Income Taxes

On December 22, 2017 the Tax Act was signed into law, lowering the corporate federal income tax rate from 35% to 21%, which provided a significant tax benefit in 2019 and in 2018 and will continue to do so in subsequent years. However, net income for 2017 was adversely impacted because ASC 740, Income Taxes, required the Company to remeasure its deferred income tax balances as of the enactment date to reflect a rate of 21%. This remeasurement resulted in a $1.7 million increase in income tax expense and is included in the line "Federal - deferred provision" in the table below.

On July 1, 2018, New Jersey's Assembly Bill 4202 was signed into law. The bill, effective January 1, 2018, imposes a temporary surtax on corporations earning New Jersey allocated taxable income in excess of $1 million at a rate of 2.5 percent for tax years beginning on or after January 1, 2018, through December 31, 2019, and at 1.5 percent for tax years beginning on or after January 1, 2020, through December 31, 2021. In addition, effective for periods on or after January 1, 2019, New Jersey requires mandatory unitary combined reporting of certain affiliates for its Corporation Business Tax.

The components of the provision for income taxes for the past three years are as follows:



	For the years ended December 31,
(In thousands)	2019			2018			2017
Federal - current provision	$	5,478		$	5,507		$	7,003
Federal - deferred (benefit) provision	(285		)	(799		)	1,702
Total federal provision	5,193			4,708			8,705
State - current provision	1,483			1,143			991
State - deferred (benefit)	(14		)	(463		)	(156		)
Total state provision	1,469			680			835
Total provision for income taxes	$	6,662		$	5,388		$	9,540

Reconciliation between the reported income tax provision and the amount computed by multiplying income before taxes by the statutory Federal income tax rate for the past three years is as follows:



	For the years ended December 31,
(In thousands, except percentages)	2019			2018			2017
Federal income tax provision at statutory rate	$	6,366		$	5,734		$	7,852
Increases (Decreases) resulting from:
Stock option and restricted stock	(185		)	(434		)	(428		)
Bank owned life insurance	(123		)	(205		)	(164		)
Tax-exempt interest	(22		)	(25		)	(56		)
Meals and entertainment	19			19			22
Captive insurance premium	(209		)	(200		)	(295		)
State income taxes, net of federal income tax effect	1,161			538			543
Impact of rate change on deferred tax assets	—			—			1,733
Other, net	(345		)	(39		)	333
Provision for income taxes	$	6,662		$	5,388		$	9,540
Effective tax rate	22.0		%	19.7		%	42.5		%

Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The components of the net deferred tax asset at December 31, 2019 and 2018 are as follows:



(In thousands)	December 31, 2019			December 31, 2018
Deferred tax assets:
Allowance for loan losses	$	4,605		$	4,476
SERP	1,006			790
Stock-based compensation	719			561
Deferred compensation	533			385
Net unrealized security losses	—			292
Depreciation	159			231
State net operating loss	140			214
EVP retirement plan	133			130
Commitment reserve	77			84
Other	212			238
Gross deferred tax assets	7,584			7,401
Valuation allowance	(140		)	(214		)
Total deferred tax assets	7,444			7,187
Deferred tax liabilities:
Deferred loan costs	451			414
Goodwill	400			382
Prepaid insurance	354			324
Deferred servicing fees	311			243
Net unrealized security gains	111			—
Bond accretion	73			72
Interest rate swaps	69			402
Other	116			—
Total deferred tax liabilities	1,885			1,837
Net deferred tax asset	$	5,559		$	5,350

The Company computes deferred income taxes under the asset and liability method. Deferred income taxes are recognized for tax consequences of “temporary differences” by applying enacted statutory tax rates to differences between the financial reporting and the tax basis of existing assets and liabilities. A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions subject to reduction of the asset by a valuation allowance.

The Company had a $140 thousand and $214 thousand valuation allowance for deferred tax assets related to its state net operating loss carry-forward deferred tax asset at December 31, 2019 and 2018, respectively. The Company’s state net operating loss carry-forwards totaled approximately $2.0 million and $3.0 million at December 31, 2019 and 2018, respectively, and expire between 2030 and 2037.

Included as a component of deferred tax assets is an income tax expense (benefit) related to unrealized gains (losses) on securities available for sale, a supplemental retirement plan (SERP) and interest rate swaps. The after-tax component of each of these is included in other comprehensive income (loss) in shareholders’ equity. The after-tax component related to securities available for sale was an unrealized gain (loss) of $280 thousand and $(757) thousand for 2019 and 2018, respectively. The after-tax component related to the SERP was an unrealized loss of $295 thousand for 2019, compared to $431 thousand (in 2018. The after-tax component related to the interest rate swaps was an unrealized gain of $168 thousand for 2019, compared to an unrealized gain of $1.0 million in the prior year.

The Company follows FASB ASC Topic 740, “Income Taxes,” which prescribes a threshold for the financial statement recognition of income taxes and provides criteria for the measurement of tax positions taken or expected to be taken in a tax return. ASC 740 also includes guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of income taxes. The Company did not recognize or accrue any interest or penalties related to income taxes during the years ended December 31, 2019 and 2018. The Company does not have an accrual for uncertain tax positions as of December 31, 2019 or 2018, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. Tax returns for all years 2016 and thereafter are subject to future examination by tax authorities.