Q2 2021 Hawaiian Electric Industries Inc Earnings Call
Good day and welcome to the Hawaiian Electric industries second quarter, 2021 earnings conference call.
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I'd now like to turn the conference over to Julie Smolinski, Vice President of Investor Relations and corporate sustainability. Please go ahead.
Thank you Andrea welcome everyone to Hawaiian Electric industries second quarter 2021 earnings call.
Joining me today are Connie Lau Hei, President and CEO, Greg Hazelton, Hei Executive Vice President and CFO, Scott do you Hawaiian electric President and CEO, and Teri Nishi 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.
Thank you Julie and Aloha, everyone Mahalo, Thank you for joining us today.
Second quarter consolidated financial results were strong as Hawaii's economy improves 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%.
<unk> 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 per cent compared to the first half of 2020.
At the utility our year to date results benefited from our focus on cost management and efficiency and from timing items expected to reverse in the balance for the year.
We expect the utility to remain within its full year guidance range announced in February.
The improved Hawaii economy, and strength in 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 increase.
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 response.
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 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 rivals 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.
How about your real estate values on activity remain robust.
July median prices of Oahu single family homes were up 22 per cent and sales volume was up 12% over last year for.
For condos prices were up 8% and sales were up 58 per cent.
As of day May forecast, you hero the University of Hawaii Economic Research organization expected State G. D. P to increase 4% in 2021 and $3.1 per cent in 'twenty 'twenty 2.
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 about east climate goals.
The new performance based regulation for P. B R framework is now fully in effect as of June 1 and we'd begun returning cost savings to our customers under the management audit savings commitment and customer dividend component of the E. R E or annual revenue.
Adjustments mechanism.
As we've discussed in the past performance incentive mechanisms or pins are an important part of the PBR framework in.
In may the <unk>.
He public Utilities Commission approved the final details of a suite of P. B R. P M, which are now in effect the.
The Commission has now started a process to consider and develop additional performance incentives. This includes pins and shared savings mechanisms relating to grid reliability.
Tire meant a fossil fuel generation interconnection of large renewable energy projects and cost control for fuel purchase power and other non a or a cost we.
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 P. B R would be a process of continued refinement and we look forward to collaborating with stakeholders to develop new ways to <unk>.
Line incentive with customer interest.
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.
For the powering past Cold task force convened by our Governor ebay has brought together a range of stakeholders to ensure commission approved projects on Oahu are successfully brought online as we prepare for retirement of public he's only coal plant where per.
<unk> forward on stage, 1 and 2 renewable procurement projects with independent power producers.
3 stage 1 projects are now under construction with others slated to start construction this year or early next year.
It takes a 12 stage 2 projects now have approved P. P A's and the remaining 6 stage 2 projects are pending approval.
Last quarter, we saw clarification from the commission regarding the interconnection docket and the Koppel, a energy storage battery energy storage project.
We appreciated the commissions work to respond quickly in both matters in.
And the interconnection Dockets 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 for conditions to its approval of the Koppel, a 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 90000 cumulative installed customer sited 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 incentivize 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 for.
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 E bus make ready infrastructure pilot project, which is projected to provide savings for bus fleet operators, while decreasing G. H T emissions.
Governor he signed into law built to replace the state's light duty vehicles with a zero emission fleet by 2035, consistent with our utilities owned fleet electrification goals and to allocate 3% of oil barrel tax revenues to finance construction of each.
Charge, Inc stations.
President Bidens 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 S. B 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 banks margin improved compared to the first quarter benefiting from fees related to a S. B cares or payment protection program P. P. P loans lower amortization of investment premiums and a continued record low cost of funds of 7 basis points.
We're still seeing margin pressures due to low asset yields and the excess liquidity is 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.
S. B is 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.
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 3 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.
Hum.
Yes.
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Yeah.
Yeah.
And now Greg will discuss our financial results and our outlook.
Thank you Tony.
Turning to our second quarter results consolidated earnings per share was <unk> 58 versus 45 cents from the same quarter last year.
29% increase quarter over quarter.
Both the utility and bank performed well and contributed to our strong consolidated results.
Utility delivered stable earnings, even though quarterly results.
Excuse me.
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 improvement because the credit profile of its loan portfolio.
And the holding company losses has remained in line with expectations.
Compared to the same time last year our consolidated.
<unk> trailing 12 month Roe.
Improved over 100 basis points to 10.5 per cent.
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.
It would be impacted by the management audit savings commitments 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.
The most significant variance drivers were.
6 million of higher O&M expenses compared to the second quarter of last year.
The main factors that drove higher O&M included $3 million due to more generating facility overhauls.
These were largely timing related to 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 the 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 units.
And $1 million due to increased increase in an 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 than depreciation.
The higher O&M, and depreciation were offset by $5 million and 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.
$1 million from lower non service pension costs due to the reset of pension costs included in rates as part of it final rate case decision.
And $1 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 customers savings under this program for Hawaiian electric.
Turning to the drivers of utility performance for the rest of the year on.
P B rpms from.
From the December PBR order are now in effect.
We expect no material upside from the pins. This year and are now tracking the potential for reliability pin penalties and expected downside sharing under the fuel cost risk sharing mechanism.
We saw some reliability impacts related to prolonged repairs at 1 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.
In fact, there would be from downside sharing the.
Cost risk sharing mechanism.
Yeah.
We currently have approximately $26 million of Covid related costs.
Primarily estimated bad debt expense.
For deferred regulatory asset accounts.
The moratorium on customer Disconnections expired on May 31, and we've requested continuation continued deferral of COVID-19 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 amount.
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 in our cost management programs. The utility is on track to do to achieve savings to meet its annual $6.6 million commitment, which we started returning to returning to customers on June 1.
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 on 1 of our Substations limiting work that could be done on other parts of the system.
And so on supply chain delays due to the pandemic.
We now expect capex to be in the $310 million to $335 million range for the year compared to our prior capex capex guidance of $335 million to $355 million.
While this means our forecasted rate base growth is now 3% to 4% from a 2020 base year. We don't expect this year's lower Capex Capex range to impact our long term earnings growth.
That's because under PBR earnings growth comes from 3 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 <unk> and <unk>.
Exceptional project recovery mechanism and a renewable energy.
Recovery mechanism.
And performance incentives.
We still expect to realize 4% to 5% utility earnings growth not including potential upside from pins starting in 2022.
The first full year of PBR.
Recovery of electrification of transportation and resilience projects could drive incremental growth from there.
Yeah.
Okay.
Turning to the bank Asp'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 of last year, where we had higher gains on sale of securities, including $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.
Net interest margin expanded slightly during the quarter to 298% from 295% 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 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 PPC piece.
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 continued to see record low cost of funds at 0.07% down 1 basis points from the linked quarter and 11 basis points from the prior year.
Overall, we still expect NIM for the year will range from 2.8% to 3%.
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 reflected reflecting the improved local economy and credit quality with credit upgrades in the commercial loan portfolio lower net charge offs and lower reserve requirement.
Related to the customer unsecured loan portfolio.
The bank recorded a negative provision for credit losses for 2.
$2 million compared to a negative provision made for them in the first quarter and a provision expense of $15.1 million in the second quarter last year.
Asp's net charge off ratio 0.0 of 4% was the lowest since 2015 this compared to 1.8% in the first quarter and point for 9% in the second quarter of 2020.
Non accrual loans were 1.
Zero, a 3% up slightly compared to 1% in the first quarter and <unk> 8.
6% in the prior year quarter.
The increase in non accrual loans was largely in the residential portfolio, which has a very low historical 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 $1.5 1% at quarter end.
HB 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 sources.
Asp's tier 1 leverage ratio of 8% was comfortably well above well capitalized.
Given the current lower risk profile of our portfolio.
We will continue to target a tier 1 leverage ratio.
The 7.5 to 8 per cent range to ensure competitive profitability metrics and growth for the ASB dividend, while maintaining strong 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 asp's year to date performance improved outlook and efficient capital structure, we now expect bank dividends of approximately $55 million to $65 million versus the previously estimated 50 to 60 minutes.
Consolidated capital structure and liquidity remains strong and we do not anticipate the need for issue external equity in 2021, unless we identify significant additional accretive investment opportunities.
And we remain committed to maintaining an investment grade.
<unk> profile.
Turning to our guidance, we're reaffirming our previously issued utility guidance, but expect to be in the lower half for the range due to headwinds from potential reliability pin penalties and downsides sharing under the fuel costs.
Risk sharing mechanism.
However, we're revising our bank and consolidated Hei guidance.
Our revised bank guidance is <unk>.
79% to 94 cents per share up from our prior guidance of 67% to 74.
This reflects our updated provision range of negative $15 million to negative $20 million.
Given growing uncertainty due to the Delta variant.
<unk> 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 Pony.
Thanks, Gregg 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 were.
To integrate ESG further into our strategies business planning and 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.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad.
If youre 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.
Okay.
And our first question will come from Eric Li of Bank of America. Please go ahead.
Good afternoon, thanks for taking the questions and congratulations on the quarter.
Alright, Thanks, Eric Thanks, Sir.
Just had a few questions on the utility given the use of 2022.
For 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 'twenty, 1 artery pressures, but first half earned ROE vs have been particularly strong if you can comment stock. Thank you.
Well, we haven't provided specific guidance yet on our 2022 on ROE and specific earnings. We we did talk about our long term earnings growth trajectory given the stability of the revenues and certainty of cost recoveries for the cost recovery mechanism.
It seems that we have under our new PBR program.
We'll come back to that we do we have seen significant improvement this year and as you know thats largely driven by the utility's ability to manage within.
The the budget of those recovering mechanisms and so we anticipate more of that going for <unk>.
Do you have any comments.
Thanks, Greg and Eric I would also add a couple of points here.
Earlier in the year in our February 21 webcast. We did note that at the midpoint of our guidance range. The realized ROE would be at 7.8% for 2000 and for 2021 now going forward in 2022, a couple of things to remember 1 day elimination.
And of the Ram R E R a lag.
So that is 1 element on the other thing to think about is under the <unk> and we're getting the full first year recovery, which eliminate another another issue of lag.
The third element I would point out is what Greg mentioned and that is managing our expenses within the aerie formula to our continued cost efficiency program.
That's our that's how we would think about 2022.
Got it much appreciated and maybe on pins.
Can you talk about focus areas for additional pins to be developed into August working group would.
Would you primarily expect us to be structured as incentive penalties on what extent of Tim upside.
Could you see in terms of basis points relative to guidance as we go forward from here.
Eric This is Shane again.
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 mechanism. 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 we're in a 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 <unk>.
Grid reliability.
Timely retirement of fossil fuels.
The interconnection of large scale renewables and then also cost controls for fuel.
Fuel purchase power and other non Ari on types of costs. So so stay tuned for more on that.
Okay.
Excellent and 1 more question for me and I'll hop back into the queue here, but.
But on the Capex on rate base reductions could you just talk about the specific reduction for a 22 and 'twenty 3 Greg I mentioned I know you mentioned.
The 21 reduction for Capex, but just wondering.
The drivers of the reduction in the ranges for 2223. Thank you.
Thanks, Thanks, Sara Eric and then turning back to our guidance slide on that overall.
Our overall range of Capex, we don't see as contracted meaningfully as you look forward.
And for about 400, we have shown $350 million to $450 million as the range for 'twenty 2.
<unk> 23, so we expect you know there's volatility in the Capex overall, we don't necessarily see general churn trends are declining and our <unk>.
Level of Capex spending a lot of that is dependent upon.
The exceptional projects proposed through.
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've had some we had some acceleration in 2019 that took us to $2.450 million recently.
And then we saw some decline on that last year as we came off that higher level. So overall, we think there'll be continued levels of spend within that.
350 to 450 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 part of our integrated grid planning processes.
We do see potential for incremental needs for investment to achieve our sustainability and reliability goals long term.
Thank you.
Thanks, Eric.
The next question comes from Paul Patterson of Glen Rock Associates. Please go ahead.
Hello, how are you doing.
Hi, Paul.
Hmm.
Just on the.
The reliability, the downsides to reliability pin penalties and.
Fuel sharing could you.
I'm sorry, if I missed this could you just quantify.
Quantify that a little bit like what kind of range are we talking about potentially.
And how do we think about that.
Debt issue in 2022.
Yes.
Paul Hi, Paul This is changed sexy Laura let me let me take your question so.
So were not where they take when I when I take a look at 2021 and what was previously mentioned about our full.
Maintaining our full utility guidance range.
Note that a couple of.
Performance incentive mechanism on might provide a potential for the downside 1 of them being the reliability spend and the next being on the steel cost risk sharing.
So together with.
Both of those potential penalties I mean, we're still in August of this year.
Looking at landing in the lower half of that EPS guidance range that we had set out.
Earlier on this year.
You'll note that the safety safety penalties are the ones the reliability metrics that are specifically, including those notes or 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 mix, which is frankly, a reflection of movements in global oil prices.
Really don't have the ability to control.
Those those have moved against us so on a projected basis, we're expecting to be also on the penalty area there.
So if oil prices go down I mean, how much exposure in general so I apologize for not knowing this but what was it.
What's your total exposure with a capped out with respect to fuel.
So first I'll take that Greg for.
For the fuel it's capped out at $3.7 million.
Okay.
And as a caveat I assume on the city the liabilities stuff as well.
Yes, and that's a penalty on its capped out at combined for safety and safety at $6.8 million.
Okay.
Okay and then.
And then with respect to the provision for loan losses.
Well once again, it's it's been great this quarter, but but.
I was 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, twenty-twenty Oh, you know you had COVID-19 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.
For 2 like what you guys originally had.
At the beginning of the year for.
For for the provision expense for.
Or would it be I'm very good 2019, if you follow me.
We'll turn that over to gain yeah, Hi, Paul This is dean 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 a personal unsecured loan portfolio. So since.
Since Covid started we've significantly de risked our our portfolio, so where were right around 100 million today.
We feel we're adequately covered.
So and then net charge offs are extremely low and so it's a function of growth I think going forward.
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 on measurement to look at in terms of size I think you would have to look at it in a more.
Free pre prior I think pre growth of our personal unsecured portfolio.
During that timeframe and that's where we're I think you would see dollar for dollar might be.
Okay.
Okay fair enough. Thanks, so much.
Great ones.
Okay. Thanks, Paul Thanks, Paul.
The next question comes from Jackie Bohlen of K B W. Please go ahead.
Hey, everyone. Good morning, Hi.
Hi, Jackie.
Hi, I wanted to pick up on that question, just a little bit more gain and dig into the mix of debt portfolio I'm. So based on my calculations using where you ended up with T cell before the pandemic and then just your year end 2019 loan balances I got a reserve ratio of roughly around $1.42.
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 balance is that $1.42 is probably somewhat of a high watermark and the reserve could trend below that a fair assumption.
Yeah, So hi tech.
We have about $20 million in and qualitative factor within our ECL currently right in our allowance for credit loss amount.
That would take our ratio down to about $1.20 on a normalized basis. So we have we think we have significant coverage given what's happening with adulthood delta in the local economy.
And so that's sort of where we're thinking as a more normalized PCL level.
Okay. So really nice question there it sounds like on them.
And then you know I understand the guidance you've got it Jack on hockey Sorry. This is Connie let me let me just add even 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 changed 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.
Okay that makes sense. So then could we be in a scenario and I know that the stepper works out perfectly and Theres a lot of modeling that happens with all of that but that you'll start to see the loan growth and you'll start to see that Q factor come down assuming that the delta variance doesn't create pandemic care, which I think we all hope for quite a bit.
And you'll just kind of see that was too at play going forward. So the loan growth can maybe absorb some of that qualitative factor and then see for a while obviously be the ultimate determinant of whether you have a provision expense of recapture that the right way to think about it.
That's exactly how to think about it Jackie.
Okay, great. Thank you.
I wanted to touch on expenses I know you had some unique items within compensation best quarter and understanding you're looking to keep expenses flat to down on maybe if you could just talk about what might be on compensation, that's not repeating or if there were any unique factors related to to Fas 91 eye on.
And just what a good run rate is there.
Yeah. This quarter, we actually had 1 unusual number that was within our comp and Ben line items.
It was related to incentive reversal on on a previous executive and got them all translated to about $1.8 million pre tax.
Also included in our expense number was.
A $500000.
In other expense related to that debt.
Transaction or that debt.
Okay.
For the total amount net unusual whats was $2.3 million.
Okay.
And that.
Sorry, if this is an ignorant question, but that $2.3 million was a benefit but would have been.
Can you just clarify that it was higher.
$8 million higher in comp and Ben and half a million higher in other expense.
Okay sorry.
Sorry, the way the reversal threw me off for a second I just wanted to make sure I wasn't really clear on that thank you.
And then you know when you when you think about fees I know theres a lot at play there.
Customer activity picking up really nicely.
Yeah, just as people get out and do more and then maybe mortgage starting to normalize a little bit just curious.
Youre thinking about those 2 drivers going forward and also on you know when you. When you talk about mortgage are you seeing anything where youre booking mortgages and with the the increase in median home prices are you putting more on portfolio because they may not be saleable at this point or is that not an issue.
Hugh.
Hi, Jackie this is an 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 when with people being flushed with cash and having.
Money on 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 portfolio in more of our mortgage so that has impacted our fees on a bit were seeing an uptick in purchase volume versus refi I think we've you know theres still some people refining, but you know there's a lot of high activity on.
Don't know if you noticed but I think its 992000 as 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 portfolio more to manage our NIM I'm not not so much because of the concerns that you referenced.
Okay.
Okay.
Great. Thank you and then just 1 last 1 and all.
Bap I was there anything unusual in the tax rate this quarter and what's a good go forward if there was.
Nothing unusual in the tax rate I think a good number is somewhere around 22% to 23%.
Okay, great. Thank you very much for taking all my questions also Jackie with the higher earnings I think that's what's driving the higher tax rate.
Okay.
It makes sense. Thanks.
Thanks, Dan.
Okay.
The next question comes from Jonathan Reeder of Wells Fargo. Please go ahead.
Hey, How's it going on today I'm going to try to Inc.
The utility.
Question again, Paul is building on on Jack you got into it but in terms of maybe a little more complex on the.
I have to tell me Parsons used to so.
The provision for loan loss my understanding was you know it.
For you around kind of $20 million per year and based on you know everything you recorded for 2020 on where you plan to come in this year it looks like you're essentially reversing all of that additional provision.
That was recorded last year or is that too simplistic a way to kind of be thinking about it or there's still more I guess more provision that can potentially be reverse you know whether it's this year or looking at 2022.
And then is there any way to kind of give us any guidance on you know.
Okay.
Number of range in terms of you know.
Going forward provision for loan loss expense amount.
You know Jonathan I appreciate the question and maybe I'll, let the bank go through this in a little more detail being a utility guy myself, it's I understand the challenges the challenges of that but you know there's there's variable that's hard to its hard to focus on a specific <unk>.
Because it does tie into loan growth for elements the composition of your portfolio into higher risk elements of the portfolio like the.
Personal unsecured lending portfolio versus residential the mix of the portfolio will will also direct channel it will determine the amount of necessary provision and loan loss reserves you what I would say what I would note in what Dane highlighted earlier.
It was that we as we sit here today at $1.5 1 percentage of our total loan portfolio.
As a reserve.
We are well provisioned under COVID-19, but we're not out of Covid yet.
So given that uncertainty we've we continue to maintain a high level of that which can create if the economy continues to recover can create opportunities for additional credit to our provision as we release reserves.
Or it can also cover additional provisioning required because we see greater levels of loan our 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 in 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 day deceiving.
It's the uncertainty going forward I think with the provision what we've given is a conservative approach.
In terms of our outlook on me if there's further improvement in Hawaii's economy, we gain more clarity around the delta Varian and the negative impacts associated with it.
There could be further releases in the coming quarters, but as of today.
I think we're taking a more conservative approach with our outlook.
Okay, and 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.
Does that modest we've seen volume.
Yeah, you know again, we will provide further guidance center on our <unk>.
We give earnings guidance for 2022, specifically.
That will again, it'll bake into account the what the composition of our loan growth will come from in our portfolio growth as you've seen this year.
We've had a net increase in earning asset growth, but that includes investment.
In some high quality securities, which required very little provisioning relative to typical alone and portions of our loan portfolio. So that's that's part of the challenge.
Yes. My guess is we started this year at gain it was 10 to 20.
It was up 17% to 20 to 17 to 22 and that was in a kind of a challenge.
Low growth economy moderate growth economy.
Here.
Debt to me that at least a good reference point overall.
But we are also you know.
As you come out of the concerns relative to Covid.
That should also temper your how much reserve margin how much reserved for margin, we put above that right.
Greg mentioned, it's really about what composition of what we're growing in what category. So personnel on secured portfolio requires us to put a little bit more coverage into our allowance.
And so as we come out of Covid. It will we'll look at where the market opportunities lie and then we'll have to provide accordingly to where those for those growth opportunities are.
So right now I think we're a low preliminary in terms of calling on a number for 'twenty 2.
Okay, but I mean.
At least thinking about that 17% doesn't sound like it's going to be wildly off base.
Now obviously can shift depending on I guess the response file on.
Well so okay.
I appreciate that color and I'm trying to break it down for us as utilities, a little more simple for them. So thank you very much.
And Jonathan it's Connie I'd, just add you know we tend to look at the ratio up.
The reserve to loans versus just an absolute number because of course for loan portfolio growth in total.
Okay got you. Thanks.
Thanks, Jonathan.
The next question comes from Charles Fishman of Morningstar. Please go ahead.
Just a couple.
Great.
To make sure I got this right you said utility EPS.
We'll be on the lower half for towards the lower end on the guide.
The lower half of the range, but we're.
We're not we're not guiding to the to the low end.
Got it Okay, just want to make sure it does.
Let's say we'd go for.
Slide 10 growth going from.
We're still using 2020 tons a day.
And I guess that makes sense because there's just so much noise this year with PBR and coming out of Covid.
If I look on slide 10.
You still.
We'll talk on 45% from 2022.
Right.
You changed that bottom that lower right off a little debt, where it used to be excludes potential.
On a simple rewards and <unk>.
It looks like all you did was made on a separate bullet points on this.
Cosmetic.
The changes you've made on that slide and am I correct or is there more going on there.
Yeah, No no there wasn't theres no sleight of hand, there at all 4% to 5% off based on 2022, excluding P M.
And I think as <unk> mentioned.
We've got the implementation pins, 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.
Keeping that theyre incentive mechanisms that performance you know we have to perform well relative to those those new mechanisms over time, and we will give you further clarification as those are implemented through the workshops and through the balance of the year.
Got it okay.
Just 1 final note. This is my last earnings call.
On the quarter.
Also on my last earnings call on my career I'm Gonna be retiring at the end of the month and I wish you everybody at Hawaiian Electric industries.
Oh, congratulations Charles it's been wonderful knowing you over all these years.
Boelkow will come off for months.
Yeah, well. Thanks, Thanks for your questions and again, it's been great. It's been great talking to you always appreciate your questions and focus on as it's been it's been very it's been very good. Thank you.
You're welcome.
This concludes our question and answer session I would like to turn the conference back over to Julie Smolinski for any closing remarks.
Thank you all for joining us today and please do reach out if you have any follow up questions have a great week.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
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Yeah.
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