INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense. The Company incurred $6,000 in interest and penalties as of March 31, 2012 and and $1,000 as of December 31, 2011. 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 2007. Tax returns have been filed through the year 2010. Extensions have been filed for 2011 tax returns.

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 $269,000 at March 31, 2012 and $86,000 at December 31, 2011.

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



	March 31, 2012			December 31, 2011
	(unaudited)
General insurance expenses	$	1,719		$	1,576
Unearned premiums	1,684			1,714
Claims liabilities	258			271
NOL carry forward	1,248			1,363
Other-than-temporary impairments on securities owned	257			258
Unrealized loss on interest rate swaps	363			407
Deferred tax assets	5,529			5,589

Depreciation	(134		)	(144		)
Deferred policy acquisition costs	(3,241		)	(3,250		)
Unrealized gains on securities available-for-sale	(2,423		)	(2,281		)
Deferred tax liabilities	(5,798		)	(5,675		)

Net deferred tax liability	$	(269	)	$	(86	)

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



	For the three-months ended March 31,
	2012			2011
Deferred policy acquisition costs	$	(9	)	$	158
Other-than-temporary impairments	1			(34		)
Trading securities	—			10
Unearned premiums	30			4
General insurance expenses	(143		)	(8		)
Depreciation	(10		)	(9		)
Claim liabilities	13			(3		)
NOL carry forward	115			—

Deferred income tax (benefit) expense	$	(3	)	$	118

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):



	For the three-months ended March 31,
	2012			2011
Federal income tax rate applied to pre-tax income	$	189		$	497
Dividends received deduction and tax-exempt interest	(47		)	(50		)
Company owned life insurance	(40		)	(22		)
Small life deduction	(55		)	(110		)
Other, net	(22		)	153

Federal income tax expense	$	25		$	468