NOTE 10: INCOME TAXES

The components of the provision for income taxes were as follows for the years ended December 31, 2011, 2010 and 2009:


(In thousands)	2011			2010		2009
Current	$	4,461		$	4,443	$	8,695
Deferred		(1,337	)		205		(4,941	)
Provision for income taxes	$	3,124		$	4,648	$	3,754

Not included in the above table is the income tax impact associated with the unrealized gain or loss on securities available for sale and the income tax impact associated with the funded status of the pension plan, which are recorded directly in shareholders' equity as a component of accumulated other comprehensive loss.

The tax effects of temporary differences and tax credits that give rise to deferred tax assets and liabilities at December 31, 2011 and 2010 are presented below:


(In thousands)	2011			2010
Deferred tax assets:
Allowance for loan losses	$	3,974		$	3,764
Post retirement benefit obligation		1,444			1,231
Loan mark-to-market adjustment		2,627			1,028
Deferred compensation		1,217			1,297
Installment sales		293			409
Core deposit intangible		108			147
Other		335			361
Investment in real estate limited partnerships, net		86			33
Total deferred tax assets	$	10,084		$	8,270
Deferred tax liabilities:
Unrealized gain on securities available for sale	$	(3,598	)	$	(2,571	)
Depreciation		(1,746	)		(1,436	)
Accrued pension cost		(1,288	)		(1,334	)
Total deferred tax liabilities	$	(6,632	)	$	(5,341	)
Net deferred tax asset	$	3,452		$	2,929

In assessing the realizability of our total deferred tax assets, Management considers whether it is more likely than not that some portion or all of those assets will not be realized. Based upon Management's consideration of historical and anticipated future pre-tax income, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance for deferred tax assets was not considered necessary at December 31, 2011 and 2010. We paid total income taxes in 2011, 2010, and 2009 of $1.95 million, $8.40 million and $5.00 million, respectively. However, factors beyond management's controls, such as the general state of the economy can affect future levels of taxable income and there can be no assurances that sufficient taxable income will be generated to fully realize the deferred tax assets in the future.

The following is a reconciliation of the federal income tax provision, calculated at the statutory rate of 35%, to the recorded provision for income taxes:


(In thousands)	2011			2010			2009
Applicable statutory Federal income tax	$	6,210		$	7,038		$	5,682
(Reduction) increase in taxes resulting from:
Tax-exempt income		(716	)		(402	)		(127	)
Housing tax credits		(2,053	)		(1,652	)		(1,791	)
Qualified school construction bond tax credits		(539	)		(375	)		0
Other, net		222			39			(10	)
Provision for income taxes	$	3,124		$	4,648		$	3,754

We have not identified any of our tax positions that contain significant uncertainties. Housing tax credits are recognized using the flow through method. We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2008 through 2011. Our state income tax returns are also open to audit under the statute of limitations for the years ending December 31, 2008 through 2011.

The State of Vermont assesses a franchise tax for banks in lieu of income tax. The franchise tax is assessed based on deposits. Vermont franchise taxes, net of state credits amounted to approximately $1.18 million, $1.07 million and $1.02 million in 2011, 2010 and 2009, respectively, which is included as non-interest expense in the accompanying consolidated statement of income.