INCOME TAXES

12 Months Ended

Dec. 31, 2019

11. INCOME TAXES

The income tax expense included in the consolidated financial statements for the years ended December 31 is allocated as follows:

(In thousands)	2019		2018			2017
Federal:
Current (benefit)/expense	$	5,647	$	(7,046	)	$	1,559
Deferred expense		6,087		16,908			13,922
State:
Current expense		3,028		3,554			2,133
Deferred expense		3,926		134			196
Total income tax expense	$	18,688	$	13,550		$	17,810

Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 21 percent for both 2019 and 2018, respectively, and 35 percent for 2017, to income before taxes as a result of the following:

(In thousands)	2019			2018			2017
Computed “expected” tax expense	$	13,886		$	12,121		$	19,008
(Decrease)/increase in taxes resulting from:
Tax-exempt income		(431	)		(402	)		(584	)
State income taxes, net of Federal benefit		2,540			2,942			1,514
Impact of state tax reform, net of Federal benefit		2,954			—			—
Bank owned life insurance income		(277	)		(290	)		(475	)
Life insurance expense		234			148			479
Gain on death benefit		—			(630	)		—
Interest disallowance		146			115			124
Meals and entertainment expense		40			25			76
Stock-based compensation		(46	)		(481	)		(982	)
Impact of Federal tax reform		—			—			(1,648	)
Other		(358	)		2			298
Total income tax expense	$	18,688		$	13,550		$	17,810

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31 are as follows:

(In thousands)	2019			2018
Deferred tax assets:
Allowance for loan losses	$	11,369		$	10,537
Tax net operating loss carryforward		6,163			7,046
Organization costs		13			13
Cash flow hedge		925			—
Unrealized loss on securities available for sale		—			969
Unrealized loss on equity security		43			79
Stock plan		2,874			1,534
Nonaccrual interest		74			31
Accrued compensation		2,956			189
Accrued expenses		1,402			—
Lease liabilities		3,234			—
Capital leases (2018)/Finance lease (2019)		768			1,051
Other		188			—
Total gross deferred tax assets	$	30,009		$	21,449
Deferred tax liabilities:
Lease financing	$	44,841		$	33,191
Cash flow hedge		—			265
Unrealized gain on securities available for sale		330			—
Deferred loan origination costs and fees		1,355			1,214
Deferred income		5,329			2,693
Amortization of intangible assets		239			—
Purchase accounting		908			—
Lease right-of-use asset		3,158
Other		—			115
Total gross deferred tax liabilities		56,160			37,478
Net deferred tax liability	$	(26,151	)	$	(16,029	)

Based upon taxes paid and projected future taxable income, Management believes that it is more likely than not that the Company that gross deferred tax assets will be realized. However, there can be no assurance that such assets will be realized if circumstances change.

At December 31, 2019 and 2018, the Company had no unrecognized tax benefits. The Company does not expect the amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company has Federal tax net operating losses arising in 2019 related to accelerated depreciation on lease financing activity of approximately $45 million and may be carried forward indefinitely. These losses cannot be carried back.

On July 1, 2018, the 2019 New Jersey Budget was passed, which established a 2.5 percent 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 continued through 2019. The surtax will adjust to 1.5 percent 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. New Jersey requires entities to report their real estate investment trust, registered investment company and investment company on a separate entity basis. The Bank made an adjustment to income tax expense and deferred tax assets/liabilities to reflect the new state tax rate. The Company’s effective tax rate was 28.3 percent for 2019 as compared to 23.5 percent for 2018. The Company’s effective tax rate for 2018 was positively affected by the adoption of ASU 2016-09 which resulted in a $538,000 reduction in income taxes.

The Company is subject to U.S. Federal income tax as well as income tax of various state jurisdictions. The Company is no longer subject to federal examination for tax years prior to 2016. The tax years of 2016, 2017 and 2018 remain open to federal examination. The Company is no longer subject to state and local examinations by tax authorities for tax years prior to 2015. The tax years of 2015, 2016, 2017 and 2018 remain open for state examination.