HAWAIIAN ELECTRIC INDUSTRIES INC

Recent Developments. See also “Recent developments” in HEI’s MD&A.

In June 2024, ASB recorded a pretax goodwill impairment charge of $82.2 million after determining it was more-likely-than-not that the fair value of ASB was less than its carrying value. The impairment charge was non-cash in nature and did not affect the Company’s current liquidity, cash flows or any debt covenants under the Company’s existing credit agreements. See “Goodwill” in Note 5 of the Condensed Consolidated Financial Statements for additional discussion.

In August 2023, ASB was impacted by wildfires on Maui which caused widespread property damage and fatalities. ASB’s outstanding credit exposure in Maui and the fire impacted zone of Lahaina as of September 30, 2024 was 12.3% and 0.6%, respectively, of the Bank’s total loan portfolio.

For the quarter ended September 30, 2024, ASB incurred additional expenses as a result of the Maui wildfires of $0.9 million, pretax, primarily consisting of professional services, partially offset by negative provision for credit losses of $0.2 million.

The Hawaii economy remained stable in the third quarter of 2024 with average daily passenger counts 3.9% higher than the comparable period in the prior year. The recovery in total passenger counts from the low levels in 2020 is largely due to domestic travelers. International visitors (excluding Japan) have gradually increased although still below pre-pandemic levels. The weak yen continues to be a key contributing factor to the low Japan visitor counts as compared to other international visitors. Hawaii’s seasonally adjusted unemployment rate of 2.9% in September 2024 was slightly lower compared to the September 2023 rate of 3.0%. Despite higher interest rates, Hawaii’s real estate market, as indicated by Oahu’s residential real estate market, has remained relatively stable. Single-family home sales grew 5.8% through September 2024 compared to the same period in 2023, while condo sales declined 5.6%.

At its September 18, 2024 meeting, the Federal Open Market Committee decided to lower the federal funds rate target range by 1/2 percentage point to 4.75% - 5.0% reflecting its confidence that inflation is moving sustainably toward 2 percent. The interest rate environment has impacted ASB’s net interest margin as higher yields on earning assets were offset by an increase in yields on deposits and other borrowings. The higher interest rate environment has also reduced mortgage refinance and purchase activity, negatively impacting mortgage banking income. Additionally, the tight labor market and inflationary pressures have increased compensation and benefit expenses.

ASB’s loan portfolio decreased $146 million in 2024 as compared to the end of 2023 primarily due to payoffs and sale of commercial loans as well as reduced demand for home equity line of credit and consumer loan products.

For the quarter ended September 30, 2024, ASB recorded a provision for credit losses of $0.2 million primarily based on strong credit quality of the loan portfolio, the healthy Hawaii economy, lower loan portfolio balances and the release of $0.2 million of credit loss reserves for loans that were impacted by Maui wildfires. The provision for credit losses in future quarters will be dependent on future economic conditions and changes to borrower credit quality at that time.

At September 30, 2024, the investment securities portfolio balance decreased approximately $94 million from year end 2023 due to repayments and no purchases of investment securities in 2024.

At September 30, 2024, ASB’s regulatory capital ratios were above the “well-capitalized” and regulatory requirements, including the conservation buffers. Approximately 83% of the Bank’s deposits are FDIC insured or fully collateralized. ASB has access to approximately $3.1 billion in funding sources to meet its liquidity needs.

ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.

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ASB’s return on average assets, return on average equity and net interest margin were as follows:

For the three and nine months ended September 30, 2024 and 2023 the Bank’s costs related to the Maui wildfires is as follows:

1 Other expenses includes recovery of destroyed/loss cash of $0.4 million in the first three months ended March 31, 2024.

Note: Bank Maui wildfires related expenses - provision for credit losses is included in Provision for credit losses, professional services expenses are included in Noninterest expense-Services and other expenses are included in Noninterest expense-Other expense on the ASB Statements of Income and Comprehensive Income Data.

1 Includes loans held for sale, at lower of cost or fair value.

2 Includes recognition of net deferred loan fees of $0.9 million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively, and $2.0 million and $2.3 million for the nine months ended September 30, 2024 and 2023, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans. Includes nonaccrual loans.

3 For the three and nine months ended September 30, 2024 and 2023, the taxable-equivalent basis adjustments made to the table above were not material.

4 Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.

Earning assets, costing liabilities, contingencies and other factors. Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. At its September 18, 2024 meeting, the Federal Open Market Committee decided to lower the federal funds rate target range by 1/2 percentage point to 4.75% - 5.0%. ASB’s net interest income and net interest margin has been impacted by the higher interest rates as the Bank has used higher costing other borrowings and term certificates to fund its loan growth.

Loans and mortgage-backed securities are ASB’s primary earning assets.

Loan portfolio. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. See Note 5 of the Condensed Consolidated Financial Statements for a composition of ASB’s loan portfolio.

Home equity — key credit statistics. The home equity line of credit (HELOC) portfolio makes up 16% of the total loan portfolio and is generally an interest-only revolving loan for a 10-year period, after which time the HELOC outstanding balance converts to a fully amortizing variable-rate term loan with a 20-year amortization period. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As of September 30, 2024, approximately 36% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option. A HELOC loan is typically in a subordinate lien position to a borrower’s first mortgage loan, however, approximately 51% of ASB’s HELOC loan portfolio is in a first lien position.

Loan portfolio risk elements. See Note 5 of the Condensed Consolidated Financial Statements.

Investment securities. ASB’s investment portfolio was comprised as follows:

Currently, ASB’s investment portfolio consists of U.S. Treasury and federal agency obligations, mortgage-backed securities, corporate bonds and mortgage revenue bonds. ASB owns mortgage-backed securities issued or guaranteed by the U.S. government agencies or sponsored agencies, including the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Small Business Administration (SBA). Principal and interest on mortgage-backed securities issued by FNMA, FHLMC, GNMA and SBA are guaranteed by the issuer and, in the case of GNMA and SBA, backed by the full faith and credit of the U.S. government. U.S. Treasury securities are also backed by the full faith of the U.S. government.

Deposits and other borrowings. Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management’s responses to these factors. In 2024, deposits decreased by $147 million due to an outflow of core deposits and reduction of public certificates of deposits, partially offset by an increase in time certificates. Core deposit retention will remain challenging in the current interest rate environment. Advances from the FHLB of Des Moines, securities sold under agreements to repurchase, borrowings from the Federal Reserve Bank and federal funds purchased continue to be additional sources of funds. As of September 30, 2024, ASB’s costing liabilities consisted of 94% deposits and 6% borrowings as compared to 92% deposits and 8% borrowings as of December 31, 2023. The weighted average cost of interest-bearing deposits for the first nine months of 2024 and 2023 was 1.32% and 0.76%, respectively. As of September 30, 2024 and December 31, 2023, ASB had approximately $1.7 billion and $1.6 billion of deposits that were uninsured or not collateralized, respectively.

Federal Home Loan Bank of Des Moines and Federal Reserve Bank. As of September 30, 2024 and December 31, 2023, ASB had $520 million and $200 million of advances outstanding at the FHLB of Des Moines, respectively. As of September 30, 2024, the unused borrowing capacity with the FHLB of Des Moines was $1.5 billion. As of September 30, 2024 and December 31, 2023, ASB had nil and $550 million of borrowings from the Federal Reserve Bank, respectively. The FHLB of Des Moines and Federal Reserve Bank are important sources of liquidity for ASB.

Contingencies. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.

Other factors. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities.

As of September 30, 2024, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities in AOCI of $128.9 million compared to an unrealized loss, net of taxes, of $150.4 million as of December 31, 2023. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.

During the first nine months of 2024, ASB recorded a negative provision for credit losses of $2.9 million in the allowance for credit losses primarily due to the release of $2.5 million of credit loss reserves related to the Maui wildfires, improving credit loss rates and lower loan balances. During the first nine months of 2023, ASB recorded a provision for credit losses of $9.4 million in the allowance for credit losses for growth in the loan portfolio, credit loss reserves related to the Maui wildfires and additional credit loss reserves to cover net charge-offs, partly offset by the release of credit loss reserves for improved credit trends and lower credit loss rates.

ASB maintains a reserve for credit losses that consists of two components, the allowance for credit losses and an allowance for loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in provision for credit losses. For the nine months ended September 30, 2024, ASB recorded a negative provision for credit losses for unfunded commitments of $0.9 million as compared to a provision for credit losses for unfunded commitments of $0.7 million for the nine months ended September 30, 2023. As of September 30, 2024 and December 31, 2023, the reserve for unfunded loan commitments was $4.2 million and $5.1 million, respectively.

Legislation and regulation. ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.”

Liquidity and capital resources.

As of September 30, 2024, ASB was one of Hawaii’s largest financial institutions based on assets of $9.3 billion and deposits of $8.0 billion.

As of September 30, 2024, ASB’s unused FHLB borrowing capacity was approximately $1.5 billion. As of September 30, 2024, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.8 billion, of which, commitments to lend to borrowers experiencing financial difficulty whose loan terms have been modified were nil. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.

For the nine months ended September 30, 2024, net cash provided by ASB’s operating activities was $49 million. Net cash provided by ASB’s investing activities during the same period was $231 million, primarily due to the receipt of investment security repayments and maturities of $133 million, a net decrease in loans receivable of $111 million and proceeds from the sale of commercial loans of $40 million partly offset by contributions to low income housing investments of $34 million and a net increase in FHLB stock of $14 million. Net cash used in financing activities during this period was $382 million, primarily due to a net decrease in other borrowings of $230 million, a decrease in deposit liabilities of $147 million and a net decrease in mortgage escrow deposits of $6 million.

For the nine months ended September 30, 2023, net cash provided by ASB’s operating activities was $80 million. Net cash used during the same period by ASB’s investing activities was $38 million, primarily due to a net increase in loans receivable of $283 million, purchases of loans held for investment of $26 million and additions to premises and equipment of $5 million, partly offset by the receipt of investment security repayments and maturities of $170 million, proceeds from the sale of commercial loans of $95 million, a net decrease in FHLB stock of $9 million and proceeds from the redemption of bank owned life insurance of $3 million. Net cash provided by financing activities during this period was $65 million, primarily due to a net increase in other borrowings of $336 million, partly offset by a net decrease in repurchase agreements of $183 million, decreases in deposit liabilities of $44 million, a net decrease in mortgage escrow deposits of $5 million and $39 million in common stock dividends to HEI (through ASB Hawaii).

ASB believes that maintaining a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of September 30, 2024, ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 8.6% (5.0%), common equity Tier-1 ratio of 13.5% (6.5%), Tier-1 capital ratio of 13.5% (8.0%) and total capital ratio of 14.6% (10.0%). As of December 31, 2023, ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 7.7% (5.0%), common equity Tier-1 ratio of 12.3% (6.5%), Tier-1 capital ratio of 12.3% (8.0%) and total capital ratio of 13.4% (10.0%). All dividends are subject to review by the OCC and FRB and receipt of a letter from the FRB communicating the agencies’ non-objection to the payment of any dividend ASB proposes to declare and pay to HEI (through ASB Hawaii). As of September 30, 2024, ASB did not request a dividend distribution from the OCC and FRB and will reevaluate its ability to distribute excess capital next quarter.