Note 10 — Employee Benefits

(A) Retirement Plan

Suffolk 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 considered a single-employer plan. However, for purposes of investment, the plan contributions are pooled with those of other participants in the system.

The following tables set forth the status of Suffolk Bancorp's combined plan as of December 31, 2011 and December 31, 2010, the time at which the annual valuation of the plan is made. (in thousands)

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


	2011			2010
Benefit obligation at start of year	$	42,570		$	35,250
Service cost		2,179			1,805
Interest cost		2,250			2,039
Actuarial loss		7,671			5,122
Benefits paid		(1,642	)		(1,646	)

Benefit obligation at end of year	$	53,028		$	42,570

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


	2011			2010
Fair value of plan assets at start of year	$	32,830		$	29,305
Actual return on plan assets		13			2,471
Employer contribution		3,700			2,700
Benefits paid		(1,726	)		(1,646	)

Fair value of plan assets at end of year	$	34,817		$	32,830

The following table presents the plan's funded status and amounts recognized in the Consolidated Statements Of Condition: (in thousands)


	2011			2010
Prepaid Pension Cost	$	7,780		$	7,245
Unrecognized Net Loss		(25,996	)		(16,992	)
Unrecognized Prior Service Cost		4			8

Under Funded Status	$	(18,212	)	$	(9,739	)

Amount Included in Other Liabilities	$	(18,212	)	$	(9,739	)

Accumulated Benefit Obligation	$	45,145		$	35,760

In December 2010, Suffolk made an annual minimum contribution of $2,700,000 for the plan year ended September 30, 2011. In December 2011, Suffolk made an annual minimum contribution of $3,700,000 for the plan year ending September 30, 2012. There is no additional minimum required contribution for the plan year ending September 30, 2012. Suffolk expects to contribute to its pension plan in 2012.

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


	Qualified Pension Plan		Post- Retirement Benefits
2012	$	1,770	$	66
2013		1,927		68
2014		2,112		70
2015		2,252		72
2016		2,423		73
2017-2021		14,589		390

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


	2011			2010			2009
Service cost	$	2,179		$	1,805		$	1,683
Interest cost on projected benefit obligations		2,250			2,039			1,884
Expected return on plan assets		(2,238	)		(2,150	)		(1,561	)
Net amortization & deferral		974			724			965

Net periodic pension cost	$	3,165		$	2,418		$	2,971

Other changes in plan assets and benefit obligations recognized in other comprehensive income
Transition adjustment	$	—		$	—		$	—
Net actuarial (gain) loss		5,348			2,419			(1,798	)
Amortization of service cost		—			2			2

Total recognized in other comprehensive (income) loss	$	5,348		$	2,421		$	(1,796	)

Total recognized in net periodic pension cost and other comprehensive loss (income)	$	8,513		$	4,839		$	1,175

Weighted-average discount rate		5.38	%		5.89	%		5.95	%
Rate of increase in future compensation		3.50	%		3.50	%		3.50	%
Expected long-term rate of return on assets		7.00	%		7.50	%		7.50	%

The following table summarizes the net periodic pension cost expected for the year ended December 31, 2012. This expense amount is subject to change if a significant plan-related event should occur before the end of fiscal 2012: (in thousands)


	2012
Service cost	$	2,665
Interest cost on projected benefit obligations		2,218
Expected return on plan assets		(2,362	)
Net amortization & deferral		1,628

Net periodic pension cost	$	4,149

Weighted-average discount rate		4.27	%
Rate of increase in future compensation		3.50	%
Expected long-term rate of return on assets		N/A

Plan Assets

Suffolk's pension plan weighted-average asset allocations at December 31, 2011 and 2010, by asset category are as follows:


	at December 31,
	2011			2010
Asset category
Cash		11	%		11	%
Equity Securities		48			48
Debt Securities		41			41
Other		—			—

Total		100	%		100	%

Fair Value

The following table summarizes the fair value measurements of Suffolk's pension plan assets on a recurring basis as of December 31, 2011: (in thousands)


	Fair Value Measurements Using
Description	Active Markets for Identical Assets Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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 table summarizes the fair value measurements of Suffolk's pension plan assets on a recurring basis as of December 31, 2010: (in thousands)


	Fair Value Measurements Using
Description	Active Markets for Identical Assets Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Investment in securities
Short-term investment funds	$	71	$	3,616	$	—	$	3,687
Equity securities		15,837		—		—		15,837
Fixed income securities
Collateralized mortgage obligations		—		714		—		714
Corporate bonds		—		3,048		—		3,048
Government-issued securities		—		9,544		—		9,544

Total	$	15,908	$	16,922	$	—	$	32,830

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 percent of investments for long-term growth and 3 percent 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 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, short sales, unregistered securities and margin purchases were prohibited.

All other investments not prohibited by the System are permitted. At December 31, 2011, the System holds 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 2012, and actual allocations at December 31, 2011 and 2010, by asset category, along with the weighted-average expected long-term rate of return:


	Target Allocation			Percentage of Plan Assets at December 31,						Weighted- average Expected Long-term Rate of Return
Asset Category	2012			2011			2010			Weighted- average Expected Long-term Rate of Return
Cash equivalents		0 - 20	%		10.60	%		11.20	%		0.39	%
Equity securities		40 - 60	%		47.90	%		48.20	%		4.62	%
Fixed income securities		40 - 60	%		41.50	%		40.60	%		1.85	%
Other financial instruments		0 - 5	%		—			—			—

At December 31, 2011, the portfolio was managed by two investment firms. The portfolio was split with approximately 46 percent and 52 percent under the control of the investment managers with the remaining 2 percent under the direct control of the System.

At December 31, 2011, there was 10 percent 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, Suffolk acquired Hamptons Bancshares, Inc., which had a director's deferred compensation plan. The liability for this plan was approximately $124,000 on December 31, 2011 and 2010. Interest (approximately $10,000 in 2011, $11,000 in 2010, and $13,000 in 2009) is accrued over the term of the plan. In 2011, the Bank paid approximately $10,000 to participants.

(C) Deferred Compensation

1986 Plan — In 1986, the Board approved a deferred compensation plan. Under the plan, certain employees and Directors of Suffolk elected to defer compensation aggregating approximately $177,000 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, interest (approximately $58,000 in 2011, $119,000 in 2010, and $71,000 in 2009) at the plan's contractual rate is being accrued on the deferral amounts over the expected plan term.

During 2011, Suffolk made payments of approximately $58,000 to participants of the plan. Suffolk 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. Suffolk is the named beneficiary on the policies. Net insurance (expense) income related to the policies aggregated approximately $156,000, $(7,000), and $17,000, in 2011, 2010, and 2009, respectively.

1999 Plan—In 1999, the Board approved a non-qualified deferred compensation plan. Under this plan, certain employees and Directors of Suffolk 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 $100,000, $147,000, and $273,000 during 2011, 2010 and 2009, respectively. Payments of $335,000, $228,000 and $244,000 have been made to participants during 2011, 2010 and 2009, 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, 2011 and 2010: (in thousands)


	2011			2010
Accumulated benefit obligation	$	(1,613	)	$	(1,366	)
Unrecognized net gain		(554	)		(859	)
Unrecognized past service cost		(8	)		(8	)
Unrecognized transition obligation		0			1

Post-retirement benefit liability	$	(2,175	)	$	(2,232	)

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


	2011			2010
Accrued Benefit Cost	$	(2,175	)	$	(2,232	)
Unrecognized Prior Service Cost		8			7
Unrecognized Net Gain		554			859

Underfunded Status	$	(1,613	)	$	(1,366	)

Net periodic post-retirement benefit cost (the "net periodic cost") for the years ended December 31, 2011, 2010, and 2009 includes the following components: (in thousands)


	2011			2010			2009
Service cost of benefits earned	$	3		$	4		$	5
Interest cost on liability		71			72			69
Unrecognized gain		(67	)		(79	)		(89	)

Net periodic cost	$	7		$	(3	)	$	(15	)

Other changes in plan assets and benefit obligations recognized in other comprehensive income
Net actuarial gain		254			89			(621	)
Amortization of net actuarial loss		—			—			—

Total recognized in other comprehensive income	$	254		$	89		$	(621	)

Total recognized in net periodic pension cost and other comprehensive income	$	261		$	86		$	(636	)

Benefit assumptions are based on sponsor contributions of $0.15 per participant per month per $1,000 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 year of service have the option to participate. Employees may elect to contribute up to a dollar limit which is set by law. The limit was $16,500 for 2011. The Bank may match up to one-half of the employee's contribution up to a maximum of 6 percent 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. Bank contributions under the 401(k) Plan amounted to $394,000, $406,000, and $396,000 in 2011, 2010, and 2009, respectively. The Bank funds all amounts when due. At December 31, 2011, 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 Suffolk's common stock.