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%. 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.

Additionally,

the Company updated its estimate of the impact to our deferred tax balances based on the proposed regulations issued to date and recorded an additional reduction of income tax expense for the year ended December 31, 2018 of $664,000. No additional adjustment amounts were recorded for the years ended December 31, 2020 and 2019.

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


	Year Ended December 31,
	2020			2019			2018
Current federal income tax	$	45,133		$	33,099		$	28,359
Current state income tax		447			150			92
Deferred federal income tax expense (benefit)		(5,249	)		(29	)		(250	)
Restatement of net deferred tax liability due to change in income tax rate		—			—			(664	)

Income tax expense	$	40,331		$	33,220		$	27,537

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
	2020			2019			2018
Statutory federal income tax rate		21.0	%		21.0	%		21.0	%

Restatement of net deferred tax liability due to change in income tax rate		—			—			(0.4	)
Reductions in tax rate resulting from interest income exempt from federal income tax		(4.6	)		(4.5	)		(5.2	)
Effect of state income tax		0.2			0.1			0.1
ESOP tax deduction		(0.1	)		(0.1	)		(0.1	)
Other		0.1			0.3			0.1

Effective income tax rate		16.6	%		16.8	%		15.5	%

The approximate effects of each type of difference that gave rise to the Company’s deferred tax assets and liabilities at December 31, 2020 and 2019 are as follows (in thousands):


	2020			2019
Deferred tax assets:
Tax basis of loans in excess of financial statement basis	$	19,193		$	12,245
Recognized for financial reporting purposes but not yet for tax purposes: Deferred compensation		2,479			2,254
Write-downs and adjustments to other real estate owned and repossessed assets		—			48
Other deferred tax assets		746			157

Total deferred tax assets	$	22,418		$	14,704

Deferred tax liabilities:
Financial statement basis of fixed assets in excess of tax basis	$	5,712		$	4,651
Intangible asset amortization deductible for tax purposes, but not for financial reporting purposes		13,400			11,935
Recognized for financial reporting purposes but not yet for tax purposes:
Accretion on investment securities		698			755
Net unrealized gain on investment securities available-for-sale		45,295			17,945
Other deferred tax liabilities		46			51

Total deferred tax liabilities	$	65,151		$	35,337

Net deferred tax asset (liability)	$	(42,733	)	$	(20,633	)

At December 31, 2020 and 2019, 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.

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 2016 or Texas state tax examinations by tax authorities for years before 2017. As of December 31, 2020 and 2019, the Company believes that there are no uncertain tax positions.

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

FIRST FINANCIAL BANKSHARES INC Income Taxes Disclosure

About Income Taxes Disclosures

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