East West Bancorp Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 14 speakers on the call.

Operator

Good afternoon, and welcome to the East West Bancorp's 4th Quarter and Full Year 2023 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Adrienne Atkinson, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and thank you, everyone, for joining us to review EastWest Bancorp's 4th quarter and full year 2023 financial results. With me are Dominic Ng, Chairman and Chief Executive Officer Christopher Delmorrill Niles, Chief Financial Officer and Irene Oh, Chief Risk Officer. This call is being recorded and will be available for replay on our Relations website. The slide deck referenced during this call is available on our Investor Relations site.

Speaker 1

Management may make projections or other forward looking statements, which may differ materially from the actual results due to a number of risks and uncertainties. Management may discuss non GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8 ks filed today. I will now turn the call over to Dominic.

Speaker 2

Thank you, Adrienne. Good afternoon and thank you everyone for joining us for our year end earnings call. 2020 was another record breaking year for East West. Our highlights include new record levels for revenue, Net interest income, net income, loans and deposits. Our 2023 results speak to the resilience of our business model, the loyalty of our customers and the persistence of our bankers.

Speaker 2

Despite the turbulence in the early half of the year, we grew customer deposits by 1,000,000,000 in each of the past two quarters. We did this by adding 40,000 new deposit accounts over the past year, both consumer and commercial and driving a more granular deposit base. Our loan growth was driven by our differentiated residential mortgage product and the strength of our commercial lending relationships. Asset quality remains strong and we continue to proactively manage our credit risk. Our 2023 annual net charge offs to average loans were just 9 basis points End of non performing assets to total asset ratio was just 16 basis points at year end.

Speaker 2

We continue to deliver industry leading efficiency, supported by our simple, proven business model and effective branch network. Our efforts drove a 20% adjusted return on average tangible common equity and a 1.7% return on average assets in 2023. Looking forward, we remain focused on driving core deposit growth and we are pleased by the early progress on continued Net new customers and balances as we begin 2024. We have started the New Year From a position of strength, given our earnings stability, solid credit performance and strong capital levels, I am pleased to announce that our Board of Directors has approved a 15% increase to the quarterly common stock dividend to $0.55 per share. I will now turn the call over to Chris to provide more details on our Q4 financial performance.

Speaker 2

Chris?

Speaker 3

Thank you, Dominic. Our Q4 20 23 net income was $239,000,000 Excluding the one time FDIC charge and security gains, our Q4 adjusted EPS was 202. Turning to loans on Slide 4, East West grew total average loans by 9% for the year, reflecting the strength and scale of our core residential mortgage and commercial real estate platforms. We note that over the last 5 years, East West has grown loans at a very healthy 10% compounded annual growth rate. Demand for residential mortgage remained quite strong.

Speaker 3

Despite the generally rising rate environment, we originated 3,500,000,000 of low risk, low LTV mortgages in 2023. And while we expect growth to moderate from Q4's trend, our pipelines remain resilient going into the Q1 of 'twenty four. Average CRE balances grew in 'twenty three as we continue to work with long standing relationship clients. We saw solid increases in both multifamily and industrial property lending, while office loans declined. Looking at the Q4 end of period balances, our 4th quarter growth was driven by an uptick in C and I utilization and continued solid residential mortgage originations.

Speaker 3

Looking forward, assuming the economy moderates into a soft landing, We expect overall loan demand to moderate as well. We expect our growth will continue to be driven by strong residential mortgage activity and continued growth in C and I lending, leading to a further and better diversified loan portfolio. Moving on to deposits. We note that over the last 5 years, East West has grown deposits faster than loans overall. Despite volatility in the first half of twenty twenty three, East West continued to grow average deposits year over year.

Speaker 3

We continue to show deposit momentum in the 4th quarter by adding another $1,000,000,000 in deposit balances. Our growth reflects the focus and dedication of our bankers and the loyalty and resilience of our broad based customers. Looking forward, we will continue to focus on adding granular low cost and business deposits, while continuing to reduce our use of non core brokerage or wholesale funding. Turning to net interest income and margin on Slide 6, q4 dollar net interest income increased by 1% to $575,000,000 from the 3rd quarter. We held our net interest margin stable at 3.48%.

Speaker 3

While our $4,250,000,000 of cash flow hedges continued to be a net drag on NII in Q4, On a mark to market basis, some of these forward looking hedges are now in the money and expected Rate cuts will only make that better. While these hedges cost us approximately 25,000,000 of NII in the 4th quarter, They're expected to provide valuable earnings protection as rates decline. Given the current forward curve and consensus economic outlook, We expect NIM to decline by 3 to 5 basis points in Q1 as deposit costs continue to normalize and new asset yields continue to flatten out. We then expect our margin to be further compressed in Q2 and Q3 as a result of the expected rates moving lower. NIM likely troughed in Q3 and we expect it to begin to rebound thereafter As assets grow, expected lower funding costs kick in and the expected Positive cash flow benefits from our balance sheet hedges begin to offset lower asset yields.

Speaker 3

Speaking of asset yields, let's turn to Slide 7. Our expectation for margin resilience is also supported by the enhanced levels of fixed rate assets in our portfolio at year end. Fixed rate and hybrid loans in a fixed period represented 42% of our loan portfolio at year end 'twenty 3 versus 35% at the beginning of 2022. Turning to funding costs on Slide 8, Our average cost of deposits for the Q4 was 2 60 basis points, up 17 basis points from the 3rd quarter. As Dominic previously mentioned, we remain laser focused on driving core deposit growth and growing net new customers and balances as we begin 2024.

Speaker 3

Looking forward, we are optimistic about our operational ability to rapidly reprice non time deposits in a falling rate environment. Moving on to fees and non interest income, East West has grown fee income at a 10% annual rate over the past 5 years. 2023 fee income growth reflected continuing strength in our customer derivatives business, lending fees and foreign exchange income. We note that Q4 saw growth in every fee categories. Moving on to Slide 10, total annual adjusted non interest expense trends are on the left.

Speaker 3

Adjusted non interest expense has grown 7% annually over the past 4 years compared with our 11% annual revenue growth. East West consistently delivers industry leading efficiency. The 4th quarter adjusted efficiency ratio was 33.1% compared with 31.2 in the prior quarter. Adjusted non interest expense was 215,000,000 in the 4th quarter. Comp and benefits did increase $8,000,000 reflecting higher commissions and incentive accruals and other operating expenses did increase $6,000,000 reflecting some increased legal expense, realized credit card fraud offers and some advertising expense.

Speaker 3

Looking forward, we expect adjusted non interest expenses to increase in the range of 6% to 8% year over year, driven primarily by comp and benefits and partially offset by lower deposit account expense as earnings credit and related rate driven expense pressure begins to ease in the lower rate environment. I will now turn the call over to Irene discussion of our asset quality and capital position. Irene?

Speaker 4

Thank you, Chris, and good afternoon to all on the call. As you can see on Slide 11, the asset quality of our portfolio remains broadly stable. During the 4th quarter, We recorded net charge offs of $20,000,000 or 15 basis points, a 1 basis point increase from the 3rd quarter. Quarter over quarter, non performing assets as of December 31, increased modestly by 1 basis point to 16 basis points of total assets. The criticized loan ratio decreased 14 basis points from September 30 to 1.87 of loans held for investment.

Speaker 4

Mentioned loans ratio decreased 18 basis points quarter over quarter to 77 basis points total loans held for investment as of December 31 and the classified loans ratio increased 4 basis points to 110 as credit continued to normalize. We remain vigilant and proactive in managing our credit risks. We recorded a provision for credit losses of $37,000,000 in the 4th quarter compared with $42,000,000 for the 3rd quarter. Turning to Slide 12. The allowance for loan losses increased 13,000,000 quarter over quarter, primarily reflecting net loan growth.

Speaker 4

The allowance for C and I loans increased 9,000,000. The allowance for commercial real estate loans increased 4,000,000 and the allowance for resi mortgage and consumer remained unchanged from the prior quarter. The reserve for office loans increased by 2,000,000 to 2.43 basis points of total office loans. We believe we are adequately reserved for the content of our loan portfolio given the current economic outlook. Turning to Slide 13.

Speaker 4

As shown on this slide, all of our capital ratios expanded quarter over quarter due to the strength of our earnings. East West CET1 capital ratio stands at a robust 13.3%, while the tangible common equity ratio grew 34 basis points to 9.37%. These capital levels place us among the most well wise banks in the industry. East West Board of Directors has declared Q1 2024 dividends for the company's common stock, resulting in a 15% increase in the dividend. The quarterly common stock dividend of $0.55 per share will be payable on February 15, 2024 to stockholders of record on February 2, 2024.

Speaker 4

East West repurchased 1,500,000 shares of common stock during the Q4 of 2023 for 82,000,000. We currently have $172,000,000,000 of repurchase authorization that remains available for future buybacks. I'll now turn it over to Chris to share our outlook for the 2024 full year.

Speaker 3

Thank you, Irene. To summarize as stated on Slide 14, Our full year 2024 outlook assumes a softening economy with a more modest growth profile in 'twenty three and takes into consideration the year end forward curve with cuts assumed to begin in the second quarter. We expect end of period loan growth in this environment to be in the range of 3% to 5%, driven by moderating demand, but do lead by a relative strength in our residential mortgage and C and I lending activity. We expect net interest income to decline in the range of 4% to 6 percent driven by the expected rate cuts. Adjusted non interest expense is expected to increase in the range of 6% to 8%, driven again primarily by comp and benefits and partially offset by lower deposit related expenses.

Speaker 3

1st quarter net charge off levels are expected to be in line with the Q4 of 'twenty 3 With subsequent quarters increasing modestly as we expect full year net charge offs will fall within the range of 15 to 25 basis points. We expect our effective tax rate will increase modestly for the full year. With that recap, now let me turn the call back to Dominic for his closing remarks.

Speaker 2

Thank you, Chris. Let's go to Slide 15. As I look back, I'm very proud of our strong performance in 2023 marked by 18% growth in tangible book value per share year over year and by recognition from S&P Global, Forbes and Bank Director as a top performing American Bank. I also would like to thank our associates for their unwavering dedication to our clients. As Chris mentioned, Economists are projecting a softening economy and a declining rate environment in 2024.

Speaker 2

But at East West, our goals remain the same, which are to help our commercial clients thrive to meet the savings and investment needs of our branch customers and to operate with strong capital and prudent risk management, allowing us to deliver top tier returns to our shareholders in any environment. I will now open the call to questions. Operator?

Operator

We will now begin the question and answer session. The first question comes from Ebrahim H. Poonawala with Bank of America. Please go ahead.

Speaker 5

I guess maybe first question for Chris, just around the NII outlook the sensitivity to the rate cuts. So it seems like the down 4% to 6% assumes the 6 state cuts that were there in the forward curve. Give us a sense of what if we get 0 rate cuts or just get 3 rate cuts, should we assume proportionately NII holds up a lot better? And If we don't get rate cuts through until maybe even May, are you doing taking further actions to kind of neutralizing the balance sheet?

Speaker 3

Yes, yes and yes. So yes, if there are not as many rate cuts as we projected at year end, and I will do better. Yes, if rate cuts start later, NII will do better. And yes, we are proactively taking a number of steps to make sure we manage our sensitivity to rates, but in particular, our focus on deposits is one that we think will yield us some benefit as we move through the course of the year.

Speaker 5

Noted. And I guess maybe another question, Dominic for you. So you managed through last year very strong results, you have solid capital levels. It feels like there's fair amount of disruption just across the banking sector, maybe in terms of people moving, loan portfolios, maybe banks up for sale. Just give us a sense in terms of when you're looking at 2024, how do you see the opportunity set in terms of actually putting investment dollars to work and capitalizing on the disruption out there?

Speaker 2

Well, we actually continue to look into the market and see To a certain extent, obviously, we all saw what happened last year that a lot of our larger peers, well, 2 of them were gone and then some of the other peers are having some Financial difficulty or transitioning and whatnot. And so from that, from a competitive landscape, I think it is marginally better for East West Bank, but we have always been prudent and the reason we didn't get into trouble is because we don't try to go all out in any one particular direction. We're always trying to look at making sure that we have a diversified portfolio. So in terms of recruiting talents So we are very selective. We're trying to make sure that there are talents out there that have the right mindset that fit into the East West culture and also they are in the kind of like business that fit into our sweet spot and then we will bring them over.

Speaker 2

And we'll continue to be out there recruiting and looking for the right talents to join us and together with our own associate who continue to grow. And So we feel that 2024, we cannot predict exactly what the economy is going to be like, But we do know what East West can do, which is that our team will find a way to continue to bring in new customers and we'll be able to continue to help support our existing customers and with that, we'll be able to grow deposit, we'll be able to grow loans and also have meaningful fee diversified fee income. And that's the plan.

Operator

The next question comes from Ben Gurlinger with Citi. Please go ahead.

Speaker 3

Good afternoon, Ben.

Speaker 6

I was just talking about deposit beta assumptions. I guess the forward curve is

Speaker 3

So Ben, I think we missed a good portion of your question, but I think your question was broadly around deposit betas And how do we think deposit betas unfold? And so I think there's a couple of thoughts here. The first part is we had a reasonable uptick in deposit beta as rates rose, we would expect to have a reasonable downtick in deposit pricing as rates fall. Specifically, we are expecting our positive beta to be north of 0.5 on the downtick. And I think that is A 0.5 that we recognize we could be more aggressive on, particularly if rate cuts come sooner or faster.

Speaker 3

And we would note that we think there is upside to that level if we can get our arms around the pace of cuts that we expect. And I think that will be Fed path dependent, but I think we're very comfortable that there's upside to that if we can get some clarity on that as we move through the course of the year. Got it. And then, Sterling Gerlinger, if you

Operator

could pick up a handset perhaps if you're on a speakerphone Any chance?

Speaker 6

Yes, sorry about that.

Speaker 7

Next question, I

Speaker 6

was curious from just the Got on interest expense guide. I know you kind of back out a few things due to your call over the main

Speaker 3

I'm just trying to think at

Speaker 5

the 6%

Speaker 6

to 8% growth, adjusted number,

Speaker 3

how should

Speaker 6

we think about the existing GAAP perspective and kind of look back and all things that can do it? And is there anything you can do to be a little bit more aggressive if revenue is lighter or potentially higher end of looking at the possibilities for

Speaker 3

We continue to see 2024 as a year for continued investment in our core businesses and platforms. And so while we recognize that up 6% maybe a higher number than you've heard from some others, we would also suggest 33% efficiency ratio is a much better start point than you have from many others. And we think that's the right decision to make for the long term of East West Franchise. Got you. We would also note that 6% growth off of 33% efficiency is a lot lower than 6% growth, say, off of a 65% just for conversations.

Operator

The next question comes from Dave Rochester with Compass Point. Please go ahead.

Speaker 8

Hey, good afternoon, guys. Under NII guide, what are you guys assuming for deposit growth in that? And what are you baking in for the BTFP maturity that's coming up. And if you can just give like a rough estimate, what are you seeing in terms of what a single cut means from a margin or NII impact at this point, just given the assumptions that you talked about on deposit betas?

Speaker 3

Yes. So We fully expect to fund all of our loan growth with core deposit funding. We expect to pay down BTFB over the course of the year. It Rolls over in March, we'll pay down some, we'll roll over some and we'll be exiting the program in all likelihood by year end. And with regard to sort of the rate sensitivity, it's somewhere in the $1,500,000 to $2,000,000 per cut per month is one way to think about it.

Speaker 3

And I think we're sort of working our way through that, but that's in the zip code.

Speaker 8

Great. And then the pay down of the BTFP, is that are you expecting to do that with deposits? Or could you fund that with some wholesale funding as well?

Speaker 3

Well, at the March date, we'll pay down some, we'll roll over some, we'll have some securities coming due, we'll have a variety of other things. If we have better than to deposit growth, we'll certainly avail ourselves of that better deposit flow. But whatever is left over, we'll just refinance at the end. Great.

Speaker 8

And then maybe one last one on the loan pipeline. It sounded like that was looking pretty good. Obviously, you're expecting to grow loans really faster Then other larger banks, how are you thinking about the composition of that growth this year? Can you just go through some of the puts and takes on that, that would be great?

Speaker 3

Yes. The pipeline strength that we're seeing today is primarily on the residential mortgage side, which has been a strong contributor to our growth over the past year and we expect we'll be the strongest contributor here certainly over the near term.

Speaker 8

Okay, great. Thanks guys.

Operator

The next question comes from Gary Tenner with D. A. Davidson. Please go ahead.

Speaker 9

Thanks. Good afternoon.

Speaker 3

Good afternoon, Gary.

Speaker 6

Just a quick follow-up question on the loan growth guide. Given the strength of growth in the back For the year near 10% annualized, I would have thought it would be maybe a little higher than that. Just wondering about kind of the C and I activity in the 4th quarter, was there any sort of pull forward or draw downs that were more seasonal in nature that were kind of Normalized here early in the Q1 that would impact the point to point loan growth outlook?

Speaker 3

We did see an uptick in utilization in December. And so that utilization rate, as you may not be surprised, came back a little bit in January. But nonetheless, we would expect C and I to be additionally a contributor to our 2024 growth. But as I just mentioned to Mr. Rochester, I think Residential growth will lead the way.

Speaker 3

And from what we're hearing and seeing from our activity levels on the CRE side, CRE will be a muted level of growth net for the year.

Speaker 4

And I'll just add, the C and I utilization at year end, the are not that different, let's say, from the prior year as well. It will pick up at year end. It's pretty normal for us.

Speaker 6

Yes, got you. And then just as a follow-up, in terms of your guidance, in the past, When the and I had a chance to look back and I apologize. Have you not guided to also a fee income Growth rate, correct me if I'm wrong, if that's not the case, but if it was curious as to why you did not discover it?

Speaker 3

I've only been here one quarter, but it wasn't in last quarter's numbers.

Speaker 6

Okay. Fair enough. I apologize. I didn't have a chance to take a look back prior to asking the questions. All right.

Speaker 6

Thank you.

Operator

The next question comes from Casey Haire with Jefferies, please go ahead.

Speaker 10

Yes, thanks. Good afternoon, everyone. Maybe first one, just apologies if I missed this. The expense guide, is that ex amortization Or does that include that? And if so, what is the tax amortization expense going forward?

Speaker 3

It is Excluding the one time items and excluding the tax amortization. So, it's what we report is adjusted expense, which is net of those things. So, It's a clean operating expense level and we think the clean level comes up a bit.

Speaker 10

Okay. But there will be a tax amortization Yes, hitting the P and L, correct?

Speaker 3

There will be, yes. And so the tax amortization expense, as you can see from this quarter's numbers, can sometimes bounce around from quarter to quarter. We haven't given you a specific guide for that, but we're also looking at adopting TAM, which is a new accounting standard for that, which may move the numbers around geographically. So, there will probably be a reduction year over year in amortization expense and a slight uptick in the tax rate as a result, but those 2 will net out to the bottom line.

Speaker 10

Got you. Okay. Thanks for clearing that up. And then Just switching to capital, just thoughts on buyback appetite going forward with a still strong 13.3 CET1?

Speaker 4

Well, that's correct. We do have strong capital and that's something we're very proud of. We do have the remaining authorization. Certainly, that's something that we'll evaluate over the course of the coming months.

Operator

The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Speaker 11

Hi, good afternoon. On the NIM trough in the second half of twenty twenty four is A little later than what others are suggesting, hear your comments on the 50% beta on the downside, But are you modeling some sort of lag into your deposit betas in the way down? Because I know you also mentioned that the NIM should rebound in 2025 after the lower funding costs kick in. So I was wondering if there's a little bit of a lag there.

Speaker 9

There is a little bit of

Speaker 3

a lag, I would say, driven by the fact that you have to remember, we have a fair amount of CDs on the books. And so those CDs, for example, our Lunar CD special that's in the market today will be in place for the next 6 months. So we'll book those here January February. They'll be with us until July, August. And so there'll be a bit of a lag because of those CDs that we're pricing today versus what will happen.

Speaker 3

So again, depending on the timing And the pace of rate cuts, we could outperform that. And certainly, as those roll over 6 months from now, we would expect to fully participate and the benefit of those lower responding costs at that point in time.

Speaker 11

Great. And maybe flipping over Credit, there remain a lot of concerns around California Commercial Real Estate. Can you talk about why your book is different and also what you're hearing from borrowers right now and how negotiations are going given that given the outlook for lower rates coming up?

Speaker 4

Yes, thanks. That's a great question. And as you can see from what we've reported, when we look at The criticized classified assets, those ratios, the non performing loan ratios, the criticized loans are down, Non performing loans are down. We're pleased with that. As we look at the different categories, office, multifamily, With the CRE, now we're comfortable with the loan grades.

Speaker 4

We're also very pleased to see that there are not a lot of new problem loans that are coming up. So overall, these conversations with customers, certainly there are some that we're working through, But it's very manageable at this point and we're very pleased to see that. All the efforts and work that we went through the last couple of years to shore up borrowers, have them pay down, have them swap, buy cap, those are all things that we see as positive today.

Speaker 2

Also as we highlighted in the previous calls before that we don't have That many loans mature, well, neither in 2023 nor in 2024, we have a very small percentage of loans coming due. So we actually really don't have much opportunity to have too many compensation with our customers in terms of dealing with some of the challenge when it comes to refinancing. And keep in mind that we have Very low LTV and our portfolio is quite granular. So I think that's the reason why our portfolio so far stands up really well versus some of the other banks.

Speaker 11

Got it. And sorry if I missed it, but did you update what your reserve levels were on CRE Office? And if it's still around 2.3% or so as it was last quarter. Can you talk about what keeps you comfortable with that level of reserves?

Speaker 3

It's on Page 12 of the slide deck and it was $243,000,000 at year end, which is up obviously from the $2,300,000,000

Speaker 11

Got it. And what keeps you Yes.

Speaker 4

Office and all of CRE, we have a rigorous process where we go through the portfolios, our RMs, our team leaders, credit supervision, all work together. And I think as we're going through these loan reviews on a regular basis, the cash flows from the clients, the properties, Those are all things that help us and the cash quite candidly and the network many of our borrowers and going towards that are all things that give us comfort.

Operator

The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 12

Hey, good afternoon. Thank you for the questions. First one just around deposits, if you can speak to kind of your outlook on non interest bearing down here this quarter, just your expectation on where that might trough relative to the mix? And then, it also looks like your Chinese New Year special is 5.25 on your website. So just thoughts there around kind of growth going forward.

Speaker 12

Is it going to continue to be dominated by CDs?

Speaker 3

In the near term, we expect CD growth certainly in the Q1 to be a significant contributor. Our current Lular CD special will attract good flows. It's been out there for about a week and the early read on that has been very positive, both on the consumer side and in the private banking client base. So we're encouraged by that and that will result Partly in some of the deposit compression, we expect to see in the Q1. With regard to overall levels of non interest bearing demand accounts, we have previously bottomed out in the high 20s.

Speaker 3

We were at 27%, 28% at sort of a low point. We think we are trending in that level today and we think that is a relative benchmark from which we will grow from over time.

Speaker 12

Okay. And then just on some spot rates, it looks like that that fly is no longer in there, that detail. Do you have the spot rate on deposits At year end and then just a related well, on the other side, on the resi mortgage book, you show a rate sheet price for 30 year fix is 788, your portfolio is at 549, which obviously includes hybrids. But Can you give us a sense for kind of the spot rate on that book as well? You would think you get some decent lift out of that So, 2 questions within there, sorry.

Speaker 2

Yes. So, I

Speaker 3

would say, we have started to see, aside from the CDs, Other deposit rates basically flattened out and some even start to trend lower. And on the mortgages, yes, it was 7.88% at year end and it's in the 7 point as we sit here today.

Speaker 4

The spot rate on deposits at year end was 2.65.

Speaker 12

Okay. Thank you.

Operator

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Speaker 9

Hey, thanks. Good afternoon, everybody.

Speaker 3

Good afternoon.

Speaker 9

I wanted to circle back to the expense guidance Just a little bit. Can you talk maybe, Chris, just about how we should expect the expense run rate progress throughout the year. It feels like we could see kind of a seasonal bump earlier in the year and then kind of run rate moderation to the back half, especially to get the forward curve to play out and you get that relief from the deposit costs. So any color on kind of the run rate throughout the year on expenses would be helpful?

Speaker 3

I think you've called that correctly. So we're not going to see a material savings in deposit related Costs in the Q1, absent some Fed rate action and maybe even a slight delay into the 2nd quarter. So those cost savings and those benefits will really come in the 3rd Q4. And on the other side, we are going to see an increase in our comp and benefit expense as we move through the Q1 as we go through the normal round of salary adjustments that we do here every year. And so as those numbers roll through, which will pick up at the end of the Q1, they'll impact expenses a little bit in the Q1 and then we'll see the offsets coming as rates decline later in the year.

Speaker 9

Okay, great. I appreciate it. And if I can also ask just as we think about maybe the opportunity for some of The BTFP reduction that you talked about earlier, can you just remind us the cash flow you'd expect off the bond book coming in 2024?

Speaker 3

Roughly $250,000,000 or $250,000,000 a quarter.

Speaker 9

Okay, great. I appreciate it.

Operator

The next question comes from Brandon King with Truist Securities. Please go ahead.

Speaker 6

Hey, good afternoon. Good afternoon.

Speaker 7

So on the strong C and I loan growth in the quarter and I didn't see this in the deck, but could you comment on what the utilization levels were and then just give us your expectations for utilization levels and if we could potentially see maybe potential uptick if rates come down?

Speaker 3

Utilization level was 67% at year end. I think when we look about when we think about uptick, it's a Demand dependent question though. And we would say in a softening economy, we don't expect demand to run away with that number in 2024.

Speaker 7

Okay. And then Lastly, just on the hedges you have and the stocks you have, how do you currently feel about your position and are you looking to potentially add more?

Speaker 3

Yes. I feel that we certainly got comfort in the Q4 that our forward starting hedges were a good call. As I mentioned in my comments, Some of them are already in the money. So you don't usually put a trade on expecting to be in the money in the same quarter, but I'm glad we did. And we're looking forward to an outlook that should have those cash flowing as we move to the end of the year, which is always a wonderful thing.

Speaker 7

Got it. So feel pretty comfortable where you're at, is a fair way to say it?

Speaker 3

Absolutely. Okay.

Speaker 7

Thanks for taking my questions.

Speaker 3

Thank you.

Operator

The next question comes from Brody Preston with UBS. Please go ahead.

Speaker 13

Hey, good afternoon, everyone. I just wanted to follow-up On a couple of things real quick on the NII, the cash flow hedges, are there any maturities through 2020 5 on the swaps that we need to be aware of. And then, you said earlier that you expected a 0.5 deposit beta on the way down. Just wanted to clarify if you that was 50% interest bearing deposit beta on the way down through 4Q 'twenty four, is that a correct interpretation?

Speaker 3

Yes, that will we will save at least half of every move in the Fed funds rate that the Fed engineers in the form of the reduced deposit costs collectively across our deposit base on the interest bearing deposits. With regard to the Cash flow hedges, there really are no material maturities in 2024. However, 2 of our Earliest or oldest trades will actually mature early in 2025 and there are 2 of the lowest strike points. So it gets better as we move into 2025.

Speaker 13

Okay. Do you happen to have the dollar amount of those 2 hedges?

Speaker 3

Yes. Those two hedges are both underwater at $2,000,000,000 And so they are currently part of the drag. And as we move through 2024, obviously, as rates decline, they incrementally improve as well. But When they go away, there'll be probably a net pickup in 2025 in the Q1.

Speaker 6

Okay.

Speaker 13

And then, Chris, my last one, I just wanted to clarify on the tax stuff. We've seen a couple other banks, I think, adopt that this earnings season where I think effectively the amortization almost went to 0 and it's going to show up in a higher tax rate. Just wanted to ask if you guys adopted that treatment, should we expect something Similar. And if so, I know that you guys have some lumpy amortization. So would that kind of introduce quarter to quarter kind of peaks and valleys in the tax rate itself?

Speaker 3

Yes. So our goal in adopting PAM will be to dampen out the volatility that you've seen to introduce a greater level of stability and it will help us on certain of the tax credits. However, on those tax credits, such as the energy tax credits that we placed into service on as project completed basis, That level of volatility from when the projects get placed in service will continue to be with us and will continue to flow as amortization in sort of above the line. So we will not go to 0. It will be dampened and reduced, it will be both a function of how much we do in the different types of credits and how we moderate that activity as we think about making this a less volatile component of our expense room moving forward.

Speaker 6

But our goal is to make it

Speaker 3

less of a talking point and more of a steady state number for you guys.

Speaker 13

Awesome. I appreciate it. Thank you.

Operator

The next question comes from Timur Braziler with Wells Fargo. Please go ahead.

Speaker 2

Hi, good afternoon.

Speaker 5

How should

Speaker 2

we think about the How should

Operator

we think about the interplay of lower interest rates in your residential product? Is that seems pretty rate agnostic. Does demand actually pick up as rates fall? And then just maybe talk more broadly what factors impact that line item most?

Speaker 2

Yes. Well, I think it's a relatively unique product that really cater to our core Asian American customers. And we always think that The rate is not anywhere like a sensitive like these traditional Fannie Mae, Freddie Mac type of products. So we feel pretty good about even when rates start going down, the rate reduction from our Home mortgages would not be going in the same proportionally higher pace like the normal products in the market.

Operator

Got it. Okay. And then looking at your multifamily portfolio, can you provide the composition geographically there? And more specifically, what Portion is in New York City and what portion of that is rent regulated?

Speaker 4

Yes. So we have of our $5,000,000,000 multifamily portfolio, the vast majority is in California and also in Southern California, in our backyard where a lot of our presence is, Pasadena, San Gabriel Valley, those areas are the largest sector. In New York, entire state of New York, we have under $300,000,000 and there is no rent regulated exposure.

Speaker 3

Okay, great. Thank you.

Operator

And we have a follow-up from Ebrahim H. Poonawala with Bank of America. Please go ahead.

Speaker 5

Thank you. Just another question in terms of when we think about deposit liquidity, Loan to deposit ratio around 93%. Just structurally, do you expect the bank will operate with a 90% plus loan to deposit ratio more

Speaker 4

or less or do you

Speaker 5

see that as resetting lower? And on the asset side, do you expect east to west to run with a Larger securities book, more HQLA securities, etcetera, even though you fall well below the $100,000,000,000 threshold The Fed has kind of identified as the dividing line. Thank you. I

Speaker 3

think broadly the answers are yes and yes. Yes, we expect to operate and sort of the lower 90s from a loan to deposit ratio, we think that's a comfortable place to be. And over time, yes, It's likely our portfolio will migrate to be more HQLA like in profile.

Speaker 5

Got it. Thanks for all the yeses.

Speaker 3

My pleasure. Always happy to say yes to the agreement.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

Speaker 2

Again, thank you all for joining our call this afternoon. And we are looking forward to speaking to you again in April. Back to you, operator.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
East West Bancorp Q4 2023
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