INCOME TAXES

The consolidated provision for income taxes includes Federal and state income taxes and is based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized.

ASC Topic 740 Income Taxes clarifies the accounting and disclosure for uncertain tax positions, as defined. ASC Topic 740 requires that a tax position meet a "probable recognition threshold" for the benefit of the uncertain tax position to be recognized in the financial statements. A tax position that fails to meet the probable recognition threshold will result in either reduction of a current or deferred tax asset or receivable, or recording a current or deferred tax liability. ASC Topic 740 also provides guidance on measurement, derecognition of tax benefits, classification, interim period accounting disclosure, and transition requirements in accounting for uncertain tax positions.

The components of applicable income tax expense (benefit) for the years ended December 31, 2014, 2013 and 2012, are as follows:



Dollars in thousands	2014		2013		2012
Current
Federal	$	3,380	$	861	$	1,716
State	294		41		5
	3,674		902		1,721
Deferred
Federal	920		1,587		(610		)
State	84		199		108
	1,004		1,786		(502		)
Total	$	4,678	$	2,688	$	1,219

Reconciliation between the amount of reported income tax expense and the amount computed by multiplying the statutory income tax rates by book pretax income for the years ended December 31, 2014, 2013 and 2012 is as follows:



	2014					2013					2012
Dollars in thousands	Amount			Percent		Amount			Percent		Amount			Percent
Computed tax at applicable statutory rate	$	5,612		35		$	3,765		35		$	2,426		35
Increase (decrease) in taxes
resulting from:
Tax-exempt interest
and dividends, net	(996		)	(6	)	(932		)	(9	)	(1,019		)	(15	)
State income taxes, net
of Federal income tax benefit	245			1		156			1		74			1
Other, net	(183		)	(1	)	(301		)	(3	)	(262		)	(4	)
Applicable income taxes	$	4,678		29		$	2,688		24		$	1,219		17

Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized. Our West Virginia net operating loss carryforward expires in 2028.

The tax effects of temporary differences, which give rise to our deferred tax assets and liabilities as of December 31, 2014 and 2013, are as follows:



Dollars in thousands	2014		2013
Deferred tax assets
Allowance for loan losses	$	4,128	$	4,681
Depreciation	168		135
Foreclosed properties	5,197		4,928
Deferred compensation	2,265		2,006
Other deferred costs and accrued expenses	349		371
Other-than-temporarily impaired securities	257		931
Net unrealized loss on securities available for sale	—		308
Net unrealized loss on interest rate swaps	1,077		—
NOL and tax credit carryforwards	37		404
Total	13,478		13,764
Deferred tax liabilities
Accretion on tax-exempt securities	8		6
Net unrealized gain on securities available for sale	2,297		—
Net unrealized gain on interest rate swaps	—		297
Purchase accounting adjustments and goodwill	806		869
Total	3,111		1,172
Net deferred tax assets	$	10,367	$	12,592

In accordance with ASC Topic 740, we concluded that there were no significant uncertain tax positions requiring recognition in the consolidated financial statements. The evaluation was performed for the years ended 2011 through 2014, the tax years which remain subject to examination by major tax jurisdictions.

We may from time to time be assessed interest or penalties associated with tax liabilities by major tax jurisdictions, although any such assessments are estimated to be minimal and immaterial. To the extent we have received an assessment for interest and/or penalties; it has been classified in the consolidated statements of income as a component of other noninterest expense.

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2011 through 2013. Tax years 2009 through 2013 remain subject to West Virginia State examination.