American Savings Bank of Hawaii (NYSE:ASBH) reported third-quarter net income of $29 million, or $0.45 per diluted share, in its first earnings call as a public company. Net income rose $1.8 million, or 6.7%, from the prior quarter, supported by higher net interest income, lower provision expense and improved operating efficiency.
President and Chief Executive Officer Ann Teranishi said the bank generated a 1.29% return on average assets and a 16.68% return on average tangible common equity during the quarter. She said results included margin expansion, improved efficiency and stronger earnings and capital ratios.
“We remained focused on disciplined execution across the franchise,” Teranishi said, noting that average loan balances increased while deposit costs decreased despite a rising-rate environment.
Margin Expands as Loans and Securities Reprice
Net interest income totaled $76.4 million, up $1.2 million from the second quarter. Chief Financial Officer Dane Teruya said the increase primarily reflected higher average loan balances and improved earning-asset yields, partly offset by lower average investment securities and interest-earning deposit balances.
Net interest margin expanded 4 basis points sequentially and 15 basis points from a year earlier to 3.61%. The increase was driven by higher yields on investment securities, residential loans and consumer loans, along with continued runoff of higher-rate certificates of deposit, Teruya said.
During the quarter, $185.7 million of loans ran off at a 5.79% yield, compared with $161 million of loan production at a 6.23% yield. Residential mortgage runoff totaled $54.9 million at a 4.85% yield, while mortgage production was $63 million with a 6.14% yield.
Teruya said the balance sheet remained neutral to slightly asset-sensitive, which he said should support additional margin expansion in a higher-for-longer rate environment. He told analysts that deposit costs could rise modestly in the fourth quarter, after the bank repriced certain deposits following a Federal Reserve rate increase.
The cost of deposits was 68 basis points, down 1 basis point from the prior quarter and 9 basis points from a year earlier. Teruya said the September spot rate was 1 basis point above the quarterly reported figure and that the fourth-quarter deposit cost could rise by only a couple of basis points.
On securities, the bank experienced approximately $74 million of runoff from its held-to-maturity and available-for-sale portfolios during the quarter. Teruya said those proceeds were being reinvested into loans or securities at a spread of more than 175 basis points.
Deposits Decline Seasonally, With Fourth-Quarter Rebound Expected
Total assets stood at $8.9 billion at quarter-end, down $112.2 million, or 1.2%, from June 30. The decline primarily reflected lower interest-bearing deposits at other financial institutions and modest decreases in loans and investment securities.
Total deposits ended the quarter at $8.1 billion, down $137.6 million, or 1.7%, sequentially. Core deposits fell $92.1 million, mainly because of lower interest-bearing checking balances tied to normal commercial customer activity.
Teruya characterized the deposit outflow as seasonal and said the bank historically sees deposits increase during the fourth quarter before balances hold through the first quarter and later decline. Non-interest-bearing deposits accounted for 31.5% of total deposits, an increase of 64 basis points from the prior quarter.
Teranishi said the company’s granular, low-cost deposit base remains a key feature of its franchise, while Teruya said commercial and retail teams are focused on developing primary banking relationships and expanding non-interest-bearing deposits.
Credit Costs Fall, Though Nonperforming Loans Rise
The allowance for credit losses on loans was $60.2 million at quarter-end, equal to 97 basis points of total loans, compared with $61.5 million, or 99 basis points, at June 30.
Provision expense was $700,000, down $2.6 million from the second quarter. Executive Vice President and Chief Credit Officer Steven Nakahara said the second quarter included provision expense related to real estate-secured loans to a commercial relationship and headwinds in the hospitality sector, with no comparable provision recorded in the third quarter.
Nonperforming loans increased to 29 basis points of total loans from 19 basis points in the prior quarter. Nakahara said the increase was primarily related to a commercial real estate construction loan that received a partial charge-off. The remaining balance on the loan was $4.1 million and represented most of the increase in nonaccrual loans.
Net charge-offs were $1.8 million, or 11 basis points on an annualized basis, compared with less than 1 basis point in the second quarter. Nakahara said the bank believes it is appropriately reserved and continues to work with customers while maintaining disciplined underwriting and portfolio monitoring.
Capital Levels Rise as Board Declares Dividend
Non-interest income totaled $21 million, down $2.8 million from the previous quarter, primarily due to lower fair-market-value adjustments tied to the bank-owned life insurance portfolio. Excluding that effect, non-interest income increased $1.3 million, driven by higher deposit service charges, investment-services income and other income.
Non-interest expense was $59 million, down $2.1 million sequentially because of lower fair-market-value adjustments related to a deferred compensation plan. Excluding that adjustment, expenses increased $2 million, primarily due to higher performance-based incentives.
Teruya said expense levels excluding the deferred-compensation fair-value adjustment represented a reasonable fourth-quarter run rate, though inflationary effects could affect expenses over time.
The effective tax rate was 23%, compared with 21.6% in the second quarter. The increase reflected limitations on compensation deductions following the company’s transition to a public company. The bank recorded $600,000 of tax expense related to those limitations, including a $400,000 catch-up for the first half of the year. Teruya said the bank expects an effective tax rate in the mid-22% to 23% range going forward.
The company’s Tier 1 leverage ratio rose to 9.24%, while its total capital ratio increased to 14.76%. The board declared a quarterly dividend of $0.27 per common share, payable Nov. 20 to shareholders of record as of Nov. 9.
Teruya said the company is discussing capital optimization with its board but has not made a determination regarding potential share repurchases.
About American Savings Bank of Hawaii (NYSE:ASBH)
American Savings Bank of Hawaii was a Hawaii-based financial institution that provided retail and commercial banking services to individuals, families, businesses and organizations. Its offerings included deposit accounts, residential and commercial lending, consumer loans, business financing and related banking services.
The bank operated through a statewide network of branches and served customers throughout the Hawaiian Islands. It also provided mortgage banking and other financial services associated with homeownership and personal banking.
American Savings Bank of Hawaii was established in 1925 and became one of Hawaii’s longstanding banking institutions.
-logo-1200x675.jpg){kind=logo}