Questions are swirling about American Savings Bank FSB's future as its parent company Hawaiian Electric Industries Inc. faces mounting lawsuits.

As the only bank in the country owned by a publicly traded utility company, American Savings Bank is in an unprecedented position as its parent company Hawaiian Electric comes under pressure following fires that devastated the town of Lahaina. The company's stock is down 67% from its price at the beginning of August, and lawsuits regarding the recent fires have piled up from different parties, such as Maui County, the victims' families and shareholders.

Those lawsuits could pose a risk to Hawaiian Electric's capital position, which would spell trouble for American Savings Bank, as holding companies are meant to serve as a source of strength for banks. Further, while American Savings Bank would not be responsible for any liabilities associated with the lawsuits, it could suffer tangential impacts due to its association with the utility company, such as customers beginning to question the viability of the bank, if Hawaiian Electric is found liable for negligence.

A scenario that has potential benefits for the parent and subsidiary is separating the bank in a liquidity event which would allow the utility company to boost cash levels as it faces mounting lawsuits and allow American Savings Bank to distance itself from the company to avoid tangential impacts, experts said.

American Savings Bank replied to a request for comment by pointing to a press release that says the bank is an "independent company" and that "there is no risk to customer deposits as a result of legal claims related to the fire."

IPO more likely than a sale

Facing mounting lawsuits, Hawaiian Electric engaged in talks with advisory firms that specialize in restructuring as it explores its options, according to a recent report from The Wall Street Journal. Guggenheim Securities, which has experience in the utility sector, is one of the firms the company is working with, Hawaiian Electric said in a statement to S&P Global Market Intelligence.

"We are seeking advice from various experts — the goal is not to restructure the company but to endure as a strong, financially healthy local utility that Maui and this state need over the long term," the statement read.

As the company looks at its options in order to manage risk, American Savings Bank could be among its most valuable assets, experts said. "A substantial amount of their value does lie with [American Savings Bank]," CFRA Policy Research analyst Rob Rains said in an interview. "It's a unique asset for the company. It's a departure, obviously, from what the company actually does."

Per an Aug. 17 note, Wells Fargo Securities pegged the value of American Savings Bank at $8 per share. That is nearly two-thirds of Hawaiian Electric's stock price as of Sept. 6, according to S&P Global Market Intelligence data.

As the company explores options, an outright sale of the bank to leading local rivals is likely out of question given how concentrated the Hawaii banking market is. A purchase of American Savings Bank by the large banks headquartered in Hawaii would likely trigger anti-trust threshold defined under the Herfindahl-Hirschman Index (HHI), which is used by regulators to determine market concentration.

"You don't have really any national banks there," Wells Fargo analyst Jared Shaw said in an interview. "There would be an HHI issue with any of the Hawaii banks acquiring another Hawaii bank."

Bank of Hawaii Corp., the largest bank headquartered in Hawaii, and First Hawaiian Inc., the second-largest bank in the state, both hold over 25% of deposits in each of the four metropolitan statistical areas (MSAs) in Hawaii, while American Savings Bank holds more than 10% in each MSA.

"The Federal Reserve would be extraordinarily unlikely to approve any bank merger among Hawaiian banks at this time," Odeon Capital analyst Richard Bove said in an interview.

However, a spinout allowing American Savings Bank to operate as a separate institution with an initial public offering is an attractive option for both the bank and Hawaiian Electric, multiple sources said. In that case, Hawaiian Electric could avoid the obstacles to a merger agreement in the state and sell it into public markets.

This sort of move has been explored in the past. In 2014, NextEra Energy Inc. announced plans to acquire Hawaiian Electric in 2014 and American Savings Bank would have become an independent, publicly traded company as part of the deal, but Hawaii's Public Utilities Commission ultimately terminated the transaction two years later.

Operating as a separate institution would spare American Savings Bank from any reputational risk associated with the lawsuits and better position the bank to benefit from the inflow of deposits that will result from insurance money and government aid flowing into the state after the wildfires, Odeon Capital analyst Richard Bove said in an interview.

Still, an IPO would face obstacles. In such an event, the company would need to assure the public that "the bank is fully ring-fenced, there's no issues with the bank," CFRA's Rains said.

Lawsuits pose risks to Hawaiian Electric's bank subsidiary

Hawaiian Electric acquired American Savings Bank in 1988 before laws such as the 1999 Gramm-Leach-Bliley Act and the 2010 Dodd-Frank Act imposed stricter limitations on the commercial activities of holding companies for deposit-taking institutions.

Only five banks have branches in Lahaina, where American Savings Bank had the third-largest market share with one branch having $117.7 million in deposits. Now, as the only bank in the US owned by a publicly traded utility company, American Savings Bank is in a precarious situation.

Each lawsuit represents new risk for Hawaiian Electric because potential damages could easily dwarf the company's capitalization, CFRA's Rains said. This also puts American Savings Bank in a tough situation, particularly if it faces deposit outflows due to its association with the beleaguered utility company, because parent companies are meant to serve as a source of strength.

"Without downstreamed parent-company cash in hand to protect it from the utility's travails, the insured depository and thus the FDIC are sure to suffer," Karen Petrou, the co-founder and managing partner at Federal Financial Analytics, wrote in a recent blog post.

The bank had $8.21 billion in total deposits at June 30, and $1.75 billion of those were uninsured, according to S&P Global Market Intelligence data. In the press release, American Savings Bank touted its liquidity and capital position, and assured customers that their deposits are safe.

The bank has 273% of liquidity coverage for its uninsured deposits and a common equity Tier 1 ratio of 12.23%. It also has borrowing capacity of $3.1 billion from the Federal Home Loan Bank and Federal Reserve, according to the press release.

Banking regulators are also in a precarious situation because they do not have oversight of Hawaiian Electric like they do for most bank holding companies. When a parent company is a bank or savings and loan holding company, the Federal Reserve can ensure the parent is a "viable source of strength" before problems emerge, Petrou wrote.

"When the parent is a nonbank, this is harder," Petrou wrote. "Insured depositories at the beck and call of commercial or nonbank financial companies will be cash cows for parent companies milked dry ahead of the FDIC."