STERLING BANCORP

Income Taxes

Income tax expense for the periods indicated consisted of the following:



	For the year ended December 31,
	2017		2016			2015
Current tax expense:
Federal	$	4,375	$	55,418		$	25,634
State and local	2,181		12,854			5,862
Total current tax expense	6,556		68,272			31,496
Deferred tax expense (benefit):
Federal	71,536		(1,069		)	(1,406		)
State and local	9,847		179			1,745
Total deferred tax expense (benefit)	81,383		(890		)	339
Total income tax expense	$	87,939	$	67,382		$	31,835

Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory Federal tax rate for the following reasons:



	For the year ended December 31,
	2017			2016			2015
Tax at federal statutory rate of 35%	$	63,341		$	72,574		$	34,282
State and local income taxes, net of federal tax benefit	7,818			8,472			4,945
Tax-exempt interest, net of disallowed interest	(18,948		)	(11,094		)	(5,218		)
BOLI income	(2,665		)	(1,933		)	(1,853		)
Non-deductible acquisition related costs	2,965			—			700
Low income housing tax credits	(1,872		)	(469		)	(215		)
Equity-based stock compensation benefit	(1,528		)	—			—
Estimated deferred tax adjustment related to reduction in federal income tax rate	40,285			—			—
Other, net	(1,457		)	(168		)	(806		)
Actual income tax expense	$	87,939		$	67,382		$	31,835
Effective income tax rate	48.6		%	32.5		%	32.5		%

The following table presents the Company’s deferred tax position at December 31, 2017 and 2016:



	December 31,
	2017		2016
Deferred tax assets:
Allowance for loan losses	$	20,468	$	25,039
Deferred compensation	315		656
Other accrued compensation and benefits	22,321		9,920
Accrued post retirement expense	7,885		2,060
Deferred rent	3,445		3,268
Intangible assets	1,612		3,108
Other comprehensive loss (securities)	11,422		16,911
Other comprehensive loss (defined benefit plans)	447		479
Pension expense	11,691		—
Accrued expenses	4,923		252
State NOL carryforward	15,400		—
AMT credit carryforward	4,070		—
Other	3,237		3,719
Total deferred tax assets	107,236		65,412
Deferred tax liabilities:
Mortgage servicing rights	2,722		403
Prepaid pension costs	—		3,798
Acquisition fair value adjustments	—		18,948
Depreciation of premises and equipment	1,026		809
Deferred loan fees and costs	5,001		—
Other	1,154		906
Total deferred tax liabilities	9,903		24,864
Net deferred tax asset	$	97,333	$	40,548

On December 22, 2017, the Tax Act was enacted, which included a reduction of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the Company was required to remeasure, through income tax expense, the Company’s deferred tax assets and liabilities using the enacted rate at which the deferred items are expected to be recovered or settled. The remeasurement of our net deferred tax asset resulted in additional income tax expense of $40,285 in 2017.

Also on December 22, 2017, the SEC released Staff Accounting Bulletin No. 118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the Tax Act in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete this accounting in the reporting period ended December 31, 2017. SAB 118 allows for a measurement period not to extend beyond one year from the enactment of the Tax Act to complete the necessary accounting.

The Company recorded provisional adjustments but has not completed its accounting for income tax effects for certain elements of the Tax Act, including purchase accounting adjustments recorded in connection with the Astoria Merger. Moreover, the Company has made no adjustments to deferred tax assets representing future deductions for accrued compensation that may be subject to new limitations under Internal Revenue Code 162(m) which, generally, limits the annual deduction for certain compensation paid to certain employees to $1,000. There is uncertainty in applying the newly-enacted rules to existing contracts, and the Company is seeking further clarifications in order to complete its analysis.

Based on the Company’s consideration of historical and anticipated future pre-tax income, and the reversal period for the items resulting in the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at either December 31, 2017 or 2016.

Retained earnings at December 31, 2017 and 2016 included approximately $9,313 for which no provision for federal income taxes has been made. This amount represents the tax bad debt reserve at December 31, 1987, which is the end of the Bank’s base year for purposes of calculating the bad debt deduction for tax purposes. If this portion of retained earnings is used in the future for any purposes other than to absorb bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on the above amount at both December 31, 2017 and 2016, was approximately $3,260.

The Company acquired state and local net operating loss (“NOL”) carryforwards in the Astoria Merger. The Company has an available New York State NOL carryforward of $164,786, which expires in 2024. The Company has an available New York City NOL carryforward of $66,612, which expires in various years from 2024 through 2037.

At December 31, 2017 and 2016, the Company had no unrecognized tax benefits or accrued interest and penalties recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Company records interest and penalties as a component of other non-interest expense.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the state of New York and various other states. The Company is generally no longer subject to examination by federal, state and local taxing authorities for tax fiscal years prior to September 30, 2014.