(8) Income Taxes

Components of income tax expense (benefit) from operations for the years ended December 31, 2013, 2012, and 2011 were as follows:

	Year ended December 31,
(In thousands)	2013		2012			2011
Current tax expense
Federal	$	10,322	$	11,895		$	9,748
State	336		672			511
Total current tax expense	10,658		12,567			10,259

Deferred tax benefit
Federal	450		(2,800		)	(1,934		)
State	120		(133		)	(134		)
Total deferred tax benefit	570		(2,933		)	(2,068		)

Total income tax expense	$	11,228	$	9,634		$	8,191

Components of income tax (benefit) expense recorded directly to stockholders’ equity for the years ended December 31, 2013, 2012, and 2011 were as follows:

	Year ended December 31,
(In thousands)	2013			2012			2011
Unrealized (loss) gain on securities available for sale	$	(4,234	)	$	(24	)	$	1,362
Reclassification adjustment for securities losses realized in income	2			—			—
Unrealized gain on derivatives	8			—			—
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes	(265		)	(83		)	(125		)
Minimum pension liability adjustment	111			2			(111		)
Total income tax (benefit) expense recorded directly to stockholders’ equity	$	(4,378	)	$	(105	)	$	1,126

An analysis of the difference between the statutory and effective tax rates from operations for the years ended December 31, 2013, 2012, and 2011 were as follows:

	Year ended December 31,
	2013		2012		2011
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Tax exempt interest income	(2.1	)	(3.8	)	(3.7	)
Tax credits	(2.5	)	(2.2	)	(2.6	)
Cash surrender value of life insurance	(2.0	)	(1.9	)	(1.5	)
State income taxes	0.8		1.0		0.9
Nontaxable gain on acquisition	(0.4	)	—		—
Nondeductible acquisition costs	0.2		—		—
Establish deferred taxes on tax credit investments	—		—		(2.2	)
Other, net	0.2		(0.9	)	(0.1	)
	29.2	%	27.2	%	25.8	%

The reduction of tax expense attributable to tax credits arises from Bancorp’s policy to record both tax credits and amortization of the related investment in income tax expense using the effective yield method.

The increase in income tax expense from 2012 to 2013 is the result of reduced tax exempt interest in 2013 as well as the reflection of the recognition of certain federal historic rehabilitation tax credits related to an investment in redevelopment of a Louisville landmark in 2012.

The increase in income tax expense from 2011 to 2012 is the result of an adjustment of approximately $700,000 made in 2011 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, 2013 and 2012 were as follows:

	December 31,
(In thousands)	2013		2012
Allowance for loan loss	$	10,236	$	11,495
Deferred compensation	4,778		3,950
Accrued expenses	1,604		1,451
Investments in partnerships	826		713
Write-downs and costs associated with other real estate owned	749		1,335
Loans	564		211
Other-than-temporary impairment	311		312
Other assets	299		324

Total deferred tax assets	19,367		19,791

Securities	354		4,088
Property and equipment	1,377		1,162
Loan costs	702		648
Prepayment penalty on modification of FHLB advances	156		263
Mortgage servicing rights	608		703
Leases	428		100
Core deposit intangible	772		—
Other liabilities	416		289

Total deferred tax liabilities	4,813		7,253

Net deferred tax asset	$	14,554	$	12,538

As a result of the acquisition of Oldham, Bancorp has a federal net operating loss carryforward of $61,698 as of January 1, 2014. Bancorp expects to fully utilize this loss in 2014.

No valuation allowance for deferred tax assets was recorded as of December 31, 2013 and 2012 because Bancorp has sufficient prior taxable income, future projected taxable income, and tax planning strategies to allow for utilization of the deductible temporary differences, net operating losses and capital losses within the carryback and carryforward periods. 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, 2013 and 2012, the gross amount of unrecognized tax benefits was $40,000 and $70,000, respectively. If recognized, all of the tax benefits would increase net income, resulting in a decrease in the effective tax rate.

Bancorp is currently under IRS examination of its 2011 corporate income tax return. Management does not expect that the results of the examination will have a material effect on our financial condition. While management believes tax positions are appropriate, the IRS could challenge Bancorp’s positions as a part of this examination. Federal and state income tax returns are subject to examination for the tax return years after 2009.

Bancorp’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of December 31, 2013 and 2012, the amount accrued for the potential payment of interest and penalties was $2,000 and $4,000, respectively.

A reconciliation of the amount of unrecognized tax benefits for the years ended December 31, 2013 and 2012 follows:

(In thousands)	2013			2012

Balance as of January 1	$	70		$	101
Increases - current year tax positions	11			10
Lapse of statute of limitations	(41		)	(41		)

Balance as of December 31	$	40		$	70