HOPE BANCORP INC

INCOME TAXES

The following presents a summary of income tax provision follows for the years ended December 31:



	Current		Deferred			Total
	(Dollars in thousands)
2017
Federal	$	64,910	$	31,464		$	96,374
State	24,739		3,276			28,015
	$	89,649	$	34,740		$	124,389
2016
Federal	$	50,780	$	4,198		$	54,978
State	20,922		1,552			22,474
	$	71,702	$	5,750		$	77,452
2015
Federal	$	47,919	$	(1,393	)	$	46,526
State	16,548		17			16,565
	$	64,467	$	(1,376	)	$	63,091

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). Among other changes, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. The Company has not yet completed accounting for the tax effects of enactment of the Tax Act; however, the Company has reasonably estimated the effects of the Tax Act and recorded provisional amounts in the Company’s financial statements as of December 31, 2017 in accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”). The Company recorded a provisional amount increasing income tax provision expense by $25.4 million, included in federal deferred income tax provision for the year ended December 31, 2017 in the table above. This amount is comprised of the re-measurement of federal net deferred tax assets and re-evaluation of investments in affordable housing partnerships resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%. The Company is still completing its analysis of the impact of the Tax Act and will record any adjustments to the provisional amount as a component of income tax expense during the measurement period provided for in SAB 118.

A reconciliation of the difference between the federal statutory income tax rate and the effective tax rate is shown in the following table for the years ended December 31:



	Year Ended December 31,
	2017		2016		2015
Statutory tax rate	35.00	%	35.00	%	35.00	%
State taxes-net of federal tax effect	7.04	%	7.28	%	7.21	%
Rate change - federal and state	9.36	%	—	%	—	%
CRA investment tax credit	(3.50	)%	(2.40	)%	(1.31	)%
Bank owned life insurance	(0.09	)%	(0.26	)%	(0.25	)%
Municipal securities	(0.45	)%	(0.22	)%	(0.15	)%
Nondeductible transaction costs	(0.02	)%	0.80	%	—	%
Other	(0.19	)%	0.31	%	0.11	%
Effective income tax rate	47.15	%	40.51	%	40.61	%

Deferred tax assets and liabilities at December 31, 2017 and 2016 are comprised of the following:



	At December 31,
	2017			2016
	(Dollars in thousands)
Deferred tax assets:
Purchase accounting fair value adjustment	$	21,508		$	42,009
Statutory bad debt deduction less than financial statement provision	20,162			26,574
Net operating loss carryforward	2,351			4,171
Investment security provision	593			1,646
State tax deductions	4,304			5,669
Accrued compensation	149			207
Deferred compensation	214			348
Mark to market on loans held for sale	764			1,244
Depreciation	221			3,157
Nonaccrual loan interest	6,272			7,330
Other real estate owned	1,753			1,507
FDIC loss share receivable	362			772
Unrealized loss on securities available for sale	8,961			9,989
Non-qualified stock option and restricted share expense	1,339			2,187
Goodwill	203			490
Other	3,053			7,063
Total Deferred Tax Assets	$	72,209		$	114,363
Deferred tax liabilities:
FHLB stock dividends	$	(695	)	$	(1,054	)
Deferred loan costs	(5,857		)	(7,085		)
State taxes deferred and other	(3,229		)	(6,629		)
Prepaid expenses	(1,542		)	(1,840		)
Amortization of intangibles	(5,236		)	(8,639		)
Lease expense	(447		)	(1,006		)
Total Deferred Tax Liabilities	$	(17,006	)	$	(26,253	)
Net deferred tax assets:	$	55,203		$	88,110

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary.

Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of December 31, 2017 and 2016.

A summary of the Company’s net operating loss carry-forwards is as follows:



	Federal					State
	Remaining Amount		Expires	Annual Limitation		Remaining Amount		Expires	Annual Limitation
	Remaining Amount		Expires	Annual Limitation		Remaining Amount		Expires	Annual Limitation
	(Dollars in thousands)
2017
Saehan Bank (acquired by Wilshire)	$	2,940	2030	$	226	$	2,940	2030	$	226
Korea First Bank of New York	991		2019	497		—		N/A	—
Pacific International Bank	6,089		2032	420		—		N/A	—
Total	$	10,020		$	1,143	$	2,940		$	226

2016
Saehan Bank (acquired by Wilshire)	$	3,166	2030	$	226	$	3,166	2030	$	226
Korea First Bank of New York	1,488		2019	497		—		N/A	—
Pacific International Bank	6,509		2032	420		—		N/A	—
Total	$	11,163		$	1,143	$	3,166		$	226

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of California and various other states. The statute of limitations for the assessment of taxes for the consolidated Federal income tax return is closed for all tax years up to and including 2013. The expiration of the statute of limitations for the assessment of taxes for the various state income and franchise tax returns for the Company and subsidiaries varies by state. The Company is currently under examination by the California Franchise Tax Board (FTB) for the 2011, 2012, and 2013 tax years and by the New York State Department of Taxation for the 2013, 2014, and 2015 tax years. Wilshire Bancorp Inc. is currently under examination by the FTB for the 2011, 2012, and 2013 tax years. While the outcomes of the examinations are unknown, the Company does not expect any material adjustments.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows:



	At December 31,
	2017			2016
	(Dollars in thousands)
Balance at January 1,	$	2,187		$	1,816
Additions based on tax positions related to the prior year through acquisition	3			1,399
Expiration of the statute of limitations for assessment of taxes	—			(916		)
Settlements with taxing authorities	(65		)	(112		)
Balance at December 31,	$	2,125		$	2,187

The total amount of unrecognized tax benefits was $2.1 million at December 31, 2017 and $2.2 million at December 31, 2016 and is primarily for uncertainties related to California enterprise zone loan interest deductions taken in prior years. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $1.9 million and $1.6 million at December 31, 2017 and 2016, respectively. The Company expects the total amount of unrecognized tax benefits to decrease by $2.1 million within the next twelve months due to the settlement with the state tax authority.

The Company recognizes interest and penalties related to income tax matters in income tax expense. The Company had approximately $348 thousand and $306 thousand for interest and penalties accrued at December 31, 2017 and 2016, respectively.