(7) Income Taxes

The components of income tax expense (benefit) from operations for the years ended December 31, 2012, 2011, and 2010 were as follows:

	Year ended December 31,
(In thousands)	2012			2011			2010

Current tax expense
Federal	$	11,895		$	9,748		$	10,010
State	672			511			611
Total current tax expense	12,567			10,259			10,621

Deferred tax benefit
Federal	(2,800		)	(1,934		)	(1,502		)
State	(133		)	(134		)	(54		)
Total deferred tax benefit	(2,933		)	(2,068		)	(1,556		)

Total income tax expense	$	9,634		$	8,191		$	9,065

The components of income tax (benefit) expense recorded directly to stockholders’ equity for the years ended December 31, 2012, 2011, and 2010 were as follows:

	Year ended December 31,
(In thousands)	2012			2011			2010

Unrealized (loss) gain on securities available for sale	$	(24	)	$	1,362		$	580
Reclassification adjustment for securities gains realized in income	—			—			(56		)
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes	(83		)	(125		)	(140		)
Minimum pension liability adjustment	2			(111		)	(17		)
Total income tax (benefit) expense recorded directly to stockholders’ equity	$	(105	)	$	1,126		$	367

An analysis of the difference between the statutory and effective tax rates from operations for the years ended December 31, 2012, 2011, and 2010 were as follows:

	Year ended December 31,
	2012		2011		2010
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Tax exempt interest income	(3.8	)	(3.7	)	(3.3	)
Tax credits	(2.2	)	(2.6	)	(2.5	)
Cash surrender value of life insurance	(1.9	)	(1.5	)	(2.0	)
State income taxes	1.0		0.9		1.1
Establish deferred taxes on tax credit investments	—		(2.2	)	—
Other, net	(0.9	)	(0.1	)	—
	27.2	%	25.8	%	28.3	%

The increased level of income tax expense from 2011 to 2012 primarily reflected a 2011 adjustment of approximately $700,000 to Bancorp’s deferred tax asset that relates to tax-advantaged investments that Bancorp has made in its primary market area over the years.

The effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities for the years ended December 31, 2012 and 2011 were as follows:

	December 31,
(In thousands)	2012		2011
Allowance for loan loss	$	11,495	$	10,724
Deferred compensation	3,950		3,363
Accrued expenses	1,451		412
Investments in partnerships	713		749
Write-downs and costs associated with other real estate owned	1,335		573
Other assets	847		847
Total deferred tax assets	19,791		16,668

Securities	4,088		4,101
Property and equipment	1,162		1,213
Loan costs	648		592
Prepayment penalty on modification of FHLB advances	263		369
Mortgage servicing rights	703		538
Other liabilities	389		274
Total deferred tax liabilities	7,253		7,087
Net deferred tax asset	$	12,538	$	9,581

No valuation allowance for deferred tax assets was recorded as of December 31, 2012 and 2011 because Bancorp has sufficient prior taxable income, future projected taxable income, and tax planning strategies to allow for utilization of the deductible temporary differences and capital loss carryforwards within the carryforward period. Management believes it is more likely than not that all deferred tax assets will be realized.

US GAAP provides guidance on the financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. As of December 31, 2012 and 2011, the gross amount of unrecognized tax benefits was $70,000 and $101,000, respectively. If recognized, all of the tax benefits would increase net income, resulting in a decrease in the effective tax rate.

Bancorp’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of December 31, 2012 and 2011, the amount accrued for the potential payment of interest and penalties was $4,000 and $7,000, respectively. Federal and state income tax returns are subject to examination for the tax return years after 2008.

A reconciliation of the amount of unrecognized tax benefits for the years ended December 31, 2012 and 2011 were as follows:

(In thousands)	2012			2011
Balance as of January 1	$	101		$	230
Increases - current year tax positions	10			11
Increases - prior year tax positions	—			5
Settlements	—			(71		)
Lapse of statute of limitations	(41		)	(74		)
Balance as of December 31	$	70		$	101