quarter data. We expect the increased bank profitability and dividend to the holding company to translate into higher consolidated earnings growth. As a result, we're increasing our consolidated EPS guidance to $2 to $2.20 per share. Now I'll turn the call back over to Connie.
spk08: Thanks, Greg. To wrap up, the second quarter was strong financially and operationally for our companies, and we're positioned well to continue delivering value for all our stakeholders the rest of this year and beyond. As we've always said, ESG is in our DNA, and as we work to integrate ESG further into our strategies, business planning, risk management practices, and reporting, We're very focused on ensuring linkage to value for all stakeholders. And with that, we look forward to your questions.
spk07: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question will come from Eric Lee of Bank of America. Please go ahead.
spk03: Good afternoon. Thanks for taking the questions, and congratulations on the quarter.
spk08: Hi. Thanks, Eric.
spk03: Thanks, Eric. Yeah, just had a few questions on the utility. Given the use of 2022 as your baseline for the 4% to 5% utility EPS guidance, could you speak to your earned ROE expectations for 2022? Recognizing you'll have greater second half 21 ROE pressures, but first half earned ROEs have been particularly strong, if you can comment to that. Thank you.
spk01: Well, we haven't provided specific guidance yet on our 2022 ROE and specific earnings. We do talk about our long-term earnings growth trajectory, given the stability of revenues and certainty of cost recoveries or the cost recovery mechanisms that we have under our new PBR program. We'll come back to that. We have seen significant improvement this year. And, as you know, that's largely driven by the utility's ability to manage within the budget of those recovery mechanisms. And so, we anticipate more of that going forward. Tane, do you have any comments?
spk09: Thanks, Greg. Eric, I would also add a couple of points here. You know, earlier in the year in our February 21 webcast, you know, we did note that at the midpoint of our guidance range, the realized ROE would be at 7.8% for 2021. Now, going forward in 2022, a couple of things to remember. One, the elimination of the RAM or ARA lag, so that is one element. The other thing to think about is under the EPRM, we're getting the full first year recovery, which eliminates another issue of lag. The third element I would point out is what Greg mentioned, and that is managing our expenses within the ARA formula through our continued cost efficiency program. That's how we would think about 2022.
spk03: Got it. Much appreciated. And maybe on PIMS, can you talk about focus areas for additional PIMS to be developed in the August working group? Would you primarily expect this to be structured as incentives, penalties, and what extent of PIM upside could you see in terms of basis points relative to guidance as we go forward from here?
spk09: Erin, this is Tane again. You know, right now we're in the preliminary stage of meeting with the working group this month to actually develop these additional performance incentive mechanisms and shared savings mechanisms. So stay tuned on what comes out of that. In the prepared comments we did say that we did have an expectation that, you know, PBR is in this mode of improvements, and the Commission is looking at ways to develop new mechanisms. But we will have to wait to see what comes out of that working group. The other thing I would add, Eric, as previously mentioned, the types of things the Commission is looking at really is focused around the things you have been hearing. on the Commission front with respect to developing mechanisms related to grid reliability, timely retirement of fossil fuels, the interconnection of large-scale renewables, and then also cost controls for fuel purchase power and other non-ARA types of costs. So stay tuned for more on that.
spk03: Excellent. And one more question for me, and I'll hop back into the queue here. But on the CapEx and rate-based reductions, could you just talk about the specific reduction for 22 and 23? Greg, I know you mentioned the 21 reduction for CapEx, but just wondering the drivers of the reduction in the ranges for 22 and 23. Thank you.
spk01: Thanks, Eric. And I'm turning back to our guidance slide on that. Our overall range of CAPACs, we don't see as contracting meaningfully. As you look forward to our base of about 400, we have shown 350 to 450 million as the range for 2023. So we expect You know, there's volatility in the CapEx overall. We don't necessarily see a general trend or decline in our level of CapEx spending. A lot of that is dependent upon the exceptional projects that are proposed through the processes as well as a baseline level of spend. As you know, our baseline level of spend has been pretty consistent year over year. We had some accelerations in 2019 that took us to $250 million recently, and then we saw some decline on that last year as we came off that higher level. So, overall, we think there will be a continued level of spend within that $350 million to $450 million level. I would note that as we also look at other programs around electrification and transportation, which are still developing, resilience projects that are needed and necessary and part of our integrated grid planning processes that we do see potential for incremental needs for investment to achieve our sustainability and reliability goals long-term. Thank you. Thanks, Eric.
spk07: The next question comes from Paul Patterson of Glenrock Associates. Please go ahead.
spk00: Hey, aloha. How are you doing? Hi, Paul. Just on the reliability, the downside to reliability, PIM penalties, and fuel sharing, could you – I'm sorry if I missed this – could you just quantify that a little bit? What kind of range are we talking about potentially, and how do we think about that issue in 2022? Yeah.
spk09: paul hi paul this is chain seki mora let me let me take your question um so when i when i take when i when i take a look at 2021 and what was previously mentioned about our full maintaining our full utility guidance range we did note that a a couple of performance incentive mechanisms might provide a potential for the downside, one of them being the reliability PIM and the next being on the fuel cost we're sharing. Together with both of those potential penalties, we're still in August of this year, we're looking at landing in the lower half of that EPS guidance range that we had set out earlier in the year.
spk01: You'll note that the SADI safety penalties are the ones that the reliability metrics that are specifically included with those. And those are penalty only, Paul. And we expect to be in the penalty area given some of the challenges on the system and the substation. And the fuel cost sharing mechanism, which is frankly a reflection of movements in global oil prices that we really don't have the ability to control. Those have moved against us, so on a projected basis, we're expecting to be also in the penalty area there.
spk00: If oil prices go down, how much exposure in general? I apologize for not knowing this, but what's a capped out with respect to fuel?
spk09: I'll take that, Greg. For the fuel, it's capped out at 3.7 million. Okay.
spk00: And is it capped out, I assume, on the SAITI, the reliability stuff as well?
spk09: Yes, and that's the penalty only. It's capped out at combined for SAITI and SAIFI at $6.8 million.
spk00: Okay, and then we'll be switching to the provision for loan losses. Once again, it's been great this quarter, but... You know, thinking going forward to a more normal year, and I don't know when we'll be there exactly, but let's just assume that 22 is more normal. Obviously, 2020, you know, you had COVID and everything, so that would be kind of an unusual year, I would think. Would it be better to go back to maybe what you guys, just as a placeholder, I know you guys aren't giving guidance, but to like what you guys originally had at the beginning of the year for the provision expense, or would it be better to go to 2019, if you follow me?
spk01: We'll turn that over to Dane. Yeah. Hi, Paul.
spk02: This is Dane. So I guess the question is, what would your provision be over a normalized basis? I think what you have to take into consideration is that most of our provision pre-pandemic was related to our personal unsecured loan portfolio. So since COVID started, we've significantly de-risked our portfolio. So we're right around 100 million today. We feel we're adequately covered. And the net charge-offs are extremely low. And so it's a function of growth, I think, going forward. As we grow our loan portfolio, obviously we have to provide for it. And then it's just the coverage ratio, so any changes in the economic outlook. So it's mostly, I think, around growth and coverage. So if you look at 2019, I don't think that's the best measurement to look at in terms of size. I think you would have to look at it in a more pre-growth of our personal and secure portfolio during that time frame, and that's where I think you would see the dollar amount be. Okay.
spk00: Okay, fair enough. Thanks so much. Have a great one. Thanks, Paul.
spk07: Thanks, Paul. The next question comes from Jackie Bolin of KBW. Please go ahead.
spk05: Hi, everyone. Good morning. Hi, Jackie. Hi. I want to pick up on that question just a little bit more, Dane, and dig into the mix of the portfolio. So based on my calculations using where you ended up with CECL before the pandemic and then just your year in 2019, loan balances, I get a reserve ratio of roughly around 142. So looking at that unsecured portfolio down to around $100 million now, is it fair to assume that the mix that the portfolio has undergone through the pandemic and lowered those unsecured balances, that $142 is probably somewhat of a high watermark and the reserve could trend below that? Is that a fair assumption?
spk02: Yeah. So hi, Jackie. We have about $20 million in balance. in qualitative factor within our ACL currently right now, our allowance for credit loss amount. That would take our ratio down to about 120 on a normalized basis. So we think we have significant coverage given what's happening with the Delta and the local economy. And so that's sort of where we're thinking is a more normalized ACL level.
spk05: Okay. So really nice question there, it sounds like. And then, you know, I understand the guidance.
spk08: Jackie, sorry. This is Connie. Let me just add in, though, you know, obviously the bank is looking at growth opportunities going forward and really wanting to put all of the liquidity from the deposits into play. And so that could also change the mix going forward. For example, you've seen us significantly take advantage of CRE opportunities, high-quality ones in our market. And so that also could change that mix going forward. Okay.
spk05: Okay, that makes sense. So then could we be in a scenario, and I know that this never works out perfectly and there's a lot of modeling that happens with all of this, but that, you know, you'll start to see the loan growth and you'll start to see that Q factor come down, assuming that the Delta variant doesn't create pandemic too, which I think we all look for quite a bit. And you'll just kind of see those two at play going forward. So the loan growth can maybe absorb some of that qualitative factor and then CISO will obviously be the ultimate determinant of whether you have a provision expense or recapture. Is that the right way to think about it?
spk02: That's exactly how to think about it, Jackie.
spk05: Okay, great. Thank you. I wanted to touch on expenses i know you had some unique items within compensation this quarter and understanding you're looking to keep expenses flat to down um maybe if you could just talk about what might be in compensation that's not repeating or if there were any unique factors related to um to faz91 um and just what a good run rate is there yeah um this quarter we actually had in one unusual um number that was within our constant line item
spk02: It was related to incentive reversal on a previous executive, and that amount translated to about $1.8 million pre-tax. Also included in our expense number was $500,000 in other expense related to that transaction or that event.
spk05: Okay.
spk02: So the total amount that was unusual was $2.3 million. Okay.
spk05: And that, sorry if this is an ignorant question, but that $2.3 million was a benefit. So it would have been, or no, can you just clarify that?
spk02: I'm sorry. It was higher, $1.8 million higher in comp and VIN and half a million higher in other expense.
spk05: Okay. Sorry, the reversal threw me off for a second, so I just wanted to make sure I was really clear on that. Thank you. And then, you know, when you think about Cs, I know there's a lot at play there. You know, customer activity picking up really nicely, you know, just as people get out and do more, and then maybe mortgage starting to normalize a little bit. Just curious. how you're thinking about those two drivers going forward. And also, you know, when you talk about mortgage, are you seeing anything where you're booking mortgages with the increase in median home prices? Are you putting more in portfolio because they may not be saleable at this point, or is that not an issue?
spk04: Hi, Jackie. This is Anne. So to your first question on fees, we are seeing an uptick in fees as the economy reopens and people are getting out there and spending more money. So, you know, interchange and debit card is increasing. We are still seeing a lower NSF charge. I think with people being flush with cash and having money in their accounts, they're not overdrafting as much. So that's just something that we've been watching pretty closely. With regard to the gain on sale for mortgage, we have been portfolioing more of our mortgage, so that has impacted our fees a bit. We're seeing an uptick in purchase volume versus refi. There's still some people refiing, but there's a lot of high activity. I don't know if you noticed, but I think it's $992,000 is the median price of home purchase right now. So demand is high, supply is low, but we remain very busy in our mortgage origination area. We are looking at portfolioing more to manage our NIM, not so much because of the concerns that you referenced.
spk05: Okay.
spk04: Okay.
spk05: Great. Thank you. And then just one last one, and I'll step back. Was there anything unusual in the tax rate this quarter? And was the good go forward if there was?
spk02: Nothing unusual in the tax rate. I think a good number is somewhere around 22 to 23%. Okay. Great.
spk05: Thank you very much for taking on my question.
spk02: So, Jackie, with the higher earnings, I think that's what's driving the higher tax rate.
spk05: Okay. That makes sense.
spk07: Thanks, Dane. The next question comes from Jonathan Reeder of Wells Fargo. Please go ahead.
spk10: Hey, how's it going today? I'm going to try to take the utility analyst question, again, that Paul was building on. I know Jackie got into it, but it turns maybe a little more complex than the average utility person is used to. the provision for loan loss, my understanding was, you know, it's usually around kind of $20 million per year, and then based on, you know, everything you recorded for 2020 and where you plan to come in this year, it looks like you're essentially reversing all of that additional provision that was recorded, you know, last year. Is that too simplistic of a way to kind of be thinking about it? Are there still more, I guess, more provision that can potentially be reversed, you know, whether it's still this year or looking at 2022? And then, you know, is there any way to kind of give us any guidance on, you know, specific number range in terms of, you know, a go forward provision for loan loss expense amount?
spk01: You know, hey, Jonathan, appreciate the question. And I'll let the bank go through this in a little more detail. Being a utility guy myself, it's You know, I understand the challenges of that. But, you know, there's variable that's hard to focus on a specific number because it does tie into loan growth elements, the composition of your portfolio, and to higher risk elements of the portfolio like the personal and secured lending portfolio versus residential. The mix of the portfolio will also determine the amount of necessary provision and loan loss reserves. What I would note and what Dane highlighted earlier was that as we sit here today at 1.51% of our total loan portfolio as a reserve, we are well provisioned under COVID, but we're not out of COVID yet. And so given that uncertainty, we continue to maintain a high level of that, which can create, if the economy continues to recover, can create opportunities for additional credits to our provision as we release reserves, or it can also cover additional provisioning required because we see greater levels of loan growth over time as well. So, and again, so therefore the run rate will also be determined by the economic activity we see out there and our ability to deploy deposits into loan growth. Maybe with that, I don't know if that helps at all, but I'll turn it over to Dane to see if you can clarify.
spk02: Yeah, it's the uncertainty going forward. I think with the provision, what we've given is a conservative approach in terms of our outlook. If there's further Improvement in Hawaii's economy would get more clarity around the Delta variant and the negative impacts associated with it There could be further releases in the coming quarters.
spk10: But as of today, I think we're taking a more conservative approach with our outlook Okay, I mean just where the portfolio stands today is there any way to kind of give a ballpark where like 22 wouldn't that kind of annual expense would look like or Is that not?
spk01: Yeah, you know, again, we will provide further guidance as we give earnings guidance for 2022 specifically. And that will, again, it'll bake into account what the composition of where our loan growth will come from and our portfolio growth. As you've seen this year, you know, we've had a net increase in earning asset growth, but that includes investment in some high-quality securities, which require very little provisioning relative to typical loan and portions of our loan portfolio. So that's part of the challenge. Yeah, my guess is, you know, we started this year at, Dane, it was 10 to 20, 17 to 22 17 to 22 when that was in a kind of a challenged you know low growth economy moderate growth economy here you know I would that to me that's a at least a good reference point overall yeah but we are also you know as you come out of the concerns relative to kovat that should also tend to figure how much reserve margin we put above that.
spk02: Right. Yeah, like Greg mentioned, it's really about what composition or what we're growing in what category. So a personal and secured portfolio requires us to put a little bit more coverage into our allowance. And so as we come out of COVID, we'll look at where the market opportunities lie, and we'll have to provide accordingly to where those growth opportunities are.
spk10: so right now i think we're a little preliminary in terms of calling a number for 22. okay but i mean at least thinking about that 17 to 22 doesn't sound like it's going to be wildly off base um you know but obviously could shift depending on i guess the risk profile of the future loans so okay no i i appreciate that color and trying to break it down for uh us utility folks in a little more simple terms so thank you very much
spk08: Hey, and Jonathan, it's Connie. I'd just add, you know, we tend to look at the ratio of the reserve to loans versus just an absolute number because, of course, the loan portfolio grows in total.
spk10: Okay, gotcha.
spk01: Thanks. Thanks, Jonathan.
spk07: The next question comes from Charles Fishman of Morningstar. Please go ahead.
spk11: Hi, just a couple. Greg, did you I just want to make sure I got this right. You said utility EPS will be in the lower half or towards the lower end of the guide?
spk01: The lower half of the range. We're not guiding to the low end. Got it.
spk11: Okay. Just wanted to make sure. Then let's say we go to slide 10. We're still using 2022 as a base, and I guess that makes sense because there's just so much noise this year with PBR and coming out of COVID. But if I look at slide 10, you're still talking 4% to 5% from 2022. But you change that bottom, that lower right box a little bit where it used to be excludes potential PIM rewards. And it looks like all you did was make it a separate bullet point. So it was just cosmetic, the changes you made in that slide. And my correctors are more going on there than
spk01: I realize. Yeah, no, there's no sleight of hand there at all. Four to five percent off base year 2022, excluding PIM. And I think as Tane mentioned, you know, we've got the implementation PIMs, but now we've got ongoing discussion around additional incentive mechanisms going forward. We do expect a good portion of those to be incentive only, as was documented as part of the PBR workshops, and so we see potential upside going forward. Of course, being that they're incentive mechanisms, the performance, we have to perform well relative to those new mechanisms over time. And we'll give you further clarification as those are implemented through the workshops and through the balance of the year.
spk11: Got it. Okay. Just one final note. This is my last earnings call of the quarter, and it's also my last earnings call of my career. I'm going to be retiring at the end of the month, and I wish you, everybody at Hawaiian Electric Industries, the best.
spk08: Oh, congratulations, Charles. It's been wonderful knowing you over all these years.
spk01: Well, thank you. Yeah.
spk11: Yeah.
spk01: Well, thanks for your questions, and again, it's been great talking to you. Always appreciate your questions and focus on us. It's been very good. Thank you. You're welcome.
spk07: This concludes our question and answer session. I would like to turn the conference back over to Julie Smolenski for any closing remarks.
spk06: Thank you all for joining us today, and please do reach out if you have any follow-up questions. Have a great week.
spk07: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Disclaimer

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Q2HE 2021

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