East West Bancorp, Inc. (EWBC) Earnings Call Transcript & Summary

Good day, and welcome to East West Bancorp's Second Quarter 2026 Earnings Call. [Operator Instructions] 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.

Thank you, operator. Good afternoon, and thank you, everyone, for joining us to review East West Bancorp's Second Quarter 2026 Financial Results. With me are Dominic Ng, Chairman and Chief Executive Officer; Chris Del Moral-Niles, Chief Financial Officer; and Irene Oh, Chief Risk Officer. This call is being recorded and will be available for replay on our Investor Relations website. The slide deck referenced during this call is available on our Investor Relations site. 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-K filed today. I will now turn the call over to Dominic.

Good afternoon, and thank you for joining us for our second quarter earnings call. I'm pleased to report that East West earned record total revenue, net interest income and non-interest income in the second quarter. These results were driven by new record levels of loans and deposits. End-of-period deposits grew by 8% year-over-year with strength across all deposit product categories. Notably, demand deposits accounted for more than 2/3 of this quarter's total increase. Our continued focus on providing solutions to our customers helped drive a 19% increase in noninterest-bearing deposit year-over-year. End-of-period loans were up 7% year-over-year with growth in residential mortgage and C&I further increasing the diversification of our portfolio. Noninterest income also grew to a new record in the second quarter and is up over 20% year-over-year. This performance has been driven by consistent execution across all our fee-based businesses. In particular, we see continued growth opportunities in wealth management and have been proactive in building out this business. Our credit quality remains strong. Nonperforming assets, criticized loans and net charge-off levels all remained broadly stable and continue to reflect our disciplined approach to risk management. Our capital position remains a key advantage for East West with a tangible common equity ratio of over 10%, on which we generate a 17% return. We believe our financial strength and customer-focused strategy position us to deliver sustainable growth and long-term shareholder value. I will now turn the call over to Chris to provide more details on our second quarter financial performance. Chris?

Thanks, Dominic. Let's start with the deposit slide on Page 4. Our end-of-period deposits grew by $1.2 billion across our more than 700,000 customer accounts. Demand deposits were up $875 million during the quarter, which accounted for the lion's share of the growth. Average DDA was up 15% year-over-year, reflecting the continued success of our small business checking campaigns and positive flows from tariff refunds across hundreds of our accounts. Our DDA mix grew to 20% -- 26% of total deposits due to core relationship growth. We continue to shift away from CDs, wholesale and public funds deposits and further emphasize core DDA. This ongoing shift helped us to support the margin and control our deposit costs during the quarter. Turning to loans on Slide 5. As Dominic mentioned, we continue to diversify our loan portfolio by emphasizing growth in residential mortgage and C&I. Residential mortgage was this quarter's standout with over $300 million of net growth. We remain committed to our conservative underwriting approach as we continue to maintain a 52% average portfolio LTV in our residential book. C&I lending balances were also up over $300 million in the second quarter, with notable growth in lending to financial services, equipment finance and lessors and manufacturers and wholesalers. Our NDFI balances increased by just $24 million, reflecting expected paydowns in our private equity loan book and consumer credit portfolios, which we had anticipated and relayed last quarter. Overall, C&I loans are up 11% year-over-year, representing over $2 billion of net growth in that period. Given the 7% level of growth we've seen over the first half of the year and the pipelines that we see looking into Q3, we are updating our guidance for the full year loan growth to now be in the range of 6% to 8% by year-end. Switching to NII and margin trends on Slide 6. Quarterly dollar net interest income grew to a record $685 million, reflecting our balance sheet growth and improving mix shift. Our net interest margin came in at 3.43%, reflecting 1 less day in the quarter, in line with our guidance and up notably 8 basis points year-over-year. Our positive deposit remixing trends continued during the quarter and allowed us to further reduce our deposit costs, driving a 6-basis points reduction in our period-end deposit cost. Looking back over the past year, we have decreased interest-bearing deposit costs by 49 basis points against the backdrop of 75 basis points of cuts in the Fed funds target. Given our robust NII growth year-to-date, we now expect full year NII growth to be in the range of up 7% to 9%, an improvement from the prior guidance range of 6% to 8%. Moving on to fees on Slide 7. Quarterly fee income grew 19% year-over-year to $96 million. While total fee income was down $3 million from Q1, this largely reflects the record wealth management results we reported in the first quarter and a slight downtick in some derivative activity. Nonetheless, loan and deposit-related fees were up 14% year-over-year, reflecting our ability to grow fees as we grow the balance sheet. We remain focused on driving a healthy level of fee income and further diversifying our revenue streams. We are on track to deliver double-digit year-over-year growth in fee income for 2026. Turning to expenses on Slide 8. Total operating noninterest expenses were $268 million for the second quarter. Comp and benefits costs were flat quarter-over-quarter. However, we expect the level of comp and benefits to actually moderate over the back half of the year. Other expense categories experienced an uptick as we continue to invest in people and platforms to sustain growth. Nonetheless, East West delivered another quarter of industry-leading efficiency. The Q2 efficiency ratio was 36.7%, consistent with the prior periods, and our operating noninterest expense to average assets ratio remained flat at 1.29%. Based on our year-to-date trends, we are narrowing our full year expense growth guidance range to 8% to 9% versus last year. I will now hand the call over to Irene for comments on credit and capital.

Thank you, Chris, and good afternoon to all on the call. As you can see on Slide 9, our asset quality metrics held broadly stable. Quarter-over-quarter, nonperforming assets saw a slight uptick of 3 basis points to 29 basis points as of June 30, 2026. We recorded net charge-offs of 19 basis points in the second quarter or $27 million compared to 9 basis points in the first quarter or $12 million. We are reaffirming our guidance range of 15 basis points to 25 basis points for the full year. We recorded a provision for credit losses of $33 million in the second quarter compared with $36 million for the first quarter. Overall, we continue to remain vigilant and proactive in managing our credit risks. Turning to Slide 10. The allowance for credit losses increased $6 million to $842 million or 1.43% of total loans as of June 30, reflecting quarter-over-quarter loan growth and portfolio mix shift. We believe we are adequately reserved for the content of our loan portfolio given the current economic outlook. Turning to Slide 11. All of East West's regulatory capital ratios remain well in excess of regulatory requirements for well-capitalized institutions and well above regional and national bank averages. East West common equity Tier 1 capital ratio stands at a robust 15.4%, while the tangible common equity ratio now sits at 10.4%. These capital levels continue to place us amongst the best capitalized banks in the industry. We currently have $117 million of repurchase authorization that remains available for future buybacks. East West also distributed approximately $111 million to shareholders via quarterly dividends. East West's third quarter 2026 dividend will be payable on August 17, 2026, to stockholders of record on August 3, 2026. I will now turn the call back to Chris to share our outlook. Chris?

Thank you, Irene. To recap, we have updated 4 elements for our guidance today, each of which is reflected on Slide 12. Number 1, we're assuming flat Fed funds through the end of the year. Number 2, we're increasing our 2026 full year guidance for end-of-period loan growth. Number 3, we are increasing our full year 2026 net interest income guidance. And number 4, we're narrowing the range of our full year expense guidance. With that, I'll now open the call for questions. Operator?

[Operator Instructions] The first question will come from Jared Shaw with Barclays.

I guess maybe just starting with margin. It was great trends in cost of funds. It looks like we saw a little bit of spread compression maybe on the loan side. How should we think about some of those components going forward in this flat rate environment? Is there still an expectation that loan yields grind lower from here?

Well, Jared, we're focused on, first of all, hitting our net interest income targets, and those continue to come along quite nicely. Absolutely, we consider margin dynamics. Overall, we expect our margin to hold relatively stable as we look to a relatively stable Fed funds environment. That having been said, yes, we're seeing some marginal compression or grinding, as you put it, on loan. Part of that was mix driven and part of that was some one-time accretion benefits that we saw in the first quarter, which partly offset by some negative items that we saw in the second quarter. That having been said, our general outlook is we're going to hold the margin relatively stable and continue to grind out stronger NII through balance sheet growth over the balance of the year. Obviously, there'll be some deposit competition factors that we're very mindful of and very thoughtful about as we think about how we're going to roll over and reprice, particularly our CDs in Q3. But so far, our customers have hung with us even as we've been pricing below what might be considered top of market by a decent amount and a reflection of the customer relationships that we have and our ability to manage those at the branch level.

Okay. All right. I guess on the deposit side, could you -- you called out the DDA growth, part of that coming from tariff benefits. What's the expectation of those balances staying through or are customers going to be deploying that windfall? And could you remind us of what the CD-roll-off is in the third quarter?

Sure. Let me take those in backwards order. The CD roll-off in the third quarter will be $13 billion, and we're proactively pricing that today at 3.60% and 3.75%, 3.60% on a 6-month and 3.75% on a 12-month, although we'll be looking at those levels as we migrate through the quarter. In all likelihood, we'll be a little bit more competitive later in the quarter. With respect to tariff deposits, yes, we did see inflows. We estimate roughly somewhere between $200 million and $250 million of the period-end balance likely reflected net excess tariff-related inflows. But what we saw throughout the quarter is money came in and money went out. And so we would tell you that of the $250 million -- $200 million, $250 million that was there at quarter end, most of it has already gone back to wherever it needed to go. On the other hand, there are ongoing tariff deposits coming in still under those refund programs, and they'll likely continue into August.

The next question will come from Casey Haire with Autonomous Research.

Casey, you might be on mute. Casey, going once. All right, the next one, operator.

The next question will come from David Rochester with Cantor.

Just maybe one quick one on expenses on the guide. It looks like you would need to see a decrease from that 2Q level in the back half of the year. And Chris, you spoke to moderating comp expenses going forward earlier. Is that primarily where you're going to see the decrease to be able to hit that guide? And then what is it that made that comp line elevated this quarter?

Sure. I think you've probably heard 2 or 3 of our peer banks talk about deferred comp expenses this quarter. And so we do have a deferred comp plan, and that's part of it, obviously. We also had some changes to the way we think about vacation pay around here that influenced that number this quarter. But those 2 things will moderate out, therefore, the comp line certainly in Q3 and likely dampen what would otherwise be growth in Q4. And so that gives us comfort that overall expense levels remain relatively stable as we move through the back half of the year.

Great. And then just back on the DDA growth. Again, that was outstanding. I know some of this is coming from the tariff benefit. Have you guys changed any of your banker incentives or anything else that could support that going forward as you focus to shift towards more DDA?

I think it's been more a change of messaging and direction and focus. And that combination has resulted in, I think, a behavioral shift where people have seen the light on the need to essentially go door-to-door and make sure that we are evangelizing the East West value proposition as efficiently and effectively as possible, and that continues to work really well in our core markets.

We have a -- I mean, on the retail banking side, we have a focus on getting our retail bankers to go after small business checking accounts. And that campaign has been going pretty well. In fact, it's done really well last year. It continued to do well this year, getting them to focus on commercial banking clients, small business, one small business at a time. Now that's not to say they are not taking care of retail consumer clients as that's always their core business. They have continued to bring in retail consumer core customers. But meanwhile, they are also out there in the market on the street and then talking to small business one at a time. And so far, they've generated some pretty decent momentum. I think that clearly contributes to our growth of noninterest-bearing deposits.

The next question will come from David Smith with Truist Securities.

C&I growth was pretty strong. Can you talk about the range of industries driving this? Are there a few standouts? Or is it a pretty diverse set of sectors at work? And then if you could compare that breadth to what you were also seeing a quarter ago, please?

Sure. So I think in the first quarter, by contrast, we saw a very significant uptick in private equity capital call line activity in particular. We called out at the end of the first quarter that we expected to see that volume pay down. And in fact, that's exactly what we saw in April and into early May. In the second quarter, we saw a pickup in financial services, equipment finance, lessor financing and as well as manufacturers and wholesale distribution borrowings. All of those sectors contributed to this year's -- this quarter's growth range, while we continue to obviously have strong growth as well in residential mortgage. And so those 2 portfolios together accounted for the larger part of the total growth, and we're certainly delighted to see both the breadth and diversification of the C&I book, and the continued conservative quality of the residential mortgage book drive our loan growth.

And then just for the loan growth this year, I assume that should continue to be predominantly C&I and residential mortgage into the second half?

We continue to be focused on attaining a 1/3, a 1/3, a 1/3 diversification at some point in the future. And so as we look at our balance sheet mix today, we still find ourselves a little underweight in resi mortgage. So we're happy to see that be the standout this quarter and expect that we'll have a good quarter in Q3 as well. We obviously are continuously focused on growing our C&I business, and that's there. We're at 34% C&I to total loans right now. We intend to defend that level and hopefully improve on it a bit. And together, those 2 will chip away at the allocation to CRE, which at 37% is still a little heavier than our long-term vision, but we're very comfortable with our clients in that space. We're very comfortable with our portfolio. We're very comfortable with the credits. And so there's no intent for us to shrink those portfolios. It's just that we're growing all of our portfolios in a balanced manner.

The next question will come from Manan Gosalia with Morgan Stanley.

Maybe on the NIB deposits again. So if I understood your comments correctly, just given the tariff-related deposits coming in and going out, is it fair to say that the average deposit number in 2Q is the right number to grow off of as opposed to the end-of-period number?

That's part of the reason I mentioned the 15% average quarter-over-quarter in my comments. Yes. Good catch.

Okay. Perfect. And then as we think about the jumping-off deposit rates, right, you mentioned that you might take another look at the 6- to 12-month promo deposits that you're offering. But as we look at some of these deposit rates on Slide 6, the 2.76% on interest-bearing deposit cost spot and then the 2.04% in total deposit costs. Is that -- I guess, is that 2.76% the right number to jump off of for 3Q and 4Q?

Yes. I mean that is the end-of-period deposit cost. So that's the right launch point. And I think what we're trying to figure out is where do we think that number lines up relative to the competitive landscape as we move forward through the balance of the year. And as we sit here today, I think we recognize there are a number of smaller banks and some larger banks that are offering deposit rates well above where we are. That having been said, we continue to see progress and expect to see more progress on our DDA over the balance of the year. And so we're not sure we need to stretch for the highest yield. And I think we need to focus on making sure we're servicing our customers on a holistic basis across all of their deposit and lending needs. And that relationship, we think, is worth a few basis points.

The next question will come from David Chiaverini with Jefferies.

On net interest income, how you raised the guide to 7% to 9% from 6% to 8%. Is the main driver of that the DDA deposit growth? Can you talk through that?

Well, I think it's both because we're also raising the loan growth. And so the asset growth profile of the bank, I think, is coming in a little stronger in part because overall deposits have come in. And added to that is the fact that some of those deposits have come in, in noninterest-bearing. And so the combination of the fact that deposit growth and loan growth continue to come in perhaps better than we would have expected earlier in the year is a positive, coupled with the fact that we are getting some of those deposits, the majority of those deposits in a lower cost framework allows us to lift the guide.

Great. And then on rate sensitivity, you mentioned about stable NIM with stable Fed funds. How should we think about if we do get a rate hike, the impact on East West?

We are modestly asset sensitive, and we've said in the past that we think a 25-basis points rate hike or rate cut probably cost us about $2 million a month with about a 45-day lag.

The next question will come from Timur Braziler with UBS.

Looking at the CD repricing, I'm assuming you're now starting to get into some of the backend of '25 production that I think was in the 3.4% and now coming in kind of 3.6%, 3.7%. Is that the right way to think about it? Do CD costs start going up here? And I'm just wondering to what extent is the expectation internally that some of the growth in DDA will be a gating factor in maybe containing some of those CD costs going higher?

I think we've been relatively both successful and pleased by our ability to retain the CD book here through the second quarter. And the majority of our CD book has, in fact, been around the 6-month maturity. And so most of the lower level 3.40% special type dollars already repriced into 3.60% or 3.68%, which is where we ran our Lunar New Year CD campaign earlier this year. And so the baseline for those repricings will be what happens in August and September. And that's what we're looking at is given that those were at 3.68%, what's the right level to price to retain those as we sit here in July, looking out to what's going to come rolling in, in August and September. And we haven't quite decided how we'll land on that, but I think we're looking at a variety of maturity structures in part to spread out that over a longer horizon and in part because to the extent the forwards are telling us rates might move forward, it could help pay for it over the longer term. But we're priced for retention, not necessarily for CD balance expansion.

Got it. Helpful. And then as a follow-up, I would love to hear how you are thinking about that $100 billion threshold, both in terms of LFI-related expense and maybe what that means for capital optionality here?