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Note 14 - Federal and State Income Taxes | 12 Months Ended
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Dec. 31, 2019
Notes to Financial Statements |
Federal and State Income Taxes | Note 14. Federal and State Income Taxes Federal and state income tax expense was comprised of the following components for the years ended December 31, 2019, 2018, and 2017:
|  | 2019 |  | 2018 |  | 2017
|  | (dollars in thousands)
Current |  | $ | 8,255 |  | $ | 2,723 |  | $ | 10,976
Deferred |  |  | 6,364 |  |  | 6,292 |  |  | (6,030)
|  | $ | 14,619 |  | $ | 9,015 |  | $ | 4,946
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, 2019, 2018, and 2017:
|  | Year Ended December 31, |
|  | 2019 |  | 2018 |  | 2017 |
|  |  |  |  | % of |  |  |  |  | % of |  |  |  |  | % of |
|  |  |  |  | Pretax |  |  |  |  | Pretax |  |  |  |  | Pretax |
|  | Amount |  | Income |  | Amount |  | Income |  | Amount |  | Income |
|  | (dollars in thousands)
Computed "expected" tax expense |  | $ | 15,126 |  | 21.0 | % | $ | 10,948 |  | 21.0 | % | $ | 14,229 |  | 35 | %
Tax exempt income, net |  |  | (4,470) |  | (6.2) |  |  | (3,958) |  | (7.6) |  |  | (5,654) |  | (13.9) |
Bank-owned life insurance |  |  | (360) |  | (0.5) |  |  | (343) |  | (0.6) |  |  | (631) |  | (1.5) |
State income taxes, net of federal benefit, current year |  |  | 3,668 |  | 5.1 |  |  | 2,681 |  | 5.2 |  |  | 1,765 |  | 4.3 |
Change in unrecognized tax benefits |  |  | (93) |  | (0.1) |  |  | (45) |  | (0.1) |  |  | (54) |  | (0.1) |
Goodwill impairment |  |  | 630 |  | 0.9 |  |  | — |  | — |  |  | — |  | — |
Intended liquidation of bank-owned life insurance |  |  | 790 |  | 1.1 |  |  | — |  | — |  |  | — |  | — |
Tax credits |  |  | (705) |  | (1.0) |  |  | (154) |  | (0.3) |  |  | (341) |  | (0.8) |
Acquisition costs |  |  | — |  | — |  |  | 227 |  | 0.4 |  |  | — |  | — |
Excess tax benefit on stock options exercised and restricted stock awards vested |  |  | (287) |  | (0.4) |  |  | (425) |  | (0.8) |  |  | (1,220) |  | (3.0) |
Re-measurement of deferred tax asset to incorporate newly enacted tax rates |  |  | — |  | — |  |  | — |  | — |  |  | (2,919) |  | (7.2) |
Other |  |  | 320 |  | 0.4 |  |  | 84 |  | 0.1 |  |  | (229) |  | (0.6) |
Federal and state income tax expense |  | $ | 14,619 |  | 20.3 | % | $ | 9,015 |  | 17.3 | % | $ | 4,946 |  | 12.2 | %
Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended December 31, 2019 and 2018:
|  | 2019 |  | 2018
|  | (dollars in thousands)
Balance, beginning |  | $ | 1,249 |  | $ | 1,293
Impact of tax positions taken during current year |  |  | 375 |  |  | 287
Gross increase (decrease) related to tax positions of prior years |  |  | 44 |  |  | (178)
Reduction as a result of a lapse of the applicable statute of limitations |  |  | (414) |  |  | (153)
Balance, ending |  | $ | 1,254 |  | $ | 1,249
Included in the unrecognized tax benefits liability at December 31, 2019 are potential benefits of approximately $1.1 million 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, 2019 and 2018, accrued interest on uncertain tax positions was approximately $232 thousand and $205 thousand, 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 2016 tax return year and later. Various state franchise and income tax returns are generally open from the 2015 and later tax return years based on individual state statutes of limitations. Note 14. Federal and State Income Taxes (continued) The net deferred tax liabilities consisted of the following as of December 31, 2019 and 2018:
|  | 2019 |  | 2018
|  | (dollars in thousands)
Deferred tax assets: |  |  |  |  |  |
Alternative minimum tax credits |  | $ | — |  | $ | 2,911
Historic tax credits |  |  | 68 |  |  | 1,937
Net unrealized losses on securities available for sale and derivative instruments |  |  | 126 |  |  | 1,687
Compensation |  |  | 8,433 |  |  | 6,772
Loan/lease losses |  |  | 11,332 |  |  | 9,549
Net operating loss carryforwards, federal and state |  |  | 739 |  |  | 849
Other |  |  | 605 |  |  | 53
|  |  | 21,303 |  |  | 23,758
Deferred tax liabilities: |  |  |  |  |  |
Premises and equipment |  |  | 4,616 |  |  | 2,717
Equipment financing leases |  |  | 16,252 |  |  | 18,329
Acquisition fair value adjustments |  |  | 3,963 |  |  | 2,739
Intended liquidation of bank-owned life insurance |  |  | 850 |  |  | —
Gain on sale of assets and liabilities of subsidiary |  |  | 794 |  |  | —
Investment accretion |  |  | 28 |  |  | 31
Deferred loan origination fees, net |  |  | 704 |  |  | 482
Other |  |  | 832 |  |  | 424
|  |  | 28,039 |  |  | 24,722
Net deferred tax liabilities |  | $ | (6,736) |  | $ | (964)
At December 31, 2019, the Company had $3.5 million of federal tax net operating loss carryforwards which are set to expire in varying amounts between 2029 and 2033. At December 31, 2019, 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, 2019, 2018, and 2017:
|  | 2019 |  | 2018 |  | 2017
|  | (dollars in thousands)
Provision for income taxes |  | $ | 6,364 |  | $ | 6,292 |  | $ | (6,030)
Net deferred tax asset resulting from market value adjustments of acquisitions |  |  | (381) |  |  | (52) |  |  | 243
Net deferred tax liabilities resulting from sale of bank subsidiary |  |  | (1,644) |  |  | — |  |  | —
Re-measurement of deferred tax asset to incorporate newly enacted tax rates |  |  | — |  |  | — |  |  | 2,919
Statement of stockholders' equity- Other comprehensive income (loss) |  |  | 1,433 |  |  | (1,000) |  |  | 668
|  | $ | 5,772 |  | $ | 5,240 |  | $ | (2,200)
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.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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