INCOME TAXES

The components of income tax expense for continuing operations for the years ended December 31, 2017, 2016, and 2015 are as follows:



	Year Ended December 31,
	2017		2016		2015
	(In thousands)
Current expense:
Federal	$	17,176	$	20,237	$	25,631
State	6,509		7,778		9,183
Total current expense	23,685		28,015		34,814
Deferred expense/(benefit):
Federal	19,820		1,976		(3,185		)
State	2,691		972		(1,237		)
Total deferred expense/(benefit)	22,511		2,948		(4,422		)
Income tax expense	$	46,196	$	30,963	$	30,392

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, 2017, 2016, and 2015 are as follows:



	Year Ended December 31,
	2017		2016		2015
Statutory Federal income tax rate	35.0	%	35.0	%	35.0	%
Increase/ (decrease) resulting from:
Re-measurement of deferred tax assets and liabilities	13.7	%	—	%	—	%
Nondeductible goodwill	10.1	%	—	%	—	%
Tax-exempt interest, net	(10.3	)%	(7.5	)%	(7.1	)%
State and local income tax, net of Federal tax benefit	6.9	%	5.6	%	5.5	%
Tax credits	(3.1	)%	(2.2	)%	(1.9	)%
Investments in affordable housing projects	2.2	%	0.9	%	0.9	%
Noncontrolling interests	(1.5	)%	(1.4	)%	(1.6	)%
Out-of-period adjustment	—	%	—	%	1.3	%
Other, net	0.5	%	0.2	%	0.5	%
Effective income tax rate	53.5	%	30.6	%	32.6	%

On December 22, 2017, H.R. 1, the Tax Act, was enacted by the U.S. government. Substantially all of the provisions of the Tax Act are effective as of January 1, 2018. The Tax Act includes significant changes to the Internal Revenue Code of 1986, as amended, including amendments which significantly change the taxation of business entities. The more significant changes in the Tax Act that impact the Company are the reduction in the federal corporate tax rate from 35% to 21% and the changes to the deductibility of executive compensation, both of which are effective as of January 1, 2018. Under ASC 740, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted, or December 22, 2017 for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. The Company re-measured its deferred tax assets and liabilities at the 21% federal corporate tax rate, reevaluated its investments in affordable housing projects using the 21% federal corporate tax rate, and reduced its deferred tax assets associated with executive compensation that is no longer deductible. As a result of these changes, the Company recorded a federal tax expense of $12.9 million in the fourth quarter of 2017.

The staff of the SEC has recognized the complexity of reflecting the impacts of the Tax Act, and on December 22, 2017 issued guidance in Staff Accounting Bulletin No. 118 (“SAB 118”) which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting. SAB 118 describes three scenarios associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. The Company completed its accounting of the effects of the Tax Act which have been reflected in the December 31, 2017 financial statements.

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 tax 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.

The components of gross deferred tax assets and gross deferred tax liabilities at December 31, 2017 and 2016 are as follows:



	December 31,
	2017		2016
	(In thousands)
Gross deferred tax assets:
Allowance for loan and OREO losses	$	22,782	$	35,545
Interest on nonaccrual loans	295		548
Stock compensation	3,156		6,079
Deferred and accrued compensation	11,822		19,801
Contingent payments	1,236		1,868
Unrealized loss on investments	3,345		8,264
Other	1,437		905
Gross deferred tax assets	44,073		73,010
Total deferred tax assets	44,073		73,010
Gross deferred tax liabilities:
Deferred income on repurchase of debt	832		2,692
Goodwill and acquired intangible assets	12,246		12,929
Fixed assets	991		67
Prepaid expenses	347		611
Other	626		1,251
Total gross deferred tax liabilities	15,042		17,550
Net deferred tax asset	$	29,031	$	55,460

Of the $26.4 million net decrease in the Company’s net deferred tax asset during 2017, $22.5 million was recognized as deferred income tax expense, $0.3 million was recognized as deferred income tax expense for discontinued operations, and $3.6 million was recognized as a decrease to shareholders’ equity. The $22.5 million deferred income tax expense includes $11.8 million from the re-measurement of deferred tax assets and liabilities due to the reduction in the federal corporate tax rate from 35% to 21% effective January 1, 2018 and $0.7 million from the reduction of deferred tax assets associated with executive compensation that is no longer deductible as a result of the Tax Act.

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-forward periods.

The Company believes that it is more likely than not that the net deferred tax asset as of December 31, 2017 will be realized, based primarily upon the ability to generate future 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 2015 through 2017.


•	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.

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



	2017			2016			2015
	(In thousands)
Balance at January 1	$	974		$	1,022		$	1,067
Additions based on tax positions related to the current year	183			160			163
Additions based on tax positions taken in prior years	227			—			—
Decreases based on the expiration of statute of limitations	(359		)	(208		)	(208		)
Balance at December 31	$	1,025		$	974		$	1,022

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, 2017, 2016, and 2015 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 $0.9 million at December 31, 2017 and $0.8 million at December 31, 2016 and 2015.

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, 2017, 2016, and 2015. The accrued amounts for interest and penalties were immaterial as of December 31, 2017, 2016, and 2015.

Federal income tax returns remain subject to examination by the Internal Revenue Service for all tax years subsequent to 2013. The examinations by the Internal Revenue Service for the tax years ended December 31, 2009 and December 31, 2012 were settled in August 2015 and December 2017, respectively. The resolution of these examinations did not have a significant impact on the effective tax rate.

State income tax returns for the Company’s major tax jurisdictions of California, Florida, Massachusetts, and New York have either been examined or remain subject to examination for all the tax years subsequent to 2013. The examination by the State of New York for the tax year ended December 31, 2012 was settled in February 2015 and the examinations by the State of New York for the tax years ended December 31, 2013 and 2014 were settled in June 2017. The resolution of these examinations did not have a significant impact on the effective tax rate.