Good day, and welcome to the Second Quarter 2020 Hawaiian Electric Industries Inc.’s Earnings Conference call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Julie Smolinski, Director of Investor Relations. Please go ahead.

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

Thanks, Julie, and Aloha to everyone. Thank you very much for joining us today, and we hope that you are safe and well and your families are as well. I am very proud of the performance of our company and our employees during this COVID-19 pandemic. While all of us face uncertainties regarding the trajectory of the virus and its implications for our pace of economic recovery, what is clear is the strength and resilience of our businesses, the dedication of our employees and our commitment to supporting our customers and our economy throughout this period. On last quarter’s call, we talked about the strengths that would help our company navigate through COVID-19. Our long history of providing essential services for most of our state; our strong liquidity across our enterprise; the stabilizing effect of decoupling and other regulatory mechanisms at our utility; and our bank’s conservative approach to risk, low-risk loan portfolio, low-cost core deposit base and strong capital position. This strong foundation, coupled with other factors that benefited earnings, enabled us to deliver solid financial results for the second quarter, $0.45 per share compared to $0.39 per share in the same period last year, while achieving important progress on our long-term goals. I’ll start with an update on the virus and economic conditions in Hawaii before turning to an update on our companies. Then Greg will review our financial results and outlook. We’re fortunate that Hawaii continues to have the nation’s lowest COVID-19 mortality rate. While cases per capita in Hawaii have generally been lower than other states throughout the pandemic, we have seen an uptick in cases recently, which our state is working to address. We’re seeing the effects of reopening of our local economy and unprecedented federal stimulus, which is estimated to have delivered approximately $7.7…

Thank you, Connie. Turning to our second quarter results on Slide 7. Consolidated earnings per share were $0.45 versus $0.39 in the same quarter last year. At the utility, timing and management of expenses and the PUC’s grant of deferral treatment for COVID-19 related expenses had a positive impact. At the bank, strong mortgage production and a gain on sale of securities helped offset tighter lending margins and higher provision. At the holding company, while costs were well in line with plan, we did see a slight increase due to an acceleration, an increase in our charitable giving during the quarter to support our local community organizations and those impacted by COVID. Consolidated 12-month ROE remains healthy at 9.4%. Utility ROE increased 10 basis points versus the same time last year to 7.9%. Bank ROE, which we look at on an annualized rather than a trailing 12-month basis, was 8% for the quarter, down from last year due to economic impacts of COVID-19. Turning to the next slide. Utility earnings were $42.3 million compared to $32.6 million in the same quarter last year, reflecting, in part, savings due to process improvements and targeted cost reductions. The most significant drivers of the variance were $7 million lower operations and maintenance expenses, primarily due to fewer generating unit overhauls, less generating station maintenance work associated with overhauls, the reclassification of COVID-19-related bad debt expense from the first quarter of 2020 to a regulatory asset as a result of the PUC approval to defer these expenses and lower labor costs due to lower staffing levels and reduced over time. The lower generation overhauls and station maintenance work represented approximately $4 million of the $7 million O&M variance and are largely timing related as some of that work will be performed later this year…

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

Thank you. [Operator Instructions] The first question today comes from Jackie Bohlen with KBW. Please go ahead.

Good morning, everyone. I’ve had lots of questions today for you, Rich. I thought I’d start off with PPP. And just given the $3 million in expected loan fees, I mean it says it was $950,000 of that to date. And I think that information is very helpful. I just want to double check that, that implies...

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

Sorry, let me take off the headset. I’ll do remotely. A little better?

Yes.

Yes.

Okay. Great. Sorry about that. I just wanted to see the PPP fees. So the $3 million expected this year and the $950,000 realized in the second quarter, so just doing the math on that, that means you expect another $2 million to come through this year, right?

No. We’re a little higher than that. So that – the timing of those loans was mid-quarter, right? So you only had a partial quarter. If it’s just amortization, you’d expect to see about $3 million, $3.5 million in the second half. And then depending on the speed of forgiveness, we could get more.

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

Correct.

Okay. And what – do you have your total expected fees to receive from PPP loans?

So roughly 4% of our outstanding – of the loans we produce was our fee rate. So that would be close to 13.5 to 14.

Okay. And is that growth of FAS 91?

Yes. That’s the key.

Sorry, I cut you off. Go ahead.

Yes. No, that’s the fee amount that we’ll receive from the SBA.

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

No. None.

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

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

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

No, I think we need to decide how much mortgage production we want to sell versus put on book that can affect it. Mortgage production is pretty strong. Rates are pretty low. There’s always a trade-off of selling versus putting it in the portfolio. The mix of how that comes in, whether it’s – it would end up being salable production or not. And then I think there’s still activity that’s out there, and we just – we need to make sure our risk appetite is in line with the opportunities that are in the market. So there is some good volume that’s out there for projects that we think are worthwhile. And – but we’re – we got to triple check our assumptions now, right? It’s not a normal environment. But at the same time, we want to be constructive for economic activity here, right? So those are probably the biggest variables.

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

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

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

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

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

Okay. I understood. Thank you.

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

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

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

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

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

Okay. And then I guess next year, it’s going to be sort of opportunistic. Is that how we should sort of think about it? Or is this sort of the $3-sort-of-ish million, $3-ish million kind of number sort of?

Yes. That’s probably a normalized number in a year, you’d see a little bit of that.

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

We’ll get Tayne to...

As a percentage, sorry. I didn’t hear that. I apologize.

Yes. No, Tayne is going to answer.

Okay. I’m sorry.

Paul, this is Tayne. We’ve seen the amount of folks paying later increasing in the 30 to 60, 60 to 90 and greater than 90 days. It’s increased slightly. But for the most part, people have been paying their bills. I would say that the moratorium on disconnection for nonpayments has been extended through September 1. And proactively, we’ve gone out to reach out to our customers with those arrearages to work out payment plans.

Okay. Great. Well, thanks a lot and hanging there.

[Operator Instructions] The next question comes from Charles Fishman with Morningstar. Please go ahead.

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

Yes. Well, that’s for the roughly that 10 basis points of excess liquidity that we talked about, right? So because to your point, when we get the funds in and those moneys, those PPP moneys are deposited in the customers’ accounts. We don’t know how fast they’re going to spend them because this is uncharted territory. So we keep it very available, right? So if they’re going to spend it and a lot of them were targeted to spend initially, as you know, in the quarter in order to get forgiveness, the original guidance was spend it all by June 30, right? So we kept it available in cash like instruments so that on a moment’s notice, customers are spending it, the cash is there. So that we had the cost side, to your point, and no – very little income against them. So you dilute down the return on the overall book because you have a lot at near 0 net interest margin.

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

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

Yes. That helps. I – some I’m struggling with. Let me move to the utility just a little – go ahead.

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

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

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

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

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

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

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.