Income Taxes

12 Months Ended

Dec. 31, 2020

The following table presents the composition of income tax (benefit) expense for the years ended December 31:


(dollars in thousands)	2020		2019		2018
Federal
Current	$	4,256	$	18,918	$	13,616
Deferred	(4,273)		(406)		3,517
Total Federal	(17)		18,512		17,133
State
Current	145		589		720
Deferred	(129)		25		(8)
Total State	16		614		712
Total Federal and State	$	(1)	$	19,126	$	17,845

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. We ordinarily generate an annual effective tax rate that is less than the statutory rate of 21 percent primarily due to benefits resulting from certain partnership investments, such as low income housing and historic rehabilitation projects, tax-exempt interest, excludable dividend income and tax-exempt income on BOLI. The state tax provision is due to taxable business activities conducted at our loan production office in New York.

On December 22, 2017, H.R.1, originally known as the Tax Cuts and Jobs Act, or Tax Act, was signed into law. The Tax Act resulted in significant changes to the U.S. corporate tax system including a federal corporate rate reduction from 35 percent to 21 percent. The Tax Act also established new tax laws that became effective January 1, 2018. GAAP requires us to record the effects of a tax law change in the period of enactment. As a result, in 2017 we re-measured our deferred tax assets and liabilities and recorded a provisional adjustment of $13.4 million. This re-measurement adjustment was recognized as an increase to our income tax expense in the fourth quarter of 2017. The calculation over the income tax effects of the Tax Act was completed in the third quarter of 2018. We recognized a $3.0 million income tax benefit as a result of finalizing the calculation.

The following table presents a reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31:


	2020		2019		2018
Statutory tax rate	21.0	%	21.0	%	21.0	%
Low income housing tax credits	(11.1)	%	(3.3)	%	(2.5)	%
Tax-exempt interest	(11.9)	%	(2.1)	%	(2.1)	%
Bank owned life insurance	(1.8)	%	(0.4)	%	(0.4)	%
Gain on sale of a majority interest of insurance business	—	%	—	%	0.7	%
Merger related expenses	—	%	0.3	%	—	%
Other	3.8	%	0.8	%	0.3	%
Impact of the Tax Act	—	%	—	%	(2.5)	%
Effective Tax Rate	—	%	16.3	%	14.5	%

The following table presents significant components of our temporary differences as of the dates presented:


	December 31,
(dollars in thousands)	2020		2019
Deferred Tax Assets:
Allowance for credit losses	$	26,051	$	13,798
Lease liabilities	11,368		11,257
State net operating loss carryforwards	5,489		5,134
Net adjustment to funded status of pension	4,692		5,438
Low income housing partnerships	3,996		3,494
Other employee benefits	2,050		3,039
Other	3,798		1,856
Gross Deferred Tax Assets	57,444		44,016
Less: Valuation allowance	(5,489)		(5,134)
Total Deferred Tax Assets	51,955		38,882
Deferred Tax Liabilities:
Right-of-use lease assets	(10,141)		(10,476)
Net unrealized gains on securities available-for-sale	(7,125)		(2,570)
Deferred loan income	(6,796)		(3,555)
Prepaid pension	(5,209)		(5,971)
Purchase accounting adjustments	(1,971)		(1,269)
Depreciation on premises and equipment	(1,275)		(592)
Other	(1,245)		(1,243)
Total Deferred Tax liabilities	(33,762)		(25,676)
Net Deferred Tax Asset	$	18,193	$	13,206

We establish a valuation allowance when it is more likely than not that we will not be able to realize the benefit of the deferred tax assets. Except for Pennsylvania net operating losses, or NOLs, we have determined that no valuation allowance is needed for 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. The valuation allowance is reviewed quarterly and adjusted based on management’s assessments of realizable deferred tax assets. Gross deferred tax assets were reduced by a valuation allowance of $5.5 million in 2020 and $5.1 million in 2019 related to Pennsylvania income tax NOLs. The Pennsylvania NOL carryforwards total $54.9 million and will expire in the years 2021-2041.

Unrecognized Tax Benefits

The following table reconciles the change in Federal and State gross unrecognized tax benefits, or UTB, for the years ended December 31:


(dollars in thousands)	2020		2019		2018
Balance at beginning of year	$	1,051	$	768	$	909

Prior period tax positions	(18)		(10)		(251)
Current period tax positions	244		293		110

Balance at End of Year	$	1,277	$	1,051	$	768
Amount That Would Impact the Effective Tax Rate if Recognized	$	1,027	$	848	$	607

We classify interest and penalties as an element of tax expense. We monitor changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. As of December 31, 2020, no significant changes to UTB are projected; however, tax audit examinations are possible. As of December 31, 2020, all income tax returns filed for the tax years 2017 - 2019 remain subject to examination by the Internal Revenue Service. The Bank's income tax returns for the audit years, January 1, 2016 through December 31, 2018 are currently under audit by the New York Department of Taxation. This audit has remained open as of December 31, 2020.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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