Hawaiian Electric Industries Inc (HE) 2016 Q3 法說會逐字稿

Welcome to the Hawaiian Electric Industries Incorporated third-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Cliff Chen, Manager of Investor Relations and Strategic Planning. Please go ahead.

Thank you. Welcome, everyone, to Hawaiian Electric Industries' third-quarter 2016 earnings conference call. Joining me this morning are Connie Lau, HEI President and Chief Executive Officer, and Chairman of the Boards of Hawaiian Electric Company and American Savings Bank; Jim Ajello, HEI Executive Vice President and Chief Financial Officer; Alan Oshima, Hawaiian Electric Company President and Chief Executive Officer; and Rich Wacker, American Savings Bank President and Chief Executive Officer; as well as other members of Senior Management.

Connie will provide an overview, followed by Jim, who will update you on Hawaii's economy, our results for the third quarter and our outlook for the remainder of the year. Then we will conclude with questions and answers.

In today's presentation Management will be using non-GAAP financial measures to describe the Company's operating performance. Our press release and webcast presentation materials, which are posted on HEI's Investor Relations' website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the equivalent GAAP measures.

Forward-looking statements will also be made on today's call. Actual results could differ materially from what is described in those statements. Please refer to the forward-looking statements disclosure accompanying the webcast slides, which provides additional information on important factors that could cause results to differ.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, including EPS guidance, whether as a result of new information, future events or otherwise. I'll now turn the call over to our CEO, Connie Lau.

Thank you, Cliff, and aloha to everyone. HEI posted strong results in the third quarter of 2016. Results were positively augmented by the receipt of the next year energy termination fee, which will help us make our needed investments in Hawaii's Clean Energy transformation.

Year to date, Hawaiian Electric has spent approximately $230 million in local infrastructure projects to modernize the electric grid and to reliably integrate more renewable energy. Our utilities continue to work towards a balanced generation portfolio, increased distributed generation, enhanced electrification of transportation, and demand response initiatives. Our Utility has also been working on the December 2016 update to its power supply improvement plan, and last month, we celebrated our Utility's 125th anniversary of providing electric service to the people of Hawaii.

Both our Utility and Banks delivered financial results in line with our full-year expectations. At the Bank, we saw excellent deposit growth and higher net interest income, but provision for loan losses was higher than our initial expectations, which impacted results for the quarter.

Overall, American Savings Bank still produced good bottom-line earnings. Together, HEI is continuing as a strong independent Company, with Hawaiian Electric focused on helping our state achieve its 100% renewable energy goal by 2045, and American Savings Bank continuing to provide banking services and products to Hawaii communities.

Turning to recent Utility developments. As we move forward as an independent Company, we must get back on track with the mandatory triennial rate-case cycle under our state's decoupling framework. By the time we file for all three of our utilities, each will not have had base-rate increases for six years.

On September 19, Hawaii Electric Light filed its 2016 test-year rate-case application, which in normal course would have been filed in summer 2015. The request includes a proposed 10.6% ROE and a base-rate increase request of $19.3 million or a 6.5% increase.

As I mentioned, this is the first proposed base-rate increase in six years and will be used to pay for higher operating costs, including an extensive tree trimming and removal program that has improved storm resilience. It will also help pay for system upgrades that improve reliability and integrate more renewable energy, and for customer service improvements.

For a typical residential customer using 500 kilowatt hours per month, their monthly bill would increase $9.31; however, the typical Hawaii island residential bill will still be less than what it was about a year ago. Hawaiian Electric on Oahu plans to file its 2017 test-year rate case by year-end 2016, and Maui Electric is expected to file its 2018 test-year rate case some time next summer.

In other developments, we continue to look for ways to bring lower cost renewables online to help stabilize and lower our customers' bills. Just last month, we filed an application with the PUC for approval to build, own and operate a 20-megawatt, $67 million solar facility at the Navy's Joint Base Pearl Harbor-Hickam. If approved, it would be the lowest cost renewable energy project in our state, at $0.0954 per kilowatt hour, and is estimated to save Oahu customers $109 million over the project's 25-year life, compared to the cost of using oil to generate that energy.

In addition, as mentioned last quarter, the 27.6-megawatt YNI solar project, the state's largest solar energy facility, remains on track to go into service in December. Eurus Energy will own and operate the project and will sell energy under a purchase power agreement to Hawaiian Electric.

Hawaiian Electric continues to be a leader in developing the distributed energy network of the future. Here are just a few recent examples of what we're doing to explore different types of energy storage with various partners. In September, Hawaiian Electric placed into service its first utility-scale battery energy storage system on Oahu, smoothing power flows in an area with a high amount of solar.

We'll also be working with Amber Kinetics to conduct a joint energy storage project. The pilot project will test the capability of the first commercially available four-hour duration flywheel system. The system can provide renewable energy firming and peak energy shifting, and ancillary services, like voltage smoothing with us in a three-year and frequency response for reliability.

And in October, STEM, which has been partnering with us in a three-year pilot to deploy intelligent storage systems with customer-sited PV and batteries, activated the largest yet customer-sited battery storage system in Hawaii. This project is also supported by Hawaii's energy accelerator and the US Department of Energy's SunShot initiative.

The pilot is targeted to deploy systems at about 30 local businesses to help provide aggregated ancillary services and storage. We also continue to work on plans for utility-scale storage to provide voltage support and other reliability benefits.

Also in October the Hawaiian Electric Companies began offering a time-of-use rate program, allowing customers the option of paying a lower rate during daylight hours and more during the evening. As directed by the PUC, this program will run for two years and is limited to the first 5,000 customers who enroll. The program will help us evaluate the impact of pricing signals on customer behavior, and hopefully help shift energy usage out of peak hours to hours when we have an abundance of solar power.

I'll now ask Jim to cover Hawaii's economy, our financial results, and outlook for the Company.

Thanks, Connie. I'll start with Hawaii's economy. Hawaii visitor spending increased 10.4% in September to a record $1.2 billion, making it the fourth straight month of increases.

Visitor arrivals also set a new record for the month of September, rising 3% from last year, and extended Hawaii's streak to 20 consecutive months of growth in arrivals. Year-to-date September visitor arrivals and expenditures increased 2.6% and 3.7%, respectively, from a year ago.

Statewide unemployment was 3.3% in September compared to 3.4% a year ago, significantly below the national average of 5%, actually this morning as of 4.9%. Hawaii's real estate activity remains strong during September, with the median sales price for single family homes on Oahu at $750,000, up 2.7% from last year and up 5.2% year-to-date September. However, according to the University of Hawaii's September 30 forecast update, although the Hawaii economy continues to roll along, there are signs of a slowdown ahead, with the maturing of the construction cycle and real estate GDP expected to grow just 2% in 2016.

Turning to our third-quarter results on slide 5. Reading across the slide from left to right, consolidated GAAP net income of $127.1 million included the one-time impact of $63.8 million in net income at the holding company. This included the NextEra pretax $90 million termination fee and the $5 million for the reimbursement of merger expenses, $8 million in additional tax benefits from previously non-deductible merger-and-spin expenses, and other merger-and-spin expenses in the quarter.

An additional tax benefit related to the domestic production activities deduction, which was accrued at $8 million, of which $2 million relates to the additional taxable income attributed to the merger recorded at the holding company in the third quarter, and was therefore not included in core earnings. In other words, the DPAD benefits would have been lower in less taxable income from non-core items, such as the merger-and-spin termination fee.

Reading all the way across to the right-hand side of the slide, excluding the merger-and-spin expenses and fees, and the $2 million I just referred to, core net income was $63.3 million compared to $52.4 million in the third quarter of 2015, or up $10.9 million. Core net income was $10.9 million higher than the prior-year quarter, driven primarily by $6 million of the DPAD benefit, as HEI has moved out of a federal net operating loss position, enabling the recognition of tax benefits of the holding company.

Of the $6 million, $4 million is attributed to the 2015 tax year, and $2 million is attributed to the first three quarters of 2016. Moving forward, we estimate that HEI would benefit by approximately $0.02 per share on an annualized basis.

Slide 6 is the corresponding version of slide 5, but on an EPS basis. 2016 GAAP earnings per share were $1.17, excluding the one-time impact of $0.59 per share at the holding company for the merger-and-spin-related items. Core earnings per share were $0.58 compared to $0.49 per share in the third quarter of 2015.

As shown on slide 7, HEI's GAAP-consolidated ROE for the last 12 months ended in September was 12.3%. Excluding earnings impacts related to the recently terminated merger and spin, HEI's core consolidated ROE was 9.5%. The GAAP ROE contributions were 8.1% from the Utility and 9.8% from the Bank.

On slide 8, Utility earnings were $47 million in the third quarter of 2016 compared to $43 million in the prior-year quarter, primarily driven by the following after-tax items; $5 million in lower operating and maintenance expenses, largely due to one-time items in the prior year quarter, partially offset by $1 million of higher depreciation expense due to increased investments for improved customer reliability, greater system efficiency and integration of more renewable energy.

O&M expenses were also lower, primarily due to the third quarter of 2015, including an adjustment for enterprise resource planning software costs and lower overhaul costs in the current-year quarter due to fewer overhauls performed.

At the Bank net income for third quarter of 2016 was $15.1 million, $1.8 million higher than the linked quarter, primarily driven by $2 million in after-tax higher revenues due to higher non-interest expense income, which included a gain on sale of real estate, and higher mortgage banking income and higher net interest income, primarily due to growth in the commercial real estate and consumer loan portfolios. Higher revenues were partially offset by higher provision for loan losses, primarily due to reserves for specific commercial credits.

Compared to the third quarter of 2015, third-quarter 2016 net income improved by $1.7 million at the Bank, primarily driven by the following after tax; $2 million in higher net interest income due to growth and higher yields in the commercial real estate and consumer loan portfolios, which was partially offset by $2 million in higher provision for loan losses, mainly related to our commercial markets and consumer loan portfolios.

Slide 9 shows the Utility's actual ROEs for the last 12 months. The consolidated Utility ROE was 8.1%, in line with 2016 guidance of approximately 8%. The improvement in Hawaii Electric Light ROE to 8.5% from 6.3% was primarily due to lower O&M expense compared to 2015, as 2015 included extensive and higher vegetation management costs and higher storm recovery costs due to heightened activity in 2015. The decline in the Maui Electric ROE to 8.4% from 9.2% was primarily due to higher O&M expense due to overhauling of generating units.

On slide 10, you could see that American continued to deliver solid profitability metrics. Year to date, we achieved a return on assets of 89 basis points and expect to achieve our full-year target of 90 basis points as our net interest margin improves.

Because the Bank has been selling its residential loan portfolio and lowered its exposure to national credits, our loan balance has decreased slightly for the quarter; however, year-to-date annualized loan growth was 3.4% and we are on track with our target of mid single-digit loan growth for the year. Year-to-date loan growth was driven primarily by commercial real estate and consumer loans.

The year-to-date net interest margin of 3.59% is at the higher end of our guidance range, benefiting from higher yields on our growing commercial and consumer portfolios. Based upon the higher-than-initially-anticipated year-to-date credit costs, we are revising our net charge-off ratio to the range of 15 to 20 basis points. Overall, the Bank continues to maintain its robust deposit base, strong capital levels and straightforward community banking business model.

On slide 11 our net interest margin of 3.57% in the third quarter of 2016 was 1 basis point lower than the linked quarter, but 4 basis points higher than the prior-year quarter. Our interest earning asset yield declined by 1 basis point, and our liability cost of 24 basis points increased by 1 basis point compared to the linked quarter.

On slide 12 pretax non-interest income was $1.9 million higher than the linked quarter, primarily due to a $1 million gain on the sale of real estate and higher mortgage banking income.

Slide 13, the increasing loan loss reserves reflect growth in the commercial real estate and consumer loans, which require higher reserve levels. Provision for loan losses was higher than the linked quarter and the prior-year quarter, largely due to reserves for specific commercial credits. As a result of our year-to-date actual results of $15.3 million, we are revising our annual provision guidance range to $16 million to $19 million.

The third-quarter 2016 net charge-off ratio was 20 basis points, 5 basis points higher than the linked quarter, partially related to ASV's strategic expansion of the unsecured commercial loan product with risk-based pricing. The allowance for loan losses was 1.24% of outstanding loans, or $59 million at quarter end, compared to 1.16% at the end of the linked quarter and 1.08% as of the prior-year end.

On slide 14, American's non-performing assets ratio was 1.12% at the end of the third quarter of 2016 compared to 1.02% at the end of the linked quarter. The increase was primarily due to a commercial loan relationship being downgraded to non-accrual status during the quarter, despite the borrower being payment current.

Slide 15 illustrates American's continued attractive asset and funding mix relative to our peer banks. American's September 20, 2016 balance sheet is compared to the last complete available data set for our peers, which is as of June 30, 2016. 100% of our loan portfolio was funded with low-cost core deposits versus the aggregate of our peer banks at 83%. Year-to-date total deposits increased by $355 million, or 9.4% annualized, while maintaining a very low cost of funds of 24 basis points, 20 basis points lower than the median for our peers.

In the third quarter of 2016 American paid $9 million in dividends to HEI, and American remains well capitalized at September 30, with a leverage ratio of 8.6% tangible common equity to tangible assets ratio of 8% and total capital ratio of 13.3%.

I'll now address HEI's outlook for 2016. Turning to slide 17, we are revising our 2016 CapEx estimate to $340 million, which excludes the Hamakua Energy Partner's plant purchase estimated previously for 2016 based on the procedural schedule extension into January of 2017.

Rate-based growth is estimated to be flat, largely due to bonus depreciation, offsetting plant additions and the impact of CapEx spending in 2016, which will not go into service until later periods. An example of this would be the Schofield project now in construction.

Under the modified decoupling order, we would expect about $275 million annually of plant additions recovered under the RAM cap. Capital expenditures above this level would require specific PUC approval. Because the Schofield project was filed prior to this new RAM cap mechanism, in early 2017 Hawaiian Electric will be filing a PUC application requesting recovery of costs for the PUC-approved Schofield project via the RAM. The project is scheduled to be completed in the first quarter of 2018.

The ERP project has been approved and is currently scheduled to be completed in the fourth quarter of 2018. We are proposing to recover costs by a surcharge mechanism. We have also included in the 2018 forecast the 20-megawatt solar facility at Joint Base Pearl Harbor-Hickam that Connie mentioned. This would be an estimated $67 million if the PUC approves the project.

Turning to slide 18, we are revising HEI's 2016 core earnings guidance range somewhat higher and tighter to $1.72 to $1.78 per share from $1.62 to $1.75 per share based upon our year-to-date actual performance and excluding any terminated merger or spinoff related items. And in light of the merger termination fee received, we do not anticipate needing any external equity, including our dividend reinvestment plan proceeds in 2017.

At the Utility we are maintaining the Utility's EPS guidance range of $1.28 to $1.36. And as just noted, rate-based growth is estimated to be flat, and long-term debt issuance is estimated to be just $40 million in 2016.

At the Bank, we are maintaining the Bank EPS range of $0.50 to $0.54; however, we expect steady instead of higher fee and mortgage banking income. As we mentioned earlier, we are now expect provision expense to be in the range of $16 million to $19 million, and charge-offs to be in the range of 15 to 20 basis points. Overall, we expect the Bank return on assets of approximately 90 basis points.

Connie, now I'll turn the call back to you for closing remarks.

Thanks, Jim. In summary, our utilities will continue transforming to focus on providing customer value and options and to support achieving our state's 100% renewable energy goal. Our Bank will continue to focus on improving earnings and efficiency.

And on Wednesday, our Board maintained our quarterly dividend of $0.31 per share, continuing our uninterrupted dividend payment since 1901. The dividend yield continues to be attractive at 4.3% as of yesterday's market close. HEI remains a strong independent Company that continues to be well positioned to achieve its goals and Hawaii's Clean Energy goals and provide long-term value for our customers, community, employees and shareholders.

Now, before I open it up for questions, during Q&A, in addition to Jim, me, Rich and Alan, you're used to also hearing from Tayne Sekimura, CFO at our Utility. In addition, today we have joining us Rob Nobriga, who just joined Rich at American Savings Bank as the Bank's new CFO. Welcome, Rob.

With that, we look forward to hearing your questions.

(Operator Instructions)

The first question comes from Paul Patterson with Glenrock Associates.

Aloha.

Aloha, Paul.

Just to go back that rate case, the rate base -- excuse me -- slide 17. I haven't been able to do all of the numbers since this has come out, what have you. But what I'm not completely clear on -- I know that there's some timing, the Hamakua is pretty straight forward.

But what I'm not really clear on is about $150 million in 2018 or $130 million, depending on which part of the range of less rate base. And just simply in 2018, if you could help me out here, what's the big driver of the decrease in your rate base forecast versus last quarter?

Okay, Tayne's going to take that question.

Hi, Paul.

Hi.

The biggest change is we had some shifting of our capital expenditures, which also moved some of the in service dates for these projects, some of the major projects there. That's the main reason for the difference.

But in 2018, right, a lot of those things have been taken care of by that point, I would assume. Like Hamakua, and these other things would have been dealt with. So what I'm wondering is looking at 2018, it looks like the numbers are about $130 million to $150 million less, so is there something that's being shifted out even further than that?

Smart grid looks to be the same, am I wrong? I just didn't -- again, I haven't worked through all of the numbers. But just looking at 2018, while there's timing, you would think it would have been dealt with. It seems like the forecast is down from there.

Yes. It is basically that, Paul. The timing differences, as we look at some of the other major projects that we have, we could be doing the spending. The spending gets delayed and that pushes out some of the in service dates beyond 2018.

Okay. For some of the things that are not being brought up here, I guess? They're not being --

That's correct.

Okay, I've got you. Okay. Okay, and then with respect to the PSIP filing that was supposed to be made this fall, was there any big change there, and do we have any update on LNG?

On the PSIP filing, we recently received the procedural schedule, and so we will be updating that as scheduled in December of this year, and then the parties' statement of positions is due in February.

Okay. Any preview you want to give us in terms of what you're thinking about the PSIP and LNG?

Well, as you know, we are updating for the new fuel forecast that came out this summer. And the Commission has asked us to look at inner island cable in order -- because the PSIPs that we filed in April indicated that Oahu is likely to need some offshore resources, and that would also include some additional work that we are doing on offshore wind and the prospects for that.

Okay.

Paul? This is Alan. We're concentrating on the five-year action plan in this filing, with a vision for the future beyond that. But LNG, we are very clear is not included in our five-year action plan. But we are analyzing the future for LNG, but it's not in our five-year action plan.

Okay. So the containerized LNG and everything like that is -- that's pretty much off the table, is that right?

In the five-year action plan. We continue to -- pursuant to the inclinations paper the PUC has provided, we continue to review the viability of LNG, but it's not in our five-year action plan.

Paul, it's Jim. Just to refresh for you and the others on the phone. The LNG contract that we have with Fortis had a significant condition precedent to the activation of that contract, which was the closing of the merger, so that terminated by its terms back in July.

Okay, I realize that, but I didn't realize that that meant that the whole -- it would be completely out of the five-year action plan, I guess.

Yes. No, it is. And that is the difference in the PSIPs that have been filed previously, because the Commission had always asked us to look at the 20%, 45%, 100% renewable goals. And we're doing all that long term planning. This update, we will be focusing, as Alan mentioned, much more on the near-term five-year action plan.

With a vision to 2045.

Okay.

More visionary.

I've got you. And then, moving to the Bank. The new loan loss provision run rate for 2016, do you see that as being extending going forward into 2017 and beyond? With the loan loss numbers being higher than initially expected, do you see those being -- is it because of just simply some of the actual credits that have had trouble, or is there a new appraisal of loan loss provisions going forward as a result of your assessment of the business?

Paul, it's Rich. Yes, so we think, based on the way the composition of the book and the way we're growing, we think that we are at this higher level. The current year is a little bit higher than we would expect because of some downgrades. Those are -- as we mentioned -- Jim mentioned in his comments -- those are lumpy, reflect a little bit dynamic of the commercial real estate market, where we've had a lot of growth.

On a book our size, one credit getting a special mention designation will move the needle a little bit. It's a little bit higher when you think about the different components.

Our net charge-off numbers will run probably a couple million dollars a quarter, as a normal rate when you look at the regular book. And we would provide for growth on top of that. Then, if you have some asset quality movements, you'd have an additional amount. So, we will be at this higher level on an ongoing basis.

And, Paul, I would just add, as Rich has explained in past calls, a lot of that growth is coming in a different mix of business, for example, consumer unsecured, which does have higher provision rate, loss rates that are expected.

Okay, and then the deposit growth. Could you remind me what's driving this? It seems pretty substantial. I was just wondering, what are the dynamics that's driving the loan growth?

So deposit growth --

I'm sorry, the deposit growth. I apologize.

(multiple speakers) mid single-digit range. The deposit growth is driven by pretty broad relationship execution across the customer base. It's a lot of growth in consumer, some growth in commercial.

We mentioned previously that we're rolling out to new e-banking tools that includes some really upgraded cash management functionality compared to what we've had in the past. It's all part of just making sure we've got as good of a relationship with our customers as we can and we bring more of their business to us.

Okay, that's it for me.

The next question comes from Charles Fishman with Morningstar.

Hello. Can I go over the core EPS guidance? Utility core guidance stayed the same. Bank guidance stayed the same, but we tightened and raised consolidated. Is that all coming from the tax benefit?

Not all. It's Jim, Charles. Thank you for the question.

Not all the tax benefit. Core earnings were higher year over year in the third quarter, pushing us through at a higher fundamental level.

But we did have some additional benefit from the deductibility of the merger and spin expenses and the DPAD recognition, the domestic production activities, that did boost the earnings to that higher level. And we tightened it, of course, as we're nine months in, having better line of sight for the year-end.

But Jim, that's all coming at the hold co, correct?

Yes, so let me pull back and tell you what's happening there. As we were doing our -- this is now regarding the DPAD itself -- as we were doing our Q3 -- in Q3, our consolidated tax return for 2015, in the ordinary course of things, we determined we were entitled to the domestic production activities. You might say, why isn't it showing up at the utility level? Primarily because they still have NOLs, right?

But when you consolidate the business altogether -- and we're a consolidated federal return filer -- we have the taxable income at the Bank, and so what the Utility was not able to temporarily use really comes upstairs, as it were, and we're able to have that deduction happen there. That's the DPAD.

As to the other tax benefits which showed up in the quarter, when you do a merger and spin like we were doing over time, you are able to capitalize, or you would capitalize some of those expenses because you're selling the company. However, with the termination of the transactions, you can go to normal tax deductability, and that generated a benefit that we weren't able to have previously in the course -- or assuming the sale and merger of the businesses.

Okay. Let's talk about going forward beyond 2016. One of the -- with all of the complexities of Hawaiian Electric Industries, one of the more consistent things was your GAAP income tax rate was always around 35%, give or take maybe 100 basis points.

You made the statement that it's going to be lower, there was a $0.02 benefit going forward. Is that going to change that, so maybe I should -- I haven't worked the numbers, but maybe we should be looking at 33% or 34% in the future?

I would not, Charles, make that assumption. The $0.02 per share DPAD, which I would expect going forward might be at the utility level, would not dramatically change your assumption there.

We had an unusual effective tax rate in the quarter of about 32%, but those twin tax items were at work there. On a run rate basis, I would guide you to return to that level that you've been using. $0.02 is not that significant in the course of things at about $1.70 a share thereabouts.

The other thing is that the DPAD, of course, is a hard deduction to estimate, with a lot of variable generation. And realize it's a generation credit that we have in a system like ours with a lot of renewables. It's hard to count repetitively and predict precisely what that tax benefit will be going forward. That help?

Yes, all right. The taxes are always difficult. Okay.

And, Charles, I would also add that the DPAD in the third quarter did include a partial catch-up for 2015, so that would not be in the run rate going forward.

And as the core earnings, Charles, and for the others, we took $0.02 per share and reduced it from core earnings because our taxable income swelled in the quarter due to the receipt of the termination fee. True to our pure form on this, by taking all the merger and spin-related items and excluding them from the fundamentals, right, that tax deduction was higher yet. It had a bigger benefit, because we had higher taxable income, so we tried to be very transparent and clear about what was core earnings as well, right?

Okay. Let me just one more quick question. The Pearl Harbor-Hickman solar project. I know that the Department of Energy has like a goal of 20% renewables at all their military facilities. Is this what drove that project, or was it more at your end driving it?

It's both. The Navy and the state and we entered an agreement to cooperate to get all of our renewable goals met, because our state has a very ambitious renewable goal, as well. It's the cooperation and collaboration that's making this possible.

Okay. I think ambitious is being a little bit of an understatement. It a pretty aggressive, renewable goal, but I'll leave it at that. Thank you very much, and I'll see you next week.

Okay see you soon.

(Operator Instructions)

The next question comes from Jacque Bohlen with KBW.

Hi. Good afternoon, everyone.

Hi, Jacque.

Rich, I wondered if you could provide a little bit more color on the commercial downgrade in the quarter. Is that related to last quarter's activity, or is that new?

There were new, special mention designations that we had in the quarter that drove a little bit more provision on that in the third quarter.

And was it anything unique, or just general course of business?

The two of them are investor properties that have some progressions of sales that were expected on them that are a little bit behind schedule. So while we check and see if those schedules catch up, we designated it, and we're going through the review of that this quarter to see how those move.

Okay. That's helpful, thank you. And then there was a mention of a decline in national credits in the prepared remarks. Is that what drove the majority of the decline in commercial loans in the quarter?

More than all of it. As we've grown with the commercial real estate and some of the local exposure, we're bringing that national book down.

And approximately where does that stand now versus where it was, say, maybe a year ago?

It's about -- today we're about $180 million.

And as -- assuming that other commercial real estate growth and consumer growth and everything continues to increase, is it fair to assume that would continue to trend down?

Not too rapidly. It would probably trend down modestly.

Okay. And then switching gears a little bit over to mortgage banking, you had a really nice quarter there in that line item. Was any of that driven by quarterly swings in MSR?

No. The biggest thing in there has just been selling a little bit higher proportion. Rates really dipped in the second quarter, and as that stuff came through and closed, we sold the stuff that we just don't want to keep on the books for a long time.

Okay. That makes sense. So that should probably -- could trend down next quarter?

Yes.

Okay. Then, just lastly, if you could just provide a little bit of color on the management change?

We have a great new guy named Rob here who came in. Rob joined from -- as Connie mentioned -- from one of the premier local institutions, Queen Hill Systems. He's a long time Hawaii guy and a real leader in our community, and we're thrilled to have him come over to the Bank.

Okay, great. Thank you very much, and welcome, Rob.

Thank you.

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

Thank you, Gary. And once again, thank you everyone for participating. We hope everyone has a good weekend. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.