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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Income tax expense reflects the following expense (benefit) components:
 Years ended December 31,
(In thousands)202220212020
Current:
Federal$170,779 $109,621 $73,172 
State and local52,579 20,374 17,417 
Total current223,358 129,995 90,589 
Deferred:
Federal(45,421)(9,844)(23,799)
State and local(24,243)4,846 (7,437)
Total deferred(69,664)(4,998)(31,236)
Total federal125,358 99,777 49,373 
Total state and local28,336 25,220 9,980 
Income tax expense$153,694 $124,997 $59,353 
Included in the Company's income tax expense for the years ended December 31, 2022, 2021, and 2020, are net tax credits of approximately $14.0 million, $2.6 million, and $1.1 million, respectively. These amounts relate primarily to LIHTC investments and include associated SALT credits and benefits, with the increase in 2022 primarily attributable to Webster's merger with Sterling.
Also included in the Company's income tax expense for the years ended December 31, 2022, and 2021, are benefits from operating loss carryforward of $10.3 million and $0.4 million, respectively. The 2022 amount includes a $9.9 million benefit related to a reduction in the Company's beginning-of-year valuation allowance for its SALT DTAs. The deferred federal benefit in 2021 reflects the effects of elections the Company 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 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,
 202220212020
(In thousands)AmountPercentAmountPercentAmountPercent
Income tax expense at federal statutory rate$167,575 21.0 %$112,111 21.0 %$58,795 21.0 %
Reconciliation to reported income tax expense:
SALT expense, net of federal32,259 4.1 19,924 3.7 7,884 2.8 
Tax-exempt interest income, net(35,371)(4.4)(6,814)(1.3)(7,181)(2.6)
Increase in cash surrender value of life insurance(6,122)(0.8)(3,030)(0.6)(3,058)(1.1)
Non-deductible FDIC Deposit insurance premiums5,581 0.7 2,064 0.4 2,172 0.8 
Low income housing tax credits and other benefits, net(7,627)(1.0)(615)(0.1)(289)(0.1)
Non-deductible compensation expense7,948 1.0 786 0.1 454 0.2 
Non-deductible merger-related expenses, excluding compensation2,717 0.3 3,451 0.7 — — 
SALT DTA valuation allowance adjustment, net(9,874)(1.2)— — — — 
Other, net(3,392)(0.4)(2,880)(0.5)576 0.2 
Income tax expense and effective tax rate$153,694 19.3 %$124,997 23.4 %$59,353 21.2 %
The following table reflects the significant components of the DTAs, net:
  At December 31,
(In thousands)20222021
Deferred tax assets:
ACL on loans and leases$161,932 $78,905 
Net operating loss and credit carry forwards72,035 64,366 
Compensation and employee benefit plans55,093 22,840 
Lease liabilities under operating leases64,899 38,130 
Net unrealized loss on AFS securities233,978 — 
Other38,314 12,790 
Gross deferred tax assets626,251 217,031 
Valuation allowance(29,176)(37,374)
Total deferred tax assets, net of valuation allowance$597,075 $179,657 
Deferred tax liabilities:
Net unrealized gain on AFS securities$— $1,885 
ROU assets under operating leases51,822 31,580 
Equipment financing leases74,295 21,193 
Goodwill and other intangible assets56,223 5,690 
Purchase accounting and fair value adjustments11,529 — 
Other31,572 9,904 
Gross deferred tax liabilities225,441 70,252 
Deferred tax assets, net$371,634 $109,405 
The Company's DTAs, net increased by $262.2 million during 2022, primarily reflecting the $69.7 million deferred tax benefit and a $245.9 million benefit allocated directly to AOCI, partially offset by a $51.9 million deferred tax liability, net, established in purchase accounting related to the merger with Sterling and acquisition of Bend.
The valuation allowance of $29.2 million at December 31, 2022, consists of approximately $28.6 million attributable to SALT net operating loss carryforwards and $0.6 million of federal credit carryforwards, as compared to $37.4 million at
December 31, 2021, attributable to SALT net operating loss carryforwards. The $8.2 million net decrease in the valuation allowance during 2022 reflects the $9.9 million reduction in the beginning-of-year valuation allowance related to a change in management's estimate about the realizability of the Company's SALT DTAs due to an estimated increase in future taxable income associated with the Sterling merger, partially offset by a $1.7 million valuation allowance established in purchase accounting related to the Bend acquisition.
SALT net operating loss carryforwards approximated $1.0 billion at December 31, 2022, including those related to the Sterling merger and Bend acquisition, and are scheduled to expire in varying amounts during tax years 2024 through 2032. Federal net operating loss carryforwards of approximately $21.9 million and credit carryforwards of $0.6 million at December 31, 2022, related to the Bend acquisition are subject to annual limitations on utilization, with the net operating losses able to be carried forward indefinitely and the credits scheduled to expire in varying amounts between 2038 and 2041. The valuation allowance has been established for approximately $484.4 million of those SALT net operating loss carryforwards and the $0.6 million of federal credit carryforwards that are 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.
DTLs of $63.2 million and $15.3 million at December 31, 2022, and 2021, respectively, have not been recognized for certain thrift bad-debt reserves, established before 1988, that would become taxable upon the occurrence of certain events: distributions by the Bank in excess of certain earnings and profits; the redemption of the Bank’s stock; or liquidation. The Company does not expect any of those events to occur. At December 31, 2022, and 2021, the cumulative taxable temporary differences applicable to those reserves approximated $233.1 million and $58.0 million, respectively, with the increase in 2022 attributable to the merger with Sterling.
The following table reflects a reconciliation of the beginning and ending balances of UTBs:
Years ended December 31,
(In thousands)202220212020
Beginning balance$4,249 $4,252 $4,813 
Additions as a result of tax positions taken during the current year223 294 87 
Additions as a result of tax positions taken during prior years8,807 434 572 
Reductions as a result of tax positions taken during prior years(503)(186)(694)
Reductions relating to settlements with taxing authorities(2,110)(267)(130)
Reductions as a result of lapse of statute of limitation periods(791)(278)(396)
Ending balance$9,875 $4,249 $4,252 
The increase in additions as a result of tax positions taken during prior years reflects the merger with Sterling. At
December 31, 2022, 2021, and 2020, there were $9.1 million, $3.5 million, and $3.5 million, respectively, of UTBs that if recognized would affect the effective tax rate.
The Company recognizes interest and penalties related to UTBs, where applicable, in income tax expense. The Company recognized an expense of $0.1 million and $0.3 million during the years ended December 31, 2022, and 2021, respectively, and a benefit of $0.1 million for the year ended December 31, 2020. At December 31, 2022 and 2021, the Company had accrued interest and penalties related to UTBs of $2.0 million and $1.9 million respectively.
The Company has determined it is reasonably possible that its total UTBs could decrease by between $0.7 million and $6.8 million by the end of 2023 as a result of potential lapses in statute-of-limitation periods and/or potential settlements with taxing authorities, primarily concerning various depreciation and state and local apportionment and tax-base determinations.
The Company's federal tax returns for all years subsequent to 2018 remain open to examination, including the carryback of a Sterling 2019 net operating loss under the CARES Act in 2020 to tax years 2014 and 2016, currently under review by the Internal Revenue Service. The Company's tax returns filed in its principal state tax jurisdictions of Connecticut, Massachusetts, New York, and Rhode Island for years subsequent to 2014, or 2018, are either under or remain open to examination.