BENEFIT PLANS (Note 12)

Pension Plan

The Bank has a non-contributory defined benefit plan (qualified plan) covering most of its employees. The qualified plan benefits are based upon years of credited service and the employee’s highest average compensation as defined. Additionally, the Bank has a supplemental non-qualified, non-funded retirement plan, which is designed to supplement the pension plan for key officers, and Valley has a non-qualified, non-funded directors’ retirement plan (both of these plans are referred to as the “non-qualified plans” below).

On June 19, 2013, the Board of Directors approved amendments to freeze the benefits earned under the qualified and non-qualified plans effective December 31, 2013. As a result, participants in each plan will not accrue further benefits and their pension benefits will be determined based on the compensation and service as of December 31, 2013. Plan benefits will not increase for any compensation or service earned after such date. However, participants’ benefits will continue to vest as long as they work for Valley.

As a result of these actions, Valley re-measured the projected benefit obligation of the affected plans and the funded status of each plan at June 30, 2013. The freeze and re-measurement decreased the projected benefit obligations by $22.9 million and decreased accumulated other comprehensive loss, net of tax, by $19.9 million during the six months ended June 30, 2013. The decrease in the plan obligations was mainly due to an increase in the discount rate from December 31, 2012 and the curtailment of plan benefits. At June 30, 2013, Valley used a discount rate of 4.87 percent for the re-measurement of the pension benefit obligation as compared to 4.26 percent at December 31, 2012. The discount rate is based on our consistent methodology of determining our discount rate based on an established yield curve that incorporates a broad group of Aa3 or higher rated bonds with durations equal to the expected benefit payment streams required by each plan. The assumption for the expected rate of return on plan assets was 7.50 percent at June 30, 2013 and remained unchanged from December 31, 2012. Additionally, a curtailment loss totaling $750 thousand was recognized as a component of net periodic pension expense during the second quarter of 2013 due to the re-measurement and freeze of the plans.

The following table sets forth the change in the projected benefit obligation, the change in fair value of plan assets and the funded status and amounts recognized in Valley’s consolidated financial statements for the qualified and non-qualified plans at December 31, 2014 and 2013:



	2014			2013
	(in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	145,034		$	161,065
Service cost	—			7,104
Interest cost	6,897			6,645
Plan amendments	—			119
Actuarial loss (gain)	28,749			(13,003		)
Curtailments	—			(12,981		)
Benefits paid	(4,341		)	(3,915		)
Projected benefit obligation at end of year	$	176,339		$	145,034
Change in fair value of plan assets:
Fair value of plan assets at beginning of year	$	184,910		$	138,857
Actual return on plan assets	13,813			24,723
Employer contributions	264			25,245
Benefits paid	(4,341		)	(3,915		)
Fair value of plan assets at end of year*	$	194,646		$	184,910

Funded status of the plan	$	18,307		$	39,876
Asset recognized	18,307			39,876
Accumulated benefit obligation	176,339			145,034

* Includes accrued interest receivable of $652 thousand and $704 thousand as of December 31, 2014 and 2013, respectively.

Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not been recognized as a component of the net periodic pension expense for Valley’s qualified and non-qualified plans are presented in the following table. Valley expects to recognize approximately $821 thousand of the net actuarial loss reported in the following table as of December 31, 2014 as a component of net periodic pension expense during 2015.



	2014			2013
	(in thousands)
Net actuarial loss	$	43,091		$	15,415
Deferred tax benefit	(18,031		)	(6,430		)
Total	$	25,060		$	8,985

The non-qualified plans had a projected benefit obligation, accumulated benefit obligation, and fair value of plan assets as follows:



	2014		2013
	(in thousands)
Projected benefit obligation	$	18,118	$	15,390
Accumulated benefit obligation	18,118		15,390
Fair value of plan assets	—		—

In determining discount rate assumptions, management looks to current rates on fixed-income corporate debt securities that receive a rating of Aa3 or higher from Moody’s with durations equal to the expected benefit payments streams required of each plan. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of benefit obligations for the qualified and non-qualified plans as of December 31, 2014 and 2013 were as follows:



	2014		2013
Discount rate	4.02	%	4.89	%
Future compensation increase rate	—		2.75

The net periodic pension expense for the qualified and non-qualified plans included the following components for the years ended December 31, 2014, 2013, and 2012:



	2014			2013			2012
	(in thousands)
Service cost	$	—		$	7,104		$	7,338
Interest cost	6,897			6,645			6,516
Expected return on plan assets	(12,967		)	(12,015		)	(8,937		)
Amortization of prior service cost	—			898			873
Amortization of net loss	226			1,970			2,401
Recognized loss due to curtailment	—			750			—
Total net periodic pension expense	$	(5,844	)	$	5,352		$	8,191

Other changes in the qualified and non-qualified plan assets and benefit obligations recognized in other comprehensive income or loss for the years ended December 31, 2014 and 2013 were as follows:



	2014			2013
	(in thousands)
Net loss (gain)	$	27,902		$	(37,955	)
Prior service cost	—			119
Recognized prior service cost	—			(2,386		)
Amortization of actuarial loss	(226		)	(1,970		)
Total recognized in other comprehensive income	$	27,676		$	(42,192	)
Total recognized in net periodic pension expense and other comprehensive income (before tax)	$	21,833		$	(36,840	)

The benefit payments, which reflect expected future service, as appropriate, expected to be paid in future years are presented in the following table:



Year	Amount
	(in thousands)
2015	$	7,116
2016	7,337
2017	7,532
2018	7,792
2019	8,160
2020 to 2024	45,680

The weighted average discount rate, expected long-term rate of return on assets and rate of compensation increase used in determining Valley’s pension expense for the years ended December 31, 2014, 2013 and 2012 were as follows:



	2014		2013		2012
Discount rate*	4.89	%	4.26/4.87%		4.87	%
Expected long-term return on plan assets	7.50	%	7.50	%	7.50	%
Rate of compensation increase	N/A		2.75	%	2.75	%


*	The discount rate for 2013 increased from 4.26 percent to 4.87 percent due to the plans’ freeze and remeasurement at June 30, 2013.

The expected rate of return on plan assets assumption is based on the concept that it is a long-term assumption independent of the current economic environment and changes would be made in the expected return only when long-term inflation expectations change, asset allocations change or when asset class returns are expected to change for the long-term.

In accordance with Section 402 (c) of ERISA, the qualified plan’s investment managers are granted full discretion to buy, sell, invest and reinvest the portions of the portfolio assigned to them consistent with the Bank’s Pension Committee’s policy and guidelines. The target asset allocation set for the qualified plan are equity securities ranging from 25 percent to 65 percent and fixed income securities ranging from 35 percent to 75 percent. The absolute investment objective for the equity portion is to earn at least 7 percent cumulative annual real return, after adjustment by the Consumer Price Index (CPI), over rolling five- periods, while the relative objective is to earn returns above the S&P 500 Index over rolling three-year periods. For the fixed income portion, the absolute objective is to earn at least a 3 percent cumulative annual real return, after adjustment by the CPI over rolling five-year periods with a relative objective of earning returns above the Merrill Lynch Intermediate Government/Corporate Index over rolling three-year periods. Cash equivalents will be invested in money market funds or in other high quality instruments approved by the Trustees of the qualified plan.

The exposure of the plan assets of the qualified plan to a concentration of credit risk is limited by the Bank’s Pension Committee’s diversification of the investments into various investment options with multiple asset managers. The Pension Committee engages an investment management advisory firm that regularly monitors the performance of the asset managers and ensures they are within compliance of the policies adopted by the Trustees. If the risk profile and overall return of assets managed are not in line with the risk objectives or expected return benchmarks for the qualified plan, the advisory firm may recommend the termination of an asset manager to the Pension Committee.

In general, the plan assets of the qualified plan are investment securities that are well-diversified in terms of industry, capitalization and asset class. The following table presents the qualified plan weighted-average asset allocations by asset category that are measured at fair value on a recurring basis by level within the fair value hierarchy under ASC Topic 820. Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 3 for further details regarding the fair value hierarchy.



					Fair Value Measurements at Reporting Date Using:
	% of Total Investments		December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Investments:
Equity securities	41	%	$	80,174	$	80,174	$	—	$	—
Corporate bonds	22		42,750		—		42,750		—
Mutual funds	18		35,709		35,709		—		—
U.S. Treasury securities	11		21,604		21,604		—		—
Cash and money market funds	7		12,895		12,895		—		—
U.S. government agency securities	1		862		—		862		—
Total investments	100	%	$	193,994	$	150,382	$	43,612	$	—



					Fair Value Measurements at Reporting Date Using:
	% of Total Investments		December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Investments:
Equity securities	42	%	$	77,565	$	77,565	$	—	$	—
Corporate bonds	23		41,863		—		41,863		—
Mutual funds	18		33,690		33,690		—		—
U.S. Treasury securities	10		19,057		19,057		—		—
Cash and money market funds	5		9,939		9,939		—		—
U.S. government agency securities	1		1,896		—		1,896		—
Trust preferred securities	1		196		196		—		—
Total investments	100	%	$	184,206	$	140,447	$	43,759	$	—

Equity securities, U.S. Treasury securities, cash and money market funds, and trust preferred securities are valued at fair value in the table above utilizing exchange quoted prices in active markets for identical instruments (Level 1 inputs). Mutual funds are measured at their respective net asset values, which represents fair values of the securities held in the funds based on exchange quoted prices available in active markets (Level 1 inputs).

Corporate bonds and U.S. government agency securities are reported at fair value utilizing Level 2 inputs. The prices for these investments are derived from market quotations and matrix pricing obtained through an independent pricing service. Such fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Based upon actuarial estimates, Valley does not expect to make any contributions to the qualified plan. Funding requirements for subsequent years are uncertain and will significantly depend on whether the plan’s actuary changes any assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes, Valley may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.

Other Non-Qualified Plans

Valley maintains other non-qualified plans for former directors of banks acquired, as well as a non-qualified plan for former senior management of Merchants Bank of New York acquired in January of 2001. Valley did not merge these plans into its existing non-qualified plans. Collectively, at December 31, 2014 and 2013, the remaining obligations under these plans were $4.1 million and $5.0 million, respectively, of which $2.1 million and $2.7 million, respectively, were funded by Valley. As of December 31, 2014 and 2013, the entire obligations were included in other liabilities and $1.2 million (net of an $882 thousand tax benefit) and $1.3 million (net of a $965 thousand tax benefit), respectively, were recorded in accumulated other comprehensive loss. The $1.2 million in accumulated other comprehensive loss will be reclassified to expense on a straight-line basis over the remaining benefit periods of these non-qualified plans.

Bonus Plan

Valley National Bank and its subsidiaries may award cash incentive and merit bonuses to its officers and employees based upon a percentage of the covered employees’ compensation as determined by the achievement of certain performance objectives. Amounts charged to salary expense were $6.8 million, $6.0 million, and $7.4 million during 2014, 2013 and 2012, respectively.

Savings and Investment Plan

Valley National Bank maintains a KSOP defined as a 401(k) plan with an employee stock ownership feature. This plan covers eligible employees of the Bank and its subsidiaries and allows employees to contribute a percentage of their salary, with the Bank matching a certain percentage of the employee contribution in cash and invested in accordance with each participant’s investment elections. The Bank recorded $6.0 million, $2.6 million, and $2.7 million in expense for contributions to the plan for the years ended December 31, 2014, 2013, and 2012, respectively.

Effective January 1, 2014, Valley increased the benefits under the Bank’s 401(k) plan in an effort to offset a portion of the employee benefits no longer accruing under the qualified pension plan after December 31, 2013. At such date, Valley’s contributions will be increased to a dollar-for-dollar matching contribution of up to six percent of eligible compensation contributed by an employee each pay period.

Stock-Based Compensation

Valley currently has one active employee stock option plan, the 2009 Long-Term Stock Incentive Plan (the “Employee Stock Incentive Plan”), adopted by Valley’s Board of Directors on November 17, 2008 and approved by its shareholders on April 14, 2009. The Employee Stock Incentive Plan is administered by the Compensation and Human Resources Committee (the “Committee”) appointed by Valley’s Board of Directors. The Committee can grant awards to officers and key employees of Valley. The purpose of the Employee Stock Incentive Plan is to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.

Under the Employee Stock Incentive Plan, as amended, Valley may award shares to its employees for up to 7.4 million shares of common stock in the form of stock appreciation rights, incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units. As of December 31, 2014, 3.5 million shares of common stock were available for issuance under the Employee Stock Incentive Plan. The essential features of each award are described in the award agreement relating to that award. The grant, exercise, vesting, settlement or payment of an award may be based upon the fair value of Valley’s common stock on the last sale price reported for Valley’s common stock on such date or the last sale price reported preceding such date, except for performance-based restricted stock awards with a market condition. The grant date fair value of performance-based restricted stock that vests based on a market condition is determined by a third party specialist using a Monte Carlo valuation model. The maximum term to exercise an incentive stock option is ten years from the date of grant and is subject to a vesting schedule.

Valley recorded stock-based compensation expense for restricted stock awards and incentive stock options of $7.5 million, $6.0 million and $4.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. The stock-based compensation expense for 2014, 2013 and 2012 included $3.9 million, $2.7 million and $2.5 million, respectively, related to stock awards granted to retirement eligible employees and was immediately recognized. The fair values of all other stock awards are expensed over the shorter of the vesting or required service period. As of December 31, 2014, the unrecognized amortization expense for all stock-based compensation totaled approximately $15.2 million and will be recognized over an average remaining vesting period of approximately 5 years.

Restricted Stock. Restricted stock is awarded to key employees providing for the immediate award of our common stock subject to certain vesting and restrictions under the Employee Stock Incentive Plan. Compensation expense is measured based on the grant-date fair value of the shares.

The following table sets forth the changes in restricted stock awards outstanding for the years ended December 31, 2014, 2013 and 2012:



	Restricted Stock Awards Outstanding
	2014		2013		2012
Outstanding at beginning of year	1,709,312		1,492,060		316,488
Granted	1,488,960		479,541		1,423,152
Vested	(524,663	)	(217,305	)	(192,870	)
Forfeited	(98,993	)	(44,984	)	(54,710	)
Outstanding at end of year	2,574,616		1,709,312		1,492,060

The amount of compensation costs related to restricted stock awards included in salary expense amounted to $7.5 million, $6.0 million and $4.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Included in the $1.5 million restricted shares granted (in the table above) during 2014, 240 thousand shares were performance-based awards made to certain executive officers and 1.3 million shares were time-based awards to both executive officers and key employees of Valley. The performance-based awards vest based on (i) growth in tangible book value per share plus dividends (75 percent of performance shares) and (ii) total shareholder return as compared to our peer group 25 percent of performance shares). A portion of the performance-based awards vest after three years based on the cumulative performance of Valley during that time period with an opportunity for earlier vesting of a portion of the shares based on growth in tangible book value performance as specified in the agreement. The restrictions on nonperformance based awards will continue to lapse at the rate of one-third of the total award per year commencing with the first anniversary of the date of grant. The average grant date fair value of non-performance and performance-based restricted stock awarded during the year ended December 31, 2014 was $9.86 and $9.10 per share, respectively.

The Director Restricted Stock Plan provides the non-employee members of the Board of Directors with the opportunity to forgo some or their entire annual cash retainer and meeting fees in exchange for shares of Valley restricted stock. On January 29, 2014, the Director Restricted Stock Plan was amended to provide that no additional fees may be exchanged for Valley’s restricted stock effective April 1, 2014. The Director Restricted Stock Plan will terminate after the restricted stock remaining under the plan as of April 1, 2014 vests and is delivered, or is forfeited pursuant to such plan.

The following table sets forth the changes in director’s restricted stock awards outstanding for the years ended December 31, 2014, 2013 and 2012:



	Restricted Stock Awards Outstanding
	2014		2013		2012
Outstanding at beginning of year	121,792		117,147		106,544
Granted	—		26,828		28,902
Vested	(23,706	)	(21,963	)	(18,299	)
Forfeited	—		(220	)	—
Outstanding at end of year	98,086		121,792		117,147

Stock Options. The fair value of each option granted on the date of grant is estimated using a binomial option pricing model. The fair values are estimated using assumptions for dividend yield based on the annual dividend rate; stock volatility, based on Valley’s historical and implied stock price volatility; risk free interest rates, based on the U.S. Treasury constant maturity bonds, in effect on the actual grant dates, with a remaining term approximating the expected term of the options; and expected exercise term calculated based on Valley’s historical exercise experience. There were no stock options granted in 2014, 2013 and 2012.

Summary of stock options activity as of December 31, 2014, 2013 and 2012 and changes during the years ended on those dates is presented below:



	2014				2013				2012
			Weighted Average Exercise				Weighted Average Exercise				Weighted Average Exercise
Stock Options	Shares		Price		Shares		Price		Shares		Price
Outstanding at beginning of year	2,322,593		$	17	2,860,081		$	17	3,000,406		$	17
Assumed in acquisition*	—		—		—		—		356,490		17
Exercised	—		—		—		—		(1,019	)	12
Forfeited or expired	(494,002	)	19		(537,488	)	19		(495,796	)	16
Outstanding at end of year	1,828,591		17		2,322,593		17		2,860,081		17
Exercisable at year-end	1,828,591		17		2,320,696		17		2,756,007		18

* Stock options acquired in connection with the State Bancorp acquisition.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2014:



Options Outstanding and Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price
$10-14	148,527	5.8	$	12
14-15	459,267	3.2	15
15-17	180,734	1.9	17
17-18	495,785	0.9	18
18-21	544,278	1.7	19
	1,828,591	2.2	17

The aggregate intrinsic value of options outstanding and exercisable was immaterial at December 31, 2014.