NOTE 9: FEDERAL, STATE, AND LOCAL TAXES

The following table summarizes the components of the Company’s net deferred tax (liability) asset at December 31, 2013 and 2012:


	December 31,
(in thousands)	2013			2012
Deferred Tax Assets:
Allowance for loan losses	$	82,872		$	97,844
Compensation and related benefit obligations		24,585			22,946
Acquisition accounting and fair value adjustments on securities (including OTTI)		30,356			29,645
Acquisition accounting adjustments on borrowed funds		7,609			10,055
Non-accrual interest		11,550			17,553
Acquisition-related costs		746			861
Other		9,482			15,603

Gross deferred tax assets		167,200			194,507
Valuation allowance		—			—

Deferred tax asset after valuation allowance	$	167,200		$	194,507

Deferred Tax Liabilities:
Amortizable intangibles		(3,753	)		(8,554	)
Acquisition accounting and fair value adjustments on loans (including the FDIC loss share receivable)		(35,459	)		(43,116	)
Mortgage servicing rights		(61,694	)		(52,049	)
Premises and equipment		(24,015	)		(27,868	)
Prepaid pension cost		(33,551	)		(13,345	)
Restructuring and retirement of borrowed funds		(3,883	)		(3,871	)
Leases		(5,217	)		—
Other		(5,439	)		(9,537	)

Gross deferred tax liabilities		(173,011	)		(158,340	)

Net deferred tax (liability) asset	$	(5,811	)	$	36,167

The net deferred tax liability (which is included in “Other liabilities”) or the net deferred tax asset (which is included in “Other assets”) in the Consolidated Statements of Condition at December 31, 2013 and 2012, represents the anticipated federal, state, and local tax expenses or 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, 2013, 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, 2013, 2012, and 2011:


	December 31,
(in thousands)	2013			2012			2011
Federal – current	$	205,985		$	206,748		$	186,936
State and local – current		40,417			30,070			41,000

Total current		246,402			236,818			227,936

Federal – deferred		20,734			34,275			28,672
State and local – deferred		4,443			8,710			(2,068	)

Total deferred		25,177			42,985			26,604

Income tax expense reported in net income	$	271,579		$	279,803		$	254,540
Income tax expense (benefit) reported in stockholders’ equity related to:
Securities available-for-sale		(8,343	)		7,672			7,805
Employee stock plans		(1,692	)		(589	)		(2,679	)
Pension liability adjustments		20,116			(807	)		(14,993	)
Non-credit portion of OTTI losses		5,028			65			4,857

Total income taxes	$	286,688		$	286,144		$	249,530

The following table presents a reconciliation of statutory federal income tax expense reported in net income to combined actual income tax expense for the years ended December 31, 2013, 2012, and 2011:


	December 31,
(in thousands)	2013			2012			2011
Statutory federal income tax expense at 35%	$	261,494		$	273,318		$	257,102
State and local income taxes, net of federal income tax effect		29,159			25,207			25,306
Effect of tax deductibility of ESOP		(7,153	)		(6,910	)		(6,739	)
Non-taxable income and expense of BOLI		(10,381	)		(10,578	)		(9,848	)
Federal tax credits		(3,111	)		(2,083	)		(6,194	)
Adjustments relating to prior tax years		150			86			(5,152	)
Other, net		1,421			763			65

Total income tax expense reported in net income	$	271,579		$	279,803		$	254,540

GAAP 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, 2013, the Company had $20.3 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, 2013 that would affect the effective tax rate, if recognized, was $13.2 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, 2013, 2012, and 2011, the Company recognized income tax expense (benefit) attributed to interest and penalties of $900,000, $1.0 million, and $(2.5) million, respectively. Accrued interest and penalties on tax liabilities were $2.2 million and $2.5 million, respectively, at December 31, 2013 and 2012.

The following table summarizes changes in the liability for unrecognized gross tax benefits for the years ended December 31, 2013, 2012, and 2011:


	December 31,
(in thousands)	2013			2012			2011
Uncertain tax positions at beginning of year	$	24,220		$	8,922		$	13,068
Additions for tax positions relating to current-year operations		2,436			4,365			457
Additions for tax positions relating to prior tax years		6,218			11,890			—
Subtractions for tax positions relating to prior tax years		(3,641	)		(457	)		(4,603	)
Reductions in balance due to settlements		(8,983	)		(500	)		—

Uncertain tax positions at end of year	$	20,250		$	24,220		$	8,922

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 2011 through the present;

•

New York State tax filings of the Company for tax years 2010 through the present;

•

New York City tax filings of the Company for tax years 2011 through the present; and

•

New Jersey tax filings of the Company and certain acquired companies for tax years 2009 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 expect that such settlements will have a material impact on tax expense. In addition, 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, 2013, 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.