Hawaiian Electric Industries, inc (HE) Q2 2021 Earnings Call Transcript

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Hawaiian Electric Industries, inc (HE 6.86%)
Q2 2021 Earnings Call
Aug 9, 2021, 4:15 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Hawaiian Electric Industries Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Julie Smolinski, Vice President of Investor Relations and Corporate Sustainability. Please go ahead.

Julie R. Smolinski -- Vice President, Investor Relations & Corporate Sustainability

Thank you, Andrea. Welcome everyone to Hawaiian Electric Industries second quarter 2021 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; Ann Teranishi 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 H. Lau -- President and Chief Executive Officer

Thank you, Julie, and Aloha everyone. Mahalo, thank you for joining us today. Second quarter consolidated financial results were strong as Hawaii's economy improved and as we advanced key priorities across our enterprise.

Our consolidated net income for the quarter was $63.9 million with EPS of $0.58, 31% and 29%, respectively, above the same quarter last year. This followed a great first quarter, and for the first half of the year, our consolidated net income and EPS were up 56% compared to the first half of 2020.

At the Utility, our year-to-date results have benefited from our focus on cost management and efficiency and from timing items expected to reverse in the balance of the year. We expect the Utility to remain within its full-year guidance range announced in February. The improved Hawaii economy and strengthened credit quality of our Bank loan portfolio were key drivers of our results year-to-date and, in the second quarter, enabled the Bank to release a portion of its reserves for credit losses resulting in a negative provision for the quarter. We are again increasing our full-year Bank and consolidated guidance, which Greg will cover shortly.

We've seen strengthening in Hawaii's economy with the reopening of our local economy and rebound of tourism. However, we are closely monitoring the recent increase in cases due to the delta variant, as well as how our community response. More than 60% of Hawaii residents are now fully vaccinated and we expect that that will increase as more employers, including state and county government, are requiring employees to be vaccinated or subject to frequent testing. Controlling virus levels will enable Hawaii to continue to be an attractive tourism destination and that will help us as our economy open.

Daily visitor arrivals have increased strongly over the last couple of months, approaching, and sometimes exceeding, pre-pandemic levels with most of our arrivals continuing to be from the U.S. Mainland. In June, arrivals from the U.S. West region were approximately 15% above June 2019 and their spending was 33% higher. Unemployment declined to 7.7% in June, the fifth month of improvement.

Hawaii real estate values and activity remain robust. For July, median prices of Oahu's single-family homes were up 22% and sales volume was up 12% over last year. For condos, prices were up 8% and sales were up 58%. As of the May forecast, UHERO, the University of Hawaii Economic Research Organization, expected state GDP to increase 4% in 2021 and 3.1% in 2022. While we've seen great progress on the economy, we're still taking a cautiously optimistic approach, particularly with uncertainty due to the delta variant.

At the Utility, we remain focused on cost efficiencies as we make needed investments to continue to provide affordable, resilient and reliable electricity to reach Hawaii's climate goals. The new Performance-Based Regulation or PBR framework is now fully in effect as of June 1, and we've begun returning cost savings to our customers under the management audit savings commitment and customer dividend component of the ARA or Annual Revenue Adjustment mechanism.

As we've discussed in the past, Performance Incentive Mechanisms or PIMs are an important part of the PBR framework. In May, the Hawaii Public Utilities Commission approved the final details of a suite of PBR PIMs which are now in effect. The Commission has now started a process to consider and develop additional performance incentives. This includes PIMs and shared savings mechanisms relating to grid reliability, retirement of fossil fuel generation, interconnection of large renewable energy projects, and cost control for fuel, purchased power and other non-ARA costs. We don't yet know when an additional performance mechanisms would come into effect or what the potential earnings impact could be. However, we always expected PBR would be a process of continued refinement, and we look forward to collaborating with stakeholders to develop new ways to align incentives with customer interests.

As we've always said, reaching our collective clean energy and decarbonization goals must be done in a way that is equitable and involve everyone working together. A lot of the progress we're seeing now across Utility scale and distributed renewable energy additions, grid modernization and the electrification of transportation are good examples of this.

The Powering Past Coal Task Force, convened by our Governor Ige, has brought together a range of stakeholders to ensure Commission-approved projects on Oahu are successfully brought online as we prepare for retirement of Hawaii's only coal plant. We're pressing forward on Stage 1 and 2 renewable procurement projects with independent power producers. Three Stage 1 projects are now under construction with others slated to start construction this year or early next year. Six of 12 Stage 2 projects now have approved PPAs and the remaining six Stage 2 projects are pending approval.

Last quarter, we sought clarification from the Commission regarding the interconnection docket and the Kapolei Energy Storage battery energy storage project. We appreciated the Commission's work to respond quickly in both matters. In the interconnection docket, the Commission clarified its intent for us to track costs to customers resulting from changes in project schedules rather than record such costs. And the Commission revised the conditions to its approval of the Kapolei Storage project, enabling us to now work with the developer to advance that project.

We are working to accelerate the addition of more distributed energy resources and are advancing programs to benefit all customers. As of this June, we surpassed 90,000 cumulative installed customer-sited solar systems, which comprise most of the nearly 1 gigawatt of solar capacity on our grid. And now the Battery Bonus program launched last month incentivizes customers to add storage and benefit the overall system by allowing the Utility to use energy from those systems in the evening hours.

Grid modernization is also progressing well with advanced meter deployment accelerating with the Commission's approval to shift from an opt-in to an opt-out approach, enabling greater operational efficiencies and more customer options.

Finally, we are encouraged by recent developments that will accelerate electrification of transportation here in Hawaii and across the country. In June, the Commission approved our eBus make-ready Infrastructure pilot project, which is projected to provide savings for bus fleet operators, while decreasing GHG emissions. Governor Ige signed into law a bill to replace the state's light duty vehicles with a zero-emission fleet by 2035, consistent with our Utility's own fleet electrification goal and to allocate 3% of oil barrel tax revenues to finance construction of EV charging stations. President Biden's recently announced goal of 50% of vehicle sales being electric by 2030 will also help accelerate our electrification efforts, which will benefit our customers, our environment and our clean energy transition.

Turning to the Bank. ASB's strong results reflected the credit-driven reserve release and resulting negative provision for credit losses as the economy and credit quality improved. We believe our reserve levels are appropriate, taking into account ongoing pandemic uncertainty. The Bank's margin improved compared to the first quarter, benefiting from fees related to ASB CARES or Payment Protection Program, PPP loans, lower amortization of investment premiums and a continued record low cost of funds of 7 basis points.

We're still seeing margin pressures due to low asset yields and excess liquidity as strong deposit growth continues to outpace lending opportunities at present. Even so, earning asset growth is helping us grow net interest income consistent with our expectations and we're starting to see more in the loan pipeline with an uptick in home equity lines of credit, as well as continued strength in residential mortgages and commercial real estate.

As ASB's digital banking transformation continues, we're focused on strategic investments to keep the franchise strong and competitive, expand service levels and continue to deliver the personal touch that is a hallmark of who we are as a bank. Ann and the Bank team are upgrading the Bank's technology, data analytics and operating model to allow our team members to transition away from processing tasks and focus more on customer relationships and satisfaction. We're getting great feedback from Bank customers on our digital offerings so far. Nearly 50% of consumer deposits are now through our upgraded ATM fleet or mobile platform and customer satisfaction remains high. We've opened three digital centers to date with a fourth opening today and are excited to see how this new concept, which merges our digital platforms with our warm in-person presence, performs in the coming months.

And now, Greg will discuss our financial results and our outlook.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thank you, Connie. Turning to our second quarter results. Consolidated earnings per share were $0.58 versus $0.45 in the same quarter last year, a 29% increase quarter-over-quarter. Both the Utility and Bank performed well and contributed to our strong consolidated results. The Utility delivered stable earnings even as quarterly results reflected higher O&M expenses, driven by an expected uptick in generation overhauls. The Bank delivered solid financial performance that was enhanced by the reduction of reserves for credit losses and resulting negative quarterly provision, reflecting underlying improvements to the credit profile of its loan portfolio. And the holding company loss has remained in line with expectations.

Compared to the same time last year, our consolidated trailing 12-month ROE improved over 100 basis points to 10.5% and the Utility realized return on equity increased levels of 100 basis points to 8.9%. As you may recall from our Q1 earnings call, we indicated the Utility ROE expectations for the second half of 2021 would be impacted by the management audit savings commitment and customer dividend as O&M reductions that have improved earnings in the first half of 2021 are returned to customers under PBR, starting June 1. Also of note, Bank ROE, which we look at on an annualized basis, more than doubled to 16.8%.

On Slide 8, Utility net income of $41.9 million was comparable with second quarter 2020 results of $42.3 million. The most significant variance drivers were $6 million of higher O&M expenses compared to the second quarter of last year. The main factors that drove higher O&M included $3 million due to more generating facility overhauls. These were largely timing-related as some of the overhauls budgeted for late last year and earlier this year took place on a delayed basis this quarter. We also had $2 million from lower bad debt expense in the second quarter of 2020 due to the recording of year-to-date amounts following the Commission's decision allowing deferral of COVID-19-related expenses last year; about $1 million from the write-off of a terminated agreement relating to a combined heat and power unit; and $1 million due to increase in an environmental reserve.

Of note, O&M increases were partially offset by $1 million from lower staffing levels and efficiency improvements. We also had about $1 million higher in depreciation. The higher O&M and depreciation were offset by $5 million in higher RAM revenues, Rate Adjustment Mechanism revenues. $2 million of this increase related to a change in the timing for revenue recognition within the year with target revenues recognized on an annual basis remaining unchanged; $1 million from lower non-service pension costs due to the reset of pension costs included in rates as part of a final rate case decision; and $1 million lower expense -- lower Enterprise Resource Planning system implementation benefits to be passed on to customers as we have already fully delivered on our commitment to provide customer savings under this program for Hawaiian Electric.

Turning to the drivers of Utility performance for the rest of the year. All PBR PIMs from the December PBR order are now in effect. We expect no material upside from the PIMs this year and are now tracking the potential for reliability PIM penalties and expected downside sharing under the fuel cost risk sharing mechanism. We saw some reliability impacts related to prolonged repairs at one of our substations, which has been partially restored and full restoration is expected to be completed soon. In addition, fuel costs have increased from our January benchmark and thus we expect there will be some downside sharing under the fuel cost risk sharing mechanism.

We currently have approximately $26 million of COVID-related costs, primarily estimated bad debt expense and deferred regulatory asset account. The moratorium on customer disconnections expired on May 31 and we've requested continuation -- continued deferral of COVID-related costs until the end of this year. We will file for recovery once we get a better idea of actual bad debt or realized amounts that requires some time so we can see how our work with customers on payment plans and other bill assistance alternatives plays out.

As mentioned, our O&M expense this quarter was impacted by an increase in overhauls, including some that were previously delayed. We expect to incur more overhaul expenses in the second half of the year and those are included in our guidance. The Utility's ability to achieve the accelerated management audit savings commitment is an important driver of results this year. To date, we've been able to realize savings through increased efficiency and our cost management programs. The Utility is on track to achieve savings to meet its annual $6.6 million commitment, which we started returning to customers on June 1.

Utility capital investments to date have been lower than planned due to productivity improvements and efficiencies that have reduced certain project costs, delay from prolonged repairs of one of our substations limiting work that could be done on other parts of the system, and some supply chain delays due to the pandemic. We now expect capex to be in the $310 million to $335 million range for the year compared to our prior capex guidance of $335 million to $355 million. While this means our forecasted rate base growth is now 3% to 4% from a 2020 base year, we don't expect this year's lower capex range to impact the long-term earnings growth. That's because under PBR, earnings growth comes from three main sources: the Annual Revenue Adjustment mechanism, which covers O&M and baseline capex and our ability to manage our spending within that allowance; separate capex recovery mechanisms, such as EPRM, Exceptional Project Recovery Mechanism and our renewable energy recovery mechanism; and performance incentives.

We still expect to realize 4% to 5% Utility earnings growth, not including potential upside from PIMs starting in 2022, the first full year of PBR. Recovery of electrification of transportation and resilience projects could drive incremental growth from there.

Turning to the Bank. ASB's net income for the quarter was $30.3 million compared to $29.6 million last quarter and $14 million in the second quarter of 2020. The negative provision for credit losses was the most significant driver of higher income. American grew net interest income, while non-interest income was lower compared to the same quarter last year, where we had higher gains on sale of securities, including a $7 million after-tax gain from the sale of Visa Class B restricted shares.

Now I'll go through the drivers in more detail. On Slide 12, ASB's net interest margin expanded slightly during the quarter to 2.98% from 2.95% in the first quarter. Fees related to PPP loans, lower amortization of investment premiums and a record low cost of funds helped soften the pressure from the low interest rate environment and continued strong deposit growth. We recognized $5 million in PPP fees in the second quarter as ASB continues to actively assist customers through the forgiveness process. American anticipates a slight reduction in PPP fee recognition for the second half of the year and continued tapering in 2022 and thereafter. Total deferred fees as of June 30 were $9.6 million.

Lower amortization of investment premiums this quarter was driven by a slower pace of repayments as a result of lower refinance activity. This quarter, we continue to see record low cost of funds at 0.07%, down 1 basis point from the linked quarter and 11 basis points from the prior year. Overall, we still expect that NIM for the year will range from 2.8% to 3%. However, we anticipate that that balance sheet growth should still lead to net interest income in line with expectations for the year despite the continued low interest rate environment.

Turning to credit. In the second quarter, the allowance for credit losses declined $13.5 million, reflecting the improved local economy and credit quality with credit upgrades in the commercial loan portfolio, lower net charge-offs and lower reserve requirements related to the customer unsecured loan portfolio. The Bank recorded a negative provision for credit losses of $12.2 million compared to a negative provision of $8.4 million in the first quarter and a provision expense of $15.1 million in the second quarter last year.

ASB's net charge-off ratio of 0.04% was the lowest since 2015. This compared to 0.18% in the first quarter and 0.49% in the second quarter of 2020. Non-accrual loans were 1.03%, up slightly compared to 1% in the first quarter and 0.86% in the prior year quarter. The increase in non-accrual loans was largely in the residential portfolio, which has a very low historical -- has very low historical loss rates and strong collateral positions. As of June 30, nearly all previously deferred loans have returned to scheduled payments. We believe we are appropriately provisioned in light of the ongoing uncertainty of the pandemic. Our allowance for credit losses to outstanding loans was 1.51% at quarter end.

ASB continues to manage liquidity and capital conservatively, maintaining ample liquidity and healthy core capital ratios. The Bank has more than $4 billion in available liquidity from a combination of reliable resources. ASB's Tier 1 leverage ratio of 8% was comfortably well above well-capitalized levels. Given the current lower risk profile of our portfolio, we continue to target a Tier 1 leverage ratio in the 7.5% to 8% range to ensure competitive profitability metrics and growth of the ASB dividend, while maintaining strong -- a strong capital position.

Regarding HEIs financing outlook for 2021. At the holding company, we expect higher Bank dividends to HEI this year than reflected in the previous guidance given ASB's year-to-date performance, improved outlook and efficient capital structure. We now expect Bank dividends of approximately $55 million to $65 million versus the previously estimated $50 million to $60 million. Consolidated capital structure and liquidity remains strong and we do not anticipate the need to issue external equity in 2021 unless we identify significant additional accretive investment opportunities. And we remain committed to maintaining an investment-grade credit profile.

Turning to our guidance. We're reaffirming our previously issued Utility guidance but expect to be in the lower half of the range due to headwinds from potential reliability PIM penalties and downside sharing under the fuel cost risk sharing mechanism. However, we're revising our Bank and consolidated HEI guidance. Our revised Bank guidance is $0.79 to $0.94 per share, up from our prior guidance of $0.67 to $0.74. This reflects our updated provision range of negative $15 million to negative $20 million.

Given growing uncertainty due to the delta variant, we have not included any potential additional provision credits for the balance of 2021 in our guidance range. However, we will continue to monitor the economic data closely and make future reserve decisions based on third quarter data. We expect the increased Bank profitability and dividend to the holding company to translate into higher consolidated earnings growth. As a result, we're increasing our consolidated EPS guidance to $2 to $2.20 per share.

Now, I will turn the call back over to Connie.

Constance H. Lau -- President and Chief Executive Officer

Thanks, Greg. To wrap up, the second quarter was strong financially and operationally for our companies and we're positioned well to continue delivering value for all our stakeholders the rest of this year and beyond. As we've always said, ESG is in our DNA, and as we work to integrate ESG further into our strategies, business planning, risk management practices and reporting, we're very focused on ensuring linkage to value for all stakeholders.

And with that, we look forward to your questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from Eric Lee of Bank of America. Please go ahead.

Eric Lee -- Bank of America -- Analyst

Good afternoon. Thanks for taking the questions and congratulations on the quarter.

Constance H. Lau -- President and Chief Executive Officer

Hi, thanks, Eric.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks, Eric.

Eric Lee -- Bank of America -- Analyst

Yeah. I just had a few questions on the Utility. Given the use of 2022 as your baseline for the 4 to 5% Utility EPS guidance, could you speak to your earned ROE expectations for 2022? Recognizing you'll have greater second half '21 ROE pressures, but first half earned ROEs have been particularly strong. If you can comment to that. Thank you.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Well, we haven't provided specific guidance yet on our 2022 ROE and specific earnings. We did talk about our long-term earnings growth trajectory given the stability of the revenues and certainty of cost recoveries or the cost recovery mechanisms that we have under our new PBR program. We'll come back to that. We do -- we have seen significant improvement this year and, as you know, that's largely driven by the Utility's ability to manage within the budget of those recovery mechanisms. And so we anticipate more of that going forward. Tayne, do you have any comments?

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer, Hawaiian Electric Company

Yeah, thanks, Greg. Eric, I would also add a couple of points here. Earlier in the year, in our February '21 webcast, we did note that at the midpoint of our guidance range, the realized ROE would be at 7.8% for 2021. Now, going forward in 2022, a couple of things to remember. One, the elimination of the RAM, our ARA lag where -- so that is one element. The other thing to think about is, under the EPRM, we're getting the full first year recovery, which eliminates another issue of lag. The third element I would point out is what Greg mentioned, and that is managing our expenses within the ARA formula through our continued cost efficiency programs. That's how we would think about 2022.

Eric Lee -- Bank of America -- Analyst

Got it. Much appreciated. And maybe on PIMs, can you talk about focus areas for the additional PIMs to be developed in the August working group? Would you primarily expect this to be structured as incentives, penalties and what extent of PIM upside could we see in terms of basis points relative to guidance as we go forward from here?

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer, Hawaiian Electric Company

Eric, this is Tayne again. Right now, we are in the preliminary stage of meeting with the working group this month to actually develop these additional Performance Incentive Mechanisms and shared savings mechanisms. So stay tuned on what comes out of that. In the prepared comments, we did say that we did have an expectation that PBR is in this mode of improvements and we're -- the Commission is looking at ways to develop new mechanisms. But we will have to wait to see what comes out of that working group.

The other thing I would add, Eric, as previously mentioned, the types of things the Commission is looking at really is focused around the things you have been hearing on the Commission front with respect to developing mechanisms related to grid reliability, timely retirement of fossil fuels, the interconnection of large-scale renewables, and then also cost controls for fuel, purchased power and other non-ARA types of costs. So stay tuned for more on that.

Eric Lee -- Bank of America -- Analyst

Excellent. And one more question for me and I'll hop back into the queue here. But on the capex and rate-base reductions, could you just talk about the specific reduction for '22 and '23, Greg? I know you mentioned the '21 reduction for capex, but just wondering the drivers of the reduction and the ranges for '22 and '23. Thank you.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks. Thanks, Eric. I'm turning back to our guidance slide on that. Overall -- our overall range of capex, we don't see as contracting meaningfully. As you look forward to our base of about $400 million, we have shown $350 million to $450 million as the range for '22 -- 2023. So we expect there is volatility in the capex overall. We don't necessarily see it a general trend or a decline in our level of capex spending. A lot of that is dependent upon the exceptional projects that are proposed through the processes, as well as a baseline level of spend. As you know, our baseline level of spend has been pretty consistent year-over-year. We've had some -- we had some accelerations in 2019 that took us to $450 million recently. And then we saw some decline on that last year as we came off at higher level. So, overall, we think that there'll be a continued level of spend within that $350 million to $450 million level.

I would note that, as we also look at other programs around electrification in transportation, which are still developing, resilience projects that are needed and necessary and part of our integrated grid planning processes, that we do see potential for incremental needs for investment to achieve our sustainability and reliability goals long-term.

Eric Lee -- Bank of America -- Analyst

Thank you.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks, Eric.

Operator

The next question comes from Paul Patterson of Glenrock Associates. Please go ahead.

Paul Patterson -- Glenrock Associates -- Analyst

Hey, aloha. How are you doing?

Constance H. Lau -- President and Chief Executive Officer

Hi, Paul.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Hey, Paul.

Paul Patterson -- Glenrock Associates -- Analyst

Just on the reliability -- the downside to reliability PIM penalties and fuel sharing, could you -- I'm sorry if I missed this, could you just quantify that a little bit, like, what kind of range are we talking about potentially and how do we think about that issue in 2022?

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer, Hawaiian Electric Company

Paul. Hi, Paul. This is Tayne Sekimura. Let me take your question. So when I take a look at 2021 and what was previously mentioned about our full -- maintaining our full Utility guidance range, we did note that a couple of Performance Incentive Mechanisms might provide the potential for the downside; one of them being the reliability PIM and the next being on the fuel cost risk sharing. So, together with both of those potential penalties, I mean, we're still in August of this year, we're looking at landing in the lower half of that EPS guidance range that we had set out earlier in the year.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

You will note that the SAIDI SAIFI penalties are the ones with the reliability metrics that are specifically included with those. And those are penalty-only, Paul. And we expect to be in the penalty area, given some of the challenges on the system in the substation. And the fuel cost sharing mix and which is frankly a reflection of movements in global oil prices that -- so we really don't have the ability to control those. Those have moved against us. So on a projected basis, we're expecting to be also in the penalty area there.

Paul Patterson -- Glenrock Associates -- Analyst

So, if oil prices go down, I mean, how much exposure in general -- I apologize for not knowing this, but what's your total exposure -- what's the capped out with respect to fuel?

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer, Hawaiian Electric Company

So first -- I'll take that, Greg.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Sure.

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer, Hawaiian Electric Company

For the fuel, it's capped out at $3.7 million.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. And is it capped out, I assume, at the -- on the SAIDI, the reliability stuff as well?

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer, Hawaiian Electric Company

Yes. And that's a penalty-only. It's capped out at -- combined for SAIDI and SAIFI, at $6.8 million.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. And then with respect to the provision for loan losses, once again, it's been great this quarter. But thinking going forward to a more normal year and I don't know when we'll be there exactly, but let's just assume that '22 is more normal. Obviously, 2020, you had COVID and everything so that would be kind of an unusual year, I would think. Would it be better to go back to maybe what you guys -- just as a placeholder, I know you guys aren't giving guidance, but to like what you guys originally had in -- at the beginning of the year for the provision expense or would it be better to go to 2019, if you follow me?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

We'll turn that over to Dane.

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Yeah. Hi, Paul. This is Dane. So, I guess, the question is what would your provision be over a normalized basis. I think what you have to take into consideration is that most of our provision pre-pandemic was related to our personal unsecured loan portfolio. So since COVID started, we've significantly de-risked our portfolio, so we're right around $100 million today. We feel we're adequately covered. And so -- and the net charge-offs are extremely low. And so, it's a function of growth, I think, going forward. As we grow our loan portfolio, obviously, we have to provide for it and then it's just the coverage ratio, so any changes in the economic outlook. So it's mostly, I think, around growth and coverage. So it's going to -- if you look at 2019, I don't think that's the best measurement to look at in terms of size. I think you would have to look at it in a more pre -- I think, pre-growth of our personal unsecured portfolio, during that timeframe, and that's where I think you would see the dollar amount be.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. Okay, fair enough. Thanks so much. Have a great one.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks, Paul.

Constance H. Lau -- President and Chief Executive Officer

Thanks, Paul.

Operator

The next question comes from Jackie Bohlen of KBW. Please go ahead.

Jackie Bohlen -- KBW -- Analyst

Hi, everyone. Good morning. Actually...

Constance H. Lau -- President and Chief Executive Officer

Hi, Jackie.

Jackie Bohlen -- KBW -- Analyst

Hi. I want to pick up on that question just a little bit more, Dane, and dig into the mix of the portfolio. So based on my calculations, using where you ended up with CECL before the pandemic and then just your year-end 2019 loan balances, I get a reserve ratio of roughly around 1.42. So looking at that unsecured portfolio, it jumps to around $100 million now. Is it fair to assume that the mix that the portfolio has undergone through the pandemic and lowered those unsecured balances, that 1.42 is probably somewhat of a high watermark and the reserve could trend below that? Is that a fair assumption?

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Yeah, yeah.

Jackie Bohlen -- KBW -- Analyst

Okay.

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

So, hi, Jackie. We have about $20 million in qualitative factor within our ACL currently right now, our allowance for credit loss amount. That would take our ratio down to about 1.20 on a normalized basis. So we have -- we think we have significant coverage, given what's happening with the delta and the local economy. And so that's sort of where we're thinking as a more normalized ACL level.

Jackie Bohlen -- KBW -- Analyst

Okay. So, really nice question there, it sounds like. And then, I understand the guidance, but it...

Constance H. Lau -- President and Chief Executive Officer

Jackie -- sorry, this is Connie. Let me just add in though. Obviously, the Bank is looking at growth opportunities going forward and really wanting to put all of the liquidity from the deposits into play and so that could also change the mix going forward. For example, you've seen us significantly take advantage of CRE opportunities, high-quality ones in our market, and so that also could change that mix going forward.

Jackie Bohlen -- KBW -- Analyst

Okay. Okay, that makes sense. So then could we be in a scenario, and I know that this never works out perfectly and there is a lot of modeling that happens with all of this, but that you'll start to see the loan growth and you'll start to see that Q factor come down, assuming that the delta variant doesn't create pandemic here, which I think we all hope for quite a bit, and you'll just kind of see those two at play going forward so the loan growth can maybe absorb some of that qualitative factor and then CECL will obviously be the ultimate determinant of whether you have a provision expense to recapture. Is that the right way to think about it?

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

That's exactly how to think about it, Jackie.

Jackie Bohlen -- KBW -- Analyst

Okay, great. Thank you. I wanted to touch on expenses. I know you had some unique items within compensation this quarter and understanding you're looking to keep expenses flat to down. Maybe if you could just talk about what might be in compensation that's not repeating or if there were any unique factors related to FAS 91. Just what a good run rate is there?

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Yeah. This quarter, we actually had one unusual number that was in our compensation [Phonetic] line item. It was related to an incentive reversal on a previous executive and that amount translated to about $1.8 million pre-tax. Also included in our expense number was $500,000 in other expense related to that transaction or that [Indecipherable].

Jackie Bohlen -- KBW -- Analyst

Okay. And that...

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

So the total amount that was unusual was $2.3 million.

Jackie Bohlen -- KBW -- Analyst

$2.3 million, OK. And that -- sorry if this is an irrelevant [Phonetic] question, but that $2.3 million was a benefit, so it would have been -- or no -- can you just clarify that, I'm sorry?

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

It was higher -- higher...

Jackie Bohlen -- KBW -- Analyst

$2.3 million higher.

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

$1.8 million higher in compensation and $0.5 million higher in other expense.

Jackie Bohlen -- KBW -- Analyst

Okay. Sorry, the reversal threw me off for a second. So I just wanted to make sure I was really clear on that. Thank you. And then when you think about fees, I know there's a lot at play there, customer activity picking up really nicely just as people get out and do more and then maybe mortgage starting to normalize a little bit. Just curious how you're thinking about those two drivers going forward. And also on -- when you talk about mortgage, are you seeing anything where your book-in mortgages and with the increase in median home prices, are you putting more in portfolio because they may not be salable at this point or is that not an issue?

Ann C. Teranishi -- President and Chief Executive Officer, American Savings Bank, F.S.B.

Hi, Jackie. This is Ann. So, to your first question on fees, we are seeing an uptick in fees as the economy reopens and people are getting out there and spending more money. So interchange and debit card is increasing. We are still seeing a lower NSF charge. I think with people being flush with cash and having money in their accounts, they're not over drafting as much. So that's just something that we've been watching pretty closely.

With regard to the gain on fit-for [Phonetic] mortgage, we have been portfolioing more of our mortgage. So that has impacted our fees a bit. We're seeing an uptick in purchase volume versus refi. I think we've -- there's still some people refiing, but there is a lot of high activity. I don't know if you noticed, but I think it's $992,000 [Phonetic] is the median price of home purchase right now. So demand is high, supply is low, but we remain very busy in our mortgage origination area. We are looking at portfolio and more to manage our NIM, not so much because of the concerns that you referenced.

Jackie Bohlen -- KBW -- Analyst

Okay. Okay. Great, thank you. And then just one last one and I'll get back. Was there anything unusual in the tax rate this quarter? And what's the good go forward if there was?

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Nothing unusual in the tax rate. I think a good number is somewhere around 22% to 23%.

Jackie Bohlen -- KBW -- Analyst

Okay. great, thank you very much for taking all my questions.

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

So Jackie, I think -- so, Jackie, with the higher earnings, I think that's what's driving the higher tax rate.

Jackie Bohlen -- KBW -- Analyst

Okay, that makes sense. Thanks, Dane.

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Yeah.

Operator

The next question comes from Jonathan Reeder of Wells Fargo. Please go ahead.

Jonathan Reeder -- Wells Fargo Securities -- Analyst

Hey, how's it going today? I'm going to try to get to Utility analyst question again that Paul was building on and then Jackie got into it, but in terms, maybe a little more complex and to have Utility persons used to. So the provision for loan loss, my understanding was it usually play around kind of $20 million per year and based on everything you recorded for 2020 and where you plan to come in this year, it looks like you're essentially reversing all of that additional provision that was recorded last year. Is that too simplistic of a way to kind of be thinking about it? Are there still more, I guess, more provision that can potentially be reversed, whether it's still this year or looking at 2022? And then is there any way to kind of give us any guidance on specific number or range in terms of a go-forward provision for loan loss expense amount?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Hey, Jonathan. Appreciate the question and I'll let the Bank go through this in a little more detail. Being a Utility guy myself it's -- I understand the challenges of that but there's a variable that it's hard to -- it's hard to focus on a specific number, because it does tie into loan growth elements, the composition of your portfolio into higher-risk elements of the portfolio like the personal and secured lending portfolio versus residential. The mix of the portfolio will also direct -- it will determine the amount of necessary provision and loan loss reserves.

What I would say -- what I would note in what Dane highlighted earlier was that we -- as we sit here today at 1.51% of our total loan portfolio as a reserve, we are well-provisioned under COVID, but we're not out of COVID yet. And so, given that uncertainty, we've -- we continue to maintain a high level of that, which can create -- if the economy continues to recover, can create opportunities for additional credits to our provision as we release reserves or it can also cover additional provisioning required because we see greater levels of loan growth over time as well. So and again -- so therefore the run rate will also be determined by the economic activity we see out there and our ability to deploy deposits into loan growth. Maybe, with that -- I don't know if that helps at all but I'll turn it over to Dane to see if he can clarify.

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Yeah. It's the uncertainty going forward. I think with the provision, what we've given is a conservative approach in terms of our outlook. If there is further improvement in Hawaii's economy and we get more clarity around the delta variant and the negative impacts associated with it, there could be further releases in the coming quarters. But, as of today, I think we're taking a more conservative approach with our outlook.

Jonathan Reeder -- Wells Fargo Securities -- Analyst

Okay. And I mean, just where the portfolio stands today, is there any way to kind of give a ballpark where like '22 would -- kind of annual expense would look like or is that not [Speech Overlap]?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Yeah. Again, we will provide further guidance as we give earnings guidance for 2022 specifically and that will -- again, it will bake into account the -- what the composition of our -- where our loan growth will come from and our portfolio growth. As you've seen this year, we've had a net increase in earning asset growth, but that includes investment in some high-quality securities, which require very little provisioning relative to typical loan and portions of our loan portfolio. So that's part of the challenge. Yeah, my guess is we started this year at, again, it was $10 million to $20 million...

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

It was $17 million to $22 million.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

$17 million to $22 million, and that was in a kind of a challenged low-growth economy -- moderate growth economy here. I would -- to me that's at least a good reference point overall.

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Yeah.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

But we are also -- as you come out of the concerns relative to COVID, that should also temper your -- how much reserve margin -- how much reserve or margin we put above that.

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Right. Yeah, like Greg mentioned, it's really about what composition or what we're growing in what category. So a personal unsecured portfolio requires us to put a little bit more coverage into our allowance. And so as we come out of COVID, we'll look at where the market opportunities lie and then -- and we'll have to provide accordingly to where those growth opportunities are. And so right now I think we're a little preliminary in terms of calling a number for '22.

Jonathan Reeder -- Wells Fargo Securities -- Analyst

Okay. But, I mean, at least thinking about that $17 million to $22 million, it doesn't sound like it's going to be wildly off base, but, obviously, could shift depending on, I guess, the risk profile of the future loans. So, OK, no, I appreciate that color. I'm just trying to break it down for us Utility folks in a little more simple terms. So thank you very much.

Constance H. Lau -- President and Chief Executive Officer

Hey, and Jonathan it's Connie. I'd just add, we tend to look at the ratio of the reserve to loans versus just an absolute number because, of course, the loan portfolio grows in total.

Jonathan Reeder -- Wells Fargo Securities -- Analyst

Okay, got you. Thanks.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks, Jonathan.

Operator

The next question comes from Charles Fishman of Morningstar. Please go ahead.

Charles Fishman -- Morningstar -- Analyst

Hi, just a couple. Hey, Greg, did you -- I just want to make sure I got this right, you said Utility EPS will be in the lower half or toward the lower end of the guide?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

The lower half of the range. We're not guiding to the low end.

Charles Fishman -- Morningstar -- Analyst

Got it, OK. Just want to make sure. Then, let's say, we go to Slide 10, growth going from -- we're still using 2022 as a base and I guess that makes sense, because there's just so much noise this year with PBR and coming out of COVID. But if I look at Slide 10, you -- you're still talking 4% to 5% in 2022, but you changed that bottom -- that lower right box a little bit where it used to be excludes potential PIM rewards and it looks like all you did was make it a separate bullet point. So it was just cosmetic, the changes you made in that slide. Am I correct or is there more going on there than I realize?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Yeah, no, no, there wasn't -- there is no sleight of hand there at all, 4% to 5% off of base year 2022, excluding PIM. And I think as Tayne mentioned, we've got the implementation PIMs but now we've got ongoing discussion around additional incentive mechanisms. Going forward, we do expect a good portion of those to be incentive only as was documented as part of the PBR workshops and so we see potential upside going forward. Of course, being that they're incentive mechanisms, the performance -- we have to perform well relative to those new mechanisms over time. And we'll give you further clarification as those are implemented through the workshops through the balance of the year.

Charles Fishman -- Morningstar -- Analyst

Got it, OK. Just one final note, this is my last earnings call of the quarter and it's also my last earnings call in my career. I'm going to be retiring at the end of the month and I wish everybody at Hawaiian Electric Industries the best.

Constance H. Lau -- President and Chief Executive Officer

Oh, congratulations, Charles. It's been wonderful knowing you over all these years.

Charles Fishman -- Morningstar -- Analyst

Good luck, everybody.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Yeah. Well, thanks for your questions. And again it's been great talking to you, always appreciate your questions and focus on us. It's been very good. Thank you.

Charles Fishman -- Morningstar -- Analyst

You're welcome.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Julie Smolinski for any closing remarks.

Julie R. Smolinski -- Vice President, Investor Relations & Corporate Sustainability

Thank you all for joining us today and please do reach out if you have any follow-up questions. Have a great week.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Julie R. Smolinski -- Vice President, Investor Relations & Corporate Sustainability

Constance H. Lau -- President and Chief Executive Officer

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer, Hawaiian Electric Company

Dane Teruya -- Executive Vice President and Chief Financial Officer, American Savings Bank,

Ann C. Teranishi -- President and Chief Executive Officer, American Savings Bank, F.S.B.

Eric Lee -- Bank of America -- Analyst

Paul Patterson -- Glenrock Associates -- Analyst

Jackie Bohlen -- KBW -- Analyst

Jonathan Reeder -- Wells Fargo Securities -- Analyst

Charles Fishman -- Morningstar -- Analyst

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