NOTE 12 – INCOME TAXES

The components of the provision (benefit) for income taxes are as follows:

	2012		2011			2010
Current	$	5,105	$	376		$	2,031
Deferred		568		4,099			2,041
Change in valuation allowance		-		(675	)		(255	)
Provision for income taxes	$	5,673	$	3,800		$	3,817

The Company's deferred tax assets and liabilities at December 31 are shown below.

	2012			2011
Deferred tax assets
Allowance for loan losses	$	4,181		$	3,497
Purchase accounting adjustments		3,745			5,470
Net operating loss carryforward		1,409			2,076
Write-downs of other real estate owned		748			424
Taxable income on non-accrual loans		1,955			841
Security writedown		250			253
Accrued expenses		131			157
Other		11			22
Total deferred tax assets		12,430			12,740

Deferred tax liabilities
Amortization of intangibles	$	(4,405	)	$	(4,052	)
Depreciation		(1,027	)		(1,009	)
Federal Home Loan Bank dividends		(377	)		(382	)
Deferred loan fees		(548	)		(450	)
Unrealized gain on investment securities		(3,388	)		(2,583	)
Other		(61	)		(267	)
Total deferred tax liabilities		(9,806	)		(8,743	)

Net deferred taxes	$	2,624		$	3,997

At December 31, 2012 the Company had federal net operating loss carryforwards of $2,779 and various state net operating loss carryforwards of $9,311 which begin to expire in 2022. The deductibility of these net operating losses is limited under IRC Sec. 382.

A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Due to statutory law changes and a change in expectations of future taxable income, the Company reversed a valuation allowance against its District of Columbia net operating loss carryforward in 2011. Due to a change in expectations of future taxable income, the Company reversed a valuation allowance against its West Virginia net operating loss carryforward in 2010.

An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows:

	2012					2011					2010
U.S. federal income tax rate	$	5,439		34.0	%	$	3,729		34.0	%	$	4,416		34.0	%
Changes from the statutory rate
State income taxes, net		266		1.7			208		1.9			239		1.9
Tax-exempt interest income		(173	)	(1.1	)		(194	)	(1.8	)		(209	)	(1.6	)
Non-deductible interest expense related to carrying tax-exempt interest earning assets		12		0.1			8		0.1			11		0.1
Non-deductible stock compensation expense		62		0.4			36		0.3			18		0.1
State deferred rate change, net		110		0.7			1,012		9.2			(377	)	(2.9	)
Tax credits, net		(49	)	(0.3	)		(49	)	(0.4	)		(49	)	(0.4	)
Change in valuation allowance, net		-		-			(675	)	(6.1	)		(255	)	(2.0	)
Other		6		0.0			(275	)	(2.5	)		23		0.2
	$	5,673		35.5	%	$	3,800		34.7	%	$	3,817		29.4	%

Unrecognized Tax Benefits: The Company does not have any beginning or ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the year ended December 31, 2012, 2011 and 2010 related to unrecognized tax benefits.

The Company and its subsidiaries file a consolidated U.S. Corporation income tax return and a combined return in the state of West Virginia and the District of Columbia. The Company also files a corporate income tax return in the state of Kentucky and Maryland. The Company is no longer subject to examination by taxing authorities for years before 2009.