NOTE 8: FEDERAL, STATE, AND LOCAL TAXES

The following table summarizes the components of the Company’s net deferred tax asset at December 31, 2011 and 2010:


	December 31,
(in thousands)	2011			2010
Deferred Tax Assets:
Allowance for loan losses	$	82,800		$	76,169
Compensation and related benefit obligations		24,208			22,093
Acquisition accounting and fair value adjustments on securities (including OTTI)		48,396			56,347
Acquisition accounting adjustments on borrowed funds		12,979			18,545
Non-accrual interest		24,176			18,529
Restructuring and retirement of borrowed funds		7,976			29,604
Acquisition-related costs		975			1,308
Other		15,868			14,568

Gross deferred tax assets		217,378			237,163
Valuation allowance		—			—

Deferred tax asset after valuation allowance	$	217,378		$	237,163

Deferred Tax Liabilities:
Amortizable intangibles		(14,816	)		(23,267	)
Acquisition accounting and fair value adjustments on loans (including the FDIC loss share receivable)		(29,530	)		(42,019	)
Mortgage servicing rights		(40,543	)		(41,946	)
Premises and equipment		(29,333	)		(22,225	)
Prepaid pension cost		(6,670	)		(7,969	)
Other		(14,646	)		(6,501	)

Gross deferred tax liabilities		(135,538	)		(143,927	)

Net deferred tax asset	$	81,840		$	93,236

The net deferred tax asset, which is included in “other assets” in the Consolidated Statements of Condition at December 31, 2011 and 2010, represents the anticipated federal, state, and local tax benefits that are expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance.

The Company has determined that at December 31, 2011, all deductible temporary differences are more likely than not to provide a benefit in reducing future federal, state, and local tax liabilities, as applicable.

The following table summarizes the Company’s income tax expense (benefit) for the years ended December 31, 2011, 2010, and 2009:


	December 31,
(in thousands)	2011			2010		2009
Federal – current	$	186,936		$	220,785	$	193,108
State and local – current		41,000			33,636		16,028

Total current		227,936			254,421		209,136

Federal – deferred		28,672			34,862		(30,482	)
State and local – deferred		(2,068	)		7,171		15,849

Total deferred		26,604			42,033		(14,633	)

Total income tax expense	$	254,540		$	296,454	$	194,503

The following table presents a reconciliation of statutory federal income tax expense (benefit) to combined actual income tax expense (benefit) for the years ended December 31, 2011, 2010, and 2009:


	December 31,
(in thousands)	2011			2010			2009
Statutory federal income tax expense at 35%	$	257,102		$	293,115		$	207,602
State and local income taxes, net of federal income tax effect		25,306			26,525			20,719
Effect of tax deductibility of ESOP		(6,739	)		(5,243	)		(5,666	)
Non-taxable income and expense of BOLI		(9,848	)		(9,805	)		(9,592	)
Federal tax credits		(6,194	)		(5,955	)		(6,048	)
Adjustments relating to prior tax years		(5,152	)		(1,342	)		(13,160	)
Other, net		65			(841	)		648

Total income tax expense	$	254,540		$	296,454		$	194,503

FASB guidance prescribes a recognition threshold and measurement attribute for use in connection with the obligation of a company to recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.

As of December 31, 2011, the Company had $8.9 million of unrecognized gross tax benefits. Gross tax benefits do not reflect the federal tax effect associated with state tax amounts.

The total amount of net unrecognized tax benefits at December 31, 2011 that would affect the effective tax rate, if recognized, was $5.8 million.

Interest and penalties (if any) related to the underpayment of income taxes are classified as a component of income tax expense in the Consolidated Statements of Income and Comprehensive Income. During the years ended December 31, 2011, 2010, and 2009, the Company recognized income tax benefit attributed to interest and penalties of $2.5 million, $1.1 million, and $1.4 million, respectively. Accrued interest and penalties on tax liabilities were $1.1 million at December 31, 2011 and $900,000 at December 31, 2010.

The following table summarizes changes in the liability for unrecognized gross tax benefits for the years ended December 31, 2011, 2010, and 2009:


	December 31,
(in thousands)	2011			2010			2009
Uncertain tax positions at beginning of year	$	13,068		$	9,327		$	24,153
Additions for tax positions relating to current-year operations		457			6,103			762
Additions for tax positions relating to prior tax years		—			2,221			778
Subtractions for tax positions relating to prior tax years		(4,603	)		(2,677	)		(13,509	)
Reductions in balance due to settlements		—			(1,906	)		(2,857	)

Uncertain tax positions at end of year	$	8,922		$	13,068		$	9,327

The Company and its acquired companies have filed tax returns in many states. The following are the more significant tax filings that are open for examination:

•

Federal tax filings of the Company for tax years 2009 through the present;

•

New York State tax filings of the Company for tax years 2007 through the present;

•

New York City tax filings of the Company for tax years 2009 through the present; and

•

New Jersey tax filings of the Company and certain acquired companies for tax years 2007 through the present.

It is reasonably possible that there will be developments within the next twelve months that would necessitate an adjustment to the balance of unrecognized tax benefits. The Company does not believe that the ranges of possible adjustments for each federal, state, and local tax position would be material.

As a savings institution, the Community Bank is subject to a special federal tax provision regarding its frozen tax bad debt reserve. At December 31, 2011, the Community Bank’s federal tax bad debt base-year reserve was $61.5 million, with a related net deferred tax liability of $21.5 million, which has not been recognized since the Community Bank does not expect that this reserve will become taxable in the foreseeable future. Events that would result in taxation of this reserve include redemptions of the Community Bank’s stock or certain excess distributions by the Community Bank to the Company.