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

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.

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%

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.