(10) INCOME TAXES

For the years ended December 31, 2011, 2010 and 2009, income tax expense attributable to income from

operations consisted of the following:

Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to

income before income tax expense as follows:

	2011			2010			2009
Tax computed at statutory rate	$	5,294,107		$	5,170,418		$	2,411,789
Tax-exempt interest		(543,638	)		(505,644	)		(515,379	)
Dividend exclusion		(35,439	)		(27,805	)		(35,417	)
State taxes, net of Federal impact		386,214			299,284			(27,711	)
Nondeductible interest expense		23,242			27,253			36,807
Other items, net		(91,336	)		141,733			(9,426	)
Actual income tax expense	$	5,033,150		$	5,105,239		$	1,860,663

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and

deferred tax liabilities at December 31, 2011 and 2010, are presented below:

	2011		2010
Deferred tax assets:
Allowance for loan losses	$	3,688,822	$	3,622,654
Accrual for employee benefit plans		829,414		843,716
Depreciation		340,274		593,102
Deferred compensation and directors' fees		894,410		792,224
Purchase accounting adjustment – deposits		314,802		154,161
Purchase accounting adjustment – loans		2,163,551		90,584
Purchase accounting adjustment - fixed assets		223,277		222,993
Accounting for defined benefit pension and other benefit plans		5,901,720		3,514,280
Trust preferred impairment writedown		1,338,943		1,311,534
Other		633,884		757,619
Total gross deferred tax assets	$	16,329,097	$	11,902,867

Deferred tax liabilities:	2011		2010
Deferred loan fees and costs	$	924,500	$	1,005,082
Prepaid pension		6,694,664		4,007,746
Net unrealized gains on securities available for sale		5,090,655		3,727,368
Other		837,297		608,569
Total gross deferred tax liabilities		13,547,116		9,348,765
Net deferred tax asset	$	2,781,981	$	2,554,102

Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of

sufficient taxable income within the loss carryback period. A valuation allowance is recognized when it is more

likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a

valuation allowance, management considers the scheduled reversal of the deferred tax assets, the level of

historical taxable income and projected future taxable income over the periods in which the temporary differences

comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no

valuation allowance is necessary.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest) is as

follows:

	2011			2010		2009
Balance at January 1	$	123,530		$	-	$	-
Additions for tax positions of current year		-			123,530		-
Reductions related to settlement with taxing authorities		(123,530	)		-		-
Balance at December 31	$	-		$	123,530	$	-

The Corporation finalized its examination by the Internal Revenue Service for the final 2009 tax return filed by

Canton Bancorp, Inc. The settlement resulted in a reversal of the Corporation's uncertain tax position. As of

December 31, 2011, the Corporation did not have any unrecognized tax benefits. At December 31, 2010, the

Corporation had $123,530 of net unrecognized tax benefits and interest.

As of December 31, 2011, there was no accrued interest related to uncertain tax positions. At December 31,

2010, accrued interest related to uncertain tax position was $7,000, net of the related tax benefit. The Corporation

accounts for interest and penalties related to uncertain tax positions as part of its provision for Federal and

state income taxes.

The Corporation is not currently subject to examinations by Federal or New York State taxing authorities for the

years prior to 2008.