BENEFIT PLANS (Note 12)

Pension Plan

The Bank has a non-contributory defined benefit plan (“qualified plan”) covering most of its employees. Effective July 1, 2011, the Bank closed the qualified plan to new employees hired on or after such date. The Plan will continue to operate and accrue normal benefits for existing participants. In conjunction with the eligibility change for the qualified plan, the Bank amended its 401(k) plan to increase the Bank’s matching percentage of employee contributions for non-pension participants, within certain statutory limits.

The qualified plan benefits are based upon years of credited service and the employee’s highest average compensation as defined. It is the Bank’s funding policy to contribute annually an amount that can be deducted for federal income tax purposes. Additionally, the Bank has a supplemental non-qualified, non-funded retirement plan (“non-qualified plan”) which is designed to supplement the pension plan for key officers.

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, 2012 and 2011:


	2012			2011
	(in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	133,796		$	108,146
Service cost		7,253			5,951
Interest cost		6,429			6,147
Plan amendments		556			338
Actuarial loss		14,040			16,678
Benefits paid		(3,510	)		(3,464	)

Projected benefit obligation at end of year	$	158,564		$	133,796

Change in fair value of plan assets:
Fair value of plan assets at beginning of year	$	95,746		$	83,937
Actual return on plan assets		11,516			2,168
Employer contributions		35,105			13,105
Benefits paid		(3,510	)		(3,464	)

Fair value of plan assets at end of year*	$	138,857		$	95,746

Funded status of the plan	$	(19,707	)	$	(38,050	)

Liability recognized	$	(19,707	)	$	(38,050	)
Accumulated benefit obligation	$	141,889		$	120,564

*	Includes accrued interest receivable of $526 thousand and $309 thousand as of December 31, 2012 and 2011, 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 $3.0 million of the net actuarial loss and $806 thousand of prior service cost reported in the following table as of December 31, 2012 as a component of net periodic pension expense during 2013.


	2012			2011
	(in thousands)
Net actuarial loss	$	54,571		$	45,487
Prior service cost		1,720			1,982
Deferred tax benefit		(23,617	)		(19,903	)

Total	$	32,674		$	27,566

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


	2012		2011
	(in thousands)
Projected benefit obligation	$	15,010	$	12,731
Accumulated benefit obligation		14,365		12,337
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, 2012 and 2011 were as follows:


	2012			2011
Discount rate		4.26	%		4.87	%
Future compensation increase rate		2.75			2.75

The net periodic pension expense for the qualified and non-qualified plans included the following components for the years ended December 31, 2012, 2011, and 2010:


	2012			2011			2010
	(in thousands)
Service cost	$	7,253		$	5,951		$	5,544
Interest cost		6,429			6,147			5,709
Expected return on plan assets		(8,937	)		(6,698	)		(6,214	)
Amortization of prior service cost		818			707			643
Amortization of net loss		2,377			1,525			1,098

Total net periodic pension expense	$	7,940		$	7,632		$	6,780

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, 2012 and 2011 were as follows:


	2012			2011
	(in thousands)
Net loss	$	11,461		$	21,208
Prior service cost		556			338
Amortization of prior service cost		(818	)		(707	)
Amortization of actuarial loss		(2,377	)		(1,525	)

Total recognized in other comprehensive income	$	8,822		$	19,314

Total recognized in net periodic pension expense and other comprehensive income (before tax)	$	16,762		$	26,946

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)
2013	$	5,581
2014		6,158
2015		6,493
2016		6,805
2017		7,096
2018 to 2022		43,135

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, 2012, 2011, and 2010 were as follows:


	2012			2011			2010
Discount rate		4.87	%		5.75	%		6.00	%
Expected long-term return on plan assets		7.50			8.00			8.00
Rate of compensation increase		2.75			3.25			3.50

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. The expected return was reduced to 7.5 percent on January 1, 2012 due to the prolonged economic recovery and expectations regarding the level of future market rates.

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-year 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.

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 plan assets are a conservative mix of various types of domestic and foreign common equity securities, U.S. Treasury securities, high quality corporate bonds, mutual funds primarily indexed to the performance of Fortune 500 U.S. companies, cash and U.S. Treasury based money market funds, U.S. government agency securities, and trust preferred securities (mainly issued by VNB Capital Trust I – see Note 11).

The qualified plan’s exposure 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.

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:
						Quoted Prices		Significant		Significant
						in Active Markets		Other		Unobservable
	% of Total			December 31,		for Identical		Observable Inputs		Inputs
	Investments			2012		Assets (Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Investments:
Equity securities		49	%	$	67,653	$	67,653	$	—	$	—
U.S. Treasury securities		10			13,249		13,249		—		—
Corporate bonds		20			28,153		—		28,153		—
Mutual funds		10			13,545		13,545		—		—
Cash and money market funds		9			12,355		12,355		—		—
U.S. government agency securities		1			1,615		—		1,615		—
Trust preferred securities		1			1,761		1,761		—		—

Total investments		100	%	$	138,331	$	108,563	$	29,768	$	—


						Fair Value Measurements at Reporting Date Using:
						Quoted Prices		Significant		Significant
						in Active Markets		Other		Unobservable
	% of Total			December 31,		for Identical		Observable Inputs		Inputs
	Investments			2011		Assets (Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Investments:
Equity securities		49	%	$	46,446	$	46,446	$	—	$	—
U.S. Treasury securities		17			16,418		16,418		—		—
Corporate bonds		12			11,743		—		11,743		—
Mutual funds		11			10,360		10,360		—		—
Cash and money market funds		7			6,354		6,354		—		—
U.S. government agency securities		2			2,421		—		2,421		—
Trust preferred securities		2			1,695		1,695		—		—

Total investments		100	%	$	95,437	$	81,273	$	14,164	$	—

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.

The qualified plan held 58,631 shares and 62,752 shares of VNB Capital Trust I preferred securities at December 31, 2012 and 2011, respectively. These shares had fair values of approximately $1.5 million and $1.6 million at December 31, 2012 and 2011, respectively. Dividends received on Valley trust preferred shares were $114 thousand and $122 thousand for the years ended December 31, 2012 and 2011, respectively.

Based upon actuarial estimates, Valley does not expect to make any contributions to the qualified plan during 2013.

Director Plans

Valley maintains a non-qualified, non-funded directors’ retirement plan. The projected benefit obligation and discount rate used to compute the obligation were $2.5 million and 4.26 percent, respectively, at December 31, 2012, and $1.9 million and 4.87 percent, respectively, at December 31, 2011.

As of December 31, 2012 and 2011, the entire obligation was included in other liabilities and $855 thousand (net of a $460 thousand tax benefit) and $468 thousand (net of a $252 thousand tax benefit), respectively, were recorded in accumulated other comprehensive loss. Net periodic pension expense of $251 thousand, $232 thousand and $228 thousand was recognized for the directors’ retirement plan in the years ended December 31, 2012, 2011 and 2010, respectively.

Valley also maintains 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, 2012 and 2011, the remaining obligations under these plans were $5.8 million and $6.6 million, respectively, of which $3.3 million and $4.0 million, respectively, were funded by Valley. As of December 31, 2012 and 2011, the entire obligations were included in other liabilities and $1.4 million (net of a $1.0 million tax benefit) and $1.5 million (net of a $1.1 million tax benefit), respectively, were recorded in accumulated other comprehensive loss. The $1.4 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 $7.4 million, $4.0 million and $6.6 million during 2012, 2011 and 2010, 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 $2.7 million, $2.0 million and $1.9 million in expense for contributions to the plan for the years ended December 31, 2012, 2011, and 2010, respectively.

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, Valley may award shares to its employees for up to 7.4 million shares of common stock in the form of incentive stock options, non-qualified stock options, stock appreciation rights and restricted stock awards. 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. An incentive stock option’s maximum term to exercise is ten years from the date of grant and is subject to a vesting schedule.

Valley recorded stock-based compensation expense for incentive stock options and restricted stock awards of $4.7 million, $3.3 million and $4.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. The stock-based compensation expense for 2012 and 2010 included $2.5 million and $1.3 million, respectively, related to stock awards granted to retirement eligible employees and was immediately recognized. There were no stock awards granted to retirement eligible employees during the year ended December 31, 2011. The fair values of all other stock awards are expensed over the shorter of the vesting or required service period. As of December 31, 2012, the unrecognized amortization expense for all stock-based compensation totaled approximately $11.2 million and will be recognized over an average remaining vesting period of approximately 5 years.

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.

Stock-based employee compensation cost under the fair value method was measured using the following weighted-average assumptions for stock options granted in 2010 (there were no stock options granted in 2012 and 2011): Risk-free interest rate of 0.29% to 2.92%; dividend yield of 5.5%; volatility of 35.0%; and expected term of 4.4 years.

Summary of stock options activity under the Employee Stock Incentive Plan as of December 31, 2012, 2011 and 2010 and changes during the years ended on those dates is presented below:


	2012				2011				2010
				Weighted				Weighted				Weighted
				Average				Average				Average
				Exercise				Exercise				Exercise
Stock Options	Shares			Price	Shares			Price	Shares			Price
Outstanding at beginning of year		3,000,406		$17		3,511,173		$18		3,661,258		$17
Granted		—		—		—		—		141,942		11
Exercised		—		—		—		—		(26,070	)	11
Forfeited or expired		(495,796	)	16		(510,767	)	14		(265,957	)	14

Outstanding at end of year		2,504,610		17		3,000,406		18		3,511,173		17

Exercisable at year-end		2,435,051		18		2,737,814		18		3,002,736		17

Weighted-average fair value of options granted during the year		N/A				N/A			$	2.03

On January 1, 2012, Valley assumed 356 thousand shares of outstanding and vested incentive stock options under State Bancorp’s long-term stock incentive plans, of which 321 thousand shares were outstanding and exercisable as of December 31, 2012. These outstanding stock options have an aggregate weighted average exercise price of $17 and weighted average remaining term of 2.6 years. There were approximately one thousand shares exercised during the year ended December 31, 2012.

The total intrinsic values of options exercised during the periods presented were immaterial. As of December 31, 2012, there was $31 thousand of total unrecognized compensation cost related to non-vested stock options to be amortized over an average remaining vesting period of less than one year. Cash received from stock options exercised during the years ended December 31, 2012 and 2010 was immaterial. Treasury shares were issued for stock options exercised.

The following table summarizes information about stock options outstanding at December 31, 2012:


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options Outstanding		Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price	Number of Options Exercisable		Weighted Average Exercise Price
$10-14		193,364	6.1	$12		136,741	$12
14-15		472,094	5.2	15		425,457	15
15-17		195,991	3.6	17		195,261	17
17-18		511,651	2.9	18		511,604	18
18-21		1,486,981	2.2	19		1,486,944	19

		2,860,081	3.2	17		2,756,007	18

The aggregate intrinsic value of options outstanding and exercisable was immaterial at December 31, 2012.

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, 2012, 2011 and 2010:


	Restricted Stock Awards Outstanding
	2012			2011			2010
Outstanding at beginning of year		316,488			537,653			555,361
Granted		1,423,152			14,866			217,021
Vested		(192,870	)		(232,274	)		(230,756	)
Forfeited		(54,710	)		(3,757	)		(3,973	)

Outstanding at end of year		1,492,060			316,488			537,653

The amount of compensation costs related to restricted stock awards included in salary expense amounted to $4.6 million, $2.9 million and $3.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. As of December 31, 2012, there was $11.0 million of total unrecognized compensation cost related to non-vested restricted shares to be amortized over the weighted average remaining vesting period of approximately 4.9 years.

The Director Restricted Stock Plan provides the non-employee members of the Board of Directors with the opportunity to forego some or their entire annual cash retainer and meeting fees in exchange for shares of Valley restricted stock.

The following table sets forth the changes in director’s restricted stock awards outstanding for the years ended December 31, 2012, 2011 and 2010:


	Restricted Stock Awards Outstanding
	2012			2011			2010
Outstanding at beginning of year		106,544			104,646			119,443
Granted		28,902			24,607			18,392
Vested		(18,299	)		(22,287	)		(33,188	)
Forfeited		—			(422	)		—

Outstanding at end of year		117,147			106,544			104,646