INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense. The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is not subject to examinations by authorities related to its U.S. federal or state income tax filings for years prior to 2009. Tax returns have been filed through the year 2013.

Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. Management believes that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. The Company recognized net deferred tax asset positions of $3,189,000 at December 31, 2014 and $4,654,000 at December 31, 2013.

The tax effect of significant differences representing deferred tax assets and liabilities are as follows (dollars in thousands):



	As of December 31, 2014			As of December 31, 2013
General expenses	$	1,371		$	1,326
Unearned premiums	1,961			1,855
Claims liabilities	849			700
Litigation settlement	2,040			3,173
AMT credit	1,240			335
NOL carryforward	—			849
Impairment on real estate owned	187			—
Unrealized loss on interest rate swaps	421			305
Deferred tax assets	8,069			8,543

Depreciation	(111		)	(119		)
Deferred policy acquisition costs	(2,921		)	(2,984		)
Unrealized gains on securities available-for-sale	(1,848		)	(786		)
Deferred tax liabilities	(4,880		)	(3,889		)
Net deferred tax asset	$	3,189		$	4,654

The appropriate income tax effects of changes in temporary differences are as follows (dollars in thousands):



	Year Ended December 31,
	2014			2013
Deferred policy acquisition costs	$	(63	)	$	(109	)
Other-than-temporary impairments	—			164
Impairments on real estate owned	(187		)	—
Trading securities	—			(1		)
Unearned premiums	(106		)	(104		)
General expenses	(45		)	(115		)
Depreciation	(8		)	25
Claims liabilities	(149		)	(457		)
Litigation settlement	1,133			397
AMT credit	(905		)	(89		)
NOL carryforward	849			1,862

Deferred income tax expense	$	519		$	1,573

Total income tax expense (benefit) varies from amounts computed by applying current federal income tax rates to income or loss before income taxes. The reasons for these differences and the approximate tax effects are as follows:



	Year ended December 31,
	2014		2013
Federal income tax rate applied to pre-tax income/loss	34.0	%	34.0	%
Dividends received deduction and tax-exempt interest	(1.2	)%	(1.7	)%
Company owned life insurance	(12.0	)%	0.3	%
Small life deduction	(3.1	)%	(4.0	)%
Life reserve tax adjustment	—	%	(6.7	)%
Other, net	1.1	%	0.8	%
Effective federal income tax rate	18.8	%	22.7	%

Under pre-1984 life insurance company tax laws, a portion of NSIC's gain from operations was not subject to current income taxation, but was accumulated for tax purposes in a memorandum account designated "policyholders' surplus".

The aggregate balance in this account, $2,520,000 at December 31, 2014, would be taxed at current rates only if distributed to shareholders or if the account exceeded a prescribed minimum. The Deficit Reduction Act of 1984 eliminated additions to policyholders' surplus for 1984 and thereafter. Deferred taxes have not been provided on amounts designated as policyholders' surplus. The deferred income tax liability not recognized is approximately $857,000 at December 31, 2014.