Income Taxes

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



	Years ended December 31,
(In thousands)	2016		2015			2014
Current:
Federal	$	73,194	$	97,575		$	90,542
State and local	5,429		10,970			6,585
Total current	78,623		108,545			97,127
Deferred:
Federal	12,542		(7,279		)	(3,784		)
State and local	5,158		(8,234		)	(1,370		)
Total deferred	17,700		(15,513		)	(5,154		)

Total federal	85,736		90,296			86,758
Total state and local	10,587		2,736			5,215
Income tax expense	$	96,323	$	93,032		$	91,973

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 $1.0 million, $2.1 million, and $0.3 million for the years ended December 31, 2016, 2015, and 2014, 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,
	2016					2015					2014
(Dollars in thousands)	Amount			Percent		Amount			Percent		Amount			Percent
Income tax expense at federal statutory rate	$	106,208		35.0	%	$	104,217		35.0	%	$	102,095		35.0	%
Reconciliation to reported income tax expense:
State and local income taxes, net of federal benefit	6,882			2.3		7,563			2.5		3,390			1.2
Tax-exempt interest income, net	(8,917		)	(2.9	)	(7,117		)	(2.4	)	(7,335		)	(2.5	)
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	(5,166		)	(1.7	)	(4,557		)	(1.5	)	(4,612		)	(1.6	)
Other, net	(2,684		)	(1.0	)	(1,289		)	(0.5	)	(1,565		)	(0.6	)
Income tax expense and effective tax rate	$	96,323		31.7	%	$	93,032		31.2	%	$	91,973		31.5	%

Refundable income taxes totaling $0.7 million and $56.6 million at December 31, 2016 and 2015, respectively, are reflected in accrued interest receivable and other assets in the accompanying Consolidated Balance Sheets. Early in 2016 Webster received refunds of tax with interest from the carryback of its losses during tax years 2008 and 2009. Later in the year the Internal Revenue Service completed an examination of the Company’s 2010 through 2012 tax years, and Webster received refunds of tax with interest applicable to those years.

The following table reflects the significant components of the deferred tax assets, net:



	At December 31,
(In thousands)	2016			2015
Deferred tax assets:
Allowance for loan and lease losses	$	77,908		$	70,937
Net operating loss and credit carry forwards	64,644			68,735
Compensation and employee benefit plans	46,433			52,422
Net losses on derivative instruments	8,624			11,734
Net unrealized loss on securities available for sale	9,898			4,138
Other	17,682			21,663
Gross deferred tax assets	225,189			229,629
Valuation allowance	(71,474		)	(74,918		)
Total deferred tax assets, net of valuation allowance	$	153,715		$	154,711
Deferred tax liabilities:
Equipment-financing leases	$	41,910		$	23,934
Deferred income on repurchase of debt	4,251			6,376
Intangible assets	9,952			9,298
Mortgage servicing assets	7,313			7,127
Other	5,898			6,398
Gross deferred tax liabilities	69,324			53,133
Deferred tax assets, net	$	84,391		$	101,578

The Company's DTAs decreased by $17.2 million during 2016, reflecting primarily the $17.7 million deferred tax expense and a $1.7 million benefit allocated directly to shareholders equity.

The $71.5 million valuation allowance at December 31, 2016 consisted of $67.8 million attributable to net state deferred tax assets and $3.7 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 $1.7 million net decrease in the portion applicable to capital losses, including $2.1 million related to the redemption of an equity interest in 2016, characterized as capital for tax purposes; and (ii) a $1.8 million decrease applicable to changes in net state deferred tax assets, which had a full valuation allowance 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 asset, net of the valuation allowance. Significant positive evidence exists in support of management’s conclusion regarding the realization of Webster's DTAs, including: book-taxable income levels in recent years and projected future years; recoverable taxes paid in 2016 and 2015; 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 DTAs will ultimately be realized.

Capital losses approximating $12.3 million at December 31, 2016 are scheduled to expire in varying amounts during tax years 2017 and 2018. A valuation allowance has been established for the tax effect of substantially all of these losses, as noted above.

State net operating losses approximating $1.2 billion at December 31, 2016 are scheduled to expire in varying amounts during tax years 2021 through 2032, and credits, totaling $1.4 million at December 31, 2016, have a five-year carryover period, with excess credits subject to expiration annually. A valuation allowance of $56.5 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, 2016 and 2015 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 UTBs:



	Years ended December 31,
(In thousands)	2016			2015			2014
Beginning balance	$	5,094		$	4,593		$	3,109
Additions as a result of tax positions taken during the current year	613			865			956
Additions as a result of tax positions taken during prior years	—			1,254			1,031
Reductions as a result of tax positions taken during prior years	(625		)	(247		)	—
Reductions relating to settlements with taxing authorities	(693		)	(992		)	—
Reductions as a result of lapse of statute of limitations	(542		)	(379		)	(503		)
Ending balance	$	3,847		$	5,094		$	4,593

At December 31, 2016, 2015, and 2014, there are $2.5 million, $3.3 million, and $3.0 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, 2016, 2015, and 2014, Webster recognized interest and penalties resulting in a benefit of $0.2 million, and an expense of $1.1 million, and $0.5 million, respectively. At December 31, 2016 and 2015, the Company had accrued interest and penalties related to UTBs of $1.7 million and $2.5 million, respectively.

Webster has determined it is reasonably possible that its total UTBs could decrease by an amount in the range of $1.0 million to $2.1 million by the end of 2017, 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 2012 remain open to examination. For Webster's principal state tax jurisdictions (Connecticut, Massachusetts, New York and Rhode Island) returns for years subsequent to 2012 are either under, or remain open to, examination.