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Text: We had a very strong start to the year with first quarter consolidated net income of $64.4 million and earnings per share of $0.59.
These results were 93% and 90%, respectively, above the same quarter last year and were driven by stronger earnings at both the utility and the bank.
In the first quarter, Hawaiian Electric benefited from continued savings from the robust cost management program we started last year.
The savings will be delivered to customers in rates beginning in June, and, along with other timing elements, we expect the utility to remain within the full year guidance range we announced in February.
American's first quarter results reflect good execution in an environment that remains challenging for bank profitability.
Our results benefited from a release of provision as we continue to conservatively manage credit in the improving Hawaii economy.
As Greg will cover in more detail, we're increasing our bank guidance and consolidated HEI guidance for the year to reflect this improvement.
We're seeing strengthening in the local economy as Hawaii continues to manage the virus well and the vaccine rollout continues.
Unemployment declined to 9% in March.
While still above the national average, it's headed in the right direction, having declined from a peak of nearly 24% a year ago.
We've seen significant growth in tourism arrivals this year.
And lately, we've experienced multiple days where arrivals have approached prepandemic averages.
At this point, almost all our arrivals are from the U.S. mainland as the COVID situation and vaccinations abroad have been more challenging than domestically.
Hawaii real estate fundamentals are strong and continue to support the conservative portfolio mix at the bank.
Year-to-date March, Oahu's sales volumes are up 19% for single-family homes and 53% for condos.
Median prices are also up 17% to $950,000 for single-family homes and 4% to $450,000 for condos.
In its March outlook, the University of Hawaii Economic Research Organization accelerated its forecast for the state's economic recovery by 18 months with the GDP now expected to rise 3.7% in 2021 and 3.1% in 2020.
COVID-19 cases in Hawaii have remained far below the mainland.
The seven-day rolling average was 94 for the state and is the fifth lowest per capita among U.S. states as of May six.
40% of our residents are now fully vaccinated and more than half have had at least one dose.
While this is encouraging, we're mindful that we're still in the early stages of Hawaii's economic recovery, and there is still some uncertainty about the pandemic's course.
At the utility, cost efficiency, our transition to the new PBR framework and our clean energy future have been and continue to be our major focus.
We and our stakeholders are all learning the new PBR framework, which is designed to align our interests as we work together to increase renewable energy and decarbonize our economy in a way that is affordable, reliable, resilient and equitable.
Our commitment to cost efficiency positions us well as we transition into PBR.
The utility has been successful in implementing efficiencies and achieving savings to deliver on our management audit savings commitment and the customer dividend.
We'll start returning these savings to customers through the Annual Revenue Adjustment, or ARA, when PBR goes into effect June one.
Cost management will continue to be a focus as we operate under PBR.
We've been working with stakeholders to finalize the new PBR performance incentive mechanisms, or PIMs, as well as the scorecards and metrics we'll report on going forward.
We are expecting the PUC to issue an order setting forth the parameters of the new PIMs in the near future.
As we've said before, reaching our collective clean energy and decarbonization goals must be done in a way that is kakou, a Hawaiian word that means it takes everyone working together.
We're working to bring projects from Hawaii's largest ever renewable energy and storage procurement online as soon as possible.
We are fully committed to this effort, which is no easy task given the number of projects, the scale of this procurement relative to our small system, community considerations, land constraints and the need to ensure reliability on isolated island grids.
We're actively working with independent power producers, government agencies and other stakeholders to overcome obstacles to bring projects online faster.
Last week, the PUC directed us to establish regulatory liabilities to track costs to customers resulting from delays in commercial operations of approved Stage one, Stage two and CBRE Phase one projects.
While we do not believe we are liable for any amount, we believe the PUC's intention may be to track rather than record costs before determination is made.
So we will be seeking reconsideration or clarification.
Last week, the PUC also approved, with conditions, our agreement for the Kapolei Energy Storage project, a stand-alone battery project that will help ensure reliability when the Oahu coal plant retires and enable integration of more renewable energy.
While technically an approval, the order imposes conditions that may prevent us and the developer from moving forward with this project.
The regulatory process allows us to raise our concerns to the PUC, and we will be filing a motion for reconsideration on Monday.
Another key focus is accelerating the addition of more distributed energy resources, or DERs, and demand response.
On May 3, we filed our recommendations to achieve this acceleration while underscoring the importance of equity and fairness in how the programs are designed.
We're advancing programs to benefit all customers, including expanding our community solar program, proposing a rooftop rental program and procuring aggregated grid services from DERs.
Grid modernization is key to facilitating faster deployment and effective use of demand response and DERs.
In March, the PUC approved our proposal to shift from an opt-in to an opt-out approach for advanced meters in targeted areas, allowing us to deploy advanced meters more quickly and thus enabling operational efficiencies and more advanced rate programs.
Turning to the bank.
American continues to perform well in a challenging environment.
In the first quarter, we continued to have strong mortgage production and deployed an additional $150 million of ASB CARES or Paycheck Protection Program loans to support small businesses in round two of that program.
Year-to-date, that amount has increased to over $170 million.
Record deposit growth, in large part driven by federal stimulus, continues to outpace lending opportunities in this early stage of Hawaii's economic recovery.
We're taking a balanced approach to managing our portfolio, optimizing fee income and loan portfolio growth in a low interest rate environment.
While net interest margin is still pressured, record-low funding costs and balance sheet growth are helping grow net interest income consistent with our expectations.
Our first quarter release of reserves for credit losses reflects the resilience of our customers as well as the moderating credit risk environment as Hawaii's economy begins to recover.
We continue to manage our reserves for credit losses conservatively.
American has also continued its cost control efforts, leading to lower noninterest expense in the first quarter even as we invest in our anytime, anywhere banking transition.
Improved profitability is also allowing the bank's dividend to HEI to increase.
We're accelerating our digital transformation to enable customers to bank with us anytime and anywhere.
Today, 44% of deposits are made through self-service channels such as ATMs and mobile, more than double prepandemic levels.
And we've seen increased customer satisfaction across all channels over that time.
We're enhancing our digital offerings to make banking even easier for our customers.
This includes providing new online financial wellness tools, upgrading our ATM fleet, strengthening our mobile app, expanding online capabilities and opening new digital centers where our teammates will help customers with digital banking solutions.
Now Greg will discuss our financial results and our outlook.
Over to you, Greg.
Turning to our first quarter results.
Consolidated earnings per share were $0.59 versus $0.31 in the same quarter last year.
Both the utility and the bank reported strong performance, reflecting the resilience of our company's and the Hawaii economy that has showed signs of a strengthening recovery.
At the utility, earnings reflect lower O&M expenses from cost reduction efforts and delays on timing of generation overhauls, coupled with higher revenues from our annual rate adjustment mechanism, including timing-related charges for target revenue recognition to eliminate seasonality impacts.
The bank benefited from the release of provision for credit losses as certain credits earned upgrades, and we saw stable credit trends in an improving economic outlook.
While the holding company loss is well in line with plan, we increased charitable giving during the quarter, including a $2 million contribution to support our community through challenging times.
Compared to the same time last year, consolidated trailing 12-month ROE improved 80 basis points to 10%.
Utility ROE increased 160 basis points to 9%; and bank ROE, which we look at on an annualized basis, was 16%.
The utility outlook remains unchanged, however, and the ROE expectations will be impacted by the management audit savings and customer dividend as O&M cost reductions that have improved earnings for the quarter are used to fund customer bill reductions under PBR.
Regarding the utility's results, net income for the quarter was $43.4 million compared to $23.9 million in the first quarter of 2020.
The most significant variance drivers were $10 million lower O&M expenses compared to the first quarter last year.
There were three main factors that drove O&M lower: lower staffing and efficiency improvements from the ongoing cost management program; timing-related items, including higher bad debt expense in the first quarter of 2020 related to COVID-19, which has since been deferred; and fewer generating facility overhauls, some of which will be performed later in the year.
There were also higher costs in 2020 related to an increased environmental reserve and higher outside service costs to support the PBR docket and other customer service projects.
In addition to lower O&M, we benefited from a $5 million revenue increase from higher rate adjustment mechanism revenues; a $4 million revenue increase related to timing of the recognition of target revenues during the year, which we -- will have no net impact on 2021 and which is due to a change in methodology that eliminates seasonality for recognizing target revenues within the year; a $1 million lower enterprise resource planning system implementation benefits to be passed on to customers; and $1 million lower nonservice pension costs due to a reset of pension costs included in rates as part of a final rate case decision.
These items were partially offset by $1 million higher depreciation.
Regarding the drivers of utility performance for the rest of the year, we expect no meaningful contribution from the performance incentive mechanisms during 2021.
We currently have approximately $22 million of COVID-related cost, primarily bad debt expense accrued in a deferred regulatory asset account.
We will continue deferring COVID-related costs through June 30.
The moratorium on customer disconnections is in place through May 31 2021, and we will -- and we continue to work with customers on extended payment plans and assisting with other bill assistance alternatives.
We plan to file a separate application to seek recovery of costs once actual costs are known.
We will also be filing a request for approval to continue deferring COVID-related costs beyond June 30.
As mentioned, our O&M expense was positively impacted by the timing of overhauls.
We do expect some of these overhauls to occur later in the year, in line with our annual guidance.
The utility's ability to achieve accelerated management audit savings commitment is an important driver of O&M expenses.
The utility is on track to achieve the savings necessary to meet the annual $6.6 million commitment, which will be returned to customers starting June one.
Utility capital investments for the quarter of approximately $60 million were lower than planned due to unexpected delays.
Some of the delays were due to extended repairs being made at one of our substations, limiting work that can be done on other parts of the electric system.
We also experienced additional design work required for T&D projects, COVID travel limitations and meter deployment delays that impacted our grid modernization work.
Despite the delays, we still expect to achieve our utility capital investment plan for 2021.
And we are maintaining the capex and rate base growth guidance we issued during our previous earnings call and still expect 2021 capex of approximately $335 million to $355 million, reflecting rate base growth of 4% to 5%.
Turning to the bank.
ASB's net income for the quarter was $29.6 million compared to $15.7 million last quarter and $15.8 million in the first quarter of 2020.
The increase primarily reflected moderation of the elevated credit risk environment as Hawaii's economy begins to recover, and the results benefited from a release of reserves for credit losses, which I'll discuss further.
Net interest income reflects the impact of strong deposit growth, lower loan demand and increased growth of our investment portfolio.
Noninterest income benefited from strong mortgage origination and sales in line with plan despite being below the prior year's quarter.
Noninterest expense remained in line with the plan as ASB continues to focus on strategic investments to drive efficiency and productivity.
ASB's net interest margin compressed 17 basis points during the quarter.
NIM was 2.95% compared to 3.12% in the fourth quarter of 2020.
The low interest rate environment and record deposit growth each contributed to NIM compression.
$3.1 million in fees from PPP lending and a record low cost of funds helped soften the pressure on asset yields.
The average cost of funds was 0.08%, down one basis point from the linked quarter and 16 basis points from the prior year.
We expect continued pressure from low interest rates and from excess liquidity due to strong deposit growth and lower reinvestment yields.
Consequently, we're updating our NIM guidance range to 2.80% to 3%.
We anticipate that balance sheet growth should still lead to net interest income in line with expectations for the year.
In the first quarter, the bank released $8.4 million in provision for credit losses compared to provisions of $11.3 million in the fourth quarter and $10.4 million in the first quarter last year.
This reflects credit upgrades in the commercial loan portfolio, reduced exposure to riskier but profitable consumer unsecured loans and lower net charge-offs as Hawaii's economy begins to recover and credit -- the credit risk environment moderates.
ASB's net charge-off ratio for the quarter was 0.18% compared to 0.36% in the fourth quarter and 0.44% in the first quarter 2020.
Nonaccrual loans were up slightly to 1% compared to 0.89% in the fourth quarter and 0.90% in the prior year.
We remain conservative as we take a wait-and-see approach to Hawaii's economic recovery.
And at 1.73% as of quarter end, our allowance for credit losses was the highest among Hawaii peers.
We're seeing positive loan deferral trends across ASB's portfolio.
Nearly all deferred loans have returned to scheduled payments.
Active deferrals are just 0.2% of the total loan portfolio.
We're -- we've experienced declining delinquencies in the higher-risk commercial and consumer portfolios.
While realizing a slight uptick in delinquencies in the residential portfolio, that portfolio is a low-risk -- is low risk and secured by rising value in the Hawaii real estate market.
These two factors have contributed to a decreasing profile of our overall -- risk profile of our overall loan portfolio.
ASP continues to manage liquidity and capital conservatively, maintaining ample liquidity and healthy core capital ratios.
The bank has approximately $4 billion in available liquidity from a combination of reliable resources.
ASB's Tier one leverage ratio of 8.33% was comfortably above well-capitalized levels.
Prospectively, given the lower risk profile of our portfolio, we're anticipating managing closer to an 8%-or-above Tier one leverage ratio and drive competitive profitability metrics, growth of the ASB dividend while maintaining a strong capital position.
We expect higher bank dividends to HEI this year than reflected in our February guidance given ASB's strong performance and outlook and efficient capital structure.
We now expect dividends of approximately $50 million to $60 million versus the previously estimated $40 million.
For the quarter, the ASB Board has declared a $23 million dividend to HEI.
We still do not anticipate the need to issue any external equity in 2021 at HEI unless we identify significant additional accretive investment opportunities.
We are committed to maintaining an investment-grade profile.
At the utility, we're pleased to have had recent utility credit rating upgrades by S&P to BBB flat and Moody's to Baaone, both with stable outlooks.
Turning to our guidance.
We're reaffirming our previously issued utility guidance.
While the utility had a strong first quarter, we'll be returning cost savings to customers beginning June one and expect additional overhauls later in the year.
In addition, while the first quarter benefited from higher revenues due to a methodology change to remove seasonality in recognizing target revenues, a portion of that will reverse later in the year.
However, we are revising our banking consolidated guidance.
Our revised guidance is $0.67 to $0.74 per share, up from our prior guidance of $0.52 to $0.62.
We're revising our NIM expectations at the bank to 2.8% to 3%, down from 2.90% to 3.15%.
The impact on net interest income should be muted by balance sheet growth.
Given strengthening credit dynamics and outlook for the Hawaii economy, we now expect provision to range from $0 to $10 million, which we believe remains appropriately conservative given continued uncertainty for the economy until we see increased vaccination levels and the eventual return of international travel.
We expect that, that stronger bank profitability will translate into consolidated earnings growth as well as increase bank dividends to the holding company.
And we're increasing HEI guidance -- earnings per share guidance to $1.90 to $2.05 per share.
I'm proud of the dedication of our employees and the resilience of our companies as we continue to provide essential electricity and banking services and deliver solid financial results while helping Hawaii reach its aggressive climate goals and build back better.
Last month, we issued our second consolidated ESG report, which includes our ESG priorities and our first Task Force on Climate-related Financial Disclosures-aligned reporting.
We're considering the implications for our companies of the Biden administration's goal to cut carbon emissions 50% from a 2005 baseline by 2030.
We believe our goals and plans here in Hawaii and the work we've been doing for some time place us on a strong path to achieve a net-zero future.
We're updating our planning and analysis, and we'll report further on that in the future.
And finally, we say aloha to Rich today as he is leaving American to pursue other interests.
Rich accomplished a great deal during his more than 10 years at the helm of American.
Rich leaves American in great shape, as evidenced by ASB's strong first quarter earnings and Greg's comments earlier.
Under Rich's leadership, ASB has grown its assets, expanded its customer base, products and services and improved operational efficiency.
He and his team have provided great customer service and made banking easy for customers.
Ann Teranishi, currently the bank's Executive Vice President of Operations, will succeed Rich as President and CEO later today.
Ann is a strong, collaborative leader with deep banking industry knowledge and a 14-year track record of success at American.
We look forward to Ann's leadership.

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q1 earnings per share $0.59.

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