13. Income taxes

The components of income tax expense were as follows:

	Year Ended December 31
	2016		2015		2014
	(In thousands)
Current
Federal	$	428,750	$	130,349	$	378,978
State and city		95,426		21,549		50,790
Total current		524,176		151,898		429,768
Deferred
Federal		147,662		324,317		65,503
State and city		26,351		72,279		27,345
Total deferred		174,013		396,596		92,848
Amortization of investments in qualified affordable housing projects		45,095		46,531		53,383
Total income taxes applicable to pre-tax income	$	743,284	$	595,025	$	575,999

The Company files a consolidated federal income tax return reflecting taxable income earned by all domestic subsidiaries. In prior years, applicable federal tax law allowed certain financial institutions the option of deducting as bad debt expense for tax purposes amounts in excess of actual losses. In accordance with GAAP, such financial institutions were not required to provide deferred income taxes on such excess. Recapture of the excess tax bad debt reserve established under the previously allowed method will result in taxable income if M&T Bank fails to maintain bank status as defined in the Internal Revenue Code or charges are made to the reserve for other than bad debt losses. At December 31, 2016, M&T Bank’s tax bad debt reserve for which no federal income taxes have been provided was $137,121,000. No actions are planned that would cause this reserve to become wholly or partially taxable.

Income taxes attributable to gains or losses on bank investment securities were an expense of $11,929,000 in 2016. There were no significant gains or losses on bank investment securities in 2015 or 2014. No alternative minimum tax expense was recognized in 2016, 2015 or 2014.

Total income taxes differed from the amount computed by applying the statutory federal income tax rate to pre-tax income as follows:

	Year Ended December 31
	2016			2015			2014
	(In thousands)

Income taxes at statutory federal income tax rate	$	720,439		$	586,142		$	574,786
Increase (decrease) in taxes:
Tax-exempt income		(35,364	)		(33,102	)		(31,752	)
State and city income taxes, net of federal income tax effect		79,155			60,988			50,788
Qualified affordable housing project federal tax credits, net		(15,091	)		(15,297	)		(14,827	)
Other		(5,855	)		(3,706	)		(2,996	)
	$	743,284		$	595,025		$	575,999

Deferred tax assets (liabilities) were comprised of the following at December 31:

	2016			2015			2014
	(In thousands)

Losses on loans and other assets	$	590,288		$	637,955		$	605,273
Retirement benefits		143,067			148,722			120,222
Postretirement and other employee benefits		52,512			55,962			34,052
Incentive and other compensation plans		36,616			60,337			36,450
Interest on loans		61,266			57,640			79,147
Stock-based compensation		52,181			72,090			64,017
Unrealized investment losses		10,741			—			—
Depreciation and amortization		—			—			3,527
Other		106,876			162,086			100,999
Gross deferred tax assets		1,053,547			1,194,792			1,043,687
Leasing transactions		(266,268	)		(285,074	)		(280,596	)
Unrealized investment gains		—			(31,121	)		(82,065	)
Capitalized servicing rights		(71,108	)		(59,171	)		(46,393	)
Depreciation and amortization		(63,959	)		(56,731	)		—
Other		(87,200	)		(55,611	)		(66,939	)
Gross deferred tax liabilities		(488,535	)		(487,708	)		(475,993	)
Net deferred tax asset	$	565,012		$	707,084		$	567,694

The Company believes that it is more likely than not that the deferred tax assets will be realized through taxable earnings or alternative tax strategies.

The income tax credits shown in the statement of income of M&T in note 25 arise principally from operating losses before dividends from subsidiaries.

A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:

	Federal, State and Local Tax			Accrued Interest			Unrecognized Income Tax Benefits
	(In thousands)

Gross unrecognized tax benefits at January 1, 2014	$	14,611		$	14,696		$	29,307
Increases as a result of tax positions taken during 2014		769			—			769
Increases as a result of tax positions taken in prior years		—			453			453
Decreases as a result of settlements with taxing authorities		(4,668	)		(11,280	)		(15,948	)
Gross unrecognized tax benefits at December 31, 2014		10,712			3,869			14,581
Increases as a result of tax positions taken during 2015		8,108			—			8,108
Increases as a result of tax positions taken in prior years		—			807			807
Decreases as a result of settlements with taxing authorities		(1,515	)		(274	)		(1,789	)
Unrealized tax benefits acquired in a business combination		7,232			3,567			10,799
Gross unrecognized tax benefits at December 31, 2015		24,537			7,969			32,506
Increases as a result of tax positions taken during 2016		12,237			—			12,237
Increases as a result of tax positions taken in prior years		—			656			656
Decreases as a result of tax positions taken in prior years		(885	)		(710	)		(1,595	)
Gross unrecognized tax benefits at December 31, 2016	$	35,889		$	7,915			43,804
Less: Federal, state and local income tax benefits								(15,332	)
Net unrecognized tax benefits at December 31, 2016 that, if recognized, would impact the effective income tax rate							$	28,472

The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits in income taxes in the consolidated statement of income. The balance of accrued interest at December 31, 2016 is included in the table above. The Company’s federal, state and local income tax returns are routinely subject to examinations from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgment used to record tax-related assets or liabilities have been appropriate. Should determinations rendered by tax authorities ultimately indicate that management’s assumptions were inappropriate, the result and adjustments required could have a material effect on the Company’s results of operations. Examinations by the Internal Revenue Service of the Company’s federal income tax returns have been largely concluded through 2015, although under statute the income tax returns from 2010 and 2013 through 2015 could be adjusted. The Company also files income tax returns in over forty states and numerous local jurisdictions. Substantially all material state and local matters have been concluded for years through 2012. It is not reasonably possible to estimate when examinations for any subsequent years will be completed.