INCOME TAXES

12 Months Ended

Dec. 31, 2019

Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2019, 2018, and 2017 were, as follows:



(In thousands)	2019			2018			2017
Current:
Federal tax expense	$	16,576		$	12,634		$	10,092
State tax expense	5,323			4,114			292
Total current tax expense	21,899			16,748			10,384
Deferred:
Federal tax expense	908			8,443			29,824
State tax (benefit)/expense	(344		)	3,770			1,805
Total deferred tax expense (1)	564			12,213			31,629
Change in valuation allowance	—			—			75
Income tax expense from continuing operations	$	22,463		$	28,961		$	42,088
Income tax (benefit)/expense from discontinued operations	(1,468		)	(1,313		)	2,414
Total	$	20,995		$	27,648		$	44,502


(1)	2017 deferred tax expense of $31.6 million includes an $18.1 million charge to re-measure the net deferred tax asset at December 31, 2017 pursuant to the reduction in the corporate income tax rate from 35% to 21%, effective January 1, 2018, per the Tax Cuts and Jobs Act enacted on December 22, 2017.

Effective Tax Rate

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2019, 2018, and 2017:



	2019					2018					2017
(In thousands, except rates)	Amount			Rate		Amount			Rate		Amount			Rate
Statutory tax rate	$	26,037		21.0	%	$	29,018		21.0	%	$	31,921		35.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit	3,641			2.9		7,081			5.1		1,699			1.9
Tax exempt income - investments, net	(3,527		)	(2.8	)	(3,620		)	(2.6	)	(5,395		)	(5.9	)
Bank-owned life insurance	(1,305		)	(1.1	)	(1,337		)	(1.0	)	(1,556		)	(1.7	)
Non-deductible merger costs	122			0.1		181			0.1		368			0.4
Tax credits, net of basis reduction	(3,531		)	(2.8	)	(3,574		)	(2.6	)	(4,656		)	(5.1	)
Change in valuation allowance	—			—		—			—		75			0.1
Impact of federal tax reform enactment	—			—		—			—		18,721			20.5
Other, net	1,026			0.8		1,212			0.9		911			1.0
Effective tax rate	$	22,463		18.1	%	$	28,961		20.9	%	$	42,088		46.2	%

Deferred Tax Assets and Liabilities

As of December 31, 2019 and 2018, significant components of the Company’s deferred tax assets and liabilities were, as follows:



(In thousands)	2019			2018
Deferred tax assets:
Allowance for loan losses	$	17,446		$	16,754
Unrealized capital loss on tax credit investments	6,195			6,045
Net unrealized loss on securities available for sale and pension in OCI	—			4,554
Employee benefit plans	10,565			5,161
Purchase accounting adjustments	39,359			27,249
Net operating loss carryforwards	951			1,162
Lease liability	22,497			—
Premises and equipment	739			—
Other	1,088			2,457
Deferred tax assets, net before valuation allowances	98,840			63,382
Valuation allowance	(200		)	(200		)
Deferred tax assets, net of valuation allowances	$	98,640		$	63,182

Deferred tax liabilities:
Net unrealized gain on securities available for sale and pension in OCI	$	(4,244	)	$	—
Premises and equipment	—			(1,654		)
Loan servicing rights	(4,669		)	(3,944		)
Deferred loan fees	(1,667		)	(3,310		)
Intangible amortization	(18,557		)	(13,940		)
Unamortized tax credit reserve	(1,142		)	(1,170		)
Right-of-use asset	(20,614		)	—
Deferred tax liabilities	$	(50,893	)	$	(24,018	)
Deferred tax assets, net	$	47,747		$	39,164

Deferred tax liabilities from discontinued operations	$	(3,418	)	$	(3,270	)
Deferred tax assets, net from continuing operations	$	51,165		$	42,434

The Company’s net deferred tax asset increased by $8.6 million during 2019, including $17.9 million from the acquisition of SIFI.

Deferred tax assets, net of valuation allowances, are expected to be realized through the reversal of existing taxable temporary differences and future taxable income.

Valuation Allowances

The components of the Company’s valuation allowance on its deferred tax asset, net as of December 31, 2019 and 2018 were, as follows:



(in thousands)	2019			2018
State tax basis difference, net of Federal tax benefit	$	(200	)	$	(200	)
Valuation allowances	$	(200	)	$	(200	)

The state tax basis difference, net of Federal tax benefit was originally recorded in 2012, due to management’s assessment that it is more likely than not that certain deferred tax assets recorded for the difference between the book basis and the state tax basis in certain tax credit limited partnership investments (LPs) will not be realized. Management anticipates that the remaining excess state tax basis will be realized as a capital loss upon disposition, and that it is unlikely that the Company will have capital gains against which to offset such capital losses.

There was no change in the valuation allowance during 2019. The valuation allowance as of December 31, 2019 is subject to change in the future as the Company continues to periodically assess the likelihood of realizing its deferred tax assets.

Tax Attributes

At December 31, 2019, the Company has $4.5 million of federal net operating loss carryforwards, the utilization of which are limited under Internal Revenue Code Section 382. These net operating losses begin to expire in 2024. The related deferred tax asset is $1.0 million.

Unrecognized Tax Benefits

On a periodic basis, the Company evaluates its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This evaluation takes into consideration the status of taxing authorities’ current examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment in relation to uncertain tax positions.

The following table presents changes in unrecognized tax benefits for the years ended December 31, 2019, 2018, and 2017:



(In thousands)	2019			2018			2017
Unrecognized tax benefits at January 1	$	467		$	304		$	460
Increase in gross amounts of tax positions related to prior years	26			533			—
Decrease in gross amounts of tax positions related to prior years	—			(370		)	(156		)
Decrease due to settlement with taxing authority	(185		)	—			—
Increase in gross amounts of tax positions related to current year	—			—			—
Decrease due to lapse in statute of limitations	(70		)	—			—
Unrecognized tax benefits at December 31	$	238		$	467		$	304

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes. The Company does not expect any significant changes in unrecognized tax benefits during the next twelve months.

All of the Company’s unrecognized tax benefits, if recognized, would be recorded as a component of income tax expense, therefore, affecting the effective tax rate. The Company recognizes interest and penalties, if any, related to the liability for uncertain tax positions as a component of income tax expense. The accrual for interest and penalties was not material for all years presented.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as in various states. In the normal course of business, the Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. The Company is no longer subject to examination for tax years prior to 2016 including any related income tax filings from its recent acquisitions. The Company has been selected for audit in the state of New York for tax years 2015-2017.