EAST WEST BANCORP INC

The Company’s primary source of revenue is net interest income, which is the interest income earned on interest-earning assets less interest expense paid on interest-bearing liabilities. Net interest margin is the ratio of net interest income to average interest-earning assets. Net interest income and net interest margin are impacted by several factors, including changes in average balances and the composition of interest-earning assets and funding sources, market interest rate fluctuations and the slope of the yield curve, repricing characteristics and maturity of interest-earning assets and interest-bearing liabilities, the volume of noninterest-bearing sources of funds, and asset quality.

Net interest income and net interest margin for 2023 increased year-over-year, which primarily reflected higher loan yields, increased loan volume, and higher yields on interest-bearing cash and deposits with banks, and AFS debt securities, partially offset by a higher cost of interest-bearing deposits and higher short-term borrowings. The changes in yields and rates reflected higher benchmark interest rates.

Average interest-earning assets were $64.0 billion in 2023, an increase of $4.7 billion or 8% from $59.3 billion in 2022. The increase in average interest-earning assets primarily reflected loan growth, and higher interest-bearing cash and deposits with banks, partially offset by decreases in assets purchased under resale agreements (“resale agreements”) and AFS debt securities.

The yield on average interest-earning assets was 5.77% in 2023, an increase of 186 bps from 3.91% in 2022. The year-over-year increase in the yield on average interest-earning assets primarily resulted from higher benchmark interest rates.

The average loan yield was 6.40% in 2023, an increase of 188 bps from 4.52% in 2022. The year-over-year change in the average loan yield reflected the loan portfolio’s sensitivity to higher benchmark interest rates. Approximately 58% and 62% of loans held-for-investment were variable-rate as of December 31, 2023 and 2022, respectively.

Deposits are an important source of funds and impact both net interest income and net interest margin. Average deposits were $55.0 billion in 2023, an increase of $663 million or 1% from $54.3 billion in 2022. Average noninterest-bearing deposits were $17.2 billion in 2023, a decrease of $5.6 billion or 25% from $22.8 billion in 2022. Average noninterest-bearing deposits made up 31% and 42% of average deposits for 2023 and 2022, respectively.

The average cost of deposits was 2.19% in 2023, an increase of 173 bps from 0.46% in 2022. The average cost of interest-bearing deposits was 3.19% in 2023, an increase of 239 bps from 0.80% in 2022. The year-over-year increases reflected higher rates paid on time deposits, money market and checking deposits, and the customer migration to higher yielding deposit products in response to the higher interest rate environment.

The average cost of funds calculation includes deposits, short-term borrowings, FHLB advances, assets sold under repurchase agreements (“repurchase agreements”) and long-term debt. In 2023, the average cost of funds was 2.35%, an increase of 185 bps from 0.50% in 2022. The year-over-year increase was mainly driven by the change in the average cost of deposits discussed above.

The Company utilizes various tools to manage interest rate risk. Refer to the Interest Rate Risk Management section of Item 7. MD&A — Risk Management — Market Risk Management for details.

The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component in 2023, 2022 and 2021:

(1)Yields on tax-exempt debt securities are not presented on a tax-equivalent basis.

(2)Includes the amortization of net premiums on AFS debt securities of $31 million, $72 million and $93 million for 2023, 2022 and 2021, respectively.

(3)Average balances include nonperforming loans and loans held-for-sale.

(4)Loans include the accretion of net deferred loan fees and amortization of net premiums, which totaled $53 million, $50 million and $62 million for 2023, 2022 and 2021, respectively.

The following table summarizes the extent to which changes in (1) interest rates, and (2) volume of average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average yield/rate.