Bank of Hawaii: Higher Yielding Series B Preferred Shares Still Best Option

Bank of Hawaii's Q1 2024 earnings reflect improved net interest income driven by a larger decrease in borrowing yield (down 21 bps) compared to asset yield (down 2 bps), despite modest loan growth of 0.3% and deposit growth of 1.8%; the bank's low loan-to-deposit ratio of under 67% signals a strong ability to finance loan growth through deposits. While loan performance, particularly in residential and commercial real estate, poses a risk, the author suggests the Series B preferred shares (NYSE:BOH.PR.B), yielding 7.8%, are an attractive option for income investors due to their high yield and deferred call risk until August 2029.

Analysis

Bank of Hawaii (BOH) demonstrated improved Q1 operating performance, largely due to beneficial shifts in interest rates. The bank's net interest margin expanded by 13 basis points to 2.32%, a consequence of its borrowing yield falling by a substantial 21 basis points to 2.24%, more than offsetting a 2 basis point dip in asset yields to 3.95%. This led to a $6 million rise in net interest income to $126 million, its fourth consecutive quarterly increase, a trend consistent with falling short-term interest rates. Deposit growth was solid at 1.8% in Q1 (1.6% YoY), and BOH maintains a robust loan-to-deposit ratio under 67%, below the 70% industry average, indicating a strong capacity to fund loan growth internally. Conversely, loan origination remains sluggish, with Q1 growth at 0.3% and year-over-year growth just under 2%. Key risks include the loan portfolio's significant concentration in residential and commercial real estate. Although nonaccrual loans have been stable quarter-over-quarter, the bank's provision for loan losses, at slightly above 1.0% of gross loans, is notably 70 basis points below benchmark levels, raising concerns about its adequacy and leading to a stated avoidance of the common shares by the article's author. The analysis presented in the article favors the Series B preferred shares (NYSE:BOH.PR.B) for their higher $2 annual dividend, resulting in an attractive 7.8% yield, and call protection until August 2029, deeming them a better option than the Series A preferreds or the common stock for income investors.

Key Decisions for Investors

• Income-focused investors may find Bank of Hawaii's Series B preferred shares (NYSE:BOH.PR.B) an attractive option, given their 7.8% dividend yield and call protection until August 2029, despite trading above par.
• Investors should exercise significant caution with Bank of Hawaii's common shares (NYSE:BOH) due to the bank's allowance for loan losses being 70 basis points below benchmark and its considerable exposure to the commercial and residential real estate sectors, which could elevate earnings volatility.
• Monitor key indicators such as trends in loan performance, particularly within the real estate segments, changes to the loan loss allowance, and the trajectory of interest rates, as these will be critical for assessing Bank of Hawaii's risk profile and earnings outlook.