Hawaiian Electric Industries Inc (HE) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2010 Hawaiian Electric Industries earnings conference call. My name is Deanna, and I'll be your Operator for today.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Shelee Kimura, Manager of Investor Relations. Please proceed.

Thank you, Deanna. Welcome everyone to Hawaiian Electric Industries's second quarter 2010 earnings conference call. I am Shelee Kimura, and joining me today are Connie Lau, HEI President and Chief Executive Officer; Jim Ajello, HEI Senior Financial Vice President, Treasurer and Chief Financial Officer; Dick Rosenblum, Hawaiian Electric Company President and Chief Executive Officer; and Tim Schools, American Savings Bank President, as well as other members of Senior Management.

In today's presentation, Management will be using non-GAAP financial measures to describe the bank's operating performance. Our press release and the slides and appendices accompanying this webcast, which are posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the equivalent GAAP measure. Forward-looking statements will also be made on today's call. Please reference the accompanying disclosure to the webcast slides located on our website. I'll now turn the call over to Connie Lau.

Aloha, and thank you for joining us today. As you can see from the information we released yesterday, we had another solid quarter. Second quarter earnings were $0.31 per share, compared to $0.17 per share in the same quarter last year, with the majority of the improvement coming from our banking operations. Here on slide three, we highlighted the primary earnings drivers for the second quarter 2010 relative to the same quarter last year. Jim will go over the financial results in more detail shortly, but let me give you some color on just a few items.

Although rate relief contributed to earnings at HECO, it was offset by higher expenses. However, while O&M is higher, it has been running at a lower rate than we expected. At the bank, we saw significant improvement over last year and it was largely driven by improved credit costs and lower operating expenses. Compared to the same quarter last year, the bank experienced lower provision expense and had no other than temporary impairment charges or OTTI as a result of the liquidation of our private issue mortgage related securities in the fourth quarter of 2009.

Turning to strategic progress, we continued to move forward with the Hawaii Clean Energy initiative and the regulatory approvals needed to advance our state toward its clean energy goals. First, we are pleased that we received a number of important PUC decisions over the last several months. On July 27, the PUC issued an interim D&O on the MECO 2010 rate case, which approved an amount equal to the settlement reached with the consumer advocate in June. The PUC granted an annual increase of $10.3 million, or a 3.3% increase with a 10.5% return on average common equity. The $18 million difference between MECO's original request of $28 million and the interim decision is largely attributable to updates in our sales forecast and expense levels since the case was filed last year. Interim rates became effective on August 1. On July 30, the PUC issued a final decision on MECO's 2007 rate case, confirming its interim decision, which was based on the settlement with the DA.

Over the last two months, the PUC also approved all four of our biofuel supply contracts, which will be used for testing and operational use in our generating units on Oahu and Maui. This is a significant step in our continuing effort to green our existing units. The PUC also approved HECO's capital commitments for the Oahu demonstration project to test the use of biofuels.

Another notable PUC decision was the approval of the power purchase agreement between First Wind's Kahuku wind project and Hawaiian Electric Company. This 30-megawatt project will contribute to our renewable energy goals, and it includes the largest battery energy storage system of its kind in Hawaii, attracting a $117 million federal loan guarantee. Construction on the project started in July and is expected to be placed into commercial service in early 2011. As many of you probably saw last week, we also achieved another significant procedural milestone towards our regulatory resets with the filing of our Oahu 2011 rate case on July 30. Our request is based on a proposed 10.75% ROE, and includes a basic increase of $54 million, or 3.1%, assuming implementation of decoupling, and an additional $40 million for several proposed programs to support our contributions to advancing the Hawaii Clean Energy initiative. As for the 2010 HELCO case, it is on schedule for an interim decision in order in November.

Lastly, on decoupling, we continue to await a PUC decision on implementation. Once decoupling is effective, it will enhance our ability to fulfill our critical role in carrying out our state's energy policy to reduce oil dependency that will benefit customers and Hawaii's economy, protect the environment and increase our energy security. While the implementation decision is taking longer than what we had anticipated, we are not aware of any policy change or issue at this time.

Slide five shows our actual versus allowed ROE as of June 30. As we implement sales decoupling, revenue adjustment mechanisms and general rate case increases, we are targeting a significant improvement in our return to narrow the gap between our earned and allowed ROEs. Although we made modest progress in the second quarter to improve HECO's ROE, MECO's and HELCO's continue to deteriorate. MECO just received its 2010 interim D&O with interim rates effective August 1, which will help. HELCO is awaiting rate relief late this year, and all three await decoupling implementation.

Turning to the bank's progress on strategic initiatives -- as expected, the bank substantially completed the performance improvement project with the successful completion of the FISERV system conversion in the second quarter. As you can see here on slide six, we have another solid quarter, reflecting significantly improved performance since the start of the project in 2008, and comparing well against our high performing peers. We expect to see additional improvement in non-interest expense in the third quarter with a full quarter of FISERV savings.

Turning to slide seven, we continue to see the gains of the performance improvement project in ASPs second quarter adjusted annualized pre-tax, pre-provision income of $118 million, $26 million higher than the quarter before the start of the performance improvement projects in 2008. We are currently on the high side of our target range because we expect the Regulation E legislation to impact us starting in the third quarter. Reg. E became effective in July of this year, and prohibits banks from charging NSF or not sufficient funds overdraft fees on debit cards and ATM transactions, unless the customer gives consent to opt in to the bank's overdraft services. However, we expect to meet our target on an annualized run rate basis by year-end.

As we mentioned last quarter, Tim Schools will be transitioning by year-end, and the timing aligns well with the completion of the performance improvement project. With respect to our search for Tim's replacement, the search is going well and we are on course to complete the transition by year-end.

Lastly, we are very proud to report that American Savings Bank was voted Hawaii's Best Bank or Credit Union in our daily newspaper's 2010 People's Choice Awards. This demonstrates the outstanding job our bank has done to deliver a superior experience to our customers. And now let me break here and ask Jim to update you on our Hawaii economy and financial results.

Thanks, Connie.

First, the economic backdrop. On slide nine, we start with Hawaii's tourism industry, a significant driver of Hawaii's economy and also one of our largest utility customer segments. Visitor arrivals numbers in 2010 continue to show the positive growth that began at the end of 2009, with arrivals up 5.7% through the first half of 2010 and as compared to the same period last year. Visitor expenditures were up 7.8% year-to-date through June 2010 compared to the prior year.

Hawaii's unemployment rate fell in June to 6.3%, its lowest level in over a year compared to the US unemployment rate of 9.5% in June. This statistic is for Hawaii as a whole. Oahu is comparatively stronger than the neighbor islands, as shown on this slide, with the Oahu unemployment rate of 5.8%.

Conditions in the housing market appear to be moving toward a recovery, although primarily on Oahu. The Oahu housing market in the first half of 2010 has seen increased closed sales in median sales prices compared to the same period last year. On the neighbor islands, the first half 2010 sales were up over 2009, but median prices were down. However, for the month of June, Maui and the Big Island both reported slight increases in median home sales price compared to 2009.

Turning to slide 12, we show local economists' forecast for the key economic indicators. While growth is resuming and economists have improved their forecast for the year, the pace of recovery is expected to be slow and we remain cautious, especially as the job market continues to struggle and is expected to be the last aspect of the economy to show signs of recovery.

Turning to second quarter financial results on slide 13, HEI earned $29.3 million in 2010, $14 million more than the same quarter of 2009. The bank contributed the majority of the earnings improvement, for $12 million higher net income over the same period last year.

At the utility, net income was $17.6 million for the quarter compared to $15.5 million in the second quarter of 2009. Rate relief granted in our 2009 rate case in Oahu of $10 million, which largely offset by $6 million higher O&M expenses excluding DSM, and $6 million higher financing and depreciation expense, primarily due to the addition of two new generating units in 2009.

Second quarter kilowatt hour sales were 1.1% below the same quarter last year, primarily due to more normal weather this quarter as compared to slightly warmer than normal weather in the second quarter last year. However, year-to-date kilowatt hour sales were up 0.3%, and we now expect kilowatt hour sales to be roughly flat through the year. Note that once we are able to implement decoupling at all three utilities, kilowatt hour sales will no longer be a significant earnings driver.

O&M expenses for the second quarter 2010 were 11% higher in the second quarter 2009, excluding DSM. Year-to-date, O&M expenses increased 9% over the same period last year, and we now expect the annual O&M increase to be slightly less than the 16% we had originally anticipated. The difference in the actual rate of increase in the second quarter results relative to our full year estimate is largely due to the timing of expenditures.

Slide 17 recaps the utility earnings drivers in 2010. Here, I will highlight that the key driver of our Company's results will be the utilities regulatory outcomes and their timing. Decoupling will give us the opportunity to earn fair returns and help narrow the gap in our actual ROEs compared to our allowed ROEs, while also supporting our state's Clean Energy goals. Once implemented, it will eliminate kilowatt hour sales as an earnings driver, will provide some offset to expected O&M increases, and will reduce regulatory lag from rate case additions. The MECO interim decision, approving a 3% rate increase and $10 million annualized decrease in depreciation expense, will be reflected in the second half of the year, and HELCO's interim decision is expected in November.

Beyond 2010, a constructive outcome for HECO's 2011 rate case will be critical to our long term financial health. On slide 18, we provide a summary of our request. Our total requested increase, assuming the implementation of decoupling, is $94 million. This takes into account the proposed revenue adjustment mechanisms for 2010, but not the revenue adjustment mechanisms for 2011. The $54 million base request is primarily to cover the cost of major completed capital projects and increasing cost of operation and maintenance.

The $40 million rate request related to the new programs would cover costs associated with the integration of higher levels of renewable energy from IPPs, independent power producers, generation facility upgrades focused on reducing fuel usage, and expanding the use of biofuels, a fuel security program to increase fuel inventory including biofuels, and a comprehensive replacement program for our aging T&D infrastructure. Statutory deadline for interim decision is June 2011. While our five year capital expenditure forecast is currently being reevaluated in conjunction with our annual budgeting process, there are no significant changes to 2010 and 2011 associated with the underlying assumptions in the HECO rate case. However, with the additional programs proposed in the rate case, our existing capital expenditure forecast beyond 2011 is likely conservative.

Turning to the bank on slide 19, second quarter 2010 earnings were $16.1 million, or $12.1 million higher than the second quarter 2009, and $2.4 million higher than the linked quarter. Major drivers for the increase over last year after-tax were $8 million lower provision for loan losses, $3 million of OTTI charges in 2009 that did not occur in 2010, and $3 million lower non-interest expense offset by $2 million in lower revenues. Compared to the linked quarter, the primary drivers after-tax were $3 million lower provision for loan losses, partially offset by $1 million higher non-interest expense resulting from higher FISERV conversion costs.

On slide 20, you can see that our net interest margin was up 4 basis points from the first quarter 2010 and continues to be one of the strongest in our peer set at 4.22%. While our average yield on assets has decreased like many others in the industry due to historically low interest rates, we are able to more than offset that with a lower cost of funds. The cost of funds was extremely low in the second quarter at 49 basis points, which declined by 6 basis points relative to the first quarter. While we are able to achieve a higher net interest margin in the quarter, we expect the trend of compression going forward.

In addition, we continue to have approximately $200 million of excess cash that is pressuring our yield on assets, and we continue to monitor the interest rate environment and are taking a disciplined approach to redeploy our cash to higher earning asset categories in light of our interest rate parameters. With cash yielding 25 basis points, we continue to look for interest rate and risk friendly ways to improve our yield while continuing to improve our interest rate risk. For example, in 2010, we've added approximately $60 million of interest rate friendly assets during our home equity line of credit promotion. We also maintained our conservative underwriting standards with an average FICO of approved loans over 770, the average debt to income below 34%, and the average loan to value below 55%. However, as loans pay down, and we continue our disciplined approach to put new assets on to the balance sheet, we still ended the quarter with over $200 million of excess cash.

Moving on to provision on slide 21, the bank reported $1 million of provision for loan losses in the quarter. Excluding the release of loan loss reserves related to two loans, provisions would have been approximately $3.4 million. The provision was unusually low this quarter, as it benefited from the commercial loan that was sold during the quarter, and a commercial real estate construction loan that was successfully completed and reclassified to a lower risk loan classification. The improvement over the same quarter last year was primarily attributed to a significant provision in 2009 for a single commercial credit.

Turning to slide 22, we show our efficiency ratio in non-interest expenses on a GAAP and adjusted basis. We also compare our efficiency ratio with our peers and high performing peers. As you can see, our efficiency ratio of 59% on a GAAP and 55% on an adjusted basis is trending in line with our peers. As we continue to realize the benefits of the performance improvement project, we expect this to improve over the remainder of the year. As for non-interest expenses, we expect to meet our target through an annualized run rate of $140 million to $145 million by the end of 2010.

Turning to our balance sheet on slide 23, here we show you our peer banks and American Savings in terms of asset and funding mix. This is our last available data for our peer set. As of 3/31/2010, we are showing you ASB's comparative data over the same period, which is very similar to ASB's June 30, 2010 balance sheet. The key differentiator for ASB versus the industry is our low cost deposit base, with an average cost of funds of 55 basis points in the first quarter versus 1.26% for the industry. As a result, we have very little wholesale funding. These are very strong numbers in the banking industry and benefit the bank by providing more profitability without taking credit risk, whereas others have to stretch on loans to generate the same net interest income. It also provides better liquidity, as core deposits tend to be more stable, and we have a larger percentage of our SHLB lines we can tap.

On slide 24, non-performing assets ratio decreased 23 basis points on a linked quarter basis to 190 basis points, reflecting a decrease primarily in non-performing residential one to four family and land loans. This is encouraging. However, neighbor island residential and land loan portfolios remain credit challenged. Our primary credit risk continued to be in the $84 million of residential lot loans primarily on the neighbor islands, $345 million of neighbor island one to four family mortgages produced from 2005 to 2007, and $108 million of mainland residential loans purchased. These three loan portfolios that now total $537 million are down $109 million, or 17%, over last year.

Our net loan charge off ratio also improved on a linked quarter basis. 57 basis points in the second quarter 2010 compared to 62 basis points in the linked quarter. Second quarter 2010 net loan charge offs of $5.2 million were primarily attributed to land loans, neighbor island residential one to four family, and commercial markets loans that we had previously provisioned for.

On slide 26, we update our simple framework to think about the annualized earnings potential of the bank over the next 12 to 24 months, assuming no changes in the yield curve. We start with an improved second quarter adjusted annualized pre-tax pre-provision income and layer in the various components we expect between now and 24 months. $4 million of additional estimated FISERV savings as $2 million of annualized savings are already in our starting point, disciplined redeployment of our excess cash at a rate of 2% to 4%, and expected savings from consolidation in real estate. The purposes of this chart, we are still reflecting a success rate for offsetting regulation E at zero to 25%. Until we collect a couple of months of opt in statistics, we feel it is too early to make a prediction on the impact of Regulation E.

The resulting pre-tax pre-provision income of $111 million to $120 million will be in line with our target of $110 million to $120 million. On provision expense, if you assume that the credit cycle will normalize over the next 12 to 24 months and the annual provision rate decreases to $5 million to $8 million -- which is high compared to 2003 and 2007, which averaged a reversal of $300,000 -- the earnings potential of the bank would be $65 million to $73 million per year, slightly better than what we showed you last quarter. These estimates are subject to changes in the yield curve, which could affect net interest income.

I'll sum up the bank's earnings drivers for 2010. As with all banks across the country, we continue to closely monitor and assess financial reform legislation, the economy, the credit cycle and interest rates. We expect net interest income to continue to be pressured with the excess cash on hand and 30 year mortgage rates at historic lows. We expect our low cost funding base to continue. With Regulation E becoming effective on July 1 for new accounts and August 15 for existing accounts, we expect NSF fee income to be lower in the second half of the year. Assuming zero customers opt in, the after-tax exposure is approximately $9 million on an annual basis, or roughly $4.5 million for the second half of 2010. This is the worst case, but like many in our industry, we continue to evaluate the expected level of impact and strategies to offset that income.

Although we are encouraged by the economic signs of stabilization and we may be seeing signs of a gradual recovery, job growth and real personal income are expected to lag. Thus we have not changed our provision expectations, and continue to estimate provision expense at approximately $5 million per quarter for the remainder of the year. Our non-interest expense, we expect to reach our target of an annualized run rate of $140 million to $145 million by year-end. With respect to the Dodd-Frank Act, we are in the process of evaluating legislation. However, at this time, we believe that changes will be manageable and will have a smaller impact on us than the larger banks.

Lastly, before I conclude the bank section, I'm pleased to report that Moody's changed its rating outlook for ASB from negative to stable as a result of better than expected asset quality and earnings performance in the last several periods. Moody's also rated ASB as strong capital ratios, which were 9.3% and 14.1% for its Tier 1 leverage ratio and total risk-based capital ratio, respectively, as of June 30, 2010. Subsequently, Moody's also changed its rating outlook for HEI and HECO from negative to stable, recognizing the progress being made to transform the regulatory model in assuming a final decoupling order during 2010.

With that, let me turn to the second quarter dividend. The Board declared the dividend payable on September 10 to holders of record on August 23. The next dividend date is August 19. Our dividend yield remains attractive and above industry (inaudible) peers. As of yesterday's close, our dividend yield was 5.1%.

I'll now turn the call back over to Connie for concluding remarks.

Thanks, Jim.

We are seeing solid progress at both operating companies and are excited about our future. At our utility, we look forward to the implementation of a comprehensive redesign of our regulatory model to ensure a financially viable utility strong enough to attract the capital necessary to execute our state's public policy of reducing Hawaii's dependence on imported oil. We expect to narrow the gap between our earned and allowed rates of return as the decoupled model is implemented over the next two years and we continue with scheduled general rate cases. With the decoupled model, the quality of earnings should significantly improve as well. We expect earnings to be less volatile and more predictable.

In addition, we expect rate base to grow over time as we make investments to our system to accept increasing renewable generation and increased equipment replacement rates to address our aging infrastructure. At the bank, the core business is performing very well and strengthening every day. Our bank has a low risk profile, strong balance sheet, terrific funding base, and a simple business model. Given our profitability improvements to date and expectations over the next year, we expect our bank to perform in line with high performing peers. We expect to see earnings benefit as the Hawaii economy and credit environment improves. And finally, we continue to maintain our dividend at an above average yield.

In summary, we believe we are well positioned to deliver attractive risk adjusted returns to our investors. I'll now open the call to questions and ask Jim, Dick, Tim, Tayne, and Alvin to join me in answering your questions.

(Operator Instructions).

The first question will come from the line of Paul Patterson, Glenrock Associates.

Good morning guys. Congratulations on the People's Choice Award.

Thanks, Paul.

I wanted to ask you guys about the bank. Just a few quick questions on it. The Dodd-Frank, you mentioned that there might be some sort of impact. I know it's a little early, but could you give us a little bit of a flavor as to what you think it might be and how we should think about it?

Yes, Paul. It's really a tough one because as you know, there will be increasing regulatory burden, particularly in the consumer protection area, but it's really difficult to know exactly what the financial impact of that will be. The bank is used to having regulations change continually, so we are hoping that we'll be able to handle that increased burden. But whether it brings some particular costs with it, we don't know, so it really is too hard for us to determine that right at this time.

Okay, now with the provision for loan losses, you guys gave us a pretty good idea about some of the specific things, like the sale of the commercial loan, et cetera, that helped things out. But it also seems that even adjusting for that, there was also still a benefit there, and I was wondering if you could give us a little bit of flavor as to how we should think about that?

Yes, hi, Paul. This is Tim.

The first way I think about it obviously, the simple math is that, had we not sold a specific large credit that we already had a large provision on, so part of our provision last year was providing for this large credit. We decided to go ahead and sell it. We took a little bit of loss on it, but net-net, some reserve came back because we have more provision in that loan. But if you excluded that and you excluded another large loan that was a construction loan, a nice shopping center that has name brand retailers in it that went live, it's occupied and the shopping center is operating, fully occupied. So it goes to a income producing property, a lower loss factor.

If you exclude those two, then it wouldn't have been $1 million. It would have been about $3.5 million. And so to your point, the core quarter still would have been better than the $5 million we've been running maybe the previous four or five quarters. With that said, that's one quarter, and that's why it's like I'm looking at the Pacific Ocean. It's like we're out in a boat and we thought we will see some sharks and maybe we saw a few less than we thought we would see. But I still think there's some more. So I'd be conservative and just -- we don't know. And so I would say $5 million, and just be conservative. But good news is the last four months, okay, the last four months, our total past dues in aggregate have either been down or flat from the previous month. So that's a good sign.

Great. And then with respect to the search for interest rate friendly higher returning assets, you mentioned there was some challenges there. Could you give us a flavor other than this home equity situation where you guys might actually be looking to get some more yield?

Well, there's not a lot of opportunity. I mean, that's a national challenge. That's not an ASB challenge. And the banks are loaded up with cash as are probably other industries. The Fed funds rate is extremely low, so there's just not a lot of places. Now the long end is coming down, so it's a really challenging short-term thing.

It shouldn't impact the long term value of the franchise. But when you're sitting here short-term, you really have to decide okay, do I stretch on credit and do I stretch on duration to get extra earnings? Or do you remain patient and take a little bit lower short-term earnings so that you don't have that future credit risk or future interest rate risk? And that's what we've done, and our cash for our size bank is relatively high. We have about $200 million more in cash than we normally need to run the Company.

On top of that, I would estimate we've got probably, I don't know, $50 million to $80 million of very, very short-term securities we've bought that might be earning 1%. So those are like one to two year securities that have a chance to reprice. So that's something we're buying. So you've got $200 million say that's earning a quarter. You've got another $50 million to $80 million. I don't remember the number --that might be earning 1%. And then we did this tremendous home equity campaign. ASB had done a wonderful job over the years on the liability side. It's one of the best deposit franchises I've seen. Our assets were still a little tough with a lot of mortgages, so we were a little behind on home equity.

First Hawaiian and Bank of Hawaii have done a wonderful job on home equity over the years. They each have about $1 billion in balances, which means they each have about $3 billion in lines and they each have floors of 4.5% or 5%, so with us they are a little bit in the defensive position. We're in the offensive position. With us not having much, we ran a campaign earlier in the year and said, "let's offer at 1% to very high quality credits and let's pay the breakage fee for people to leave Bank of Hawaii and First Hawaiian," and there's not a whole lot they can do because they've got a floor and that customer can go from 4.5% or 5% to 1%.

If they've got $100,000 line, they saved $4,000 the first year. So we had over $400 million of applications, and as of June 30 we booked $60 million. I think we've booked more like $75 million or $80 million by now. So that's more loans that are at 1%, that 12 months from now those will reprice to our floor of 4.5%. So put an extra 3.5% on that $80 million, that's another $2 million to $3 million that will come into our earnings next year. So those are small kind of things we're doing to try and be disciplined and put the cash to use, but it is a challenge and every bank has that challenge.

It doesn't sound like you guys are going the higher risk route. Is that still pretty much the philosophy?

We aren't. Absolutely not.

Paul, the biggest tradeoff that we're making right now is we do have good mortgage production, particularly with the rates being low and that would be an easy product to put onto the balance sheet. But as Tim mentioned, you're trading the duration risk for the interest rate risk. So we have continued to sell a good portion of that production.

Here is what I'd be thinking about if I was you Paul and other people on the phone, is you have our numbers for this quarter and we're pretty much done performance improvement plan. You're going to have a modest amount of expense savings showing through in the third quarter for the other half of FISERV. You only saw half of it come in this quarter because we converted May 15. So you've got the one-time expense noise in FISERV for second quarter you would take out. You shouldn't see that going forward. You got another half of a quarter of benefit on the expense side that will be recurring run rate.

And then you've got three things that you all need to determine when it will come in and how much. Number one is credit. This is a low risk bank and in second quarter, it was running, we did $1 million, but let's just say the underlying core was that $3.5 million. That's a $12 million to $14 million annualized rate. That will come down at some point, you need to decide when, but that is going to be an earnings driver over the next 24 months. That will come in at some point.

Number two, you've got all that cash that you can add up, $200 million at a quarter, probably some $50 million at 1% and then the home equities at 1%. That -- when the rate environment does adjust at some point, that will be earnings to the system. And then lastly, you've got the NSFs that are up to $15 million.

So the way I think about it is I think that it might not be parallel. They might not perfectly match, but I do think that the value of the cash, the extra FISERV savings you'll see coming in could -- and the credit benefit could potentially offset the NSF detriment or exceed it. So I think that what you're seeing this quarter is pretty sound and possibly might be even able to be enhanced over coming quarters.

Paul, it's Jim. What you saw this quarter, just to add what Tim said, $2.7 million of FISERV expense. It's really the end of it, so look at the reconciliation schedule you can see that non-interest expense.

Somebody asked a year ago how much longer they would see these one-time charges, and a year ago I told you one year. There should be -- the GAAP non-GAAP should be very close going forward every quarter now.

Excellent.

Listen, just one final question -- I think I asked that question before. But the economic forecast on slide 12, the only thing that seems a little odd to me is most indicators seem positive, yet personal income is being forecasted in considerably more negative for 2010. Do you know why that is? (Inaudible) look like the projections are higher, payroll jobs, all of the other indicators, unemployment, et cetera, seem to be better, yet, your personal income, which is I guess, your proxy for gross state product, is worse. Do you know why?

We're not exactly sure what's in the model here. Obviously, what's happening is people are keeping a lid on these kinds of expenses as we go, and for that matter you might also be able to say the same thing about unemployment, right? We're already 50 basis points below the estimated 2010, so maybe at the end of the day we'll look back on these as conservative. But it's too soon to tell right now. I think we're in a transition period right now, and also we also have our public sector continuing to go through some cutbacks and the exercise of state furloughs. So these are factors that are working at that.

Okay, thanks a lot, guys.

The next question will come from the line of James Bellessa, D.A. Davidson & Company.

Good morning.

Good morning, Jim.

I have a follow-up question on this mortgage related securities.

Sequentially, your quarters on your average balance went up $120 million in mortgage related securities. And how much of that was home security, home loans?

They were all home loans. We're buying all conforming securities, so there's no private mortgage backed securities. And that's an example, Jim, of the ones we're buying that are like one and two years, so we didn't add a lot of profit on that because we're staying short and just getting 1% or 2% on the yield.

Now what happens if the rates were to go up 100 basis points on one of those pieces of the investment? What happens to the price in that scenario? Let's say by the end of the year, the mortgages are 100 basis points higher -- how much movement down do you have to mark your portfolio down?

Well, on the specific incremental purchases we bought, it would be nominal, because we're sticking to ones that only have like a two year average life left. So that would be nominal on that one purchase. But the bigger picture I think you're getting at is just overall aggregate interest rate risk and we published that in our SEC disclosures, but we have higher -- I don't think it's scary, but we do have higher relative interest rate risk than most financial institutions simply because of our franchise. We are roughly, I think 45% of our loans are 30 year fixed rate mortgages that would not be the shorter duration I'm talking about.

These ones we've purchased -- when you purchase them, you're able to go out in the market and look for ones that only have two or three years left. So it may have been issued as a 30 year mortgage, 15 years ago, but there's not much left. We do have mortgages on our books that we booked two years ago, five years ago, seven years ago that were 30 year fixed rate mortgages. So it's not a high level of interest rate risk, but it would be, that's the one category I would say when you look at our entire franchise, it is modestly higher risk than other companies.

And Jim, you wouldn't see the loans being mark-to-market for the securities -- you would see it coming on the balance sheet through the AOCI.

The $120 million increase, how much was home equity loans of that sequential quarterly change?

Are you talking about in our securities portfolio?

Where do you pull up place your home equity loans? Is that in loans receivable?

Yes, so that would not be in the securities portfolio. That's in the loan portfolio.

Okay, thank you very much.

Securities -- just so everybody is clear, the securities were traditional, conforming, regular houses like you live in, and those went in the securities portfolio.

(Operator Instructions).

Your next question will come from the line of Jacquelynne Chimera, KBW.

Hi, everyone how are you doing?

Good, thanks.

Hi. Most of my questions have been answered, but I just had a few quick ones remaining.

I saw you had some good CRE growth this quarter and I was just wondering what loans that was from.

I don't know specifically. That's not a huge line of business for us -- as you know, our total portfolio is small. We've never really been big, and construction CRE is primarily income producing properties that we go after and our gentleman that runs that, Dean, is very talented, been in the market a long time and actually before that was a regulator. So he understands the risk. And in the last two months, he's been telling me, interestingly, that he's seeing a lot of deals and they're high quality deals. So I'd have to get more specifics offline but --

Okay, so do you take that along with some of the economic indicators that you've seen that there might be some increased demand going on in the marketplace?

I don't know. There's always early indicators right? I was over on Maui this weekend -- we did a Grand Reopening of our Wal-Mart. We ripped it out, it was about 10 years old, and did a brand new design. It looks great. And I was with one of the City Councilman there and he said hotels are looking pretty good, that occupancy is starting to come up. Had another friend there that was there Friday night and wanted to stay over -- they were there through Friday, wanted to stay Friday night until Saturday, and had to come back to Oahu because they couldn't find a hotel room.

Oh, that is good.

So Alvin is reminding me, I'm not sure what you're looking at on the CRE. We have heard there's good deals. One of the things that happened -- keep in mind is we had about a larger loan that was that shopping center I told you about and it was in the commercial real estate construction category, and since it got completed and the shopping center -- Target's in there, whatever, Sports Authority, I don't remember what else is in there. But a Ross store is in there. But anyway it went live, so we recategorized that loan from commercial real estate construction to CRE, so that could be some of the movement you're seeing in balances also. But I think there is some modest growth. Some of it could be the moving of that one loan.

Okay, and I'm less looking at it from a credit standpoint and more looking at it from just growth in the area, which could then drive consumer growth.

Yes, I wouldn't get too excited about that. I think anything we saw, it's modest. There's not -- our economy is not too much different than the rest of the country. It's fairly slow.

Jackie, I'd say we're not seeing that yet as far as the loan growth. But what I can tell you is that there's a lot of people who have been out here looking for projects and looking to put money to work, but it will take a while before the loans actually come through.

Okay. And then I just want to make sure that I'm not looking at this incorrectly. So I saw that you had lowered the pre-provision estimates by about $10 million or so just to account for the NSF fees. And so since those were about $15 million last year, are you expecting about 30% of them to stick going forward?

Well, like anybody, we just guess -- so we just said we're a conservative Company. If anybody on the phone has been following us, I think that we've hit every number that we've said we've been hitting for the last two years. So we just said, we don't know, so I'm not going to spook you. So we just said let's say 25% stays and hopefully we'll beat it. But it's too early in the game, so when we model numbers for you, we're taking that $15 million and just assuming that 25% stay.

Okay.

This is less an estimate than it is to show you the possible range of outcomes. We don't --

Because we don't know.

We don't know yet what the behavior of the consumers will be until we get into the third quarter. We don't have enough data yet. So our point here is to show you when you net down to the $65 million to $73 million range what the possible impact is, and we'll have more to say about that later in the year, but that's really just to show you the range of the math.

And Jackie, we may be a little behind some of the other banks that you follow and that's primarily because we started our opt in program later because of the FISERV conversion, so we've only really just begun that and as Jim said --

And no, you're actually right along with everyone else. I mean, no one really has any kind of indication what it's going to be.

Well, people have been collecting data for a while. We only started two weeks ago because we converted FISERV May 15, so we had to have all of our new data systems up in order to be able to capture the data. We literally started asking new checking accounts as well as our existing checking accounts only two weeks ago.

Okay. And then -- I think that's about it. Thank you very much.

Sure.

The next question will come from the line of [Bo Chang], Longbow.

I was wondering if Dick could elaborate on your comment that the 2011 post CapEx, post 2011 CapEx will be, I think you said it was conservative. So I was wondering if you could give a little more color on that and maybe what projects you're looking at.

Dick, what I said was that 2010 and 2011 are unlikely to change, but if the programs that we have proposed come through, it's likely conservative is what we said.

Beyond.

Beyond '11, right.

Yes, this is Dick. I don't know if I can expand actually much on what Jim just said, but as we look going forward, we think the projects we have in our capital queue are likely to increase the number of projects rather than decrease, so that the numbers we've got out there are relatively conservative.

Okay, fair enough, and then also another question for you, Dick, just with respect to the HELCO case. I know formal (inaudible) discussions will be coming up in the next couple weeks I think. You were able to settle the MECO case. Fair to say there's maybe a fair chance that we could also settle this case as well?

That's certainly our goal and I'd say there's a fair chance.

Okay, and finally maybe for Jim. I know you entered for some swaps for the medium term note that you're going to issue this year. Is that for the 2011 maturities or is that -- are you just trying to capture some of the lower interest costs?

These are forward starting swaps for the $150 million of MTNs at the Holding Company that mature in March and August of next year.

Okay.

So we're basically trying to lock in a rate now, given this environment, and not wait until the maturity of those. And our perspective on this is not to really try to guess at rates or be a certain rate, but basically lock in a rate that is acceptable or even better than what we had estimated for our business plan. That's how we would get it.

Any thought to maybe prepaying some of the maturities outside of the 2011?

Yes, so as this Company progresses toward all of the things that we've talked about with a better economy, an improved regulatory model and the like, earnings in the future may allow us to do that. So we do have that in mind to reduce Holding Company debt as cash flow develops.

Great, thank you.

The next question will come from the line of Gavin Tam, Macquarie.

Hi, good morning, guys. A question on the utilities.

Wondering if the $10 million outcome on the MECO rate case, whether you think that gives you a reasonable opportunity to earn the 10.7% allowed ROE?

This is Dick Rosenblum. It will certainly help close the gap. I don't believe it will get us to the 10.7% immediately, as we've said several times, once decoupling becomes effective, it typically takes several years and about one rate case cycle before you've pretty much gotten the full value out of your regulatory model shift. So the MECO settlement will help us, get us part of the way there, and then it will take another rate case cycle to get all of the way there.

Gavin, this is (inaudible). I had one clarification. Per the interim decision, the ROE is at 10.5%.

Oh, okay, my mistake. I'm sorry.

And then similarly, on the HELCO rate case, I know -- I think they were filed around the same time as the MECO rate case. Do you anticipate a similar update in the sales forecast that might have a similar impact as it did on the MECO rate case?

This is Dick Rosenblum again. I don't think so. The MECO sales have somewhat dramatically changed over the period. The HELCO sales have not.

And Gavin, it's Jim. The cases were not filed at the same time, actually, as well. They were several months apart. And so the maturity of the HELCO one would be, if not settled, November.

Correct.

And Gavin, with respect to the sales, if you look at what's happened to the economy on Maui versus the Big Island, Maui was our island that was most significantly hit in the downturn, so it's coming back off that lower base.

Okay, great. Thanks guys.

Sure.

There are no more questions at this time. I'd like to turn the call back to Shelee Kimura for closing remarks.

Thank you, everyone for joining us today. As always, call me if you have additional questions. Aloha, everybody.

And ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.