NOTE 13 — INCOME TAXES

Income tax expense was $194.0 million for the year ended December 31, 2015, representing an effective tax rate of 33.5%, compared to $101.1 million, representing an effective tax rate of 22.6% and $153.8 million, representing an effective tax rate of 34.4% for the years ended December 31, 2014 and 2013, respectively. The higher effective tax rate in 2015 compared to 2014, was mainly due to less tax credits that were recognized in 2015 from investments in affordable housing, historic rehabilitation and renewable energy projects. The Company recognizes investment tax credits from affordable housing partnerships and other tax credit investments in the year the credit arises under the flow-through method of accounting. Included in the income tax expense recognized during 2015, 2014 and 2013 were $67.6 million, $85.7 million and $35.0 million, respectively, of tax credits generated mainly from investments in affordable housing partnerships and other tax credit investments.

The following table presents the components of income tax expense for the years indicated:




($ in thousands)	Year Ended December 31,
($ in thousands)	2015			2014			2013
Current income tax (benefit) expense:
Federal	$	(62,829	)	$	174,640		$	152,061
State	(4,750		)	70,527			44,389
Foreign	409			3,846			208
Total current income tax (benefit) expense	(67,170		)	249,013			196,658
Deferred income tax expense (benefit):
Federal	199,858			(111,122		)	(31,293		)
State	60,437			(36,040		)	(13,155		)
Foreign	919			(706		)	1,612
Total deferred income tax expense (benefit)	261,214			(147,868		)	(42,836		)
Income tax expense⁽¹⁾	$	194,044		$	101,145		$	153,822


(1)	Prior periods were restated to reflect the retrospective application of adopting the new accounting guidance related to the Company’s investments in qualified affordable housing projects ASU 2014-01. Please see Note 9 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for additional information.

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,
	2015		2014		2013
Federal income tax provision at statutory rate	35.0	%	35.0	%	35.0	%
State franchise taxes, net of federal tax effect	6.3		5.0		4.6
Tax credits	(8.7	)	(16.7	)	(4.8	)
Other, net	0.9		(0.7	)	(0.4	)
Effective income tax rate ⁽¹⁾	33.5	%	22.6	%	34.4	%


(1)	Prior periods were restated to reflect the retrospective application of adopting the new accounting guidance related to the Company’s investments in qualified affordable housing projects ASU 2014-01. Please see Note 9 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for additional information.

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. The tax effects of temporary differences that give rise to significant portions of the deferred tax (liabilities) assets are presented below:




($ in thousands)	December 31,
	2015												2014
	Federal			State			Foreign			Total			Federal			State			Foreign		Total
Deferred tax liabilities:
Core deposit intangibles	$	(12,588	)	$	(3,616	)	$	—		$	(16,204	)	$	(15,748	)	$	(4,513	)	$	—	$	(20,261	)
Fixed assets	(15,167		)	(4,093		)	—			(19,260		)	(16,615		)	(4,101		)	—		(20,716		)
FHLB stock	(2,229		)	(618		)	—			(2,847		)	(5,064		)	(1,475		)	—		(6,539		)
Deferred loan fees	(1,198		)	(332		)	—			(1,530		)	(1,587		)	(454		)	—		(2,041		)
Purchased loan discounts	—			—			—			—			(51		)	(15		)	—		(66		)
State taxes	(912		)	—			—			(912		)	(8,244		)	—			—		(8,244		)
Gain from FDIC-assisted acquisition	—			—			—			—			(2,063		)	(64		)	—		(2,127		)
Acquired debt	(2,295		)	(637		)	—			(2,932		)	(2,237		)	1,369			—		(868		)
Acquired loans and OREO	(7,222		)	(1,714		)	(406		)	(9,342		)	—			—			—		—
Other, net	(1,740		)	(883		)	—			(2,623		)	(1,652		)	(473		)	—		(2,125		)
Total gross deferred tax (liabilities)	(43,351		)	(11,893		)	(406		)	(55,650		)	(53,261		)	(9,726		)	—		(62,987		)
Deferred tax assets:
Tax credit and other investments ⁽¹⁾	(1,250		)	3,894			—			2,644			5,523			6,349			—		11,872
Allowance for loan losses and OREO reserves	102,382			28,686			1,153			132,221			93,749			23,615			1,409		118,773
NOL carryforwards	—			282			—			282			—			749			—		749
Deferred compensation	21,484			6,028			—			27,512			16,505			4,785			—		21,290
Mortgage servicing assets	875			243			—			1,118			2,570			735			—		3,305
Purchased loan premium	172			48			—			220			292			84			—		376
Unrealized loss on securities	4,685			1,279			—			5,964			42,737			12,638			—		55,375
FDIC receivable & clawback	—			—			—			—			36,630			11,736			—		48,366
Acquired loans and OREO	—			—			—			—			139,360			36,678			256		176,294
Nonaccrual interest income	4,124			1,144			—			5,268			356			102			—		458
Other, net	12,905			3,573			96			16,574			11,833			4,116			97		16,046
Total gross deferred tax assets ⁽¹⁾	145,377			45,177			1,249			191,803			349,555			101,587			1,762		452,904
Valuation allowance	—			(282		)	—			(282		)	—			(316		)	—		(316		)
Net deferred tax assets ⁽¹⁾	$	102,026		$	33,002		$	843		$	135,871		$	296,294		$	91,545		$	1,762	$	389,601


(1)	Prior period was restated to reflect the retrospective application of adopting the new accounting guidance related to the Company’s investments in qualified affordable housing projects ASU 2014-01. Please see Note 9 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for additional information.

A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is used, as needed, to reduce the deferred tax assets to the amount that is more likely than not to be realized.

The Company expects to have sufficient taxable income in future years to fully realize the deferred tax assets. Based on the available evidence, management believes that it is more likely than not that all of the benefit of the deferred tax assets recorded as of December 31, 2015 will be realized, with the exception of the deferred tax assets related to certain state net operating loss (“NOL”) carryforwards. A valuation allowance has been recorded for the state NOL (for states other than California, Georgia, Massachusetts and New York) since management believes that these NOLs may not be fully utilized. The Company believes that adequate provisions have been made for all income tax uncertainties consistent with the standards of ASC 740-10. As of December 31, 2015 and 2014, the Company had net deferred tax assets of $135.9 million and $389.6 million, respectively. The decrease in deferred tax assets in 2015 was mainly due to the termination of the FDIC shared-loss agreements, realization of previously impaired available-for-sale investment securities and the deductibility of certain acquired loans for tax purposes. Net deferred tax assets are included in other assets on the Consolidated Balance Sheets.

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




($ in thousands)	Year Ended December 31,
($ in thousands)	2015		2014
Beginning Balance	$	5,020	$	4,677
Additions for tax positions of prior years	2,105		343
Reductions for tax positions of prior years	—		—
Additions for tax positions of current year	—		—
Settlements	—		—
Ending Balance	$	7,125	$	5,020

For the years ended December 31, 2015 and 2014, the Company increased the unrecognized tax benefits by $2.1 million and $343 thousand, respectively, for the California enterprise zone net interest deduction. As of December 31, 2015 and 2014, the balances of unrecognized tax benefits related to tax uncertainties, including interest and penalties was $8.9 million and $7.2 million, respectively, which is included in accrued expenses and other liabilities on the Consolidated Balance Sheets. Also, for the years ended December 31, 2015 and 2014, the total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $4.6 million and $3.3 million, respectively.

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. Filed in September 2014, the 2013 tax return received a full acceptance of all tax matters from the IRS. The Company has executed a MOU with the IRS for the 2014 to 2016 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 state of North Carolina has initiated an audit of East West Bank’s corporate income tax return for 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, 2016.

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 Statements of Income. The Company recorded a change in interest and penalties of ($460) thousand, $597 thousand and ($744) thousand for its unrecognized tax positions as of December 31, 2015, 2014 and 2013, respectively. Total interest and penalties accrued as of December 31, 2015 and 2014 were $1.8 million and $2.2 million, respectively, which is included in accrued expenses and other liabilities on the Consolidated Balance Sheets.