Bank of Hawaii's Preferred Stock as a High-Yield Opportunity in a Risk-Managed Portfolio

For income-focused investors seeking a balance between yield and risk mitigation, Bank of Hawaii's Series B preferred stock (BOH.PRB) has emerged as a compelling candidate. With an annualized dividend yield of 7.60%—well above the 6.48% average for financial preferred stocksBank of Hawaii Corp - Preferred Stock Channel^[1]—the security offers a high-yield proposition. However, the true value of BOH.PRB lies in its alignment with the bank's robust loan portfolio, which remains a critical catalyst for its valuation and yield stability.

A Loan Book Built for Resilience

Bank of Hawaii's Q2 2025 earnings report underscored the strength of its credit portfolio, despite macroeconomic headwinds. Non-performing assets (NPLs) rose to 13 basis points of total assets, or 0.13% of total loans, reflecting a 17.8% year-over-year increase to $17.9 millionBank of Hawaii BOH Q2 2025 Earnings Transcript^[2]. While this represents a modest deterioration, it remains exceptionally low by industry standards. The bank's proactive risk management is evident in its Allowance for Credit Losses (ACL), which climbed to 1.06% of loans in Q2 2025, up from 1.05% the prior quarterBank of Hawai‘i Corporation First Quarter 2025 Financial Results^[3]. This buffer, combined with a Tier 1 capital ratio of 14.2%Bank of Hawaii Q2 Deep Dive: Margins Expand as Deposit Trends and Loan Growth Remain in Focus^[4], positions the bank to absorb potential losses without compromising its capital base.

The loan portfolio's resilience is further bolstered by its composition. As noted by Bank of Hawaii's Chief Credit Officer, the book is dominated by long-standing relationships with borrowers, reducing the likelihood of sudden defaultsBank of Hawaii BOH Q2 2025 Earnings Transcript^[2]. Additionally, low loan-to-value ratios and a geographically concentrated but diversified Hawaii-based portfolio provide a natural hedge against systemic risksAssessing Bank of Hawaii: Insights From 4 Financial Analysts^[5]. These factors collectively reinforce the bank's ability to sustain earnings, a critical underpinning for preferred stock dividends.

Preferred Stock Valuation: Yield vs. Risk

BOH.PRB's current market price of $26.31—trading at a 5.24% premium to its $25 liquidation preference—reflects investor confidence in the bank's credit profileBank of Hawaii Corp - Preferred Stock Channel^[1]. The stock's 8.000% fixed dividend rate, paid quarterly, is particularly attractive in a rising rate environment, where income-generating assets are in demand. Analysts have highlighted the alignment between the loan book's stability and the preferred stock's performance. For instance, Piper Sandler upgraded its price target for the bank's common stock to $76.25, citing “disciplined underwriting and margin expansion” as key driversAssessing Bank of Hawaii: Insights From 4 Financial Analysts^[5]. While this optimism is directed at common shares, it indirectly supports the case for BOH.PRB, as stronger earnings translate to greater capacity for dividend payments.

However, risks persist. Commercial loan growth has stagnated due to elevated prepayment activity and market uncertaintyBank of Hawaii BOH Q2 2025 Earnings Transcript^[2], which could limit future earnings growth. Yet, the bank's conservative loan-to-deposit ratio and strong deposit growth mitigate these concerns, ensuring liquidity and operational flexibilityBank of Hawaii Q2 Deep Dive: Margins Expand as Deposit Trends and Loan Growth Remain in Focus^[4]. For preferred stockholders, this balance between risk and capital preservation is crucial, as non-cumulative preferred dividends depend on the issuer's ability to generate consistent profits.

The Case for a Risk-Managed Approach

While BOH.PRB's yield is enticing, its inclusion in a portfolio should be tempered by an understanding of its sensitivity to credit quality. A report by Weiss Ratings noted that the bank's NPL ratio of 2.3% of core capital in 2024—though stable—remains a metric to monitorSummary - Weiss Ratings^[6]. Any meaningful increase in delinquencies could pressure the ACL and, by extension, earnings. However, the current ACL adequacy and low NPL levels suggest the bank is well-prepared for moderate economic stress.

Analysts also emphasize the role of management's strategic initiatives in sustaining performance. Recent promotions within the Finance Division signal a commitment to enhancing risk oversightAssessing Bank of Hawaii: Insights From 4 Financial Analysts^[5], while asset repricing is expected to drive further net interest margin expansionBank of Hawaii BOH Q2 2025 Earnings Transcript^[2]. These operational strengths reinforce the argument that BOH.PRB is more than a yield play—it is a security anchored to a bank with a proven ability to navigate complex economic cycles.

Conclusion

Bank of Hawaii's preferred stock offers a rare combination of high yield and structural safeguards, making it a strategic addition to a risk-managed portfolio. The loan book's low NPLs, adequate ACL, and conservative underwriting practices form a solid foundation for dividend stability. While challenges in commercial lending and macroeconomic volatility persist, the bank's capital strength and operational discipline provide a buffer. For investors willing to accept moderate credit risk in exchange for above-average income, BOH.PRB represents a compelling opportunity—provided it is held alongside a diversified mix of assets to mitigate sector-specific exposure.