13. Income taxes

The components of income tax expense (benefit) were as follows:


	Year Ended December 31
	2012		2011			2010
	(In thousands)
Current
Federal	$	309,156	$	277,631		$	250,489
State and city		82,014		53,566			55,071

Total current		391,170		331,197			305,560

Deferred
Federal		117,229		34,325			47,123
State and city		14,629		(401	)		3,945

Total deferred		131,858		33,924			51,068

Total income taxes applicable to pre-tax income	$	523,028	$	365,121		$	356,628

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, 2012, M&T Bank’s tax bad debt reserve for which no federal income taxes have been provided was $79,121,000. 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 benefits of $18,766,000 in 2012 and $32,778,000 in 2010 and expense of $28,712,000 in 2011. No alternative minimum tax expense was recognized in 2012, 2011 or 2010.

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
	2012			2011			2010
	(In thousands)
Income taxes at statutory federal income tax rate	$	543,384		$	428,610		$	382,476
Increase (decrease) in taxes:
Tax-exempt income		(33,890	)		(33,799	)		(32,466	)
State and city income taxes, net of federal income tax effect		62,818			34,557			38,360
Low income housing and other credits		(42,074	)		(40,763	)		(29,882	)
Non-taxable gain on acquisition		—			(22,725	)		—
Other		(7,210	)		(759	)		(1,860	)

	$	523,028		$	365,121		$	356,628

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


	2012			2011			2010
	(In thousands)
Losses on loans and other assets	$	809,033		$	896,219		$	550,970
Postretirement and other employee benefits		34,517			39,992			28,135
Incentive compensation plans		50,067			49,183			27,388
Interest on loans		72,278			46,965			43,563
Retirement benefits		91,980			147,997			42,422
Stock-based compensation		69,874			78,014			70,641
Unrealized investment losses		—			50,528			54,557
Depreciation and amortization		12,130			9,563			13,332
Other		103,027			99,012			51,768

Gross deferred tax assets		1,242,906			1,417,473			882,776

Leasing transactions		(291,524	)		(294,150	)		(294,510	)
Unrealized investment gains		(23,574	)		—			—
Capitalized servicing rights		(20,348	)		(17,603	)		(14,739	)
Interest on subordinated note exchange		(8,794	)		(11,275	)		(13,534	)
Other		(61,410	)		(48,803	)		(36,080	)

Gross deferred tax liabilities		(405,650	)		(371,831	)		(358,863	)

Net deferred tax asset	$	837,256		$	1,045,642		$	523,913

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, 2010	$	28,297		$	19,508		$	47,805
Increases in unrecognized tax benefits as a result of tax positions taken during prior years		—			11,468			11,468
Deceases in unrecognized tax benefits because applicable returns are no longer subject to examination		(1,403	)		(670	)		(2,073	)
Decreases in unrecognized tax benefits as a result of settlements with taxing authorities		(967	)		(549	)		(1,516	)
Decreases in unrecognized tax benefits as a result of tax positions taken in prior years		(1,074	)		(9,061	)		(10,135	)

Gross unrecognized tax benefits at December 31, 2010		24,853			20,696			45,549
Increases in unrecognized tax benefits as a result of tax positions taken during 2011		4,659			—			4,659
Decreases in unrecognized tax benefits as a result of settlements with taxing authorities		(9,742	)		(5,497	)		(15,239	)
Decreases in unrecognized tax benefits as a result of tax positions taken in prior years		—			(1,645	)		(1,645	)
Decreases in unrecognized tax benefits because applicable returns are no longer subject to examination		(8,471	)		(8,201	)		(16,672	)
Unrecognized tax benefits acquired in a business combination		7,034			3,924			10,958

Gross unrecognized tax benefits at December 31, 2011		18,333			9,277			27,610
Increases in unrecognized tax benefits as a result of tax positions taken during 2012		860			—			860
Increases in unrecognized tax benefits as a result of tax positions taken in prior years		—			4,514			4,514
Decreases in unrecognized tax benefits as a result of settlements with taxing authorities		(1,002	)		—			(1,002	)
Decreases in unrecognized tax benefits because applicable returns are no longer subject to examination		(1,643	)		(1,412	)		(3,055	)

Gross unrecognized tax benefits at December 31, 2012	$	16,548		$	12,379			28,927

Less: Federal, state and local income tax benefits								(9,479	)

Net unrecognized tax benefits at December 31, 2012 that, if recognized, would impact the effective income tax rate							$	19,448

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, 2012 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. Under statute, the Company’s federal income tax returns for the years 2009, 2010, and 2011 could be adjusted by the Internal Revenue Service, although examinations for those tax years have been concluded. 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 2003. It is not reasonably possible to estimate when examinations for any subsequent years will be completed.