The current and deferred amounts of income tax expense for 2019, 2018 and 2017 are as follows (dollars in thousands):

	2019		2018		2017
Current:
Federal	$	15,509	$	8,902	$	21,090
State		5,018		954		505
Subtotal		20,527		9,856		21,595
Deferred:
Federal		916		2,455		3,876
State		(812)		(1,529)		(177)
Subtotal		104		926		3,699
Income tax expense	$	20,631	$	10,782	$	25,294

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 - Income Taxes – (continued)

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. 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. These changes are not temporary. Although regulations implementing the legislative changes have not yet been issued, it is possible that the Company will lose the benefit of at least certain of its tax management strategies, and, if so, our total tax expense will likely increase. As a result of the Bill the Company recorded a net tax benefit of $0.6 million primarily due to a re-measurement of deferred tax assets and liabilities. 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):

	2019			2018			2017
Income before income tax expense	$	94,026		$	71,134		$	68,514
Federal statutory rate		21	%		21	%		35
Computed “expected” Federal income tax expense		19,745			14,938			23,980
State tax, net of federal tax benefit		3,436			1,104			213
Impact of the Tax Cuts and Jobs Act		-			(790)			5,623
Impact of “the Bill”		-			(618)			-
Bank owned life insurance		(732)			(650)			(1,113)
Tax-exempt interest and dividends		(2,519)			(1,521)			(2,123)
Tax benefits from stock-based compensation		(27)			(1,100)			(348)
Other, net		728			(581)			(938)
Income tax expense	$	20,631		$	10,782		$	25,294

The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability at December 31, 2019 and 2018 are presented in the following table:

	2019		2018
	(dollars in thousands)
Deferred tax assets
Allowance for loan losses	$	11,333	$	10,358
Purchase accounting		4,543		307
Pension actuarial losses		-		2,203
New Jersey net operating loss		3,424		2,796
Deferred compensation		1,440		1,234
Unrealized losses on securities and swaps		1,509		1,620
Deferred loan costs, net of fees		20		19
Accrued rent		-		426
Capital lease		230		232
Nonaccrual interest		69		95
Other		2,240		-
Total deferred tax assets	$	24,808	$	19,290
Deferred tax liabilities
Employee benefit plans	$	(2,131)	$	(2,167)
Pension actuarial gains		(1,062)		-
Depreciation		(1,146)		(512)
Prepaid expenses		(173)		(185)
Market discount accretion		(32)		(414)
Unrealized gains on securities and swaps		-		(366)
Other		-		(198)
Total deferred tax liabilities		(4,544)		(3,842)
Net deferred tax assets	$	20,264	$	15,448

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Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 - Income Taxes – (continued)

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 2019 and 2018, 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 2016 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.