Good morning and welcome to the East West Bancorp 2014 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Irene Oh, Executive Vice President and CFO. Please go ahead.
Good morning and thank you for joining us to review the financial results of East West Bancorp for the third quarter of 2014. Also participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer; and Julia Gouw, our President and Chief Operating Officer.
We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the Company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of factors that affect the Companys operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2013.
Todays call is also being recorded and will be available in replay format at www.eastwestbank.com.
Ill now turn the call over to Dominic.
Thank you, Irene. Good morning. And thank you all for joining us this morning for our earnings call. Yesterday afternoon, we were pleased to report our financial results for the third quarter of 2014. For the third quarter, net income was $88.8 million or $0.62 per diluted share, compared to the same quarter a year ago, net income increased $15.6 million or 21% and earnings per diluted share increased by $0.09 or 17%.
Quarter-over-quarter, we grew net income by $4.8 million or 6% and earnings per diluted share by $0.04 or 7%. In line with our strong earnings for the quarter, we achieved strong profitability ratios as well. Return on assets was 1.25% and return on equity was 12.8% for the quarter. In fact, the quarterly return on assets and return on equity ratios were an improvement from both the prior quarter and the prior year period.
Our increased earnings and profitability were largely driven by the strength of our balance sheet and our robust growth in loans and core deposits. Overall, we are pleased with the results for this quarter. Total loans and total deposits up both at the highest levels ever in the history of the bank at $21.2 billion and $23.8 billion respectively.
Total loans receivables increased $4 billion or 23% from a year ago. Our outstanding loan growth is well diversified. We have achieved strong growth throughout the bank and in all loan categories. Our ongoing efforts to improve the quality of our deposits and our deposits mix continue to progress well. As demonstrated by the solid deposit growth we continue to achieve.
Total deposits increased $3.5 billion year-over-year to a record of $23.8 billion as of September 30, 2014. Core deposits also reached record high, totaling $17.7 billion as of September 30, 2014. The third quarter of 2014 marks sixth consecutive quarter we have achieved net interest income growth despite the low interest rate environment.
Over the last few years, we have proven that despite a challenging economic and interest rate environment, we can continue to profitability and prudently grow both our balance sheet and market share. Our success in winning new customers and growing our business and market share is a direct result of our unique position as the bridge between east and the west.
We continue to build talent, expertise and infrastructure in serving our cross border customers that are doing business in the US and in Greater China. In Greater China, we have planning for the grand opening of our new branch in Shenzhen in November of this year. Given the vast size and business opportunities in the US and Greater China cross border market, as we continue to build our capabilities, improve our operational excellence and to meet and exceed the needs of our customers, I am confident that we can capitalize on new growth opportunities and continue our success.
With our acquisition of MetroCorp earlier this year in January and the full integration of people, processes and systems, we have made big progress in building the team and talent. In fact, we have already made strong progress and deposit growth in Texas. Year-to-date, deposit in Texas have grown $125 million or 14%.
East West has proven its ability to generate healthy balance sheet growth, resulting in increased revenue and net interest income, combined with high credit quality and strong expense control, we have been able to achieve strong earnings growth and return levels that are better than many peer banks. Our goal at East West is to consistently be a high performing bank and provide long-term value to our shareholders. As we demonstrated our ability to perform financially, quarter after quarter, year after year, we are confident that we are making great progress towards our goal.
So in summary, based on strong results achieved in the third quarter and year-to-date, at this point, we expect that we will end 2014 as our fifth consecutive year of record earnings for East West.
With that I would now turn the call over to Julia to discuss more detailed of our key successes in third quarter and our expectations for the remainder of 2014.
Thank you, very much, Dominic. And good morning to everyone. I would like to spend a few minutes to discuss the key drivers for our loan growth and net interest margin for the quarter. Additionally, I will review the guidance provided in the earnings release yesterday for the fourth quarter and the full year of 2014. As Dominic noted, our total loan portfolio reached a new record high of $21.2 billion as of September 30, 2014, an increase of $694.9 million or 3% from the end of the last quarter. The growth in our loan portfolio was broad based. We grew all non-covered loan categories by at least 2% during the quarter. In particular, our commercial and industrial loan growth continues to be outstanding. Non-covered commercial and industrial loans increased $610.4 million or 9% to $7.3 billion during the quarter due to strong originations and fundings in the sectors of manufacturing, entertainment trade finance, and agriculture.
On the consumer side, single family loan originations continue to be strong. We originated 667 new single family loans totaling $316.8 million and a total of 649 home equity loans totaling $217 million in commitment.
The growth of the single family loan portfolio to $3.5 billion is an increased of $156.1 million or 5% from the previous quarter. Additionally, non-covered home equity loans have increased a $130.5 million or 13% quarter-to-quarter to $1.1 billion as of September 30, 2014.
The credit quality of our non-covered consumer residential loans continued to be excellent. As of September 30, 2014, we had $8.3 million in single family and home equity loans delinquent over 90 days out of total balance of $4.6 billion or a 90 days delinquent ratio of 18 basis points. In continuation of growth trends to the first three quarter of the year and for the remainder of 2014, we expect loan growth to be largely centered in the commercial and industrial loan.
Although we expect a loan growth in the non-covered portfolio to continue to be offset by the reduction in the covered portfolio, we project that we can grow the total loan portfolio by approximately $400 million to the last quarter of 2014.
Additionally, we sold approximately $300 million of loans during the quarter, largely comprised of government guaranteed student loans at a net gain $7.7 million. As the student loan portfolio is not a core business to East West, we expect to continue to sell off this portfolio in the coming quarters.
Next, I would like to spend a few minutes discussing the net interest income and net interest margin for the third quarter of 2014, and our expectations for the rest of 2014. Net interest income adjusted for the net impact of covered loan activity and amortization of the FDIC indemnification assets totaled $225.4 million for the third quarter of 2014, this was an increase of $7 million or 3% from $218.4 million in the second quarter of 2014 and an increase of $33 million or 17% from a $192.4 million for the third quarter of 2013. These figures take in to consideration of the net impact of the reduction to the FDIC indemnification asset due to covered loan activity and amortization of the FDIC indemnification asset of $31.6 million for the third quarter of 2014. For the $8.1 million for the second quarter of 2014 and $61.9 million for the third quarter of 2013. The core net interest margin for the third quarter decreased modestly by five basis points to 3.41% compared to 3.46% for the second quarter of 2014. The five basis points decrease in the net interest margin was due to the excess liquidity from the deposit growth during the quarter being deployed in short duration assets and the decrease in the investment securities deals. The yield on the non-covered loan stabilized during the third quarter and remained unchanged from the second quarter of 2014 at 4.21%.
Lastly, I would like to provide some additional color on our updated guidance for 2014. As in the past, in our earnings release yesterday, we provided guidance for the fourth quarter and full-year of 2014. We estimate that the diluted earnings per share for the full-year of 2014 will range from $2.37 to $2.39, an increase of $0.27 to $0.29, or13% to 14% from $2.10 for the full year of 2013. And an increase of approximately 3% from our prior guidance. This EPS guidance for the remainder of 2014 is based upon adjusted net interest margin of approximately 3.4%, total loan growth of approximately $400 million, provision for loan losses for non-covered loan of approximately $8 million, non-interest expense of approximately $140 million and the effective rate of 17.5%. Management currently estimate that fully diluted earnings per share for the fourth quarter of 2014 will range from $0.63 to $0.65 based upon the assumptions previously stated.
The increase in the fourth quarter guidance from our previously disclosed guidance is due to greater than estimated loan growth in the third quarter, resulting in a stronger adjusted net interest income, combined with the impact of the tax credit investment purchased in the third quarter of 2014.
With that, I would now like to turn the call over to Irene to discuss our third quarter 2014 financial results in more depth.
Thank you, very much, Julia. And good morning to everyone. I would like to discuss our financial result for the third quarter of 2014 in more detail, specifically on credit quality, the accounting for the covered loan, non-interest income and non-interest expense.
Starting with credit quality, the total non-performing assets, excluding covered-assets-to-total-assets ratio continues to be under 1% as it has been for over four consecutive years with non-performing assets at $159.1 million or 56 basis points of total assets as of September 30, 2014. For the third quarter of 2014, the Company reported a provision for loan losses for non-covered loan of $7.6 million compared to $8.9 million for the second quarter of 2014 and $4.5 million for the third quarter of 2013. Net charge-offs on non-covered loans totaled $5.4 million for the third quarter compared to $7.3 million in the second quarter of this year and $334,000 in the prior year quarter. The Company also recorded a provision of $7.7 million for covered loan during the quarter due to charge off incurred on covered loan for which we expect reimbursement of 80% from the FDIC and accordingly have reported a receivable in the third quarter of 2014.
East West continues to maintain a strong allowance for non-covered loan losses of $249.3 million or 1.29% of non-covered loans receivable as of September 30, 2014. As of September 30, 2014, East West also has recorded an allowance for covered loan of $3.9 million. Further, net of other FDIC related items including the indemnification asset expected to be amortized and the future product liability, the future net pretax income estimated today to be accretive over the life of the loan is approximately $60 million as of September 30, 2014. During the quarter, we recorded an expense of $6.3 million of additional clawback liability. Under the share loss agreement with the FDIC, if losses in the covered portfolio do not meet specific thresholds, the bank is required to pay the FDIC a calculated amount. As of September 30, 2014, our total recorded liability to the FDIC for this clawback liability for both the UCB and WFIB acquisition was $96 million.
Moving on to non-interest income, East West reported a non-interest income for the third quarter of 2014 of $10.3 million compared to non-interest losses of $14.9 million last quarter and $41.4 million for the third quarter of 2014.
Branch fees, letter of credit fees and foreign exchange income, loan fees and other operating income totaled $35.6 million in the third quarter of 2014, a $1.3 million increase from the previous quarter and a $7.7 million increase in the prior year period. This $1.3 million increase from the second quarter of 2014 was largely due to increases in fee income from letters of credit, customer and foreign exchange, and interest rate swap transactions.
Moving on to non-interest expense, non-interest expense for the third quarter of 2014 totaled $177 million, an increase of $49.1 million or 38% from the previous quarter, and an increase of $76.6 million or 76% from the third quarter of 2013. The increase in non-interest expense in the quarter of 2014 compared to last quarter was largely due to an increase in amortization expense from new affordable housing partnership and other tax credit investments entered into during the quarter and also an increase in legal expenses.
During the quarter, we purchased additional tax credit investments comprised primarily of historic and renewable energy tax credits which resulted in a higher amortization expense during the quarter and a reduction in the effective tax rate to 17.5% for the full-year of 2014, down from our previously estimated 29%. The impact of additional tax credits purchased to third quarter earnings was approximately $0.11 per diluted share. The non-interest expense guidance for the fourth quarter of 2014 of $140 million also includes approximately $23 million of estimated amortization expense, affordable housing partnership and other tax credit investments. The increase in legal expense during the third quarter of 2014 was largely due to a litigation accrual of $28.8 million or $0.12 per diluted share from unfavorable jury verdict previously disclosed in 8-K filing. The verdict is not final and if the final judgment is not favorably decided, the Company will appeal.
Finally, as stated in the earnings announcement released yesterday, East Wests Board of Directors has declared fourth quarter dividend on the common stock. The common stock cash dividend of $0.18 is payable on or about November 17, 2014 to shareholders of record on November 3, 2014.
I will now turn the call back to Dominic.
Thank you, Irene. I would now open the call to questions.