INCOME TAXES

Income taxes, computed on the separate return basis with the benefit of filing a consolidated return being recorded at the holding company, 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 (permanent differences). 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.

A tax position that meets a "probable recognition threshold" for the benefit of the uncertain tax position is 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. 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 2013 through 2016, the tax years which remain subject to examination by major tax jurisdictions.

The components of applicable income tax expense for the years ended December 31, 2016, 2015 and 2014, are as follows:



Dollars in thousands	2016			2015		2014
Current
Federal	$	7,738		$	6,219	$	3,380
State	627			484		294
	8,365			6,703		3,674
Deferred
Federal	(353		)	165		920
State	(4		)	25		84
	(357		)	190		1,004
Total	$	8,008		$	6,893	$	4,678

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, 2016, 2015 and 2014 is as follows:



	2016					2015					2014
Dollars in thousands	Amount			Percent		Amount			Percent		Amount			Percent
Computed tax at applicable statutory rate	$	8,857		35		$	8,048		35		$	5,612		35
Increase (decrease) in taxes
resulting from:
Tax-exempt interest
and dividends, net	(1,080		)	(4	)	(1,047		)	(4	)	(996		)	(6	)
State income taxes, net
of Federal income tax benefit	405			2		331			1		245			1
Non-deductible merger-related expenses	108			—		—			—		—			—
Low-income housing and
rehabilitation tax credits	(55		)	—		—			—		—			—
Other, net	(227		)	(1	)	(439		)	(2	)	(183		)	(1	)
Applicable income taxes	$	8,008		32		$	6,893		30		$	4,678		29

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.

The tax effects of temporary differences, which give rise to our deferred tax assets and liabilities as of December 31, 2016 and 2015, are as follows:



Dollars in thousands	2016		2015
Deferred tax assets
Allowance for loan losses	$	4,320	$	4,245
Depreciation	97		168
Foreclosed properties	4,184		4,506
Deferred revenue	38		—
Deferred compensation	3,118		2,554
Other deferred costs and accrued expenses	440		387
Other-than-temporarily impaired securities	257		257
Net unrealized loss on securities available for sale	208		—
Net unrealized loss on interest rate swaps	1,706		1,876
NOL and tax credit carryforwards	—		25
Total	14,368		14,018
Deferred tax liabilities
Accretion on tax-exempt securities	—		3
Net unrealized gain on securities available for sale	—		1,609
Purchase accounting adjustments and goodwill	701		743
Total	701		2,355
Net deferred tax assets	$	13,667	$	11,663

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, 2013 through 2015. Tax years 2014 through 2015 remain subject to West Virginia State examination.