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,

2016,

2015,

and

2014:

	2016			2015			2014

Current	$	11,969,194		$	5,673,774		$	4,203,979
Deferred		(3,066,407	)		(2,004,532	)		(1,165,009	)
	$	8,902,787		$	3,669,242		$	3,038,970

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,

2016,

2015,

and

2014:

	Years Ended December 31,
	2016						2015						2014
				% of						% of						% of
				Pretax						Pretax						Pretax
	Amount			Income			Amount			Income			Amount			Income

Computed "expected" tax expense	$	12,806,351			35.0	%	$	7,208,993			35.0	%	$	6,297,027			35.0	%
Effect of graduated tax rates		(250,013	)		(0.7	)		(76,973	)		(0.4	)		(79,529	)		(0.4	)
Tax exempt income, net		(4,343,270	)		(11.9	)		(3,461,438	)		(16.8	)		(2,646,275	)		(14.7	)
Bank-owned life insurance		(619,988	)		(1.7	)		(616,737	)		(3.0	)		(585,312	)		(3.3	)
State income taxes, net of federal benefit, current year		1,245,524			3.4			767,557			3.7			497,068			2.8
Change in unrecognized tax benefits		121,008			0.3			223,668			1.1			(55,728	)		(0.3	)
Acquisition costs		176,050			0.5			-			-			-			-
Other		(232,875	)		(0.6	)		(375,828	)		(1.8	)		(388,281	)		(2.1	)
	$	8,902,787			24.3	%	$	3,669,242			17.8	%	$	3,038,970			17.0	%

Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended

December

31,

2016

and

2015:

	2016			2015

Balance, beginning	$	1,225,959		$	1,002,291
Impact of tax positions taken during current year		319,047			468,055
Gross increase related to tax positions of prior years		17,789			16,965
Reduction as a result of a lapse of the applicable statute of limitations		(215,828	)		(261,352	)
Balance, ending	$	1,346,967		$	1,225,959

Included in the unrecognized tax benefits liability at

December

31,

2016

are potential benefits of approximately

$1,124,000

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,

2016

and

2015,

accrued interest on uncertain tax positions was approximately

$223,000

and

$221,000,

respectively. Estimated interest related to the underpayment of income taxes is classified as a component of “income taxes” in the statements of income.

The Company’s federal income tax returns are open and subject to examination from the

2013

tax return year and later. Various state franchise and income tax returns are generally open from the

2012

and later tax return years based on individual state statute of limitations.

The net deferred tax assets consisted of the following as of

December

31,

2016

and

2015:

	2016		2015
Deferred tax assets:
Alternative minimum tax credits	$	6,513,502	$	5,475,062
New markets tax credits		1,797,587		2,700,000
Net unrealized losses on securities available for sale and derivative instruments		1,470,759		1,268,068
Compensation		8,737,976		8,687,856
Loan/lease losses		10,479,227		8,802,271
Net operating loss carryforwards, federal and state		1,879,746		2,069,093
Other		247,594		452,854
		31,126,391		29,455,204
Deferred tax liabilities:
Premises and equipment		4,899,107		1,173,966
Equipment financing leases		22,050,540		25,059,159
Acquisition fair value adjustments		1,336,338		1,755,874
Investment accretion		46,581		44,462
Deferred loan origination fees, net		261,915		137,461
Other		456,219		678,227
		29,050,700		28,849,149
Net deferred tax asset	$	2,075,691	$	606,055

December

31,

2016,

the Company had

$5.1

million of federal tax net operating loss carryforwards which are set to expire in varying amounts between

2029

and

2033.

December

31,

2016,

the Company had

$3.7

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 majority of 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,

2016,

2015,

and

2014:

	2016			2015			2014

Provision for income taxes	$	(3,066,407	)	$	(2,004,532	)	$	(1,165,009	)
Net deferred tax asset acquired from CSB		(3,310,553	)		-			-
Net deferred tax asset resulting from market value adjustments of acquisition of CSB		5,110,015			-			-
Statement of stockholders' equity- Accumulated other comprehensive income (loss)		(202,691	)		(81,524	)		7,281,574
	$	(1,469,636	)	$	(2,086,056	)	$	6,116,565