Income Taxes
The Tax Cuts and Jobs Act (the "Act",) which was enacted on December 22, 2017, made key changes to the U.S. tax law, including the reduction of the U.S. federal corporate tax rate from 35% to 21%. As ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is 21%. The Company is still analyzing certain aspects of the Act, and refining its calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax asset was $13,493. Additionally, related to the deferred tax effects on the unrealized holding gains and losses for available for sale securities, the effect of the Act was recorded as a component of tax expense related to continuing operations during 2017, which is consistent with ASC 740's general prohibition on backward tracing.
The Company's pre-tax income is subject to federal income tax and state margin tax at a combined rate of 36% for 2017, 2016 and 2015. Income tax expense for 2017, 2016 and 2015, was as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current expense | $ | 56,341 |
| | $ | 59,900 |
| | $ | 38,648 |
|
Deferred expense | (4,115 | ) | | (6,798 | ) | | (692 | ) |
Impact of Tax Cuts and Jobs Act - net future deductions | 12,752 |
| | — |
| | — |
|
Impact of Tax Cuts and Jobs Act - unrealized loss on AFS securities | 741 |
| | — |
| | — |
|
Total income tax expense | $ | 65,719 |
| | $ | 53,102 |
| | $ | 37,956 |
|
At December 31, 2017 and 2016, deferred tax assets and liabilities were due to the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Allowance for loan losses | $ | 15,168 |
| | $ | 22,602 |
|
Deferred compensation arrangements | 762 |
| | 1,261 |
|
Self-funded health insurance | 251 |
| | 241 |
|
Non-accrual interest | 503 |
| | 966 |
|
Restricted stock and stock options | 2,577 |
| | 3,132 |
|
Accrued expenses | 623 |
| | 1,255 |
|
Fair value mark on purchased loans | 965 |
| | 2,348 |
|
Net unrealized loss on securities available for sale | 1,111 |
| | 1,465 |
|
Other | 1,909 |
| | 2,121 |
|
| 23,869 |
| | 35,391 |
|
Deferred tax liabilities: | | | |
|
Depreciation | (270 | ) | | (336 | ) |
Partnerships — CRA-purposed private equity funds | (941 | ) | | (1,697 | ) |
Fair value mark on subordinated debt | (743 | ) | | (1,303 | ) |
Other | (1,675 | ) | | (2,824 | ) |
| (3,629 | ) | | (6,160 | ) |
Net deferred tax asset | $ | 20,240 |
| | $ | 29,231 |
|
The net deferred tax asset is recorded on the consolidated balance sheets under “other assets.” Management performed an analysis related to the Company's deferred tax asset for each of the years ended December 31, 2017 and 2016 and, based upon these analyses, no valuation allowance was deemed necessary as of December 31, 2017 or 2016.
Effective tax rates differ from the federal statutory rate of 35% in 2017, 2016 and 2015, applied to income before income taxes due to the following: |
| | | | | | | | | | | |
| At and for the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate times financial statement income | $ | 54,325 |
| | $ | 52,823 |
| | $ | 38,105 |
|
Effect of: | | | | | |
State taxes, net of federal benefit | 239 |
| | 267 |
| | 37 |
|
Bank-owned life insurance income | (423 | ) | | (436 | ) | | (419 | ) |
Municipal interest income | (978 | ) | | (1,041 | ) | | (1,025 | ) |
ESOP shares released | 541 |
| | 757 |
| | 1,207 |
|
Restricted stock and stock options | (1,578 | ) | | — |
| | — |
|
Sale of LegacyTexas Insurance Services, Inc. | — |
| | 640 |
| | — |
|
DTA write-down due to the Tax Cuts and Jobs Act | 13,493 |
| | — |
| | — |
|
Other | 100 |
| | 92 |
| | 51 |
|
Total income tax expense | $ | 65,719 |
| | $ | 53,102 |
| | $ | 37,956 |
|
Effective Tax Rate before deferred tax write-down | 33.65 | % | | 35.18 | % | | 34.86 | % |
Effective Tax Rate | 42.34 | % | | 35.18 | % | | 34.86 | % |
The Company files income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. The Company is generally no longer subject to U.S. federal income tax examinations for tax years prior to 2014.