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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the First Quarter 2020 Hawaiian Electric Industries, Inc. Earnings Conference call. [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 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 like, and a whole of community response have succeeded in flattening the curve in Hawaii. As of May 4th, we have had sadly 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 remain -- 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 shift to secure loans under the Paycheck Protection Program or PPP 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 obtain 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 in which included our first green bond offering.
The lower loads also impact our renewable portfolio standard or RPS performance, albeit in a positive fashion, since the lower kilowatt hour sales reduces 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 or PBR 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, implemented 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, foodservices, 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 through 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.
On slide 9, 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 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.
On slide 10, 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 $3 million revenue increase from higher rate adjustment mechanism revenues; $1 million revenue increase from the recovery of West Loch and Grid Modernization projects under the major project interim recovery mechanism; and $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 due to COVID-19; the absence of onetime -- 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 -- that we received in 1Q ‘19, $1 million from the absence of mutual assistant work reimbursement from the first quarter of ‘19, and $1 million lower AFUDC, as there were fewer long-duration projects in 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 -- 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 $65 million -- a $65 million 364-day term loan, freeing up the full capacity of $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 the capacity through a new revolver and launched and repriced -- and priced $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 or FHLB, 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 -- our long-term debt 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 such as PPP 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 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 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 -- 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 loan 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 bright spot for our customers.
We are now approximately -- we now forecast 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 2 times depreciation. This does not include potential self-build projects that made it through the first round of the renewable energy and storage stage 2 RFP process. We’ll find out whether any of those projects are ultimately selected later this week. We continue to expect the utility able 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 of $0.73 to $0.80 is shown on the lower left. And that is in -- and that included our standard elements including asset growth, net interest margin provision and return on assets. I wish I should say our prior bank guidance, which 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 as well 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, 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 in net interest margins.
Floating rate debt such as LIBOR-based and prime link 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 tied. Those lines of credit are now at their floor price and consequently we do not expect -- we would expect minimal incremental impact from further repricing of that portfolio.
Fixed rate debts such as 30-year fixed rate mortgages were repriced -- will reprice at a much -- much more slowly through 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 the 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 point 0.81%. If you apply that to a portfolio of our size today, you’d have approximately -- you’d have an average credit cost of $27 million 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 cost is granted during 2020 for later recovery. At the bank, because provision is tied to uncertainties regarding impacts of COVID-19 and the economic recovery, we’re providing guidance at the pre-tax pre-provision line. We expect pre-tax 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 expected net interest margin in the 3.45% to 3.55% range. Our holding company guidance is unchanged at $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.
[Operator Instructions] Our first question comes from Jackie Bohlen with KBW. Please go ahead.
Hi. Good morning, everyone. I just wanted to clarify a couple of items with the Paycheck Protection Program and make sure I heard correctly. So, is that -- you said roughly $370 million for about 3,600 applications. Did I hear that right?
Yes. Hi, Jackie. It’s Rich. And that’s through -- 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 a 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 have only probably in there -- I think we 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 Feds 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.
Okay. Thank you. That’s helpful. And then, in terms of the -- and thank you for the added detail within the slide deck. I was flipping through that as you were going through prepared remarks. I’m just looking to this mix exposure in general and understanding that at 4% it’s a pretty low piece of the portfolio. Related to the grades on those with 75% of the portfolio being investment grade, is that similar to where it was at 12/31 or did you see any downgrades during the quarter? I know it’s still a little bit early for that given the timing, but 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. So, 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. And as we work through that we’re communicating with customers about -- this is a deferral, not a forgiveness. This is -- we need to be -- 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 2Q, 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 biggest hit that we take is the repricing on the variable loans. That has been -- you can see the benchmark, how they’ve moved. That’s been pretty severe since down 150 basis points on LIBOR just since year-end. So, it doesn’t have much further to go, I don’t think. And, as the clarity on the economy becomes more evident, then we would expect interest rates to stabilize. And we wouldn’t expect to see significantly further lower 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.
So, just sort of to go over sort of the bank stuff a little bit more. And I’m not as familiar as perhaps others. But, just in general, when we’re talking about these deferrals and sort of the 40 13 [ph] and the just sort of all the stuff that’s going on with CARES. How should we think about -- what’s the accounting impact that’s associated when somebody asked for deferrals? Is there any reserve or anything that we should think about that happens with that? And what has been the run rate? I mean, you mentioned that the non -- the unsecured consumer stuff. But, I was just wondering in general, what are you seeing on the mortgage side? I’m sorry, if I missed that.
Yes. So, across the -- this is Rich again. Good morning, Paul. Across the book, we have roughly 10% of the book that has asked for hardship accommodations and that we’ve accommodated. So, the mortgage side is about 11% of the book. And so, under the guidance that was released, as long as the customer was current prior to the situation and the hardship, it doesn’t affect the pass-through status. So, they’re considered still current good loans. And we are not required to make any adjustments for the provision. We -- though on certain parts of the book, we’ve determined that that’s prudent. And that was the case with some of the consumer unsecured, where we elected to provide on a qualitative factor some additional for uncollectability of that book. But broadly, initially restructurings of commercial loans that are -- that again were current before are not going to be considered TDRs. So, the regulatory guidance has been, I think, constructive as we come through it. And so, what we’re really going to see is as we -- as the clarity comes on how the economy is going to open up, how the tourism industry is going to open up again, then we’ll be really on a company by company exposure by exposure basis and determining what we do.
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, we’re doing three months at a time. We would be able to -- the current is up to six months. So, we began doing these in late March. You had an initial surge -- the additional requests have sort of leveled off. So, I think the people who wanted and needed to take advantage of it at the early stages have, and the growth since then has been fairly modest. We’ll go through that towards the end of this quarter and the end of the second quarter on considerations for another three-month extension of those terms. And that’s at our discretion to do that.
We -- in the first round, we did make it very easy for people to take advantage of those. And we’ll make our call on that at the end of the second quarter, based on how things look.
Okay. And then, I guess, you guys used references to 2008 what have you, and you guys did quite well, I think in comparison to others on that. But, this is considerably different, I guess. And, for instance, the Governor, at least -- there is also report, was suggesting that public employees take a 20% pay cut. And I know you guys are very-dependent on tourism, what have you. And so, I’m just sort of trying to get a sense as to what kind of exposure we should be thinking about here. I mean, if that kind of activity were to take place, I’m just trying to get some sense as to what that stress might mean in terms of your loans and what have you. Do you follow what I’m saying? I mean, it just feels very different.
That would be called guidance around the provision. So, as we said that it’s a bit murky. I think there’s -- it is hard to draw a comparison to any specific search situation. We’ve provided the historical context for one situation. But I think, while there’s also never been anything like the kind of stimulus coming in this -- will be close to $3.5 billion is my guest on the PPP by the time we get through round two. The $1.5 billion or $1.3 billion that’s coming in through the CARES Act in Coronavirus Relief Fund, the $1.2 billion of stimulus payments that are getting out into the individual consumer. So, we’ve never seen that dynamic either. So, I think there’s things in the negative sense and things in the positive sense that we’re going to just need a little time to play out. But, I think there’s factors that affect it both ways.
Okay. Could you have a sense, if that 20% take up was happening, how many -- how much of the workforce of Hawaii would be -- I see that you guys say 19% is government, but on the other hand -- and so that’s probably defense and what have you. But, then there’s another number that’s involved in education in that pie chart on slide 3, and healthcare. So, I’m just wondering, just -- do you guys have -- do you guys look at your own numbers? What are you guys thinking about in terms of the number of people who might theoretically face that kind of reduction if they would remain employed? Do you follow me? As a presenter of the workforce, do you guys have any sense or sort of metric associated with that?
Paul, this is Julie. We will double check the number. I’m pretty sure it’s in the range of about 10%.
Okay.
And Paul, just to clarify the Governor’s signaled that that might be a possibility and also said it would be a last resort.
Yes. No, I’m sure, they’ll have resistance to it as well. Just finally on the University of Hawaii stuff. That 75%, I apologize for just not getting that completely, what -- 75% of activity would be normalized by the end of the year. Is that what they were saying? Just what is it?
That’s correct. And 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, he 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 expense?
Why don’t turn that over to Joe Viola, on a 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 on that [Technical Difficulty]. So there is precedence for deferral treatment for extraordinary costs.
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, Hawaiian Electric? Just to add to what Joe just said. Even yesterday, our Public Utilities Commission issued an order, which basically had a number of elements. But probably the most important was that in addition to saying that if you’ve not already done so, please suspend disconnections. And meanwhile, it’s given us authorization to establish regulatory assets to record our costs that results from the suspension of these disconnections. So that’s a pretty good signal I think that our Commission is one -- we’re required to start tracking these costs and then to file regular updates to the Commission of these costs.
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. So, if you refer to -- there’s a slide in the material that gives you a little bit more on it. I think, it’s Slide 31 in the back that shows you we got about a $5.2 billion loan book. If you look at the residential mortgage piece, counting the home equities, you’ve got about $3.3 billion of it right there. And then, you add commercial real estate that gets you up -- and then within other component that gets you up to the 80% of the 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. So, 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’ve 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.
Right. And I think, on there you can also see that our home equity portfolio is different than you might think about home equity. So, a lot of times people think about them as a second mortgage and a high LTV. And in fact, predominant -- a majority of ours are first position. A lot of -- the LTVs are very low. People use it as almost a sort of flexible source of funding on what has always been strong real estate values -- strong and stable real estate values in Hawaii. So, it’s not what your initial perception of home equity books would be. And we’ve seen it perform quite, quite well 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 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. And as we said in Hawaii, that’s especially true when it’s so hard -- we have limited land mass. So, it’s so hard to even get into 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.