NOTE 9: FEDERAL, STATE, AND LOCAL TAXES

The following table summarizes the components of the Company’s net deferred tax asset (liability) at December 31, 2015 and 2014:


	December 31,
(in thousands)	2015			2014
Deferred Tax Assets:
Allowance for loan losses	$	73,835		$	74,508
Compensation and related benefit obligations		31,112			29,876
Acquisition accounting and fair value adjustments on securities (including OTTI)		13,970			89
Acquisition accounting adjustments on borrowed funds		—			5,203
Non-accrual interest		6,107			7,917
Restructuring and retirement of borrowed funds		16,545			—
Net operating loss carryforwards		16,675			—
Other		19,723			21,535

Gross deferred tax assets		177,967			139,128
Valuation allowance		—			—

Deferred tax asset after valuation allowance	$	177,967		$	139,128

Deferred Tax Liabilities:
Amortizable intangibles	$	(1,379	)	$	(1,967	)
Acquisition accounting and fair value adjustments on loans (including the FDIC loss share receivable)		(1,094	)		(18,336	)
Mortgage servicing rights		(53,370	)		(47,966	)
Premises and equipment		(20,120	)		(22,714	)
Prepaid pension cost		(27,056	)		(26,607	)
Restructuring and retirement of borrowed funds		—			(3,111	)
Leases		(50,658	)		(24,117	)
Other		(12,281	)		(14,576	)

Gross deferred tax liabilities	$	(165,958	)	$	(159,394	)

Net deferred tax asset (liability)	$	12,009		$	(20,266	)

The net federal deferred tax liability, which is included in “Other liabilities,” and the net state and local deferred tax asset, which is included in “Other assets,” in the Consolidated Statements of Condition at December 31, 2015 and 2014, represent 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 said balances.

At December 31, 2015, the Company had net operating loss carryforwards for various state and local jurisdictions which are available to offset future taxable income. The following are the more significant net operating loss carryforwards:

•

A New York State net operating loss carryforward in the amount of $169.2 million available through 2035; and

•

A New York City net operating loss carryforward in the amount of $478.8 million available through 2035.

The Company has determined that all deductible temporary differences and net operating loss carryforwards are more likely than not to provide a benefit in reducing future federal, state, and local tax liabilities, as applicable. The Company has reached this determination based on its history of reporting positive taxable income in all relevant tax jurisdictions, the nature of the non-routine debt repositioning charge which resulted in the net operating loss in 2015, the length of time available to utilize the net operating loss carryforwards, and the recognition of taxable income in future periods from taxable temporary differences.

The following table summarizes the Company’s income taxes for the years ended December 31, 2015, 2014, and 2013:


	December 31,
(in thousands)	2015			2014			2013
Federal – current	$	(53,273	)	$	207,864		$	205,985
State and local – current		(295	)		53,654			40,417

Total current		(53,568	)		261,518			246,402

Federal – deferred		468			23,814			20,734
State and local – deferred		(31,757	)		2,337			4,443

Total deferred		(31,289	)		26,151			25,177

Income tax (benefit) expense reported in net income	$	(84,857	)	$	287,669		$	271,579
Income tax (benefit) expense reported in stockholders’ equity related to:
Employee stock plans		(2,486	)		(3,225	)		(1,692	)
Adoption of ASU No. 2014-01		—			1,303			—
Securities available-for-sale		131			1,851			(8,343	)
Pension liability adjustments		(1,161	)		(14,992	)		20,116
Non-credit portion of OTTI losses		44			142			5,028

Total income taxes	$	(88,329	)	$	272,748		$	286,688

The following table presents a reconciliation of statutory federal income tax (benefit) expense to combined actual income tax (benefit) expense reported in net income for the years ended December 31, 2015, 2014, and 2013:


	December 31,
(in thousands)	2015			2014			2013
Statutory federal income tax at 35%	$	(46,204	)	$	270,573		$	261,494
State and local income taxes, net of federal income tax effect ⁽¹⁾		(20,835	)		36,394			29,159
Effect of tax deductibility of ESOP		(7,321	)		(7,297	)		(7,153	)
Non-taxable income and expense of BOLI		(9,575	)		(9,415	)		(10,381	)
Federal tax credits		(1,554	)		(1,820	)		(3,111	)
Adjustments relating to prior tax years		(248	)		(1,166	)		150
Merger-related expenses		850			—			—
Other, net		30			400			1,421

Total income tax (benefit) expense	$	(84,857	)	$	287,669		$	271,579

(1)

Includes income tax (benefit) expense for the years ended December 31, 2015 and 2014 of $(1.4) million and $600,000, respectively, for adjustments to deferred taxes necessitated by changes in tax laws of New York City and New York State that were enacted in April 2015 and March 2014, respectively.

The Company invests in affordable housing projects through limited partnerships which generate federal Low Income Housing Tax Credits. The balances of these investments were $35.4 million and $37.8 million at December 31, 2015 and 2014, respectively, and are included in “Other assets” in the Consolidated Statements of Condition. These balances include respective commitments of $18.3 million and $21.7 million at December 31, 2015 and 2014 that are expected to be funded over the next three years. The Company elected to early adopt ASU No. 2014-01, effective January 1, 2014, and to apply the proportional amortization method to these investments. Retrospective application of the new accounting guidance would not have resulted in a material change to the prior-period presentations. Furthermore, the balance in retained earnings as of January 1, 2014 was reduced by $1.3 million to reflect the reduction of deferred tax assets relating to these investments. Recognized in the determination of income tax (benefit) expense from operations for the years ended December 31, 2015 and 2014 were $3.2 million and $3.9 million, respectively, of affordable housing tax credits and other tax benefits, and an offsetting $2.4 million and $2.9 million, respectively, for the amortization of the related investments. For the years ended December 31, 2015 and 2014, the Company did not recognize any impairment losses relating to these investments. In addition, none of these investments were accounted for under the “equity method.” Please see Note 2, “Summary of Significant Accounting Policies” for additional information.

In March 2014, tax legislation was enacted that changed the manner in which financial institutions and their affiliates are taxed in New York State. In April 2015, similar legislation was enacted for New York City. Most of the provisions are effective for fiscal years beginning in 2015. The most significant changes affecting the Company were as follows:

•

The tax rate applied to apportioned New York State taxable income is reduced from 7.1% to 6.5%, effective for fiscal years beginning in 2016. For financial institutions with total assets below $100 billion, the New York City statutory tax rate drops from 9% to 8.85%.

•

Tax is now determined by measuring the apportioned income of the combined group of all domestic affiliates that participate in a unitary business relationship.

•

Taxable income is apportioned based on the location of the taxpayer’s customers, with special rules for income from certain financial transactions.

•

Thrift institutions that maintain a qualified residential loan portfolio are entitled to a specially computed modification that reduces taxable income.

•

New York City taxable income is reduced by net interest income earned on residential portfolio loans that are secured by rent-regulated units or situated in low-income communities in New York City. This benefit is gradually phased out for financial institutions with total assets between $100 billion and $150 billion.

•

An alternative tax of 0.15% on apportioned capital is imposed to the extent that it exceeds the tax on apportioned income. The New York State alternative tax is capped at $5 million for a tax year and is gradually phased out over six years. The New York City alternative tax is capped at $10 million for a tax year and is not phased out.

•

A reduction to taxable income from the utilization of a net operating loss carryforward is determined without reference to, nor limitation based on, a federal tax deduction of such carryforward.

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, 2015, the Company had $30.5 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, 2015 that would have affected the effective tax rate, if recognized, was $19.8 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 Operations and Comprehensive (Loss) Income. During the years ended December 31, 2015, 2014, and 2013, the Company recognized income tax expense attributed to interest and penalties of $1.1 million, $700,000, and $900,000, respectively. Accrued interest and penalties on tax liabilities were $5.0 million and $3.4 million, respectively, at December 31, 2015 and 2014.

The following table summarizes changes in the liability for unrecognized gross tax benefits for the years ended December 31, 2015, 2014, and 2013:


	December 31,
(in thousands)	2015			2014			2013
Uncertain tax positions at beginning of year	$	24,779		$	20,250		$	24,220
Additions for tax positions relating to current-year operations		3,827			3,515			2,436
Additions for tax positions relating to prior tax years		2,935			1,819			6,218
Subtractions for tax positions relating to prior tax years		(963	)		(929	)		(3,641	)
Reductions in balance due to settlements		(122	)		124			(8,983	)

Uncertain tax positions at end of year	$	30,456		$	24,779		$	20,250

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

•

Federal tax filings for tax years 2012 through the present;

•

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

•

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

•

New Jersey tax filings for tax years 2012 through the present.

The Company is currently under examination by the following taxing jurisdictions:

•

New York State for the tax years 2010 through 2012;

•

New York City for the tax years 2011 and 2012;

•

California for the tax years 2011 and 2012;

•

Massachusetts for the tax years 2009 through 2012;

•

Illinois for the tax years 2011 and 2012;

•

Florida for the tax years 2011 through 2013; and

•

Missouri for the tax years 2011 through 2013.

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, including decreases of up to $14 million due to completion of tax authorities’ exams and the expiration of statutes of limitations.

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, 2015, the Community Bank’s federal tax bad debt base-year reserve was $61.5 million, with a related federal 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.