Income taxes

12 Months Ended

Dec. 31, 2019

13. Income taxes

The components of income tax expense were as follows:

	Year Ended December 31
	2019		2018			2017
	(In thousands)
Current
Federal	$	359,668	$	408,428		$	363,043
State and local		132,696		113,706			94,714
Total current		492,364		522,134			457,757
Deferred
Federal		40,769		(12,780	)		367,308
State and local		16,779		28,637			33,482
Total deferred		57,548		15,857			400,790
Amortization of investments in qualified affordable housing projects		68,200		52,169			57,009
Total income taxes applicable to pre-tax income	$	618,112	$	590,160		$	915,556

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, 2019, M&T Bank’s tax bad debt reserve for which no federal income taxes have been provided was $137 million. 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 $5 million in 2019 and $7 million in 2017, and a benefit of $2 million in 2018. No alternative minimum tax expense was recognized in 2017.

The Tax Cuts and Jobs Act (“Tax Act”) was signed into law on December 22, 2017, reducing the corporate federal income tax rate from 35% to 21% effective January 1, 2018 and making other changes to U.S. corporate income tax laws, including eliminating the alternative minimum tax as of January 1, 2018. GAAP requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the incremental income tax expense recorded by the Company in the fourth quarter of 2017 related to the Tax Act was $85 million. That additional expense was largely attributable to the reduction in carrying value of net deferred tax assets reflecting lower future tax benefits resulting from the lower corporate income tax rate. During 2018 the Company received approval from the Internal Revenue Service to change the timing of recognition of certain loan fees

retroactive to 2017. Given the reduction of the federal income tax rate, the change resulted in a $15 million reduction of income tax expense in 2018.

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
	2019			2018			2017
	(In thousands)

Income taxes at statutory federal income tax rate	$	534,925		$	526,730		$	813,352
Increase (decrease) in taxes:
Tax-exempt income		(27,319	)		(26,186	)		(40,778	)
State and local income taxes, net of federal income tax effect		118,085			112,451			83,327
Qualified affordable housing project federal tax credits, net		(15,324	)		(12,240	)		(16,015	)
Initial impact of enactment of Tax Act		—			—			85,431
Other		7,745			(10,595	)		(9,761	)
	$	618,112		$	590,160		$	915,556

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

	2019			2018			2017
	(In thousands)

Losses on loans and other assets	$	309,523		$	322,818		$	345,609
Operating lease liabilities		128,178			—			—
Retirement benefits		55,048			30,057			45,322
Postretirement and other employee benefits		24,023			23,563			26,009
Incentive and other compensation plans		26,861			24,796			25,050
Interest on loans		—			—			37,900
Stock-based compensation		27,912			26,759			26,676
Unrealized losses		—			52,580			—
Losses on cash flow hedges		—			1,861			4,033
Other		69,863			43,880			66,247
Gross deferred tax assets		641,408			526,314			576,846
Right of use assets and other leasing transactions		(326,626	)		(186,787	)		(181,159	)
Unrealized gains		(13,322	)		—			(94,285	)
Capitalized servicing rights		(56,649	)		(54,894	)		(51,781	)
Depreciation and amortization		(66,925	)		(61,881	)		(52,733	)
Interest on loans		(23,552	)		(18,920	)		—
Gains on cash flow hedges		(36,845	)		—			—
Other		(40,472	)		(30,211	)		(25,632	)
Gross deferred tax liabilities		(564,391	)		(352,693	)		(405,590	)
Net deferred tax asset	$	77,017		$	173,621		$	171,256

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, 2017	$	35,889		$	7,915		$	43,804
Increases as a result of tax positions taken during 2017		13,019			—			13,019
Increases as a result of tax positions taken in prior years		—			1,379			1,379
Decreases as a result of settlements with taxing authorities		(332	)		(168	)		(500	)
Decreases as a result of tax positions taken in prior years		(3,144	)		(3,475	)		(6,619	)
Gross unrecognized tax benefits at December 31, 2017		45,432			5,651			51,083
Increases as a result of tax positions taken during 2018		13,426			—			13,426
Increases as a result of tax positions taken in prior years		—			1,969			1,969
Decreases as a result of settlements with taxing authorities		(664	)		(289	)		(953	)
Decreases as a result of tax positions taken in prior years		(1,920	)		(702	)		(2,622	)
Gross unrecognized tax benefits at December 31, 2018		56,274			6,629			62,903
Increases as a result of tax positions taken during 2019		6,996			—			6,996
Increases as a result of tax positions taken in prior years		3,265			3,255			6,520
Decreases as a result of tax positions taken in prior years		(7,566	)		(2,685	)		(10,251	)
Gross unrecognized tax benefits at December 31, 2019	$	58,969		$	7,199			66,168
Less: Federal, state and local income tax benefits								(13,208	)
Net unrecognized tax benefits at December 31, 2019 that, if recognized, would impact the effective income tax rate							$	52,960

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, 2019 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 2018, although under statute the income tax returns from 2016 through 2018 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 2013. It is not reasonably possible to estimate when examinations for any subsequent years will be completed.