INCOME TAXES
The income tax expense included in the accompanying statements of income consists of the following (in thousands):
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current income tax expense | | $ | 12,607 |
| | $ | 8,557 |
| | $ | 10,671 |
|
Deferred income tax expense (benefit) | | 3,514 |
| | 1,768 |
| | (3,392 | ) |
Income tax expense | | $ | 16,121 |
| | $ | 10,325 |
| | $ | 7,279 |
|
The components of the net deferred tax asset (liability) as of December 31, 2017 and 2016 are summarized below (in thousands): |
| | | | | | | |
| | Assets | | Liabilities |
Allowance for loan losses | | $ | 4,364 |
| | $ |
Retirement and other benefit plans | | |
| | (2,102 | ) |
Premises and equipment | | | | (5,716 | ) |
Core deposit intangible | | | | (3,660 | ) |
Unrealized losses on securities available for sale | | 4,285 |
| | |
Effective hedging derivatives | | | | (1,701 | ) |
Fair value adjustment on loans | | 2,607 |
| | |
Fair value adjustment on time deposits | | | | (54 | ) |
Alternative minimum tax credit | | 6,943 |
| | |
Unfunded status of defined benefit plan | | 7,018 |
| | |
|
State business tax credit | | 544 |
| | |
|
Stock-based compensation | | 642 |
| | |
|
Other | |
|
| | (966 | ) |
Gross deferred tax assets (liabilities) | | 26,403 |
|
| (14,199 | ) |
Net deferred tax asset at December 31, 2017 | | $ | 12,204 |
| | |
|
| | | | |
Allowance for loan losses | | $ | 6,269 |
| | $ |
Retirement and other benefit plans | | |
| | (2,707 | ) |
Premises and equipment | | |
| | (5,273 | ) |
Core deposit intangible | | | | (1,576 | ) |
Unrealized losses on securities available for sale | | 12,286 |
| |
|
|
Effective hedging derivatives | | | | (2,474 | ) |
Fair value adjustment on loans | | 1,404 |
| | |
Alternative minimum tax credit | | 8,776 |
| | |
Unfunded status of defined benefit plan | | 10,436 |
| | |
|
State business tax credit | | 604 |
| | |
|
Stock-based compensation | | 995 |
| | |
|
Other | | 151 |
| | |
|
Gross deferred tax assets (liabilities) | | 40,921 |
| | (12,030 | ) |
Net deferred tax asset at December 31, 2016 | | $ | 28,891 |
| | |
|
A reconciliation of tax at statutory rates and total tax expense is as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Amount | | Percent of Pre-Tax Income | | Amount | | Percent of Pre-Tax Income | | Amount | | Percent of Pre-Tax Income |
Statutory tax expense | | $ | 24,652 |
| | 35.0 | % | | $ | 20,886 |
| | 35.0 | % | | $ | 17,946 |
| | 35.0 | % |
Increase (decrease) in taxes from: | | |
| | |
| | |
| | |
| | |
| | |
|
Tax rate changes | | 2,416 |
| | 3.4 | % | | — |
| | — |
| | — |
| | — |
|
Tax exempt interest | | (10,195 | ) | | (14.5 | )% | | (9,879 | ) | | (16.6 | )% | | (9,975 | ) | | (19.5 | )% |
Bank owned life insurance | | (885 | ) | | (1.2 | )% | | (915 | ) | | (1.5 | )% | | (914 | ) | | (1.8 | )% |
Share-based compensation | | (482 | ) | | (0.7 | )% | | — |
| | — |
| | (75 | ) | | (0.1 | )% |
Acquisition costs | | 467 |
| | 0.7 | % | | — |
| | — |
| | — |
| | — |
|
State business tax | | 68 |
| | 0.1 | % | | 71 |
| | 0.1 | % | | — |
| | — |
|
Other, net | | 80 |
| | 0.1 | % | | 162 |
| | 0.3 | % | | 297 |
| | 0.6 | % |
Income tax expense | | $ | 16,121 |
| | 22.9 | % | | $ | 10,325 |
| | 17.3 | % | | $ | 7,279 |
| | 14.2 | % |
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our net deferred tax asset balance was $2.4 million, an increase to the effective tax rate (“ETR”) of 3.4%.
The Tax Cuts and Jobs Act repealed the existing Alternative Minimum Tax (“AMT”). As of December 31, 2017, we had a remaining AMT tax credit of $6.9 million. This existing tax credit carryforward can be used to offset regular future tax liability. Additionally, this AMT credit is refundable in any taxable year after 2017 and before 2022 in an amount equal to 50% of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. We expect to realize the remaining AMT tax credit in 2018 to offset tax liability.
During the first quarter of 2017, we adopted a new accounting standard that impacted how the income tax effects associated with stock-based compensation are recognized. See “Note 1 - Summary of Significant Accounting and Reporting Policies” for additional information. The adoption of the standard reduced income tax expense by $482,000 and the ETR by 0.7% for the year ended December 31, 2017.
We file income tax returns in the U.S. federal jurisdiction and in certain states. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2014 or Texas state tax examinations by tax authorities for years before 2013. No valuation allowance for deferred tax assets was recorded at December 31, 2017 or 2016 as management believes it is more likely than not that all of the deferred tax assets will be realized in future years. Unrecognized tax benefits were not material at December 31, 2017 or 2016.