(7) INCOME TAXES

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

	Years Ended December 31,
	2014		2013		2012
	(Dollars in Thousands)
Federal
Current	$	16,659	$	4,289	$	63
Deferred		1,059		1,393		2,052
Provision for Federal income tax expense		17,718		5,682		2,115
State
Current		2,204		-		-
Deferred		186		809		320
Provision for state income tax expense		2,390		809		320
Provision for income tax expense	$	20,108	$	6,491	$	2,435

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

	Years Ended December 31,
	2014			2013			2012
	(Dollars in Thousands)

Computed expected tax expense provision, at federal rate	$	19,887		$	6,535		$	2,294
State tax, net of federal deduction expense		1,696			698			245
Tax-exempt interest		(312	)		(31	)		(26	)
Dividend received deduction		(136	)		(97	)		(88	)
Stock option expense		-			(34	)		72
AMT Tax credit		-			-			(113	)
True-up / Rate Change		(1,027	)		(306	)		-
Other		-			(274	)		51
Provision for income tax expense	$	20,108		$	6,491		$	2,435

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,
	2014			2013
Deferred tax assets:
Unpaid losses and loss adjustment expenses	$	1,239		$	1,157
Unearned premiums		7,812			6,864
Discount on advance premiums		-			243
Allowance for credit losses		63			59
Allowance for impairments		20			21
Depreciation & amortization		13			149
Reserve for claims settlements		12			1,844
NOL Carryforward		-			73
Deferred revenue		36			-
Flow-through income or loss		-			4
Stock option expense per ASC 718		545			550
Total deferred tax assets		9,740			10,964

Deferred tax liabilities:
Deferred acquisition costs, net		(6,199	)		(6,287	)
Flow-through income or loss		(9	)		-
Dividends Collected vs. Earned		(12	)		(6	)
Regulatory assessments		(69	)		(67	)
Unrealized Gain on investment securities		(4,792	)		(3,598	)
Total deferred tax liabilities		(11,081	)		(9,958	)
Net deferred tax (liability) asset	$	(1,341	)	$	1,006

The Company has adopted ASC 740-10-05, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 provides a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s policy is to classify interest and penalties related to unrecognized tax positions in income before income taxes. As of December 31, 2014, 2013 and 2012, we have determined that no uncertain tax liabilities are required.

In September 2013, the Internal Revenue Service (“IRS”) released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code regarding the deduction and capitalization of expenditures related to tangible property as well as dispositions of tangible property. These regulations are effective for our tax year beginning January 1, 2014. The adoption of these regulations is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.

The Company has recorded a net deferred tax liability and asset of $1.3 million and $1.0 million as of December 31, 2014 and 2013, respectively. Realization of deferred tax assets is dependent on generating sufficient taxable income in future periods. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in assessing the ability to realize deferred tax assets. 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 and as such no valuation allowance has been recorded against deferred tax assets. 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 a 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 a federal income tax return and various state and local tax returns. The Company’s consolidated federal and state income tax returns for 2012 - 2013 are open for review by the IRS and various state taxing authorities. The Company’s 2011 federal tax return was under review by the IRS and in 2014 the audit was closed with a no change report.

During 2014, the Company recorded tax benefits of $0.9 million from the exercise of non-qualifying stock options, restricted stock and disqualifying dispositions of incentive stock options as a reduction of the Company's income tax liability and an increase in equity. Additionally, in 2014 the Company recorded deferred tax liabilities of $1.0 million related to unrealized gains on investments as a decrease to equity.