American Savings will stay tethered to parent for now

American Savings Bank is going to remain part of the Hawaiian Electric Industries Inc. family.

For the time being, anyway.

With NextEra Energy Inc.’s proposed $4.3 billion acquisition being rejected 2-0 Friday by the state Public Utilities Commission, Hawaii’s third-largest bank will continue to be a subsidiary of HEI as it has been since being acquired by the company in 1988.

It remains to be seen whether HEI will want to spin off the bank at a future date since much of the preparation already is in place for that to happen. Or, perhaps, another company could follow in NextEra’s footsteps and make a pitch for HEI and spin off the bank in the process. The PUC also left open the door for HEI to renew discussions with NextEra on key elements that should serve as the foundation for future applications.

American Savings President and CEO Rich Wacker said minutes after the midafternoon decision that company officials were still digesting the order and wouldn’t comment immediately.

New York-based analyst Andrew Weisel, who covers HEI, said he doesn’t think a future spinoff would occur without the stipulations that were part of NextEra’s offer.

“Though utility investors would absolutely love to see Hawaiian Electric without the bank, we view it as extremely unlikely without the NextEra merger,” Weisel, of Macquarie Capital USA Inc., said in an email. “HEI has been trying for years to divest it, but has struggled to do so without a huge tax bill to be paid by shareholders. The only reason it would have been tax-free for HEI shareholders under the NextEra offer is that the buyer was to assume a $165 million tax liability as part of the deal.

‘A taxable event’

“In other words, NextEra would have paid the taxes due from shareholders as a way to sweeten their offer. Either way, a spinoff is a taxable event, but without NextEra (or another buyer) paying the taxes on the gain, shareholders would have to. HEI’s management won’t see that as creating value for shareholders.”

Shareholders of HEI’s common stock would have received the equivalent of about $39.29 a share, a 21 percent premium over Friday’s HEI closing price of $32.48 and a 39.4 percent premium over HEI’s closing price of $28.19 on Dec. 3 when the deal was announced after the market closed. The $39.29 price included the value of the NextEra stock conversion, HEI’s estimated $8 per-share value of American Savings and a special dividend of 50 cents a share.

A spinoff of the bank also would have allowed it to regain about $6 million a year in fee income that it was losing annually because of a recent law capping “interchange” fees at 21-24 cents that big banks can charge merchants. American Savings was earning an average of 49 cents per electronic debit transaction, but when parent company HEI went over $10 billion in assets at the end of 2012, that triggered the Durbin Amendment effective July 1, 2013. Without HEI, American Savings would be categorized by it $6.1 billion in assets and thus be exempt from that law.

Benefits lost

Another benefit ASB would have realized from a spinoff: It would have no longer had to pay dividends to HEI. Right now ASB pays about 70 percent of its net income to HEI to fund the utility’s capital expenditures. As an independent, ASB would pay a dividend to shareholders of only 30 to 40 percent. So the bank would have had more free cash to invest excess capital in the bank and conduct buybacks. The additional income would have given the bank more options and free it from providing capital to holding company HEI and the utility. Besides giving dividends to ASB shareholders, the bank would have been able to invest excess capital in the bank and conduct buybacks.

Utility analyst Charles Fishman of Chicago-based investment research firm Morningstar Inc. said HEI would be easier to cover if ASB were spun off from the parent company.

“HEI is a very difficult utility for analysts to follow due to the material contribution of ASB,” Fishman said. “I believe it would simplify HEI’s investment thesis, make it easier for analysts to calculate valuation and provide a higher stock price if ASB is spun off.”

The bank had $6.14 billion in assets, $4.54 billion in loans and $5.14 billion in deposits as of March 31, and is due to report its second-quarter earnings at the end of this month. Wacker, 53, who has been president and CEO of American Savings since November 2010, would have remained in the same positions after the planned spinoff. Wacker received a pay package of $1.4 million in 2015.

Move delayed

American Savings, which has 1,150 employees and 55 branches, has been planning to relocate its headquarters from downtown to Chinatown. But those plans have been delayed since February when iwi kupuna, or human remains, were discovered at the 300 N. Beretania St. site, across the street from Aala Park. The bank is working with recognized cultural descendants to create a respectful burial treatment plan to be approved by the Oahu Island Burial Council.

Banking analyst Aaron Deer said American Savings would benefit from Hawaii’s robust economy if it were to go independent.

“There is a lot to be said for independent community banks in this era when public sentiment toward big banks is so negative,” said Deer, of San Francisco-based investment bank Sandler O’Neill. “Banks play an essential role in our communities, providing a safe place for us to save money, helping us buy a home and being a partner for small businesses. That role is as important in Hawaii as anywhere, and with its strong economy, record-level tourism, robust construction activity and low unemployment rate, the state is a great place to be banking right now.”