Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

	Years ended December 31,
(In thousands)	2021		2020		2019
Current:
Federal	$	109,621	$	73,172	$	84,447
State and local	20,374		17,417		18,595
Total current	129,995		90,589		103,042
Deferred:
Federal	(9,844)		(23,799)		811
State and local	4,846		(7,437)		116
Total deferred	(4,998)		(31,236)		927
Total federal	99,777		49,373		85,258
Total state and local	25,220		9,980		18,711
Income tax expense	$	124,997	$	59,353	$	103,969

Included in the Company's income tax expense for the years ended December 31, 2021, 2020, and 2019, are net tax credits of approximately $2.6 million, $1.1 million, and $4.8 million, respectively, along with a $0.4 million benefit from operating loss carryforwards in 2021. The deferred federal benefit in 2021 reflects the effects of elections Webster made on its 2020 federal tax return to defer cost recovery deductions, which did not impact deferred state and local expense to any significant degree.

The $2.6 million of net tax credits in 2021 includes $0.5 million for increases in federal and state research tax credits previously estimated for and recognized in 2020. 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 before 2019.

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%:

	Years ended December 31,
	2021				2020				2019
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Income tax expense at federal statutory rate	$	112,111	21.0	%	$	58,795	21.0	%	$	102,205	21.0	%
Reconciliation to reported income tax expense:
SALT expense, net of federal	19,924		3.7		7,884		2.8		14,782		3.0
Tax-exempt interest income, net	(6,814)		(1.3)		(7,181)		(2.6)		(6,752)		(1.4)
Increase in cash surrender value of life insurance	(3,030)		(0.6)		(3,058)		(1.1)		(3,069)		(0.6)
Tax deficiencies (excess tax benefits), net	(1,479)		(0.3)		484		0.2		(2,251)		(0.4)
Non-deductible FDIC Deposit insurance premiums	2,064		0.4		2,172		0.8		1,904		0.4
Non-deductible merger-related expenses	3,451		0.7		—		—		—		—
Other, net	(1,230)		(0.2)		257		0.1		(2,850)		(0.6)
Income tax expense and effective tax rate	$	124,997	23.4	%	$	59,353	21.2	%	$	103,969	21.4	%

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

	At December 31,
(In thousands)	2021		2020
Deferred tax assets:
Allowance for loan and lease losses	$	78,905	$	93,791
Net operating loss and credit carry forwards	64,366		66,840
Compensation and employee benefit plans	22,840		27,643
Lease liabilities under operating leases	38,130		41,679
Other	12,790		8,750
Gross deferred tax assets	217,031		238,703
Valuation allowance	37,374		37,374
Total deferred tax assets, net of valuation allowance	$	179,657	$	201,329
Deferred tax liabilities:
Net unrealized gain on securities available for sale	$	1,885	$	24,364
Net unrealized gain on derivatives	2,584		7,616
ROU assets under operating leases	31,580		33,569
Equipment financing leases	21,193		38,511
Premises and equipment	879		6,735
Goodwill and other intangible assets	5,690		5,954
Other	6,441		3,294
Gross deferred tax liabilities	70,252		120,043
Deferred tax assets, net	$	109,405	$	81,286

The Company's DTAs, net increased by $28.1 million during 2021, primarily reflecting the $5.0 million deferred tax benefit and a $23.2 million benefit allocated directly to AOCI. The decreases in the equipment financing leases and premises and equipment DTLs during 2021 reflect elections Webster made on its 2020 federal tax return to defer cost recovery deductions.

The valuation allowance of $37.4 million at both December 31, 2021 and 2020 is attributable to SALT net operating loss carryforwards, which approximated $1.1 billion at December 31, 2021 and are scheduled to expire in varying amounts during tax years 2024 through 2032. The valuation allowance has been established for approximately $630.8 million of those net operating loss carryforwards estimated to expire unused.

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 Cuts and Jobs Act of 2017, significant positive evidence remains in support of management's conclusion regarding the realizability of the Company'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 DTL 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, 2021 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 of unrecognized tax benefits (UTBs):

	Years ended December 31,
(In thousands)	2021		2020		2019
Beginning balance	$	4,252	$	4,813	$	2,856
Additions as a result of tax positions taken during the current year	294		87		1,106
Additions as a result of tax positions taken during prior years	434		572		1,744
Reductions as a result of tax positions taken during prior years	(186)		(694)		(238)
Reductions relating to settlements with taxing authorities	(267)		(130)		(18)
Reductions as a result of lapse of statute of limitation periods	(278)		(396)		(637)
Ending balance	$	4,249	$	4,252	$	4,813

At December 31, 2021, 2020, and 2019, there were $3.5 million, $3.5 million, and $3.9 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. Webster recognized an expense of $0.3 million during the year ended December 31, 2021, and a benefit of $0.1 million for both the years ended December 31, 2020 and 2019. At December 31, 2021 and 2020, the Company had accrued interest and penalties related to UTBs of $1.9 million and $1.7 million respectively.

Webster has determined it is reasonably possible that its total UTBs could decrease by an amount in the range of $1.6 million to $2.6 million by the end of 2022 as a result of potential lapses in statute-of-limitation periods and/or potential settlements with taxing authorities concerning various apportionment, tax-base, and research tax credit determinations.

Webster's federal tax returns for all years subsequent to 2016 remain open to examination. Webster's tax returns filed in its principal state tax jurisdictions of Connecticut, Massachusetts, New York, and Rhode Island for years subsequent to 2014, or 2017, are either under or remain open to examination.