INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense. The Company incurred no interest or penalties as of both September 30, 2011 and December 31, 2010. 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 2006. Tax returns have been filed through the year 2010.

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 liability positions of $275,000 at September 30, 2011 and $1,043,000 at December 31, 2010.

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



	September 30, 2011			December 31, 2010
General insurance expenses	$	1,534		$	1,442
Unearned premiums	1,895			1,795
Claims liabilities	294			301
Trading securities	43			17
NOL carry forward	700			—
Other-than-temporary impairments on securities owned	267			115
Unrealized loss on interest rate swaps	382			77
Deferred tax assets	$	5,115		$	3,747

Depreciation	$	(150	)	$	(171	)
Deferred policy acquisition costs	(3,275		)	(2,874		)
Unrealized gains on securities available-for-sale	(1,965		)	(1,745		)
Deferred tax liabilities	$	(5,390	)	$	(4,790	)

Net deferred tax liability	$	(275	)	$	(1,043	)

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



	Nine months ended September 30,
	2011			2010
Deferred policy acquisition costs	$	401		$	619
Other-than-temporary impairments	(152		)	49
Trading securities	(26		)	(29		)
Unearned premiums	(100		)	(183		)
General insurance expenses	(92		)	10
Depreciation	(21		)	(18		)
Claim liabilities	7			(2		)
NOL carry forward	(700		)	—

Deferred income tax expense	$	(683	)	$	446

Total income tax expense varies from amounts computed by applying current federal income tax rates to income before income taxes. The reason for these differences and the approximate tax effects are as follows (dollars in thousands):



	Nine months ended September 30,
	2011			2010
Federal income tax rate applied to pre-tax income	$	(2,387	)	$	1,298
Dividends received deduction and tax-exempt interest	(151		)	(137		)
Company owned life insurance	(6		)	(101		)
Small life deduction	(325		)	(101		)
Other, net	447			(71		)

Federal income tax (benefit) expense	$	(2,422	)	$	888