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 2010. Tax returns have been filed through the year 2015.

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 $2,311,000 at September 30, 2016 and $3,824,000 at December 31, 2015.

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



	As of September 30, 2016			As of December 31, 2015
General expenses	$	1,566		$	1,569
Unearned premiums	2,206			2,039
Claims liabilities	739			730
Litigation settlement	1,748			1,748
AMT credit	455			816
Impairment on real estate owned	187			187
Unrealized loss on interest rate swaps	455			483
Deferred tax assets	7,356			7,572

Depreciation	(117		)	(111		)
Deferred policy acquisition costs	(2,962		)	(2,885		)
Unrealized gains on securities available-for-sale	(1,966		)	(752		)
Deferred tax liabilities	(5,045		)	(3,748		)
Net deferred tax asset	$	2,311		$	3,824

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



	Nine months ended September 30,
	2016			2015
Deferred policy acquisition costs	$	77		$	26
Unearned premiums	(167		)	(206		)
General expenses	3			(57		)
Depreciation	6			(10		)
Claims liabilities	(9		)	10
AMT credit	361			485
Deferred income tax expense (benefit)	$	271		$	248

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:



	Nine months ended September 30,
	2016		2015
Federal income tax rate applied to pre-tax income/loss	34.0	%	34.0	%
Dividends received deduction and tax-exempt interest	(1.4	)%	(1.6	)%
Company owned life insurance	(0.6	)%	1.5	%
Small life deduction	(5.9	)%	(4.3	)%
Other, net	0.2	%	(2.4	)%
Effective federal income tax rate	26.3	%	27.2	%