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Hawaiian Electric Industries Inc (HE 6.86%)
Q3Â 2020 Earnings Call
Nov 6, 2020, 4:15 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Hawaiian Electric Industries Inc. Third Quarter 2020 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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. Please go ahead.
Julie Smolinski -- Director of Investor Relations
Thank you, Ailee. Welcome everyone to Hawaiian Electric Industries third quarter 2020 earnings 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, and other members of senior management.
Our press release and presentation are posted in the Investor Relations section of our website.
As a reminder, forward-looking statements will be made on today's call. Factors that could cause actual results to differ materially from expectations can be found in our presentation, our SEC filings and in the Investor Relations section of our website. Now, Connie, will begin with her remarks.
Constance Lau -- Chief Executive Officer
Hello everyone, and mahalo for joining us today. We hope you're safe and well. I have been deeply impressed by the dedication of our employees and the resilience of our customers and communities as we all adapt to the ongoing challenges of COVID-19. Our core strengths continue to serve us well in these unprecedented times. That includes our long history of providing essential services for the State of Hawaii, strong liquidity, stabilizing utility regulatory mechanisms, our Bank's conservative approach to risk, its low risk loan portfolio and strong capital position.
In the third quarter, our financial stability enabled us to continue helping our customers, our economy and our communities and again to deliver solid financial results. Net income of $65 million and earnings per share of $0.59 compared to $63.4 million and earnings per share of $0.58 in the same quarter last year. I'll start with an update on the virus and economic conditions in Hawaii before turning update on our companies. Then, Greg will review our financial results and outlook.
Well, there is still uncertainty regarding the course of the virus and the timing of economic recovery, we've seen some positive signs. First, daily new COVID cases are down significantly from the surge we saw this summer. The seven-day average of new cases is down to 92 with about a 2% positivity rate after a second stay-at-home order on Oahu starting in late August. Oahu's local economy largely reopened in late September, under a tiered framework and since then we've been able to move to the second tier allowing more business activity.
On October 15, Hawaii's tourism sector reopened with a program allowing domestic travelers with a negative COVID test to bypass the 14-day quarantine. Since then, we've seen an average of 5,600 arrivals per day, up from the roughly 2,000 a day that we saw before the 15th. Starting today, this program also includes travelers from Japan and Hawaii is working to extend it to other countries.
While the tourism reopening is encouraging, the timing of a sustained reopening depends on how the virus plays out. The federal government and military, our second largest economic driver, have maintained stability throughout the COVID period. Residential real estate values have also remained strong. Year-to-date September, Oahu's single family home prices were up 3.3% and compared to the month of September last year, Oahu's single family home prices were up more than 13% driven by low inventory and low interest rates. The latest forecast from the University of Hawaii Economic Research Organization or UHERO whose outlooks have informed our own estimates, projects Hawaii's economic recovery starting in 2021 and accelerating into 2022.
Turning to our companies. Keeping customer rates down has been a central focus for our utility. That began before the onset of COVID and remains a core priority. Fortunately, customers have seen some bill relief this year. Lower fuel costs and a lower revenue balancing account component from higher-than-projected electricity sales last year meant that an Oahu residential customer using 500-kilowatt hours of electricity in October paid 13% less than in March. The commission has extended the suspension of disconnections for non-payment through year-end. We continue working with customers on repayment options and connecting them with services to help them through this time including with utility bills.
Last month, the commission approved our settlement with the consumer advocate to not increase base rates in our Oahu rate case. In improving the settlement, the Commission maintained Hawaiian Electric's current allowed return on equity of 9.5% and 58% equity capitalization, lifted the 90% cap on Schofield Generating Station project cost recovery, ended the 2017 rate case customer benefit adjustments and deemed the enterprise resource planning system benefits commitment to be flowed through to customers as part of the zero base rate increase.
To help offset the lack of a base rate increase and deliver on our commitment to ramp up to $25 million in customer savings by year-end 2022, our utility is executing on its multi-year efficiency improvement program, which began earlier this year. While we pursue cost efficiencies, we are also pressing forward aggressively on our clean energy goals. We are on track to exceed the 2020 RPS milestone of 30% for the year. Since the RPS calculation divides renewable energy by sales, lower sales due to COVID temporarily pushed our RPS above 35% as of the second quarter. With electricity sales expected to increase in the fourth quarter, we expect RPS to moderate, but still exceed 30% by year-end. In the next few years, we anticipate strong RPS growth from our major renewable energy and storage procurements.
In the third quarter, we filed eight purchase power agreements for renewable energy and storage projects and to self-build storage applications as part of our Stage 2 procurement. Two of the projects selected in that procurement are still under negotiation. Last month the PUC approved the 8th final PPA from our Stage 1 procurement for a solar-plus-storage project on Maui. If all Stage 1 projects and the filed Stage 2 projects come online in anticipated timeframes, they would add nearly 600 megawatts of renewable energy and 3 gigawatt hours of storage to our system between now and the end of 2023. This will help [indecipherable] Hawaii in 2022 with the expiration of one of our Oahu IPP contracts. The Stage 2 projects together with our recently proposed Kahului synchronous condenser project will also help us retire one of our Maui fossil plants by 2024.
We are also preparing an RFP for up to 235 megawatts of community-based renewable energy. Given the scale of our system, these procurements are significant. If you add up what I've just talked about, you get over 800 megawatts, that's on a system with a total peak load of just 1,200 megawatts on Oahu and 200 megawatt each on Hawaii Island and Maui County. While timing for projects to come online can be affected by many factors, there is no question we are moving forward aggressively.
As you know, we, the commission and many stakeholders, have been working hard to align the regulatory framework with customer interest and Hawaii's renewable energy goals through the performance-based regulation or PBR docket. The commission has kept the docket moving through COVID and appears on track for a December decision. The guiding principles is set early on in PBR including maintaining financial integrity of the utility and the collaborative stakeholder based approach, the commission established has been consistent throughout the process. We've generally summarized areas of consensus and divergence on Slide 30 of our deck.
The Commission's decision and order will confirm the way forward. The Commission has been progressing other dockets too, and just last week approved a 50-year contract for Hawaiian Electric to own, operate and maintain the electric system serving the Army's 12 installations on Oahu.
Turning to our banks. American Savings Bank continues its solid execution of the dynamic COVID environment. Areas are returning to normal operations. We've reopened six branches we had temporarily closed. While low interest rates continue to compress net interest margin in the third quarter, we were able to replace much of the prior quarter's gains on sales securities through core activities, including strong mortgage banking income and resumption of certain payments. We remain focused on sound risk management, with the timing of a sustained tourism reopening uncertain, ASB's third quarter results again reflect elevated provision.
We think we are well-provisioned and continue proactively working with customers to understand how their financial health and outlook are affected by COVID. Cost efficiency is and will continue to be our main focus particularly in the current low interest rate environment. In addition to reducing COVID costs, we also closed five branches with two more scheduled in December. Most of these have been temporarily closed earlier in the pandemic. We're continuing to roll out our new smart ATMs providing more customer options and convenience. We've been impressed by how customers have conserved to manage their resources during this time. The majority of customers who sought initial loan deferrals are returning to repayment while some customers and sectors are more impacted, overall we are seeing low delinquency rates and continued strong deposit growth.
For customers who received PPP loans, we're now working on forgiveness and have started submitting loans to the SBA for that process. We've continued to see robust adoption of our online and mobile banking services and high customer satisfaction with our digital offerings.
And now Greg will review our results for the quarter and our outlook.
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
Thanks, Connie. Turning to our third quarter results. Consolidated earnings per share were $0.59 versus $0.58 in the same quarter last year. At the utility, timing and management of O&M expenses had a positive impact. At the bank, tighter lending margins and COVID-driven provisioning continued to affect results while non-interest income from core activities improved compared to the linked quarter.
While holding company loss is well in line with plan, we saw a modest increase due to lower income at Pacific Current and higher interest expense from higher short-term borrowing. Consolidated trailing 12 month ROE remains healthy at 9.4%. Utility ROE increased 80 basis points versus the same time last year to 8.4%. Bank ROE, which we look at on an annualized rather than a trailing 12-month basis was 6.8% for the quarter down from last year due to the economic impacts of COVID and a low interest rate environment.
Turning to the next slide. Utility earnings were $60.1 million compared to $46.8 million in the same quarter last year. The most significant variance drivers were $10 million lower O&M expenses, primarily due to fewer generating unit overhauls, lower labor cost due to lower staffing levels and reduced over time and elevated vegetation management work in the third quarter of 2019. The lower overhauls represented about $5 million of the $10 million O&M variance. Of the $5 million, $2 million was due to an elevated number of overhauls in the third quarter of 2019, and the remaining $3 million was timing as some overhaul work will be performed later this year or in 2021.
We also had a $5 million revenue increase from higher rate adjustment mechanism revenues and a $1 million increase in major project interim recovery revenues for the West Loch PV and Grid Modernization projects. These items were partially offset by the following after-tax items. $1 million lower AFUDC as there were fewer long duration projects in construction work in progress. $1 million higher savings from enterprise resource planning system implementation, which are to be returned to customers and $1 million higher depreciation due to increasing investments to integrate renewable energy and improve customer reliability and system efficiency.
Looking at the drivers of the utilities' financial performance for the rest of the year. With the Commission's final decision in Hawaii Electric rate case, our rates, cost of capital and equity capitalization are now set across all three utilities. Recall that we received a final decision in July for no base rate increase in the Hawaii Electric Light rate case and are not filing a request a rate case for Maui Electric. The utilities multi-year efficiency program will help offset the lack of base rate increases and achieve the Management Audit customer savings commitment. Cost savings initiatives are well under way with additional efficiency opportunities to be identified.
COVID-related expenses from March 17 to year end are being deferred for the commission order we received in June. We've requested an extension of that deferral through at least June 30 of next year. We'll have to file separately for recovery at a later date. COVID related costs have been $12.4 million to date, mostly related to bad debt expense. The suspension of customer disconnections remains in place until year end. Lower fuel prices have been good for our customers with a typical 500-kilowatt hour residential monthly bill on Oahu in October was down $21 since March, due to fuel price savings for customers. With these savings, the utility may qualify for a reward under the fossil fuel cost risk sharing mechanism.
On Slide 11, based on year-to-date information, we are forecasting $340 million to $350 million of capex in 2020, down from $360 million communicated last quarter, primarily due to unexpected delays from COVID-19 and completion of some of our work at lower cost. Specifically COVID-19 delayed our smart meter deployment, completion of a generating unit overhaul on Maui and impacted transmission structural replacement work when a helicopter contractor went out of business due to COVID-19. Fortunately, we were able to bring some of that work in-house and completed at lower cost. We also saw some other delays related to permitting.
We are maintaining our longer-term capex and rate base guidance in the 2021 to 2022 period. We still expect capex to average approximately $400 million per year or about 2 times depreciation. While strategically important, we don't expect the recently approved Army Privatization contract to have a material impact on annual earnings, which will depend on a number of factors including the amount in timing of capital upgrades and capital replacements. We continue to expect the utility to self-fund its forecasted capex through 2020 via retained earnings and access to the debt capital markets.
Turning to the bank on Slide 12. American's net income was $12.2 million in the quarter compared to $14 million in the prior quarter. Although yield on earning assets continued to be impacted by the low interest rate environment, we had improvements in a number of areas including record mortgage banking income, a record low cost of funds supporting net interest margin, increased fee income as we resumed certain fees suspended to help customers during the initial impact of COVID and lower non-interest expense. We continue to see elevated provisioning this year given the ongoing COVID-19 related economic uncertainty, provision was down slightly versus the last quarter, which included amounts for unfunded commitments.
Improved non-interest income from core activities and expense controls were key drivers of bank net income during the quarter. As you may recall, we had a large one-time impact in the second quarter from $9.3 million in gains on sale of securities on a pre-tax basis. We were able to replace much of that amount through a combination of record mortgage projection generating mortgage banking income of $7.7 million versus $6.3 million last quarter and resumption of previously suspended fees driving $9.6 million in fee revenue compared to $7.2 million last quarter.
Expense controls were also helped to offset the second quarter's gain on sales. In the second quarter, we incurred $3.7 million in COVID-19 related expenses consisting of additional -- paid to frontline employees, the payout of excess vacation days for employees unable to use vacation while working through the pandemic, purchases of PPE and sanitation supplies, the employee meals to promote employee safety and support Small Business restaurants. In the third quarter, our COVID-19 related costs were down $3.1 million to $0.7 million consisting primarily of cleaning and sanitation costs.
On Slide 14, as expected ASB's net interest margin compressed more moderately in the third quarter than prior quarter, narrowing 9 basis points to 3.1%. Record low cost of funds and lower FAS 91 amortization help to offset the impact of the low interest rate environment on asset yields. Most of our adjustable-rate loans repriced in the second quarter while fixed price loans, which are driving most of the repricing now, reprice more gradually. For the remainder of the year, we expect continued margin pressure, but at a moderate pace. This includes pressure from continued low interest rates and from excess liquidity due to strong deposit growth and lower reinvestment yields. For the full year, we expect to be within our previously guided NIM range of 3.35% to 3.25%, year-to-date net interest margin was 3.34%.
Turning to credit. This quarter's provision was $14 million compared to $15.1 million in the linked quarter. With uncertainty regarding if we will realize a sustained gradual reopening of tourism and strengthening of our economy, this quarter's provision included $12.3 million in additional reserves related to potential economic impacts from the pandemic. Credit quality improved in our personal unsecured loan portfolio and we were able to release some reserves related to that portfolio during the quarter. Net charge-offs also improved and were lower than the last two quarters. With the economic picture still in flux we are still holding off on providing provision guidance.
Slide 16 provides an update on what we're seeing in our loan portfolio. Overall, we have a high quality loan book that remains healthy with only 3% of our portfolio on active deferral at the end of the quarter. 76% of deferred loans have returned to payment. Previously deferred loans, do have a somewhat higher delinquency rate of 1% compared to 0.3% for our portfolio as a whole. We continue to carefully monitor our portfolio and are closely -- are working closely with our customers to understand their circumstances and outlook. Given the enhanced monitoring, we have implemented for commercial loans as well as the overall quality of our loan book, we feel we are well-provisioned as of September 30.
As we continue -- ASB continues to maintain ample liquidity and healthy capital ratios. The bank is over $3.2 billion in available liquidity from a combination of reliable sources. ASB's Tier 1 leverage ratio of 8.35% was comfortably well above well capitalized levels as of the end of the quarter. As a reminder, the bank is self-funding and we don't anticipate that it would need capital from the holding company even under more severe stress scenarios than we anticipate from COVID-19.
Turning to consolidated liquidity, we're well positioned to withstand the impacts of COVID. As of September 30, we had $425 million of undrawn credit facility capacity, consisting of $150 million at the holding company and $275 million at the utility, with just $23 million in commercial paper outstanding, all of which was at the holding company. We recently executed transactions to further enhance liquidity and pre-fund upcoming debt maturities. At the holding company in September, we executed a $50 million private placement to pre-fund a March 21 maturity. In October, we launched and priced a subsequent transaction to pre-fund a term loan maturity coming up in April, 21.
At the utility, in October we executed $115 million private placement, which we can draw on at any time leading up to its January funding date. The utility has no long-term debt maturities in '21. At the holding company, all long-term debt maturities in '21 are now pre-funded and we maintain solid liquidity and financial flexibility and strength heading into 2021. And we remain committed to an investment-grade capital structure.
On the next slide, we expect our dividend from and the equity investment in the utility to be consistent with our earlier projections. The utility continues to perform in line with plan, has sufficient retained earnings to support its capex and adequate liquidity to support growth in customer account receivable balances and payment programs for customers impacted by COVID. Bank dividends received to date are sufficient to maintain HEI's strong consolidated capital structure and liquidity. We expect to maintain our external dividend as reflected in HEI's recent dividend announcement.
On Slide 20, we've updated our guidance for the full year. At the utility, we are reaffirming our guidance range of $1.46 to $1.54 per share, and expect the utility to be within the bottom half of that range. While second quarter and third quarter utility results were strong, that was partially due to timing of expenses, some of which are expected to be incurred in the fourth quarter. We're also working to offset the lack of the Hawaii Electric base rate increase and as mentioned, we're expecting capex to be $10 million to $20 million lower than previously anticipated.
At the bank, given economic uncertainty and its effect on provision, we're continuing to provide pre-tax pre-provision income guidance. We've revised our pre-tax pre-provision income guidance upward to $105 million to $115 million versus the previous range of $90 million to $110 million or $10 million increase from mid-point to mid-point. Our holding company guidance is unchanged at $0.27 to $0.29 loss. Since bank provision remains uncertain, we're still not providing consolidated EPS guidance.
I'll now turn the call back to Connie.
Constance Lau -- Chief Executive Officer
Thanks, Greg. Overall, our companies continue to perform well during the pandemic. Our financial stability has enabled us to deliver value for all our stakeholders. In that vein, I'd like to close with a comment on ESG. ESG has been a focus for us for a long time. That's why we say ESG is in our DNA. We just didn't call it ESG before. We've long talked about the linkage between the health of our state and that of our companies. Our renewable energy transition is central to our Company's strategy, and we talk about it on every call, along with the evolution of our regulatory framework to support that transition.
For our bank, key areas of focus include addressing affordable housing and financial fitness for our communities and customers as well as economic diversification and job creation. And you'll recall that Pacific Current was formed to advance sustainability through infrastructure investments here in Hawaii. We're formalizing our ESG approach, integrating it more deeply in our businesses to the extent material to value creation. We published our first FASB aligned report in September and plan to expand future reporting to include TCFD aligned disclosures. So look to hear more from us on ESG going forward.
And with that, we look forward to your questions.
Questions and Answers:
Operator
We'll now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Julien Dumoulin-Smith with Bank of America.
Julien Dumoulin-Smith -- Bank of America -- Analyst
Hey, good afternoon to all of you, or good morning rather. Thanks for the time.
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
How's it going, Julien?
Julien Dumoulin-Smith -- Bank of America -- Analyst
So, first off, how do you think about sustainability of O&M savings going into next year and frankly beyond I mean this is a question across a lot of utilities, but for you guys specifically. And in particular can you talk about what has driven the $10 million year-over-year improvement on utility O&M beyond just shifting out generation maintenance costs?
Constance Lau -- Chief Executive Officer
Okay, go ahead.
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
So we'll provide clarification of the expected savings for next year, some of which of the savings that we've achieved so far this year we expect to be durable, meaning some of the staffing reductions and the efficiencies that we've put in place. But I'll have Tayne Sekimura also comment with a little more detail on that point and the look forward.
Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer
Hi, this is Tayne. Commenting on that -- on O&M as we see it, our cost efficiency initiatives have included things like managing staffing levels to meet our Management Audit commitments as well as to offset the no base rate increase for Hawaiian Electric. It also includes reduced over time and higher productivity due to better planning, scheduling and coordination of work. And so that -- those sorts of activities are sustainable into the -- into next year.
The other thing we're doing is we're engaged in our strategic sourcing efforts to bring down the cost of our goods and services and that too will continue as we move on into 2021. We also look for other opportunities as well as we are working differently in tele working, virtual environment and have found different ways to get our work done. And so some of the things we are looking at is how much office space do we need. How big should our foot print really be, use effect of technology to be able to interact with one another inside the company as well as outside the company. So those are just some of the examples.
Julien Dumoulin-Smith -- Bank of America -- Analyst
Yeah. Excellent. Okay, perfect. And then maybe related to that, if you don't mind, can you discuss the improvement in utility, LTM, ROE. Obviously it's improved here to 8.4% from 7.9% prior. How do you think about this carrying forward right, kind of dovetails with the O&M.
Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer
Yes. So a big part of that improvement does relate to our lower O&M expenses and so there we're seeing that in our results to date. Going forward, it's going to be really key for us to see what comes out of the PBR proceedings. And let me take you through some as well as what came out of the Hawaiian Electric final decision. And so let me take you through some of those pieces. In our ROE chart, we do have a breakdown of the ROE drivers there. And if you look at some of the things like the customer benefit adjustment is an example.
In the Hawaiian Electric final decision, it was considered to be removed and so we're going to stop accruing that amount of the customer benefits and a very small amount will remain for Maui. Right now, it's about 40 basis points and what will remain later would be for Maui is just a couple of basis points.
The other thing is, for the ERP customer benefits, that was deemed to be removed from the Hawaiian Electric final decision, all that will remain there is roughly 10 basis points for Maui Electric and Hawaii Electric Light. So those two items come from the Hawaiian Electric final decision in order. The last piece is the RAM revenue adjustment and the accrual right now is delayed to June 1. But in the PBR docket, there is general consensus of the parties in PBR that this lag should be removed, of course, that is subject to the PUC's decision in PBR that we expect in December. In addition to that as we look forward at PBR, our cost containment, cost management initiatives will continue and be expected as we operate our company. So that's going to be really key -- our continuation of cost management efforts to close the ROE gap.
Julien Dumoulin-Smith -- Bank of America -- Analyst
Yeah. Sorry if I can squeeze in one more just real quickly to finish up the thought. So your full-year '20 guidance remains unchanged ultimately. Why does utility earnings remain in the bottom half then? Is that implicit that some of this pushed out generation maintenance spends in 4Q or is there something in the tail end of this year? And is there any update you can provide around ASB earnings based on the provision loss to date? Just again trying to square that against the guidance and where you're trending.
Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer
Okay, I can speak to the utility. What is coming up in the fourth quarter, as mentioned earlier, you heard about the timing of some of our generating unit overhauls and some station maintenance work that will be performed in Q4. So there will be some elevated O&M there. In addition to that, we also have other expenses that were timing related, related to things like what we're doing in the community-based renewable energy, CBRE. And we had some IT software and hardware purchases that were delayed to Q4. So we'll see those O&M expenses elevated.
Constance Lau -- Chief Executive Officer
And Julien, if I can add, the original guidance, way, way back actually was when we were looking at having the Oahu rate case and of course that's the one that's been settled at a no base rate increase.
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
Yeah. So, as we go into the fourth quarter, we still have this offset no base rate increased costs. And it is a range Julien so obviously there is some movement within the range, but still some uncertainty going into fourth quarter around timing of certain expenses and when and if they materialize. So we've kept it within the lower half of that range, but I think we're positioned well going into the fourth quarter. And then on a consolidated basis, you did see the improvement in our pre-tax pre-provision guidance from the bank as well, which was a improvement in that position going into the fourth quarter now, just seeing how the provisioning plays out during that period as we reopen the economy.
Julien Dumoulin-Smith -- Bank of America -- Analyst
Got it. Excellent. Thank you guys for the time and patience. Yeah, thanks for the Friday afternoon discussion.
Constance Lau -- Chief Executive Officer
Yeah. We thought we are going to hear from Eric not you. So, thank you.
Operator
And our next question will come from Paul Patterson with Glenrock Associates.
Paul Patterson -- Glenrock Associates -- Analyst
Aloha! How are you doing?
Constance Lau -- Chief Executive Officer
Hey. Hi, Paul.
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
Hi, Paul.
Paul Patterson -- Glenrock Associates -- Analyst
So, I apologize for not being able to completely -- could you just why the higher pre-tax pre-provision bank income. What's exactly driving that?
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
Let me turn that over to Rich. They've had a great quarter, but go ahead.
Richard F. Wacker -- President and Chief Executive Officer, American Savings Bank
So. Hi, Paul. As Greg mentioned in the comments as he was going through, we've been able to run pretty well on our expenses and manage those down. We've got some unique things that are related to COVID that come and go. But, those are tighter. And then during the initial stages of the lockdown, we did things like wave all ATM fees and put it in bigger sort of grace periods for late fees and things like that. And during the third quarter, we began to phase those back in as we tried to sort of normalize operations again.
So you're seeing those things come up and you've also seen really strong production on the mortgage side. We are number two in the market so far year-to-date on production of mortgages and that's played through as we work to kind of balance how much we want on the book versus how much we sell, when we sell those gains come through that mortgage banking line. And so those are the main factors.
Paul Patterson -- Glenrock Associates -- Analyst
So just to understand, so when you guys were doing -- when you guys were giving your guidance last quarter, you were more cautious about fee income and expense, all these things that you just mentioned, I won't repeat them all. But basically you were just being more cautious and things came in better than you thought, or was there any -- is that right to think about it?
Richard F. Wacker -- President and Chief Executive Officer, American Savings Bank
Yeah. So for example, we didn't know exactly how the phase-in of the fees would -- how much of it would come back to pre-COVID levels, the strength of the market on the mortgage side and things. So, every one of them we're just working hard to beat what we can do, because we've got a big note of provisions we got to pay for. Right. So the team is just working hard.
Paul Patterson -- Glenrock Associates -- Analyst
How is the loan deferrals? Can you remind us how those are accounted for if there is any sort of provision associated with that if it's past 90 days or something or is there any --
Richard F. Wacker -- President and Chief Executive Officer, American Savings Bank
So we've taken what we think is a conservative approach on loan deferrals. So any -- especially on the commercial side, any customer that has asked for a payment deferral, we've classified that as a special mention loan because the definition of special mention is, there is a potential weakness and approaching us to say, hey I need help to pay, is -- it seems like a potential weakness and so that's been one of the reasons, you've seen our provision higher when we classify a loan or criticize a loan, you carry a higher provision. And so that's been the main difference -- with the deferment, we freeze the loan in the delinquency status as it is if it's current or if it's 30 days. It just stays there until the payment period starts again and it picks up from there. But that -- the classification change is the biggest impact.
Paul Patterson -- Glenrock Associates -- Analyst
Okay. And then turning to the utility. First on PBR, is there any potential for a settlement as we approach the December timeframe here?
Scott W.H. Seu -- President and Chief Executive Officer
Hi, Paul. This is Scott Seu from Hawaiian Electric. This is a PUC driven proceeding. And so where we are in the proceeding is it's in front of the PUC basically ready for their decision making. So the PUC is considering all of the filings, statements of position, evidentiary hearings took place in September and all the parties have filed their post-hearing briefs. So it's basically ready for decision making and that's expected in December.
Paul Patterson -- Glenrock Associates -- Analyst
Okay, thanks for that. So -- and then just in terms of what you guys are thinking about and I guess it depends on what we obviously get with the PBR and everything. But, and I know what -- you guys have done a bunch of stuff here with base rates in the settlements that you have. But how should we think about the rate trajectory for total rates, right, with all the stuff that you have going on. What's your expectation for sort of the total rates obviously subject to change, because we don't know what's going to happen with certain variables. But holding fuel and stuff flat kind of thing, where do you see the trajectory of rates over the next couple of years, given your rate base growth at this point?
Scott W.H. Seu -- President and Chief Executive Officer
Yeah, Paul, that's a little bit tough to answer, but I -- maybe the way I can frame it is at least in far -- as far as the context of the discussions with the PBR docket, it appears that we will be retaining most of the recovery adjustment mechanism such as for the fuel, power purchase adjustment cost and some of those other recovery mechanisms. The Commission is looking at possible adjustments to our major project interim recovery mechanism as part of the PBR docket. It's difficult for me to answer that question, just because there are a variety of these moving parts. And of course as you even reflected, fuel is going to be the biggest driver at least for the foreseeable future. Even though we are working hard to wean ourselves off that, but that is the biggest driver of what the customer see in their bills.
Paul Patterson -- Glenrock Associates -- Analyst
Okay, fair enough. And we'll see what happens with -- in December. Thanks so much and have a good one.
Constance Lau -- Chief Executive Officer
Thanks, Paul. And Paul I just add, remember going forward too, the performance incentive mechanisms are incentive based. So there will be benefit to customers, at the same time there might be benefit to the company.
Paul Patterson -- Glenrock Associates -- Analyst
Great. Thank you.
Operator
And our next question comes from Jackie Bohlen with KBW.
Jackie Bohlen -- KBW -- Analyst
Hi, good morning.
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
Hi Jackie.
Constance Lau -- Chief Executive Officer
Hey Jackie.
Jackie Bohlen -- KBW -- Analyst
Hi. Just wanted to start on the risk rating. I mean, understanding that you've taken a really conservative stance with how your -- marking your special mention. How is that going to have an impact as those get upgraded to watch and to pass? I mean, you had a really good decline in the level of deferrals in the quarter. So just wondering, number one, if borrowers are going back on to payment, how long do you expect them to sit in the special mention bucket. And number two, how you would expect that to affect your reserve methodology as they do that?
Richard F. Wacker -- President and Chief Executive Officer, American Savings Bank
Right. So Jackie it's a great point. We look kind of for about six months of sustained payment performance before we'd look at upgrading the accounts. The -- and so we think that's right now given still the uncertainty about where the recent opening sustain and all that. So we will take some time and watch them, we don't want to jerk around the provision moving them up, moving them back down if there is a closing again. So, we'll look over a couple of quarters.
Jackie Bohlen -- KBW -- Analyst
Okay. So I would suspect that, I'll call it by the third quarter of next year and assuming that when conditions continue to improve that we could be back to a lower level of special mention, and you could have some potential reserve release associated with upgrades to offset any potential charge-offs that are coming through the pipe at that point. Is that a fair assessment?
Richard F. Wacker -- President and Chief Executive Officer, American Savings Bank
From your lips to God's ears, I hope. So I think the point that you're making is a really good one. And I think it's important for people as they think about banking. The provision is for potential credit losses. Right? And if you think about what we're doing, we're providing for what we know is a difficult situation for our customers. When -- with the big increase in coverage that we've had this year is around the risky environment and we've got a lot of customers, as we said, kind of in our release that have really impressed us how they've shepherded their resources and have hunkered down to kind of work their way through.
And we got to see how it plays out. If they succeed, then, yeah, when those upgrade we'll get those provisions back and we're in their corner fighting with them and we hope that these provisions don't turn into charge-offs right, and that's the game. And you've seen charge-offs have been relatively stable with our past, we haven't seen a surge in that and so we're -- we hope this scenario works out like you described.
Jackie Bohlen -- KBW -- Analyst
Okay. And then turning to balance sheet liquidity. I'm -- how are you thinking about that over the next couple of quarters understanding that there are obviously a lot of factors at play inclusive of whether or not we're going to get more stimulus in the future?
Richard F. Wacker -- President and Chief Executive Officer, American Savings Bank
Yeah, we're cautiously optimistic that it continues to be as strong as it is. Our deposits have continued to build the customers as we look at where they are, we're seeing it on the consumer and we're seeing it in commercial. We know people will need to spend down some, but we don't anticipate a large run off over the next quarter or so. So it's strong, liquidity is good, we're staying close to the customers. Commercial customers, our guys are with them on a very regular basis, understanding what their cash flow situation is and how they look. So right now we would expect relatively consistent performance.
Jackie Bohlen -- KBW -- Analyst
Okay. And then just lastly, in terms of loan growth, on a linked quarter basis, you had good generation in CRE balances. Is there anything point to point that was unusual there? Was it just really solid growth in the quarter?
Richard F. Wacker -- President and Chief Executive Officer, American Savings Bank
Yeah, no there were -- we've got a terrific new leader of that CRE team that joined our bank earlier this year. And he is just good at finding the right kind of deals. We have tended to be more heavy in sort of construction-related and project. He is excellent at getting the long-term investor component of the portfolio, growing too, and we're really prudent in this environment right, we are sitting here saying that we're not interested in bringing somebody else's troubled asset on to our book. But as you know, we've also stressed you how Hawaii real estate is a resilient asset. So we're being really selective but when we see the deal that we like, we also want to support those deals and the customers associated with them.
Jackie Bohlen -- KBW -- Analyst
Okay, great. Thanks, Rich.
Operator
[Operator Instructions] Our next question comes from Charles Fishman with Morningstar.
Charles Fishman -- Morningstar -- Analyst
Hi. Good morning to you. And just had a couple. On Oahu rate case, will that now be the three-year cycle? And there was nothing in that settlement that we'll now operate, where you could come back four, three years.
Constance Lau -- Chief Executive Officer
So Charles, the Commission is no longer looking at the mandatory triennial rate case cycle because of the transition to PBR. And so that's why in the PBR framework there is the multi-year rate plan, which is at five years. And so that's --
Charles Fishman -- Morningstar -- Analyst
Yeah, I forgot about that. Okay. Let's talk about PBR though. I mean on that one slide, I've lost it, you'd have the things if you free to, there it is. I realize you're still negotiating with the PBR. But on the left hand side, are they agreed to things? Could you maybe discuss that, it would seem like as I look at that list to eliminate the RAM lag, that's a real positive. Is that -- is there something else on that left side that I should be saying, wow, that's pretty good?
Constance Lau -- Chief Executive Officer
We'll let Tayne answer you or Scott.
Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer
Charles, hi. This is Tayne. Yeah and again as a reminder, this is a summary of the consensus and differences of the parties. It is subject to PUC decision making. But yes, it is positive that the existing -- the parties do agree that the existing RAM like it should be removed because that's roughly 30 basis points to 40 basis points.
Charles Fishman -- Morningstar -- Analyst
I know that's been a problem in the past. So I thought that was good. That's on the left hand side.
Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer
Yeah. The other thing that's a positive but we'll need to see what actually comes out is a potential to earn performance incentive mechanisms, consistent with the outcomes put forth by the PUC. We will need to see how those are set up and how achievable they are, but that's another positive thing. The other thing I would point out is the earnings sharing mechanism, and again it's the position of the parties. The general consensus was that it should be modified to be symmetrical. Currently, we have an asymmetrical mechanism whereby earnings of both of them not ROE are shared with customers. So there is, on the other side for the company to be protected there.
Charles Fishman -- Morningstar -- Analyst
No, symmetrical would be good. Just one more thing. I think it was the last call that the Hawaiian Economic Research Organization, I guess, this is where this number came from the goal was to get back to a 50% level of tourism by the end of the year, which obviously would be the pre-arrival testing program being delayed. And the second wave here I suspect that's optimistic that you provided a lot of data from the Economic Research Organization, but is there any number like that that's comparable that I'm missing or is that just something that they're not doing anymore? I thought that'd be real interesting to see just the level of recovery on the tourism.
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
Yeah, Charles, this is Greg. We show on Slide 3 as part of the UHERO forecast, and by the way, this information is also available on the University of Hawaii Economic Research Organization website. So it's publicly available here. So what they showed was and you see 2020, a 70%, almost 74% reduction from '20 pre-COVID to where we're at, what they're projecting for the calendar year in 2020. With roughly a recovery starting in the fourth quarter. So consistent with what we're starting to see now. And then we've -- on a base case, they are looking at a 73%, 74% recovery back starting off with that lower base and then further improvement in 2022.
What the indication is, it will take and then ultimately their forecast gets to 80% to 90% recovery of -- relative to pre-COVID over the three, four year forecast. So it's a recovery, their revised forecast is a more gradual recovery. And it does stop short of the pre-COVID levels within the forecast period that they have. But it's still a pretty robust number when you think that pre-COVID we were at 10 million arrivals, which was a high watermark year-over-year for us going -- coming out of 2019.
Charles Fishman -- Morningstar -- Analyst
Okay. Well, thank you. That's helpful. That's all I have. Thanks and appreciate it.
Constance Lau -- Chief Executive Officer
Okay. Thanks, Charles.
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
Thanks, Charles.
Operator
This concludes our question-and-answer session. And I would like to turn the call back over to Julie Smolinski for any closing remarks.
Julie Smolinski -- Director of Investor Relations
Thank you all for joining us today and for your questions. And with that have a great weekend.
Operator
[Operator Closing Remarks]
Duration: 58 minutes
Call participants:
Julie Smolinski -- Director of Investor Relations
Constance Lau -- Chief Executive Officer
Gregory Hazelton -- Executive Vice President and Chief Financial Officer
Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer
Richard F. Wacker -- President and Chief Executive Officer, American Savings Bank
Scott W.H. Seu -- President and Chief Executive Officer
Julien Dumoulin-Smith -- Bank of America -- Analyst
Paul Patterson -- Glenrock Associates -- Analyst
Jackie Bohlen -- KBW -- Analyst
Charles Fishman -- Morningstar -- Analyst
