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 2018 and will continue to do so in subsequent years. However, net income for 2017 was adversely impacted because under ASC 740, Income Taxes, Unity was required 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 new 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 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)	2018			2017			2016
Federal - current provision	$	5,507		$	7,003		$	6,352
Federal - deferred (benefit) provision	(799		)	1,702			73
Total federal provision	4,708			8,705			6,425
State - current provision	1,143			991			795
State - deferred (benefit) provision	(463		)	(156		)	37
Total state provision	680			835			832
Total provision for income taxes	$	5,388		$	9,540		$	7,257

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)	2018			2017			2016
Federal income tax provision at statutory rate	$	5,734		$	7,852		$	7,162
Increases (Decreases) resulting from:
Stock option and restricted stock	(434		)	(428		)	—
Bank owned life insurance	(205		)	(164		)	(132		)
Tax-exempt interest	(25		)	(56		)	(71		)
Meals and entertainment	19			22			21
Captive insurance premium	(200		)	(295		)	—
State income taxes, net of federal income tax effect	538			543			541
Impact of rate change on deferred tax assets	—			1,733			—
Other, net	(39		)	333			(264		)
Provision for income taxes	$	5,388		$	9,540		$	7,257
Effective tax rate	19.7		%	42.5		%	35.5		%

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, 2018, 2017 and 2016 are as follows:



(In thousands)	December 31, 2018			December 31, 2017
Deferred tax assets:
Allowance for loan losses	$	4,476		$	3,782
SERP	790			334
Stock-based compensation	561			434
Deferred compensation	385			274
Net unrealized security losses	292			150
Depreciation	231			237
State net operating loss	214			296
EVP retirement plan	130			75
Commitment reserve	84			81
Other	238			300
Gross deferred tax assets	7,401			5,963
Valuation allowance	(214		)	(296		)
Total deferred tax assets	7,187			5,667
Deferred tax liabilities:
Deferred loan costs	414			502
Interest rate swaps	402			396
Goodwill	382			341
Prepaid insurance	324			298
Deferred servicing fees	243			100
Bond accretion	72			13
Total deferred tax liabilities	1,837			1,650
Net deferred tax asset	$	5,350		$	4,017

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 $214 thousand and $296 thousand valuation allowance for deferred tax assets related to its state net operating loss carry-forward deferred tax asset at December 31, 2018 and 2017, respectively. The Company’s state net operating loss carry-forwards totaled approximately $3.0 million at December 31, 2018 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 loss of $757 thousand and $335 thousand for 2018 and 2017, respectively. The after-tax component related to the SERP was an unrealized loss of $431 thousand for 2018, compared to $341 thousand in 2017. The after-tax component related to the interest rate swaps was an unrealized gain of $1.0 million for 2018, compared to an unrealized gain of $882 thousand 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, 2018 and 2017. The Company does not have an accrual for uncertain tax positions as of December 31, 2018 or 2017, 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 2015 and thereafter are subject to future examination by tax authorities.