Hawaiian Electric Industries Inc (HE) 2017 Q3 法說會逐字稿

Good day, and welcome to the Hawaiian Electric Industries Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. At this time, I would like to turn the conference over to Cliff Chen, Treasurer and Manager of Investor Relations. Please go ahead, sir.

Thank you, Denise. And thank you, and welcome to HEI's Third Quarter 2017 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; Greg Hazelton, 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 Greg who will update you on Hawaii's economy, our results for the second -- for the third quarter, sorry, 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 cautionary note regarding the forward-looking statements disclosure accompanying the webcast slides, which provide 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 without limitation, EPS guidance, whether as a result of new information, future events or otherwise.

And now our CEO, Connie Lau.

Thanks, Cliff, and aloha to everyone, and we also look forward to seeing many of you soon in Florida at the EEI Financial Conference.

At our utilities, we've continued to make progress together with stakeholders and our PUC to move Hawaii toward 100% renewable energy with a number of key regulatory developments in the quarter. Utility financial results were as expected as 2017 continues to be a year of transition as our utilities move through 3 concurrent rate cases after having remained out for 6 years.

At the bank, quarterly performance was strong, with higher earnings and profitability, driven by improving credit quality, higher yields on interest-earning assets and robust core deposit growth. Together, HEI's core earnings compared well with the prior year quarter, demonstrating the value of the unique combination of businesses which comprise HEI.

The third quarter was a busy one from a regulatory perspective. We saw the advancement of many of the plans, initiatives and mechanisms that collectively comprise the framework through which Hawaii can progress to a 100% renewable future.

In July, the Hawaii PUC accepted our Power Supply Improvement Plan, or PSIP, which provides a broad, yet flexible roadmap to reach Hawaii's 100% renewable energy goal by 2045. And in August, we filed our grid modernization strategy following feedback from customers and other stakeholders, and the public comment period which the PUC initiated is now closed. The first segment of the modernization is estimated at about $205 million over 6 years and is already incorporated in our CapEx plans.

On October 23, the utilities filed their proposed process for competitively procuring the largest amount of renewable resources ever to be developed in Hawaii to begin procurement of the resources identified in the PSIP. The filing includes drafts of proposed RFPs and a new model for renewable power purchase contracts, including the requirement for developers to engage with communities on their renewable projects. The utilities are requesting stakeholder and market feedback on these drafts over the next month to inform our plans and to launch an expedited RFP process in 2018.

RFPs would be issued in 2 stages over the next 2 years for renewable resources targeted in the PSIP through 2022. Those resources include: 220 megawatts of renewable generation on Oahu; 100 megawatts for Maui, including 40 megawatts of firm generation; and 50 megawatts for Hawaii Island. Bidders will also have the option to include energy storage in their bids.

In demand response, the PUC approved in October our application to install a demand response management system, or DRMS. Demand response will provide more options and incentives for customers to provide grid services that enable the company to integrate more renewables. The PUC's decision allows deferral of certain computer software and development costs of the DRMS to accumulate AFUDC during the deferral period and to recover the deferred costs through our renewable energy infrastructure surcharge until incorporated into base rate.

Turning to Slide 4, as I mentioned earlier, our utilities are getting back on track with staggered (inaudible) rate cases required under our state's decoupling mechanisms.

On August 21, the PUC issued an Interim Decision and Order on the Hawaii Electric Light 2016 test year rate case, approving an interim increase of $9.9 million in revenues and an interim allowed ROE of 9.5%.

On October 20, the company filed briefs supporting a higher 9.75% ROE for the final award. Recall that the company had settled with the Consumer Advocate on an allowed ROE between 9.5% and 9.75%. There is no statutory deadline for a final decision.

For Oahu, the Hawaiian Electric 2017 test year rate case, we are currently in settlement discussions with the Consumer Advocate. Per the PUC procedural schedule, a joint settlement letter, if any, is due on November 15, with December 15 specified as the tentative date of issuance of an interim D&O. However, the commission is not required to issue an interim D&O until April 28.

For Maui, Maui Electric filed its 2018 test year rate case on October 12, requesting a revenue increase of $30 million. An interim decision is expected in the second half of 2018.

Earlier this year, we also received a 2017 decoupling order, which established guidelines to support a new recovery mechanism, the Major Projects Interim Recovery, or MPIR. The MPIR mechanism is for projects placed in service between general rate cases under circumstances in which cost recovery, net of related benefits, is limited by the RAM cap.

Under the MPIR mechanism, we are awaiting PUC decisions for our 50 megawatts Schofield Generating Station expected to be placed in service in the second quarter of 2018, and our 20-megawatt West Loch solar project, expected to be placed in service in the fourth quarter of 2018.

Moving to Slide 5, our commission issued a major residential solar decision on October 20. As you know, Hawaii leads the nation in the penetration of rooftop solar systems, with 17% of our residential customers with private systems. Thus, our utilities have become recognized for achieving the integration of high levels of distributed energy while maintaining system reliability and resilience, especially without the benefit of interconnection with a large bulk power grid.

In the October 20 decision, the Hawaii PUC authorized the activation of new, advanced inverter functions in PV and storage systems to provide support to the electric grid during different types of grid disturbances.

The PUC also approved 2 new programs: 1 for PV-only systems; and 1 for PV plus storage systems. The new smart export program provides a new option for customers installing a rooftop PV system, combined with a battery energy storage system. Under smart export, a customer's energy storage system will recharge during the day with energy captured from their PV system. The energy storage system will then power their home in the evening, with an option to also export electricity back to the grid. If the customer sends power back to the grid during non-daylight hours, they receive a monetary credit on their electric bill.

The second program, called the controllable Customer Grid Supply, or CGS+ system, allows customers to install solar systems without storage and to export energy to the grid during the day. But they have to utilize advanced equipment that allows the utility to manage the power from their system. Credits vary by island but on Oahu, is based for the smart export system on marginal cost and fixed at $0.1497 per kilowatt hour for the next 5 years; and for the CGS+ program, at $0.1008 per kilowatt hour, based on avoided cost for the next 5 years.

In addition, the PUC announced that grandfathered Net Energy Metering, or NEM customers will be allowed to add to their systems, provided they meet certain technical requirements. Also, customers in the prior Customer Grid Supply program will continue to receive their current bill credit for the next 5 years with the PUC again reserving the right to change it after 5 years.

In other developments, the company introduced new customer access tools. The first is a new mobile application, which provides an outage map and platform for customer service enhancements. The company also introduced the first-of-its-kind online private rooftop solar interconnection tool to enable customers to complete their paperwork online, sign documents and check application status.

And finally, in August, the company opened its 12th utility-owned fast charger for electric vehicles on Oahu. The utilities have approval from the Hawaii PUC to install up to 25 fast chargers to promote electric vehicles.

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

Thanks, Connie. Turning to Slide 6, Hawaii's overall economy is performing well. Hawaii's tourism industry, a significant driver of Hawaii's economy, continues its strong performance. Visitor spending and arrivals year-to-date through September increased 7.1% and 4.9%, respectively, compared to the same period last year.

The Hawaii labor market remains very healthy with the state's unemployment rate remaining very low at 2.5% in September 2017, lower than the prior year's rate of 3% and the national rate of 4.2% and today is the second lowest rate in the nation.

Hawaii's real estate market remains strong as Oahu's September year-to-date sales volume for single-family residential homes and condominiums increased 5% and 5.8%, respectively compared to the prior year. The median sale prices for Oahu single-family homes of $760,000 and condominiums of $425,000 in September was up 1.3% and 10.9%, respectively from last year. Overall, Hawaii's economy is performing well.

Turning to our third quarter results on Slide 7, consolidated GAAP net income was $60.1 million and $127.1 million for the third quarter 2017 and the prior year quarter, respectively. Recall that the third quarter last year included the onetime net income impact of [$63.8] million (corrected by company after the call) at the holding company, which was comprised of the NextEra termination fee, reimbursement of merger-related expenses and other merger-related tax benefits and expenses. Excluding merger-related impacts, core net income was $63.3 million in the third quarter last year as compared to $60.1 million in the third quarter of 2017.

In addition, the third quarter of 2016 core results included favorable tax adjustments of $6 million. For the quarter, bank earnings were strong and utility earnings were consistent with our expectations.

On an earnings per share basis, third quarter 2017 GAAP EPS was $0.55 compared to $1.17 in the prior year quarter, which included the merger-related fees and expenses of $0.59 per share. Excluding the merger-related items, core EPS was $0.55 this year compared to $0.58 per share in the prior quarter.

As shown on Slide 9, HEI's GAAP consolidated ROE for the last 12 months was 8.5%, with ROE contributions of 7.2% from the utility and 11.2% from the bank. Recall that the expiration of the 2013 RAM settlement impacted the first 5 months of 2017, and thereby had approximately 75 basis points negative impact on the utility ROE for the year.

Looking to Slide 10, utility earnings were $47.5 million in the third quarter of 2017 compared to $47 million in the third quarter of 2016. On an after-tax basis, the most significant net income drivers were: $2 million after-tax from higher 2017 RAM revenues, primarily due to the cost -- to the higher recovery of cost for integrating more renewables and reliability investments; and the Hawaii Electric Light 2016 interim rate increase effective August 31, 2017; $2 million higher allowance for funds used during construction, driven largely by the Schofield Generation Station project, which is expected to be placed in service in the second quarter of 2018; and other items including a $1 million favorable tax adjustment as the utility moved out of a federal net operating loss position, enabling the recognition of certain tax benefits in the third quarter of 2017.

These increases were offset by $4 million of higher O&M expenses, primarily due to higher overall expenses and enterprise resource planning project costs, and $1 million higher depreciation expense.

Turning to Slide 11, at the bank, net income for the third quarter of 2017 was $17.6 million, $2.5 million higher than the third quarter of 2016 and $0.9 million higher than the second quarter or linked-quarter 2017. Compared to the third quarter of 2016, the $2.5 million increase was primarily driven by the following on an after-tax basis: $3 million higher net interest income, driven mainly by growth in interest-earning assets, funded by strong core deposit growth and overall improvement in asset yields; and $3 million lower provision for loan losses resulting from improvements in commercial loan credit quality.

These items were offset by the following on an after-tax basis: $2 million lower noninterest income, primarily due to lower mortgage banking income, and nonrecurring 2016 gain on sale of real estate; and $1 million higher noninterest expense primarily due to higher performance-based incentive costs. Compared to the second quarter of 2017, the $0.9 million increase was primarily driven by lower provision for loan losses.

On Slide 12, we see American's strong performance reflected in ASB's return on assets and net interest margin. We achieved a return on assets of 107 basis points for the quarter, above our original target of 90 basis points. Our net interest margin is currently higher than our 2017 guidance range at 3.69% in the third quarter and 3.68% in the year-to-date period due to overall improvement in asset yields.

Slide 13 reviews the drivers of our 3.69% third quarter net interest margin. Our interest earning asset yield was unchanged from the linked quarter. Our liability cost of 20 basis points decreased by 1 basis point due to lower borrowing levels.

On Slide 14, total loans as of the quarter end were lower than the prior quarter. We continued to strategically reduce our commercial lending exposure to national syndicated credits and resolved specific commercial and commercial real estate problem loans, which offset growth in the home equity line of credit, consumer and residential loan portfolios.

Our deposit growth has been consistently strong at 4.9% annualized year-to-date 2017. The growth of low-cost deposits has funded increases in our investment portfolio, and higher yields on our loans have contributed to slightly higher net interest income compared to the linked quarter.

Noninterest income was $15.2 million in the third quarter, lower than the $16.2 million in the linked quarter, primarily due to lower performance on bank-owned life insurance investments.

We continue to improve credit quality as a result of prudent risk management and a healthy local economy. Our residential portfolio remains very clean, consumer unsecured credit is in line with expectations for the year, and we have improved our risk profile of our commercial and commercial real estate portfolios by resolving specific problem loans and reducing our exposure to syndicated national credits. The $2.3 million provision decrease from the linked quarter reflected the release of reserves attributed to the strategic reduction in our commercial loan portfolio, including a $53 million decrease in our exposure to national syndicated credits.

Our net charge-off ratio of 32 basis points for the third quarter of 2017, 11 basis points higher than the linked or second quarter, was primarily due to our strategic decision to increase higher-margin consumer lending. Nonaccrual loans as a percentage of total loans receivable held for investment was 0.5% compared to 0.44% at the end of the linked quarter and 1.11% in the prior year quarter. The allowance for loan losses was 1.13% of outstanding loans at $53 million at quarter end, lower than 1.19% at the end of the linked quarter and 1.24% as of the third quarter of the prior year.

Slide 16 illustrates American's continued attractive asset and funding mix relative to our peer banks. American's September 30, 2017 balance sheet is compared to the last complete available data set for our peers, which is as of June 30, 2017. 100% of our loan portfolio was funded with low-cost core deposits versus the aggregate of our peer banks at 86%. Year-to-date total deposits increased by $203 million or 4.9% annualized while maintaining very low cost of funds of 20 basis points, 33 basis points lower than the median for our peers.

In the third quarter 2017, American paid $9.4 million in dividends to HEI, and American remains well capitalized at September 30, with a leverage ratio of 8.7%, tangible common equity to tangible asset ratio of 8% and a total capital ratio of 13.9%.

Turning to Slide 17, we are reducing our 2017 CapEx estimate to $400 million from $420 million, based on our year-to-date results and our estimate of expenditures for the remainder of the year. Our 2018 and 2019 CapEx estimates remain unchanged and will be updated in the normal course for our fourth quarter 2017 webcast expected in February of 2018.

Turning to our 2017 EPS guidance for the year. As we indicated in our second quarter call, for the utility, we are guiding towards the lower end of the utility EPS range due to 4 factors: the denial of the Hamakua Energy Partners facility purchase by the utility; Hawaii Electric Light's settlement agreement with the CA and interim D&O; a slight -- a delay in the Hawaiian Electric 2017 test year interim decision; and certain year-to-date onetime expenses. However, the utility continues to look for cost reduction opportunities to mitigate these impacts.

At the bank, based on our year-to-date actual results, growing net interest income benefiting from higher yields and improvements in our credit risk profile, we are raising the net interest margin range to 3.6% to 3.7%, and lowering our provision range to $11 million to $14 million, but raising our net charge-off range to 23 basis points to 29 basis points. Based upon these changes, we are raising the bank's earnings guidance range to $0.58 to $0.60 per share, with an expected ROA in excess of 95 basis points.

Overall, our HEI consolidated 2017 earnings guidance remains unchanged at $1.55 to $1.70 per share. Connie, back to you.

Thanks, Greg. In summary, our utility has continued to work closely with stakeholders and the PUC to establish frameworks to help Hawaii achieve its 100% renewable goal. Our Power Supply Improvement Plan has now been accepted by the PUC, and we've been given approval to move forward with resource acquisition for the largest procurement of renewable resources in Hawaii's history.

In addition, our grid modernization strategy has received good public acceptance. We are also focused on increasing our resilience and reliability and promoting sustainable communities. And we are actively involved in discussions to encourage electrification of transportation within our state to help us achieve a broader clean energy vision and increase energy independence for Hawaii.

Our bank will continue to focus on profitability through increasing balance sheet growth, deepening customer relationships, improving operating efficiency and enhancing asset quality. In addition, we are now more broadly focused on our enterprise-wide strategy to develop and invest in opportunities that serve as catalysts for a better Hawaii, especially in energy-related fields.

In September, we announced our first investment, which is expected to be our purchase of the 60-megawatt Hamakua Energy Partners plant from ArcLight Capital Partners. After closing, this investment will be housed under a new subsidiary called Pacific Current, and will provide stable local ownership of a power plant that is vital to providing [farmed] power to the island of Hawaii for the remaining term of the approved power purchase agreement. And will help ensure continued reliability for customers while Hawaii Electric Light works to transition the island to 100% renewables.

And finally, on Tuesday, 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 3.4% as of yesterday's market close.

HEI, Hawaiian Electric and American Savings Bank will continue to move forward, providing long-term value for our customers, community, employees and shareholders.

And now, we look forward to hearing your questions.

(Operator Instructions) And the first question will come from Julien Dumoulin-Smith of Bank of America Merrill Lynch.

Actually, let me just follow right up on what you guys were just talking about a second ago with respect to the Pacific Current's effort. How wide of a definition are you thinking about with this new subsidiary?

I mean, are you thinking this latest acquisition is going to be it for the time being? Or is this something that we should be thinking about in conjunction with the procurement on the utility side that you just thought about and potentially having some affiliate efforts? Or is it a different effort altogether?

So not necessarily connected to the renewable resource procurement on the utility side, but it is a broader strategy that really is what I would call a place-based strategy.

So unlike some of the other corporate strategies that you might be used to hearing about that would say, we're going to go into renewable energy development or we're going to go into energy efficiency or EV charging systems. What we're really committed to as one of the largest public companies in Hawaii, is helping move our state forward and look for opportunities that can be a catalyst to help our state meet its goal of 100% renewable. Not just on the power generation side but also, in a broader sense, including the transportation sector.

And so what that means is we are going to continue our strategy of working within our communities, kind of from a bottom-up approach, to look at what communities, community by community, might find as useful projects to help them achieve clean energy and economic development and good growth for their communities that is sustainable.

That's why I call it more of a place-based strategy. So you will see us look at the whole range of opportunities that other utilities across the nation are looking at, but it will be based here in Hawaii and it will be on a bottom-up community by community basis. So we are looking at other opportunities now, Julien, and hopefully, we can announce some more as we go forward.

Excellent. And if I can actually just read between the lines there, you talked about community by community. Is that -- are you getting at community solar things? Or am I, again, reading too much into that?

Yes. You're reading too much into it. That could be one of them. That could be one of them but it's broader than that.

Okay, excellent. And maybe looking at the regulatory construct overall, I'd be curious -- and obviously, you all have been using the RAM mechanism in recent years. How do you think about implementing or the prospects potentially of something more performance-based on the islands? And what would that look like or what kind of metrics might you start to think about if that was indeed the direction?

Yes. So let me just start that answer and then I'll ask Tayne to elaborate. Our commission is already moving towards performance-based ratemaking. And we have already proposed and they've asked us for 3 metrics, 2 of them relate to reliability and actually are in the nature only of penalties.

But there is one on customer satisfaction that is 2-way, both an incentive and a penalty. And we would expect that whole framework to grow. And Tayne or Alan, if you'd like to add anything.

I don't have anything other to add other than what we did was we filed tariffs with the PUC recently, and we expect some kind of implementation early next year.

I'll add that I think there's a general recognition that regulatory reform is needed so that everyone is aligned as we move forward to 100%. And performance-based ratemaking is certainly on the radar screen for everyone to engage as we move forward. So there's nothing in writing yet but the discussions are ongoing.

Julien, you didn't ask this question but the other trend that our state is moving towards is towards opening up markets. So like the resi solar programs that I talked about, they're starting to move in the direction of market-based pricing but doing it through these pilot programs that run for a number of years where the rate is fixed for that time period, allowing the markets and technology to develop.

So Julien, I just want to make sure that everyone understands that we have -- the holding company here and the subsidiaries here and some of the Pacific current discussion is on the holding company level. And everyone should understand that as we move forward, we have a very aggressive affiliate transaction code, codes of conduct, et cetera, to make sure that the utility is intact and not participating in an unfair way with how HEI might move forward. It's to level the playing field to all potential developers and competitors.

Yes. And I would just add, both of our subsidiaries are heavily regulated, so we have to be quite cognizant of affiliate transactions across the board. Because just as the utility side has very stringent affiliate transaction rules and we have a lot of policies and procedures in place, the same thing applies on our banking side.

Right, absolutely. And in fact, I didn't ask this before but since you bring it up on Pacific Current, do you have a target of how big that business wants to be?

We don't because, as I mentioned, it's really place-based and community-based, so we really have to be out in the communities working on that range of ideas. And I think Greg wants to comment. Greg actually has been leading some of our efforts in the Pacific Current space, and I think it's been heartening that we've been seeing some opportunities where we might be able to help accelerate markets.

Yes. I think there's some strong opportunities in the market here and so we are hopeful that we'll find other opportunities for growth. We can't speak to any specific elements of that.

But I did want to say about our strategy at Pacific Current, we're looking to make investment opportunities that are accretive to earnings. That are structured and consistent with our investment-grade portfolio -- or profile at the holding company and maintenance of that. Not relying on commodity-exposed, merchant-type projects but more infrastructure-type investing here in Hawaii.

So we'll keep the execution of the strategy consistent with our holding company and our overall profile as to why our shareholders invest in it in terms of stability -- stability, investment-grade focus.

The next question will come from Paul Patterson of Glenrock Associates.

So listen, I wanted to touch base on the tax benefit, the domestic production activities deduction. Could you sort of talk a little bit more about exactly what that represents? And I know that it's driven by you guys getting out of the operating loss. But just if you could drive -- sort of elaborate a little bit more on that and what you see that doing going forward.

Paul, this is Greg. Well, the impact year-over-year was rough -- and for the quarter was roughly $6 million. As we came out of an NOL position at the holding company last year and were able to monetize and the utility -- recall, the utility was also in an NOL position.

So we weren't able to monetize those deductions, except for us coming out in the third quarter last year with the merger termination fee and so forth. So that created a fairly large recognition of benefits the last third quarter. We've had -- the general trend as we've gone through now additional studies of revenue studies that underlie and support the DPAD calculation. We have seen a declining level of credits available under DPAD coming out of those studies.

And also in particular, as utility generation -- the utility-owned generation is used less frequently and its fuel costs have come down as well because on a revenue basis, the fuel costs are a factor. As fuel costs have come down, we've seen that credit on a forward-going basis, a more limited credit than it was in 2015 and 2016, which drove last year's results. So part...

So how should we think about them going forward in 2017 and 2018?

Yes. So far this year, we recognized $0.9 million, almost $1 million -- just under $1 million of benefit. And instead of it being recognized at the holding company, which was the case last year, the utility rolled out of its NOL position as of this quarter as well and was able to monetize that at the utility level, so it's included in their results.

So that's an indication of the year-to-date impact of DPAD at the utility level. We would estimate a continuation at a comparable level looking forward, again, subject to volatility of oil prices which is a factor.

Is there any rule of thumb for the oil prices in terms of how it could drive it? I mean, if you don't have it, that's okay. I was just wondering if there was in light of...

That's a good question, Paul. I don't know whether we will see you at EEI but, whether or not, I can dig into that a little bit. But it's a factor and generally, directionally, you understand how that works. But I don't have it off the top of my head.

Yes, and overall, Paul, as Greg said, it was unusually large last year because we had the termination fee and oil prices were still pretty high. But then this year, it's a lot smaller on an ongoing basis.

And you don't see a big -- absent a big change in oil prices, you don't see any big change in this going forward in future years, is that correct?

Correct. We're not anticipating it.

Right.

Okay. And then the provision for loan losses, which seemed to be a significant benefit this quarter and it looks like your outlook for the year. What is it within national syndicated credits? Sorry to be slow on this but what it is that's limiting your exposure there?

If you could just elaborate a little bit more on how that's helping out the provision for loan losses, given that the charge-offs and et cetera are going up. So I was just wondering if you can just elaborate a little more on that.

Paul, this is Rich. So as we looked at the national credit, what we've seen just as a general trend over the last quarters and longer is just continued -- they continue to be tighter. Terms are a little bit more aggressive and the amount of work to manage them and oversee them and underwrite them is -- has not changed and gets more as you get going on it.

So as we looked at overall risk reward on it, we just said we got more important things to do in Hawaii for the Hawaii book and that's where we want to spend our time. So as we've reduced our exposure to those, that's been the biggest driver. We're down about $100 million on that year-to-date.

And so if you think about the general coverage rate on those, our coverage rate overall on the book is about 1.2%, something like that. You bring that down, you get a reduction of provision requirements just because you've got a lower asset level.

And some of them were challenged. We talked about other problem loans that we've resolved through payoffs and others. And as we do those, those generally have higher coverage rates. As we resolve them, we get that money back.

And so year-over-year, it's a good comparison. If you looked at third quarter last year, we had these -- especially on the commercial side, they're a little bit lumpy. We talk about that from time to time. Third quarter last year, we ended up providing for a few. This quarter, we ended up getting the money back because we resolved a few, and that's been the dynamic.

And how should we think about that moving into 2018?

We'll give more guidance as we get into, I think, the February meeting about '18, but we -- in general, we feel like the book's in good shape. You look at our asset quality metrics, they're improved and healthy and we think we're in good shape.

And then the real estate benefits and everything in Hawaii, do we see that helping out provision for loan losses anytime soon? Or in terms of just your calculation from what you have to take? There was a time when you guys were doing really well on that, if you recall. I don't -- it wasn't when you were around but I don't know, that's why I was wondering.

Certainly, we've been doing well on that. Collateral values, property values are strong, right? And so from a collateral value, we're in good shape. Generally, when we have a real estate loan that we term problematic, it's more related to the timing of the -- if it's a construction project, the timing of the project in terms of its build and sell and paydown, rather than a risk of loss on the value of the loan and all that.

And so if they're delayed then we have to call them delayed and we have to provide for them a little bit. And then as the project gets completed and paid down, we get the money back.

So I think you've generally heard from all the institutions that the construction market has peaked. And so activity, new activity and construction will be less but the projects have all performed well, things are resolving. You're going to see paydowns on the development and construction side, and you're going to see growth on the investor side.

The next question will come from Jackie Bohlen of KBW.

Just sticking over onto the bank. As we think about the provision, Rich, and understanding that at this time, you're not going to provide 2018 guidance. But you -- I know you have a lot of factors at play there with the shift that you're working on towards commercial -- certain commercial, high-quality commercial credits in Hawaii and the impact that can have on the reserve ratio versus single-family mortgages. But then also the SNC portfolio running down. How do you see that ratio playing out over time?

The ratio being the coverage ratio or...

Yes, the coverage on loans.

Yes. We're about 120 basis points. We think it's a pretty good level. It'll bounce around in that 110, 120 range probably overall.

Okay. And what's left in your SNC book at this point?

We're down to under $100 million on balances, commitments a little bit, just -- would take us just a little bit higher than that.

Okay. And are you interested in running down all of those or is it primarily the ones where credit is weaker?

It's generally been higher leverage. We -- so we wouldn't see it all going away, but it's effectively the leverage lending and that -- those tend to be leverage lending. You've seen the leverage go up under the SNC market in total. And so we're still going to play but it will be on the lower leveraged parts of that book.

Okay. So given that you have around $100 million left in year-to-date, you're down around $100 million. Going forward, is it fair to say that the stem of runoff could slow a bit?

Yes, yes.

Okay. And then the decline that we saw in the commercial real estate book in the quarter, was that -- or am I looking at the right portfolio, yes. Was that driven by some of the credit language that was in the press release and that you talked about? Or was there something else taking place there?

No. Dominantly, it was one large exposure that was a criticized exposure that paid off.

Well, that must feel good.

Yes, yes. We knew we were right.

Okay. So essentially, some of the factors that have been mitigating some of the loan growth that you've been producing, a lot of those are winding down and we could see net growth pick up a little bit to the sum of the mid-single digit level that we talked about in the past.

Right. So in terms of our long-term strategy, we continue to want to grow. And we've grown earning assets in that mid-single-digit range. It's just this year, it's been more of it's gotten shifted to the investment portfolio than the loan book as we worked through particularly these 2 areas of de-risking. But long term, our goal is still that we're growing earning assets and loans in that low to mid-single-digit range.

Okay, that's very helpful. And then just one last one on deposits. Your costs have been outstanding despite the increases in fed funds. Do you have a lot of public deposits on balance sheet?

Jackie, this is Robert Nobriga, the CFO of American Savings. We don't have a huge exposure to public deposits. We probably have some appetite to take on more but we're pretty conservative in terms of how we manage our funding. Part of the improvement in our funding cost has been just working down some borrowings that we've had, and just our strong core deposit growth has really helped us with our profitability.

Okay. And just looking at the larger buckets, it looks like outside of CDs, there really hasn't been much of a move at all in funding costs. Is that a fair assessment?

That's a fair assessment.

Okay. And so as the margin guidance has come up from where it was prior, is part of that related to the strong performance of the funding in the portfolio?

Definitely. I think our ability to be able to control our funding cost has been a strength. And we got a little more confidence in our ability to hold that like all the other banks in town. And we just have a great local deposit base here in Hawaii, especially on the retail side. We did get a little bit of a boost on NIM from rising rates and our loans enjoyed a little bit of a better yield because of that. So a combination of controlled funding costs and a small little lift on loan yield allowed us to raise expectations there.

(Operator Instructions) The next question will come from Charles Fishman of MorningStar.

If I can continue the questions Jackie asked at a higher level since I'm just a stupid utility analyst. Let's -- you've done something with the banks...

(inaudible) sharp.

Okay. You've done some things at the bank that were strategy changes that have paid off, okay? So now, you're guiding $0.58 to $0.60 for this year. I appreciate you're not giving '18 guidance yet, but should we start thinking about $0.58 to $0.60 as being the new base because of these strategy changes? Or -- because I didn't hear anything in Jackie's questions or what you said that were really one-offs. Aren't they just the result of a shift in the business strategy, most of it?

We're glad you've got so much interest in the bank now, we love that. And I think for that forward guidance, we're going to wait until February to talk to that. But I think in general, we are working hard to make permanent improvement in the profit structure. And I'll leave it at that for right now.

Okay. And then so February, we'll hear guidance, correct?

Yes.

Okay. Well, let me get -- let me ask my second question on something I'm more comfortable with, the utility. Slide 22, which is I think I've said this before, a slide I love. I think what I heard from -- I think it was Greg that said this, there was a 75 basis point lag because of the RAM -- change in the RAM accrual period, okay?

So if I look at Slide 22 and we assume the 2017 version of Slide 22, it's that bar #3 that's really going to increase dramatically for 2017. In other words, that's going to roughly 75 basis points when we look at this Slide 22 for when you present it for 2017. Is that correct?

Yes. That's a contributor underneath the RAM accrual to -- yes, I'd say that's the right area that I'd put it. It was a onetime adjustment and reversion to a June 1 through May 31 recognition and collection of the RAM -- under the RAM adjustment mechanism, so we lost 5 months of accrual in 2017, $25 million of revenue, $14 million of net income, and that's -- then we back into that in terms of a 75 basis point impact to our allowed -- to our ROE.

So really, without that 75 basis points, '17 is shaping up to look very similar to '16 on a regulatory lag basis, correct?

It's comparable, recognizing that we're still relying heavily on those mechanisms to earn our ROE as we're going through the rate case resets of that mechanism and inclusion of a new level setting base rate. So we're hopeful coming out of that that, one, we won't have to rely upon the RAM mechanism for -- as heavily for our recovery; and secondly, we'll get closer to our allowed.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Cliff Chen for his closing remarks.

Thank you, Denise. And we'd like to thank everyone for their participation today and have a good day.

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.