INCOME TAXES

12 Months Ended

Dec. 31, 2013

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)	2013		2012		2011
Current	$	3	$	(18)	$	(2,853)
Deferred		4,967		(906)		(3,179)
Net Operating Loss		(5,441)		(2,907)		(5,269)
		(471)		(3,831)		(11,301)
Valuation allowance		474		3,813		8,318
Total income tax expense/(benefit)	$	3	$	(18)	$	(2,983)

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

	Year Ended December 31,
(Dollars in thousands)	2013			2012			2011
Federal statutory rate		34.0	%		34.0	%		34.0	%
Change in valuation allowance		63.7			(45.3)			(31.8)
Tax-exempt interest income		(10.4)			1.2			1.3
Increase in cash surrender value of life insurance		(16.8)			1.5			0.4
Stock option expense		6.9			(0.5)			(0.1)
Low income Housing tax credits		(76.9)			12.7			7.1
Other		(0.2)			(3.4)			0.5
Effective rate		0.3	%		0.2	%		11.4	%

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, 2013, 2012 and 2011 this resulted in $0, $0 and $3.1 million 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 full valuation allowance, we considered various factors including our five year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and operating results in 2013, 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, 2013 and December 31, 2012.

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)	2013		2012
Deferred tax assets:
Allowance for loan losses	$	3,308	$	5,965
Net operating loss carryforward		13,617		8,176
AMT credit carryforward		196		196
Low income housing credits		3,494		2,922
Net unrealized loss on securities available-for-sale		2,726		-
Intangibles and fair value adjustments		-		120
Writedowns of real estate owned		1,226		3,917
Nonaccrual loan interest		805		1,253
Accrued liabilities and other		423		230
Total deferred tax assets		25,795		22,779
Deferred tax liabilities:
Depreciation		1,848		1,982
Net unrealized gain on securities available-for-sale		-		1,299
Federal Home Loan Bank stock		1,049		1,049
Deferred gain on like-kind exchange		4		4
Other		240		290
Total deferred tax liabilities		3,141		4,624
Net temporary differences		22,654		18,155
Valuation allowance		(22,654)		(18,155)
Net deferred tax assets	$	-	$	-

At December 31, 2013, we had net operating loss carryforwards of $39 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 2009.

There were no unrecognized tax benefits at December 31, 2013 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, 2013 and 2012. 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.