ConnectOne Bancorp, Inc. Income Taxes Disclosure

Note 11 – Income Taxes

 

Pretax income and income tax expense from continuing operations were as follows:

 

		2025				2024				2023
		(dollars in thousands)
Pretax income		$	112,743			$	98,467			$	116,958
Current:
Federal		$	18,512			$	15,556			$	16,185
State and Local			16,560				11,158				9,635
Subtotal			35,072				26,714				25,820
Deferred:
Federal			(2,024	)			258				2,903
State and Local			(748	)			(2,298	)			1,232
Subtotal			(2,772	)			(2,040	)			4,135
Income tax expense		$	32,300			$	24,674			$	29,955

 

Pretax income and income tax expense are derived solely from domestic operations.

 

The following table reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate for the year ended December 31, 2025:

 

		2025
(dollars in thousands)		Amount				Rate
US Federal tax at statutory rate		$	23,676				21.0	%
State and Local tax, net of federal tax benefit			12,492				11.1
Nontaxable or nondeductible items:
Tax-exempt interest and dividends			(3,207	)			(2.8	)
Bank owned life insurance			(1,936	)			(1.7	)
162M adjustment			576				0.5
Tax benefits from stock-based compensation			129				0.1
Merger expenses			1,682				1.4
Other, net			(1,112	)			(1.0	)
Income tax expense		$	32,300				28.6	%

 

State taxes in New York and New Jersey made up the majority (greater than 50 percent) of the tax effect in this category.

 

 

The following table sets forth a reconciliation of the income tax expense computed at the U.S. federal statutory income tax rate to the Company's actual income tax expense for the periods indicated:

 

(dollars in thousands)		2024				2023
Income before income tax expense		$	98,467			$	116,958
Federal statutory rate			21	%			21	%
Computed “expected” Federal income tax expense		$	20,678				24,561
State and Local tax, net of federal tax benefit			6,514				9,404
Tax-exempt interest and dividends			(2,632	)			(2,514	)
Bank owned life insurance			(1,500	)			(1,326	)
162M adjustment			469				779
Tax benefits from stock-based compensation			109				(66	)
Other, net			1,036				(883	)
Income tax expense		$	24,674			$	29,955

 

 

 

Income taxes paid were as follows for the year ended December 31, 2025:

 

		2025
(dollars in thousands)
Federal		$	18,752
State and Local:
New Jersey			16,681
New York			6,723
Connecticut			1,169
Florida			190
Total		$	43,515

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2025 and 2024 are as follows:       

                  

		2025				2024
		(dollars in thousands)
Deferred tax assets
Allowance for credit losses		$	44,656			$	24,891
Depreciation			822				6
Pension actuarial losses			-				272
State net operating losses			10,807				2,683
Deferred compensation			7,765				4,919
Purchase accounting			37,400				-
Unrealized losses on available-for-sale securities			38,890				25,959
Deferred loan costs, net of fees			4,321				1,608
Finance lease			134				163
Nonaccrual interest			373				275
Operating lease liability			10,431				4,671
Interest Expense Disallowance			5,239				-
Other			2,090				1,519
Total deferred tax assets		$	162,928			$	66,966
Deferred tax liabilities
Employee benefit plans		$	(7,709	)		$	(2,515	)
Pension actuarial losses			(380	)			-
Purchase accounting			-				(1,599	)
Prepaid expenses			(2,213	)			(1,551	)
Unrealized gains on derivatives			(3,802	)			(8,790	)
Right of use asset			(9,138	)			(4,304	)
Other			(2,008	)			(1,240	)
Total deferred tax liabilities			(25,250	)			(19,999	)
Net deferred tax assets before valuation allowance		$	137,678			$	46,967
Valuation allowance			(10,947	)			-
Net deferred tax assets		$	126,731			$	46,967

 

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. This assessment includes the evaluation of future taxable income, the scheduled reversal of deferred tax liabilities, and available tax planning strategies. In connection with the acquisition of FLIC, the Company obtained net operating loss carryforwards and other tax attributes that are subject to utilization limits under Internal Revenue Code Section 382. These limits affect both realized and unrealized built-in losses and may restrict the Company's ability to utilize these attributes during the carryforward period. Accordingly, management established a valuation allowance against the relevant acquired deferred tax assets based on its evaluation of their future realizability. Refer to Note 2, Business Combinations, for additional information regarding the FLIC acquisition. Aside from these acquired attributes, the Company believes its remaining net deferred tax assets are more likely than not to be realized as of December 31, 2025 and as of December 31, 2024. The Company has no unrecognized tax benefits as of December 31, 2025 and as of December 31, 2024. 

 

The Company files income tax returns in multiple jurisdictions and is subject to examination by federal, state, and local taxing authorities. The Company regularly assesses developments in tax laws and regulations that may impact its effective tax rate and financial reporting. The Company’s federal income tax returns that are currently open and subject to examination are from the tax year 2022 return and forward. The Company’s state income tax returns are generally open from the tax year 2021 and forward based on individual state statutes of limitations.

 

As of December 31, 2025, the Company had state net operating loss carryforwards of approximately $134 million, which expire at various dates from 2041 through 2045. Additionally, the Company generated Recognized Built-In Losses (RBILs) of $26.5 million which may be carried forward indefinitely for federal tax purposes and expire in 2045 for the state tax purposes. The Company also had federal interest expense disallowance carryforwards of approximately $24.9 million, which may be carried forward indefinitely. These attributes are subject to utilization limits under Section 382, which is $9.7 million. A valuation allowance has been established solely against certain state net operating loss and state RBIL carryforwards that are not more likely than not to be realized before expiration or utilization.