Earnings Call Transcript - EWBC Q2 2025

Operator, Operator

Good afternoon, and welcome to the East West Bancorp Second Quarter 2025 Earnings Conference Call. 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.

Adrienne Atkinson, Director of Investor Relations

Thank you, operator. Good afternoon, and thank you, everyone, for joining us to review East West Bancorp's Second Quarter 2025 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.

Dominic Ng, Chairman and CEO

Thank you, Adrienne. Good afternoon, and thank you for joining us for our second quarter earnings call. I'm pleased to report strong second quarter results. We continued to grow the bank and reported record quarterly revenue and net interest income. Both loan and deposit growth were solid with average growth up 2% quarter-over-quarter in each. Our relationship-driven model continued to support consumer and commercial growth on both sides of the balance sheet. This growth and another quarter of solid fee income fueled a 16.7% adjusted return on tangible common equity and a 1.6% return on average assets. Asset quality has remained resilient and credit is performing as expected. Both criticized and nonperforming loans decreased from the end of the first quarter. We continue to focus on using our capital to support customers and capitalize on any market opportunities that arise. With approximately 10% tangible common equity, we are operating from a position of strength. Lastly, I am pleased to announce that East West Bank has once again been ranked by Bank Director magazine as the #1 Performing Bank above $50 billion in assets. This is the third consecutive year we have earned a top spot and is our fourth title in the past five years. This achievement is a testament to the steady execution of our associates and our ongoing customer focus. I will now turn the call over to Chris to provide more details on our second quarter financial performance. Chris?

Christopher Del Moral-Niles, CFO

Thank you, Dominic. Let me start with a recap on our deposits. As Dominic mentioned, total average deposits grew 2% quarter-over-quarter, while end-of-period deposits grew 3%. We were particularly encouraged by the strong growth in noninterest-bearing deposits this quarter. We also saw growth in interest-bearing checking, money market, and time deposit balances, rounding out another great deposit-led quarter. We saw notable growth in our commercial deposit segment, complemented by continued growth in our consumer and business banking balances, underscoring the value of our strong customer relationships across the board. We continue to expect customer deposits will fund our loan growth this year. Turning to loans on Slide 5. Our average loan balances were up $940 million quarter-over-quarter. C&I lending was the largest contributor, with new originations coming from a broad range of industries, while utilization remained broadly stable quarter-over-quarter. Three weeks into this quarter, our pipelines remain active and we expect to continue growing C&I throughout this quarter. Demand for residential mortgage products also proved relatively durable. And at current rates, we continue to see a strong pipeline into Q3. We would expect residential mortgage to contribute a similar or higher volume to the balance sheet in Q3. We also grew our commercial real estate balances modestly this quarter as we continue to support our long-standing CRE clients. Slide 6 covers our net interest income trend. We grew dollar net interest income to $617 million, up $17 million from Q1. Looking back to the start of the cutting cycle, we have decreased interest-bearing deposit costs by 67 basis points, successfully exceeding our 50% beta guidance shared in prior quarters. We continue to expect dollar net interest income growth as we progress throughout the year. Moving on to fees on Slide 7. We note that total noninterest income was $86 million in the second quarter, and fee income was $81 million, the third highest quarter for fees in East West history. While these fees weren't as strong as the first quarter, which was a new record for us, we note that for the six months ended June 30, total fee income has grown 14% as compared to the first six months of last year. The sustained execution on fee income levels reflects our ongoing focus on the products, services, and capabilities that will further diversify our revenue over time. Turning to expenses on Slide 8. East West continues to deliver industry-leading efficiency while investing for its future growth. The Q2 efficiency ratio was 36.4%. Total operating noninterest expense was $230 million for the second quarter. We continue to expect expenses will come in line with our guidance for the full year. Regarding income tax expense, we note that second quarter income tax expense was $92 million, with an effective tax rate of 22.9%. Second quarter income tax expense included $6 million of one-time expense related to California's adoption of a single sales factor apportionment method which became effective on June 30. We continue to expect our full-year effective tax rate to be approximately 23%. However, subsequent quarters will likely be under that and closer to 22%. Now let me hand the call over to Irene for some comments on credit and capital.

Irene Oh, Chief Risk Officer

Thank you, Chris, and good afternoon to all on the call. As you can see on Slide 9, our asset quality metrics continue to broadly outperform the industry, with criticized, nonaccrual loans and nonperforming asset metrics, all improving. Non-improving assets decreased by 2 basis points quarter-over-quarter to 22 basis points of total assets as of June 30, 2025. The criticized loans ratio decreased during the quarter by 14 basis points to 2.15% of loans. The special mention ratio decreased 10 basis points quarter-over-quarter to 81 basis points of total loans, while the classified loans ratio decreased 4 basis points to 1.34%. We recorded net charge-offs of 11 basis points in the second quarter or $15 million compared to 12 basis points in the first quarter or also $15 million. We reported a lower provision for credit losses of $45 million in the second quarter compared with $49 million for the first quarter. We remain vigilant and proactive in managing our credit risk. Turning to Slide 10. The allowance for credit losses increased $25 million to $760 million or 1.38% of total loans as of June 30, 2025, considering changes to the economic outlook. We believe we are adequately reserved for the content of our loan portfolio given the current outlook. Turning to Slide 11. As Dominic mentioned, our strong capital levels allow us to operate from a position of strength and support our customers with confidence. 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 peers. East West Common Equity Tier 1 capital ratio rose nearly 20 basis points to a robust 14.5%, while the tangible common equity ratio rose to 10%. These capital ratios placed us amongst the best-capitalized banks in the industry. In the second quarter, East West repurchased approximately 26,000 shares of common stock for approximately $2 million. We currently have $241 million of repurchase authorization that remains available for future buybacks. East West third quarter 2025 dividends will be payable on August 15, 2025, to stockholders of record on August 4, 2025. I will now turn it back to Chris to share our outlook. Chris?

Christopher Del Moral-Niles, CFO

Thank you, Irene. We are making a few updates to our full-year outlook this time. We are assuming forward curves as of quarter end, and we continue to expect full-year end-of-period loan growth will fall in the range of 4% to 6%. However, regarding net interest income and revenue trends, we see both trending above 7% for the full year. We're also adjusting our outlook on net charge-offs, and we now expect full-year net charge-offs to fall in the range between 15 basis points and 25 basis points. As I mentioned earlier, we continue to expect our full year tax rate to be about 23%, and we continue to expect amortization of our tax credits and CRA investment expense will fall in the range of $70 million to $80 million. With that, let me turn the call over to the line for questions. Operator?

Operator, Operator

Our first question today is from Casey Haire with Autonomous.

Casey Haire, Analyst

So first question just be on the margin. You guys are doing a great job holding the line on loan yields. And then obviously, deposit beta pushing above 60%. Just wondering your ability to sustain both of them going forward.

Christopher Del Moral-Niles, CFO

Yes. I believe we are continuously focusing on optimizing deposit costs, and this will likely remain a priority for us in the third quarter, regardless of a potential rate cut in September. We see opportunities for further improvements in this area and will continue to manage it diligently. We did reduce our total deposit costs slightly this quarter, and we are committed to this effort. Regarding asset repricing, we still anticipate some effects from the first or second quarters in mortgages and mortgage-backed securities. However, we expect that fixed-rate asset classes will have a chance to reprice positively. Therefore, we are hopeful that we can maintain our margin within a certain range throughout the third quarter, and we will monitor how and when potential rate cuts occur thereafter.

Casey Haire, Analyst

Got you. Okay. And then just wanted to touch on credit. You guys did build the reserve led by C&I, looks like despite favorable migration and you took your charge-off guide down. Just maybe a little color on what's going on there. What are you seeing in C&I? Or did you just change the weightings around? Just a little color on the reserve build.

Irene Oh, Chief Risk Officer

This is Irene. I'll answer that. It wasn't anything specific that we saw within the C&I book. I'll just comment that it really has to do with the CECL model and the economic outlook and forecast.

Operator, Operator

The next question is from Manan Gosalia with Morgan Stanley.

Manan Gosalia, Analyst

So can you talk about the impact of the recent legislative changes in the renewable energy tax credits business?

Christopher Del Moral-Niles, CFO

Sure. We're taking a look at the renewable energy investments that we make as well as the lending that we do. And obviously, that will have implications for the go forward. However, as we looked at all the projects we had already committed to and all the ones that were in flight, they seem to fall in under the exemption or under the period of grace until the new rules kick in. So as we sit here today, all of the existing investments and all our existing loan commitments are unimpacted. And we're rethinking about some of our go-forward tax credit investment strategies as we look down the road.

Manan Gosalia, Analyst

So presumably, that means that all else equal, the tax rate would go up. Are there any offsets to that, that we should be thinking about for next year?

Christopher Del Moral-Niles, CFO

I think the good news is there's an army of consultants that have lots of ideas for us. So I think we're thinking through a lot of them. I don't know that I would write off our ability to find something to offset those changes in the long run.

Operator, Operator

The next question is from Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala, Analyst

Were you trying to finish something, Chris?

Christopher Del Moral-Niles, CFO

No, go ahead. Go ahead.

Ebrahim Poonawala, Analyst

Okay. So I guess, just going back to one on the NII side, the 7%-plus guidance it implies no growth relative to where we've been in the first half or the second quarter. I'm just wondering if we don't get rate cuts and you hit your loan growth outlook, shouldn't we assume NII generally to sort of drift higher and track loan growth. Is that sort of the right way to think about direction and pace of NII growth relative to loan growth?

Christopher Del Moral-Niles, CFO

Yes. So let me use the framework that you put forward. So yes, we are fundamentally asset sensitive. So yes, fewer rate cuts are better for us. And so the extent that rate cuts are slower, come later or of a lesser magnitude, we will do better. You're also correct, it's a function of loan growth and asset growth. And thankfully, we've had great deposit growth that's allowed us to continue to fund profitable loan growth. And to the extent that continues at a good pace, that could be better. And so those are the two key factors that could lead that to be better. I think, Ebrahim, I would say maybe slightly differently as well. I think we came out assuming this year that our NII growth would be in line with our overall asset or loan growth specifically in that 4% to 6% range. We raised that estimate when we went not from 4% to 6%, but to 6% plus back in June. And I think we're reraising today as we go to 7% plus. And to the extent rates are higher for longer or loan growth comes in better, there's still upside to that. And obviously, as Dominic would remind me, part of my task is to make sure we're putting our best foot forward and doing the best we can. And so we'll continue doing that every day.

Ebrahim Poonawala, Analyst

Understood. And I guess, maybe just a separate question. It feels like industry-wide, there's some momentum on loan growth. Obviously, your loan growth guidance implies a pickup in the back half. But maybe Dominic, talk to us about just client sentiment around pace of investment picking up. I think there's some seasonality to lending for East West in the second half. And are we through the worst of like the tariff noise in terms of the clients navigating that? Or are there more structural changes that are happening this time, which was different than what happened in 2018, '19?

Dominic Ng, Chairman and CEO

Client sentiment is definitely improving. While they may not be thrilled, they seem more at ease with the existence of tariffs. There's greater certainty now compared to earlier this year when there was widespread confusion about what to expect. Although tariffs will still be present, there will be some pass-through to consumers. Additionally, many imports have been exempted from the tariffs, so a variety of products are unaffected. Each business has its own specifics, with some passing costs onto consumers while others benefit from exemptions. Overall, most customers are becoming more comfortable with the situation. I want to emphasize that our East West Bank clients are generally more experienced and sophisticated regarding tariffs, having navigated these challenges since 2017. Consequently, they've developed various strategies, making them more agile in response. From our perspective at East West Bank, we feel reassured. Furthermore, our loan portfolio is quite diverse across different industries and types of products, meaning the import/export business represents a relatively small segment of our overall operations. Therefore, with or without tariffs, the effect on our profit and loss statement is considerably less significant than before. Currently, things appear to be improving, though uncertainties still persist in the market. On the bright side, tax reform has been completed, which is generally beneficial for business. However, tariff-related issues remain unpredictable, as conditions can change rapidly. We are closely monitoring the situation, and we're confident in our ability to manage it.

Operator, Operator

The next question is from Jared Shaw with Barclays.

Jared Shaw, Analyst

Maybe just on the deposit side, when we look at sort of the trends this quarter, it looks like average cost was higher than both end of period for first quarter and second quarter. Can you just sort of walk us through how that's moving and your thoughts on how that's going to move through the rest of the year?

Christopher Del Moral-Niles, CFO

Sorry, Jared. If I look at Table 6 press release, average total deposit costs were down 2 basis points. Total interest-bearing deposit costs were down 3 basis points. So on a quarter-over-quarter basis, I think we're moving in the right direction. And if I'm looking at Page 6 in our deck, I would note that the end of period interest-bearing deposit costs were down to 3.25%, which is a low point here relative to last quarter or prior period. So I think we're moving the deposit costs down.

Jared Shaw, Analyst

Okay. Do you believe that you will be able to maintain this pace as we move forward, given the forward curve?

Christopher Del Moral-Niles, CFO

Well, I think if you look at Page 6, that might be a good graph, and I think I've described this in prior conversations. We have had the benefit that we have a good amount of CDs and the CDs essentially price in the forward curve expectations. And so we actually get to lower the deposit costs as we approach future rate cuts. And so when you look at the step down that occurred late last year, that's because there were several cuts that occurred late last year. And as we look at the slower pacing, the line is becoming gradually less steep with each step, it reflects the sort of slower pacing of Fed cuts that we've seen. So this year, we're expecting potentially some rate cuts later in the year. To the extent we get something in September, you'll see a step down there, certainly at September period end. To the extent we see further down in Q4, we'll see a little bit more in Q4. It probably won't be as steep as last year's when we saw 100 basis points, but it will be a good move in the right direction.

Jared Shaw, Analyst

Okay. And then just as a follow-up, on the core expenses, to get to the guidance, it really implies a step-up in the second half of the year. Where are those investments coming from? And how much of that is tied to potentially the $100 billion threshold? And if we see that adjusted, would that impact the expense outlook?

Christopher Del Moral-Niles, CFO

So I think what we've tried to communicate is that we are being very programmatic about finding the right people to bring in and hire and help us build the bank that's going to be as robust and resilient as it needs to be as we continue to grow in size. And to a certain extent, while the $100 billion is a real number today, the reality is there's depth and strength and resiliency to our total management functions that are going to require additional investments. And so when you look at our expense guidance, it fully reflects our expectation that we're going to continue to round out the team, continue to build our cyber capabilities, continue to build our online and mobile strengthening, continue to build our fraud capabilities as well as all the things you need to do for regulatory, as well as develop new tools and solutions for our customers. And so all of that growth is still in process and in motion. And I expect you will see increasing line items because most of our expenditures are in comp and benefits; you'll see that continue to grow as we grow through the year and into the years ahead. We're focused on hiring to help us build the bank we want to be, and we're focused on then supporting those hires with the right systems and solutions to be as strong a bank as we can be, all in a very efficient manner, of course, but our costs are going to go up.

Operator, Operator

And the next question is from Timur Braziler with Wells Fargo.

Timur Braziler, Analyst

I appreciate your comments around SFR for the third quarter. I'm just wondering maybe looking out a little bit, some of the noise regarding the presidency. Do you think that line item is at risk in the longer term with just some of the migration trends? Or is it isolated enough or insulated enough, I should say, that that growth rate really shouldn't change all that much?

Christopher Del Moral-Niles, CFO

I think Irene pointed out to me a little over a year ago shortly after I joined that the American dream is alive and well, despite where rates are at, despite where sentiment is around anything else. And so the reality is we see ourselves providing a solution that supports that dream of American homeownership and that demand for the clients we serve is not slacking at all.

Timur Braziler, Analyst

Okay. And then maybe another question just around some of the tariff uncertainty. Your ability to sustain fee income here has been pretty impressive over these last two quarters. I'm just wondering, did you get any sense if there's a pull forward that occurred earlier in the quarter or any type of broader cross-border trade disruption within your fee income lines? Or is this a good steady state to base future assumptions off of?

Christopher Del Moral-Niles, CFO

If I look at the graph that's out there on the fee income on Page 7 in the deck, three of the quarters have come in at a pretty solid $81 million, three of the last four quarters. So I'd say that's a pretty good run rate for us. And the reality is where we gave up fees was a little bit on the derivatives, FX side of things, which are a little more transactional and some of the wealth stuff that was one-time in nature. But our other fees are relatively steady and just steadily building. And so we continue to expect that to be a pretty steady contributor.

Operator, Operator

The next question is from Gary Tenner with D.A. Davidson.

Gary Tenner, Analyst

A lot of questions were asked, but I just wanted to kind of follow up on the buyback. Chris, you had some comments on that in your prepared remarks, I think. The amount of buyback in the second quarter was pretty light in terms of shares. And I'm wondering how much of that was simply being cautious in the wake of the announcements because obviously, there was an opportunity to be repurchasing shares quite a bit lower than the stock is trading now.

Christopher Del Moral-Niles, CFO

Yes, part of the situation was related to timing. In the initial weeks of the quarter, which followed Liberation Day, our stock experienced a decline. We typically avoid buying back shares when we possess unreleased financial results to ensure we remain compliant with SEC regulations. This created a blackout period for us prior to the earnings call, during which we couldn't be active, even though the stock price was moving. When we returned to buying back shares, we were mindful of the price levels, especially considering there was a significant drop earlier in the quarter that we didn't see again. Throughout the quarter, we worked to keep pace with the market but struggled to get ahead. Moving forward, we will be strategic about our repurchases in the second half of the year, and we recognize that we have $241 million available for the right opportunities, which we plan to use as needed.

Operator, Operator

The next question is from Matthew Clark with Piper Sandler.

Matthew Clark, Analyst

First one for me, just on the macro changes that you made with the CECL model. Can you just speak to some of the assumptions you made and how they changed, just to give us a sense for the conservatism that's built in around C&I, in particular?

Christopher Del Moral-Niles, CFO

So I think as Irene mentioned earlier in one of her responses, I think it was macro driven. And as we think about it, we didn't necessarily change the weighting assumptions about recessionary outlook versus the core outlook. But the Moody's model itself did have some degradation. And so we factored that degradation into our core and also factored into our other scenarios that we do run, and that contributed a good portion of the net change. We also took some specific looks at some of the C&I portfolios. And obviously, we're constantly evaluating those and essentially grading and risk rating those, and that was also part and parcel. But obviously, part of our risk rating takes into consideration the outlook. And so that's all baked in. Irene, would you care to add more to that?

Irene Oh, Chief Risk Officer

No, I think that's a good summary. As a reminder, I think many people use the same kind of Moody's models, but we also use multi-scenarios. I wanted to just factor that in as well. So that is part of maybe just the conservatism you alluded to.

Matthew Clark, Analyst

Okay. Great. And then on the criticized migration in non-multifamily CRE, can you just speak to what asset classes within non-multifamily CRE drove that and kind of what the line of sight is in that area?

Irene Oh, Chief Risk Officer

Good question. About half were special mention, half were substandard, pretty evenly distributed there as far as the income-producing CRE. From an asset class perspective, pretty broad-based as well. There were some loans that we downgraded because of cash flow kind of shortfall that we saw reductions for some properties that were impacted after the fires, but others kind of broad-based. As we look at these loans loan by loan and the underlying collateral, I would say, at this point, I don't see these moving to nonaccrual or something that will result in a charge-off at this point in time. But certainly, we're looking at the cash flows very carefully and ensuring that the grading is appropriate as well.

Operator, Operator

The next question is from Chris McGratty with KBW.

Christopher McGratty, Analyst

Chris, a question for you on the balance sheet. Your mid-80s loan-to-deposit ratio, a lot of capital. Is there anything you want to do to the balance sheet over the next several quarters that may not have been done yet?

Christopher Del Moral-Niles, CFO

Well, I think we meet regularly with Irene and Dominic through the ALCO process, and we're always trying to optimize the balance sheet. I think we've made good strides towards that direction, but the reality is we know there's more on the deposits that can be optimized. And we know that there's a component of the investment portfolio that could be further optimized, and we continue to think about how we're going to grow the C&I book, in particular, so that's further optimized as a percentage of the total loans. And so those are all works in progress that we continue to sort of try and push in the right direction each day we come in.

Christopher McGratty, Analyst

Great. And then on capital, I hesitate to even ask the question, but you've got 10% TCE going to 11% probably and CET1 to 15%. It's a high-class problem. But is there anything you want to do with your capital beyond what we've talked about over the medium term to build out fee income capabilities, portfolio acquisitions, anything like that?

Christopher Del Moral-Niles, CFO

Yes. So I mean, I think in the long term, of course. Our first goal, as we've always highlighted, is to deliver top quartile returns. And so as long as we're delivering 16%, 17%-type quarter-after-quarter returns on tangible capital, we hope shareholders feel we're doing the right thing for them. The second thing, of course, as we've said publicly, we have every intention to continue to build out our fee businesses, and we continue to have conversations and ongoing dialogue with different providers about different services that we could offer our customers, about different solutions that we could sell, and about different ways of building out our fee income businesses to continue to grow. We think there's opportunity in many of them. And Dominic has encouraged us and directed us to make hires to bolster and grow a variety of those business lines here over the last six months. And we're continuously looking at not only hires but also potentially purchase solutions and/or even acquired solutions.

Operator, Operator

The next question is from Andrew Terrell with Stephens.

Andrew Terrell, Analyst

If I could just go back to some of the loan growth quickly. The single-family and C&I, Chris, your comments sounded pretty optimistic on kind of the third quarter setup. I'm curious just on the commercial real estate. Any selective kind of slowing of the growth potential in that business that you guys are seeing right now, just to either manage concentrations or maybe based on the competitive environment? Just hoping to unpack maybe a little bit of the CRE business.

Christopher Del Moral-Niles, CFO

Yes. I mean, I think if I look at Page 7 of the press release, Table 2, you'll see that on a year-over-year basis, we've grown our single-family book by 5%, almost 6%, our C&I book by 5%, almost 6%, and our CRE book by a little less than 2%. And so if I think about, hopefully, the comments that I've been making at the last several quarterly earnings calls and at the last several earnings presentations, it’s a focus on continuing to grow the bank overall with a particular emphasis on growing our C&I and single-family in a balanced manner to get towards the one-third, one-third, one-third balance that Dominic has encouraged the bank to sort of shoot for in the medium to long term. And I think we're continuing to make progress on that quarter after quarter, year after year. And I think this is another good quarter of balanced growth in the way we'd like to see it.

Operator, Operator

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

Dominic Ng, Chairman and CEO

Thank you. Once again, I would like to thank everyone on joining our call today, and we are looking forward to speaking with you in October. Bye.

Operator, Operator

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