NOTE 12 – INCOME TAXES

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

	2013		2012		2011
Current	$	5,509	$	5,105	$	376
Deferred		1,895		568		4,099
Change in valuation allowance		-		-		(675	)
Provision for income taxes	$	7,404	$	5,673	$	3,800

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

	2013			2012
Deferred tax assets
Allowance for loan losses	$	4,016		$	4,181
Purchase accounting adjustments		2,611			3,745
Net operating loss carryforward		1,048			1,569
Write-downs of other real estate owned		893			748
Taxable income on non-accrual loans		2,053			1,955
Security writedown		-			250
Capital loss carryforward		196			-
Accrued expenses		172			131
Unrealized loss on investment securities		322			-
Other		19			11
Total deferred tax assets		11,330			12,590

Deferred tax liabilities
Amortization of intangibles	$	(4,615	)	$	(4,405	)
Depreciation		(1,101	)		(1,027	)
Federal Home Loan Bank dividends		(377	)		(377	)
Deferred loan fees		(567	)		(548	)
Unrealized gain on investment securities		-			(3,388	)
Other		(71	)		(61	)
Total deferred tax liabilities		(6,731	)		(9,806	)

Valuation allowance on deferred tax assets		(160	)		(160	)
Net deferred taxes	$	4,439		$	2,624

At December 31, 2013 the Company had federal net operating loss carryforwards of $1,845 and various state net operating loss carryforwards of $5,569 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 a portion of its District of Columbia net operating loss carryforward in 2011.

At both December 31, 2013 and 2012, the Company maintains a valuation allowance of $160 against the portion of its District of Columbia net operating loss carryforward that is not expected to be utilized before expiration due to separate company limitations. All other deferred tax assets are more likely than not to be utilized; therefore no additional valuation allowance is needed.

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

	2013					2012					2011
U.S. federal income tax rate	$	7,015		34.0	%	$	5,439		34.0	%	$	3,729		34.0	%
Changes from the statutory rate
Impact of graduated federal tax rate		72		0.4			26		0.2			-		-
State income taxes, net		439		2.1			376		2.4			1,220		11.1
Tax-exempt interest income		(149	)	(0.7	)		(173	)	(1.1	)		(194	)	(1.8	)
Non-deductible interest expense related to carrying tax-exempt interest earning assets		9		0.0			12		0.1			8		0.1
Non-deductible stock compensation expense		57		0.3			62		0.4			36		0.3
Tax credits, net		(49	)	(0.2	)		(49	)	(0.3	)		(49	)	(0.4	)
Change in valuation allowance, net		-		-			-		-			(675	)	(6.1	)
Other		10		0.0			(20	)	(0.2	)		(275	)	(2.5	)
	$	7,404		35.9	%	$	5,673		35.5	%	$	3,800		34.7	%

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 years ended December 31, 2013, 2012 and 2011 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 2010.