Income Taxes

12 Months Ended

Dec. 31, 2019

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


	Years ended December 31,
(In thousands)	2019		2018		2017
Current:
Federal	$	84,447	$	58,334	$	96,364
State and local	18,595		13,409		11,061
Total current	103,042		71,743		107,425
Deferred:
Federal	811		8,508		39,568
State and local	116		964		(48,642)
Total deferred	927		9,472		(9,074)

Total federal	85,258		66,842		135,932
Total state and local	18,711		14,373		(37,581)
Income tax expense	$	103,969	$	81,215	$	98,351

Included in the Company's income tax expense for the years ended December 31, 2019, 2018, and 2017, are net tax credits of $4.8 million, $1.2 million, and $1.6 million, respectively. Income tax expense in 2017 also included benefits from operating loss carryforwards of $25.1 million. These net tax credits and benefits are exclusive of the Tax Act impacts.

The $4.8 million of net tax credits in 2019 includes $3.0 million, related to federal and state research tax credits, $2.4 million of which relates to the Company’s qualifying technology expenditures incurred between 2015 and 2018.

The Company's deferred state and local benefit in 2017 includes $47.5 million related to a reduction in its beginning-of-year valuation allowance for SALT DTA's, or $37.5 million net of deferred federal expense of $10.0 million. The deferred state and local benefit in 2017 also includes $1.8 million from other SALT DTA adjustments, net of federal effects.

The Company's deferred federal expense in 2017 also includes $31.5 million from a re-measurement of its DTA upon the enactment of the Tax Act. Due to a $10.6 million impact of the Tax Act on the $39.3 million of net SALT DTA adjustments noted above, the Company reported a $20.9 million expense attributable to the Tax Act, and a $28.7 million net benefit from SALT DTAs in 2017.

The following table reflects a reconciliation of reported income tax expense to the amount that would result from applying the federal statutory rate of 21.0% in 2019, and 2018, and 35.0% and 2017:


	Years ended December 31,
	2019						2018						2017
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Income tax expense at federal statutory rate	$	102,205	21.0	%	$	92,743	21.0	%	$	123,826	35.0	%
Reconciliation to reported income tax expense:
SALT expense, net of federal	14,782		3.0		11,354		2.6		8,189		2.3
Tax-exempt interest income, net	(6,752)		(1.4)		(6,475)		(1.5)		(10,826)		(3.1)
Increase in cash surrender value of life insurance	(3,069)		(0.6)		(3,069)		(0.7)		(5,120)		(1.4)
Excess tax benefits, net	(2,251)		(0.4)		(4,483)		(1.0)		(6,349)		(1.8)
Non-deductible FDIC Deposit insurance premiums	1,904		0.4		2,215		0.5		—		—
SALT DTA adjustments, net of federal	—		—		—		—		(28,724)		(8.1)
Tax Act impacts, net	—		—		(10,982)		(2.5)		20,891		5.9
Other, net	(2,850)		(0.6)		(88)		—		(3,536)		(1.0)
Income tax expense and effective tax rate	$	103,969	21.4	%	$	81,215	18.4	%	$	98,351	27.8	%

Included in the Tax Act impacts, net for 2018 are $10.4 million of tax planning benefits related to the Tax Act.

The following table reflects the significant components of the DTAs, net:


	At December 31,
(In thousands)	2019		2018
Deferred tax assets:
Allowance for loan and lease losses	$	53,851	$	54,390
Net operating loss and credit carry forwards	69,827		70,808
Compensation and employee benefit plans	24,518		29,623
Lease liabilities under operating leases	45,923		—
Net unrealized loss on securities available for sale	—		25,060
Other	9,521		14,388
Gross deferred tax assets	203,640		194,269
Valuation allowance	38,181		38,181
Total deferred tax assets, net of valuation allowance	$	165,459	$	156,088
Deferred tax liabilities:
Net unrealized gain on securities available for sale	$	6,430	$	—
ROU assets under operating leases	40,908		—
Equipment financing leases	31,332		28,140
Premises and equipment	7,838		10,293
Loan origination costs, net	6,816		9,608
Goodwill and other intangible assets	6,172		6,293
Other	3,988		5,238
Gross deferred tax liabilities	103,484		59,572
Deferred tax assets, net	$	61,975	$	96,516

The Company's DTAs, net decreased by $34.5 million during 2019, reflecting the $0.9 million deferred tax expense and a $33.6 million benefit allocated directly to shareholders' equity.

The $38.2 million valuation allowance at December 31, 2019 is attributable to SALT net operating loss carryforwards, which approximated $1.2 billion.

SALT net operating loss carryforwards approximated $1.2 billion at December 31, 2019 and are scheduled to expire in varying amounts during tax years 2024 through 2032. The valuation allowance has been established for approximately $644.4 million of those net operating loss carryforwards estimated to expire unused. Credit carryovers of $0.7 million, net at December 31, 2019 have a five-year carryover period and are scheduled to expire in varying amounts during tax years 2020 through 2024.

Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its total DTAs, net of the valuation allowance. Although taxable income in prior years is no longer able to be included as a source of taxable income, due to the general repeal of the carryback of net operating losses under the Tax Act, significant positive evidence remains in support of management's conclusion regarding the realizability of Webster's DTAs, including projected future reversals of existing taxable temporary differences and book-taxable income levels in recent and projected in future years. 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.

A deferred tax liability of $15.3 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 liquidation. Webster does not expect any of those events to occur. At December 31, 2019 the cumulative taxable temporary differences applicable to those reserves approximated $58.0 million.