Bank of Hawaii Corp (BOH) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience. You've joined the Bank of Hawaii Corporation Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Director of Investor Relations, Ms. Cindy Wyrick. Ma'am, you may begin.

Thank you very much. Good morning, and good afternoon, everyone. Thank you for joining us today as we review the financial results for the fourth quarter of 2017. Joining me today is Chairman, President and CEO, Peter Ho; our Chief Financial Officer, Dean Shigemura; and our Chief Risk Officer, Mary Sellers.

Before we get started, let me remind you that today's conference call will contain some forward-looking statements, and while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected.

And now, I'd like to turn the call over to Peter Ho.

Thanks, Cindy. Good morning, everyone. Happy New Year, and thanks for joining us today.

2017 was another good year for Bank of Hawaii, and we were pleased with our financial results. Earnings per share increased to a record $4.33. Our net interest margin expanded, asset quality remained strong and our efficiency ratio improved to 55.7% from 57% in 2016, reflecting strong expense management.

Assets, loans and deposits each grew in a measured manner with total assets finishing the year in excess of $17 billion for the first time in our history. Loan growth of 9% was led by consumer growth during the year. Deposits grew 4% in 2017, finishing at just under $14.9 billion. Deposits fell slightly on a linked basis compared to the third quarter of 2017 as solid consumer deposit growth of 2.4% was offset by slightly lower commercial activity and lower public deposit activity.

The linked reduction in commercial deposits results from the closing of a few large condominium projects in the fourth quarter with reduced deposit balances for some of our escrow customers. Reduction in public deposits resulted from a $300 million decline in public time deposits, resulting from our decision to not aggressively pursue this limited deposit segment. Pricing has gotten well outside of what we are seeing in other substantial deposit segments for us, and frankly, we don't have the requirement for the funds on our balance sheet.

All in all, though, we feel good about what we achieved in 2017. We opened 4 new Branches of Tomorrow. We also made considerable progress in our driving digital activity with 40% of our consumer deposits now coming from either our ATM or mobile applications.

As I mentioned previously, we were pleased with our numbers for the year. I'll now ask Dean to provide you with some additional details on our financial performance for the quarter and our outlook for 2018. Mary will then make some comments on our credit quality. Dean?

Thank you, Peter. Net income for the fourth quarter was $43 million or $1.01 per share compared to $45.9 million or $1.08 per share in the third quarter and $43.5 million or $1.02 per share in the fourth quarter of 2016. Our return on assets during assets the fourth quarter was 1%. The return on equity was 13.85%. And our efficiency ratio was 57.49%.

Included in the fourth quarter of 2017 was an additional income tax expense of $3.6 million due to the reduction in value of our net deferred tax assets impacted by the tax reform bill. Excluding this additional tax expense, net income was $46.5 million or $1.10 per share.

Our net interest margin for the fourth quarter was 2.98%, up 6 basis points from the third quarter and up 15 basis points from the fourth quarter of 2016. Net interest income in the quarter increased to $118.8 million, up from $116.3 million in the previous quarter and $107.1 million in the same quarter of 2016. As a result of the tax reform bill, we expect our net interest margin this year to be negatively affected by approximately 4 basis points due to the revisions in the tax equivalent adjustment. However, this will have no impact on our net interest income.

As Mary will discuss later, we recorded a credit provision of $4.3 million this quarter. Noninterest income totaled $41.9 million in the fourth quarter of 2017 compared with $42.4 million in the previous quarter and $46.5 million in the same quarter of 2016. The decline compared to the previous quarter was largely due to lower mortgage banking income. Compared with the previous year, the decrease was largely due to lower mortgage banking income and lower revenue from the customer derivative program.

Growth in noninterest income will continue to be a challenge this year due to the downward trend in overdraft fees and our expectation for lower volumes of salable mortgages. While we currently have no plans to sell the remaining Visa Class B shares, we will continue to incur carrying costs on the shares already sold until the litigation is resolved and those shares are convertible into Class A shares.

Noninterest expense totaled $92.3 million in the fourth quarter of 2017 compared with $88.6 million in the previous quarter and $89.6 million in the same quarter of 2016. Noninterest expense in the fourth quarter of 2017 included onetime employee bonuses totaling $2.2 million.

Expenses in the third quarter of 2017 included $2.1 million in severance, partially offset by a reduction of $900,000 in share-based compensation. Noninterest expense in the fourth quarter of 2016 included expenses of $1.3 million related to the increase in the spot price, which was partially offset by a net gain of $1 million on the sale of a branch building.

For the full year of 2018, we expect noninterest expenses to be about 2.5% to 3.5% above our 2017 expenses of $358 million. This includes the impact of increasing our minimum wage rate to $15 an hour.

Excluding the onetime adjustment related to the tax reform bill, the effective tax rate for the fourth quarter of 2017 was 27.37% compared with 30.62% in the previous quarter and 28.38% in the same quarter of 2016. Currently, we expect the effective tax rate for 2018 to be between 20% and 22%.

As a result of our strong loan growth during the quarter, our investment portfolio decreased to $6.2 billion. Premium amortization was $10.1 million in the fourth quarter, essentially flat with the previous quarter and down from $11.1 million in the fourth quarter of 2016.

We purchased a total of $210 million in fixed rate securities during the quarter, and the reinvestment differential was a positive 53 basis points. The duration for the available-for-sale portfolio was 2.29 years at the end of the fourth quarter. The held-to-maturity duration was 3.93 years, and the duration for the total portfolio was 3.3 years -- 3.33 years.

Our shareholders' equity was $1.2 billion at the end of the fourth quarter, up slightly from the previous quarter and up from the same quarter of 2016. At the end of the fourth quarter, our Tier 1 capital ratio was 13.24% and our Tier 1 leverage ratio was 7.26%.

During the quarter, we paid out $22.1 million or 51% of net income in dividends and repurchased 128,600 shares of common stock for a total of $10.6 million. We repurchased an additional 19,500 shares between January 2 and January 19 at a total cost of $1.7 million. Also, our board declared a dividend of $0.52 per share for the first quarter of 2018.

And finally, our capital management strategy going forward will remain consistent with our current strategy, which is to pay out approximately 50% of net income in dividends to maintain adequate capital to support our business growth with a minimum Tier 1 leverage ratio of 7% with the remainder available for share repurchases.

Now I'll turn the call over to Mary Sellers.

Thank you, Dean. Net charge-offs for the fourth quarter totaled $3.8 million, up $313,000 on a linked-quarter basis and up $775,000 year-over-year. For the full year of 2017, net charge-offs totaled $13.8 million or 15 basis points of average loans and leases. Comparatively, net charge-offs for the full year of 2016, inclusive of a full recovery of a single commercial loan previously charged off in 2013, totaled $3.4 million or 4 basis points. Adjusting for the nonrecurring recovery, net charge-offs totaled $10 million or 12 basis points.

At the end of the fourth quarter, nonperforming assets totaled $16.1 million or 16 basis points, down $915,000 or 2 basis points from the third quarter and down $3.6 million or 6 basis points year-over-year. Loans past due 90 days or more and still accruing interest totaled $7.1 million, up $483,000 for the linked period and up $77,000 from the same period last year.

Restructured loans not included in nonaccrual loans or loans past due 90 days or more totaled $55.7 million at the end of the quarter compared with $55 million at the end of the third quarter and $52.2 million at the end of '16. Residential real estate loans modified to assist our customers accounted for $20.2 million of the total at the end of '17.

In the fourth quarter, underwriting metrics for loan originations remained strong as we continued to tighten around the margin. Accordingly, at the end of 2017, the weighted average loan to value for the commercial mortgage portfolio was 55%, while the weighted average loan to value for the residential mortgage portfolio and the home equity portfolio was 57% and 63%, respectively.

And in the indirect portfolio, the weighted average monitoring FICO score was 703. At the end of the fourth quarter, the allowance for loan and lease losses totaled 107.3. Given net charge-offs $3.8 million, a credit provision of $4.3 million was recorded. The ratio of the allowance to total loans and leases was 1.1% at the end of the quarter, down 2 basis points for the linked period and down 7 basis points year-over-year.

The allowance reflects the continued strength in the company's asset quality and the Hawaii economy over this period as well as the mix and quality in loan growth. The total reserve unfunded commitments was $6.8 million at year-end, unchanged from the prior quarter and up $250,000 from the end of 2016.

I'll now turn the call back to Peter.

Great. Thank you, Mary. The Hawaiian economy continues to perform well due to healthy labor market conditions, an active construction pipeline and continuation of the strong performance of our tourism industry and increasing home prices. The statewide seasonally adjusted unemployment rate was 2% in November compared with 4.1% nationally.

Sales of single-family homes on Oahu, our primary market, increased 6.3% in 2017, while condominium sales increased 6.9%. The median price of single-family homes on Oahu increased 2.7%, and median price of condominiums increased 3.8%. Months of inventory in December declined to a low of 2.1 months for a single-family home and 2.3 months for a condominium. The median number of days on the market during 2017 was 16 days for a single-family home and 17 days for a condominium.

Tourism in Hawaii also remains strong with visitor spending increasing 6.6% in the first 11 months of 2017 compared with the same period in 2016. The growth in spending is a result of a 4.9% increase in visitor arrivals, an increase of 1.8% in average daily spending, driven mostly by domestic visitor spend.

Thanks again for joining us today. And now, we'd be happy to respond to your questions.

(Operator Instructions) Our first question comes from the line of Casey Haire of Jefferies.

Wanted to touch on loan growth, I guess, starting off. What's the expectation for this year? Or are we moderating from that 9%? And I guess, more specifically, on the construction book, is there -- what kind of -- what magnitude of runoff is still remaining?

Yes. Good question, Casey. I think that the general guidance is not too changed from what we've expressed previously. And we've talked about how commercial activity ought to moderate in the coming periods, and that will be offset somewhat by stronger consumer growth. I think that remains the case. We had a pretty big reduction in construction. At this point, I think, we likely will continue to see some moderation in that portfolio but probably not at the same velocity as in 2017. The leasing portfolio was a headwind, mostly because we had a pretty large early buyout in the fourth quarter of about $25 million. So we'll see that portfolio continue to decline as it's really not a focus for us at this point but probably not at that same velocity. So I think that we've talked about mid-, higher single-digit growth on the loan portfolio. I think that, that still holds. The one caveat that I'd put out there is CRE is a little lighter than usual for us, and at this point, I'm not sure if that's just a one-off periodic type of thing or a trend. But I would say that fourth/first quarter, we have seen a bit of a pause there. And that, as we've been discussing, it could be really as a result of uncertainty around the tax bill. So that's -- those are our thoughts on the lending side.

Okay. Great. And then, just switching to deposit pricing, Peter. This is the first time I've heard you kind of talk about some irrational pricing in market. Can you just give us some color there? And also, what is the appetite -- you guys are in a great position liquidity-wise with a 65% loan-to-deposit ratio. Where -- how much appetite is there to take that even higher? Is there a ceiling? Or how you managing liquidity in what could be a tougher deposit pricing environment?

Yes. So right, good question. Let me give you some perspective on our deposit composition, Casey. We're pretty diversified. So 50.2% of our deposits come from our consumer book. 40.1% come from our commercial book. And our public deposit book is 9.7%. We're also pretty diversified by category. So 52.4% of our deposits are demand. 36.2% are savings. And 11.3% are time. So you can see there that we've got a very, very solid core deposit base and really is skewing from a sector standpoint that's pretty darn diversified. The area that I alluded to in my opening comments really is a pretty small segment for us. So it's in the public space, which is just under 10%, and specifically, it's in the time space, which is about half of that 10%. So it's just over 5% of our overall book. And what we're seeing there is pricing that's substantially higher than what we're seeing for like term in just about all of our other segments. We're seeing pricing well in excess of 1% for terms that are well below a year. So you talked about our loan-to-deposit ratio. Obviously, we don't need to turn to any funding just because we have that liquidity, and so that's the positioning that we're taking at this point. In terms of what would be the optimal loan to deposit or liquidity position for us, we like to think that there's room for us to move up from 65%. I think we'd be comfortable in the 70%, 75% range, and frankly, I'd like to get there by growing loans and growing deposits over time.

Okay. Great. Very comprehensive. And just one more for Dean. With the 10-year up above 2.60%, where is the reinvestment rate in the securities book versus that 2.30% yield in the fourth quarter?

The reinvestment rate is, of course, ratcheting higher. I would say, quarter-for-quarter, we're looking at about a 10 basis point increase. We're still investing in, I would say, shorter-duration investments. So in terms of a rate, it's going to be below 3% because we want to moderate our duration of our portfolio. But overall, we're still growing the yield on the book.

Our next question comes from the line of Ebrahim Poonawala of Bank of America.

So I just wanted to follow up, if you can talk about the margin outlook. So I guess we see the margin reset to about 2.94% because of the tax change in 1Q. Given sort of your expectation for runoff in time deposits, that should be margin-accretive, I would assume, and the benefit of the December rate hike, Dean, like where do you think the margin lands when we think about first quarter? And from there on, how do you view your rate sensitivity to a real additional Fed rate hike?

Well, the margin, we expect some modest increases, and the driver's going to be mainly balance sheet growth, but we do expect to pick up some on the rate side. The rate increase in December is going to help us. To the extent that the longer end remains higher than last year, I think we'll pick up more there. So overall, we're going to report in our 10-K a 3.4% sensitivity. So that's kind of a rough guide on how you can calculate the benefit from higher rates.

Understood. And can you give any detail on -- sorry, I think, Peter, you mentioned 10% of deposits of public funds, half of those are time deposits, so your take $700 million. What's the rate on those? And do we expect those to run off at some point this year?

Yes. The actual number, Ebrahim, is $838 million on public time. Based on our win-loss record under the pricing environment, we could see as much as half of that $838 million disappear over the course of this year would be my estimate if pricing holds where it has the past several months. We haven't talked about pricing, and I'm not sure we're going to get into that, but I will give you guidance that the pricing in the government time space is well in excess of what we're experiencing in the consumer time space, and in excess of 1% even for less than a year.

Understood. That's clear. And if so, just switching very quickly, my last question on fee revenue. I think dean mentioned that we expect growth to remain challenged based on declining overdraft fees. How big is overdraft fees? And is it going down because of any changes you made? Or are you just seeing low -- less activity because of sort of the consumer backdrop right now?

Yes. So while Dean finds out the exact number on overdraft fees, I'll tell you we're wandering down -- we're wandering down for a couple reasons. One, we are making certain changes to our procedures and processes and policies that reduce some lower ODs over time. And secondly, we take a pretty conservative approach to our opt-in activity. So I know that some banks genuinely encourage opt-in as almost a business. We actually are trying to get a more neutral positioning out there, and so that has had an impact on people choosing not to opt in, which, obviously, impacts our OD revenue.

Yes. So our OD revenue for '17 was $17.4 million, and year-over-year, it's down about $800,000.

Okay. Got it. Right. So is it fair to say that, incrementally, that's kind of the pace of decline? If we see more decline, is that sort of a reasonable way to think about it?

Yes. I think so, Ebrahim.

And just one last on fees in mortgage banking. $2.6 million this quarter, was much higher a few quarters ago. If I'm right, there's about $2 million of servicing fee revenue in that number, and the rest is origination related. Like what's your expectation on that as we go into '18?

Yes I think we're kind of flattening out here. Your servicing income is about right, and so the difference would be due to the salable component of the business. So to the extent that we think that's going to start stabilizing next year, the income for mortgage banking should be pretty stable from the fourth quarter.

Our next question comes from the line of Aaron Deer of Sandler O'Neill.

Switching to expenses. Just curious, I guess, even backing out the special bonus that you guys paid to your employees this quarter, it still seems like comp occupancy, professional fees and the other line all just seemed a little bit elevated. Just wondering if maybe there was some kind of year-end cleanup in those numbers and maybe what a good run rate might be for your overall noninterest income heading into 2018?

Yes. Aaron, I'll talk about the...

I'm sorry, noninterest expense.

Yes. I'll talk about the fourth quarter, and Dean'll chat about our guidance for 2018. I think, probably, the best comp to look at for the fourth quarter is the year-on-year because we do have a fair amount of seasonality in the fourth quarter with holiday expenses and the like as well as we commissioned a number of studies and consulting arrangements in the fourth quarter as we closed out the year. So if you look at fourth quarter '17 versus fourth quarter '16, you see the performance actually was pretty good. If we back out the holiday bonus, if we back out the Kahalui gain last year, and if we add back $1.3 million in RSU cost, last year was really as a result of the runup of the stock price last year, which negatively impacts our expense line and comp. The adjusted delta there is about 1%. So if you look at it on a seasonal basis, 4Q to 4Q, we're probably in line with where our expense pattern has been all year. And then, looking forward, Dean?

Yes. So the guidance we provided was about 2.5% to 3.5% over the 2017 expense levels. The one thing I will note there is that, in the first quarter, we do have a seasonal bump in expenses of about $2.5 million. All of that is incorporated into the guidance we provided, but that's related to the incentive payout. Also included is the increase in our minimum wage to $15 an hour in the 2.5% to 3.5% guidance.

Okay. That's helpful. And then, back on the deposits. Just curious, Peter, last quarter, you talked a little bit about kind of going after kind of "your share", market share of retail CDs. Is it your expectation at this point, given that you're kind of letting some of the public CDs run off, that you'd go after more -- continue, I guess, to go after more time deposits on the retail side?

I think so. We had good performance both on the commercial as well as on the consumer time space last year. And so that would -- we would anticipate that to continue for us. And as I mentioned, that's coming in at substantially lower pricing on the government side.

Our next question comes from the line of Jeff Rulis of D.A. Davidson.

Just following up on the [Benia] outlined a capital management plan, and I guess, if you've stated it, there's no reason to fall through, but I guess, given the tax benefit, it's rough math, I guess, around $25 million a year. I guess, that's -- we read that to be the percentage of dividends and share repo. It's just -- it's a greater -- well, a greater number off the higher earning level. Or is there any thoughts on changing, on the fringes, anything from capital deployment?

No. I think, we're going to stay with our current strategy, which is to pay out approximately 50% of net income in dividends and, of course, adding -- retaining enough for our business growth, and then, the remainder would be available for share repurchases. So we're going to pretty much stick to that plan.

Yes. So just to emphasize, Jeff, that the increased proceeds generated by the tax change effective will get captured in our capital management plan that you're familiar with simply because that plan is returning everything back to the shareholder with the exception of growth.

Fair enough. And then, just to -- I wanted to make sure, Dean, I got that correct on the Visa shares. So there, what we're seeing really Q2 on is that, that is basically the carrying cost of holding that. Could you break that out for me? And is that expectation, as long as you're still holding that, that we'd see a drag on a quarterly basis?

Yes. So the Q2 number, and Q4, if you annualize that, that would be the expected cost to carry the shares.

Our next question comes from the line of Brett Rabatin of Piper Jaffray.

Wanted to -- just to go back to expenses for a second. You talked about 2.5% to 3.5% growth and expenses off that 3 58, run rate and merit increases. Are there other projects that are going on? Or can you give us a flavor for anything else you've got in the works in terms of initiatives that might raise your expenses? You had pretty modest growth in expenses last year. So...

Yes. So I'll take a stab at it and Dean can clean up from my comments. The answer's yes. If you add the $15 minimum wage and what's looking to be about a $2.5 million increase for the year in depreciation, that basically gets us to plus 2%. So basically, when we're talking about plus 2.5% to 3.5%, I think the range there, effectively from what we've already input is kind of flat to up a bit, which I think would be about in line with what we've demonstrated over the past couple of years.

Okay. That's great color. And then, just wanted to hear your thoughts on the corporate tax rate cut and just any optimism that, that may have created in Hawaii. And do you think that, that helps -- further in, I realize C&I is not a huge thing in Hawaii relative to the Mainland but just does this help industries in Hawaii? And do you think that you'll see some benefit from that in your lending operations this year?

I'll tell you, I've been somewhat pleasantly surprised by how much perceived impact the tax change is creating. Clearly, we see it in the business community, people feeling like there's just excess capital being freed up here. Yet to be seen what happens on the consumer side but certainly not a negative. So overall, we think it's a modest positive for the local economy out here in the islands.

Our next question comes from the line of Ken Zerbe of Morgan Stanley.

Maybe just more of a read-across question because I'm trying to -- I want to go back to the public deposit pricing of over 1%. I would love your thoughts, like who's doing this? Like why are they are doing this? What's the value to them of being so aggressive on the public side versus trying to gather funding from other sources at cheaper costs? Because I guess what I'm worried about is, is this sort of -- like they're being aggressive in this area and, therefore, in 1 month or 2 months down the road, they're going to start getting aggressive in other areas and what it might mean for you guys.

Yes. That's a good question, and obviously, we've thought about that. The answer to your first question, at least from us, is I don't know. I mean, I think, my guess would be that the state public time deposit space is mostly local, but I think there're probably also some national or international players in that space. On first blush, you'd think that at that pricing, people would seek elsewhere. I think when you look at the loan-to-deposit construct of the 4 major banks in Hawaii, it doesn't really give me pause for concern because everyone's kind of well below that 80-plus-percent level. No one -- I don't think anyone's over 100%. So it doesn't, at least statistically, look like people are being forced into the funding side. So I really -- I can't answer the question, except to tell you that it used to be a pretty nice little pool of funding for us as rates were closer to zero, and as rates have risen, that's just not the case anymore.

Got it. Okay. Second question then, just in terms of commercial real estate, I heard what you said, and I want to clarify that you said there's a slowdown in first quarter? Or was it fourth quarter? And then, I have a real question.

Yes. Fourth quarter was actually okay. And then, just -- it looks like our pipe is overall looking pretty strong for the year 2018, but the first quarter is looking a little weak. And actually, I was just musing as to whether or not that was uncertainty around the tax legislation or not but not exactly sure what the reasoning is there.

Okay. Fair enough. And from a fundamental standpoint, obviously, banks, just in general, have been tightening underwriting standards for, call it, a year, 2 years. Like, are you seeing any kind of, I want to say demand changes based on that or type of borrower changes? Really just trying to get a decent sense of the fundamentals of the CRE market. It still seems really, really good, but obviously, banks have been tightening, and you guys have been tightening -- I'm sure everyone has, to try to proof -- guard against loss in some future period.

Yes. So I think that the market dynamics out here, Ken, are -- the economy is still chugging along just fine. There are a fair amount of projects coming out, a fair amount of CRE opportunities. But there's no denying the fact that we are definitely later in the cycle here. And so I think Bank of Hawaii and probably a lot of other institutions are tightening around the margins. We are seeing more activity in the nonbank fund space, which is what we hadn't seen. In fact, we've been talking for the past year-or-so that, usually, about this time, you start to see that form of competitor. And I'd say, in the last 6 months, we've seen a marked increase in that space. So that would be our thoughts in CRE.

In the nonbank space?

In the nonbank space, right.

Our next question comes from Jackie Bohlen of KBW.

Just a quick follow-up on expenses and a question on severance. In the past, I thought we had discussed that there could be more of that going forward, and we didn't see any in the fourth quarter. So just your outlook on what that might be in 2018, if any?

I think we're going to see some severance costs flowing through in 2018, and they're likely to be episodic. So I can't tell you exactly which quarters, but you'll probably see a few quarters with that kind of activity.

And how -- understanding that this may not be a known quantity, but how do you think it'll compare to 2017's level?

Really tough to tell. But if I were to venture, I'd say comparable to a little bit higher.

Our next question comes from the line of Matthew Keating of Barclays.

I'd also like to ask about the impact of corporate tax reform, specifically on the residential mortgage portfolio. And in particular, I'm interested in any impact you might perceive from the cap on mortgage interest deductibility on the growth of that portfolio this year.

Yes. So we've actually tried to, as best we can, lay that out, reflect -- the input would be a lower tax bite for mid-segment, mass affluent segment, and the outflow would be the reduction in the benefit on the mortgage side. And what -- at least what we have analyzed out is that the net impact to the broader market isn't that great. It's not clear that that's going to have a meaningful impact on the residential mortgage side. Maybe a little bit more impact on the home equity side. And then, where you do see an impact is the deductibility versus the benefit in tax rates is really in the affluent segment. And there, it's -- we'll see how that pans out. But also remember that there's $1 million cap on mortgage deductibility in any event, and that really hasn't changed much from the prior tax bill. So it's something to think about. We'll keep trying to analyze it and figure it out, but I guess our positioning for now is we're not terribly concerned about it.

Okay. Now that's helpful. And maybe could you quantify the impact in the quarter of the release of the valuation allowance on the sale of the low-income housing tax credits?

In total, it was about $3.4 million.

Okay. That's helpful. And then, finally, as it relates to the trust and asset management line item, it's been a pretty strong quarter -- or a pretty strong year rather for the markets, and the fee income there really didn't grow all that much, and so what initiatives do you have in place to show better progress in that area in 2018?

Yes. So we're at about $9.5 billion in AUM. That's actually grown here in the second half of the year. You're right. We seem to be effectively equally trading off market gain for a trust runoff. So we have a pretty big irrevocable book, and as those mature out, oftentimes people choose to take their assets elsewhere. Our experience on the institutional side of late has been pretty strong. So we've had some good success in garnering business there. That's going to continue to be an area of emphasis for us. And then, we've also had a fair amount of success, not so much on the trust side but on the broker-dealer side with our managed account business. And so if you were to look at both of those businesses, we're going to really put a concerted effort into 2018 to provide customers with both options to either come in through the trust side or through the broker-dealer side and, obviously, catering to what's best for them but bottom line of garnering business one way or the other.

(Operator Instructions) Our next question comes from the line of Laurie Hunsicker of Compass Point.

And just wanted to circle back on public funds. The $1.4 billion that you stand as of December 31, do you have a total cost on that?

$1.4 billion? $1.4 billion? Our public funds are...

Or do you have an exact number?

Sure. Our public deposits are $1.4 billion, of which, just over $800 million are time.

Right. Do you have -- actually, do you have a cost on those pieces? In other words, what was the cost on your public funds? What was the cost on the CD portion?

Yes. So obviously, the $838 million is going to be the most expensive. And Laurie, as I mentioned earlier, we don't -- we haven't disclosed pricing in the past, and we're just not going to do that in the future, but I'll tell you, the pricing on that public time book is pretty darn high. It has gotten higher.

Okay. And you mentioned that dropped $300 million fee were up at $1.1 billion.

Right.

I mean, I'm just trying to understand how much of it -- or maybe asked a different way, how much of a margin improvement can we just see on that book being cut in half this year, the public fund? I mean, I look at where the 3-month is, which is where a lot of the public money benches do, and so you're already at 1.43% on the 3-month, right. So it's certainly in excess of 1%. It's gone up sharply.

Yes. It'll be hard to -- I would have to go back and sit down and calculate that. But as of -- if you look at what happened in the fourth quarter, essentially, what happened was our cash balances, so the moneys we hold at the Fed came down almost the same amount as the public time deposits ran off, didn't really impact our income, but it did impact our margin.

Positively.

And do you have just a September balance on your total public funds?

September balance on total public funds was $1.653 billion.

$1.653 billion. Okay. And basically, $1.1 billion was the time piece.

Correct.

Okay. And then, just to go back to expenses and just want to make sure that I understand this here. If I'm looking here at this other, other line with noninterest expense, the $16.3 million, how much of that is seasonal holiday expense-related. I mean, close to $2 million?

No. Not that much. I would have to ballpark it at about less than $1 million.

Less than $1 million. Okay. And then, when I think about 2018 in terms of tax windfall reinvestment, what's the actual dollar amount on that that's going to impact your noninterest expense line? Obviously, you've got wage inflation, other initiatives you're doing. What's an actual dollar amount?

Let me try to understand that again, Laurie. Can you rephrase that for me?

Sure. In other words, as we think about the tax windfall that's, again, not totally dropping to the bottom line because you're doing infrastructure reinvestment, you've given bump-ups. Aside from the onetime bonuses in the fourth quarter, you just raised your minimum wage to $15 a share. Do we have an actual dollar amount? Because I don't know how many of your employees are now $15 employees. Can you just help us understand an actual dollar amount that we're just going to see in full year '18 from the noninterest expense line?

Sure. Yes. So that's a good question. The impact will be not much from a capital spending standpoint directly attributable to the change in the tax law. I mentioned earlier that our depreciation is likely to go up about $2.5 million this year, and that is mostly reinvesting into positive NPV deal, so we'll see it on the revenue line. But that really wasn't -- that was already in the works prior to President Trump signing the bill. So I wouldn't include that. What I would include is the $15 minimum wage, and that's $2.2 million. And then, we are all -- we are accruing our value share for our broad employee base at the new tax number. So the impact of that is probably $700,000. So all in all, that's, call it, $3 million that's coming about as a result of the tax change, and that's effectively what you'd net out of the benefit. Just as an asterisk, on the executive compensation plans, we have not made any adjustments to those plans as a result of the tax change.

At this time, I'd like to turn the call back over to Ms. Wyrick for any closing remarks. Ma'am?

I'd like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. As always, feel free to contact me if you have additional questions or any further clarification on any of the topics discussed today. Thanks, everyone, again, and have a great day.

Thank you, ma'am. And ladies and gentlemen, that does conclude today's conference. Thank you for your participation, and have a wonderful day.