NOTE 13 – INCOME TAXES

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

	2016			2015		2014
Current	$	6,993		$	6,282	$	3,775
Deferred		(223	)		621		3,395
Change in valuation allowance		-			-		-
Provision for income taxes	$	6,770		$	6,903	$	7,170

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

	2016			2015
Deferred tax assets
Allowance for loan losses	$	3,563		$	3,468
Purchase accounting adjustments		312			973
Net operating loss carryforward		513			545
Alternative minimum tax credit carryforward		517			-
Write-downs of other real estate owned		1,214			1,010
Taxable income on non-accrual loans		1,727			1,255
Accrued expenses		153			141
Unrealized loss on investment securities		1,035			-
Other		38			29
Total deferred tax assets		9,072			7,421

Deferred tax liabilities
Amortization of intangibles	$	(4,780	)	$	(4,685	)
Depreciation		(1,442	)		(1,000	)
Federal Home Loan Bank dividends		(355	)		(349	)
Deferred loan fees		(774	)		(664	)
Unrealized gain on investment securities		-			(166	)
Other		(161	)		(51	)
Total deferred tax liabilities		(7,512	)		(6,915	)

Valuation allowance on deferred tax assets		(160	)		(160	)
Net deferred taxes	$	1,400		$	346

At December 31, 2016 the Company had federal net operating loss carryforwards of $984, a federal alternative minimum tax credit carryforward of $517, and various state net operating loss carryforwards of $2,425 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.

At both December 31, 2016 and 2015, 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:

	2016					2015					2014
U.S. federal income tax rate	$	6,630		35.0	%	$	6,579		34.0	%	$	6,909		34.0	%
Changes from the statutory rate
Impact of graduated federal tax rate		-		-			169		0.9			19		0.1
State income taxes, net		355		1.9			308		1.6			335		1.6
Tax-exempt interest income		(254	)	(1.4	)		(182	)	(0.9	)		(175	)	(0.9	)
Non-deductible interest expense related to carrying tax-exempt interest earning assets		15		0.1			11		0.1			12		0.1
Non-deductible stock compensation expense		26		0.1			34		0.1			55		0.3
Tax credits, net		(42	)	(0.2	)		(44	)	(0.2	)		(49	)	(0.2	)
Other		40		0.2			28		0.1			64		0.3
	$	6,770		35.7	%	$	6,903		35.7	%	$	7,170		35.3	%

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, 2016, 2015 and 2014 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 2013.