INCOME TAXES

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

13. INCOME TAXES

We file a consolidated federal income tax return and income tax is apportioned among all companies based on their taxable income or loss. Provision for income taxes is as follows:

	Year Ended December 31,
(Dollars in thousands)	2012			2011			2010
Current	$	(18	)	$	(2,853	)	$	239
Deferred		(906	)		(3,179	)		(3,244	)
Net Operating Loss		(2,907	)		(5,269	)		-
		(3,831	)		(11,301	)		(3,005	)
Valuation allowance		3,813			8,318			4,791
Total income tax expense/(benefit)	$	(18	)	$	(2,983	)	$	1,786

The provision for income taxes differs from the amount computed at the statutory rates as follows:

	Year Ended December 31,
(Dollars in thousands)	2012			2011			2010
Federal statutory rate		34.0	%		34.0	%		34.0	%
Change in valuation allowance		(45.3	)		(31.8	)		(63.0	)
Tax-exempt interest income		1.2			1.3			3.8
Increase in cash surrender value of life insurance		1.5			0.4			1.6
Stock option expense		(0.5	)		(0.1	)		(0.5	)
Effect of state tax expense recorded		-			-			0.5
Low income Housing tax credits		12.7			7.1			-
Other		(3.4	)		0.5			0.1
Effective rate		0.2	%		11.4	%		-23.5	%

The calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of stockholders’ equity on the balance sheet.  However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and income in other components of the financial statements.  In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations.  For the years ended December 31, 2012, 2011 and 2010 this resulted in $0, $3.1 million and $0 of income tax benefit allocated to continuing operations.

A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, we considered various factors including our four year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels in 2012 and 2011 and our non-compliance with the capital requirements of our Consent Order. These factors represent the most significant negative evidence that we considered in concluding that a valuation allowance was necessary at December 31, 2012 and December 31, 2011.

Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred income taxes relate to the following:

	December 31,
(Dollars in thousands)	2012			2011
Deferred tax assets:
Allowance for loan losses	$	5,965		$	6,029
Net operating loss carryforward		8,176			5,269
AMT credit carryforward		196			196
Low income housing credits		2,922			1,862
Intangibles and fair value adjustments		120			90
Other than temporary impairment		-			718
Writedowns of real estate owned		3,917			3,560
Nonaccrual loan interest		1,253			1,024
Accrued liabilities and other		230			330
Total deferred tax assets		22,779			19,078
Deferred tax liabilities:
Depreciation		1,982			2,134
Net unrealized gain on securities available-for-sale		1,299			1,318
Federal Home Loan Bank stock		1,049			1,049
Deferred gain on like-kind exchange		4			8
Other		290			227
Total deferred tax liabilities		4,624			4,736
Net temporary differences		18,155			14,342
Valuation allowance		(18,155	)		(14,342	)
Net deferred tax assets	$	-		$	-

At December 31, 2012, we had net operating loss carryforwards of $24 million which begin to expire in 2032.

We file a consolidated U.S. federal income tax return and the Corporation files income tax returns in Kentucky, Indiana and Tennessee. The Bank is subject to federal income tax and state income tax in Indiana and Tennessee. These returns are subject to examination by taxing authorities for all years after 2008.

There were no unrecognized tax benefits at December 31, 2012 and we do not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.

Federal income tax laws provided savings banks with additional bad debt deductions through 1987, totaling $9.3 million for us. Accounting standards do not require a deferred tax liability to be recorded on this amount, which would otherwise total $3.2 million at December 31, 2012 and 2011. If we were liquidated or otherwise ceased to be a bank or if tax laws were to change, the $3.2 million would be recorded as a liability with an offset to expense.