Income Taxes

12 Months Ended

Dec. 31, 2019

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



	Years Ended December 31,
	2019			2018			2017
Federal tax expense (benefit):
Current	$	8,543		$	8,540		$	10,113
Deferred	376			(742		)	14,290
	8,919			7,798			24,403
State and local tax expense (benefit):
Current	4,067			1,985			1,672
Deferred	(199		)	(151		)	903
	3,868			1,834			2,575
Total income tax expense	$	12,787		$	9,632		$	26,978

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, 2019, 2018, and 2017, is as follows (dollars in thousands):



	Years Ended December 31,
	2019			2018			2017
Tax expense at statutory rate	$	11,135		$	10,439		$	18,111
Applicable statutory federal income tax rate	21		%	21		%	35		%
Increase (decrease) in taxes resulting from:
State tax, net of federal income tax	3,056			1,448			1,674
Impact of 2017 federal tax reform	—			—			10,453
Bank owned life insurance	(1,475		)	(778		)	(1,885		)
ESOP fair market value adjustment	187			196			404
Incentive stock options	81			146			247
Uncertain tax position	—			—			132
Excess tax benefits from employee share based payments	(110		)	(1,939		)	(2,309		)
Other, net	(87		)	120			151
Income tax expense	$	12,787		$	9,632		$	26,978

Federal Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Among numerous provisions included in the Act was the reduction of the U.S. federal corporate income 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 fourth quarter of 2017, 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.

New Jersey State Taxation

On July 1, 2018, the State Of New Jersey enacted new legislation which established a 2.5% surtax on businesses that have New Jersey allocated net income in excess of $1.0 million. The surtax was effective as of January 1, 2018 and will continue through 2019, and will adjust to 1.5% for 2020 and 2021. In addition, effective for taxable years beginning on or after January 1, 2019, banks will be required to file combined reports of taxable income including their parent holding company. In May 2019, the State of New Jersey issued a tax technical bulletin, subsequently revised in December 2019, which gives guidance on the treatment of real estate investment trusts in connection with the combined reporting for New Jersey corporate business tax purposes. Real estate investment trusts and investment companies will be excluded from the combined group and will continue to file separate New Jersey tax returns. As a result of this guidance the Company recorded an additional $889,000

of state tax expense net of federal benefit for the year ended December 31, 2019. The $889,000 increase was comprised of $1.1 million of current tax expense, partially offset by a write-up of deferred tax assets of $239,000.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018, are as follows (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Allowance for loan losses	$	7,985		$	7,317
Capitalized leases	—			13
Deferred compensation	3,498			3,426
Accrued salaries	738			737
Postretirement benefits	376			375
Equity awards	2,164			3,045
Unrealized actuarial losses on post-retirement benefits	(21		)	18
Straight-line rent	1,277			1,051
Asset retirement obligation	70			67
Reserve for accrued interest receivable	578			602
Reserve for loan commitments	216			146
Employee Stock Ownership Plan	615			551
Other	244			261
Depreciation	2,414			2,383
Fair value adjustments of acquired loans	3,713			3,934
Fair value adjustments of pension benefit obligations	160			154
Unrealized losses on debt securities available-for-sale	—			3,575
Total gross deferred tax assets	24,027			27,655
Deferred tax liabilities:
Unrealized gains on debt securities available for sale	1,786			—
Fair value adjustments of acquired securities	20			28
Fair value adjustments of deposit liabilities	219			285
Deferred loan fees	2,224			1,984
Other	30			33
Total gross deferred tax liabilities	4,279			2,330
Net deferred tax asset	$	19,748		$	25,325

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 since it is “more likely than not” that the net deferred tax asset 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 asset 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, 2019 and December 31, 2018, 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,
	2019			2018			2017
Beginning balance	$	530		$	482		$	459
Settlements based on tax positions related to prior years	(530		)	(238		)	(109		)
Additions based on tax positions related to prior years	190			286			132
Ending balance	$	190		$	530		$	482

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 2017 through present.


•	New York State tax filings 2015 through present. The 2015 through 2018 filings are currently under examination.


•	New York City tax filings 2015 through present. The 2015 filing is currently under examination.

•

State of New Jersey 2015 through present.