NOTE I: INCOME TAXES

The provision for income taxes for the years ended December 31 is as follows:

(000's omitted)	2011	2010	2009
Current:
Federal	$17,145	$13,090	$6,400
State and other	375	776	1,788
Deferred:
Federal	10,674	7,633	3,929
State and other	2,191	1,566	(495)
Provision for income taxes	$30,385	$23,065	$11,622

Components of the net deferred tax liability, included in other liabilities, as of December 31 are as follows:

(000's omitted)	2011	2010
Allowance for loan losses	$16,371	$16,437
Employee benefits	6,718	5,843
Interest rate swap	0	1,243
Debt extinguishment	1,821	2,111
Other	2,169	1,440
Deferred tax asset	27,079	27,074

Investment securities	37,386	7,487
Intangible assets	9,448	16,962
Loan origination costs	5,041	4,397
Depreciation	5,779	3,700
Mortgage servicing rights	678	933
Pension	2,860	4,163
Prepaid FDIC insurance	3,079	2,913
Deferred tax liability	64,271	40,555
Net deferred tax liability	($37,192)	($13,481)

The Company has a state tax net operating loss carry forward of $25.7 million that resulted in a gross deferred tax asset of $1.4 million prior to federal tax effect. This net operating loss carry forward will expire between 2026 and 2029, but is expected to be substantially utilized over the next two years and completely utilized over the next five years.

The Company has determined that no valuation allowance is necessary as it is more likely than not that the gross deferred tax assets will be realized through carryback of future deductions to taxable income in prior years, future reversals of existing temporary differences, and through future taxable income.

A reconciliation of the differences between the federal statutory income tax rate and the effective tax rate for the years ended December 31 is shown in the following table:

	2011	2010	2009
Federal statutory income tax rate	35.0%	35.0%	35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest	(7.1)	(8.3)	(14.1)
State income taxes, net of federal benefit	1.6	1.8	1.7
Other	(0.1)	(1.8)	(0.7)
Effective income tax rate	29.4%	26.7%	21.9%

A reconciliation of the unrecognized tax benefits for the years ended December 31 is shown in the following table:

(000's omitted)	2011	2010	2009
Unrecognized tax benefits at beginning of year	$98	$708	$856
Changes related to:
Positions taken during the current year	35	35	79
Settlements with taxing authorities	0	(408)	0
Lapse of statutes of limitation	0	(237)	(227)
Unrecognized tax benefits at end of year	$133	$98	$708

As of December 31, 2011, the total amount of unrecognized tax benefits that would impact the Company's effective tax rate if recognized is $0.1 million. It is reasonably possible that the amount of unrecognized tax benefits could change in the next twelve months as a result of the New York State examination and expiration of statutes of limitations on prior tax returns.

The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as part of income taxes in the consolidated statement of income. The accrued interest related to tax positions was approximately $10,000 at December 31, 2011 and $20,000 at December 31, 2010 and $0.2 million at December 31, 2009.

The Company's federal and state income tax returns are routinely subject to examination from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgment used to record tax-related assets or liabilities have been appropriate. Future examinations by taxing authorities of the Company's federal or state tax returns could have a material impact on the Company's results of operations. The Company's federal income tax returns for years after 2007 may still be examined by the Internal Revenue Service. New York State income tax returns for years after 2007 may still be examined by the New York Department of Taxation and Finance. It is not possible to estimate when those examinations may be completed.