(7) INCOME TAXES

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

	Years Ended December 31,
	2012		2011			2010
	(Dollars in Thousands)
Federal
Current	$	63	$	310		$	(1,701	)
Deferred		2,052		(490	)		(1,928	)
Provision for Federal income tax expense (benefit)		2,115		(180	)		(3,629	)
State
Current		-		-			-
Deferred		320		(390	)		(330	)
Provision for state income tax expense (benefit)		320		(390	)		(330	)
Provision for income tax expense (benefit)	$	2,435	$	(570	)	$	(3,959	)

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,
	2012			2011			2010
	(Dollars in Thousands)

Computed expected tax expense (benefit) provision, at federal rate	$	2,294		$	(341	)	$	(4,065	)
State tax, net of federal deduction expense (benefit)		245			(36	)		(434	)
Tax-exempt interest		(26	)		(41	)		(211	)
Dividend received deduction		(88	)		(80	)		(99	)
Stock option expense and other permanent differences		72			87			114
Intercompany		-			-			223
AMT tax credit		(113	)		-			-
Other		51			(159	)		513
Provision for income tax expense (benefit)	$	2,435		$	(570	)	$	(3,959	)

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,
	2012			2011
Deferred tax assets:
Unpaid losses and loss adjustment expenses	$	1,725		$	2,385
Unearned premiums		2,629			1,950
Discount on advance premiums		167			195
Allowance for credit losses		31			34
Allowance for impairments		91			317
FIGA Guaranty Assessment		306			-
Depreciation & amortization		366			317
Reserve for claims settlements		809			809
NOL Carryforward		3,259			5,696
AMT credit		253			-
Stock option expense per ASC 718		432			410
Total deferred tax assets		10,068			12,113
Deferred tax liabilities:

Deferred acquisition costs, net		(3,191	)		(2,905	)
Dividends Collected vs. Earned		(18	)		-
Regulatory assessments		(67	)		(67	)
Unrealized Gain on investment securities		(2,454	)		(529	)
Total deferred tax liabilities		(5,730	)		(3,501	)
Net deferred tax asset	$	4,338		$	8,612

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 $4.3 million and $8.6 million as of December 31, 2012 and 2011, 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, 2012 and 2011, 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's consolidated federal and state income tax returns for 2009-2011 are open for review by the Internal Revenue Service ("IRS") and various state taxing authorities. The 2012 federal and state income tax returns have been extended and will be filed by the extended due date in Q3 of 2013. The 2005 and 2006 income tax returns and net operating loss carry-back from tax year 2009 have been reviewed by the Joint Committee on Taxation. The Joint committee on Taxation completed its consideration in September 2011 and took no exception to the conclusions reached by the IRS regarding the net operating loss carry-back from tax year 2009.