Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

9. INCOME TAXES:

The Company files a consolidated federal income tax return. Income tax expense is comprised of the following (in thousands):

	Year Ended December 31,
	2021		2020			2019
Current federal income tax	$	40,527	$	45,133		$	33,099
Current state income tax		350		447			150
Deferred federal income tax expense (benefit)		3,531		(5,249	)		(29	)
Income tax expense	$	44,408	$	40,331		$	33,220

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
	2021			2020			2019
Statutory federal income tax rate		21.0	%		21.0	%		21.0	%
Reductions in tax rate resulting from interest income    exempt from federal income tax		(4.7	)		(4.6	)		(4.5	)
Other		0.0			0.2			0.3
Effective income tax rate		16.3	%		16.6	%		16.8	%

The approximate effects of each type of difference that gave rise to the Company’s deferred tax assets and liabilities at December 31, 2021 and 2020 are as follows (in thousands):

	2021			2020
Deferred tax assets:
Tax basis of loans in excess of financial statement basis	$	15,607		$	19,193
Recognized for financial reporting purposes but not yet    for tax purposes - deferred compensation		2,933			2,479
Other deferred tax assets		831			746
Total deferred tax assets	$	19,371		$	22,418
Deferred tax liabilities:
Financial statement basis of fixed assets in excess of tax    basis	$	6,178		$	5,712
Intangible asset amortization deductible for tax purposes,    but not for financial reporting purposes		13,594			13,400
Recognized for financial reporting purposes but not yet    for tax purposes - accretion on investment securities		499			698
Net unrealized gain on investment securities available-for-    sale		26,384			45,295
Other deferred tax liabilities		69			46
Total deferred tax liabilities	$	46,724		$	65,151
Net deferred tax asset (liability)	$	(27,353	)	$	(42,733	)

At December 31, 2021 and 2020, management believes that it is more likely than not that all of the deferred tax assets shown above will be realized and therefore no valuation allowance was recorded.

Low Income Housing Tax Credit Investments - During 2021, the Company began investing in an affordable housing fund that will invest in real estate projects that qualify for the federal low income housing tax credit (“LIHTC”) program designed to promote private development of low income housing. The investments made by the fund will generate a return to the Company primarily through the realization of LIHTCs, and also through federal tax deductions generated from the ongoing operating losses from the investees of the fund. The Company’s investment in the fund will be amortized through income tax expense using the proportional amortization method as related tax credits are utilized by the Company. The initial capital contribution commitment to the fund was for up to $5,500,000, and the initial contribution was $55,000 which is included in other assets at December 31, 2021.

New Market Tax Credits - During 2021, The Company began investing in qualifying Community Development Entities (“CDE”) under the federal New Market Tax Credits (“NMTC”) program. NMTC investments are made through the third-party CDEs which are qualified through the U.S. Department of the Treasury and receive periodic allocation of amounts under the NMTC program. NMTCs are generated from qualified investments by the CDEs utilizing equity investments made by a taxpayer, like the Company. Through these equity investments, the Company will receive the tax benefits from the NMTCs equal to 39% of the qualified investment from the CDE to qualifying eligible projects over a seven year period. The Company’s equity investments in the CDEs is amortized using the effective yield method a related tax credits are allocated to the Company. At December 31, 2021, the consolidated balance sheet of the Company included the $18,000,000 loan to the investee in loans, the $29,000,000 CDE investments in other assets and the $21,053,000 leveraged loan from the investee in other borrowings (see Note 7).

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 state margin tax returns in the state of Texas. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2017 or Texas state tax examinations by tax authorities for years before 2018. As of December 31, 2021 and 2020, the Company believes that there are no uncertain tax positions.