Income Taxes

Income tax expense reflects the following expense (benefit) components:



	Years ended December 31,
(In thousands)	2015			2014			2013
Current:
Federal	$	98,442		$	90,542		$	62,042
State and local	11,047			6,585			3,572
Total current	109,489			97,127			65,614
Deferred:
Federal	(7,279		)	(3,784		)	10,760
State and local	(8,234		)	(1,370		)	739
Total deferred	(15,513		)	(5,154		)	11,499

Total federal	91,163			86,758			72,802
Total state and local	2,813			5,215			4,311
Income tax expense	$	93,976		$	91,973		$	77,113

The Company's income tax expense reflects the benefits of an operating loss carryforward of $3.0 million in 2015, and net tax credits of $2.1 million, $0.3 million, and $0.6 million for the years ended December 31, 2015, 2014, and 2013, respectively.

The following table reflects a reconciliation of reported income tax expense to the amount that would result from applying the federal statutory rate of 35.0%:



	Years ended December 31,
	2015					2014					2013
(Dollars in thousands)	Amount			Percent		Amount			Percent		Amount			Percent
Income tax expense at federal statutory rate	$	105,111		35.0	%	$	102,095		35.0	%	$	89,799		35.0	%
Reconciliation to reported income tax expense:
State and local income taxes, net of federal benefit	7,613			2.5		3,390			1.2		2,802			1.1
Tax-exempt interest income, net	(7,117		)	(2.4	)	(7,335		)	(2.5	)	(8,517		)	(3.3	)
Decrease in valuation allowance applicable to net state deferred tax assets, net of federal effects	(5,785		)	(1.9	)	—			—		—			—
Increase in cash surrender value of life insurance	(4,557		)	(1.5	)	(4,612		)	(1.6	)	(4,819		)	(1.9	)
Other, net	(1,289		)	(0.4	)	(1,565		)	(0.6	)	(2,152		)	(0.8	)
Income tax expense and effective tax rate	$	93,976		31.3	%	$	91,973		31.5	%	$	77,113		30.1	%

Refundable income taxes totaling $56.6 million and $56.7 million at December 31, 2015 and 2014, respectively, are reflected in accrued interest receivable and other assets in the accompanying Consolidated Balance Sheets, and are largely attributable to federal carryback claims applicable to 2008 and 2009 losses. During 2015, the Internal Revenue Service (“IRS”) completed its examination of Webster and submitted its report to the U.S. congressional Joint Committee on Taxation (“JCT”). The JCT completed its review in late 2015, taking no exception to the conclusions reached by the IRS. The refunds, which include estimated non-contingent accrued interest income of $2.8 million and $1.0 million at December 31, 2015 and 2014, respectively, are anticipated to be received by the Company in early 2016.

The following table reflects the significant components of the deferred tax asset, net (“DTA”):



	At December 31,
(In thousands)	2015			2014
Deferred tax assets:
Allowance for loan and lease losses	$	70,937		$	65,288
Net operating loss and credit carry forwards	62,403			64,561
Compensation and employee benefit plans	52,422			47,748
Net losses on derivative instruments	11,734			12,637
Net unrealized loss on securities available for sale	4,138			—
Other	27,862			27,300
Gross deferred tax assets	229,496			217,534
Valuation allowance	(74,918		)	(80,722		)
Total deferred tax assets, net of valuation allowance	$	154,578		$	136,812
Deferred tax liabilities:
Net unrealized gain on securities available for sale	$	—		$	10,288
Equipment-financing leases	23,934			21,930
Deferred income on repurchase of debt	6,376			8,502
Intangible assets	9,165			9,242
Mortgage servicing assets	7,127			7,230
Other	6,398			5,747
Gross deferred tax liabilities	53,000			62,939
Deferred tax asset, net	$	101,578		$	73,873

The Company's DTA increased by $27.7 million during 2015, reflecting primarily the $15.5 million deferred tax benefit and a $14.3 million benefit allocated directly to shareholders equity. The $15.5 million deferred benefit included a $5.8 million reduction in the beginning-of-year valuation allowance applicable to state and local deferred tax assets. The $14.3 million benefit allocated to shareholders' equity included $13.3 million related to a reduction in valuations of available-for-sale securities during the year.

The $74.9 million valuation allowance at December 31, 2015 consisted of $69.6 million attributable to net state deferred tax assets and $5.3 million to capital losses, deductible only to the extent of capital gains for federal tax purposes. The decrease in the valuation allowance includes: (i) a $1.0 million decrease applicable to capital losses; (ii) the $5.8 million reduction in the beginning-of-year valuation allowance noted above, applicable to a change in the Company’s estimated realizability of state deferred tax assets for which a full valuation allowance had been established at the beginning of the year, including $4.4 million applicable to future years; and (iii) a $1.0 million increase applicable to changes in net state deferred tax assets for which a full valuation allowance had been established at both the beginning and end of the year.

Management believes it is more likely than not that Webster will realize its total deferred tax assets, net of the valuation allowance. Significant positive evidence exists in support of management’s conclusion regarding the realization of Webster's DTA, including: book-taxable income levels in recent years and projected future years; recoverable taxes paid in 2015 and 2014; and projected future reversals of existing taxable temporary differences. There can, however, be no assurance that any specific level of future income will be generated or that the Company’s DTA will ultimately be realized.

Capital losses approximating $15.4 million at December 31, 2015 are scheduled to expire in varying amounts during tax years 2017 and 2018. A full valuation allowance has been established for the tax effect of these losses, as noted above.

State net operating losses approximating $1.2 billion at December 31, 2015 are scheduled to expire in varying amounts during tax years 2021 through 2032, and credits, totaling $2.2 million at December 31, 2015, have a five-year carryover period, with excess credits subject to expiration annually. A valuation allowance of $58.0 million, net, has been established for those state net operating losses and credits not expected to be utilized, and is included in the valuation allowance attributable to net state deferred tax assets as noted above.

A deferred tax liability of $21.4 million has not been recognized for certain thrift bad-debt reserves, established before 1988, that would become taxable upon the occurrence of certain events: distributions by Webster Bank in excess of certain earnings and profits; the redemption of Webster Bank’s stock; or a liquidation. Webster does not expect any of those events to occur. At December 31, 2015 and 2014 the cumulative taxable temporary differences applicable to those reserves approximated $58.0 million.

The following table reflects a reconciliation of the beginning and ending balances for unrecognized tax benefits (“UTBs”):



	Years ended December 31,
(In thousands)	2015			2014			2013
Beginning balance	$	4,593		$	3,109		$	3,119
Additions as a result of tax positions taken during the current year	865			956			528
Additions as a result of tax positions taken during prior years	1,254			1,031			442
Reductions as a result of tax positions taken during prior years	(247		)	—			(460		)
Reductions relating to settlements with taxing authorities	(992		)	—			—
Reductions as a result of lapse of statute of limitations	(379		)	(503		)	(520		)
Ending balance	$	5,094		$	4,593		$	3,109

At December 31, 2015, 2014, and 2013, there are $3.3 million, $3.0 million, and $2.0 million, respectively, of UTBs that, if recognized, would affect the effective tax rate.

Webster recognizes interest and penalties related to UTBs, where applicable, in income tax expense. During the years ended December 31, 2015, 2014, and 2013, Webster recognized interest and penalties totaling $1.1 million, $0.5 million, and $0.3 million, respectively. At December 31, 2015 and 2014, the Company had accrued interest and penalties related to UTBs of $2.5 million and $1.6 million, respectively.

Webster has determined it is reasonably possible that its total UTBs could decrease by an amount in the range of $2.2 million to $3.4 million by the end of 2016, primarily as a result of potential settlements with state and local taxing authorities concerning tax-base and apportionment determinations.

Webster is currently under, or subject to, examination by various taxing authorities. Federal tax returns for all years subsequent to 2009 are either under, or remain open to, examination. For Webster’s principal state tax jurisdictions, returns for years subsequent to the following are either under, or remain open to, examination: Massachusetts and Rhode Island 2010; Connecticut 2011; and New York 2012.