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).

Effective December 31, 2013 the benefits earned under the qualified and non-qualified were frozen. As a result, Valley re-measured the projected benefit obligation of the affected plans and the funded status of each plan at June 30, 2013. Consequently, 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.

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, 2016 and 2015:



	2016			2015
	(in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	157,661		$	176,339
Interest cost	6,681			6,889
Actuarial loss (gain)	2,047			(17,177		)
Benefits paid	(5,546		)	(8,390		)
Projected benefit obligation at end of year	$	161,306		$	157,661
Change in fair value of plan assets:
Fair value of plan assets at beginning of year	$	189,414		$	194,646
Actual return on plan assets	22,424			2,875
Employer contributions	347			283
Benefits paid	(5,546		)	(8,390		)
Fair value of plan assets at end of year*	$	206,639		$	189,414

Funded status of the plan
Asset recognized	$	45,333		$	31,753
Accumulated benefit obligation	161,306			157,661

* Includes accrued interest receivable of $606 thousand and $607 thousand as of December 31, 2016 and 2015, 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 $367 thousand of the net actuarial loss reported in the following table as of December 31, 2016 as a component of net periodic pension expense during 2017.



	2016			2015
	(in thousands)
Net actuarial loss	$	30,140		$	36,271
Deferred tax benefit	(12,647		)	(15,118		)
Total	$	17,493		$	21,153

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



	2016		2015
	(in thousands)
Projected benefit obligation	$	18,286	$	17,411
Accumulated benefit obligation	18,286		17,411
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 AA or higher from either Moody’s or S&P with durations equal to the expected benefit payments streams required of each plan. The weighted average discount rate used in determining the actuarial present value of benefit obligations for the qualified and non-qualified plans were 4.11 percent and 4.33 percent as of December 31, 2016 and 2015, respectively.

The net periodic pension income for the qualified and non-qualified plans included the following components for the years ended December 31, 2016, 2015 and 2014:



	2016			2015			2014
	(in thousands)
Interest cost	$	6,681		$	6,889		$	6,897
Expected return on plan assets	(14,539		)	(14,023		)	(12,967		)
Amortization of net loss	294			790			226
Total net periodic pension income	$	(7,564	)	$	(6,344	)	$	(5,844	)

At the end of 2016, Valley changed the method utilized to estimate the interest cost component of net periodic pension costs for our qualified and non-qualified plans. Historically, Valley estimated the interest cost component (and the service cost component when it was applicable) using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Valley will elect to use a spot rate approach for the plans in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows, as Valley believes this provides a better estimate of service and interest costs. Valley considers this a change in estimate and, accordingly, will account for it prospectively starting in 2017. This change does not affect the measurement of the total benefit obligation. For 2017, the change in estimate is expected to increase net periodic pension income by approximately $765 thousand when compared to the prior approach.

Other changes in the qualified and non-qualified plan assets and benefit obligations recognized in other comprehensive income/loss for the years ended December 31, 2016 and 2015 were as follows:



	2016			2015
	(in thousands)
Net gain	$	(5,837	)	$	(6,030	)
Prior service cost	462			—
Amortization of actuarial loss	(294		)	(790		)
Total recognized in other comprehensive income	$	(5,669	)	$	(6,820	)
Total recognized in net periodic pension income and other comprehensive income/loss (before tax)	$	(13,233	)	$	(13,163	)

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)
2017	$	6,847
2018	7,206
2019	7,744
2020	8,081
2021	8,423
Thereafter	45,462

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, 2016, 2015 and 2014 were as follows:



	2016		2015		2014
Discount rate	4.33	%	4.02	%	4.89	%
Expected long-term return on plan assets	7.50	%	7.50	%	7.50	%
Rate of compensation increase	N/A		N/A		N/A

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 annualized 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.

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, 2016		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	43	%	$	88,250	$	88,250	$	—	$	—
Corporate bonds	21		43,152		—		43,152		—
Mutual funds	19		38,975		38,975		—		—
U.S. Treasury securities	12		24,910		24,910		—		—
Cash and money market funds	5		10,402		10,402		—		—
U.S. government agency securities	*		344		—		344		—
Total investments	100	%	$	206,033	$	162,537	$	43,496	$	—



					Fair Value Measurements at Reporting Date Using:
	% of Total Investments		December 31, 2015		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	%	$	76,578	$	76,578	$	—	$	—
Corporate bonds	22		41,786		—		41,786		—
Mutual funds	19		36,052		36,052		—		—
U.S. Treasury securities	12		22,130		2,213		—		—
Cash and money market funds	6		11,913		11,913		—		—
U.S. government agency securities	*		348		—		348		—
Total investments	100	%	$	188,807	$	126,756	$	42,134	$	—



*	Represents less than one percent of total investments.

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

Equity securities, U.S. Treasury securities and cash and money market funds 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, 2016 and 2015, the remaining obligations under these plans were $3.3 million and $3.4 million, respectively, of which $1.5 million and $1.6 million, respectively, were funded by Valley. As of December 31, 2016 and 2015, the entire obligations were included in other liabilities and $867 thousand (net of a $614 thousand tax benefit) and $1.0 million (net of a $748 thousand tax benefit), respectively, were recorded in accumulated other comprehensive loss. The $1.5 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 $10.5 million, $9.0 million and $6.8 million during 2016, 2015 and 2014, respectively.

Savings and Investment Plan

Valley National Bank maintains a KSOP, which is 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 $6.7 million, $7.1 million and $6.0 million in expense for contributions to the plan for the years ended December 31, 2016, 2015 and 2014, respectively.

Effective January 1, 2016, Valley amended the benefits under the Bank’s 401(k) plan. Under the amendment, Valley’s matching contribution increased to a 100 percent of the first 4 percent of compensation contributed by an employee each pay period, and 50 percent of the next 2 percent of compensation contributed, for a maximum matching contribution of 5 percent with an annual limit of $13,250 in 2016. During 2015 and 2014, Valley's matching contribution was dollar-for-dollar up to 6 percent of compensation contributed by an employee each pay period.

Stock-Based Compensation

Valley currently has one active employee stock option plan, the 2016 Long-Term Stock Incentive Plan (the “2016 Stock Plan”), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016. The 2016 Stock Plan provides for certain increases and decreases in the number of shares available for grant under Valley's 2009 Long-Term Stock Incentive Plan (the "2009 Stock Plan"). Effective January 1, 2016, the 2.2 million of common shares remaining under the 2009 Stock Plan became available for future grants under the 2016 Stock Plan. Accordingly, Valley will no longer grant new awards under the 2009 Stock Plan.

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 2016 Stock Plan, Valley may award shares of common stock to its employees and non-employee directors in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs). As of December 31, 2016, 8.3 million shares of common stock were available for issuance under the 2016 Stock 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 awards with a market condition. The grant date fair values of performance-based awards that vest based on a market condition are 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 total stock-based compensation expense, primarily for restricted stock awards, totaling $10.0 million, $8.8 million and $7.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. The stock-based compensation expense for 2016, 2015 and 2014 included $3.5 million, $2.6 million and $3.9 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, 2016, the unrecognized amortization expense for all stock-based compensation totaled approximately $13.8 million and will be recognized over an average remaining vesting period of approximately 2.5 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, 2016, 2015 and 2014:



	Restricted Stock Awards Outstanding
	2016		2015		2014
Outstanding at beginning of year	2,755,138		2,574,616		1,709,312
Granted	544,307		886,427		1,488,960
Vested	(1,050,293	)	(559,958	)	(524,663	)
Forfeited	(148,336	)	(145,947	)	(98,993	)
Outstanding at end of year	2,100,816		2,755,138		2,574,616

The restricted stock awards granted in 2016 have vesting periods ranging from three to six years. The average grant date fair value of restricted stock awarded during the year ended December 31, 2016 was $8.84 per share. Included in the restricted shares granted (in the table above) during 2014, 240 thousand shares were performance-based awards made to executive officers. The performance-based restricted stock awards vest based on the same performance measures for the RSU grants discussed further below. A portion of the performance-based restricted stock 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. During 2016 and 2015, 53 thousand and 50 thousand restricted shares, respectively, of the performance-based restricted stock awards vested. The remaining outstanding awards were unvested as of December 31, 2016, of which 85 thousand shares vested during the first quarter of 2017. The remaining unvested restricted stock awards were subsequently forfeited during the first quarter of 2017 due to failure to meet the performance and market conditions.

Restricted Stock Units. Valley granted 431 thousand shares and 313 thousand shares of performance-based RSUs to certain executive officers for the year ended December 31, 2016 and 2015, respectively. The RSUs 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). The RSUs "cliff" vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common share) over the applicable performance period. Dividend equivalents and accrued interest, per the terms of the agreements, are accumulated and paid to the grantee at the vesting date, or forfeited if the performance conditions are not met. The grant date fair value of the RSUs was $8.32 and $8.98 per share for the years ended December 31, 2016 and 2015, respectively. Compensation costs related to RSUs totaled $2.8 million and $2.3 million, and were included in total stock-based compensation expense for the years ended December 31, 2016 and 2015, respectively.

Our 2016 Stock Plan provides for our non-employee directors to be eligible recipients of limited equity awards. Commencing with our 2017 annual meeting, each non-employee director will receive RSU awards totaling $50,000 in grant date fair value as part of their annual retainer. The RSUs will be granted on the date of the annual shareholders’ meeting, with the number of RSUs to be determined using the closing market price on the date prior to grant. The RSUs vest on the earliest of the next annual shareholders’ meeting or the first anniversary of the grant date, with acceleration upon a change in control, death or disability, but not resignation from the board.

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; the stock volatility, based on Valley’s historical and implied stock price volatility; the 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.

The following table summarizes stock options activity as of December 31, 2016, 2015 and 2014 and changes during the years ended on those dates:



	2016				2015				2014
			Weighted Average Exercise				Weighted Average Exercise				Weighted Average Exercise
Stock Options	Shares		Price		Shares		Price		Shares		Price
Outstanding at beginning of year	1,383,365		$	16	1,828,591		$	17	2,322,593		$	17
Granted	—		—		100,000		11		—		—
Forfeited or expired	(650,876	)	18		(545,226	)	18		(494,002	)	19
Outstanding at end of year	732,489		14		1,383,365		16		1,828,591		17
Exercisable at year-end	632,489		14		1,283,365		16		1,828,591		17

The following table summarizes information about stock options outstanding and exercisable at December 31, 2016:



Options Outstanding and Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price
$10-14	134,681	3.6	$	12
14-15	445,654	1.1	15
15-17	3,388	1.1	16
18-19	48,766	0.1	19
	632,489	1.6	14

Director Restricted Stock Plan. 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 April 2018 when the remaining restricted stock under the plan 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, 2016, 2015 and 2014:



	Restricted Stock Awards Outstanding
	2016		2015		2014
Outstanding at beginning of year	80,117		98,086		121,792
Vested	(24,607	)	(17,969	)	(23,706	)
Outstanding at end of year	55,510		80,117		98,086