INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense. The Company has not incurred any income tax related interest and penalties as of June 30, 2012 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 2006. Tax returns have been filed through the year 2011.

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 position of $4,282,000 at June 30, 2012, and net deferred tax liability position of $86,000 at December 31, 2011.

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



	June 30, 2012			December 31, 2011
	(unaudited)
General expenses	$	1,211		$	1,576
Unearned premiums	1,827			1,714
Claims liabilities	249			271
Litigation settlement	4,420			—
NOL carry forward	1,594			1,363
Other-than-temporary impairments on securities owned	231			258
Unrealized loss on interest rate swaps	489			407
Deferred tax assets	10,021			5,589

Depreciation	(120		)	(144		)
Deferred policy acquisition costs	(3,299		)	(3,250		)
Unrealized gains on securities available-for-sale	(2,320		)	(2,281		)
Deferred tax liabilities	(5,739		)	(5,675		)

Net deferred tax asset (liability)	$	4,282		$	(86	)

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



	Six Months Ended June 30,
	2012			2011
Deferred policy acquisition costs	$	49		$	304
Other-than-temporary impairments	27			(69		)
Trading securities	—			10
Unearned premiums	(113		)	(102		)
General expenses	(61		)	(98		)
Depreciation	(24		)	(16		)
Claim liabilities	22			(2		)
Litigation settlement	(3,995		)	—
NOL carry forward	(230		)	—

Deferred income tax (benefit) expense	$	(4,325	)	$	27

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



	Six Months Ended June 30,
	2012		2011
Federal income tax rate applied to pre-tax income/loss	34.00	%	34.00	%
Dividends received deduction and tax-exempt interest	0.80	%	1.70	%
Company owned life insurance	0.50	%	0.70	%
Small life deduction	2.10	%	3.10	%
Other, net	0.60	%	(4.40	)%

Effective federal income tax rate	38.00	%	35.10	%