INCOME TAXES

The components of income tax expense for continuing operations for the years ended December 31, 2018, 2017, and 2016 are as follows:



	Year Ended December 31,
	2018		2017		2016
	(In thousands)
Current expense:
Federal	$	20,165	$	17,176	$	20,237
State	12,152		6,509		7,778
Total current expense	32,317		23,685		28,015
Deferred expense:
Federal	2,857		19,820		1,976
State	2,363		2,691		972
Total deferred expense	5,220		22,511		2,948
Income tax expense	$	37,537	$	46,196	$	30,963

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 21% to the effective income tax rate for the year ended December 31, 2018 and the federal statutory income tax rate of 35% to the effective income tax rate for the years ended December 31, 2017 and 2016 are as follows:



	Year Ended December 31,
	2018		2017		2016
Statutory Federal income tax rate	21.0	%	35.0	%	35.0	%
Increase/ (decrease) resulting from:
State and local income tax, net of Federal tax benefit	9.6	%	6.9	%	5.6	%
Book versus tax difference	6.7	%	—	%	—	%
Tax-exempt interest, net	(4.8	)%	(10.3	)%	(7.5	)%
Tax credits	(2.9	)%	(3.1	)%	(2.2	)%
Investments in affordable housing projects	1.9	%	2.2	%	0.9	%
Noncontrolling interests	(0.5	)%	(1.5	)%	(1.4	)%
Re-measurement of deferred tax assets and liabilities	—	%	13.7	%	—	%
Nondeductible goodwill	—	%	10.1	%	—	%
Other, net	0.4	%	0.5	%	0.2	%
Effective income tax rate	31.4	%	53.5	%	30.6	%

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 were 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. Under ASC 740, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted, or the fourth quarter of 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. In the fourth quarter of 2017, 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 components of gross deferred tax assets and gross deferred tax liabilities at December 31, 2018 and 2017 are as follows:



	December 31,
	2018		2017
	(In thousands)
Gross deferred tax assets:
Allowance for loan and OREO losses	$	21,919	$	22,782
Interest on nonaccrual loans	254		295
Stock compensation	2,679		3,156
Deferred and accrued compensation	15,540		11,822
Contingent payments	—		1,236
Unrealized loss on investments	6,781		3,345
Other	1,294		1,437
Gross deferred tax assets	48,467		44,073
Total deferred tax assets	48,467		44,073
Gross deferred tax liabilities:
Deferred income on repurchase of debt	—		832
Goodwill and acquired intangible assets	11,492		12,246
Fixed assets	2,248		991
Prepaid expenses	344		347
Contingent payments	7,680		—
Other	65		626
Total gross deferred tax liabilities	21,829		15,042
Net deferred tax asset	$	26,638	$	29,031

Of the $2.4 million net decrease in the Company’s net deferred tax asset during 2018, $5.2 million was recognized as deferred income tax expense, $0.7 million was recognized as deferred income tax expense for discontinued operations, and $3.7 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-forward periods.

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 2016 through 2018.


•	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:



	2018			2017			2016
	(In thousands)
Balance at January 1	$	1,025		$	974		$	1,022
Additions based on tax positions related to the current year	149			183			160
Additions based on tax positions taken in prior years	—			227			—
Decreases based on the expiration of statute of limitations	(239		)	(359		)	(208		)
Balance at December 31	$	935		$	1,025		$	974

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, 2018, 2017, and 2016 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 benefits is $0.8 million, $0.9 million, $0.8 million at December 31, 2018, 2017, and 2016, respectively, which, if recognized would affect the effective tax rate.

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, 2018, 2017, and 2016. The accrued amounts for interest and penalties were immaterial as of December 31, 2018, 2017, and 2016.

Federal income tax returns remain subject to examination by the Internal Revenue Service for all tax years subsequent to 2014. State income tax returns for the Company’s major tax jurisdictions of California, Massachusetts, and New York remain subject to examination for all tax years subsequent to 2014.