Northfield Bancorp, Inc.

Income Taxes

Income tax expense (benefit) consists of the following (in thousands):



	December 31,
	2017		2016			2015
Federal tax expense (benefit):
Current	$	10,113	$	14,218		$	11,796
Deferred	14,290		(1,260		)	(2,305		)
	24,403		12,958			9,491
State and local tax expense (benefit):
Current	1,672		2,506			1,811
Deferred	903		(1,799		)	673
	2,575		707			2,484
Total income tax expense	$	26,978	$	13,665		$	11,975

Reconciliation between the amount of reported total income tax expense and the amount computed by multiplying the applicable statutory income tax rate for the years ended December 31, 2017, 2016, and 2015, is as follows (dollars in thousands):



	December 31,
	2017			2016			2015
Tax expense at statutory rate of 35%	$	18,111		$	13,928		$	11,027
Increase (decrease) in taxes resulting from:
State tax, net of federal income tax	1,674			460			1,615
Impact of 2017 federal tax reform	10,453			—			—
Bank owned life insurance	(1,885		)	(1,399		)	(1,319		)
ESOP fair market value adjustment	404			352			—
Incentive stock options	247			299			210
Uncertain tax position	132			178			51
Merger related costs	—			74			201
Excess tax benefits from employee share based payments	(2,309		)	—			—
Other, net	151			(227		)	190
Income tax expense	$	26,978		$	13,665		$	11,975

Federal Tax Reform

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. The Tax Act includes many provisions that will affect our income tax expense, including reducing our federal tax rate from 35% to 21%, effective January 1, 2018. As a result of this rate reduction, we were required to re-measure, through income tax expense in the period of enactment, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The re-measurement of our net deferred tax asset resulted in additional 2017 income tax expense of $10.5 million.

Also on December 22, 2017, the Securities and Exchange Commission 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 that includes the enactment date. SAB 118 describes three scenarios associated with a company’s status of accounting for the TaxAct: (1) a company reflects the income tax effects of the Tax Act in which the accounting under ASC 740 is complete, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, Income Taxes, based on the provisions of the tax laws in effect immediately prior to tax reform being enacted. SAB 118 allows for a measurement period, not to extend beyond one year from the Tax Act’s enactment date, to complete the necessary accounting. There were no items for which the Company was unable to make reasonable estimates for the effects of the Tax Act changes.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016, are as follows (in thousands):



	December 31,
	2017		2016
Deferred tax assets:
Allowance for loan losses	$	6,836	$	9,470
Capitalized leases	84		213
Deferred compensation	3,474		5,686
Accrued salaries	2		1,128
Postretirement benefits	381		576
Equity awards	3,582		5,005
Unrealized actuarial losses on post-retirement benefits	93		124
Straight-line leases adjustment	892		1,219
Asset retirement obligation	65		89
Reserve for accrued interest receivable	712		1,116
Reserve for loan commitments	124		193
Employee Stock Ownership Plan	497		642
Other	236		366
Depreciation	2,116		2,509
Fair value adjustments of acquired loans	4,868		10,168
Fair value adjustments of pension benefit obligations	154		250
Unrealized losses on securities	2,070		2,775
Total gross deferred tax assets	26,186		41,529
Deferred tax liabilities:
Fair value adjustments of acquired securities	35		82
Fair value adjustments of deposit liabilities	358		547
Deferred loan fees	1,815		1,910
Undistributed earnings related to NSB Realty Trust	939		—
Other	37		59
Total gross deferred tax liabilities	3,184		2,598
Net deferred tax asset	$	23,002	$	38,931

Net deferred tax assets are included in other assets on the consolidated balance sheets. In 2016, the Company recorded net deferred tax assets of approximately $3.9 million as a result of the Hopewell Valley acquisition.

The Company has determined that it is not required to establish a valuation reserve for the net deferred tax asset account since it is “more likely than not” that the net deferred tax assets will be realized through future reversals of existing taxable temporary differences, future taxable income and tax planning strategies. The conclusion that it is “more likely than not” that the net deferred tax assets will be realized is based on the history of earnings and the prospects for continued profitability. Management will continue to review the tax criteria related to the recognition of deferred tax assets.

As a savings institution, the Bank is subject to a special federal tax provision regarding its frozen tax bad debt reserve. At December 31, 2017 and December 31, 2016, the Bank’s federal tax bad debt base-year reserve was $5.9 million, with a related net deferred tax liability of $2.8 million, which has not been recognized since the 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 Bank’s stock or certain excess distributions by the Bank to the Company.

A reconciliation of the Company’s uncertain tax positions are as follows (in thousands):



	December 31,
	2017			2016		2015
Beginning balance	$	459		$	281	$	230
Settlements based on tax positions related to prior years	(109		)	—		—
Additions based on tax positions related to prior years	132			178		51
Ending balance	$	482		$	459	$	281

The Company recognizes interest and penalties on income taxes in income tax expense.

The following years are open for examination or under examination:


•	Federal tax filings for 2014 through present.


•	New York State tax filings 2014 through present. The 2013 through 2014 filings are currently under examination.


•	New York City tax filings 2014 through present. The 2010 through 2012 filings are currently under examination.


•	State of New Jersey 2014 through present.