Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Note 11 – Income Taxes

The current and deferred amounts of income tax expense for 2020, 2019 and 2018 are as follows (dollars in thousands):

	2020		2019		2018
Current:
Federal	$	19,590	$	15,509	$	8,902
State		7,006		5,018		954
Subtotal		26,596		20,527		9,856
Deferred:
Federal		(3,881)		916		2,455
State		(3,614)		(812)		(1,529)
Subtotal		(7,495)		104		926
Income tax expense	$	19,101	$	20,631	$	10,782

On July 1, 2018 New Jersey Governor Phil Murphy signed Assembly Bill 4202 (“the Bill”) into law. The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. However, in 2020, this surtax was extended through December 31, 2023, at the 2.5% level. The legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits the deductibility of dividends received.

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 (dollars in thousands):

	2020			2019			2018
Income before income tax expense	$	90,390		$	94,026		$	71,134
Federal statutory rate		21	%		21	%		21	%
Computed “expected” Federal income tax expense		18,982			19,745			14,938
State tax, net of federal tax benefit		1,913			3,436			1,104
Impact of the Tax Cuts and Jobs Act 2017		-			-			(790)
Impact of the “the Bill”		-			-			(618)
Bank owned life insurance		(1,052)			(732)			(650)
Tax-exempt interest and dividends		(1,491)			(2,519)			(1,521)
Tax benefits from stock-based compensation		157			(27)			(1,100)
Other, net		592			728			(581)
Income tax expense	$	19,101		$	20,631		$	10,782

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 – Income Taxes – (continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability as of December 31, 2020 and 2019 are presented in the following table:

	2020		2019
	(dollars in thousands)
Deferred tax assets
Allowance for loan losses	$	23,399	$	11,333
Purchase accounting		-		4,543
Pension actuarial losses		1,385		-
New Jersey net operating loss		4,370		3,424
Deferred compensation		1,835		1,440
Unrealized losses on securities and swaps		-		1,509
Deferred loan costs, net of fees		357		20
Capital lease		225		230
Nonaccrual interest		51		69
Other		4,519		2,240
Total deferred tax assets	$	36,141	$	24,808
Deferred tax liabilities
Employee benefit plans	$	(2,161)	$	(2,131)
Purchase accounting		(1,821)		-
Pension actuarial gains		-		(1,062)
Depreciation		(187)		(1,146)
Prepaid expenses		(201)		(173)
Market discount accretion		(428)		(32)
Unrealized gains on securities and swaps		(2,171)		-
Total deferred tax liabilities		(6,969)		(4,544)
Net deferred tax assets	$	29,172	$	20,264

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets for state purposes is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible, while for Federal purposes the deferred tax assets can also be realized through tax carrybacks. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income, and tax planning strategies in making this assessment. During 2020 and 2019, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes the net deferred tax assets are more likely than not to be realized. There are no unrecorded tax benefits and the Company does not expect the total amount of unrecognized income tax benefits to significantly increase in the next twelve months.

The Company’s federal income tax returns are open and subject to examination from the 2017 tax return year and forward. The Company’s state income tax returns are generally open from the 2015 and later tax return years based on individual state statutes of limitations.