Suzy Hollinger – Manager, Treasury & IR Connie Lau – President & CEO Jim Ajello – CFO Dick Rosenblum – President & CEO, HECO Tim Schools – President, ASB Tayne Sekimura – SVP, Finance and Administration

Paul Patterson – Glenrock Associates Steve Vuggarsa [ph] Bobby Boland – KBW Vik Ghei – Owl Creek Asset Management

Thank you. Hello and good afternoon.

Thanks for joining us for an update on Hawaiian Electric Industry. Here with me from our senior management team is speaking today are Connie Lau, HEI President and CEO, Jim Ajello, HEI CFO, Dick Rosenblum, HECO, President and CEO, and Tim Schools, ASB President.

Alvin Sokimoto, ASB Executive Vice President, finance, and Tayne Sekimura, HECO's, Senior Financial Vice President are also on the call. Connie will begin the presentation with a wrap up of 2008 accomplishments and Jim will take you through financial highlights.

Connie will then discuss the outlook for 2009 and key strategic initiatives. Dick will provide some insight on the utility schedule for its regulatory initiative and Tim will provide some color on bank credit quality and accomplishments.

Connie will end with closing remarks and then open it up for Q&A. Before I hand the call over to Connie, I would like to alert you that forward-looking statements will be made on today's call.

Please reference pages 2 & 3 of our 2008 Annual Report that was filed on 8-K this morning, for information about forward-looking statements. Now let me turn the call over to Connie to begin the formal comments.

Hello, everyone and thanks for joining us on the call today. Before I begin formal comments I'd like to formally introduce two new members of our senior management team.

First, Dick Rosenblum, our new Utility President and CEO, who joined us on January 1. Dick comes to us from Southern California Edison, where he spent over 30 years in all areas of utility operations.

We are very fortunate to have someone of Dick's experience and caliber leading our Electric utilities. In late January, we also welcomed Jim Ajello as HEI's Senior Financial Vice President, Treasurer and Chief Financial Officer.

Just prior to joining HEI, Jim spent eight years at Reliant Energy, where he led their effort to expand and grow competitive electricity markets across the country. Jim also has significant financial experience from his 14 years in various investment banking positions with UBS.

I'd like to start the formal presentation by addressing questions some of you have asked regarding the amount of credit risk in our banks loan and securities portfolios and the maintenance of our dividends. In the fourth quarter, the bank increased its provision for loan losses, probably more than some of you expected, to reflect a rise in classifications of commercial loans and increases in non-performing residential loans, primarily vacant lot loans.

Overall, the quality of our loan portfolio remains solid and net charge-offs remain low. For context, in the two loan categories in which we are seeing greater weakness as the economy slows.

Out of our $4 billion loan portfolio, $127 million are vacant residential lot loans and $597 million are commercial loans. I will note that our business plan does assume additional deterioration in credit as the economic and credit cycle proceeds.

The bank also recorded a $4.7 million net of tax write-down on two of its private mortgage-related securities. While we estimated the economic loss of the securities to be relatively small and not occurring for some time as of year-end, the accounting rules require a write-down to their very distressed values at year-end.

In both cases, as long as the underlying loans continue to perform, the difference between the write-down and the expected loss will accrete back into interest income over the remaining lives of the securities. If conditions stay the same, we would not expect to see additional write-downs in this portfolio.

However, as markets worsen, we could see additional write-downs. Overall, while we experienced tighter credit costs in the quarter, our banks credit quality remains sound and the overall core franchise is profitable and growing.

The securities write-downs are also a function of today's very distressed market valuation for mortgage-related securities, and to the extent, the securities continue to perform, that amount will accrete back into earnings over time. Finally, unlike most banks, our bank returned capital to HEI during 2008.

I'll ask Tim to give you further color on these two items later in the presentation, so you'll have a better feel for the risks going forward. With a couple of recent dividend cuts in our industry, there also appears to be some speculation about whether our dividend would be cut.

As you probably know by now our Board declared a quarterly dividend of $0.31 per share to be paid on March 10th to holders of record on March 2nd. Next dividend date is February 26th.

At an annualized rate of $1.24 per share, our dividend yield is now an attractive 7%. Let me now spend a few minutes discussing the company's significant accomplishments in 2008.

First off, in contrast to many companies, HEI's 2008 earnings improved over the prior year. In addition, we were one of five among the 59 HEI companies to deliver positive total returns to shareholders last year.

Over the last two years, we have been especially focused on improving the operating and financial performance of both our operating companies. While that may sounds right in today’s environment, we fortunately got a head start on such activity.

Accordingly, we are very pleased to be able to report that in 2008, our utility and bank both benefited from the achievement of several strategic initiatives, which also laid a ground work for further shareholder value creation. At our utility, we entered into a landmark agreement with our Governor, Hawaii State Department of Business, Economic Development and Tourism; and our Consumer Advocate, which memorializes a shared vision of reducing our state dependence on imported fossil fuels and provides for a new decoupled regulatory model for our utility, which should improve our ability to recover costs and earn our allowed return.

We also benefited from a full year rate relief which was granted at various times during 2007. At American, the execution of a balance sheet restructuring in June successfully enabled the bank to maintain its earnings power on lower assets and a lower capital base.

The restructuring improved profitability as the net interest margin increased from 3.13% at the end of the first quarter to 4.07% at the end of the fourth quarter, significantly above peer level. It also enabled the bank to dividend excess capital to HEI.

In addition, Tim and his team announced a comprehensive performance improvement initiative and have started to reduce the run rate of non-interest expenses. As a result of the bank’s balance sheet restructuring, the return of capital was instrumental in strengthening the company's financial flexibility.

Also key was the issuance of a $115 million of common stock in December, which will enable HEI to help strengthen the utilities balance sheet and support its capital expenditure program. The timing of our common stock offering was important, given the uncertainty in the capital markets and the list of utilities that are now queuing up to go to market to finance their own capital projects.

Overall, 2008 was a good year for the company on both the financial and operational perspective. And I am pleased to be able to report the significant strides we made in the execution of our strategies in 2008.

I'll pause here and let Jim discuss the financial highlights; comment on pension funding requirements and our 2009 financing. I'll return to discuss our outlook and strategic opportunities.

Thanks, Connie. The company earned $90 million or $1.07 per share in 2008 compared with $85 million or $1.03 per share in 2007.

Excluding the $35.6 million charge related to the bank’s balance sheet restructuring, adjusted net income for the year was a $126 million or $1.49 per share. Tampering a positive year however, was a 66% decline in fourth quarter earnings brought on by worsening economic conditions and the dislocation on the capital markets.

Hawaii's visitor industry and related to this were specially impacted. Visitor arrivals were down 14% in the quarter compared with the same quarter of 2007.

Visitor expenditures were lower by 15% quarter-over-quarter. Unemployment was adversely affected by this trend, rising to 5.5% at year-end.

For relative comparison, unemployment levels for 2007 range between 2.4% and 3.1%. Worsening economic conditions affected key quarter-over-quarter net income drivers.

Kilowatt hour sales were 3.6% lower in the fourth quarter compared with same quarter of 2007. Lowering utility revenues by $24 million and causing full year kilowatt hour sales to decline 1.8% compared with 2007 which is more than we had expected at the end of the third quarter.

Economic conditions also affected the bank; the mortgage related securities write-down and increase in the provision for loan losses that Connie discussed earlier. The significant impacts of economic and market conditions on these key earnings drivers lowered the fourth quarter results to 14 million or $0.16 per share compared with $41 million or $0.49 per share in the fourth quarter of 2007.

Let me now update you on our pension funding requirements for 2009. Because of the deterioration in the financial markets, the funded status of our pension plan dropped from 91% at the end of 2007 to 64% at the end of 2008, given the requirements of Pension Protection Act, the company will make $21 million cash contribution to the plan in 2009.

Sales are included on pages 8 to 10 and 112 to 116 of our annual report that was filed on Form 8-K earlier today. Note our pension tracking mechanism which mitigates our pension expense exposure, as described in the 8-K.

Lastly, our financing plans. There are no long-term debt maturities for HEI until 2011 or for HECO until 2012.

Accordingly, no refinancing for debt are contemplated this year. However, utilities financing plans for 2009 include long-term debt and additional equity from HEI.

The equity infusion from HEI will be made from the proceeds of HEI secondary stock offering was completed in December 2008. As a reminder, PUC must approve all long-term security issuances by the utilities.

We believe our short-term borrowing capacities at those companies are adequate. HEI has $100 million syndicated credit facility and HECO has two facilities totaling $215 million.

There were no draws on any of the facilities at year-end and there was no commercial paper outstanding from either HEI or HECO at year-end. One of the HECO facilities were $75 million, it’s a short-term facility that expires in September 2009.

Now, I'll hand the call back to Connie.

Thank you, Jim. We anticipate that the fourth quarter trends Jim discussed will continue into 2009.

For that reason, 2009 looks to be a year of transition. We expect results will be impacted by 1% lower projected kilowatt hour sales, 13% higher utility O&M expenses and higher levels of bank provisions for loan losses.

The anticipated increase in O&M is due to the larger scope of planned work in 2009 to maintain system reliability. New work related to meetings and Hawaii Clean Energy Initiative commitment to build a smarter, more robust grid that is able to integrate greater levels of renewable energy and an increase in staffing to support both.

These cost increases are included as part of our 2009 Oahu rate case and will be included in later HELCO and MECO cases. Earnings for the second half of the year are expected to improve reflecting anticipated interim rate relief and revenue decoupling.

Continued focus on strategic opportunity is helping the Company mitigate some of the impacts of current economic conditions and lay the foundation for long-term earnings growth. The key areas of focus are on rate relief in our 2009 Oahu rate case, implementation of the Hawaii Clean Energy Initiative, and the banks performance improvement initiative.

In the case of the utility, the groundbreaking Clean Energy Initiative puts Hawaii on a path to transform its energy future. The Company has the opportunity to further broaden its strategic focus on renewable generation and energy efficiency.

The agreement also recognizes the importance of a reliable grid and a financially sound utility to achieve these goals, and thus the need for a sound regulatory framework that enables timely or cost recovery and return on investments through new mechanisms. That leads me to the utilities 2009 Oahu rate case.

We expect to set the base for revenue decoupling from kilowatt hour sales on Oahu through this rate case. As discussed in our previous call, decoupling would remove the inherent disincentive for energy efficiency and conservation as well as customer sided generation, while still allowing for the appropriate recovery of cost.

Decoupling can also provide more stability in rates over the long term, and was an important part of the Hawaii Clean Energy Initiative agreement. A separate decoupling docket is underway, to work out the details of the revenue adjustment mechanism.

We are scheduled to receive an interim decision on the Oahu case this summer, followed by a decision in the decoupling docket in early fall. As part of the Hawaii Clean Energy Initiative, we also agreed to file rate cases for HECO and MECO to set the base for decoupling their revenues.

The timing of those rate cases is still under review. The continued need and opportunity to invest in the reliability of the grid and an improvement to help integrate greater levels of renewable energy is reflected in the utilities capital expenditures budget, especially in the later year.

The CapEx budget for 2009 increased to $54 million, half of which were costs carried over from 2008. In addition to decoupling, the new business model and the clean energy agreement provides for a new clean energy infrastructure surcharge designed to expedite cost recovery, both capital and expense, supporting greater use of renewable energy within our utility system.

We have submitted a request for approval of the clean energy infrastructure surcharge mechanism to the PUC. Under the proposal, we will request approvals to recover through the surcharge costs of qualifying projects as part of each projects individual PUC application.

We recently made such a request for our AMI project for which $40 million of costs are included in our five year plan. As we noted last quarter, we believe our regulators are open to these elements of the clean energy agreement and we are hopeful that the participation of the state administration and the consumer advocate upfront in reaching the agreement will help facilitate implementation of these efforts through the regulatory process.

The banks key focus remains on performance improvement, which seeks to optimize all areas of the bank, including utilizing technology, streamlining processes, reducing costs, and recasting staffing levels, while ensuring that enterprise risk is being managed appropriately and better products and services are delivered to customers. The goal is to reduce the banks non-interest expenses from a 2008 run rate of $176 million to the $150 million to $55 million range over the next two years.

The 2008 run rate represents 2008 bank non-interest expenses of $176 million, plus $40 million of gross loss on early extinguishment of debt related to the balance sheet restructuring. Bank non-interest expenses for the quarter of about $45 million, do not demonstrate the great progress that has been made through the year.

The fourth quarter included $3 million for items such as severance, lease buyouts, the termination of certain benefit programs, and expenses related to the partial sale of our insurance agency. Adjusting for the $3 million, expenses were about $43 million or $172 million annualized.

Importantly, January, which was a relatively clean month was $167 million annualized. This is particularly impressive as two new expenses totaling $5 million annually began in January.

So on a comparative basis, the run rate would be $162 million versus the past couple of years in the $172 million to $176 million range and a good step towards our goal of $150 million to $155 million. One final comment on expenses.

Our bank team recently completed its review of its core processing selection. While we had originally thought that we would renegotiate with our current vendor, the team identified an alternative vendor which we believe offers a superior product at a reduced cost.

This savings, absent other expense trends, would help reduce expenses another $5 million per year, taking the comparative expense level to $157 million. This savings will not begin until May of 2010 and will require us to spend $3 million this year in the conversion process.

On the reverse side, we're optimistic that the positive advancements we saw in the core banking franchise will continue in 2009. To cite just a few, consumer checking accounts increased 8.6%, core deposits increased almost $55 million, and the number of home equity loans increased 12% and balances about 40%.

As you can see, we have a lot of positive initiatives going on that will strengthen the company in its prospects and we are proceeding full steam ahead. Before we take questions, I'd like to ask Dick and Tim to address a few items I know are of specific interest to many of you.

First, I'd like to ask Dick to provide you with more detail on the schedule for some of the utilities regulatory initiatives this year. Tim will follow to give you more color around asset quality at the bank.

I'll come back for some closing comments and then we'll open it up for Q&A. Dick?

Thanks, Connie. We know there is a lot of interest in the schedule for the major Clean Energy Initiatives.

Here is a quick look at some key dates for the major dockets. In the decoupling proceeding, final statements of position by all parties are due in May.

After hearings, the procedural schedule allows for the PUC to be able to issue a decision in the fall of this year. In the feed and tariff docket, which was set standardized prices for specified quantities and types of renewable energy, all statements of position are due by the end of March with implementation targeted by late 2009.

Lastly, turning to the clean energy infrastructure surcharge, that mechanism is virtually the same as the renewable energy infrastructure surcharge, we are already pursuing in an ongoing case. All parties in that case supported the surcharge in an October filing with the PUC.

In November, we filed a joint letter with the Consumer Advocate that took the position that the clean energy infrastructure surcharge should be considered the replacement for the renewable energy infrastructure surcharge. The PUC is now doing its due diligence in this case.

These major initiatives will help address the core issues to successfully execute on our strategic Clean Energy Initiatives. Now, let me turn things over to Tim.

Thanks, Dick. As you are aware the stellar credit environment of the last 10 years to 15 years has turned.

Nationally, provisions and loan charge-offs have elevated at a rapid pace. To this point, ASB and Hawaii have been rather immune.

In fact our charge-offs for 2008 were $4.7 million, down from $6.7 million in the prior year for 2007. As a percent of our loans, this remains well below peers.

However in the fourth quarter of 2008, we began to see deterioration in our commercial loan portfolio and higher delinquency levels in our consumer and residential loan portfolios. Based on our allowance for loan loss methodology, this caused us to provide a higher provision for potential loan losses.

Hawaii is largely dependent on tourism and the effects of the global recession are now impacting Hawaii as evidenced by a growing number of layoffs. Therefore, we expect 2009 to be a challenging year that will require increasing provisions.

While our outlook is cautious and calls for increasing provisions, we believe we have a quality portfolio and will fair better than what you have observed nationally. Our portfolio is largely 30 year fixed rate mortgages to high quality borrowers.

On a limited basis, ASB has offered stated income and loans above 80% on certain consumer and residential loans. Another area that has caused a lot of pressure nationally is construction lending.

We have always been very conservative in this area. In total we have $315 million of commercial real estate loans, but importantly, only $73 million is construction.

On the residential side, we have about an additional $35 million of construction. Investment securities and goodwill are two additional areas in which banks have begun to recognize charges over the past few years.

Under the accounting rules we monitor and evaluate each on a quarterly basis. While we determine that our annual goodwill impairment testing was satisfactory, we did conclude the two of our investment securities were impaired based on the accounting treatment for other than temporary impairment.

These rules require you to evaluate securities whose market values fall below the book value to determine if the value is other than temporary. This is somewhat similar to provisioning for expected loan losses with the exception that if you deem that there is a possibility of not collecting your full principal amount, you are required to write the security down to its current market value, not the expected loss amount.

In our case, we have two bonds that depending on the assumptions used, showed a likelihood that all principal would not be collected at maturity. However, the recorded charge was $7.8 million pre-tax, while the estimated actual loss was approximately $500,000.

Unlike provisioning for loan losses, if the economic environment improves and market values return to historical levels, you are not allowed to bring the recovered amount immediately back into earnings. In that case, the written down amount would accrete back into earnings over the remaining life of the bond.

While we believe we have captured the banks investment portfolio evaluation exposure as of year end, further deterioration and market conditions could contribute to additional write-downs of securities. In our annual report that was filed on Form 8-K today, Note 4 of HEI's consolidated financial statements show a table summarizing the private issue mortgage securities by rating and vintage.

This information should be helpful to you in assessing the quality of the portfolio. While we are entering a challenging period and facing headwinds that our industry has not seen in some time, ASB is making great strides in improving its position in the market, strengthening our balance sheet and reducing our operating cost structure.

This year, we introduced market leading consumer products which rewarded ASB with many new households that we can now cross-sell other financial services. Our goal is to be quick and nimble and to be recognized as the bank that looks out for the consumer from a value and service standpoint.

The numbers on this slide, some of which Connie mentioned are remarkable if we were operating in high growth markets like the Carolinas, Atlanta, or Florida and demonstrates the opportunity we see for American in this market. 9% checking account growth is unheard of especially in a market with little to no growth.

The response was so good that within weeks, our competitors rolled out very similar products and marketing campaigns. We have reduced our operating expenses from 2007 to the January annualized amount by 9 million.

January includes increased FDIC insurance expense and pension costs of $5 million. Therefore, our team has really eliminated $14 million of annual operating expenses in only about 12 months timeframe.

That is an 8% reduction in one year. As Connie mentioned, we have also elected to change core processors which we believe will bring us a stronger platform and a more competitive price or in no other movements that would contribute another $5 million.

That will be an 11% reduction. We believe there is more opportunity through better use of technology and more efficient use of real estate.

We also restructured our balance sheet which freed up capital that was not earning shareholders cost of equity. In addition to it being positive for shareholder value it allows ASB to focus on its core business of relationship banking and significantly increases our liquidity by reducing our FHLB line from a little over $1.5 billion to a couple hundred million.

The exciting thing to me is we honestly are just getting started. Effectively, our leadership team has only been in place since October.

We are now just formulating our market strategies as well as really getting organized around efficiency improvements. We have a very well established brand and following in the market to build on.

Higher credit costs will be an issue as we maneuver through this environment but we are working quickly to add more revenue and reduce expenses to help absorb this cost and provide a stronger more profitable earnings stream long term. Now I'll turn it back to Connie.

Thank you, Tim. In closing, while 2008 was a good year yielding improved earnings, economic and financial market declines impacted fourth quarter's results and tempered full year results.

As we've described, the environment will have continued implications for our Company this year, especially in the first half of the year while our utilities await an interim decision in the Oahu rate case. However, with our senior management team now in place and full implementation of our strategic initiatives just getting under way, we believe we will weather this tumultuous period and be well positioned for long-term earnings growth.

Now I'd like to open it up for your questions.

Good morning guys.

Hi, Paul.

How you doing? Well, the loan loss reserve question I've always been asking, I guess the answer is that we were now beginning to see a significant increase in that.

Should we take the fourth quarter number and extrapolate that into 2009 or should we think about, you mentioned that might get a little bit – might be – you might get a little bit tougher there with the economy. How should we think about that?

Paul, it's very difficult to extrapolate just one quarter's work, because a lot of the provisioning relates to specific loans and so every quarter, we have to look not only at pool rates for pieces of the portfolio, but also specifically loan by loan. So I think what we're saying is that the tick up that you saw in the fourth quarter is not unusual under these kinds of market conditions and it could remain about it at that rate.

It could be a little bit higher. It could be a little lower.

Okay. But when we look at the – okay then on the other side, you guys are talking about a reduction in non-interest expense, that's pretty substantial, and if I understood the 150 to 155, I wasn't clear whether that included the $5 million benefit from the new vendor that you're seeing in May of 2010 I think it was or whether that was part of it or not?

Yes, it does.

It does include that.

Now the ultimate longer term target is the 150 to 155.

Okay.

And so that will be included in that.

And it sounds like because of some of the cost efforts that you're making that will be more likely next year, it's a two year goal, that'll be happening later on than it will be this year. Is that a good way to think about it?

Yes, that's correct that 2009 is our conversion year for the system, and so we won't be able to convert on to the new system and realize the $5 million of cost savings until the middle of 2010, as I mentioned.

Paul, you should see a lot of cost savings this year. The number in 2007 was $176 million.

Right.

And there were one-time expenses and there were one-time benefits. They really net out to neutral.

So 2007, the $176 is a pretty solid number. 2008 was $176 again and I don't have all the one-time items, but there probably was $2.5 million of severance charges, there was $2 million to write-off a software system, so the $176 for 2008, it was $176, but it was a lot of sort of clean-up, one-time expense to help get the run rate down.

And then our January actual number with the new $5 million of what happened with the FDIC raised pension insurance costs for the whole nation. That's going to hit us about $2.5 million this year, and then our pension, like we talk about is going to cost us about an extra $2.5 million due to the change in market values, so my January number annualized was $167, so you should see material savings versus your 2008 run rate in our numbers this year and it should get even better next year, when we get in the new core processing system as well as we implement other things we've identified.

Right, but the loan loss…

Paul, just a clarification, FDIC is the increase in deposit insurance premium, not the pension.

Okay. I got you.

The loan loss reserve though, this will help offset the loan loss reserve, the increase in loan loss reserve…

Yes, without a doubt. So, as I've been talking to the Board, I got here last two years and we've been talking about, we are in the banking business.

The banking business has gotten comfortable in the last 10 years to 15 years that this has not been an expense line. When you're in banking, this is an expense line.

So, we've been talking in the last 18 months to 24 months that one of the reasons to do these expenses and we've been proactive. We really started over a year ago is that, as they come in, they will be long-term annuity savings, but in the short-term, it maybe a give up to help fund some of the provision.

So, I can't promise that it will be an exact offset, but it surely will help.

Paul, I'll just add that from the Board's perspective, we've decided that the longer term building of business is the way to go, and so that's the reason why you see us taking some of these near term charges in favor of that longer term growth.

An example just so you guys can follow and understand and Connie mentioned one, we had a branch, it was about a quarter of a mile, really two blocks from another branch. So, we said, here at Honolulu for those of you who have been here, it's an urban center, it's not sort of suburban, it's very concentrated and dense.

So we decided to consolidate that and then you have the opportunity to reduce FTE, reduce electricity, and ATM, the servicing, lot of duplication, but that one branch we were leaving to go in the other had a three year lease lapse. So we paid one year off to pick up two additional years.

Okay, great. Now that makes a lot of sense.

Now the securities write-down, what triggered the timing of that at this quarter as opposed to previously? Was there a specific event or something that caused the write-down of those securities?

What happens is, it's the global environment, that under accounting rules you have to look at that every quarter, and so the last ten years, I mean you look at every quarter and it's just never been that securities are so far below. So once your securities fall below book value, you then have to monitor and study that to determine, is it other than temporary.

What is the potential that it's going to come back? And so, it's something you do every quarter, and banks are having to do it much more so, as well as insurance companies, anybody that owns bonds over the last 12 months.

What happened in December is, delinquency rates nationally, most of these mortgage pools are national. Our securities, the mortgages are not from Hawaii.

They're from all over the country. And so delinquency rates really shot up in December.

And so, you use two numbers to estimate your loss, probability of default and then loss given default. And the probabilities really went up because of the increased delinquencies, and then the loss rates that people servicers are seeing because of foreclosures.

The loss rates are pretty high. I mean, if you have 30% market fall in a market and you got to pay 6% commission to a realtor, you got to pay some money to clean up the house, and then their stresses from it being a foreclosure, people cherry picking, it really pushes the prices down.

So, those two numbers that you use in your model really peaked in December. We ran it against our whole portfolio and as Connie said at December 31, we believe we've captured all the risk.

Now, if delinquencies continue to rise and probability defaults go up and/or your loss given default goes up, there could be more or maybe not.

And Paul, you're thinking about third quarter versus fourth quarter, think about how different the markets were at September 30th versus September 31st.

Right. Okay, and then…

In the product slides we showed – (inaudible) if you can put them back up, I don’t know how that works. But if you look at this new slide we showed this time that has the four charts, that's a good example, you just ask what happened in the fourth quarter.

Look at the slide she just put up and look at the total loans past due and the total loans 90 days past due. Look how our delinquency shot up in the fourth quarter.

That's also what happened nationally.

Okay. That's great guys.

Now just finally, on the – I was just wondering are there any – what the limitations might be in terms of the bank returning capital to HEI and what that means in terms of the longer term implications for financing at the parent company?

Paul, the extra capital that was returned last year really came about because of the balance sheet restructuring project, and so we would not be expecting that there might be additional restructuring this year. I mean that really was a project; however, one of the things that we have been watching, our conditions in the banking market.

And there was one point earlier in this year, if you recall when the mortgage rates dropped significantly. And when those kinds of conditions occur, we have to really think about whether we want to book all the production that we have on to the balance sheet or whether we want to sell that into the secondary market.

And so we are making those kinds of decisions continually about whether we have the opportunity to grow the balance sheet in a profitable manner or whether it is better for us to take the fee income on making that loan and then selling it into the secondary market. But outside of some shrinkage that might come from a strategy that shifts like that, we are actually not looking for any major balance sheet restructuring this year.

But you're also really asking, also what is the risk of shortfalls of the bank dividend to HEI due to higher credit risk?

You got it.

So we just ran three scenarios. I guess Connie said it honestly is hard to determine what the provision could be.

I mean it’s not like we're not wanting to tell you. I mean, its companies deteriorate; certain companies lay off; they are in different businesses, you don’t know we're monitoring our credits all the time.

And we take additional collateral.

Yes. So we just ran three scenarios over the past couple weeks.

What we deem we've got the room with a bunch of people, what do we think a low stress, a moderate stress and high stress is, and their estimates. You estimate probability of defaults and loss given defaults.

And we have different ranges and each one presents different challenges. And so I'm working with Jim in those different scenarios what would be our contingency plans and it looks like in all three, based on the assumptions we used, that the bank would be satisfactory and that HEI would have various strategies to maintain our operations.

Right, Paul. So we integrate that in our entire cash planning function and look at under these scenarios, which funds are available from dividends.

We look at our liquidity sources and we make sure under all these scenarios that we have adequate capital regardless of the risk posture that Tim talked about. So I would say under all these scenarios, bank would be in very good shape and the corporation as a whole would be able to fund under virtually any scenario that we've run.

There's always a possibility that it could be even more stressful or there could be certain spikes in time, but we rather think we have it well covered.

Okay. Thanks a lot, guys.

Sure.

Good afternoon.

Hi, Steve.

Hi, Steve.

I just had a question on the loan loss provisions, and I guess this kind of dovetails to the scenario planning you just did. Roughly $6 million with the provision in the fourth quarter, and I appreciate they are right, analyzing, these are our portfolio on a facts and circumstances basis so it's hard to give forecasts but in terms of what you view to be a downside case, what would that provision look like under a kind of protracted weak economy, what would run through the P&L in 2009?

It's hard to tell. First thing I always do is look back at history and when you look, the last stress cycle that the banking system had was the late 80s, early 90s.

You look at ASB. Now our portfolio is modestly different, not greatly different, modestly different, I will explain that in a minute.

But in the early 90s our provision ran about $13.5 million and $14 million a year, which last year, which we just reported was a total of I think about 10.7. Now the fourth quarter run rate of six times four is 24 so that one quarter is higher, the year was lower but that gives you some indication.

How big is the loan portfolio, two to three times the size of what it was back then?

The bank was roughly the same size, the bank really has not grown tremendously.

So the fourth quarter run rate would then be if you look at the $24 million run rate that would be a pretty conservative – that would be a fairly relative to economic history that would be pretty conservative provisioning?

Well, here is the key difference. The key difference is over the last 10 years a commercial portfolio has been built so back in that cycle, that mainly was our mortgages, any consumer loans and commercial real estate.

We did have modest amount of commercial real estate. Our commercial’s really been built the last 10 years so it hasn't been tested.

Our total commercial portfolio was close to 600 million so it's a little bit of a mix shift so it's hard to estimate that was 13 to 14, we do have this new sort of portfolio, I want to see how that plays into it.

Could you comment on how concentrated your commercial portfolio is? Like is there top five loans, is it some large percentage of that?

I think our top, I mean if you can look at top whatever but our top, I mean our top 60 loans is ironically is about the same amount. It's about 60% so the top 60 are fairly sizeable, but I mean, and then the rest; the other 40% would be 400,000, $1 million credits.

Okay, and so is it fair to say then that scenario, if you had a situation where the Q4 run rate in provisioning was kind of extrapolated through 2009, that would be consistent with some of the scenarios you've run?

Yes.

And which you had –

Yes, right. We all see in the news, gosh, who would have ever imagined that Lehman, Washington Mutual, Countrywide, people are totally out of business.

We're in unprecedented territory, so I don't know that it will exactly be horrible but I don't know that it will be the 13 million from the 90's. What I'm trying to do as a prudent person is okay, how does it look, if it is two years like the 90's, how does it look if it's twice that, how does it look if it's three times that, and in general, the bank specifically looks fine and safe if that happens and then Jim working through his cash needs if that were to lower my dividend to him, his planning looks adequate so one thing to point out specifically for the bank, unlike other situations, is our capital ratio has gone from – I forget the numbers I think it's 778, end of last year to 848 at the end of this year, so we actually have increased capital percentage relative to our balance sheet versus the prior year.

So we built up capital, we have less wholesale risk, we got rid of FHLB stuff so we don't really have liquidity risk and we're getting our expenses down to help pay for some of the credit.

Okay, if I could just switch to the utility for a moment. On the decoupling that would presumably, decoupling in your Oahu case would that hit in the fourth quarter of 2009 if that one is planned, is that right?

Yes, that’s the likely time, Steve.

And is there – will there be any forward-looking? I know you do have, I think the ability to project expenses to some degree currently.

But in this current round of rate cases or the next round of rate cases that you are going to have, do you expect to have any abilities to have a better matching between your expense levels and your rates?

Yes. Definitely as we mentioned some of the increases that we experienced in fourth quarter and are running at now are in the 2009 Oahu rate case and will be going into the HELCO and MECO cases plus when we decouple there will also be rate adjustment mechanisms as well that should help with all kinds of increases.

But I guess my question is, will you be using an improved like – is it the same test year structure that you'll be using in these cases?

Yes, that's correct.

Okay.

But, Steve I'd just add, the butt is that once – we will use the same rate case structure to set the base rates but then once we set that and then we decouple with the decision coming in the fall, then that's when we would have the rate adjustment mechanism that would carry us going forward and the plan would be that once that system is in place we would only have a rate case which would be in the nature of more of a true-up rate case about once every three years.

So, I guess I am confused in that. I understand how decoupling helps you on the volume, but if your O&M expense is growing 10% every year, how is decoupling, how do you deal with that issue?

It's not the decoupling. It's the rate adjustment mechanism.

So the rate adjustment mechanism will adjust to your expense level?

Correct.

So it is essentially a forward-looking mechanism with the true-up?

No, it is not a forward-looking mechanism but it will look at various kinds of indices, different kinds of costs and then as once we agree on the types of indices that go into the rate adjustment mechanism then the rates will adjust according to those indices.

Let me add to Connie's comments there, we are still – Steve, this is Tayne, we are still working through the process with the parties and consumer advocate, but just in summary what we're trying to do is the cost of services established in a rate case and years after that, we would use indices to true-up or down from that base and then it gets reset in base rates in the next rate case.

So why don't you give them an example? Just give Steve an example what the kind of rate adjustments there.

So one of the things we're looking at for example, you set a level of O&M expenses in a rate case and based on whatever index you use to true-up in the following year, based on something that we agree on, it would true-up say 2% at the beginning of the year, based on the base set in the rate case and we would have other trackers such as we're looking at rate based growth, and this would be for both the return on the investment as well as some of the expenses.

Great. Well, thank you very much.

Thanks for taking my question. I think this question will be for Tim.

Looking at the deposit growth that you saw in the quarter, I was wondering if you could talk about that a little more, because we did see from both of your public competitors, they also both produced fairly significant deposit growth in the quarter, so I was wondering if you could just give a little background on, is it higher balances, net new accounts, et cetera?

I always followed their numbers. For us, I think it's both.

I think that we rolled out two new checking accounts this year, that as I mentioned, everybody quickly followed, and there was commercials within a couple of weeks, everybody was comping them. But we increased our checking accounts, 16,000 for the year, which is a 9% checking account growth.

And that really came from rolling out. We introduced free checking to Hawaii.

Free checking had never really come to Hawaii, in the way that we know it on the mainland. And then we introduced really simplifying our product set.

We have seven checking accounts and we're going to two. So we have free checking and then interest checking, which is just the free checking with on top of that you get one or two extra features.

And it's been well received, there are simple products here, tend to be a little bit complex and it's just been welcomed. And so ours has come from a lot of new account growth, but then also we've benefited from people being shy of the equity markets or CD rates are very low.

So a lot of people that had CD rates nationally are either in the mainland or here across Hawaii are putting those into depository accounts. So, the pro of that is great.

We got deposits. The count of that kind of money is likely when rates go up, that money moves back out.

Right. Now, can you, I'm not sure if you can tell this or not, but are you seeing movement in from any of the, like credit unions or is that hard to tell?

To be honest, we have had good acquisition. I mean this is a very, I mean, I was shocked.

This is my fourth bank, and this would probably is good of the individual year I've seen in any of the banks I've worked at, to grow net checking accounts 9%. Our market only grows about 1% a year, and there's only more about a million people who lived in Hawaii.

So, you're really stealing share from others. I mean all those accounts, more people that just moved here to Hawaii.

Okay.

So, they are really come in. I mean, if you look at where they are coming from and we do track that, it's not any one source.

It's really from all over.

Okay. That's helpful.

Thank you.

Hey, thanks for taking my question. This question is probably actually for Tim as well.

Just had a few quick questions. The first I guess was, by the way, commendable that you gave so much disclosure on the private mortgage backed security bucket as something which we have been looking at, and also congratulations on the cost cutting that you've been doing.

The first question just on the MBS book, I noticed that you took like a $37 million temporary charge on that which didn't flow through the income statement and when I, if that actually was a real charge, I guess you would have like a negative $30 million loss for the bank. But why is that only temporary and do you think that your book that's marked at $0.94 when you consider only the full sort of the non-temporary charges, do you think that's an accurate number?

Yes, again, the fair value accounting rules are weird. I've always felt they were weird.

And when you think about a bank balance sheet of securities and loans on the asset side, and deposits and debt and equity on the liabilities side is the only mark-to-market one category of your whole balance sheet. And if you are doing prudent interest rate risk management in theory, if the values of your assets go up and down and you really are managing that interest rate risk, the values of your liability side should offset that.

So, if you are really calculating what's called economic value of equity, and in theory, good interest rate risk management, it should net to zero. So what's unfortunate about the accounting rules on what you're talking about, other comprehensive income is, things happen on securities.

You are required to mark them to market, the ones that are held available for sale, held that way, not held to maturity. And whether the values go up, you put the gain in your equity.

The values go down; you put the loss in your equity. We have stuff on the other side.

Our deposits would be much more valuable today, but we don't get to recognize the gain of that in our equity to offset that. So what you see there is just the change in the publicly traded prices of those securities that we have to reflect in there until we realize a loss, number one.

Why were you so much more optimistic than the market? Clearly the market is pricing these down.

You think that you won't lose as much as the market is saying. But wouldn't the market be a fairly better judge than you?

No, not necessarily, because that's trading value. That's what somebody is willing today to buy today that may not be willing to hold it till the end or, lots of different situations.

It's not just credit risk. Its liquidity risk also.

And we have the ability and the intent to hold it till maturity. We've got a lot of capital and we can hold it till the very end.

And so, we feel sort of weighed out. We don't really have the liquidity needs.

And so, I'd say the answer is no.

Okay.

Also, the part of our portfolio is agency mortgage-backed securities, which are guaranteed by the government.

I'd just add that, we actually looked very closely at the securities portfolio last summer when we restructured the balance sheet and we made some conscious decisions about those that we would keep or not keep, as Tim said, depending on what the market valuations were versus our views on what the true value was to the bank over time.

No, no, that makes a lot of sense. Well, thanks for the disclosures.

It’s very, very useful. I guess the second question I had related to, I saw in your 10-Q, on the last 10-Q that you filed that about, I guess that 6% of your residential loan book was not originated by you guys in Hawaii.

I think Suzy confirmed that it was broker originated mortgages at various parts of the U.S. And I guess that comes out according to my calculations of like 220 million, which like 60% of your tangible equity.

Could you provide some disclosure on that?

Yes, what happened was the summer of 2007, the company purchased two loan pools that totaled about $200 million and they were just national loans. And so, our guidelines on one to four family mortgages have been fairly conservative here.

And so at that time, during that summer, they went out and built a filter or underwriting credit profile and went out and said let's find similar ones with geographic distribution across the country. So, they are 30-year fixed rate mortgages with high FICO scores in similar characteristics, but they are all geographies.

They are not concentrated in any one state.

Can you give a break down of sort of what are the biggest states and where they are located?

Actually, I don't have that right in front of me but I actually did pull that about a month or two ago. And the largest state from that one from memory was Maryland.

Okay.

But they all differ. All of these mortgage securities we have; if you pull every one off, the larger states differ.

And in fact some of the limitations were that we put limitations on for states like California or Florida.

From memory, I could be off, don't hold me to this; I was thinking that, it’s been a month or two, I think Maryland was like 13% or something.

Got it. Okay.

That's pretty good. Thanks, thanks.

And just the last question I guess was, I noticed reading your 10-K and I saw you filed an 8-K about a year ago. The OTS gave you a seasoned assist order I think, which related to something about money laundering, has all that issue been cleared up and what is that about?

Yes, what happens is under banking regulation. There is something called the Bank Secrecy Act and it came into play as full force, five years or so ago, and your companies have been building programs and any time new legislation or new regulation comes out like that, it's infrastructure and learning, and I guess it was in the '06 time frame it was found that there could be some improvements in ASB's process.

It was not any fraud that was going on or anything. It was more around the process and the reporting that was happening, and so really nationally what happened was you saw a wave of seasoned assist orders around DSA for banks nationally because the regulators were like, hey, this program has been out for four years or five years, it's time we get this wrapped up, get everybody on par together and it's basically a way to put a finite timeline on, you have till a year to get it done.

That's really what it was. So fortunately for us we got (inaudible) in less than nine months and then the OTS removed it.

Our exam is every fall for six weeks, so they came in, starting around September 1 last year for six weeks and at that point they removed it.

Okay, thanks, that's really helpful and the last question I guess relates to just I was under the impression that the OTS and you had an agreement that if the Tier 1 fell below 8% that you wouldn't upstream any more money. And so I guess right now you're at 8.3% but if you actually took that temporary charge that ends up being real, then you're probably below 8%.

Does that effectively mean that you can't dividend more than your positive net income and if you actually started losing money that you can't dividend upstream at all?

That's not determined. Right now what we're doing is it was not a mandate or anything from the OTS.

We have an agreement with them that we've told them we're going to during these times managed 8% leverage ratio which basically is just equity assets which are backing out your goodwill in essence, and your unrealized loss. So, that we've been dividending out everything above 8%.

Actually was is more than you want to know but that actually was a definition change to the OTSs leverage ratio calculation in fourth quarter but just the definition change created $16 million of additional capital for us and took that 8% ratio to 828 just at a prudency we've elected to just leave that in the bank and so we are going to run now closer to 828 that’s just a management decision, we haven’t even told the OTS yet that. So we are just going to run at 828 through this time, because we want to make sure the bank remains healthy and that provides an extra $16 million of capital in your mass and then if such unfortunate events happen that charge-offs at the OTTI or just regular provisioning, took it below 8% we have to cross that bridge to see whether we could work with the OTS to just earn back to the eight or whether they would require a capital infusion from HEI.

Okay. Thank you very much.

Let me just add one other thing, is that, when you talk about the valuation of the security, the market valuation runs through the balance sheet through AOCI, and so that has already been reflected on the balance sheet, but it's not affected in the capital, the regulatory capital calculation. So unless we scale those securities, you wouldn't see it hitting the capital.

Or unless you deem that they are not temporary.

Correct.

That’s right.

Right.

Okay. Thank you.

You're back, Paul.

Hi, guys. I know.

Can't get enough. Really actually a really simple question I think and I apologize if I missed it, but where are the ROE's the utilities I guess, where are the most recent ROE's that you guys are earning there?

Paul, this is Tayne. The most recent ROE's are as follows For HECO, HELCO, and MECO we are at 8.07% for HECO, 9.39% for HELCO and 8.54% for MECO and this is compared to the allowed for the most recent interim decision of 10.7%.

Okay, great, and this is as of what date? Was this the end of the year?

This is as of the end of the year.

Okay, great. Thanks a lot guys.

Thanks everyone for being on the call today. If you have further questions, please call me 808-543-7385 and I'll be sure to get back to you.

Thanks.