Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Total income tax was allocated for the years ended December 31, 2022, 2021 and 2020 as follows:             

	Years ended December 31,
	2022		2021	2020
Income tax expense	$	40,026	46,801	17,672
Shareholders’ equity for unrealized gain/(loss) on securities available-for-sale	(45,321)		(10,425)	5,061
Shareholders’ equity for pension adjustment	6,980		9,659	(3,774)
Unallocated income tax	$	1,685	46,035	18,959

Income tax expense applicable to income before taxes consists of:         

	Years ended December 31,
	2022		2021	2020
Current tax provision/(benefit):
Federal	$	36,235	24,554	23,968
State	9,295		9,933	1,788
Total current tax provision/(benefit)	45,530		34,487	25,756
Deferred tax provision/(benefit):
Federal	(5,325)		10,752	(9,072)
State	(179)		1,562	988
Total deferred tax provision/(benefit)	(5,504)		12,314	(8,084)
Total income tax expense	$	40,026	46,801	17,672

A reconciliation of the expected federal statutory income tax rate to the effective rate, expressed as a percentage of pretax income for the years ended December 31, 2022, 2021 and 2020, is as follows:

	Years ended December 31,
	2022		2021		2020
Expected tax rate	21.0	%	21.0	%	21.0	%
Tax-exempt interest income	(1.1)	%	(0.9)	%	(1.7)	%
State income tax, net of federal benefit	4.0	%	4.5	%	2.2	%
Bank-owned life insurance	(0.9)	%	(0.6)	%	(1.1)	%
Stock-based compensation	0.1	%	(0.1)	%	0.2	%
Dividends on stock plans	(0.5)	%	(0.4)	%	(0.9)	%
Low income housing and historic tax credits	(0.2)	%	(0.2)	%	(0.9)	%
Other	0.6	%	—	%	0.3	%
Effective tax rate	23.0	%	23.3	%	19.1	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 are presented below:

	December 31,
	2022		2021
Deferred tax assets:
Deferred compensation expense	$	4,804	4,230
Bad debts	27,105		23,273
Other reserves	3,554		1,333
Accrued post-retirement benefit cost	502		900
Stock benefit plans	652		623
Pension and post-retirement benefits	2,767		9,747
Unrealized loss on the fair value of securities available-for-sale	49,414		4,093
Deferred income	95		341
Lease liability	13,101		12,958
Purchase accounting	696		432
Net operating loss	1,592		2,140
Other	1,877		922
Total deferred tax assets	106,159		60,992
Deferred tax liabilities:
Pension expense	6,231		6,993
Intangible assets	17,400		16,543
Mortgage servicing rights	1,768		2,278
Fixed assets	6,518		5,287
Net deferred loan costs	3,055		2,338
Right of use asset	12,463		12,322
Interest rate derivatives	123		341
Other	2,369		2,503
Total deferred tax liabilities	49,927		48,605
Net deferred tax asset	$	56,232	12,387

    We have $2.9 million of federal net operating loss carryovers subject to the annual limitation under Internal Revenue Code Section 382 at December 31, 2022. The carryovers begin to expire in 2030 and are expected to be fully realized. We have $32.0 million of Indiana net operating loss carryovers subject to annual limitation as Indiana conforms to the Internal Revenue Code Section 382 at December 31, 2022. The carryovers begin to expire in 2026. Due to limitation, we do not expect to realize $7.6 million of the Indiana net operating loss carryover. This is netted against the net operating loss deferred tax asset in the preceding table.

    We recorded a valuation allowance against state deferred tax assets of a Northwest subsidiary since the subsidiary is not expected to utilize its deferred tax assets in the foreseeable future. This valuation allowance is netted against other deferred tax assets in the preceding table.

Other than stated above, we have determined that no valuation allowance is necessary for the deferred tax assets because it is more likely than not that these assets will be realized through future reversals of existing temporary differences and through future taxable income. We will continue to review the criteria related to the recognition of deferred tax assets on a regular basis.

We utilize a comprehensive approach to recognize, measure, present and disclose in our financial statements uncertain tax positions that the company has taken or expects to take on a tax return. We recognize interest accrued and penalties (if any) related to unrecognized tax benefits in income tax expense. The accrual for interest and penalties was not material for all years presented.

The following table presents changes in unrecognized tax benefits at December 31, 2022, 2021 and 2020:            

	Year ended December 31,
	2022		2021	2020
Unrecognized tax benefits:
Balance, beginning of year	$	241	331	—
Increases related to prior year tax positions	252		37	336
Decreases related to prior year tax positions	(28)		(173)	(5)
Increases related to current year tax positions	8		46	—
Balance, end of year	$	473	241	331

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes. We do not expect any significant changes in unrecognized tax benefits during the next twelve months.

We are subject to routine audits of our tax returns by the Internal Revenue Service as well as all states in which we conduct business. We are subject to audit by the Internal Revenue Service for the tax periods ended after December 31, 2018 and generally subject to audit by any state in which we conduct business for the tax periods ended after December 31, 2018. We are under audit by the state of New York for tax years 2016 through 2018. We do not expect any material adjustments from this audit. No findings have been issued at this time.