American Savings Bank, National Association (ASBH) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the American Savings Bank Third Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Jordan Hino, Head of Investor Relations. Jordan, please go ahead.

Thanks, Gabby. Aloha, and welcome to American Savings Bank's Third Quarter 2026 Earnings Call. With me today are Ann Teranishi, President and Chief Executive Officer; Dane Teruya, Executive Vice President and Chief Financial Officer; and Steven Nakahara, Executive Vice President and Chief Credit Officer. During today's call, we may refer to non-GAAP financial measures. Please see our statement on the use of non-GAAP financial measures and the related reconciliations in our earnings release and supplemental materials. We may also make forward-looking statements. These statements involve known and unknown risks and uncertainties, and actual results or performance could be materially different from those expressed or implied by the forward-looking statements. Please refer to our securities filings with the Office of the Comptroller of the Currency for a discussion of factors that could affect our results and other risk factors. We undertake no obligation to update these forward-looking statements, except as required by law. With that, I'll turn the call over to Ann.

Thank you, Jordan, and Aloha everyone. We appreciate you joining us for our first earnings call as a public company. As we mark this milestone, I want to begin by expressing my gratitude to the teammates who have shaped ASB and to our customers and community for their continued trust and support. We are proud of the straightforward reliable business model we have built together, one that has served us well for more than 100 years and continues to drive our performance today. That strength was evident in our third quarter results. We delivered another quarter of strong earnings with net income of $29 million or $0.45 per diluted share, return on average assets of 1.29% and a return on average tangible common equity of 16.68%. Our results also included quarter-over-quarter margin expansion, improved efficiency and stronger earnings and capital ratios. We remain focused on disciplined execution across the franchise. Average loan balances increased and deposit costs decreased despite a rising rate environment. Turning to the local economy. Infrastructure and military investment, together with rebuilding efforts on Maui, continue to support construction activity, while Hawaii faces elevated oil prices and impacts from recent storms. We are monitoring key economic metrics, including visitor activity, employment and housing trends. Visitor arrivals and spending increased year-to-date through August compared with the same period last year despite declines in August. The civilian labor force and jobs expanded, while the unemployment rate increased from 2.6% in June to 2.8% in September. Statewide single-family home sales and median prices increased year-to-date through September, while condominium sales and median prices declined compared to the same period last year. Local economists continue to forecast growth in 2026, but have recently lowered their estimates. Against this backdrop, we remain focused on responsible growth while maintaining the strong underwriting standards that have served us well through economic cycles. We will also maintain a disciplined approach to capital allocation, including returning capital to shareholders. I'll now turn the call over to Dane for more detail on our financial results.

Thank you, Ann. Net income for the third quarter was $29 million, an increase of $1.8 million or 6.7% from the prior quarter. The increase reflected higher net interest income, lower provision expense and an improved efficiency ratio. Net interest income was $76.4 million, up $1.2 million from the prior quarter, primarily reflecting higher average loan balances and improved earning asset yields, partially offset by lower average investment securities and interest-earning deposit balances. Net interest margin was 3.61%, 4 basis points higher than the prior quarter and 15 basis points higher than the prior year period. The quarter-over-quarter increase was driven primarily by higher investment securities, residential and consumer loan yields, together with continued runoff of higher rate CDs. In the third quarter, we had $185.7 million of loan runoff at a yield of 5.79% versus $161 million of production at a yield of 6.23%. The residential mortgage runoff was $54.9 million at a yield of 4.85%. Mortgage production was $63 million in the third quarter with a production yield of 6.14%. Our balance sheet continues to be neutral to slightly asset sensitive, which will support NIM expansion in this higher for longer interest rate environment. Our cost of deposits was 68 basis points, down 1 basis point from the prior quarter and 9 basis points lower than the prior year period despite the rising interest rate environment. Noninterest income was $21 million, down $2.8 million from the prior quarter, primarily due to lower fair market value adjustments related to our BOLI portfolio. Excluding the fair market value impact, noninterest income increased $1.3 million, driven primarily by higher service charges on deposit accounts, income from investment services and other income. Noninterest expense was $59 million, down $2.1 million from the prior quarter, primarily due to lower fair market value adjustment related to our deferred compensation plan. Excluding that fair market value impact, noninterest expense increased $2 million from the prior quarter, primarily reflecting higher performance-based incentives. Our effective tax rate was 23% in the third quarter compared to 21.6% in the second quarter. The increase in the effective tax rate primarily relates to limitations on deductions for compensation as a result of being a public company. We recognized $600,000 of income tax expense in the third quarter for these limitations. $400,000 of that was a catch-up for the first half of the year. Total assets were $8.9 billion at quarter end, down $112.2 million or 1.2% from June 30. The decrease primarily reflects a decrease in interest-bearing deposits at other financial institutions and modest declines in loans and investment securities. Total deposits ended the quarter at $8.1 billion, down $137.6 million or 1.7% from the prior quarter. Core deposits declined $92.1 million, primarily due to a decline in interest-bearing checking balances resulting from normal commercial customer activity. Noninterest-bearing deposits made up 31.5% of total deposits, 64 basis points higher than the prior period. Our Tier 1 leverage ratio increased to 9.24% and our total capital ratio increased to 14.76%. With our ability to generate capital and our focus on returning capital to shareholders, the Board declared a quarterly dividend of $0.27 per common share payable on November 20 to shareholders of record as of November 9. Now I'll hand it over to Steven to cover provision and credit quality. Steven?

Thanks, Dane. The allowance for credit losses on loans was $60.2 million at quarter end or 97 basis points of total loans compared with $61.5 million or 99 basis points at June 30. Provision expense was $0.7 million in the third quarter, down $2.6 million from the linked quarter. In the second quarter, we recognized provision related to real estate secured loans to a commercial relationship and headwinds within the hospitality sector. We did not have a comparable provision in the third quarter. Nonperforming loans were 29 basis points of total loans compared with 19 basis points in the prior quarter. In the third quarter, we recognized a partial charge-off of a nonperforming commercial construction loan. As a result, net charge-offs were $1.8 million or 11 basis points on an annualized basis compared to less than 1 basis point in the prior quarter. We believe we are appropriately reserved and continue to work closely with our customers while maintaining disciplined underwriting and portfolio monitoring. And with that, I'll turn the call back to Ann.

Thank you, Steven. Our third quarter performance demonstrates the strength of our straightforward, reliable business model and the continued focus of our teammates. As we begin this next chapter as a public company, we remain committed to disciplined growth, strong credit risk management and delivering value for our customers, communities and shareholders. And now we will open the call up for questions.

[Operator Instructions] Your first question comes from the line of Jeff Rulis with D.A. Davidson.

Maybe a little bit on the margin. Dane, you talked about the kind of the roll-off, roll-on dynamic on loans, but the cost of deposits down, continues to be a remarkably low number. I guess as we think about the margin and that kind of expectation for further climb, I just -- maybe if you could unpack the deposit side and your expectations for -- expect to see any rate pressure on that front, seeing as the loan side seems pretty positive on the yield front.

Yes. Jeff, the deposit side, the yield has been remaining relatively stable. I think looking at the spot rate for the month of September, it's up 1 basis point versus what we reported on a quarterly basis. So we did reprice some of our deposits as a result of the Federal Reserve interest rate hike. And so what you'll see is it slightly ticking up in the fourth quarter, but relatively only about a couple of basis points up.

Got it. And again, as we roll into '27, just that we're back to kind of that slow climb is still continues to be the expectation on the margin overall.

Yes, that's correct. The interest rate environment is really the determining factor. So if the Federal Reserve does raise interest rates -- right now, we're expecting one in the fourth quarter. There is also probably a couple that will occur in 2027. So with those interest rate moves, we will be resetting some of our higher more rate-sensitive commercial products a little higher to reflect those changes. So we would expect our cost of funds to inch higher as those rate changes become effective.

Appreciate it, Dane. And then maybe just one other one. On the expense side, it seems like kind of the items that are onetime in nature, if we think about the fair value adjustment on comp against maybe an offset of the IPO costs, I think that's about $1.4 million net of that. I guess a run rate going forward of [ 60.5 ] is kind of in that range. Is that correct? And then kind of a growth rate from there, we just assume a kind of inflation growth off of that?

Yes. So in the third quarter, if you eliminate the fair market value related to our deferred comp plans, we think the -- that would be a good run rate for the fourth quarter. So there was a tick up in our noninterest expense related primarily due to higher performance incentives. And so then going forward, as we move through the year, there will be some inflationary impacts on that number.

Your next question comes from the line of Matthew Clark with Piper Sandler.

Just to round out the margin discussion. Can you just update us on the cash flows coming off the single-family resi portfolio, which is where I think the opportunity is to reprice, and same thing on the HTM securities portfolio and the pickup in spread that we should anticipate there?

Yes. So the cash flow that came off in the third quarter was roughly about $55 million. The yield was about 4.85%. We are seeing a benefit of reinvesting that back into mortgage production, roughly about 125 basis points higher. And then on the investment portfolio, we are seeing runoff within our HTM and AFS portfolio. In the third quarter, we got roughly about $74 million runoff. We're currently reinvesting that either back into loans or back into the investment portfolio at a spread of a little more than 175 basis points.

Okay. And that $74 million was a blend of AFS and HTM, obviously.

Yes. That's correct.

Got it. Okay. And then just on the CD runoff, maybe speak to that trend. Is that somewhat deliberate? Is that a customer preference? And what's the kind of the rate and duration on the new CDs? Just trying to get a sense for kind of the roll-off, roll-on rates.

Correct. So we have some campaigns out there. I think in this environment, our customers' demand is going to be a little shorter. So we have some promotional campaigns in the 3-month and 6-month range. So what's rolling off has been a consistent trend over the past couple of quarters, and you can see that in our numbers. I think in this environment, people are wanting to be a little bit more liquid and not lock in their money. And so we think that trend will continue, but eventually will stabilize.