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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The following table sets forth information regarding the Company’s tax provision and applicable tax rates for the periods indicated:
For the Year Ended December 31,
202120202019
(Dollars in thousands)
Combined federal and state income tax provisions$34,047 $13,163 $39,481 
Effective income tax rates18.0 %36.7 %22.6 %
The Company’s provision for income taxes was $34.0 million, $13.2 million and $39.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. The Company’s effective tax rate was 18.0% and is lower than the effective tax rate of 36.7% for the prior year ending December 31, 2020. The increase in income tax expense and the decrease in the effective tax rate during the year ended December 31, 2021 compared to the year ended December 31, 2020, was primarily due to higher income before income tax expense, decreasing the impact on the effective rate related to favorable permanent differences, including investment tax credits and tax-exempt income. The reduction in the effective tax rate during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to a $11.3 million release of a $12.0 million valuation allowance against the Company’s 2020 charitable contribution carryover deferred tax asset which was established as of December 31, 2020.
The provision for income taxes is comprised of the following components:
For the Year Ended December 31,
202120202019
(In thousands)
Current tax expense:
Federal$26,114 $23,002 $26,365 
State13,246 10,520 11,740 
Total current tax expense39,360 33,522 38,105 
Deferred tax expense (benefit):
Federal(7,747)(13,736)782 
State2,434 (6,623)594 
Total deferred tax (benefit) expense(5,313)(20,359)1,376 
Total income tax expense$34,047 $13,163 $39,481 
A reconciliation of the U.S. federal statutory rate to the Company’s effective income tax rate is detailed below:
For the Year Ended December 31,
202120202019
(Dollars in thousands)
Income tax expense at statutory rate$39,630 21.00 %$7,53921.00 %$36,662 21.00 %
Increase (decrease) resulting from:
State income tax, net of federal tax benefit12,387 6.56 %430.12 %9,744 5.58 %
Valuation allowance(11,300)(5.99)%12,000 33.43 %— — %
Amortization of qualified low-income housing investments5,753 3.05 %4,97713.86 %4,782 2.74 %
Tax credits(6,539)(3.46)%(7,085)(19.73)%(7,570)(4.34)%
Tax-exempt income(5,665)(3.00)%(4,091)(11.40)%(3,923)(2.25)%
Other, net(219)(0.12)%(220)(0.61)%(214)(0.12)%
Actual income tax expense$34,047 18.04 %$13,16336.67 %$39,481 22.61 %
Significant components of the Company’s deferred tax assets and deferred tax liabilities are presented below:
As of December 31,
20212020
(In thousands)
Deferred tax assets:
Allowance for loan losses$30,335 $34,397 
Leases25,389 24,098 
Charitable contribution limitation carryover18,278 22,942 
Employee benefits13,996 — 
Unrealized loss on available for sale securities17,370 — 
Investment losses10,680 — 
Accrued expenses6,888 5,047 
Fixed assets3,799 4,183 
Loan basis difference fair value adjustments3,949 461 
PPP loans fee income2,967 5,969 
Other1,783 967 
Total deferred tax assets before valuation allowance135,434 98,064 
Valuation allowance(700)(12,000)
Total deferred tax assets134,734 86,064 
Deferred tax liabilities:
Amortization of intangibles17,339 13,585 
Unrealized gain on available for sale securities— 13,005 
Partnerships3,324 1,448 
Cash flow hedges2,878 11,658 
Trading securities6,482 5,110 
Lease obligation23,849 23,048 
Employee benefits— 1,613 
Other4,327 3,368 
Total deferred tax liabilities58,199 72,835 
Net deferred income tax assets$76,535 $13,229 
The Company assesses the realizability of deferred tax assets and whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The Company considers projections of future taxable income during the periods in which deferred tax assets and liabilities are scheduled to reverse. Additionally, in determining the availability of operating loss carrybacks and other tax attributes, both projected future taxable income and tax planning strategies are considered in making this assessment. As of December 31, 2020, the Company established a valuation allowance of $12.0 million related to the $91.3 million stock donation and the $3.7 million cash contribution to the Foundation. Based upon the level of available historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are realizable, a release of $11.3 million was recorded as of December 31, 2021. Management believes it is more likely than not that the Company will realize the remainder of the net deferred tax asset of $76.5 million at December 31, 2021.
Management has performed an evaluation of the Company’s uncertain tax positions and determined that a liability for unrecognized tax benefits at December 31, 2021 of $8.2 million, which includes accrued interest and penalties, was needed related to state tax positions taken. Management performed a similar evaluation as of December 31, 2020 and determined that none was needed.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits:
As of December 31, 2021
(In thousands)
Beginning$— 
Additions based on tax positions related to the current year— 
Additions for tax positions of prior years7,923 
Reductions related to settlements with taxing authorities— 
Reductions as a result of a lapse of the applicable statute of limitations— 
Ending$7,923 
The amount that would reduce the effective tax rate, if recognized, is $8.2 million. The reduction in the effective tax rate is inclusive of the federal benefit for unrecognized state tax benefits, and accrued interest and penalties. The entire balance of unrecognized tax benefits, if recognized, would favorably affect the Company’s effective income tax rate. The Company recognizes penalties and accrued interest related to unrecognized tax benefits in tax expense. Accrued penalties and interest amounted to $2.0 million at December 31, 2021. There were no tax reserves recorded as of December 31, 2020. The change in accrued penalties and interest for the current year impacted goodwill by $1.9 million and the consolidated statements of income as a component of the provision for income taxes by less than $0.1 million. Management anticipates that approximately $2.1 million in unrecognized state tax benefits and $0.6 million of interest and penalties will reverse in 2022 upon expiration of the statute of limitations for the tax year to which the reserve is related.
The Company had no net operating loss carryforwards for federal or state income tax purposes at December 31, 2021 and 2020, respectively.
At December 31, 2021, the Bank’s federal pre-1988 reserve, for which no federal income tax provision has been made, was approximately $20.8 million. Under current federal law, these reserves are subject to recapture into taxable income, should the Company make non-dividend distributions, make distributions in excess of earnings and profits retained, as defined, or cease to maintain a banking type charter. A deferred tax liability is not recognized for the base year amount unless it becomes apparent that those temporary differences will reverse into taxable income in the foreseeable future. No deferred tax liability has been established as these two events are not expected to occur in the foreseeable future.
The Company’s primary banking activities are in the states of Massachusetts, New Hampshire and Rhode Island; however, the Company also files additional state corporate income and/or franchise tax returns in states in which the Company has a filing requirement. The methods of filing, and the methods for calculating taxable and apportionable income, vary depending upon the laws of the taxing jurisdiction.
The Company is subject to routine audits of its tax returns by the Internal Revenue Service and various state taxing authorities. The Company is no longer subject to federal and state income tax examinations by tax authorities for years before 2018.
The Company invests in low-income affordable housing and renewable energy projects which provide the Company with tax benefits, including tax credits, generally over a period of approximately 5-15 years. When permissible, the Company accounts for its investments in Low Income Housing Tax Credit (“LIHTC”) projects using the proportional amortization method, under which it amortizes the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognizes that amortization as a component of income tax expense. The net investment performance in the housing projects is included in other assets. The Company will continue to use the proportional amortization method on any new qualifying LIHTC investments. During the years ended December 31, 2021 and 2020, the Company generated federal tax credits primarily from LIHTC investments of $6.5 million and $7.1 million, respectively. During the year ended December 31, 2021, the Company generated no state tax credits from LIHTC investments and generated $0.3 million of state tax credits from LIHTC investments during the year ended December 31, 2020. The Company treats the investment tax credits received as a reduction of federal income taxes for the year in which the credit arises using the flow-through method (i.e., the credit flows directly through the statement of income in the year of purchase). For additional information on these investments, refer to Note 13, “Low Income Housing Tax Credits and Other Tax Credit Investments.