Hawaiian Electric Industries' (HE) CEO Connie Lau on Q2 2016 Results - Earnings Call Transcript

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Hawaiian Electric Industries, Inc. (NYSE:HE) Q2 2016 Earnings Conference Call August 4, 2016 5:00 PM ET

Executives

Cliff Chen - Manager, IR & Strategic Planning

Connie Lau - President & CEO

Jim Ajello - EVP & CFO

Rich Wacker - President & CEO, American Savings Bank

Tayne Sekimura - SVP & CFO

Alan Oshima - President & CEO

Analysts

Charles Fishman - Morningstar

Paul Patterson - Glenrock Associates

Andrew Weisel - Macquarie Capital

Jacque Chimera - KBW

Andy Levi - Avon Capital Advisors

Operator

Welcome to the Hawaiian Electric Industries Inc. Second quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Manager of Investor Relations and Strategic Planning, Mr. Cliff Chen. Please go ahead, sir.

Cliff Chen

Thank you Andrew and welcome to Hawaiian Electric Industries Second Quarter 2016 earnings conference call. Joining me this morning are Connie Lau, HEI President and Chief Executive Officer and Chairman of Board's 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, 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 second quarter and our outlook for the remainder of the year then we'll 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 will now turn the call over to our CEO, Connie Lau.

Connie Lau

Thank you, Cliff and Aloha to everyone. As you are all aware by now NextEra Energy terminated our merger agreement on July 16 as a result of the Hawaii Public Utilities Commission order dismissing our merger application. Further terms of the merger agreement next year NextEra Energy that paid AGI the $90 million terminations fee and $5 million towards the reimbursement of expenses associated with the merger and banks spend transaction. These amounts will be reflected in our third quarter results. After the payment of taxes The net amount of approximately $60 million will help a fund Hawaii's clean energy transformation including our 2016 plan to invest approximately $145 million into Hawaiian Electric and while we believe the merger would have provided significant benefits for have Hawaii, AGI remains the owner of the primary power company serving 95% of the State of Hawaii and its third largest bank and we will continue to provide long term value for our customers, community, employees and shareholders.

At Hawaiian Electric we were in the midst of a fundamental transformation of our company to evolve rapidly to adapt to Hawaii's rapidly changing energy landscape when NextEra arrive. We continue this transformation during the pendency of the merger including breaking department silos, accelerating work process and focusing on innovation and efficiency to provide our customers with more choices and better service. And we remain focused on reducing the cost of electricity to our customers and maintaining efficiency and reliability while seeking to achieve our states goal of 100% renewable energy by 2045.

Our bank remains part of the AGI family of companies as a spinoff was contingent upon the completion of the merger. American Savings Bank will continue to serve and invest in Hawaii helping residents and businesses grow and prosper.

Turning to our second quarter results, both our bank and utility delivered financial results in line with our full year expectation. Year-to-date our utility has spent over $150 million in local infrastructure projects to modernize the electric grid and to integrate more renewable energy reliably. Our utilities continue to work towards a balance generation portfolio, increase distributed generation and enhanced electrification of transportation and demand response initiative. At the bank, we saw excellent deposit and loan growth and higher net interest income which drove results for the quarter.

Many of you will recall that our utilities filed their updated power supply improvement plans or PSIPs on April 1, 2016 which outlined a path to 100% renewable energy by 2045. The highest RP's target of any state in the nation. We plan to further update the PSIPs in late September to include an updated field forecast and adjustments post-merger. We're currently executing on our near term action plans to meet the 2020 RPS and capacity requirements and formulating plans for our 2030 goal and we're also waiting for the guidance from the PUC on the docket process. On July 21, we announced plans to build, own and operate a 20 megawatt solar facility with the Navy at Joint Base Pearl Harbor-Hickam estimated at $70 million This project will require PSIP approval and a waiver from competitive bidding similar to the Schofield Generating Station project that we have with the Army and is one of several major projects and initiatives by Hawaiian Electric to significantly increase renewable energy by the end of the decade. The energy generated by the solar facility will feed into a Oahu's electric grid and serves our island customers. In addition progress is being made on the 27.6 megawatt Waianae solar project being developed by [indiscernible] Energy.

Hawaiian Electric signed the purchase power agreement in November 2014. Construction is well underway and when the solar facility goes into service later this year it will be the largest PV project in Hawaii and Hawaii is the postcard from the future particularly on the integration of distributed renewables we continue to innovate and pilot new technologies. There are just a couple of examples. On the island of Molokai we're piloting the installation of e-gear battery storage systems to integrate additional rooftop solar, the pilot is unique because it is the only arrangement in the nation where distributed storage units are being installed in front of the meter with [Technical Difficulty] technology which will allow the battery to be charged during the day and discharged during our evening peak.

We're also partnering with parenthetic Varentec to pilot their grid optimizer technology to manage voltage on circuits with very high levels of rooftop solar. As we move ahead as an independent company we remain committed to transitioning to 100% renewable energy in the most cost effective way possible. We continue to focus on stabilizing and reducing energy costs while becoming more innovative and we will take advantage of new technologies as they are developed to deliver greater customer value and choice. I will now ask Jim to cover Hawaii's economy, our financial results and outlook for the company. Jim?

Jim Ajello

Thanks, Connie. I will start with Hawaii's economy, year-to-date June 2016 visitor arrivals and expenditures exceeded the prior year and recorded its best midyear performance ever. Year-to-date visitor arrivals exceeded 4.4 million visitors and total visitor expenditures amounted to more than $7.7 billion increasing 3.3% and 1.6% respectively from 2015. The Hawaii Tourism Authority anticipates visitor spending of $15.9 billion in 2016. Statewide unemployment was 3.3% in June of 2016 compared to 3.6% a year ago significantly below the national unemployment rate of 4.9% as of June 2016.

Hawaii’s real estate activity remained strong during June of 2016 with medium sales price for single-family homes in Oahu at $760,000 up 8.6% from last year and up 6.1% year-to-date. Construction activity remained high, the activity is expected to continue in 2016 as planned and permitted building continues. Overall Hawaii’s year-to-date economic performance is being sustained by continuing strength in the tourism industry and strong activity in the construction industry. The University of Hawaii forecasters expect real-estate GDP to grow 3.2% in 2016.

As shown on Slide 5, second quarter 2016 GAAP earnings per share were $0.41 compared to $0.33 in the second quarter of 2015, a 24% increase from the prior year. Core earnings per share which excluded merger and spin related expenses and cost related to the terminated LNG Contract which was conditioned on merger closing between HEI and NextEra Energy were $0.43 per share compared to $0.399 per share in the second quarter of 2015. Consolidated core net income was $4.7 million higher than the prior year quarter and core EPS was $0.04 higher.

As shown on Slide 6, HEI’s GAAP consolidated ROE for the last 12 months ended in June was 8.8% excluding cost related to the recently terminated merger, cancelled spin-off of ASP Hawaii and the recently terminated LNG contract, HEI's core consolidated ROE was 9/3% with ROE contributions of 8% from the utility and 9.7% from the bank.

On Slide 7, utility earnings were $36 million in the second quarter of 2016 compared to $33 million in the prior year quarter, $4 million of higher net revenues were primarily attributed to the recovery of cost for clean energy and reliability investments which were partially offset by $2 million of higher depreciation expense or increasing investments for customer reliability, greater system efficiency and the integration of more renewable energy.

O&M expenses at the utility were relatively flat compared to the prior year quarter the second quarter of 2016 included higher plant overhaul and LNG consulting and legal expenses compared to the second quarter of 2015 which included higher vegetation management and boiler and steam maintenance expenses.

At the bank, net income for the second quarter of 2016 was $13.3 million, $0.6 million higher than the linked quarter primarily driven by $1 million in after-tax higher revenues due to higher non-interest income which included gains on sale of securities and higher mortgage banking income as well as higher net interest income primarily due to the growth in commercial real estate and consumer loan portfolios. Higher revenues were partially offset by $1 million in aftertax higher non-interest expense due primarily to cost related to the replacement and upgrade of the electronic banking platform.

Compared to the second quarter of 2015, second quarter 2016 net income improved by $0.4 million primarily driven by the following aftertax, 3 million in higher net interest income due to growth in commercial real estate and consumer loan and investment portfolios and higher yields on interest earning assets.

This was offset by the following on an aftertax basis, $2 million of higher provision for loan losses mainly driven by commercial real estate and consumer loan growth and downgrades of specific commercial credits in the second quarter of 2016 and $1 million higher non-interest expense primarily due to costs related to the replacement and upgrade of the electronic banking platform.

Slide 8 shows the utilities’ actual ROEs for the last 12 months, consolidated utility ROE of 8% was in line with the 2016 guidance of approximately 8%. On Slide 9, you can see that American continued to deliver solid profitability metrics. Through the first half of the year American achieved a return on assets of 85 basis points and expects to achieve full year target of 90 basis points as the net interest margin improves and credit quality normalizes.

Year-to-date annualized loan growth was 6% in-line with a target of mid-single digit loan growth for the year. Year-to-date loan growth was driven primarily by commercial real estate consumer and commercial markets loans. Year-to-date net interest margin was 3.6% slightly above our guidance range benefiting from higher yields on the growing commercial and consumer portfolios. Although the year to date credit costs were higher than expected with a net charge off ratio of 18 basis points we expect these costs to moderate over the remainder of the year.

On slide 10, our net interest margin of 3.58% in the second quarter of 2016 was four basis points lower than the linked quarter, but six basis points higher than the prior year quarter. Our interest earning asset yield declined by three basis points, primarily due to higher mortgage-backs securities and amortization, partially offset by growth in the higher yielding commercial real estate consumer and commercial markets loan portfolios. Liability cost of 23 basis points remain unchanged compared to the linked quarter.

On slide 11. Noninterest income was $1.2 million higher than the linked quarter, primarily due to the gain on sale of investment securities and slightly higher mortgage banking income. On slide 12, you could see credit quality remains within acceptable limits and the increasing loan loss reserves reflect growth in commercial real estate and consumer loans which require higher reserve levels. Provision for loan losses was unchanged from the linked quarter and $3 million higher than the prior year quarter, mainly due to commercial real estate loan growth and specific downgrades to commercial credits in the second quarter of 2016.

Second quarter of 2016. Net charge-off ratio was 15 basis points primarily related to charge-offs in the consumer and commercial markets loans. The allowance for loan losses was 1.16% of outstanding loans at $55 million at quarter end compared to 1.13% at the end of the linked quarter and 1.04% as of the prior year-end. On slide 13, Americans nonperforming assets ratio improved to 1.02% at the end of the second quarter of 2016, compared to 1.03% at the end of the linked quarter. Slide 14 illustrates American's continued attractive asset in funding mix relative to the peer banks, American's June 30, 2016 balance sheet is compared to the last available dataset for its peers which was as of March, 31, 2016. Nearly 100% the loan portfolio was funded with low-cost core deposits versus the aggregate of the peer banks at 84%.

Year-to-date total deposits increased by $207 million or 8.2% annualized while maintaining a very low cost of funds of 23 basis points, 19 basis points lower than the median of its peers. American remains well capitalized at June 30, the leverage ratio of 8.7%, tangible common equity to tangible assets ratio of 8.1% and the total capital ratio of 13.2%. In the second quarter of 2016, American paid $9 million in dividends to HEI, while maintaining healthy capital levels.

Now, I'll address HEI outlook for the balance of 2016. Turning to slide 16, we're reaffirming our 2016 to 2018 capital CapEx estimates. However, we want to stress that the rate base in capital expenditure estimate shown on the slide may vary depending on what is approved by the Public Utilities Commission. Note that $85 million is included in 2016 for the Hamakua Energy Partners plant or HEP, but that application is still pending for PUC approval. We expect 2016 rate base growth to be above 1%, should have not be approved this year, but 3% to 4%, if it is. And we've revised the 2016 rate base growth range to 1% to 4%. We have also revised to 2017 rate base growth range accordingly.

And finally the recently announced and previously discussed 20 megawatt solar facility at Joint Base Pearl Harbor-Hickam, estimated at $70 million is not yet included in the 2017 to 2018 forecast shown on the slide, as it still requires approval by the PUC.

As Connie noted earlier, NextEra has paid HEI the $90 million termination fee and $5 million for reimbursement of expenses per the terms of the merger repayment. These amounts will be reflected in our third quarter results. In addition, the cash reserve of $54 million that HEI had previously set aside for the one-time cash dividend of $0.50 a share which would have been paid at the merger closed was released. The reserves were then used to reduce outstanding commercial paper borrowings. As a result of the above events equity needs will be reduced in 2017. We're reaffirming HEI's 2016 core earnings guidance range of the $62 to a $75 per share, excluding any terminated merger spin-off for LNG contract related expenses.

At the utility we're maintaining utility EPS range of a $28 to a $36. Now expect utilities O&M to be lower by 2% compared to last year instead of the 4% reduction that we previously estimated last quarter. The increase in O&M is primarily due to spending on new energy programs for customers to support renewable energy integration. As we have previously indicated, we expect 2016 rate base growth to be about 1% should have not be approved this year but 3% to 4% if it is and hence we have revised the rate base growth range from 1% to 2%. We're also maintaining bank EPS range of $0.50 to $0.54 per share. However, we expect NIM to be higher at 3.5%, 3.6%, instead of 3.45% to 3.55% based on higher year-to-date performance.

We expect provision expense to be at the higher end of the provision guidance range of $8 million to $12 million and charge-offs to be approximately 15% instead less than 15 basis points for it. Overall though we expect the bank return on assets of approximately 90 basis points. I'll now turn the call back to Connie.

Connie Lau

Thanks, Jim. In summary, our utilities will continue transforming to focus on providing customer value and options and to support quarter achieving our state's 100% renewable energy, energy goal. We will accomplish this through innovation, a balance generation portfolio, distributed generation, electrification of transportation and demand response initiative. Our bank will continue to focus on operating as the high-performing financial institution.

And 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 4% as of yesterday's market close. ATI a strong company that is well positioned to achieve its goal and provide long term value for our customers, community, employees and shareholders.

And with that, we look forward to hearing your question.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from the line of Charles Fishman with Morningstar. Your line is now open.

Charles Fishman

I was confused about a comment you made, you said your equity needs are reduced, if I look at your guidance slide this quarter versus first quarter, I mean we're still talking about just the DRIP $35 million. So, what was my misunderstanding when you said your equity needs are reduced.

Jim Ajello

So, we typically only provide guidance one year forward. So, any of the guidance commentary that I made with the exclusion of your reference, really relates to 2016. And just to refresh there, we're only using proceeds from original issuance under DRIP for equity in 2016. So, while we haven't provided 2017 guidance, the influx of funding from the termination fee, the release of the special dividend reserve will provide us cash into 2017 that will help us reduce equity requirements or dilution in 2017. We'll provide the guidance for 2017 equity as all the other factors will be provided in the first quarter conference call. I was simply trying to convey the notion that with this inflow of liquidity, we would need less equity and solid liquidity, but our balance sheet is stronger in terms of debt to equity.

Charles Fishman

And then my second question, I guess I'm going to have to dust-off my bank analyst skills now. If I look at slide 9 on loan growth and ASP is was lagging peers, is that would you say, I mean I realize we're just looking at a snapshot of year-to-date 2016 and I haven't gone back and looked at that over the years. But is just a more conservative nature the way that banks been operated?

Rich Wacker

Charles, this is Rich. Yes, I think we've always come out and talk to you about mid-single loan growth as our target. If you go back, we were a fairly narrow institution with high percentage of residential mortgages and a fairly narrow range of products outside that.

So, we have been in the process over several years of reducing the concentration in risk mortgages and expanding in other areas. And so, as part of the portfolio rebalancing and trying to get to the target mix that we want, we're not originating or we're selling, say for example in mortgages we basically sell almost all the salable mortgages that we originate because it's part of the rebalancing of the books, so we target that mid-single-digit loan growth, we're growing faster in other segments, slower in others as we work on introducing new products in growing new segments, but also then managing the concentrations in other segments.

Operator

And our next question or comment comes from the line of Paul Patterson with Glenrock Associates. Your line is open.

Paul Patterson

A few quick ones. I guess first of all on the provision for loan losses, was that impacted at all by the increase in home prices that you guys highlighted?

Rich Wacker

This is Rich again, no there is no impact and that increase in home prices is helpful for the valuations in the relative collateral physicians and all that. So no, it's principally, as Jim mentioned, growth in higher coverage areas like construction, commercial real estate construction in those areas.

Paul Patterson

Okay. I guess in the past you guys have had increases in home prices as a driver of lowering down your provision for loan losses other than what it would have been, do you follow what I'm saying? I would think that higher home prices would increase the long provision. But I guess I'm wondering is it having any impact at all in terms of value or provisioning, it doesn't with the significant increase in that prices or could it have in the future.

Rich Wacker

Our losses on residential are already low, so directionally it can contribute to lower, but it's not a meaningful driver of the changes in our provision at this point.

Paul Patterson

Okay. And the loan losses seen to be higher than what you guys had previously expected. Just elaborate a little bit further on that.

Rich Wacker

Yes, so again as we, if you take a look at on relative dollar-for-dollar. If you think about the areas that were growing faster in commercial real estate, faster in unsecured consumer relative to something like residential mortgages for example, the provision coverage in those areas are naturally, significantly higher as a percentage of the exposure, residential mortgages or very low loss rates, very low provision coverage required.

So dollar-for-dollar asset growth of provision coverage requirements are higher. Construction, particularly we carry a fairly high coverage rate on as it grows in the market the active construction that's a meaningful portion of our growth on the commercial side and our growth on the commercial real estate side and so again we're adding more and then as Jim mentioned, we've had a couple of specific criticized loans, were we're providing more until those are result.

Paul Patterson

Okay. So I mean that, so I guess it's those two, those couple of loans that is what's differing them, what's your expectation was? Is that the way to think of that?

Rich Wacker

Well, we always have them the commercial loans are larger and a little lumpier. We always anticipate that we'll have them and when they happen there little bit lumpier, when we resolve we get something back on them and you'll see a lumpier recovery. So the commercial side is just lumpier than the rest of the book.

Jim Ajello

Rich, it's Jim here Paul, would it be helpful to say here that about half the provision was for growth and when you consider the type of mix that you are adding those are generally more provisioned type loans.

Rich Wacker

If you think about the growth in the provision the level of our overall provision since the start of year 90% of that is related to commercial real estate segment and growth in there.

Paul Patterson

So on the how should we think of LNG going forward, is it now pretty much no longer enough, I mean how should we think about the potential role for LNG now that you guys have cancelled the contract and just in general, what we've heard over the people reception to what have you, can you give us little bit more feeling for that?

Alan Oshima

So, this is Alan. No, as part of our resource planning for the future. We have to look at all alternatives to get to 100% at most reasonable cost. So we just can't eliminate things that may be useful so we will continue to study it watch the markets, watch fuel prices, because I think we have an obligation to do so. Yes, we canceled the contract that was a conditioned upon the merger, but we'll continue to watch LNG and other fuels, as we move forward.

Paul Patterson

Okay. Can you give us a preview, what we might see in the PSIP filling that you’re going to be making in the fall?

Alan Oshima

It's just refinements of what we have already done, we're remodeling work in progress. I just came from a piece of meeting reaching out to stakeholders getting other ideas from all the stakeholders. So I just can't predict at this point.

Paul Patterson

Okay and then just finally on the O&M and I apologize if I'm real slow in the uptake here. The difference in O&M from the previous quarter. I saw it, I missed, what was the driver that?

Jim Ajello

Well, first of all, Paul, it's Jim. The prior guidance was down 4% and the current guidance is down about 2% for the year. Okay?

Paul Patterson

Right. And I'm just wondering what's driving that? I apologize.

Jim Ajello

Yes. Will refer that question to Tayne.

Tayne Sekimura

Hey Paul, this is Tayne. Just wanted to give you some background on that. On the O&M, we were going to defer some of our costs related to some of our renewable strategies that we actually have to move them up. And we will be incurring costs, things like our interconnection improvement program as well as our demand response program, we did get an order from the PUC. So, those expenses will be coming in the second half of this year. Originally, we had anticipated those expenses to be incurred next year.

Operator

And our next question or comment comes from the line of Andrew Weisel with Macquarie Capital. Your line is now open.

Andrew Weisel

Elaborating on that last question about O&Ms, should we think of those incremental O&Ms or that stuff that might have been done in 2017 or beyond being pulled forward?

Jim Ajello

That these are largely pulled forward and in addition to all the points that Tayne made I would say that the power supply improvement plan activity is that a level where [Technical Difficulty] as well. So that just took more money to get that done in the refresh that Alan mentioned a moment ago, but these are expenditures that happen within, let's say, a six months to a year range that are hard to drive into one quarter or two.

Andrew Weisel

Okay. And I believe I might have even asked the same question, last quarter when you had smaller reduction to the decline forecast. What does that mean about the utility EPS guidance range, are you trending more and more towards the lower end or are you finding other ways to offset that O&M impact?

Jim Ajello

It's Jim again. The team always finds ways and tries to find ways to offset the O&M in fact, but it looks as though the -- while we're maintaining the range at the utility EPS range of $1.28 to $1.36. I would think it's closer to the bottom of that range now given the additional expenditures.

Andrew Weisel

Next question, when I look at the rate base growth forecast I understand the timing around HEP being a little uncertain, but over a multi-year period. Should we think of that as a good bogey for EPS growth at the utility or might there be some of the puts and takes that could get in the way?

Jim Ajello

I'll start and ask Tayne to join in Andrew, I think that it is not necessarily a perfect proxy for EPS growth because the plants while we have AFUDC that plans up to go in service before you have the full impact of the rate base growth and increases. So it's not a one-to-one correlation and I'll ask Tayne to join in after that.

Tayne Sekimura

I'll add to Jim's comments that the rate base growth can vary because in the next couple of years we also have other projects that are pending PEC approval and those would include our smart grid project as well as our ERP project is the software project that's also can increase the approval as well.

Andrew Weisel

Okay can you remind me what's the rate at which you book AFUDC or does it vary?

Tayne Sekimura

The rate of AFUDC is roughly our return on rate base and if you take a look at our appendix slides you see that information there.

Andrew Weisel

Okay, great. I'll take a look. Then lastly it's probably been a long time since you've been asked about as a single Company again, what are your high level thoughts on the dividends, I trust it's fully sustainable but at what point would you consider dividend growth?

Tayne Sekimura

Andrew I think we're still on the same policy that we would consider increasing should we able to sustain approximately the 65% payout ratio. We do have significant investment that still is going into the utility particularly post-merger.

Operator

And our next question or comment comes from the line of Andy Levi with Avon Capital Advisors. Your line is now open.

Andy Levi

Just a very quick questions just on the '17 comments on the equity. Are you just referring to be like ESOP, the to $1.5 million shares you tend to do every year, that's my approximation or is it have to do with equity above that about?

Jim Ajello

Andy I'm not been that specific, it's Jim. I just -- you said that as a result of the inflows and strength of the balance sheet, I would add the equity needs, from what we would have otherwise really had in 2017 will be reduced it is obviously my goal as you observe to have us little dilution as we possibly can. So this year its little more than 1%, I would hope that we can do the same next year, but it really depends on our forecasting in the fall and how much CapEx which is the primary driver of the equity that we need and the intuition that I make into the utility so, I do know directionally it's going down, so that's probably as much color as I can provide before the February call.

Andy Levi

When you say going down, going down relative to 2016, is that what you mean?

Jim Ajello

No, I'm sorry, going down relative to what we were otherwise expected and I recognize this is a hard thing for you to perceive, because we didn't provide you forward guidance for the next couple of years only the 2016 time frame.

Tayne Sekimura

I was just going to add of course the other big driver is we there are some of the large projects that have to await PUC approval as well.

Operator

And our next question or comment comes from the line of Jackie Chimera with KBW. Your line is now open.

Jacque Chimera

Rich I was wondering, if you could give a little bit of color on the, replacement of the electronic banking platform, kind of where you stand with that if you see more expenses and if there is any future cost basis associated with that?

Jim Ajello

So we did the implementation and go live in at the end of June it was June 22 on the consumer side and sort of this individual proprietor small business group that is over and well adopted by our consumers we have the ambition of cut over on medium and larger businesses with some more of the higher-end commercial functionality that we didn't have an offering far before.

So it's a nice upgrade of our capabilities and features for customers with broad new features into the market. So we're excited about that, we're going to be doing some advertising around that coming up soon. And yes, we do expect that the combination on consumer and commercial will give us savings at the operating cost line starting from the fourth quarter of this year.

Jacque Chimera

We have a [indiscernible] 4Q?

Alan Oshima

I'm sorry.

Jacque Chimera

Sorry, I'm at an airport. We have a full run rate with the cost savings, will those be fully implemented in 4Q or will you start--

Alan Oshima

So, by the fourth quarter, we will be completely cut over of the new ones and completely out of the old one with termination charge that we took which was about a little over $1 million for the previous systems is the entire one. So, you won't see an additional charge related to that.

Jacque Chimera

Okay. So, it sounds like maybe trending down a little bit next quarter since you won't have that termination charge for you, so you'll doing some implementation and then you'll have a nice clean 4Q, is that a good way to think about it?

Alan Oshima

Correct.

Jacque Chimera

Okay. Do you have now the premium amortization numbers for the quarter versus last quarter?

Alan Oshima

Yes. So, in the terms of basis points, I think we were down -- it was about 5 basis points impact this quarter, last quarter, higher amortization last quarter, that's the quarter-over quarter, about 5 basis points.

Jacque Chimera

Okay. For 2Q versus 1Q?

Alan Oshima

Right.

Jacque Chimera

When I think about your provision, I'm just look at the earlier comments about 50% of that was for growth, so that would be about that $2.5 million. And in five years, upper end of your range which is $12 million for the year, that's only about $2.5 million left between affirmation of 1Q and 2Q. So, I guess how should I think about that in later leasing that single digit loan growth.

Alan Oshima

So, the number for overall growth for the year is a little more than where ahead of our target with the high end of the asset growth range that we set to the mid-single digit growth. So, we think, as we look towards the end of the year with what we expect to be pay-offs, completions of certain projects, resolution of other of other projects that our asset growth in the second half will be less than in the first half. So, you won't see need for that provision for growth and you'll see -- we expect with the resolution of some of the other project exposures and criticized assets that we will get some benefit from those that help us stay in that range.

Jacque Chimera

And then just one last one, when I look at mortgage banking, you had a good quarter there, quite a nice expansion from 1Q. Was that driven by a volume or was there anything in MSR, either right after breakdown that impacted that?

Alan Oshima

No it's soft volume. Obviously, the market was very strong, I think all of our peers in market showed very strong volume growth and as I mentioned, as we try to continue to bring down the relative concentration of the risk book in our book, we're things that are salable are generally being sold and so that's contributed to the increase in gains.

Jacque Chimera

Okay and how is volume in July relative to the second quarter?

Alan Oshima

Very strong.

Operator

[Operator Instructions]. And our next question or comment comes from the line of [indiscernible]. Your line is now open.

Unidentified Analyst

I'm wondering obviously we're testing up a little bit on given the termination of merger but when you gave your utility earnings guidance for 2016, can you tell us what's the -- years that based on that versus kind of you’re authorized in terms of what that differential basically is.

Jim Ajello

You're talking about the utility when you talked I believe that our current ROE versus the allowed so the ROACE guidance is actually 8% against the consolidated utility network allowed ROE of about 9.8%.

Unidentified Analyst

So there is a 180 point gap there in terms of opportunity over a period of time to try to close that, so I'm wondering now that your back of the standalone can you kind of give sense us to what strategy if you might have to try to close that gap because that recall you've been fighting the battle to various degrees for quite a while you'll never be on top of it but in particularly wide right now.

Jim Ajello

Yes, I'll offer an initial comment and then Tayne can pick up, so what would you can anticipate from us some rate case filings now as you indicated were independent again, we're always independent. But now with no intentions to be married as it work and so you'll see a rate case filing on the big island or the Hawaii Electric Light Company, then on Oahu, Hawaiian Electric Company as we get further into this year. So that's one topic and I'll let Tayne pick up from there.

Tayne Sekimura

Actually, this is Tayne, Jim I don't have much to add to that because I mean that is what we're doing with the next couple of rate cases that we have one on tap there required under the decoupling mechanism. And we do have the like you said the Hawaii Electric Light test here 2016 followed by the Oahu Hawaiian Electric rate using a 2017 test year that is our opportunity to reset our cost.

Connie Lau

I would just to add, you probably recognize that we have to get back on track with the every three year rate case filing cycle that is required to enter into coupling mechanism and so the year for Hawaii Electric Light was actually this year, so had we been on our normal schedule we would have actually give a notice that our case would have been filed summer ago and then we would be in the midst of that rate case now. So, [indiscernible] will be on the 2016 test year, but we will also be filing Oahu for the 2017 test year, because that their year to go in.

Rich Wacker

And those two are depicted an appendix slide 28. So it's been quite some time. I believe since you've seen that -- yes. That's important because Hawaii Electric Light has been six years. There was a deferred case in 2013 and then in the mean time we've been working with the trackers that are helping us there.

Operator

And at this time I'm showing no further questions or comments. So with that said, I'd like to turn the conference back over to Mr. Cliff Chen for closing remarks.

Cliff Chen

Thank you, Andrew and thank you for participating today. Have a good afternoon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.

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