(7) INCOME TAXES

A summary of the provision for income tax expense (benefit) is as follows.

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Federal
Current	$	4,289	$	63	$	310
Deferred		1,393		2,052		(490	)
Provision for Federal income tax expense (benefit)		5,682		2,115		(180	)
State
Current		-		-		-
Deferred		809		320		(390	)
Provision for state income tax expense (benefit)		809		320		(390	)
Provision for income tax expense (benefit)	$	6,491	$	2,435	$	(570	)

The actual income tax expense (benefit) differs from the "expected" income tax expense (benefit) (computed by applying the combined applicable effective federal and state tax rates to income before provision for income tax expense (benefit) as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)

Computed expected tax expense (benefit) provision, at federal rate	$	6,535		$	2,294		$	(341	)
State tax, net of federal deduction expense (benefit)		698			245			(36	)
Tax-exempt interest		(31	)		(26	)		(41	)
Dividend received deduction		(97	)		(88	)		(80	)
Stock option expense and other permanent differences		(34	)		72			87
AMT Tax credit		-			(113	)		-
True-up		(306	)		-			-
Other		(274	)		51			(159	)
Provision for income tax expense (benefit)	$	6,491		$	2,435		$	(570	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax asset are as follows.

	Years Ended December 31,
	2013			2012
Deferred tax assets:
Unpaid losses and loss adjustment expenses	$	1,157		$	1,725
Unearned premiums		6,864			2,629
Discount on advance premiums		243			167
Allowance for credit losses		59			31
Allowance for impairments		21			91
FIGA Guaranty Assessment		-			306
Depreciation & amortization		149			366
Reserve for claims settlements		1,844			809
NOL Carryforward		73			3,259
AMT credit		-			253
Flow-through income or loss		4			-
Stock option expense per ASC 718		550			432
Total deferred tax assets		10,964			10,068
Deferred tax liabilities:

Deferred acquisition costs, net		(6,287	)		(3,191	)
Dividends Collected vs. Earned		(6	)		(18	)
Regulatory assessments		(67	)		(67	)
Unrealized Gain on investment securities		(3,598	)		(2,454	)
Total deferred tax liabilities		(9,958	)		(5,730	)
Net deferred tax asset	$	1,006		$	4,338

Based upon the results of our analysis and the application of ASC 740-10, we have determined that all material tax positions meet the recognition threshold and can be considered as highly certain tax positions. This is based on clear and unambiguous tax law, and we are highly confident that the full amount of each tax position will be sustained upon possible examination. Accordingly, the full amount of the tax positions will be recognized in the financial statements.

The Company has recorded a net deferred tax asset of $1.0 million and $4.3 million as of December 31, 2013 and December 31, 2012, respectively. Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2013, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for 2010 - 2012 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities. The Company’s 2011 federal tax return is currently under review by the IRS. The 2012 federal and state income tax returns were filed by the extended due date in the third quarter of 2013. The 2013 federal and state income tax returns have been extended as of March 2014 and will be timely filed in the third quarter of 2014.