Entity information:
Note
13.
Federal and State Income Taxes
 
Federal and state income tax expense was comprised of the following components for the years ended
December 31,
2017,
2016,
and
2015:
 
   
2017
    
2016
    
2015
  
                         
Current
   $
10,976,005
     $
11,969,194
     $
5,673,774
  
Deferred
    
(6,029,555
 )    
(3,066,407
 )    
(2,004,532
 )
    $
4,946,450
     $
8,902,787
     $
3,669,242
  
 
A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended
December 31,
2017,
2016,
and
2015:
 
   
Years Ended December 31,
  
   
2017
    
2016
    
2015
  
           
% of
            
% of
            
% of
  
           
Pretax
            
Pretax
            
Pretax
  
   
Amount
    
Income
    
Amount
    
Income
    
Amount
    
Income
  
                                                 
Computed "expected" tax expense
   $
14,228,535
      
35.0
 %   $
12,806,351
      
35.0
 %   $
7,208,993
      
35.0
 %
Effect of graduated tax rates
    
-
      
-
      
(250,013
 )    
(0.7
 )    
(76,973
 )    
(0.4
 )
Tax exempt income, net
    
(5,653,979
 )    
(13.9
 )    
(4,343,270
 )    
(11.9
 )    
(3,461,438
 )    
(16.8
 )
Bank-owned life insurance
    
(630,855
 )    
(1.5
 )    
(619,988
 )    
(1.7
 )    
(616,737
 )    
(3.0
 )
State income taxes, net of federal benefit, current year
    
1,764,671
      
4.3
      
1,245,524
      
3.4
      
767,557
      
3.7
  
Change in unrecognized tax benefits
    
(53,699
 )    
(0.1
 )    
121,008
      
0.3
      
223,668
      
1.1
  
New Markets Tax Credits and other credits
    
(341,268
 )    
(0.8
 )    
(180,000
 )    
(0.5
 )    
(180,000
 )    
(0.9
 )
Acquisition costs
    
-
      
-
      
176,050
      
0.5
      
-
      
-
  
Excess tax benefit on stock options exercised and restricted stock awards vested
    
(1,219,483
 )    
(3.0
 )    
-
      
-
      
-
      
-
  
Re-measurement of deferred tax asset to incorporate newly enacted tax rates
    
(2,918,606
 )    
(7.2
 )    
-
      
-
      
-
      
-
  
Other
    
(228,866
 )    
(0.6
 )    
(52,875
 )    
(0.1
 )    
(195,828
 )    
(0.9
 )
    $
4,946,450
      
12.2
 %   $
8,902,787
      
24.3
 %   $
3,669,242
      
17.8
 %
 
Changes in the
unrecognized tax benefits included in other liabilities are as follows for the years ended
December 31, 2017
and
2016:
 
   
2017
    
2016
  
                 
Balance, beginning
   $
1,346,967
     $
1,225,959
  
Impact of tax positions taken during current year
    
333,253
      
319,047
  
Gross increase (decrease) related to tax positions of prior years
    
(40,584
 )    
17,789
  
Reduction as a result of a lapse of the applicable statute of limitations
    
(346,368
 )    
(215,828
 )
Balance, ending
   $
1,293,268
     $
1,346,967
  
 
Included in the unrecognized tax benefits liability at
December 31,
2017
are potential benefits of approximately
$1,143,000
that, if recognized, would affect the effective tax rate.
 
The liability for unrecognized tax benefits includes accrued interest for tax positions, which either do
not
meet the more-likely-than-
not
recognition threshold or where the tax benefit is measured at an amount less than the tax benefit claimed or expected to be claimed on an income tax return. At
December 31,
2017
and
2016,
accrued interest on uncertain tax positions was approximately
$150,000
and
$223,000,
respectively. Estimated interest related to the underpayment of income taxes is classified as a component of “income tax expense” in the statements of income.
 
The Company
’s federal income tax returns are open and subject to examination from the
2014
tax return year and later. Various state franchise and income tax returns are generally open from the
2013
and later tax return years based on individual state statutes of limitations.
 
The net deferred tax assets
consisted of the following as of
December 31, 2017
and
2016:
 
   
2017
    
2016
  
Deferred tax assets:
                
Alternative minimum tax credits
   $
6,513,502
     $
6,513,502
  
New markets tax credits
    
2,164,727
      
1,797,587
  
Net unrealized losses on securities available for sale and derivative instruments
    
498,860
      
1,470,759
  
Compensation
    
6,282,603
      
8,737,976
  
Loan/lease losses
    
8,029,714
      
10,479,227
  
Net operating loss carryforwards, federal and state
    
959,627
      
1,879,746
  
Other
    
34,962
      
247,594
  
     
24,483,995
      
31,126,391
  
Deferred tax liabilities:
                
Premises and equipment
    
2,400,397
      
4,899,107
  
Equipment financing leases
    
15,367,705
      
22,050,540
  
Acquisition fair value adjustments
    
1,864,599
      
1,336,338
  
Investment accretion
    
30,656
      
46,581
  
Deferred loan origination fees, net
    
115,153
      
261,915
  
Other
    
430,125
      
456,219
  
     
20,208,635
      
29,050,700
  
Net deferred tax assets
   $
4,275,360
     $
2,075,691
  
 
At
December 31,
2017,
the Company had
$4.6
million of federal tax net operating loss carryforwards which are set to expire in varying amounts between
2029
and
2033.
At
December 31, 2017,
the Company had
$2.1
million of state tax net operating loss carryforwards which are set to expire in varying amounts between
2023
and
2028.
All of the federal tax net operating loss carryforwards and the state tax net operating loss carryforwards were acquired from Community National and CNB.    
 
The change in deferred income taxes was reflected in the consolidated financial statements as follows for the years ended
December 31,
2017,
2016,
and
2015:
 
   
2017
    
2016
    
2015
  
                         
Provision for income taxes
   $
(6,029,555
 )   $
(3,066,407
 )   $
(2,004,532
 )
Net deferred tax asset acquired
    
-
      
(3,310,553
 )    
-
  
Net deferred tax asset resulting from market value adjustments of acquisitions
    
243,195
      
5,110,015
      
-
  
Re-measurement of deferred tax asset to incorporate newly enacted tax rates
    
2,918,606
      
-
      
-
  
Statement of stockholders' equity- Other comprehensive income (loss)
    
668,085
      
(202,691
 )    
(81,524
 )
    $
(2,199,669
 )   $
(1,469,636
 )   $
(2,086,056
 )
 
The Tax Act was enacted on
December 22, 2017
and reduces the federal corporate tax rate from
35%
to
21%.
  As a result, the Company revalued the deferred tax assets and liabilities to reflect the lower federal corporate tax rate, which resulted in the Company recognizing a benefit of
$2.9
million in the
fourth
quarter of
2017.
  Additionally, while the Tax Act eliminated the corporate alternative minimum tax, it did preserve the alternative minimum tax credit and the usability.  At this time, the Company projects full utilization of those credits.  Other relevant changes that resulted from tax reform are
not
expected to have a material impact on the Company’s financial results.