Irene Oh - Chief Financial Officer
Thank you, Greg. On Page 8, we have a slide that shows the summary income statement, a snapshot of the key items, including tax related items. I’ll skip the summary and dive right into details on Slide 9. Second quarter net interest income of $342 million increased by 5% linked quarter. And the GAAP net interest margin of 3.83% million expanded by 10 basis points, reflecting the benefits of higher interest rates on our asset sensitive balance sheet despite the increase in the cost of funds.
For seven consecutive quarters, our GAAP net interest margin has been expanding by an average of 8 basis points per quarter, rising by cumulative 57 basis points from 3.26% in the third quarter of 2016, or 44% of the increase in the average fed funds raise over the same period. The drivers of the 10 basis points expansion in the GAAP margin for the second quarter are as follows.
22 basis points increase from the higher earnings asset yields, of which 18 basis points are from higher loan yields; 3 basis points are from increased loan fee and net discount accretion, including ASC 310-30 discount; and 2 basis points are from higher yields on other earning assets, including investments. This was partially offset by a reduction of 13 basis points from higher rates on funding costs comprised of 12 basis points from higher deposit costs and 1 basis point from higher borrowing costs. The impact to margin from the shift and the mix of earning assets and deposit sources was neutral this quarter as a positive 1 basis point increase from the mix shift of earning assets was offset by negative 1 basis point from the mix shift in funding sources.
Relative to the change in average fed fund rates this quarter, our implied second quarter betas were 90% from loan yield adjusted for accretion and 54% for deposit costs. Cycle to-date since our federal reserve started increasing the fed funds rates we have had an implied beta of 55% on our loan yields adjusted for accretion and 23% on our total deposit costs. Again, relative to the change in the average fed funds rates. As a reference point, in the third quarter of 2015, our loan yields, excluding accretion income, was 4% and our total cost of deposits was 28 basis points. Id like to note in 2015 and '16, the impact of the ASC-310-30 discount accretion income was still significant to our loan yield.
Turning to Slide 10, our second quarter revenue grew by 5.5% linked quarter, excluding the Desert Community Bank gain in the first quarter, outpacing growth in our operating expenses, which increased by 3.5%, generating positive operating leverage. Accordingly, our second quarter 2018 pretax pre-provision income of $234 million grew by 7% quarter-over-quarter and our pretax pre-provision profitability ratio reached 2.5%. Second quarter non-interest expense was $177 million and our adjusted non-interest expense, excluding amortization of tax credit investments and core deposit intangibles was $156 million.
With our strong revenue growth and profitability, we are continuing to make investments to support the Bank’s future growth. We’re adding frontline relationship managers, growing our cross-border vacancies and expanding our credit and risk management teams to support growth for long term. We are also continuously investing in technology and platforms to enhance our product capabilities and our customer experience. The second quarter expense increases were partially offset by a decrease in compensation from the first quarter, which was largely due to increased payroll taxes. Our adjusted efficiency ratio was 39.9% in the second quarter. And for the past five quarters, our adjusted efficiency ratio has raised from 41.6% to 39.8%.
In Slide 11 of the presentation, we detailed out critical asset quality metrics. Our allowance for loan losses totaled $302 million as of June 30th or 1% of loans held for investment compared to 1.01% as of March 31st and 0.99% as of December 31, 2017. Non-performing assets of $104 million as of June 30th decreased by 21% from $131 million as of March 31st and increased from $115 million as of December 31, 2017. The decrease in non-performing assets during the second quarter was largely driven by resolution of non-accrual C&I and construction loan.
For the second quarter of 2018, net charge-offs were $11 million or 15 basis points of average loan annualized. This compares to a net charge-off ratio of 13 basis points annualized for the first quarter of 2018, and 8 basis points for the full year of 2017. The provision for credit losses reported for the first quarter was $16 million compared to $20 million for the first quarter of 2018, and $11 million for the second quarter of 2017.
Moving to capital ratio on Slide 12, East West capital ratios remained strong. Tangible equity per share of $25.01 as of June 30, 2018 grew 4% linked quarter and grew by 14% year-over-year. Our regulatory capital ratios increased by approximately 75 basis points year-to-date. Current earnings levels are sufficient to support continued organic growth, capital ratio expansion and an increase to the common dividend.
As noted by Dominic and announced in our earning released earlier today, East West Board of Directors has declared first quarter 2018 dividends for the Company’s common stock. The common stock cash dividend of $0.23 per share is payable on August 15, 2018 to the stockholders of record on August 01, 2018. This is an increase of 15% over the prior quarterly dividend of $0.20 per share.
And with that, I’ll move onto to reviewing our updated 2018 outlook on Slide 13. We expect end of period loans to grow approximately 10%, unchanged from our previous outlook. The pace of loan growth picked up slightly from the first and second quarters, and our outlook anticipate modest acceleration in the second half of the year. Given that we’re half way through the year, we’re also updating our net interest margins guidance to 3.75 for the full year of 2018, the upper end of our previously identified range of 3.65 to 3.75, excluding ASC 310-30 discount accretion.
Accretion income is expected to add approximately 5 basis points to the net interest margin. Our outlook for expense growth in the high single-digits and provision expense to range from $70 million to $80 million is unchanged. We are also updating the tax related items in our outlook based on additional tax investments made in the second quarter. With that, we estimate that tax credit investments in 2018 will be approximately $115 million and the associated tax credit expense will be $100 million. Accordingly, we are also lowering our projected full year of effective tax rate to 13% from 16% previously.
With that, I’ll now turn the call back to Dominic for closing remarks.
East West Bancorp, Inc. (EWBC) CEO Dominic Ng on Q2 2018 Results - Earnings Call Transcript | Seeking Alpha
