Hawaiian Electric Industries Inc Q1 FY2020 Earnings Call

Good day, and welcome to the First Quarter 2020 Hawaiian Electric Industries, Inc. Earnings Conference call. Please note, this event is being recorded. I would now like to turn the conference over to Julie Smolinski, Director of Investor Relations and Strategic Planning. Please go ahead.

Thank you, Brandon, and thank you everyone for joining us today. Apologies for the delay there. Thanks for being with us. Today, of course, is Hawaiian Electric Industries first quarter 2020 earnings conference 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 as well as other members of senior management. In keeping with our social distancing practices, our executives are in different locations today. So, please bear with us if we have any delays or mixed audio quality during the call. During today’s 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 filings with the SEC and on our website. And now, Connie Lau will begin with her remarks.

Thank you, Julie. And aloha, everyone. Mahalo, thank you for joining us today. We hope you are safe and well. Our thoughts are with those who have been affected by COVID-19. We’re grateful for the healthcare workers and the many others on the front lines, providing supplies and services as we collectively weather this pandemic. Today, I’ll start with COVID-19 impacts in Hawaii, plans for reopening our economy and how our companies are positioned. Then, Greg will review our first quarter results and discuss guidance before we turn to your questions. Hawaii is facing an unprecedented challenge from COVID-19, and we’re especially mindful of the essential roles our companies play. Through our utility, we provide reliable electricity to keep our hospitals, homes and essential businesses running. And through our bank, we help ensure money keeps flowing through our economy. I’m proud of the dedication of our employees and thank them for continuing to provide these essential services throughout these challenging times, even with personal risk to themselves and their families. Continuing to provide these vital services while protecting the health of our customers as well as our employees has been a core focus. In Hawaii, we talk about our special culture of Aloha and of kuleana, our responsibility to others. It’s a culture that we’ve described previously in terms of our community coming together to take care of each other and of the land and environment. And it’s a culture that has served us well in managing the public health impacts of COVID-19. Our government’s early actions to impose statewide stay-at-home, work-from-home orders and mandatory 14-day quarantines for all incoming travelers, both visitors and residential alike, and a whole of community response have succeeded in flattening the curve in Hawaii. As of May 4th, we have had 17 deaths and a total caseload of 621, but also 16 days where new cases were in the single digits. On our most populous island of Oahu, where population density is comparable to cities like San Jose, California, we’ve even had multiple days of no new cases. These numbers are encouraging and have enabled us to start reopening our economy. While this is a difficult time, we believe we will get through this crisis. Although Hawaii’s tourism industry has been significantly impacted by the stay-at-home orders and the travel quarantine, the beauty of our state and the Aloha of Hawaii’s people will not change. Post-911 and post the Great Recession, tourism came back strongly. It was clear that people still wanted to travel, but they wanted to travel to a safe destination. In this crisis, we have the opportunity to rebrand Hawaii as the safest place on earth. We believe that we can demonstrate that our state will be a welcoming and safe place for visitors, and that Hawaii will continue to be a very attractive place for tourism. Hawaii will also continue to remain of strategic importance for the military, and federal, state and local government will continue to play a major role here. Our housing market has also proven resilient. It was relatively stable during and after the Great Recession and continues to be characterized by robust demand for a limited supply. The public and private sectors here are collaborating to responsibly reopen our economy for both residents and visitors, and also to shape what we want our economy to look like in the future. Our Company’s leaders are deeply involved in these efforts. In addition, Alan Oshima, former CEO of Hawaiian Electric, who stepped down just a couple of months ago, was appointed by our Governor Ige to coordinate and navigate our state’s economic and community recovery in a collaborative fashion. The overarching plan has three phases. Phase 1, stabilization of the number of COVID cases; phase 2, a gradual reopening and recovery of our economy; and phase 3, making our economy even more resilient with strong business and job growth. We’re beginning to gradually reopen our economy among local residents and preparing to later welcome visitors. Parks and golf courses have reopened, elective surgeries have resumed, and low-contact businesses such as car dealerships and automated service providers were allowed to reopen May 1st. We anticipate economic activity will increase over the coming weeks and months, with meaningful activity resuming mid to late summer and significant recovery by year-end. Yesterday, our University of Hawaii Economic Research Organization updated their forecast for Hawaii’s economic recovery. And they believe that local economic activity will return by 35% to 45% in May and June, and 75% by year-end. Tourism will take longer, likely beginning to return late July, with arrivals by year-end reaching half of their normal levels. This reopening gives our state a unique opportunity to consider the future of our economy. And thereto, we’re looking at doing it responsibly, and ensuring that the choices and investments we make move us towards a more sustainable economy. We’re thinking about the right level of tourism that ensures a good experience for visitors and is sustainable for our environment, our lands, our economy, and our communities. As a company, we’re working to support in advance our state’s recovery. At our bank, we’re focused on building the innovation economy to diversify and expand job opportunities. At our utility, we continue to partner with stakeholders to progress clean energy projects and identify opportunities to rebuild with Hawaii’s green economy goals in mind. And we remain committed to our state’s 100% renewable portfolio standard and carbon neutrality goals. Protecting the health and safety of our employees, helping our customers and supporting our community through this time have been core goals for our companies. To protect employees and customers, we implemented a mandatory work-from-home policy for employees who are able, and we instituted the use of discrete work teams to increase physical distancing for those employees who must be on the job, such as our linemen and power plant operators. We also scaled back our open bank branches and implemented extensive cleaning and physical distancing precautions for those that remain open. The bank has seen strong increases in online account enrollments and mobile usage, which is encouraging and should help keep reducing costs for routine transactions over time. As the state and county stay-at-home orders get phased out over time, we will likely phase back into full operations, albeit with new practices to maintain health and safety. We’ve been pleased that our liquidity and balance sheet strength of our utility, bank and consolidated enterprise have enabled us to support our customers in this uncertain time. Our utilities have suspended disconnections for nonpayment through the end of June and urge customers experiencing hardship to reach out, so we can help with payment arrangements. We also remain very focused on affordability of customer bills. We are mindful of the need to operate even more efficiently, given the economy and how it may impact pending rate requests. One bright spot has been fuel costs, which are largely a pass-through item for our customers. Our customers are seeing some benefits of lower fuel prices, just when they need it most. For example, on Oahu in May, lower fuel costs would reduce a 500 kilowatt hour per month bill by more than $12 compared to March. We expect lower fuel prices to continue to benefit customers for the next few months. But longer term, we remain concerned about the volatility of oil and its impact on customers. So, we’re still focused on moving off oil as rapidly as possible. At our bank, we made a huge push with teammates working round-the-clock shifts to secure loans under the Paycheck Protection Program to help small businesses pay employees and other essential bills like utilities. We’re proud that Americans secured over $370 million for approximately 3,600 small businesses, employing roughly 40,000 individuals. And then, Hawaii banks in total obtained funding for 78% of our state’s eligible payrolls in the first round, placing Hawaii in the top five states in the nation. American is also helping customers by providing loan deferral and forbearance options and waiving a number of fees. Like Hawaii, as a company, our fundamentals remain strong and that serves us well to weather the challenges of COVID-19. On a consolidated basis, we’re comprised of stable operating companies in essential industries. Our utility has delivered power for our state for over 125 years through many different economic and social conditions. During this COVID period, we do expect higher bad debt expense and lower kilowatt hour sales. And indeed in the last week of March, we saw lower loads, 7% lower on Oahu and Hawaii Island, and 14% lower on Maui. Given the utility’s fully decoupled regulatory structure, the primary financial effect relates to liquidity. Although decoupling enables the recovery of target revenues approved by the PUC, despite lower loads, cash collections under that mechanism would be delayed until 2021 under the revenue balancing account. We’ve taken steps to meaningfully strengthen the utility’s liquidity position, including through an expanded revolver and a private placement, which priced last week and included our first green bond offering. The lower loads also impact our renewable portfolio standard performance, albeit in a positive fashion since the lower kilowatt hour sales reduce the denominator in the RPS calculation, and we expect to comfortably exceed our 2020 RPS goal of 30%. Our utility and regulators continue to move regulatory processes forward with minimal disruption. The performance-based regulation docket remains on track for final decision by year-end with workshops proceeding remotely. Our Hawaiian Electric 2020 rate chase is also moving forward, although the schedule for an interim decision in order is now October, rather than July. As part of that rate case, the PUC implemented a management audit. That’s been a constructive process and the audit report is still expected in May. On April 29th, the PUC published an order terminating the mandatory triennial rate case cycle. As such, we are no longer required to file a Maui Electric rate case and we’re evaluating our options there. Our bank has served our state for 95 years and has a conservative risk culture, lending practices and loan portfolio. These attributes helped ASB perform well compared to other banks during the 2008-2009 financial crisis and position it well for the challenge at hand. While net interest income will decline due to lower rates across the curve and credit losses will rise due to the economic slowdown, the bank remains a good contributor to HEI. ASB independently maintains strong liquidity and capital and regularly conducts stress testing. We’ve implemented these measures after the banking crisis of the Great Recession, including under scenarios more severe than what is anticipated from COVID-19. Our bank also has limited exposure to industries such as accommodations, food services, and retail, with a commercial and industrial loan portfolio that is highly focused and secured by real estate. At this point, we do not see a scenario that would require HEI to inject capital into the bank. However, to maintain its target leverage ratio while supporting increased lending under the Paycheck Protection Program, the bank will retain capital it otherwise would have paid in dividends to the holding company. At the holding company, we have enhanced our liquidity to ensure that we can be a source of strength to our subsidiaries in the unlikely event that it is needed, while maintaining our investment-grade capital structure and our shareholder dividend. We have paid an uninterrupted dividend since 1901, including during the Great Recession. And maintaining the stability of our dividend is no less important today. We have a strong leadership team with the experience and judgment to guide our companies through this period. I was CEO of HEI during 911 and the Great Recession, Rich led a publicly traded Korean bank through that crisis, our bank CFO led a recapitalization of another bank here in Hawaii, and our utility and executive teams have decades of experience and are well-versed in incident and crisis management. Our Board members with whom we’ve been very actively engaged in this period include former utility and bank executives who steered their companies through the financial crisis as CEOs, CFOs and chief risk officers. Despite our company’s strengths and the essential services we provide, we do expect impacts from COVID-19. We saw the beginnings of those in the first quarter, including higher bad debt expense at our utility and higher allowance for credit losses at our bank. With the exception of bad debt, COVID-19-related costs were not significant for the first quarter but may increase in the next few quarters. As a result, the utility has filed a request for deferral treatment of COVID-19-related costs and plans to seek recovery of those costs at a later time. The first quarter was impacted by items other than COVID-19, in particular, higher than planned utility O&M expense. Utility O&M expense management has been an area of focus for us. And while we have a number of efforts underway, we do have more work to do. I’ll now ask Greg to discuss our first quarter results, our liquidity and our guidance. Greg?

Thank you, Connie. And welcome, everyone. I’ll speak briefly on our Q1 results before moving to our outlook. Our Q1 earnings were $0.31 per share compared to $0.42 per share in the prior year quarter. COVID-19 expenses impacted earnings at both the utility and the bank, including $2.5 million higher utility bad debt expense, pretax, than Q1 of last year, and additional provisioning for COVID-19 of over $4 million at the bank. Bad debt expense at the utility also impacted utility ROE. And we expect that bad debt expense will continue to impact our income statement until deferral treatment is granted for future recovery. Although we did have negative impacts from COVID-19 during the quarter, we also had a very strong start to the year prior to the pandemic. Loads were strong and showed increases over the prior year of nearly 5%. We started the year with one of the nation’s lowest unemployment rates. And the strength of the pre-COVID Hawaii economy makes us optimistic about our future, once we’re through the crisis. Utility earnings were $23.9 million compared to $32.1 million in the first quarter of 2019. The most significant drivers of the variance were a $3 million revenue increase from higher rate adjustment mechanism revenues; a $1 million revenue increase from the recovery of West Loch and Grid Modernization projects under the major project interim recovery mechanism; and a $1 million lower interest expense due to debt refinancings at lower rates. These items were offset by $7 million higher O&M expenses compared to Q1 2019, primarily due to increased bad debt expense caused by COVID-19; the absence of a onetime benefit in Q1 ’19 due to deferral treatment for certain previously incurred expenses; and an increase in vegetation management work and higher outside service costs. In addition, we had approximately $1 million higher depreciation expense, $1 million lower net income from the absence of renewable procurement performance incentive mechanism, and we received $1 million from the absence of mutual assistance work reimbursement from the first quarter of ’19, and $1 million lower AFUDC, as there were fewer long-duration projects seeking construction work in progress, particularly after the West Loch was placed in service in November. Turning to the bank, American’s net income was $15.8 million in the quarter down from $28.2 million in the previous quarter. Although, as a reminder, the fourth quarter 2019 included $7.7 million of net income from the sales of former properties. Net income was also down by $5 million versus the first quarter of 2019, mostly due to the provision taken due to COVID-19. Following our adoption of CECL and the additional provisions in the first quarter relating to COVID, we believe we are well-positioned, and our allowance for loan and lease losses ratio of 149 basis points is above our local peers who average about 126 basis points. We also saw strong loan growth during the quarter of 4.7% annualized with solid loan growth in commercial real estate portfolios, as well as strong deposit growth of 7.1% on an annualized basis. I’d like to spend some time on how we’re prudently positioning ourselves to withstand the impacts of COVID as it runs its course. In April, we executed financing transactions at both the utility and the holding company that increased committed credit capacity and allowed us to migrate away from commercial paper markets. HEI issued a $65 million 364-day term loan, freeing up the full capacity of a $150 million credit facility. The strong pro forma holding company liquidity allows it to serve as a source of strength for the combined enterprise and ensures 2020 cash needs can be met. Hawaiian Electric added $75 million of capacity through a new revolver and launched and priced a $160 million private placement, $95 million of which was used to free-up credit capacity on its revolver. The private placement also included a $50 million green bond portion. The utility will be refinancing an existing 364-day term loan with an extended maturity into 2021, freeing up liquidity in 2020, when the customer challenges due to COVID will likely have the most impact. With these transactions, we will have increased liquidity at the utility by over 3 times. With full availability of our credit facilities at both the utility and the holding company, post-closing of the utility’s private placement, and ample liquidity at ASB to the Federal Home Loan Bank, we believe our consolidated company has ample liquidity. We’re in a strong position to support our state’s economic recovery and maintain our commitment to investment-grade ratings. Looking at maturities over the remainder of 2020, only $14 million remains at the utility. We have a modest holding company maturity of $50 million in the first quarter of 2021, which we expect to refinance in advance of that maturity. Turning to the bank, ASB’s commitment to a strong balance sheet and conservative capital ratios is why it’s so resilient during challenging times such as this. The bank has strong liquidity with approximately $3 billion available from the combination of the FHLB and unencumbered securities. The bank is self-funding and we don’t expect it to need capital from the holding company under any scenario, including very severe stress scenarios that we’ve refreshed during the quarter. We expect ASB’s dividend to the holding company this year will be reduced as we expect ASB to focus on retaining capital to support loan growth, and important customer programs such as the Paycheck Protection Program and to cover higher credit costs during this period. On slide 14, we don’t expect our dividend from the utility to change meaningfully from the level previously communicated. Although the dividend from ASB is lower, we expect that its profitable operations will continue to contribute to earnings. We remain committed to investment grade rating and can turn on our dividend reinvestment program if needed, which can cost-effectively generate about $30 million of cash and incremental equity annually, based on historical levels. However, we don’t currently believe we have a need to issue equity this year. We expect to maintain our external dividend, while growing the dividend in line with longer-term earnings growth, although we have run scenarios around the pandemic’s impacts and we maintain healthy capital, liquidity and dividends under these scenarios. Turning to the outlook for the year. We’re currently forecasting approximately $22 million of COVID-19-related expenses at the utility. Whether we get deferral treatment is an important driver for the year; we’ve requested a decision by June 30th. On the regulatory front, timing for the Hawaiian Electric rate case interim decision has shifted to October. We had originally requested a 4% revenue increase or about $78 million. However, we recognize how difficult the current economic environment is for customers. And we recognized that we did not receive an increase in the Hawaiian Electric light interim last year and that some of our peers are not being granted increases by the regulators. We’re tightening our belts, like everyone in our community to find expenses to offset and find expense offsets for any lower revenue increase while maintaining our utility earnings outlook. Full decoupling at our utility will help provide earnings stability for the year. COVID-19 impacts were mainly in the latter half of March as stay-at-home orders and air travel quarantines went into effect. While we’re insulated from the impacts of lower load on revenue, we don’t get true-ups for incremental bad debt expense, which was up considerably in March versus last year. We’ve had an unprecedented level of federal stimulus coming into the states, including funds loaned through the Paycheck Protection Program, and we expect that this will provide some upside as customers get more breathing room to pay bills. The lower fuel prices are also a bright spot for our customers. We are now forecasting approximately $330 million to $360 million in CapEx in 2020, as we see about $30 million of potential downside due to COVID-related delays. As I mentioned, we’ve delayed some scheduled maintenance to avoid outages for residential customers now working from home. However, we’re maintaining our longer-term CapEx and rate case guidance. In the 2021 through 2022 period, we expect CapEx to average approximately $400 million per year or about two times depreciation. This does not include potential self-build projects that made it through the first round of the renewable energy and storage stage two RFP process. We’ll find out whether any of those projects are ultimately selected later this week. We continue to expect the utility to self-fund its forecasted CapEx through 2020 via retained earnings and access to debt capital markets. Turning to ASB’s guidance and key drivers. Our bank guidance for the year was $0.73 to $0.80, but that is no longer in effect. Experience tells us that it’s difficult to know how an event such as COVID-19 will impact asset quality until we have a better sense about the timing and manner in which our local economy will reopen. Given that uncertainty, it’s too early to provide guidance on provision and consequently, we’re unable to provide EPS or return on asset guidance for the bank. However, we do have sufficient visibility to provide guidance on a pretax, pre-provision level, which is comprised of net interest income, noninterest income, and noninterest expense, which also provides you a snapshot of the continuing profitable operations of the bank in this economic environment, excluding the credit impacts of COVID-19. We estimate the pretax provision income range to be from $90 million to $110 million for 2020. That income, along with our existing bank reserves and strong capital position, gives us significant headroom to absorb the uncertainty of COVID-related credit impacts. While rate moves by the Fed in March had a modest impact in the first quarter, we expect the low interest rate environment to have a greater impact on asset yields in Q2 and thus further pressure on net interest margins. Floating rate debt such as LIBOR-based and prime-linked loans reprice based on the change in the benchmark to which they are tied. We saw some effect in Q1 from lower LIBOR rates on our commercial portfolios and expect to see the full impact in Q2. We also saw some Q1 impact from the lower prime rate to which our home equity line of credit portfolios are tied. Those lines of credit are now at their floor price, and consequently, we do not expect significant incremental impact from further repricing of that portfolio. Fixed-rate debts such as 30-year fixed-rate mortgages will reprice much more slowly through the refinancing of existing mortgages. Given our already very low cost of funds at 24 basis points in the first quarter, there’s little room to move lower and to improve net interest margins. ASB’s net charge-offs have consistently been below the national average. This was true during the financial crisis, as Hawaii’s residents continued to pay their mortgages and other loans. If you look at the 2008 through 2011 period, our provision expense averaged 0.52% of our loan portfolio and peaked at 0.81%. If you apply that to a portfolio of our size today, you’d have approximately a $27 million average credit cost and a peak of $42 million. Turning to slide 20, we’ve walked through each of the key drivers for our utility and bank. So, now, I’ll bring it all together. At the utility, we are reaffirming our guidance range, and we currently expect the utility to be at or below the midpoint. This assumes the deferral of COVID-19-related costs is granted during 2020 for later recovery. At the bank, because the provision is tied to uncertainties regarding impacts of COVID-19 and the economic recovery, we’re providing guidance at the pretax, pre-provision line. We expect pretax, pre-provision income, which includes net interest income, noninterest income and noninterest expense to range from $90 million to $110 million. We continue to expect low to mid-single-digit earning asset growth. Given our current low interest rate environment, we expect net interest margin in the 3.45% to 3.55% range. Our holding company guidance is unchanged at a $0.27 to $0.29 EPS loss. Given that it’s too early to determine the bank provision, we are unable to provide consolidated earnings per share guidance at this time. Connie will now make her closing remarks.

Thanks, Greg. And mahalo, again. Thank you to everyone for joining us today. Although this is a difficult time for our community, we are proud of the way our companies have stepped up to help our state recover. However, we recognize that there is a long road ahead. And we think we are well-prepared to weather the storm and help our customers as COVID-19 runs its course. And now, we look forward to hearing your questions.

Our first question comes from Jackie Bohlen with KBW. Please go ahead.

Hi, good morning, everyone. I wanted to clarify a couple of items regarding the Paycheck Protection Program and ensure that I understood correctly. So, is it approximately $370 million for about 3,600 applications? Did I get that right?

Yes, hi, Jackie. It’s Rich. That’s through April.

Okay. Through April? So, that includes some round two in there as well?

Correct.

Okay. So, when I look at that number, it seems like the average loan size is a little bit larger than $100,000. So, I would guess there is a fee on that. It’s somewhere in between 3% to 5%, maybe towards the higher end, given the average loan size. Is that accurate or are there some larger loans in there that are moving the average a little bit?

No. That’s correct. That’s correct. We probably have less than two dozen loans that are bigger than a couple of million bucks. So, we really hit the sweet spot of the small businesses.

Okay. And then, are you obtaining to fund these through existing balance sheet liquidity or are you looking at the Fed's 1 funding facility for that?

Yes, existing balance sheet primarily. And we’re set up to take advantage of the Fed facility, but we’ll do that if we have the need to. Right now, we’re keeping it on balance sheet. As you know, we don’t expect them to last too long. A significant portion will get forgiven as we come out of the second quarter. So, it’s sort of a temporary spike.

Thank you for the added detail in the slide deck. I was reviewing it while you were going through your prepared remarks. I'm looking at the mix exposure and understanding that at 4%, it's a small part of the portfolio. With 75% of the portfolio being investment-grade, is that similar to where it was at the end of December, or did you experience any downgrades during the quarter? I realize it might be a bit early to tell given the timing, but I'm just curious.

Yes. It’s pretty consistent. We haven’t seen downgrades on our exposures in that time.

Okay. And then, in terms of just outreach that you might be doing for the personal and secured loans, if you could just provide any color on that and how that plays into deferrals that you might be granting, and how that played into some of the reserve builds you had in the quarter?

Yes. As you know, we’re offering deferments and others across the portfolio, across the bank, commercial and consumer. In the consumer unsecured, we’ve had about 3,000 customers ask for referrals out of that portfolio. It represents a little more than 10% of the balance of the book. As we work through that, we’re communicating with customers about this being a deferral, not a forgiveness. We’re happy to help you. Let’s make sure we’re communicating about how you’re going to make payments again when this starts up. And we’re beefing up our loss mitigation resources on that side as well. So, as we look at it, we felt coming out of the quarter, it was prudent to put up a little bit of reserves against deterioration in the collectability of that book. And we’ll see how it goes as we play through. But as Connie mentioned, Hawaii tends to have a little bit better performance than the national average on payments and paying back our debt. So, we’re hopeful that that continues through this crisis too.

Okay. That’s helpful. And if I’m remembering correctly, that’s a very granular portfolio. Right?

Right. The average loan size is somewhere around $10,000. So, it’s not a large individual exposure, very, very small size loans.

Okay. And then, just one last one for me, and I’ll step back. Looking to the net interest margin specifically and understanding some of the repricing trends the pushes and pulls that you have going on there. It sounds like following repricing that takes place in Q2, outside of new generation that may be at a lower rate in the portfolio, the NIM could start to stabilize in the latter half of the year. Is that how you’re thinking about it?

Yes. The largest impact we face is from the repricing of variable loans. The benchmark rates have changed significantly, with LIBOR dropping by 150 basis points since the end of the year. I don’t believe there is much room for further decreases. As the economic situation becomes clearer, we expect interest rates to stabilize and do not anticipate any major further declines in repricing.

Okay, great. Thanks, Rich. I appreciate it.

Okay.

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

Hey. Good morning.

Hi, Paul.

I would like to discuss some of the banking aspects in more detail. While I may not be as well-versed as others, I'm curious about the deferrals and the relevant details surrounding them, particularly regarding CARES. How should we understand the accounting implications when someone requests deferrals? Are there any reserves we should consider? Additionally, what has been the trend? You mentioned the unsecured consumer loans, but I'm also interested in what you're seeing in the mortgage sector. I apologize if I missed that information.

Yes. So, this is Rich again. Good morning, Paul. Across the book, we have roughly 10% of customers who requested and received hardship accommodations. Specifically, on the mortgage side, this is about 11% of the total. According to the guidance released, as long as a customer was current before the hardship, it does not impact the pass-through status. These loans are still considered current and good. No adjustments are necessary for the provision, as we believe that is prudent. In some cases with consumer unsecured loans, we did make qualitative adjustments for uncollectibility. However, initial restructurings of commercial loans that were current prior to the situation will not be labeled as TDRs. The regulatory guidance has been helpful as we navigate this. Moving forward, as we gain clarity on the economy and the reopening of the tourism sector, we will evaluate each company’s exposure and decide accordingly.

Okay. And then, just in general though, I mean, my understanding, these things are sort of automatic almost. And they can be, I guess, granted for up to 12 months. Is that about right?

No, it’s not that long. We’re currently managing it in three-month increments. We have the capacity to extend it up to six months. We started this in late March. There was an initial surge, but additional requests have leveled off. I believe those who wanted to take advantage of it early on have done so, and the growth since then has been quite modest. We’ll assess this at the end of this quarter and the second quarter to consider another three-month extension of those terms, which is at our discretion. In the first round, we made it very easy for participants to utilize these options. We’ll make a decision at the end of the second quarter based on the overall situation.

Okay. You mentioned comparisons to 2008, and I believe you performed quite well compared to others during that time. However, the current situation is quite different. For example, the Governor suggested that public employees should consider a 20% pay cut. Given your heavy reliance on tourism, I'm trying to understand what risks we should be aware of. If such measures were implemented, what impact could that have on your loans and overall financial health? It all feels significantly different this time around.

That would be referred to as guidance regarding the provision. As we mentioned, it's somewhat unclear. It's difficult to find a direct comparison to any specific search situation. We have provided historical context for one instance. However, we have never experienced anything similar to the level of stimulus that is approaching $3.5 billion from the PPP by the time we complete the second round. Additionally, there’s $1.5 billion or $1.3 billion coming in through the CARES Act in the Coronavirus Relief Fund, along with $1.2 billion in stimulus payments being distributed to individual consumers. We have not seen such dynamics before. There are factors that may have negative implications as well as positive ones, and we will need some time to see how it all plays out. Overall, there are influences on both sides.

Could you provide an estimate of the potential impact on Hawaii's workforce if there is a 20% take-up? I see that 19% of the workforce is in government, likely due to defense and related roles. However, there are also figures related to education and healthcare in that chart on slide 3. I'm curious if you analyze your own data. What are your thoughts on the number of individuals who might experience a reduction if they keep their jobs? Do you have any metrics or insights related to this?

Paul, this is Julie. We will double-check the number. I’m pretty sure it’s in the range of about 10%.

And Paul, just to clarify, the Governor signaled that that might be a possibility and also said it would be a last resort.

Yes, I'm sure they will have some resistance to it as well. Regarding the University of Hawaii matter, I apologize for not fully understanding, but were they saying that 75% of activity would be normalized by the end of the year?

That’s correct. I really urge you to go take a look at UHERO’s forecast because, for example, the prior forecast which was as of the end of March did not include the effect of the stimulus payments that Rich was talking about. And that now is included in this current one, although he has a little more pessimistic view on tourism. So, that’s the nature of everybody. We’re all trying to look into this crystal ball and look at all the determinants and put them together and come up with views that are different as time progresses, and we see what actually develops within the economy.

Our next question comes from Charles Fishman with Morningstar. Please go ahead.

On the deferral of COVID-19 expenses with respect to the utility, I guess, we have a track record in the Southeast U.S. mainland with storms where pretty much what happens and how they get deferrals when a hurricane comes through. Is there anything you have that a precedent in Hawaii for this type of deferral of unusual expenses?

Why don’t we turn that over to Joe Viola, on the regulatory team at the utility?

Hi. Thanks. This is Joe Viola. Yes, we have experienced in Hawaii on approval for deferral of significant costs. It’s usually threshold amount for that. You’re right. I mean, hurricane-related for some of utilities, actually in the past for our lava incidents.

So, I guess, there’s a fair level of confidence that you’ll get that and I realize you can’t. I mean, you’re holding that as an unknown. But, there is certainly, I would think, a decent chance you’re going to get it. Is that a fair assessment?

Yes. Charles, hi. This is Scott Seu from Hawaiian Electric. I would like to add to what Joe mentioned. Just yesterday, our Public Utilities Commission issued an order that included several elements. The most significant aspect was the directive to suspend disconnections if that hasn't already been done. Additionally, we have been authorized to establish regulatory assets to record the costs incurred due to the suspension of these disconnections. This indicates that our Commission is requiring us to start tracking these costs and to provide regular updates regarding them.

Okay. And then, moving to the bank. I believe Greg said that a pretty material portion of the loan book was mortgages. Could you maybe give a little more color to that? Like, what percentage is residential mortgages, what percentage is commercial mortgages of the total loan book?

Yes. If you look at a slide in the material, specifically Slide 31, it shows that we have approximately a $5.2 billion loan book. Within that, the residential mortgage segment, including home equities, accounts for about $3.3 billion. When you include commercial real estate, that brings us to around 80% of the total loan book.

Perfect slide, I just never noticed that before. I suspect that’s a slide you include in every deck and I just never had a reason to look at it. Okay.

That was Charles for today. We thought you might ask.

There you go. Okay. Well, that slide is perfect.

Charles, this is Connie. Let me just add to that and call your attention. Not only do we have Slide 31, which basically shows that about 80% of the total loan portfolio is secured by real estate here in Hawaii, but then thereafter on slides 32, 33, 34 and even 35, which is the national syndication slide that Jackie was referring to. We tried to break out the loan portfolio and give some stats there, so everyone has a sense of the quality of the loan portfolio. So, for example, if I go to Slide 32 for the residential mortgage portfolio, it will show you that the average loan to value for the portfolio is 53.5%. So, that gives you a sense of how much equity is in each one of these loans as a buffer.

Our home equity portfolio is quite different from the typical perception of home equity. Many people view it as a second mortgage with a high loan-to-value ratio, but most of our products are actually in the first position. Many of our customers utilize it as a flexible funding source, supported by the strong and stable real estate values in Hawaii. This differs from the usual understanding of home equity portfolios, and we have observed its consistent strong performance over time.

And you can also see the granularity that Jackie was talking about. For example, for the residential mortgages, average loan size of $300,000; the personal unsecured $10,000. So, we have a very community bank-like portfolio that is quite granular.

Okay. Well, again, I’m not a bank analyst, but that’s certainly got to give you confidence that people don’t like to walk away from their home loans or their homes. So, that’s an added level of confidence that I suspect you experienced 10 plus years ago in the last crisis.

Yes. As mentioned in Hawaii, this is particularly significant given our limited land area, making it challenging to even find a home.

This concludes our question-and-answer session. I’d like to turn the call back over to management for any closing remarks.

Thank you all for joining us today. I appreciate your comments and questions, and please let us know, please feel free to get in touch if you have anything else, and certainly stay healthy and safe. Take care.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.