INCOME TAXES

The components of income tax expense for continuing operations for the years ended December 31, 2016, 2015, and 2014 are as follows:



	Year Ended December 31,
	2016		2015			2014
	(In thousands)
Current expense:
Federal	$	20,237	$	25,631		$	20,557
State	7,778		9,183			7,254
Total current expense	28,015		34,814			27,811
Deferred expense/(benefit):
Federal	1,976		(3,185		)	3,895
State	972		(1,237		)	659
Total deferred expense/(benefit)	2,948		(4,422		)	4,554
Income tax expense	$	30,963	$	30,392		$	32,365

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, 2016, 2015, and 2014 are as follows:



	Year Ended December 31,
	2016		2015		2014
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
Increase/ (decrease) resulting from:
Tax exempt interest, net	(7.5	)%	(7.1	)%	(5.6	)%
State and local income tax, net of Federal tax benefit	5.6	%	5.5	%	5.2	%
Tax credits	(2.2	)%	(1.9	)%	(1.7	)%
Noncontrolling interests	(1.4	)%	(1.6	)%	(1.7	)%
Out-of-period adjustment	—	%	1.3	%	—	%
Other, net	1.1	%	1.4	%	1.2	%
Effective income tax rate	30.6	%	32.6	%	32.4	%

During the third quarter of 2015, the Company reevaluated its executive compensation plans and identified certain executive compensation that was previously treated as fully deductible was non-deductible. The correction resulted in $1.2 million of additional federal tax expense and $0.2 million of additional state tax, net of federal tax benefit, that was related to prior years. After evaluating the quantitative and qualitative aspects of the correction, the Company determined that previously issued consolidated financial statements were not materially misstated and, as a result, recorded the correction in 2015.

On April 13, 2015, New York City enacted legislation that requires corporations that are engaged in unitary business operations to file combined returns with their affiliates for tax years beginning on or after January 1, 2015. Starting in 2015, all of the Company’s affiliates are included in the Company’s New York City tax return instead of just those affiliates with nexus to New York City. The Company incorporated the impact of these New York City law changes in 2015 due to the law being enacted in 2015. The Company adjusted the New York City apportionment percentages for purposes of measuring deferred tax assets and liabilities that will reverse after the effective date. As a result of these changes, the Company recorded a state tax benefit of $0.5 million, net of federal tax, in 2015.

On March 31, 2014, New York enacted legislation that requires corporations that are engaged in unitary business operations to file combined returns with their affiliates for tax years beginning on or after January 1, 2015. Starting in 2015, all of the Company’s affiliates are included in the Company’s New York tax return instead of just those affiliates with nexus to New York. In addition, the New York tax rate will be reduced from 7.1% to 6.5% for tax years beginning on or after January 1, 2016. The Company incorporated the impact of these New York law changes in 2014 due to the law being enacted in 2014. The Company adjusted the New York state applicable tax rate and apportionment percentages for purposes of measuring deferred tax assets and liabilities that will reverse after the effective date. As a result of these changes, the Company recorded a state tax benefit of $0.5 million, net of federal tax, in 2014.

The components of gross deferred tax assets and gross deferred tax liabilities at December 31, 2016 and 2015 are as follows:



	December 31,
	2016		2015
	(In thousands)
Gross deferred tax assets:
Allowance for loan losses	$	35,471	$	37,401
Allowance for losses on OREO	74		912
Interest on nonaccrual loans	548		833
Stock compensation	6,079		7,391
Deferred and accrued compensation	19,801		19,370
State loss carryforward, net of federal	—		60
Capital loss carryforward	—		458
Mark-to-market on securities available-for-sale	185		274
Contingent payments	1,868		1,978
Unrealized loss on investments	8,264		748
Other	720		756
Gross deferred tax assets	73,010		70,181
Less: valuation allowance	—		458
Total deferred tax assets	73,010		69,723
Gross deferred tax liabilities:
Cancellation of debt income deferral	2,692		4,035
Goodwill and acquired intangible assets	12,929		11,894
Fixed assets	67		62
Prepaid expenses	611		580
Other	1,251		1,453
Total gross deferred tax liabilities	17,550		18,024
Net deferred tax asset	$	55,460	$	51,699

Of the $3.8 million net increase in the Company’s net deferred tax asset during 2016, $2.9 million was recognized as deferred income tax expense, $0.1 million was recognized as deferred income tax benefit for discontinued operations, and $6.6 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 of the appropriate character within the carry-back and carry-forward periods.

The Company believes that it is more likely than not that the net deferred tax asset as of December 31, 2016 will be realized, based upon the ability to generate future taxable income as well as the availability of current and historical 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 2014 through 2016.


•	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, 2015, the Company had a $0.5 million deferred tax asset for $1.2 million of capital loss carryovers that were scheduled to expire in 2016. The Company believed it was more likely than not that the net deferred tax asset related to capital losses would not be realized and had recorded a valuation allowance of $0.5 million at December 31, 2015 attributable to this net deferred tax asset. The net change in the valuation allowance during the year ending December 31, 2016 of $0.5 million is primarily related to prior year provision to return differences as well as the unforeseen realization of capital losses during the year ending December 31, 2016.

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



	2016			2015			2014
	(In thousands)
Balance at January 1	$	1,022		$	1,067		$	549
Additions based on tax positions related to the current year	160			163			245
Additions based on tax positions taken in prior years	—			—			366
Decreases based on tax positions taken in prior years	—			—			—
Decreases based on settlements with taxing authorities	—			—			—
Decreases based on the expiration of statute of limitations	(208		)	(208		)	(93		)
Balance at December 31	$	974		$	1,022		$	1,067

The Company does not currently believe there is a reasonable possibility of any significant change to unrecognized tax benefits within the next twelve months.

Excluded from the gross amount of unrecognized tax benefits for the years ended December 31, 2016, 2015, and 2014 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 $0.8 million at December 31, 2016, 2015, and 2014.

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 immaterial for the years ending December 31, 2016, 2015, and 2014. The accrued amounts for interest and penalties were immaterial as of December 31, 2016, 2015, and 2014.

Federal income tax returns remain subject to examination by the Internal Revenue Service for all tax years subsequent to 2012. The examination by the Internal Revenue Service for the tax year ended December 31, 2009 was settled in August, 2015. The resolution of this examination did 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 2012. The examination by the State of New York for the tax year ended December 31, 2012 was settled in February, 2015. The resolution of this examination did not have a significant impact on the effective tax rate. As of December 31, 2016, the Company was under examination by the State of New York for the tax years ended December 31, 2013 and 2014. The Company believes the resolution of this examination will not have a significant impact on the effective tax rate.