NOTE 12 — INCOME TAXES

Income tax expense was $140.5 million for the year ended December 31, 2016, compared to $194.0 million and $101.1 million for years ended December 31, 2015 and 2014, respectively. The effective tax rates were 24.6%, 33.5% and 22.6% for the years ended December 31, 2016, 2015 and 2014, respectively. The lower effective tax rate during the year ended December 31, 2016 compared to the same period in 2015 was attributable to additional tax credits that were recognized from investments in qualified affordable housing, historic rehabilitation and renewable energy projects during the year ended December 31, 2016. The Company recognizes investment tax credits from these investments in the year the tax credits arise under the flow-through method of accounting. Included in income tax expense recognized during the years ended December 31, 2016, 2015 and 2014 were $126.2 million, $67.6 million and $85.7 million, respectively, of tax credits generated from investments in qualified 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)	2016			2015			2014
Current income tax expense (benefit):
Federal	$	63,642		$	(62,829	)	$	174,640
State	48,558			(4,750		)	70,527
Foreign	1,345			409			3,846
Total current income tax expense (benefit)	113,545			(67,170		)	249,013
Deferred income tax expense (benefit):
Federal	25,296			199,858			(111,122		)
State	1,883			60,437			(36,040		)
Foreign	(213		)	919			(706		)
Total deferred income tax expense (benefit)	26,966			261,214			(147,868		)
Income tax expense	$	140,511		$	194,044		$	101,145

The preceding table does not include the tax benefit associated with the Company’s stock compensation plans recorded directly to the Consolidated Statements of Changes in Stockholders’ Equity of $1.1 million, $3.3 million and $6.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The following table presents the reconciliation of the federal statutory rate to the Company’s effective tax rate for the years ended December 31, 2016, 2015 and 2014:




	Year Ended December 31,
	2016		2015		2014
Federal income tax provision at statutory rate	35.0	%	35.0	%	35.0	%
State franchise taxes, net of federal tax effect	6.1		6.3		5.0
Tax credits, net of amortization	(18.3	)	(8.7	)	(16.7	)
Other, net	1.8		0.9		(0.7	)
Effective income tax rate	24.6	%	33.5	%	22.6	%

The tax effects of temporary differences that give rise to significant portion of deferred tax assets and deferred tax liabilities as of December 31, 2016 and 2015 are presented below:




($ in thousands)	December 31,
	2016												2015
	Federal			State			Foreign			Total			Federal			State			Foreign			Total
Deferred tax assets:
Allowance for loan losses and OREO reserves	$	97,921		$	27,792		$	1,365		$	127,078		$	102,382		$	28,686		$	1,153		$	132,221
Investments in partnerships, tax credit and other investments, net	—			—			—			—			(1,250		)	3,894			—			2,644
Net operating loss (“NOL”) carryforwards	—			283			—			283			—			282			—			282
Deferred compensation	20,093			5,731			—			25,824			21,484			6,028			—			27,512
Mortgage servicing assets	—			—			—			—			875			243			—			1,118
Purchased loan premiums	170			48			—			218			172			48			—			220
Unrealized losses on securities	16,253			5,315			—			21,568			4,070			1,083			—			5,153
State taxes	1,333			—			—			1,333			—			—			—			—
Interest income on nonaccrual loans	4,461			1,258			—			5,719			4,124			1,144			—			5,268
Other, net	1,883			4,938			97			6,918			13,520			3,769			96			17,385
Total gross deferred tax assets	142,114			45,365			1,462			188,941			145,377			45,177			1,249			191,803
Valuation allowance	—			(283		)	—			(283		)	—			(282		)	—			(282		)
Total deferred tax assets, net of valuation allowance	$	142,114		$	45,082		$	1,462		$	188,658		$	145,377		$	44,895		$	1,249		$	191,521
Deferred tax liabilities:
Core deposit intangibles	$	(9,768	)	$	(2,874	)	$	—		$	(12,642	)	$	(12,588	)	$	(3,616	)	$	—		$	(16,204	)
Investments in partnerships, tax credit and other investments, net	(7,012		)	5,318			—			(1,694		)	—			—			—			—
Property, plant and equipment	(26,406		)	(5,226		)	—			(31,632		)	(15,167		)	(4,093		)	—			(19,260		)
FHLB stock dividends	(1,189		)	(335		)	—			(1,524		)	(2,229		)	(618		)	—			(2,847		)
Deferred loan fees	—			—			—			—			(1,198		)	(332		)	—			(1,530		)
State taxes	—			—			—			—			(912		)	—			—			(912		)
Mortgage servicing assets	(184		)	(52		)	—			(236		)	—			—			—			—
Acquired debt	(2,210		)	(623		)	—			(2,833		)	(2,295		)	(637		)	—			(2,932		)
Acquired loans and OREO	(5,407		)	(1,242		)	(406		)	(7,055		)	(7,222		)	(1,714		)	(406		)	(9,342		)
Other, net	(1,025		)	(319		)	—			(1,344		)	(1,740		)	(883		)	—			(2,623		)
Total gross deferred tax liabilities	(53,201		)	(5,353		)	(406		)	(58,960		)	(43,351		)	(11,893		)	(406		)	(55,650		)
Net deferred tax assets	$	88,913		$	39,729		$	1,056		$	129,698		$	102,026		$	33,002		$	843		$	135,871

The tax benefits of deductible temporary differences and tax carryforwards are recorded as an asset to the extent that management assesses the utilization of such temporary differences and carryforwards to be more likely than not. 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. Evidence the Company considered includes the Company’s ability to generate future taxable income, implement tax-planning strategies, and utilize taxable income from prior carryback years (if such carryback is permitted under the applicable tax law), as well as future reversals of existing taxable temporary differences. The Company expects to have sufficient taxable income in future years to fully realize the deferred tax assets. Apart from this factor, the Company also performed an overall assessment by weighing all positive evidence against all negative evidence and concluded that it is more likely than not that all of the benefits of the deferred assets will be realized, with the exception of the deferred tax assets related to certain state NOL carryforwards. For states other than California, Georgia, Massachusetts and New York, since management believes that the state NOL carryforwards may not be fully utilized, a valuation allowance was recorded accordingly. 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, 2016 and 2015, the Company recorded net deferred tax assets of $129.7 million and $135.9 million, respectively, in Other assets on the Consolidated Balance Sheets.

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




($ in thousands)	Year Ended December 31,
($ in thousands)	2016			2015
Beginning Balance	$	7,125		$	5,020
Additions for tax positions of prior years	5,819			2,105
Settlements	(2,525		)	—
Ending Balance	$	10,419		$	7,125

As of December 31, 2016 and 2015, the total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in the future was $6.8 million and $4.6 million, respectively. The Company recognizes interest and penalties, if applicable, related to the underpayment of income taxes as a component of Income Tax Expense on the Consolidated Statements of Income. The Company recorded a charge (reversal) of $6.2 million, ($460) thousand and $597 thousand of interest and penalties for the years ended December 31, 2016, 2015 and 2014, respectively. Total accrued interest and penalties included in Accrued expenses and other liabilities on the Consolidated Balance Sheets were $7.9 million and $1.8 million as of December 31, 2016 and 2015, respectively.

The foreign provision for income taxes is based on foreign pre-tax earnings of $4.5 million, $5.3 million and $12.6 million in 2016, 2015 and 2014, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. All of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by the Company’s subsidiary organized in China, which has a statutory tax rate of 25%. As of December 31, 2016, U.S. income taxes have not been provided on a cumulative total of $31.0 million of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be $3.1 million.

Every year, subsequent to 2012, the Company has executed a Memorandum of Understanding (“MOU”) with the Internal Revenue Service (“IRS”) to voluntarily participate in the IRS Compliance Assurance Process (“CAP”). Under the CAP, the IRS audits the tax position of the Company, and identifies and resolves 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 2015, the 2014 tax return received a full acceptance of all tax matters from the IRS. The Company has executed a MOU with the IRS for the 2015 to 2017 tax years. For federal tax purposes, tax years from 2013 and beyond remain open. During the year ended December 31, 2016, the Company closed its audits for the tax years 2003 to 2008 with the California Franchise Tax Board and received a settlement of $4.7 million related to various refund claims under review. This settlement contributed to a $3.0 million income tax benefit during the year ended December 31, 2016. For California franchise tax purposes, tax years from 2009 and beyond remain open. The City of New York initiated an audit of the Company’s corporate income tax return for the 2012 to 2014 tax years in September 2016. 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 in the next twelve months.