Hawaiian Electric Industries - Earnings Call - Q2 2020
August 6, 2020
Transcript
Speaker 0
Good day, and welcome to the Second Quarter twenty twenty Hawaiian Electric Industries, Inc. Earnings Conference Call. Participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Julie Similinski, Director of Investor Relations. Please go ahead.
Speaker 1
Thank you, Anita. Welcome everyone to Hawaiian Electric Industries' second quarter twenty twenty earnings call. Joining me today are Connie Lau, HEI President and CEO Greg Hazelton, HEI Executive Vice President and CFO Scott Sue, 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.
Speaker 2
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 this performance of our companies and our employees during this COVID-nineteen 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-nineteen.
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, $0.04 5 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-nineteen 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 $7,700,000,000 in funding to our state thus far. Hawaii's unemployment rate improved to 13.9% in June after peaking at 23.8% in April. At our utility, while sales were 11.6% below the same quarter last year, we've seen sales improve in some areas such as shopping centers and retail since opening of our local economy began. We've also seen areas that have maintained stability throughout the COVID period such as our federal government and military presence.
Residential real estate values have remained strong and are up from last year showing continued strength for the collateral that secures much of our bank's lending. A key question for Hawaii's economy is when Transpacific travel and tourism can resume. Hawaii currently plans to allow travelers with a negative COVID test to forego the mandatory fourteen day quarantine beginning September 1. Recognizing Hawaii's prudent management of COVID-nineteen, Japan announced Hawaii's addition to a list of 12 global destinations deemed safe for Japan residents to resume travel. This will help restart tourism, although it may take some time before we see tourism near pre COVID levels.
Of course, all of these plans are subject to the actual course of the virus and the effectiveness of mitigation. While tourism and federal stimulus developments will have a significant impact on the pace at which our economy rebounds, our state does have the ingredients for a solid recovery. We continue to benefit from a robust federal government presence here as host to the U. S. Indo Pacific Command from which The U.
S. Watches 52% of the world's surface and all component service commands. We also believe the unique environment and experience we offer here will continue to make our state a very attractive place for tourism. There is a new energy to economic diversification efforts here as well and our companies are actively supporting those efforts. Turning to our companies.
At our utility, solid regulatory foundations have served both the company and our customers well and enabled us to be a source of strength for our community during this unprecedented time. Our decoupled regulatory structure has provided accrued revenue stability despite reduced sales in the second quarter. On June 30, our commission approved our request to defer COVID related costs to be considered for potential recovery in a future proceeding. To help customers during this time, we extended our suspension of disconnections through September 1 and have offered a range of payment plans to help customers manage their bills. Working closely with customers is a key focus for us.
Ensuring our services are affordable is also a key focus now even more than ever. Customer bills are lower now than last quarter due to lower fuel costs and a reduction in the RBA component of the bill due to higher than projected electricity sales in 2019. A customer using 500 kilowatt hours of electricity in July paid 14% less for that energy than in March. We are also working to become a highly efficient utility. And as of June 30, we recorded $7,200,000 in a regulatory liability account related to ERP benefits, amounts that are to be returned to customers as a reduction in O and M expenses included in rates.
We've also secured significantly lower and fixed priced renewable energy plus storage contracts through our recent RFPs, which will help lower and stabilize customer bills once those come online. Last week, the PUC issued a final decision in the Hawaii Electric Light rate case. Results were consistent with the interim decision maintaining current effective rates. In recognition of financial challenges our customers face in this COVID period, in late May, we and filed a settlement with the PUC to hold base rates flat in Hawaiian Electric's 2020 Oahu rate case. You may recall that the PUC had commissioned a management audit as part of the rate case.
The audit report highlighted areas for improvement including several we had identified and were working to address. In response to the audit and as part of the settlement, we committed to ramp up to $25,000,000 in annual savings by year end 2022 to be delivered to customers beginning by 2023. We have proposed to deliver those savings to customers through PBR. An interim decision on the settlement is scheduled for October. In addition, we are no longer planning to file a Maui Electric 2021 rate case.
To offset the lack of a base rate increase and achieve our $25,000,000 by year end 2022 commitment, we're developing and have begun implementing plans to reduce costs, including through overtime reductions, better scheduling and coordination, managed reductions of our workforce and reducing lower priority work. And in the second quarter, we already began to see some of these savings. As we advance these important cost reductions, we, our commission and other stakeholders continue to ensure that the renewable and regulatory transition moves forward. There is great interest in our state in doing everything we can to make Hawaii's economic recovery a green and sustainable recovery. Performance based rate making or PBR continues on track for PUC decision this December, which we believe will lay out the core mechanisms and performance incentive mechanisms or PIMS.
A new step in the schedule has been added thereafter to enable development of tariffs to implement the new and changed mechanisms. The commission will determine when the new changes will be effective in 2021. We continue to aggressively advance efforts to help move our state towards 100% renewable energy These efforts will also help provide jobs and construction activity to help our state recover from the impacts of COVID-nineteen. This includes pursuing new sources of renewable energy through Hawaii's largest renewable procurement. In May, we announced the final selection of projects for our Stage two renewable energy RFP.
We're excited to have 14 projects, all solar plus storage or storage only from the original 16 selected moving forward through the contract negotiation and community engagement phase. If all are completed, they could add about four fifty megawatts of solar and about three gigawatt hours of storage to our city. Two of the projects are company self build storage projects on Maui and Hawaii Island. Stage one RFP projects also continue to advance. While some developers provided force majeure notices as a preventive measure given the possibility of COVID-nineteen interruptions, So far, all Stage one projects are still moving forward.
Last month, the Commission approved our application to rebuild the Puna Geothermal Venture or PGV transmission line. This will allow us to bring PGV back onto our system under the existing PPA while awaiting approval of our amended PPA. With land at a premium in Hawaii, we'll need to use both open land and as many rooftops as are available to reach our renewable energy goals. We're gathering information on parcels as small as one acre and rooftops of at least 3,200 square feet for future grid scale solar and wind projects and community solar projects. We also continue working to help reduce carbon emissions from the transportation sector.
To help accelerate this transition, we filed a pilot project for e bus make ready infrastructure. And just this week, Hawaiian Electric announced its commitment to convert its entire fleet of light duty vehicles across the islands, nearly 400 sedans, SUVs, small vans and light trucks to be electric by 02/1935, leading the state of Hawaii in electric vehicle fleets. Turning to our bank, in the second quarter, we stayed focused on doing the right things during this difficult time, ensuring employee and customer safety and well-being, supporting our customers, managing risk and controlling costs. We've ramped up sanitation efforts and the use of PPE at all of our locations and workspaces. And we've rolled out a new contactless card for all of our debit cardholders to keep them safe.
We've been able to help our customers manage economic uncertainty, offering fee suspensions and loan deferral and forbearance options and providing Paycheck Protection Program or PPP loans. Our team worked aggressively to secure and deploy PPP funding delivering $370,000,000 approximately 4,100 small businesses that represent roughly 40,000 jobs in our state. This accounted for the bulk of our loan growth in the quarter. At the bank, we have a front row seat to the effects of federal stimulus with federal stimulus checks leading to significant deposit growth, 24% on an annualized basis. This excess liquidity gives us added cushion during this COVID period, although it does pressure net interest margin.
The bank's net interest margin was also impacted by the lower interest rate environment and PPP loans. Our core focus has been prudently managing our risk. Our team has been working closely with commercial customers to understand their condition and ensure we provision at the right levels. And we're controlling costs despite additional COVID related expenses. We're also taking advantage of new opportunities that this period presents.
As an example, we've seen rapid customer adoption of self-service options such as online banking and ATMs. This allows us to accelerate our plans for optimizing our branch footprint. We've also started implementing our planned replacement of our ATM fleet with smart ATMs, which will be the newest in Hawaii and will give customers even more capabilities outside the branches. Now Greg will review our results for the quarter and our outlook.
Speaker 3
Greg? Thank you, Connie. Turning to our second quarter results on Slide seven. 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-nineteen related expenses had a positive impact.
At the bank, mortgage production and a gain on sale of securities helped offset tighter lending margins and higher provision. At the holding company, while costs were well in line with plan, we did see a slight increase due to an acceleration and increase in our charitable giving during the quarter to support our local community organizations and those impacted by COVID. Consolidated twelve months 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 twelve month basis was 8% for the quarter, down from last year due to economic impacts of COVID-nineteen.
Turning to the next slide. Utility earnings were $42,300,000 compared to $32,600,000 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 $7,000,000 lower operations and maintenance expenses primarily due to fewer generating unit overhauls, less generating station maintenance work associated with overhauls, the reclassification of COVID-nineteen related bad debt expense from the 2020 to a regulatory asset as a result of the PUC approval to defer these expenses and lower labor costs due to lower staffing levels and reduced overtime. The lower generation overhauls and station maintenance work represented approximately $4,000,000 of the $7,000,000 O and M variance and are largely timing related as some of that work will be performed later this year or next year. Earnings also reflected a $5,000,000 revenue increase from $4,000,000 higher RAM revenues and $1,000,000 for recovery of Westlock project and grid modernization projects under the MPIR mechanism.
1,000,000 higher net income due to an unfavorable adjustment in 2019 related to reliability performance incentives and $1,000,000 lower interest expense due to debt refinancings at lower rates. These items were slightly offset by the following after tax items, dollars 1,000,000 lower allowance for funds used during construction as there were fewer long duration projects in construction work in progress. 1,000,000 higher cost savings from ERP system implementation to be returned to customers, and $1,000,000 higher depreciation due to increasing investments to integrate more renewable energy, improve customer reliability and strengthen system efficiency. Turning to the drivers of the utility's financial performance for the remainder of the year. The Public Utility Commission issued its final decision for Hawaii Island Utility confirming Hawaii Electric's 9.5% allowed ROE and 58% equity capitalization with no change to base rates.
Separately, if the PUC approves our settlement with the consumer advocate in the Hawaiian Electric rate case for Oahu, we should see a similar outcome. No increase in base rates with 9.5% allowed ROE and 58% equity capitalization. The utility's multi year strategy for greater operational efficiency and cost reductions should help offset the lack of base rate increases. The PUC order approving deferral of COVID related expenses covers expenses incurred from March 17 to year end. In the second quarter, we reclassified a pretax amount of $2,500,000 in bad debt expense and incurred in the first quarter to a regulatory asset.
COVID related costs have been $6,500,000 to date. A separate application will be filed to request recovery of such costs in the future. Although sales were down 11.6% versus the second quarter of last year due revenues, to we were not significantly impacted. Substantial decreases in fuel prices have been positive for both the utility and customers. Fuel prices were down close to 30% in the quarter and the average customer bill declined by over $20 per month monthly since the pandemic began.
The utility may qualify for rewards this year under the fuel cost risk sharing mechanism as well. On Slide 10, we continue to forecast approximately $360,000,000 of CapEx during 2020. Last quarter, you may recall, we indicated the potential for up to $30,000,000 below the forecast given potential COVID impacts. After a full quarter in the COVID environment, we have confidence in achieving the $360,000,000 we forecast for the year. We're maintaining our longer term CapEx and rate based guidance In twenty twenty one to twenty twenty two period, we still expect CapEx to average approximately $400,000,000 per year or about two times depreciation.
As you know, with capital projects, the timing of a specific project spend can sometimes shift between years. And the chart at the bottom left reflects some modest updates. Those updates don't change our overall guidance in the bar chart on the top left. We continue to expect the utility to be able to self fund its forecasted CapEx through 2020 via retained earnings and access to the debt capital markets. Turning to the bank, American's net income was $14,000,000 down from $15,800,000 in the prior quarter and $17,000,000 in the same quarter last year.
Net interest income was $56,700,000 compared to $61,100,000 in the linked quarter and $61,500,000 in the 2019. The decrease was primarily due to lower asset yields given the lower interest rate environment, Higher amortization of premiums within the mortgage backed securities portfolio also impacted investment portfolio yield. Net income was also impacted by a higher provision for the quarter. ASV took an additional $7,000,000 in credit reserves related to COVID as well as an additional $4,000,000 for unfunded commitments. On the net income non interest income side, gains on sales of securities contributed positively to net income.
We realized $7,100,000 gain related to the sale of Visa Class B restricted shares and $2,200,000 gain on the sale of investment securities as we sold some legacy positions to reduce credit risk and yield volatility in our investment portfolio. There were additional COVID related expenses and savings expense. American incurred $3,700,000 in COVID related expenses consisting of additional pay to frontline employees, the payout of excess vacation days for employees unable to use vacation while working through the pandemic, purchases of PPE and sanitation supplies and employee meals purchased to promote employee safety and support small business restaurants. These higher COVID related expenses were largely offset by lower travel, business development and marketing expenses. On Slide 12, ASB's net interest margin declined to 3.21% this quarter from 3.72% in the first quarter.
On the upper right, we've detailed the elements of that decline. The lower interest rate environment was the largest driver of the net interest margin compression comprising 34 basis points of the decline. Much of this reflected anticipated repricing in Q2 of most of our adjustable and floating rate portfolio. Four basis points was related to low yielding PPP loans. FAS 91 amortization was also a large factor reflecting a faster rate of prepayments due to lower rates at the long end of the curve.
This accounted for 15 basis points of compression. We also realized strong deposit growth from federal stimulus and unemployment benefits that added to cash deposit balances. While bolstering our liquidity and low cost funding base, these temporary excess liquidity is low yielding and pressured margins. As noted, we did realize benefit from lower deposit costs, which contributed eight basis points to net interest margin. Turning to bank drivers for the remainder of the year, we expect continued margin pressure, but at a more moderate pace than in the second quarter.
In the second quarter NIM compression compressed quickly as variable rate loans repriced after the Fed lowered its benchmark rate to near zero in March. Approximately 93% of our variable rate portfolio have now repriced and indices to which those variable rates are tied are at or near their floors. Thus we don't expect that part of our FLOAT loan book to have materially to have materially impacted be materially impacted by further NIM compression. We do expect continued refinancing of our fixed rate loan portfolio such as home mortgages as customers take advantage of historically low rates. This type of repricing is more gradual.
Aside from continued low interest rates, we expect increased amortization in the investment portfolio to continue to impact net interest margin. As a reminder of how that impacts NIM, we purchased bonds for the investment portfolio at a premium or discount and that premium discount is amortized over the expected life of the bond's cash flows. For mortgage backed securities, which comprise 90% of this portfolio, the amortization increases if prepayments accelerate. We see this occur in low interest rate environments as refinance activity increases. We expect excess liquidity to to pressure margins at similar levels to those realized this quarter as well.
Given these factors, we now expect net interest margin to be in the 3.35% to 3.25% range for the year. Turning to the provision, as mentioned we did have an additional provision in the quarter related to COVID-nineteen. The total provision recognized during the quarter was 15,100,000 as reflected on our income statement, which also included $4,300,000 allowance related to unfunded commitments. As noted on the slide, reserves for unfunded commitments are recorded in other liabilities on the balance sheet rather than the allowance for for credit losses. We believe we have approximately we have appropriately provided for future credit losses as of June 30.
The provision outlook for the balance of the year is dependent on the economic conditions which at this point remain uncertain. We are not currently providing full year bank provision guidance given the uncertainty created by the impacts of COVID-nineteen on our economy. Slide 15 provides an update on what we're seeing in our loan portfolio. Overall, we have a high quality loan book that remains healthy with only three percent of our borrowers requesting or qualifying for additional deferral thus far. Our residential book comprises approximately 60% of the loan portfolio and the loan to value of that portfolio remains conservative at 52%.
Only a small portion of that portfolio, roughly 8%, have requested payment relief. In consumer loans, which make up just over 4%
Speaker 4
of the overall
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portfolio, we've seen a high volume of deferment requests but at low balances. While curtailment of supplemental unemployment benefits could result in increased deferment requests, we're closely monitoring what happens with additional federal stimulus. We have moved all commercial markets and CRE loans with payment deferrals to what is called special mention, meaning that those are subject to enhanced monitoring. These loans will be reevaluated for upgrade after successful resumption of payments. Given the enhanced monitoring we have implemented for the commercial markets and CRE loans as well as the overall quality of our loan book, we feel we are well provisioned as of June 30.
ASB continues to maintain ample liquidity and healthy capital ratios despite the challenging economic condition. The bank has strong liquidity with over $3,000,000,000 available from a combination of FHLB and unencumbered securities. ASB's Tier one leverage ratio of 8.4% was comfortably above well capitalized levels at the end of the second quarter. As a reminder, the bank is self funding and we don't expect to see a scenario in which it would need capital from the holding company. Turning to our consolidated liquidity, we are well positioned to withstand the impacts of COVID through the remainder of the year and beyond.
As of June 30, we had $425,000,000 of undrawn credit facility capacity, consisting of $150,000,000 at the holding company and $275,000,000 at the utility with just 16,500,000 in commercial paper outstanding all at the holding company. The utility paid off $14,000,000 in long term debt when it matured in July with no other long term debt maturities until 2022. As of June 30, it had $65,000,000 in unrestricted cash balances. In 2021, the utility has $50,000,000 in short term bank loan maturity and expects to access the debt capital markets to help fund its capital investment program. At the holding company, have $50,000,000 long term debt and $65,000,000 short term bank term loan maturing in the 2021 and we are currently planning refinancing options for those maturities.
On Slide 18, we expect our dividend from an equity investment in the utility to be consistent with our earlier projections as the utility continues
Speaker 0
plan and has sufficient retained earnings to support its capital
Speaker 3
consistent investment requirements and adequate liquidity to support growth in the customer account receivable balances and payment programs for customers that are impacted by COVID-nineteen. Although the dividend from ASB is lower than our pre COVID outlook, bank dividends received to date are sufficient to maintain HEI's strong consolidated capital structure and liquidity. On Tuesday, the Board approved our quarterly dividend of $0.33 per share at an annualized rate of $1.32 per share. We expect to maintain our external dividend and do not expect the need for additional equity at this time. We've talked through the key drivers for the utility in the bank and on Slide 19, you'll see our resulting guidance for the year.
At the utility, we're reaffirming our guidance range and expect to be within the low end of the range. At the bank, we are continuing to provide pretax, pre provision income guidance, which includes net interest income, non interest income and non interest expense to range from 90,000,000 to 110,000,000 We now expect mid single digit earning asset growth compared to low to mid single digit growth we previously forecasted. Given the current low interest rate environment and excess liquidity, we expect interest margin in the 3.25% to 3.35% range. Our holding company guidance is unchanged at zero two seven dollars to $0.29 loss. Since it is still too early to determine bank provision, we are unable to provide consolidated EPS guidance at this time.
I'll now turn it back to Connie for her closing remarks.
Speaker 2
Thanks, Greg, and mahalo again. Thank you to everyone for joining us today. Although this continues to be a difficult time for our community, we are proud of our companies and teams for stepping up to help our state navigate this crisis. The pandemic has highlighted how strong the foundation our company has built over many decades and that has positioned us well to weather this storm. And now we look forward to hearing your questions.
Speaker 0
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. The first question today comes from Jackie Bowen with KBW.
Please go ahead.
Speaker 5
Hi. Good morning, everyone.
Speaker 6
Good morning, Jackie. Hi, Jackie.
Speaker 5
I thought I lots of questions today for you, Rich. I thought I'd start off with with PPP and just being the the million in loan fees. It says you've moved up 950,000 back to date, and thank you for that information. That's very helpful. Just wanna double check if that implies
Speaker 6
Hey, Jackie.
Speaker 2
To you, Jackie. Uh-huh. Jackie, you you were breaking you were breaking up on that question. Could you repeat?
Speaker 7
Sorry. Let me take off my headset. I do a
Speaker 5
more remotely a little better.
Speaker 6
Yes. Yes. Okay.
Speaker 5
Great. Sorry about that. I just wanted to see the the PPP fees. So the expected this year and the 950,000 realized in the second quarter. So just doing the math on that, that means you expect another 2,000,000 to to come through this year.
Right?
Speaker 6
No. We're a little higher than that. So that, you know, the timing of those loans was mid quarter, right? So you only had a partial quarter. If it's just amortization, you'd expect to see about three, three and a half in the second half.
And then depending on the speed of forgiveness, you we could get more.
Speaker 5
Okay. So that's that's just the pure amortization. It doesn't take into account if you are, you know, having those loans forgiven and accelerating that. Right?
Speaker 6
Correct.
Speaker 5
Okay. And what do you have your total expected fees to receive from PPP loans?
Speaker 6
So roughly 4% of of our outstanding of the loans we produced was our was our fee rate. So that'd be close to 13 to 14.
Speaker 5
Okay. And is that gross of FAS 91?
Speaker 6
Yes. Okay. That's that's the fee.
Speaker 5
Sorry. I cut you off. Go ahead.
Speaker 6
Yeah. No. That's that's the fee amount that we'll receive from from the SBA.
Speaker 5
Okay. And did that have a large impact on compensation this quarter?
Speaker 6
No. None. Okay.
Speaker 5
Okay. Okay. And then I guess just in, you know, 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?
Speaker 6
We feel pretty good. I mean, you know, our our book our production really targeted, really hit the target of what the program was set out to achieve. We have only a couple handfuls of loans bigger than $2,000,000 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 marshaling them, shepherding them, which is why we've got some excess liquidity, or they use, but intend to use it for payrolls, or, and now with the additional time to use it for payrolls, we we would expect they would they would broadly qualify.
Speaker 5
Okay. Okay. That's helpful. Thank you. And just I know this is a really challenging question, But with all the moving parts that you have with excess liquidity not related to PPP and then, you know, the PPP deposits and forgiveness and everything else, how are you thinking about, you know, the ebbs and flows of balance sheet size?
I know that, you know, you've you've provided mid single digit expectation growth for earning assets. But I guess what are things that could cause that to be higher or lower from there?
Speaker 6
You know, I think we need to decide how much mortgage production we wanna sell versus put on book. Can affect that mortgage production's pretty strong, rates are pretty low. You know, there's always a trade off of selling versus putting it in the portfolio. The mix of how that comes in, whether it would end up being saleable 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, but we gotta triple check our assumptions now, right? It's not a normal environment. But at the same time we wanna be constructive for economic activity here, right? So those are probably the biggest variables.
Speaker 5
Okay, okay, no that's helpful to keep that in mind. And then just one last one, and then I'll step back. In terms of the decision to sell versus portfolio mortgages, correct me if I'm wrong on this, but I'm assuming that the gain on sale that you're seeing in the market has some impact on that decision. Are you still seeing a pretty good gain on sale margin as we're, you know, at the beginning of the quarter?
Speaker 6
Yes, we are. Yeah. I think it's still a healthy margin and so that factors in, as you said, to the considerations.
Speaker 5
Okay. Okay, thanks Rich.
Speaker 6
Okay.
Speaker 2
Hey Jackie, this is Connie. I would just add, you know, we're having lots of those discussions that you just raised about the optimal size of the balance sheet. And the nice thing about American being part of the AGI holding company is that we probably have more levers that we can pull than, you know, 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, you know, we do believe that we're going to pull through this.
And certainly if, you know, there's a vaccine or therapeutic treatment that would really accelerate things. But even in
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the
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meantime, as we noted, you know, the real estate values have been holding up here, and that's always been very good economic activity for Hawaii.
Speaker 5
Okay. So interpreting that, then I would say outside of, you know, customer behavior and deposits and and all of that, it's 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?
Speaker 2
No. You could actually see it go both ways, either way. But it would be that we will look at smart growth. So we'll be looking to, you know, carefully to at that NIM going forward to put on the kinds of loans that can help bolster that, but for the long term.
Speaker 5
Okay. Okay. Understood. Thank you.
Speaker 0
The next question comes from Paul Patterson with Glenrock Associates. Please go ahead.
Speaker 8
Aloha, Paul. So I wanted to I apologize if I just missed this, but what 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 what you weren't expecting I guess?
Speaker 6
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 to floors, but it quickly and so that was part of it. And then secondly, you know, as we were coming in the PPP, the dilution effect of the PPP as that came in, the ongoing dilution effect of that.
Depending, again, on how fast they forgive or pay off, that's still a variable that we've gotta watch as we go forward. From where we were sitting at the April, the biggest mover in there was the drop in those benchmark indices against which the adjustable rate loans price.
Speaker 8
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?
Speaker 6
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 $3,000,000 $4,000,000 of sales. Roughly, those happen based on portfolio repositioning and other things like that that are normal course.
We've gotten 3,000,000 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, you know, what happens with any individual security that we're in and Dane'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.
Speaker 8
Okay. And then I guess next year it's gonna be sort of opportunistic. Is that how we should sort of think about it or is this sort of the three sort of ish, three ish kind of number sort of? Right.
Speaker 6
Yeah. That's probably a a normalized number. Any any year, you'd see a little bit of that.
Speaker 8
Okay. And then just and again, the the the arrearage level customers that are on the utility side, how many customers are are current with their electric bills or how many are not, I guess? We'll get change. Yeah. Sorry?
I didn't hear that. I apologize.
Speaker 7
Yeah. No. Payne's gonna answer.
Speaker 8
Oh, okay. I'm sorry.
Speaker 7
Yeah. Hi, Paul. This is Payne. You know, we've seen the amount of folks paying later increasing in the, you know, thirty to sixty, sixty to ninety, and and greater than ninety days. It's increased slightly, but, you know, for the most part, you know, people have been, you know, paying their bills.
I would say that, you know, the moratorium on disconnection for nonpayment is it's been extended through September 1. And, you know, proactively, we've gone out to reach out to our customers with those arrearages to work out payment plans.
Speaker 8
Okay. Great. Well, thanks a lot, and hang in there.
Speaker 7
Thanks, Paul. Thanks, Paul.
Speaker 0
The next question comes from Charles Fishman with Morningstar. Please go ahead.
Speaker 4
Hopefully I won't embarrass myself asking a bank question here as a utility analyst, but I I'm still not getting It's fine. This NIM. Okay.
Speaker 6
Awesome. Yeah.
Speaker 4
Just trying to make it simple. I mean, you knew the NIM was coming down. I mean, you took it down first quarter. You're taking it down again. So, know, it's just more obviously, we're dealing with an unprecedented event.
I'm not beating on you. It's more than you thought. But in simplified language, it's this this flow of money came in from the PPP, the 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, isn't is loaning out and taking money in at a lower rate, but you you knew the money was those deposits are gonna 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 the costs associated with the administration of this. Is that a simplified con you know, idea what went on here with the NIM?
Speaker 6
Yeah. Well, that's for roughly that 10 basis points of excess liquidity that we talked about, right? Yeah. Because to your point, when we get the funds in and those moneys, those PPP monies are deposited into customers' accounts, we don't know how fast they're gonna spend them because this is uncharted territory. So we keep it very available, right?
So that if they're gonna 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 zero net interest margin.
Speaker 4
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, again, 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 a a fairly small part of your portfolio, but certainly the most that has the the most uncertain part.
Speaker 6
Sure. And it's I wouldn't just say small, but it cuts across, right? And to your point, think we've given you guys kind of a view of the portfolio and the various exposures. We are less exposed to the riskier segments. 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. 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, but we don't know when we're gonna 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 gonna be able to endure the necessary time period. Does that answer your question, Charles?
Speaker 4
Charles: Yeah. No, that helps. I you know, it's something I'm struggling with. Me move to the utility just a little
Speaker 0
Charles: ahead.
Speaker 6
Charles: Before you move
Speaker 2
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, you know, 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.
Speaker 4
Well, that helps. Let me look at those slides and I'll call your IR people if you And have any then on the utility, just one question. Are you counting on any of this fuel reward market you know, the the sharing of the 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?
Speaker 3
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.
Speaker 4
Okay. Thank you very much. You probably, of all the utilities I cover, have one of the more difficult situations so hang in there. Thank you.
Speaker 7
Thanks, Charles.
Speaker 3
Thanks, Charles.
Speaker 0
This concludes our question and answer session. I would now like to turn the conference back over to Julie Smolinski for any closing remarks.
Speaker 1
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.
Speaker 0
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.