Note 10 — Employee Benefits

(A) Retirement Plan

The Company has a noncontributory defined benefit pension plan available to all full-time employees who are at least 21 years old and have completed at least one year of employment. The plan is governed by the rules and regulations in the Prototype Plan of the New York Bankers Association Retirement System and the Retirement System Adoption Agreement executed by the Bank. The plan is a single-employer plan. However, for purposes of investment, the plan contributions are pooled with those of other participants in the system.

On December 31, 2012, certain provisions of the Company's pension plan were changed which affected all participants in this plan and froze the participation of new entrants into the pension plan for all remaining employees in 2012. These changes froze the plan such that no additional pension benefits would accumulate. As a result of these changes, the funded status of the pension benefit plan was remeasured at December 31, 2012. A pension curtailment gain of $1 thousand was recorded which is included in the net loss for 2012. This amendment decreased the pension liability by $14 million and resulted in an after-tax decrease in accumulated other comprehensive loss of $9 million.

The tables below set forth the status of the Company's pension plan as of December 31, 2012 and December 31, 2011, the time at which the annual valuation of the plan is made.

The following table sets forth the plan's change in benefit obligation: (in thousands)

	2012			2011
Benefit obligation at start of year	$	53,028		$	42,570
Service cost		2,665			2,179
Interest cost		2,218			2,250
Actuarial loss		(3,789	)		7,671
Benefits paid and expected expenses		(1,777	)		(1,642	)
Curtailment		(6,969	)		-
Benefit obligation at end of year	$	45,376		$	53,028

The following table sets forth the plan's change in plan assets: (in thousands)

	2012			2011
Fair value of plan assets at start of year	$	34,817		$	32,830
Actual return on plan assets		3,615			13
Employer contribution		1,000			3,700
Benefits paid and actual expenses		(1,837	)		(1,726	)
Fair value of plan assets at end of year	$	37,595		$	34,817

The following table presents the plan's funded status and amounts recognized in the consolidated statements of condition: (in thousands)

	2012			2011
Prepaid Pension Cost	$	4,632		$	7,780
Unrecognized Net Loss		(12,413	)		(25,996	)
Unrecognized Prior Service Cost		-			4
Under Funded Status	$	(7,781	)	$	(18,212	)
Amount Included in Other Liabilities	$	(7,781	)	$	(18,212	)
Accumulated Benefit Obligation	$	45,376		$	45,145

In December 2012, the Company made an annual minimum contribution of $1 million for the plan year ending September 30, 2013. There is no additional minimum required contribution for the plan year ending September 30, 2013. In December 2011, the Company made an annual minimum contribution of $4 million for the plan year ended September 30, 2012. The Company does not expect to contribute to its pension plan in 2013.

The following table presents estimated benefits to be paid during the years indicated: (in thousands)

	Qualified		Post-
	Pension		Retirement
	Plan		Benefits
2013	$	1,711	$	71
2014		1,815		72
2015		2,003		73
2016		2,123		75
2017		2,281		76
2018-2021		14,076		396

The following table summarizes the net periodic pension cost: (in thousands)

	2012			2011			2010
Service cost	$	2,665		$	2,179		$	1,805
Interest cost on projected benefit obligations		2,218			2,250			2,039
Expected return on plan assets		(2,362	)		(2,238	)		(2,150	)
Net amortization & deferral		1,628			974			724
Curtailment gain		(1	)		-			-
Net periodic pension cost		4,148			3,165			2,418
Other changes in plan assets and benefit obligations recognized in other comprehensive income
Net actuarial (gain) loss		(13,578	)		5,348			2,419
Amortization of service cost		-			-			2
Total recognized in other comprehensive income		(13,578	)		5,348			2,421
Total recognized in net periodic pension cost and other comprehensive income	$	(9,430	)	$	8,513		$	4,839

Weighted-averagediscount rate		4.27	%		5.38	%		5.89	%
Rate of increase in future compensation		3.50	%		3.50	%		3.50	%
Expected long-term rate of return on assets		7.00	%		7.00	%		7.50	%

The assumptions used in the measurement of the Company's pension obligation at December 31, 2012 were:

●

Weighted-average discount rate of 4.50%;

●

Rate of increase in future compensation of 0.00%;

●

Expected long-term rate of return on assets was not applicable.

The following table summarizes the net periodic pension cost expected for the year ended December 31, 2013. This expense amount is subject to change if a significant plan-related event should occur before the end of fiscal 2013: (in thousands)

	2013
Service cost	$	254
Interest cost on projected benefit obligations		1,993
Expected return on plan assets		(2,556	)
Net amortization & deferral		245
Net periodic pension cost	$	(64	)
Weighted-average discount rate		4.27	%
Rate of increase in future compensation		0.00	%
Expected long-term rate of return on assets		7.00	%

Plan Assets

The Company's pension plan weighted-average asset allocations at December 31, 2012 and 2011, by asset category are as follows:

	At December 31,
Asset category	2012			2011
Cash		13	%		11	%
Equity Securities		45			48
Debt Securities		42			41
Total		100	%		100	%

Fair Value

The following table summarizes the fair value measurements of the Company's pension plan assets on a recurring basis as of December 31, 2012: (in thousands)

	Fair Value Measurements Using
	Active Markets for		Significant		Significant
	Identical Assets		Other		Unobservable
	Quoted Prices		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Investment in securities
Short-term investment funds	$	39	$	4,813	$	-	$	4,852
Equity securities		17,073		-		-		17,073
Fixed income securities
Auto loan receivable		-		204		-		204
Collateralized mortgage obligations		-		4,074		-		4,074
Corporate bonds		-		3,549		-		3,549
Government-issued securities		-		7,834		-		7,834
Other asset-backed		-		9		-		9
Total	$	17,112	$	20,483	$	-	$	37,595

The following table summarizes the fair value measurements of the Company's pension plan assets on a recurring basis as of

December 31, 2011: (in thousands)

	Fair Value Measurements Using
	Active Markets for		Significant		Significant
	Identical Assets		Other		Unobservable
	Quoted Prices		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Investment in securities
Short-term investment funds	$	60	$	3,635	$	-	$	3,695
Equity securities		16,683		-		-		16,683
Fixed income securities
Collateralized mortgage obligations		-		3,403		-		3,403
Corporate bonds		-		3,137		-		3,137
Government-issued securities		-		7,899		-		7,899
Total	$	16,743	$	18,074	$	-	$	34,817

The following is a description of the valuation methodologies used for pension assets measured at fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

For pension assets, Level 1 securities consist primarily of short-term investment funds and equity securities which include investments in common stock and depository receipts. Level 2 securities consist of fixed income securities including corporate bonds, government issues, and mortgage-backed securities.

Investment Policies

The New York State Bankers Retirement System (the "System") was established in 1938 to provide for the payment of benefits to employees of participating banks. The System is overseen by a Board of Trustees who meet quarterly and set the investment policy guidelines.

The System's overall investment strategy is to achieve a mix of approximately 97% of investments for long-term growth and 3% for near-term benefit payments with a wide diversification of asset types, fund strategies, and fund managers. The target allocations for System assets are shown in the table below. Cash equivalents consist primarily of short term investment funds. Equity securities primarily include investments in common stock and depository receipts. Fixed income securities include corporate bonds, government issues and mortgage backed securities. Other financial instruments primarily include rights and warrants.

The weighted average expected long-term rate of return is estimated based on current trends in the System's assets as well as projected future rates of return on those assets and reasonable actuarial assumptions based on the guidance provided by Actuarial Standard of Practice ("ASOP") No. 27 "Selection of Economic Assumptions for Measuring Pension Obligations" for long term inflation, and the real and nominal rate of investment return for a specific mix of asset classes. The following assumptions were used in determining the long-term rate of return:

Equity securities - Dividend discount model, the smoothed earnings yield model and the equity risk premium model

Fixed income securities - Current yield-to-maturity and forecasts of future yields

Other financial instruments - Comparison of the specific investment's risk to that of fixed income and equity instruments and using judgment

The long term rate of return considers historical returns. Adjustments were made to historical returns in order to reflect expectations of future returns. These adjustments were due to factor forecasts by economists and long-term U.S. Treasury yields to forecast long-term inflation. In addition, forecasts by economists and others for long-term GDP growth were factored into the development of assumptions for earnings growth and per capita income.

Effective September 2011, the System revised its investment guidelines. The System currently prohibits its investment managers from purchasing any security greater than 5% of the portfolio at the time of purchase or greater than 8% at market value in any one issuer. In addition, the following are prohibited:

Equity securities

·	Short sales

·	Unregistered securities and

·	Margin purchases

Fixed income

·	Mortgage backed derivatives that have an inverse floating rate coupon or that are interest only securities

·	Any asset backed security that is not issued by the U.S. Government or its agencies or its instrumentalities

·	Generally securities of less than Baa2/BBB quality may not be purchased

·	Securities of less than A-quality may not in the aggregate exceed 10% of the investment manager's portfolio

Other financial instruments

·	Un-hedged currency exposure in countries not defined as "high income economies" by the World Bank

Prior to September 2011 investments in emerging countries as defined by the Morgan Stanley Emerging Markets Index and structured notes were prohibited.

All other investments not prohibited by the System are permitted. At December 31, 2012 and 2011, the System held certain investments which are no longer deemed acceptable to acquire. These positions will be liquidated when the investment managers deem that such liquidation is in the best interest of the System.

The following table presents target investment allocations for 2013, and actual allocations at December 31, 2012 and 2011, by asset category, along with the weighted-average expected long-term rate of return:

	Target Allocation			Percentage of Plan Assets at December 31,
Asset Category	2013			2012			2011			Weighted-average Expected Long-term Rate of Return
Cash equivalents		0 - 20	%		12.8	%		10.6	%		0.38	%
Equity securities		40 - 60	%		45.5	%		47.9	%		3.95	%
Fixed income securities		40 - 60	%		41.7	%		41.5	%		1.90	%
Other financial instruments		0 - 5	%		-			-			-

At December 31, 2012, the portfolio was managed by two investment firms. In addition, approximately $20 million of System monies had not yet been allocated to either investment manager. The portfolio was split with approximately 49% and 43%, respectively, under the control of the two investment managers with the remaining 8% under the direct control of the System.

At December 31, 2012, there was a 12% of portfolio concentration in the State Street Bank & Trust Co. Short Term Investment Fund.

(B) Director's Retirement Income Agreement of the Bank of the Hamptons

On April 11, 1994, the Company acquired Hamptons Bancshares, Inc., which had a director's deferred compensation plan. The liability for this plan was approximately $138 thousand and $124 thousand at December 31, 2012 and 2011, respectively. Expenses of approximately $24 thousand in 2012, $10 thousand in 2011, and $11 thousand in 2010) are included in the consolidated statements of operations. In 2012, the Company paid approximately $10 thousand to participants.

1986 Plan - In 1986, the Board approved a deferred compensation plan. Under this plan, certain employees and Directors of the Company elected to defer compensation aggregating approximately $177 thousand in 1986 in exchange for stated future payments to be made at specified dates. The rate of return on the initial deferral was guaranteed. For purposes of financial reporting, (income) expense of approximately $(13) thousand in 2012, $58 thousand in 2011, and $119 thousand in 2010 were recorded.

During 2012, the Company made payments of approximately $25 thousand to participants of this plan. The Company has purchased life insurance policies on the plan's participants based upon reasonable actuarial benefit and other financial assumptions where the present value of the projected cash flows from the insurance proceeds approximates the present value of the projected cost of the employee benefit. The Company is the named beneficiary on the policies. Subsequent to December 31, 2012, the Company surrendered these policies. Net insurance income (expense) related to the policies aggregated approximately $155 thousand, $156 thousand, and $(7) thousand in 2012, 2011, and 2010, respectively.

1999 Plan - In 1999, the Board approved a non-qualified deferred compensation plan. Under this plan, certain employees and Directors of the Company may elect to defer some or all of their compensation in exchange for a future payment of the compensation deferred, with accrued interest, at retirement. Participants deferred compensation totaling $64 thousand, $100 thousand, and $147 thousand, during 2012, 2011, and 2010, respectively. Payments of $383 thousand, $335 thousand, and $228 thousand were made to participants during 2012, 2011, and 2010, respectively.

(D) Post-Retirement Benefits Other Than Pension

The Plan provides life insurance benefits to employees meeting eligibility requirements. Employees hired after December 31, 1997 are not eligible for retiree life insurance. No other welfare benefits are covered under this plan.

The following table sets forth the post-retirement benefit liability included in other liabilities in the accompanying consolidated statements of condition as of December 31, 2012 and 2011: (in thousands)

	2012			2011
Accumulated benefit obligation	$	(1,549	)	$	(1,613	)
Unrecognized net gain		(581	)		(554	)
Unrecognized prior service cost		(7	)		(8	)
Post-retirement benefit liability	$	(2,137	)	$	(2,175	)

The following table presents the plan's funded status: (in thousands)

	2012			2011
Accrued benefit cost	$	(2,137	)	$	(2,175	)
Unrecognized prior service cost		7			8
Unrecognized net gain		581			554
Underfunded status	$	(1,549	)	$	(1,613	)

Net periodic post-retirement benefit cost (the "net periodic cost") for the years ended December 31, 2012, 2011, and 2010 includes the following components: (in thousands)

	2012			2011			2010
Service cost of benefits earned	$	3		$	3		$	4
Interest cost on liability		67			71			72
Unrecognized gain		(39	)		(67	)		(79	)
Net periodic cost		31			7			(3	)
Other changes in plan assets and benefit obligations recognized in other comprehensive income
Net actuarial gain		(22	)		254			89
Total recognized in other comprehensive income		(22	)		254			89
Total recognized in net periodic pension cost and other comprehensive income	$	9		$	261		$	86

Benefit assumptions are based on sponsor contributions of $0.14 per participant per month per $1 thousand of life insurance.

(E) 401(k) Retirement Plan

The Bank has a 401(k) Retirement Plan and Trust (the "401(k) Plan"). Employees who have attained the age of 21 and have completed one-half year of service or 500 hours have the option to participate. Employees may elect to contribute up to a dollar limit which is set by law. The limit was $17,500 for 2012. The Bank may match up to one-half of the employee's contribution up to a maximum of 6% of the employee's annual gross compensation subject to the aforementioned limit. Employees are fully vested in their own contributions and the Bank's matching contributions are fully vested once the participant has six years of creditable service. The 401(k) Plan was amended in 2012 to reduce the service time required to participate in the 401(k) Plan from one year of service to one-half year of service or 500 hours. Bank contributions under the 401(k) Plan amounted to $110 thousand, $394 thousand, and $406 thousand in 2012, 2011, and 2010, respectively. The Bank funds all amounts when due. At December 31, 2012, contributions to the 401(k) Plan were invested in various bond, equity, money market, or diversified funds as directed by each employee. The 401(k) Plan does not allow for investment in the Company's common stock.