Q2 2023 Hawaiian Electric Industries Inc Earnings Call
Good afternoon, and thank you for attending today's second quarter 2023, Hawaiian Industries incorporated earnings Conference call. My name is Jason and I'll be the moderator for todays call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you would.
To ask a question. Please press star one on your telephone keypad.
I would now like to best conference over to our host Matteo Garcia.
Thank you Jason welcome.
Welcome everyone to Hei second quarter 2023 earnings call. Joining me today are Scott few Hei, President and CEO , Paul Ito Hei CFO .
Kelly Kimura, Hawaiian electric President and CEO .
Antero Nishi American savings Bank, President and CEO and other members of senior management.
Our earnings release, and our presentation for this call are available in the Investor Relations section of our website.
As a reminder, forward looking statements will be made on today's call factors.
Factors that could cause actual results to differ materially from expectations can be found in our presentation, our SEC filings and in the Investor relation relations section of our website.
Now Scott will begin with his remarks.
Hello, Hookah co greetings everyone. Thank.
Thank you for joining us today.
I will give an overview of our results.
See you on our businesses and the whole economy, and then turn the call over to Paul to further discuss our financial results and guidance.
Our combination of businesses continue to work well for us in the second quarter as it has through many different business cycles and economic environments.
Both operating companies delivered solid results in the quarter and Hei generated net income of $54 6 million and earnings per share of <unk> 50.
Compared to $52 5 million and 48 in the same quarter last year.
Despite the headwinds the bank sector has seen this year ESPN low risk community banking model and the utilities execution within our new performance based regulation or PBR framework.
Both contributed to our earnings this quarter.
Our utility grew net income to $45 $3 million and although there were elevated operations and maintenance expenses during the quarter.
We expect this to moderate in the second half of the year with full year expenses expected to be within annual revenue adjustment or <unk> allowed levels.
The utility has executed well on its capital plan this year in <unk>.
During the reliability and resilience of our system as we continue to aggressively pursue our clean energy transition.
The PBR framework continues to work well for us.
And we've been pleased with the improved visibility and predictability the framework provides.
Our bank grew net income to $22 million this quarter, despite industry wide funding cost pressures impacting banking sector profitability.
<unk> net interest margin compression in the quarter was relatively small compared to peers and are primarily insured and mostly retail deposit base remains stable.
Credit quality remains excellent supported by the continued stability of Hawaii's economy.
Overall, our bank remains very well positioned to continue delivering value to our enterprise.
I'm proud to say that ESP was recently named to Forbes America's Best in State Banks list, the only bank in Hawaii to receive this prestigious recognition this year.
In addition, we recently received credit ratings upgrades at both the utility and Hei from Fitch.
The upgrades were based on our utilities more predictable regulatory construct under PBR.
Management's ability to manage near term renewable targets and the bank's role as a low risk well run institution, providing stable dividends overtime.
Fitch also reaffirmed espies triple B rating with an outlook of stable.
While <unk> has been successful in maintaining deposit levels, we've seen a continuing shift to higher cost funding sources that is expected to persist for the remainder of the year.
Last quarter, we mentioned that we'd revisit bank guidance this quarter given some of the trends we thought we're likely to play out.
And as a result of continued funding cost pressures were revising guidance for the bank, which Paul will cover in more detail.
Turning to the utility we continue to advance our de carbonization initiatives, while improving reliability resilience and affordability for our customers.
Affordability has improved significantly since last year with the average residential customer bill on Oahu down 17% from last year's peak in September .
In late May we filed our final integrated grid planning or AGP, which proposes a clear path forward to meeting our state's clean energy goals.
While prioritizing reliability and affordability.
The proposed plan would require a significant investment in our transmission and distribution systems as well as new firm and variable renewable generation.
Our <unk> is the result of industry, leading planning and analysis for renewables powered and highly distributed energy reliant grid.
The plan is the culmination of a robust stakeholder engagement effort over five years.
<unk> includes a stakeholder driven governance structure focused on technical market and social aspects.
Our IGT is crucial to achieving our state's clean energy goals of net zero carbon emissions and 100% renewables by 2045.
The utility is on track with milestones for the stage three renewable energy request for proposal or RFP for.
The Oahu, Hawaii Island, and variable generation portion of Maui Rfps. The utility is currently evaluating best and final offers from the selected priority list and we will announce the selection of the final Award group in late October .
Proposals for the firm generation portion of the Maui RFP are due on August 17 2023.
The utility is bidding into the RFP consistent with the reliability requirements under the competitive bid framework.
The utility has submitted its best and final offer to provide firm renewable generation by Repowering, The White house power plant on Oahu.
The proposed project would replace six aging fossil fuel powered steam generators with smaller more efficient and fuel flexible units.
The proposed new units can provide firm renewable generation to backup the expanding portfolio of variable resources on Oahu grid.
The project has advanced to the selected priority list.
My last highlight is that we're ahead of schedule on our system wide smart meter deployment.
We now have 285000 smart meters deployed serving about 60% of our customers.
Advanced meters provide data and tools that help us operate our grid more efficiently reliably and affordably.
They will help us get distributed energy resources or <unk>.
<unk> connected to our system faster.
Contribute to our efforts to achieve the <unk> interconnection performance incentive mechanism with him.
And enable time of use rates, which are currently in a pilot phase and will further contribute to customer affordability.
Turning to the bank on slide four.
ESB continues to be well positioned compared to peers. Despite the headwinds the sector has seen this year.
We're performing well in the local banking market characterized by stability and customer loyalty.
Our depositor base remains strong and stable and 86% of deposits are FDIC insured or fully collateralized.
Total deposits at the end of the second quarter were essentially flat compared to deposits at year end down a modest eight basis points.
ESB remains a consistent contributor to earnings and cash flow and during the quarter paid hei $11 million of dividends.
We continue to see positive trends in credit quality evidence of the stability of our economy and financial health of our borrowers.
Our high quality loan book, most of which is Hawaii real estate secured.
<unk>, a continuation of low delinquency rates and net charge offs this quarter.
<unk> capital position remains very strong with excess liquidity of approximately three times the amount of uninsured or uncollateralized deposits.
Turning to slide five key indicators continue to point to a healthy Hawaii economy.
The University of Hawaii, Economic Research organization, which provides regular forecasts of our state's economy is projecting growth in Hawaii in 2023, driven by continued strength in tourism, despite the delayed Japanese market recovery and strong public sector construction spending.
Hawaii's labor market has continued to strengthen throughout the year.
Our state's unemployment rate was 3.0% in June an improvement from three 1% in may and lower than the national average of three 6%.
Visitor arrivals have been hovering near pre pandemic levels throughout 2023.
In June over 889000 visitors arrived in Hawaii, an increase of five 5% from last year.
And reaching 94% of June 2019 levels.
International arrivals were up over 60% compared to June of last year and have nearly doubled year to date.
Visitor spending remains robust and year to date June expenditures were up 17% compared to last year.
Hawaii supply constrained housing market continues to see prices near record levels.
And while sales volumes have been lower this year given high mortgage rates Oahu median prices are still over $1 million.
Or is housing market is a key focus of our state policymakers and in July Governor Green signed an emergency proclamation on housing.
The proclamation aims to streamline the development process and empower developers and stakeholders to contribute to the creation of more housing opportunities across our state.
I'll now hand, the call over to Paul to further discuss our financial results and outlook.
Scott I'll start with our results for the quarter on slide six.
<unk> net income of 54.
And EPS of <unk> 50.
We're up from $52 5 million and EPS of <unk> 48 last year.
The utility grew net income despite elevated O&M expenses during the quarter, some of which were due to timing.
The bank grew net income amid a challenging interest rate environment that has pressured net interest margins across the industry.
Our consolidated last 12 months ROE remains healthy at 10, 2%.
Which is down slightly from 10, 4% last year due primarily to higher last 12 months earnings in the prior year due to a gain on sale recognized in the first quarter of 2022.
Utility ROE remained stable at eight 2% and bank ROE on an annualized basis was up 400 basis points compared to the same quarter last year.
On slide seven we show a major variances across the enterprise compared to the second quarter of last year.
Higher bank net income was primarily due to higher noninterest income from higher bank owned life insurance income.
On sale of real estate and higher fee income.
Well as a lower provision for credit losses, and higher net interest income primarily due to higher interest and fees on loans.
These impacts were partially offset by higher noninterest expense, primarily due to higher compensation and benefits expenses and FDIC insurance premiums.
On the utility side, we saw higher <unk> revenues higher fossil fuel cost risk sharing revenues higher.
Higher AFDC from increased Capex and higher revenues from a onetime true up of billable costs related to our pole infrastructure.
These are partially offset by higher O&M, primarily due to higher transmission and distribution expenses.
Outside services costs increased labor and employee benefit costs higher facility expenses and higher legal and other fees associated with environmental matters.
Partially offset by fewer overhauls performed in the quarter.
The higher holding company and other segment net loss was primarily due to higher interest expense.
Turning to slide eight year to date utility Capex was $225 million about $100 million higher than at this same time last year.
The utility is on track with the execution of their capital plan with steps taken to mitigate supply chain challenges, including advanced planning for the availability of labor and material resources.
For the full year, we expect to be in the top half of our 370 million to $410 million Capex guidance range.
On slide nine we show utility earnings drivers for the remainder of the year.
The utility saw elevated O&M expenses in the second quarter. However, there were approximately $2 million of elevated expenses due to timing and we expect O&M to moderate in the second half of the year.
The timing related expenses included vegetation management and generating station maintenance work that was accelerated into the first half of the year in preparation for hurricane season in the fall generation peak.
Efficient execution will remain a key area of focus for us for the remainder of the year and we still expect to manage O&M increases within the 368% inflationary adjustment allowed under the AIA.
Performance incentive mechanisms Rpms will also be a key driver of our full year earnings.
We still expect total net debt of approximately $4 million.
Although a different mix of pins are contributing to this total than originally forecast.
Fuel prices have decreased since the beginning of the year and during the second quarter, we recognized approximately $1 million and net income from fuel cost risk sharing mechanism due to our fuel costs being lower than the benchmark, which was set based on our January she'll costs.
Lower fuel prices have also contributed to lower customer bills across our items.
We are also expecting a higher interconnection approval award as we improve interconnection times for our customers and increase renewable generation.
We no longer expect to recognize any rewards from our PSA Tim This year as we've seen delays in one of our third party owned generators on Hawaii Island, and ramping up to full capacity after undergoing repair work as well as delays in ramping up at two other renewable projects.
However, we expect the higher fuel cost risk sharing reward.
Rewards from our interconnection approvals, Tim to offset the <unk> 10 reduction.
Turning to the bank.
Asp's loyal and long tenured deposit base, along with our conservative approach to lending underpin our low risk community banking business model.
This model has continued to serve us well this year as we navigated challenges arising from the bank failures in sector liquidity fears that occurred earlier this year.
And as we've worked to manage the industry wide funding cost pressures caused by the rapid interest rate increases over the last year and a half.
As a reminder, the vast majority of our deposits are 85% are from our retail customers.
Nearly 50% of our retail customers have been with us for 10 years or longer.
Also have strong commercial customer relationships with nearly 40% of our commercial accounts, having a tenure of more than 10 years.
The long term nature of our customer base contributes to our funding stability.
86% of the Asp's deposits were FDIC insured or collateralized as of the end of the second quarter up slightly from 85% at the end of the first quarter.
79% of deposits were FDIC insured equivalent to last quarter.
This is a very high level of deposit security for our customers and contributes to deposit stability.
Total deposits as of quarter end of $8 2 billion were roughly flat compared to December 31 2022.
Time deposits were up while core deposits saw a modest decline of two 8% as we've continued to see a slight uptick in customer spending due to the inflationary environment we.
We have not seen any unusual customer behavior as a result of the mainland bank issues experienced earlier this year.
However, in addition to higher customer spending we continue to see some deposit are seeking higher yielding alternatives.
We will continue to mitigate these pressures through cost efficiencies as well as prioritizing bringing in new deposits.
On the asset side of the balance sheet, the very high quality of <unk> loan book is a result of our conservative approach to lending.
This has served the bank well as we've started to see a focus on the quality of commercial real estate credits for mainland banks.
The quality of our CRE loan portfolio and the quality of our broader loan book remained very strong.
Delinquencies net charge offs and non accruals on percentages are at low levels.
The vast majority of our loan book is backed by real estate, all located within Hawaii, where real estate values are supported by the real estate supply constrained nature of our island markets.
Turning to slide 11.
Although higher interest rates have continued to benefit our yield on earning assets, which was up seven basis points in the second quarter, the higher rates and a shift in funding mix have increased funding costs, which are similarly, pressuring net interest margins industry wide.
Our cost of funds still remains relatively low compared to similarly sized peers, but was up 17 basis points to 83 basis points in the second quarter.
The increase was due to higher rates and a shift in funding mix to include higher amounts of certificates of deposits and wholesale borrowings as you can see at the bottom left of the slide.
During the quarter, our net interest margin was down 10 basis points to 275% our.
Our NIM compression compares favorably with similarly sized peers and places us in the top quartile of the Keryx constituents.
Turning to drivers of bank performance for the rest of the year on slide 12.
Due to the shift in funding mix and higher funding costs, we've seen across the industry. We are expecting net interest.
Interest margin to be lower for the full year than previously anticipated.
We are expecting relative stability compared to our peers and we've seen this play out so far this year.
Our net interest margin guidance, which I'll cover in more detail on the next slide reflects a continued composition shift in our funding mix.
Further fed fund rate increases this year are expected to be immaterial to our guidance due to our balance sheet. The interest sensitive neutral and the limited period left in 2023 that a rate increase would affect.
Our credit outlook remains very positive and we now expect a lower provision for credit losses than previously anticipated.
We're seeing strong credit quality with low net charge offs and delinquencies.
Outlook and our expectations of continued stability in the Hawaii economy have contributed to our expectations of a lower provision now in the zero to $6 million range for the year.
Expense management remains a key focus for ESP as we continue to make critical investments in digital transformation, while prudently controlling costs.
Turning to slide 13, I'll provide a recap of our updated guidance expectations for the remainder of the year.
We are reaffirming our utility guidance of $1 75 to $1.85 per share.
Achieving performance incentive mechanism rewards and controlling O&M expenses remain key areas of focus for management.
As mentioned, we expect other terms such as fuel cost risk sharing and interconnection approval to offset our lower expectations for our PSA rewards.
The utility's liquidity remains strong having proactively addressed our near term financing needs early in the year.
Okay.
Turning to the bank's outlook for the remainder of the year.
Higher short term interest rates and a challenging deposit environment continue to create margin pressures across the sector.
Although our net interest margin has fared well relative to peers in the current environment. We now expect net interest margin for the year to be two 7% to two 8% versus our previous expectation of $2 eight to two 9%.
Given continuing stable credit trends, we are forecasting a lower provision for credit losses at zero to $6 million versus zero to $10 million previously.
Still assume low single digit loan growth for the year.
Last quarter, we indicated that we would revisit bank EPS guidance this quarter, given uncertainty and macro trends.
Due to continued funding cost pressures and the resulting impact on net interest margin.
We now expect bank EPS to be 62 to 66.
Down from our previous expectation of 75 to 85.
Our guidance assumes a continued gradual funding mix shift for the balance of the year.
The bank has managed noninterest expense increases within our guidance this year and we expect this to continue as we proceed through the second half of the year.
Due to the lower than anticipated Pacific correct performance, we expect holding company and other segment net losses of 37 to.
<unk> 39 per share compared to our previous expectation of 34 to 36 per share.
We still do not anticipate any equity issuances for 2023.
Based on the combined forecast for the segments consolidated EPS is expected to be in the range of $2 and $2 10.
Down from $2 15 to $2 35 previously.
Although our updated forecast reflects some near term bank headwinds, resulting from an unusually rapid rise in interest rates and its related impacts the bank performed well overall in the second quarter.
I'll now turn it back over to Scott, who will provide closing remarks.
Mahal upon mahalo to all of you for joining us today in summary, Hei delivered solid performance in the second quarter growing net income at both the utility and bank. Despite the macro challenges that face the broader banking sector.
The utility is executing well under performance based regulation and we continue to make progress on our clean energy transition.
Asp's Conservative business model with our mostly retail and largely insured deposit base has proven its stability through different business and interest rate cycles.
<unk> contributing earnings and dividends that reduce hei's need to issue equity.
Our management team is laser focused on execution and efficiency and our combination of businesses continues to serve hei shareholders well.
With that let's open up the call for questions.
If you'd like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please press star followed by two again to ask a question. It is star one on your telephone keypad.
Our first question is from Julien Dumoulin Smith with Bank of America. Your line is now open.
Hey, good afternoon. Thanks for the time I appreciate it.
Hey, Julien.
You hear me, Okay, Hey, absolutely we can hey, just.
Wonderful.
Just picking up on the on the bank side here real quickly here I mean, obviously southern revisions here that you just mentioned in the remarks.
Do you think about growth here year over year into 'twenty for what is it going to be the puts and takes do you think that.
We've sort of re baseline at this point or how do you think about the moving pieces here within the guidance.
<unk> sort of incremental trends from here as you annualize at this level.
Yes, Julian Thanks for the question so in terms of.
Year over year growth I think.
We're starting our planning process and we won't have sort of the outlook for 'twenty four.
Until later in the year and then of course, we'll give our guidance in the first quarter of next year, but the factors that would drive what happens next year or some of the things that we're seeing now right. So in terms of interest rates.
Were they head from here and when the fed starts to reduce those rates loan growth of course would be a factor for next year as well.
As we messaged for this for the balance of the year, we do expect loan growth to be in.
Mid single digits low single digits.
As higher interest rates have sort of sort of.
To reduce.
Buyer interest in taking out loans.
And of course on that.
On the mortgage side, it's also.
Has led to lower activity.
The other thing is deposit mix shift is an important factor.
In terms of driving our margin as you as we've message right for the balance of this year, we are seeing sort of a gradual mix shift continuing and we've built that into our guidance.
To the extent.
Those.
Those.
Trends change that obviously will affect our earnings so I would say and then of course noninterest expenses is the other factor for drivers and over the long term, we expect to manage our expenses.
Low to mid single digits. So those are various factors that would drive next year, but.
In terms of talking about this year.
I think we've given our guidance so we feel like.
Although we can't call any certain we can't we're not seeing in terms of the trends.
In terms of deposit growth.
I'm sorry deposit.
Mix.
We built that into our $2 70 to 280.
NIM guidance there.
Julian This is Chuck.
Yes, I was just going to add to what Paul said.
Of course, I'm thinking about this from an enterprise wide perspective.
And.
Of course, the whole banking sector. This year has been under some has seen some challenges.
As we said in some of our remarks, we expect to see through the remainder of the year for the bank is.
Impacts those challenges moderating.
Performance, starting to get better and then of course the risk.
Enterprise the utility, we'll continue to see pretty stable growth.
As we projected there. So overall working through 2023, I think the utility and the bank combination continues to serve it served us pretty well.
Sort of points to the value of having the combination.
Right.
Youre comfortable that you would annualize still at this level of the reduced NIM here the two seven to two eight.
I know that obviously, that's what you're incrementally brought down here quarter over quarter, but I just want to get some degree of confidence in that new level here.
Yes.
Yes, we are yes, Julian we're confident that's the that's the range that we're putting out there that takes into two effect.
It takes into account what we see in terms of the market here in Hawaii and.
And the trends.
Alright fair enough and then I wanted to come back to the <unk>.
Procurement.
Avenues I know that there's two separate avenues there.
And you also alluded to in your comment that there are some wires investments potentially as well.
Can you give us a sense of the scale of opportunity.
<unk> represented here I mean, obviously, there's megawatts released here as well but.
As you think about especially the T&D side of that right, whether whether or not you're awarded some of these projects. How do you think about that that wires side in both.
Maui and Oahu, if you could speak to it and.
And presumably those announcements will be made simultaneously for the wires and the generation in late October .
Well just to just to clarify a bit Julien.
The announcement will be for the final award group for the generation I mean this is a.
A renewable generation RFP.
The investment the added investment down the road in the transmission and distribution system.
Would come about partly to support these renew renewable generation projects that would be brought online.
But then also just continued investment in modernization.
As we see more distributed energy resources and the Lake.
I think in our I referenced our <unk> plan.
And Thats, where I made reference to this additional T&D investment most of that would probably come in post 2025, because that would be aligned with the timing of a lot of these new resources coming online.
Got it any indications on the scale I mean, obviously, you said you'll be in the top half year of the overall Capex range.
Our range for the current year and maybe call. It for 10, but any sense of what that could do as you think about scaling into that post 'twenty five periods and then.
Obviously difficult to say necessarily early on in the RFP process.
But any commentary about what that kind of a range of opportunities that could emerge.
So the.
So Julien in terms of the IGT plan, we do have the final draft of filed and in that plan. We do put out some forecast of what that investment could be and obviously a lot could change until those plans are finalized but in terms of building out the renewable energies on.
Infrastructure it is a pretty significant investment.
I think we do have post 2025 as Scott mentioned.
Some numbers in the IGT.
There is a portion of about $60 million and then there's a larger portion that's.
Very very significant over $1 billion, but that's over a long period of time.
So those are the.
Sort of the numbers again very preliminary until we.
We have these plans.
Developed in more detail.
That's that's the guidance that we can give it its a long term investment opportunity for us going forward and I'll just add to reenter. This is Shelly Kimura I'll just add that those numbers that Paul provided of 60 million and over $1 billion that would happen after 2025 through 2035 and on the <unk>.
Generation side, because we're in a competitive procurement process right now.
We're not going to be discussing any more details on the scale or amount of bids.
Bids that we either already put in for the Oahu RFP or the bid that we will be putting in for the Maui RFP.
Yeah, no I understand its difficult to speak to you exactly today.
Fair to assume that the next quarter, we'll get a formal update post the awards here on what that would translate to in dollars and timing.
Yes, so for the Oahu.
<unk> RFP the results will come out in October so we would be able to talk about that at that time.
For the Maui RFP, we won't have the results at that point.
Thank you alright, Thank you guys.
Our next question is from Paul Patterson with Glen Rock Associates. Your line is now open.
Hey, good morning.
Hey, Paul can you hear me all right.
So just.
A couple of items on the bank.
It sounds to me that if I heard you correctly I apologize, but isn't it.
You guys are seeing more competition from <unk>.
Customers looking for higher interest rates.
Than you were previously in the last quarter is that correct.
No Paul I think what we're seeing is.
Compared to our previous forecast. So obviously the interest rate forecast is higher than we had previously anticipated. So that's one driver.
We are seeing a mix shift.
And we actually did a little bit or we dug down insurance.
In terms of deposit deposit changes and what we're seeing there for the first half of the year and what we saw was probably a majority.
What we're seeing is a lot more deposits coming in but also a lot more deposits going out. So there is a net net outflow related to consumer spending so in other words.
Depositors' spending more on sort of daily living.
Expenses because of the higher inflationary environment now.
We are seeing some.
Migration to higher yielding alternatives.
And in the data and we expect that to continue if the rate environment stays elevated.
But in terms of your question on competition.
Think in the local Hawaii banking market.
What we're seeing as all banks are.
Competing on Cds and as we've mentioned before right. This is new money that in.
In order to take advantage of the higher rates it requires a certain level of new money coming into the bank and so that's where we are seeing a.
A little bit more competition.
Yes, and Paul the other thing I'd say is that I don't think this was unexpected given the higher interest rate environment right. I mean, all the banks are competing we are starting to see a little bit of shift from core deposits to the time based Cds and Thats I think that was anticipated.
Our overall total cost of funds still remains very attractive compared to our peers.
Okay Paul.
So you can more clearly I guess, what I was talking about competition from all sources.
Redirect to online banking what have you.
Not just the the Hawaiian market.
And I guess, what I'm wondering I guess in this context is I guess back to Julians question.
Net interest margin I'm wondering whether or not there's a risk of further deterioration.
Given the interest rate environment, and just the rollover as we go into quarter after quarter going into 2024, if you follow what I'm, saying.
Yeah, Paul I'm going to ask answer initially our bank president to comment a little bit on that.
I think in general, though what we're starting to see is a moderation of.
The impacts on NIM, but maybe you can expand yes.
Yes, I think Paul to answer your initial question about are we seeing increased competition I think competition has been there and it hasn't changed quarter over quarter and we have been quite successful in the second quarter with some of our CD campaigns.
<unk> had great success in bringing on new retail deposit money some existing customers from some from new customers as well as being able to expand our commercial deposit base as well so.
We're feeling that.
<unk> NAND is appropriate and tracking with what we're seeing what we've seen in the first six months as well.
Our preliminary thing.
The second half as well.
Right.
What Julian was asking about I believe.
Was the annualized rate and I think he was suggesting for the annualized rate starting now.
And the new net interest margin and I guess to be clear about this.
How do you see the net interest margin for the next 12 months I guess is what I'm, saying.
Well for the next six months how about that.
Would it just be the the <unk>.
Average it out we could be reverse engineered I guess basically looking at what you guys had four months ago.
And what it is now or how.
How should we think about that.
Yes.
The the.
The NIM guidance for the full 2023, and we're not really able to comment as to 2024.
The cost of funds is.
Creating some.
Some pressure on the NIM and we're just managing that.
Being very surgical in how we apply pricing as well as as we originate new loans, how we're structuring and how they're pricing loans. So that's all being.
Very carefully manage.
And Paul I think I think.
Yeah.
I'm trying to be clear on my answer here. So the $2 70 to $2 80 range is for the full year 2023, alright.
Our Q1 was 285 Q2 was.
275.
And as we project then throughout the remainder of the year, that's where we are estimating the full $2 70 to $2 80.
That is our range that's our that's our we're fairly confident in that.
Okay I appreciate it thanks, so much.
Our next question instrument, Jonathan Reeder with Wells Fargo. Your line is now open.
Hey.
Guys hear me okay.
Yes, Hi, Jonathan for Jonathan.
How are you guys.
Good.
I guess I might as well continue with our with the bank question, but I guess for us utility dedicated folks like what can you do to limit or even eliminate the higher wholesale funding Mike. It seems like that's something that's more controllable on your end to some degree.
Yes, yes.
Yes, Jonathan in terms of the wholesale funding.
What drives whether we can pay that down is really deposit trends our deposit growth.
In this current environment, we're seeing deposits relatively flat.
And so being able to pay down debt wholesale fundings were not expecting that for the balance of the year. The other thing that drives that is sort of pay down of the investment portfolio and our and our loan portfolio and the cash flow from that.
But the other offsetting factors loan growth rate. So we have to sort of balance all of those three things in terms of loan growth deposit growth and then determine.
Is there excess cash flow and if there is excess cash flow, we would pay down our highest cost funding sources first.
But specific to wholesale funding, we're not expecting a significant.
We're not expecting to pay debt pay that higher cost funding down any meaningful amount.
For this year.
Okay. So I mean in your opinion, it's still worth having I guess that wholesale funding balance out there.
If that.
In order to I guess grow.
One book still like that that's a tradeoff that still more of that versus just saying.
Can you keep the loans flat versus low low single digit growth.
Yes, yes, I think I mean, yes it.
Just given the current interest rate environment that we're in.
The fact that.
Loans are pricing are being issued at higher and higher rates, but our funding is all set at a higher rate.
Got it.
It is a little bit not accretive to NIM, but accretive to NII.
Yeah and the other thing Jonathan is we are being very careful in terms of the loans that we're issuing.
We recognize that there is still a need by our customers for four.
For funding.
But at the same time, we're being fairly selective in the loan book in terms of how we're growing it because.
Again balancing all of these different factors.
Sure, Okay that makes sense.
I kind of missed it but what was driving the revision and the Holdco drag was that just higher interest expense at parent.
Okay.
No. This was related to Pacific current we're expecting a little bit lower performance. This year at one of their projects. There were some equipment issues that continued resulting in.
The plant being down for a little bit of time.
That's largely been resolved so but in effect for the full year, we're expecting a little bit lower or higher net loss related to that.
Okay. So that should hopefully be something that I guess bounces back in 2000 and for not having that outage.
Yes, correct.
Okay, and then last from me.
Following up on Julians question on the IGT is that filing and is that something that like the commission actually approves and like sets a definitive roadmap for you to follow an approval process.
To move forward with the Capex and then if so whats the HBU six timeline for approving that IGT.
This is shelly.
The ICP was filed or waiting for PUC approval. Our next steps are to file the RFP that builds off of the IGT. We plan to file a draft in September and our hope is that we can issue. The final RFP in March of 2024 with respect to your question about.
The T&D investments longer term that would require a separate filing to request approval for that kind of program, but it would be based in the broader master plan.
ATP.
Okay. So the commission does give their blessing to the IGD, but you.
You just have these other ways of actually.
I guess definitively moving forward with projects and maybe selling costs.
Yeah, that's right and I'd also like to add that just a reminder, under PBR we have.
Our.
Cost recovery. So there is some level of Capex, that's already built into the PBR and we get the inflationary increases each year.
Right right, Okay, great. Thanks for taking my questions today.
Youre welcome.
Our next question is from <unk> Khan with various fund your line is now open.
Hi, how are you doing.
Can I just ask a quick question so.
Bank earnings.
Expected to be down 14th.
From quarter one guidance.
Can you break it down how much is it named related how much of it is Roe.
What are the factors could you could you help us to identify breakdown the dropping.
Drop in guidance, what are the factors, which lead to the 14th.
Yes, really the driver is essentially the NIM right. So because of the mix shift and higher interest rate environment that significantly increased our interest expense that we were previously forecasting.
And so that resulted in a large compression in our NII.
Again.
Given our first quarter forecast, we weren't expecting as much of a mix shift and we were at.
Expecting deposits total deposits to be flat to modestly up whereas now our guidance incorporates.
Continued mix shift for the balance of the year.
Yes.
I'd like to add too so.
Banks are all experiencing that's similar in our cost of funding pressure and just want to highlight though with the change in our NIM guidance, we've been managing it while R&M compression quarter over quarter with just 10 basis.
Average for care, so it's more like 20 or so.
I think we're trying to be pretty upfront and what we think the impact would be on cost of funds for the remainder of the year, but just know that we're managing that very closely with our deposit pricing.
Managing that shift in deposits.
So can I can I, just assume that like if I'm right. The NIM went down by about 10 basis points assumptions between the two quarters.
So the 10 basis points.
Is equivalent to 14.
Right.
<unk>.
Yes, so in terms of.
So I am thinking about total.
<unk> cost rates they are different.
Times banks talk talk about their core funding costs.
We generally refer to our total funding costs.
Our total funding costs.
For the quarter.
Was 17 basis point change.
In terms of the full year, we haven't.
I guess given the guidance of what that change will be but I think you can maybe take it from our NIM guidance in the first quarter versus our our new guidance, so essentially moving down from.
280 to 290 down to $2 70 to $2 80.
But.
I mean that would be the.
In terms of the drivers is really really the NIM. So if your question is.
Whether you can.
Assumed.
I mean, I think you have to what you have to do is look at our earning assets and then take the gym to change in the NIM and that would be sort of what you could expect.
Okay.
Okay fair enough.
Yeah, I'm just I'm just trying to I'm just trying to see if there is further NIM pressure what would be the impact on.
No earnings and weather.
The 10 basis points.
14 is the God.
Good good.
Benchmark to use for.
For the.
Wanted to go upward down.
May I.
Yeah.
Okay.
Again I. Thank you.
Go ahead.
Correct.
Okay.
Go ahead Sir.
And my final question is no.
I see our cash flow slides have not changed.
So can I ask you, where that's a weird, losing about 14 or 15 million then.
You know earnings after tax.
Where is that.
How is that.
Being absorbed.
Cash flow is exactly the same as in quarter one.
What is coming into replace that lost earnings in your cash flow projections for Goodyear.
Yes, sure I assume youre talking about.
The cash flow dividends from the bank to.
The holding company.
Wade.
The way, we the way we size the dividend to the holding company is based on the bank's tier one leverage ratio.
And the tier one leverage ratio is.
Is affected by earnings kind of extent, but also balance sheet size growth or contraction of the balance sheet also has an impact.
So based on our outlook, even though earnings have come down, but based on our outlook for tier one leverage were still able to manage the dividend up.
That we set earlier in the year.
Okay.
Okay.
Can I just follow up to that.
What is the maximum that you can dividend out of the bank to manage that there. One what are what is can I just have that information what is a what a bad bet you. All what is the maximum dividend that you can get out from the bank.
So we manage our tier one leverage ratio to be between 7.5% to 8%.
In terms of the maximum we could dividend I don't have that exact number in front of me I think in our 10-K, we sort of touch on the amount of dividends that our subsidiaries are restricted from not able to be dividend up to the holding company.
But at the end of the quarter, we were at 779% for our tier one leverage ratio.
Okay, Okay, and you can go down to seven and a half.
The range was.
And then they'll have to correct am I right.
Technically, but I think we like to manage our tier one leverage ratio conservatively, so we wouldn't necessarily.
Make a decision to dividend the maximum amount to get down to seven 5%.
But we generally try to stay within that seven 5% to 8% range.
Okay. Okay. Thank you so much.
There are no more questions. So I'll pass the call back over to Scott <unk> for closing remarks.
Yeah.
So I just want to thank everybody again for joining us today.
We look forward to another quarter of solid results supported by our stability.
<unk> and reliable performance that our companies. So thank you everybody.
That concludes.
The conference call. Thank you for your participation you may now disconnect your lines.
So thank you everybody.
Yes.