7. INCOME TAXES:
On December 22, 2017 the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for the Company was to lower the corporate income tax rate to 21% from 35%. The Company’s deferred tax assets and liabilities were re-measured based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. However, the Company continues to analyze certain aspects of the Act resulting in refinement of the 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 re-measurement of the Company’s deferred tax balance was $7,650,000, a reduction of income tax expense for the year ended December 31, 2017.
The Company files a consolidated federal income tax return. Income tax expense is comprised of the following (dollars in thousands):
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current federal income tax |
$ | 34,421 | $ | 30,381 | $ | 31,014 | ||||||
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Current state income tax |
99 | 99 | 103 | |||||||||
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Deferred federal income tax expense (benefit) |
(53 | ) | 673 | 320 | ||||||||
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Restatement of net deferred tax liability due to change in income tax rate |
(7,650 | ) | — | — | ||||||||
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Income tax expense |
$ | 26,817 | $ | 31,153 | $ | 31,437 | ||||||
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Income tax expense, as a percentage of pretax earnings, differs from the statutory federal income tax rate as follows:
| As a Percent of Pretax Earnings |
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| 2017 | 2016 | 2015 | ||||||||||
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Statutory federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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Restatement of net deferred tax liability due to change in income tax rate |
(5.3 | ) | — | — | ||||||||
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Reductions in tax rate resulting from interest income exempt from federal income tax |
(11.5 | ) | (12.1 | ) | (11.4 | ) | ||||||
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Effect of state income tax |
0.1 | 0.1 | 0.1 | |||||||||
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ESOP tax deduction |
(0.2 | ) | (0.2 | ) | (0.2 | ) | ||||||
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Other |
0.1 | 0.1 | 0.3 | |||||||||
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Effective income tax rate |
18.2 | % | 22.9 | % | 23.8 | % | ||||||
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The approximate effects of each type of difference that gave rise to the Company’s deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows (dollars in thousands):
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Tax basis of loans in excess of financial statement basis |
$ | 10,550 | $ | 17,006 | ||||
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Minimum liability in defined benefit plan |
766 | 1,641 | ||||||
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Recognized for financial reporting purposes but not yet for tax purposes: |
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Deferred compensation |
1,818 | 2,807 | ||||||
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Write-downs and adjustments to other real estate owned and repossessed assets |
11 | 9 | ||||||
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Other deferred tax assets |
79 | 226 | ||||||
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Total deferred tax assets |
$ | 13,224 | $ | 21,689 | ||||
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Deferred tax liabilities: |
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Financial statement basis of fixed assets in excess of tax basis |
$ | 3,343 | 5,870 | |||||
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Intangible asset amortization deductible for tax purposes, but not for financial reporting purposes |
9,926 | 15,191 | ||||||
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Recognized for financial reporting purposes but not yet for tax purposes: |
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Accretion on investment securities |
1,039 | 1,788 | ||||||
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Pension plan contributions |
1,086 | 1,799 | ||||||
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Net unrealized gain on investment securities available-for-sale |
9,420 | 11,573 | ||||||
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Other deferred tax liabilities |
31 | 83 | ||||||
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Total deferred tax liabilities |
$ | 24,845 | $ | 36,304 | ||||
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Net deferred tax asset (liability) |
$ | (11,621 | ) | $ | (14,615 | ) | ||
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At December 31, 2017 and 2016, management believes that it is more likely than not that all of the deferred tax amounts shown above will be realized and therefore no valuation allowance was recorded.
Current authoritative accounting guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Current authoritative accounting guidance also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company concluded the tax benefits of positions taken and expected to be taken on its tax returns should be recognized in the financial statements under this guidance. The Company files income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. 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. As of December 31, 2017 and 2016, the Company believes that there are no uncertain tax positions.