NOTE 14 — INCOME TAXES

Provision for income taxes was $73.0 million in 2014, representing an effective tax rate of 17.6%, compared to $130.8 million, representing an effective tax rate of 30.7% and $143.9 million, representing an effective tax rate of 33.8% for 2013 and 2012, respectively. The lower effective tax rate in 2014 compared to 2013 and 2012, was mainly due to the additional purchases of affordable housing, historic and renewable energy tax credit investments. Included in the income tax expense recognized during 2014, 2013 and 2012 was $85.7 million, $35.0 million and $18.7 million, respectively, of tax credits generated mainly from investments in affordable housing partnerships and other tax credit investments.

Management regularly reviews the Company’s tax positions and deferred tax assets. Factors considered in this analysis include future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, and tax planning strategies. The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted rates expected to be in effect when such amounts are realized and settled. Based on the available evidence, Management has concluded that it is more likely than not that all of the benefit of the deferred tax assets will be realized, with the exception of the deferred tax assets related to certain state NOL carryforwards. Accordingly, a valuation allowance has been recorded for these amounts.

As of December 31, 2014 and 2013, the Company had a net deferred tax asset of $384.4 million and $255.5 million, respectively.

The following table presents the components of provision for income taxes for the years indicated:



	Year Ended December 31,
	2014			2013			2012
	(In thousands)
Current income tax expense:
Federal	$	153,211		$	131,236		$	148,572
State	70,527			44,389			2,316
Foreign	3,846			208			5,704
Total current income tax expense	227,584			175,833			156,592
Deferred income tax benefit:
Federal	(116,241		)	(32,963		)	(38,749		)
State	(37,665		)	(13,677		)	26,099
Foreign	(706		)	1,612			—
Total deferred income tax benefit	(154,612		)	(45,028		)	(12,650		)
Provision for income taxes	$	72,972		$	130,805		$	143,942

The difference between the effective tax rate implicit in the consolidated financial statements and the statutory federal income tax rate can be attributed to the following:



	Year Ended December 31,
	2014		2013		2012
Federal income tax provision at statutory rate	35.0	%	35.0	%	35.0	%
State franchise taxes, net of federal tax effect	5.1		4.7		4.3
Tax credits	(21.5	)	(8.4	)	(5.3	)
Other, net	(1.0	)	(0.6	)	(0.2	)
Effective income tax rate	17.6	%	30.7	%	33.8	%

The Company recognizes investment tax credits from low income housing and other investments in the year the credit arises under the flow-through method of accounting. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) are presented below:



	December 31,
	2014											2013
	Federal			State			Foreign		Total			Federal			State			Foreign		Total
	(In thousands)
Deferred tax liabilities:
Core deposit intangibles	$	(15,748	)	$	(4,513	)	$	—	$	(20,261	)	$	(16,422	)	$	(4,642	)	$	—	$	(21,064	)
Affordable housing partnerships and other investments	—			—			—		—			(14,158		)	(1,730		)	—		(15,888		)
Fixed assets	(16,615		)	(4,101		)	—		(20,716		)	(15,594		)	(3,879		)	—		(19,473		)
Federal Housing Loan Bank stock	(5,064		)	(1,475		)	—		(6,539		)	(11,337		)	(3,224		)	—		(14,561		)
Deferred loan fees	(1,587		)	(454		)	—		(2,041		)	(1,976		)	(557		)	—		(2,533		)
Purchased loan discounts	(51		)	(15		)	—		(66		)	(98		)	(28		)	—		(126		)
State taxes	(8,244		)	—			—		(8,244		)	(1,079		)	—			—		(1,079		)
Section 597 gain	(2,063		)	(64		)	—		(2,127		)	(48,370		)	(1,317		)	—		(49,687		)
FDIC receivable	—			—			—		—			(245,907		)	(6,695		)	—		(252,602		)
Acquired debt	(2,237		)	1,369			—		(868		)	(10,812		)	(1,042		)	—		(11,854		)
Other, net	(1,652		)	(473		)	—		(2,125		)	(6,805		)	923			—		(5,882		)
Total gross deferred tax (liabilities)	(53,261		)	(9,726		)	—		(62,987		)	(372,558		)	(22,191		)	—		(394,749		)
Deferred tax assets:
Affordable housing partnerships and other investments	1,768			4,870			—		6,638			—			—			—		—
Allowance for loan losses and REO reserves	93,749			23,615			1,409		118,773			93,018			23,046			—		116,064
FDIC receivable and clawback	36,630			11,736			—		48,366			—			—			—		—
Deferred compensation	16,505			4,785			—		21,290			13,322			3,824			—		17,146
Mortgage servicing assets	2,570			735			—		3,305			287			81			—		368
Purchased loan premium	292			84			—		376			424			120			—		544
Unrealized loss on securities	42,737			12,638			—		55,375			62,535			19,177			—		81,712
Acquired loans and REOs	139,360			36,678			256		176,294			366,290			26,959			959		394,208
Other, net	12,189			4,967			97		17,253			30,768			9,709			97		40,574
Total gross deferred tax assets	345,800			100,108			1,762		447,670			566,644			82,916			1,056		650,616
Valuation allowance	—			(316		)	—		(316		)	—			(337		)	—		(337		)
Net deferred tax assets	$	292,539		$	90,066		$	1,762	$	384,367		$	194,086		$	60,388		$	1,056	$	255,530

Management believes that it is more likely than not that all of the deferred tax assets recorded as of December 31, 2014 will be realized (except to the extent of the recorded valuation allowance) because it expects to have sufficient taxable income in future years to fully realize them. A valuation allowance has been provided for the state NOLs (for states other than California, Georgia, Massachusetts and New York) since management believes that these NOLs may not be fully utilized. As of December 31, 2014, the Bank had state net operating loss carryforwards of approximately $4.0 million. Net deferred tax assets are included in other assets on the consolidated balance sheet presented earlier in this report.

The following table summarizes the activity related to the Company's unrecognized tax benefits:



	Year Ended December 31,
	2014		2013
	(In thousands)
Beginning Balance	$	4,677	$	3,457
Additions for tax positions of prior years	343		232
Reductions for tax positions of prior years	—		—
Additions for tax positions of current year			988
Settlements	—		—
Ending Balance	$	5,020	$	4,677

For the years ended December 31, 2014 and 2013, the Company increased the unrecognized tax benefits reserve by $343 thousand and $1.2 million, respectively, for the California enterprise zone net interest deduction. There were no reductions in unrecognized tax benefits for 2014. As of December 31, 2014 and 2013, the liability for uncertain tax positions was $7.2 million and $6.3 million, respectively, which is included in accrued expenses and other liabilities on the consolidated balance sheets presented earlier in this report. Also, for the years ended December 31, 2014 and 2013, the total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $3.3 million and $3.0 million, respectively.

During 2014, the Company closed the Internal Revenue Service (“IRS”) examination of the 2012 tax year with no material changes. Every year, subsequent to 2012, the Company has executed a Memorandum of Understanding (“MOU”) with the IRS to voluntarily participate in the IRS Compliance Assurance Process (“CAP”) where the IRS will assist the Company in identifying and resolving any tax issues that may arise throughout the tax year. The objective of the CAP is to resolve issues in a timely and contemporaneous manner and eliminate the need for a lengthy post-filing examination. The 2013 and 2012 tax return filed in September 2014 and September 2013, respectively received a full acceptance of all tax matters from the IRS. The Company has entered a MOU with the IRS for the 2014 and 2015 tax years. For federal tax purposes, tax years from 2011 and beyond remain open. For California franchise tax purposes, tax years from 2003 and beyond remain open. The states of Alabama, New York and Ohio have initiated audits of East West Bank’s corporate income tax returns through the 2012 tax year. The Company does not believe that the outcome of unresolved issues or claims in any tax jurisdiction is likely to be material to the Company’s financial position, cash flows or results of operations. The Company further believes that adequate provisions have been made for all income tax uncertainties. The Company does not anticipate that the total amount of unrecognized tax benefits will significantly change for the year ended December 31, 2015.

The Company recognizes interest and penalties, if applicable, related to the underpayment of income taxes as a component of income tax expense in the consolidated statement of operations. The Company accrued interest and penalties of $597 thousand, ($744) thousand and $1.2 million for its unrecognized tax positions as of December 31, 2014, 2013 and 2012, respectively. Total interest and penalties accrued as of December 31, 2014 and 2013 were $2.2 million and $1.6 million, respectively, which is included in accrued expenses and other liabilities on the consolidated balance sheets presented earlier in this report.