INCOME TAXES

The components of income tax expense for continuing operations for the years ended December 31, 2013, 2012, and 2011 are as follows:



	Year Ended December 31,
	2013		2012		2011
	(In thousands)
Current expense:
Federal	$	17,103	$	12,253	$	3,859
State	6,622		4,100		2,769
Total current expense	23,725		16,353		6,628
Deferred expense:
Federal	6,153		3,534		6,680
State	2,430		443		972
Total deferred expense	8,583		3,977		7,652
Income tax expense	$	32,308	$	20,330	$	14,280

Income tax expense attributable to income from continuing operations differs from the amounts computed by applying the Federal statutory rate to pre-tax income from continuing operations. Reconciliations between the Federal statutory income tax rate of 35% to the effective income tax rate for the years ended December 31, 2013, 2012, and 2011 are as follows:



	Year Ended December 31,
	2013		2012		2011
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
Increase/ (decrease) resulting from:
Tax exempt interest, net	(5.0	)%	(5.7	)%	(6.9	)%
State and local income tax, net of Federal tax benefit	5.9	%	4.3	%	4.8	%
Tax credits	(1.4	)%	(1.9	)%	(2.3	)%
Noncontrolling interests	(1.4	)%	(1.6	)%	(2.2	)%
Other, net	(0.5	)%	(0.7	)%	(0.1	)%
Effective income tax rate	32.6	%	29.4	%	28.3	%

The components of gross deferred tax assets and gross deferred tax liabilities at December 31, 2013 and 2012 are as follows:



	December 31,
	2013		2012
	(In thousands)
Gross deferred tax assets:
Allowance for loan losses	$	36,634	$	41,218
Allowance for losses on OREO	896		930
Stock compensation	9,258		11,336
Goodwill and acquired intangible assets	—		944
Deferred and accrued compensation	14,436		11,347
State loss carryforward, net of federal	346		781
Capital loss carryforward	2,165		2,381
Mark to market on securities available for sale	489		899
Contingent payments	1,902		3,094
Unrealized loss on investments	2,619		—
Other	2,320		2,716
Gross deferred tax assets	71,065		75,646
Less: valuation allowance	2,000		2,232
Total deferred tax assets	69,065		73,414
Gross deferred tax liabilities:
Unrealized gain on investments	—		1,228
Cancellation of debt income deferral	7,168		7,072
Goodwill and acquired intangible assets	2,673		—
Fixed assets	674		211
Other	3,186		2,658
Total gross deferred tax liabilities	13,701		11,169
Net deferred tax asset	$	55,364	$	62,245

Of the $6.9 million net decrease in the Company’s net deferred tax asset during 2013, $1.7 million was recognized as deferred income tax expense for discontinued operations and $3.4 million was recognized as an increase to shareholders’ equity.

In accordance with ASC 740, deferred tax assets are to be reduced by a valuation allowance 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. The realization of the tax benefit depends upon the existence of sufficient taxable income within the carry-back and future periods.

The Company believes that it is more likely than not that the net deferred tax asset as of December 31, 2013, excluding the net deferred tax asset on capital losses, will be realized, based upon the ability to generate future taxable income as well as the availability of current and historical taxable income.

The Company believes the existing net deductible temporary differences that give rise to the net deferred tax asset, excluding the capital losses, will reverse in future periods when the Company expects to generate taxable income. Other positive evidence to support the realization of the Company’s net deferred tax asset includes:


•	The Company had cumulative pre-tax income, as adjusted for permanent book-to-tax differences, in the period 2011 through 2013.


•	Certain tax planning strategies are available to the Company, such as reducing investments in tax-exempt securities.


•	The Company has not had any operating loss or tax credit carryovers expiring unused in recent years.

At December 31, 2013, the Company had a $0.2 million deferred tax liability for a $0.4 million potential capital gain related to an installment sale and a $2.2 million deferred tax asset for $5.3 million of capital loss carryovers that are scheduled to expire in various tax years: $4.1 million in 2014 and $1.2 million in 2016. The Company believes it is more likely than not that the net deferred tax asset related to capital losses will not be realized and has recorded a valuation allowance of $2.0 million and $2.2 million at December 31, 2013 and 2012, respectively, attributable to this net deferred tax asset. The net change in the valuation allowance during the year ending December 31, 2013 of $0.2 million is primarily attributable to the generation of capital gains in the current year.

At December 31, 2013, the Company had a $0.3 million deferred tax asset for state net operating loss carryovers totaling $6.3 million that are scheduled to expire in various tax years: $4.4 million in 2030; $0.1 million in 2031; and $1.8 million in 2032. The Company believes that it is more likely than not that the full amount of these state net operating loss carryovers will be utilized before they expire.

A reconciliation of the beginning and ending gross amount of unrecognized tax benefits under the provisions of ASC 740-10 is as follows:



	2013			2012			2011
	(In thousands)
Balance at January 1	$	4,802		$	526		$	477
Additions based on tax positions related to the current year	143			149			98
Additions based on tax positions taken in prior years	1,493			4,332			44
Decreases based on tax positions taken in prior years	(4,332		)	—			(60		)
Decreases based on settlements with taxing authorities	(1,493		)	—			—
Decreases based on the expiration of statute of limitations	(64		)	(205		)	(33		)
Balance at December 31	$	549		$	4,802		$	526

Excluded from the gross amount of unrecognized tax benefits for the years ended December 31, 2013, 2012, and 2011 are the federal tax benefits associated with the gross amount of state unrecognized tax benefits which, if recognized, would affect the effective tax rate. The net amount of unrecognized tax benefit which, if recognized, would affect the effective tax rate is $0.4 million at December 31, 2013, $0.2 million at December 31, 2012, and $0.4 million at December 31, 2011.

During the year ended December 31, 2013, the Company’s gross amount of unrecognized tax benefits decreased by $4.3 million, from $4.8 million at December 31, 2012, to $0.5 million at December 31, 2013. The $4.3 million decrease includes the release of $4.3 million of timing-related uncertainties as a result of the Company filing an accounting method change for income tax purposes. The release of $4.3 million of timing-related uncertainties did not affect the effective tax rate. During the year ended December 31, 2013, the Company established $1.5 million of gross unrecognized tax benefits related primarily to a change in the interpretation of tax law with respect to certain tax positions taken on previously filed tax returns. The Company subsequently released $1.5 million of gross unrecognized tax benefits due to settlements with taxing authorities. The Company does not currently believe there is a reasonable possibility of any significant change to unrecognized tax benefits within the next twelve months.

The Company classifies interest and penalties, if applicable, related to unrecognized tax benefits as a component of income tax expense in the consolidated statements of operations. Interest and penalties recognized as part of the Company’s income tax expense was a benefit of $0.4 million for the year ended December 31, 2013, an expense of $0.3 million for the year ended December 31, 2012, and immaterial for the year ended December 31, 2011. The accrued amounts for interest and penalties were immaterial as of December 31, 2013, $0.4 million as of December 31, 2012, and immaterial as of December 31, 2011.

Federal income tax returns for the tax years subsequent to 2008 remain subject to examination by the Internal Revenue Service. The examination by the Internal Revenue Service for the tax year ended December 31, 2008 was settled in April, 2011. The resolution of this examination did not have a significant impact on the effective tax rate. In January, 2014, the Company received notification that the Company’s federal income tax return for the tax year ended December 31, 2009 had been selected for examination by the Internal Revenue Service. The Company believes the resolution of this examination will not have a significant impact on the effective tax rate.

State income tax returns for the Company’s major tax jurisdictions of California, Massachusetts, and New York have either been examined or remain subject to examination for all the tax years subsequent to 2008. The examination by the Commonwealth of Massachusetts for the tax year ended December 31, 2009 was settled in October, 2012. The resolution of this examination did not have a significant impact on the effective tax rate. The examination by the State of New York for the tax years ended December 31, 2008 through 2011 was settled in November 2013. The resolution of this examination resulted in a release of gross state unrecognized tax benefits of $1.5 million, of which $0.6 million, including the federal tax benefits associated with the gross amount of these benefits, affected the effective tax rate.