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 plans 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 their compensation and service as of December 31, 2013. Plan benefits will not increase for any compensation or service earned after such date. All participants were immediately vested in their frozen accrued benefits if they were employed by the Bank as of December 31, 2013.

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, 2018 and 2017:



	2018			2017
	(in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	170,566		$	161,306
Interest cost	5,542			5,713
Actuarial (gain) loss	(11,540		)	10,148
Benefits paid	(7,204		)	(6,601		)
Projected benefit obligation at end of year	$	157,364		$	170,566
Change in fair value of plan assets:
Fair value of plan assets at beginning of year	$	222,124		$	206,639
Actual (loss) return on plan assets	(5,545		)	21,468
Employer contributions	1,133			618
Benefits paid	(7,204		)	(6,601		)
Fair value of plan assets at end of year*	$	210,508		$	222,124

Funded status of the plan
Asset recognized	$	53,144		$	51,558
Accumulated benefit obligation	157,364			170,566

* Includes accrued interest receivable of $660 thousand and $993 thousand as of December 31, 2018 and 2017, 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 $309 thousand of the net actuarial loss reported in the following table as of December 31, 2018 as a component of net periodic pension expense during 2019.



	2018			2017
	(in thousands)
Net actuarial loss	$	42,893		$	33,602
Deferred tax benefit	(12,205		)	(14,044		)
Total	$	30,688		$	19,558

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



	2018		2017
	(in thousands)
Projected benefit obligation	$	18,708	$	20,175
Accumulated benefit obligation	18,708		20,175
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 was 4.30 percent and 3.69 percent as of December 31, 2018 and 2017, respectively.

The net periodic pension income for the qualified and non-qualified plans reported within other non-interest expense (due to the adoption of ASU No. 2017-07) included the following components for the years ended December 31, 2018, 2017 and 2016:



	2018			2017			2016
	(in thousands)
Interest cost	$	5,542		$	5,713		$	6,681
Expected return on plan assets	(15,912		)	(15,163		)	(14,539		)
Amortization of net loss	625			381			294
Total net periodic pension income	$	(9,745	)	$	(9,069	)	$	(7,564	)

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. At December 31, 2016, Valley elected 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. Valley believes this provides a better estimate of service and interest costs. Valley accounted for this change in estimate prospectively starting in 2017. This change does not affect the measurement of the total benefit obligation. For 2017, the change in estimate when compared to the prior approach accounted for a large portion of the decline in interest cost from 2016 to 2017 as shown in the table above.

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, 2018 and 2017 were as follows:



	2018			2017
	(in thousands)
Net loss	$	9,917		$	3,843
Amortization of prior service cost	(35		)	(35		)
Amortization of actuarial loss	(625		)	(381		)
Total recognized in other comprehensive income	$	9,257		$	3,427
Total recognized in net periodic pension income and other comprehensive income/loss (before tax)	$	(453	)	$	(5,607	)

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)
2019	$	8,213
2020	8,491
2021	8,764
2022	8,938
2023	9,182
Thereafter	47,835

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, 2018, 2017 and 2016 were as follows:



	2018		2017		2016
Discount rate	3.69	%	4.12	%	4.33	%
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 materially 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 is an approximate equal weighting of 50 percent fixed income securities and 50 percent equity securities. 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, 2018		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	28	%	$	59,447	$	59,447	$	—	$	—
Corporate bonds	24		50,889		—		50,889		—
Mutual funds	17		36,293		36,293		—		—
U.S. Treasury securities	24		50,838		50,838		—		—
Cash and money market funds	4		7,429		7,429		—		—
U.S. government agency securities	3		4,952		—		4,952		—
Total investments	100	%	$	209,848	$	154,007	$	55,841	$	—



					Fair Value Measurements at Reporting Date Using:
	% of Total Investments		December 31, 2017		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	38	%	$	84,791	$	84,791	$	—	$	—
Corporate bonds	22		47,471		—		47,471		—
Mutual funds	23		48,814		48,814		—		—
U.S. Treasury securities	13		28,671		28,671		—		—
Cash and money market funds	4		9,522		9,522		—		—
U.S. government agency securities	*		1,862		—		1,862		—
Total investments	100	%	$	221,131	$	171,798	$	49,333	$	—



*	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, 2018 and 2017, the remaining obligations under these plans were $1.7 million and $2.1 million, respectively, of which $512 thousand and $682 thousand, respectively, were funded by Valley.

As of December 31, 2018 and 2017, all of the obligations were included in other liabilities and $872 thousand (net of a $345 thousand tax benefit) and $994 thousand (net of a $400 thousand tax benefit), respectively, were recorded in accumulated other comprehensive loss. The $816 thousand 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 $18.8 million, $10.8 million and $10.5 million during 2018, 2017 and 2016, 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 invested in accordance with each participant’s investment elections. The Bank recorded $8.5 million, $7.1 million and $6.7 million in expense for contributions to the plan for the years ended December 31, 2018, 2017 and 2016, respectively.

Stock-Based Compensation

Valley currently has one active employee stock incentive 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 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 2016 Stock 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 in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors. As of December 31, 2018, 5.5 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 $19.5 million, $12.2 million and $10.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. The stock-based compensation expense for 2018, 2017 and 2016 included $4.3 million, $4.3 million and $3.5 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, 2018, the unrecognized amortization expense for all stock-based compensation totaled approximately $16.6 million and will be recognized over an average remaining vesting period of approximately 2.1 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 2016 Stock 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 (RSAs) outstanding for the years ended December 31, 2018, 2017 and 2016:



	Restricted Stock Awards Outstanding
	2018		2017		2016
Outstanding at beginning of year	1,771,702		2,100,816		2,755,138
Granted	1,263,144		608,786		544,307
Vested	(1,128,521	)	(736,575	)	(1,050,293	)
Forfeited	(185,357	)	(201,325	)	(148,336	)
Outstanding at end of year	1,720,968		1,771,702		2,100,816

The RSAs granted in 2018 have vesting periods ranging from one to five years. The average grant date fair value of RSAs granted during the year ended December 31, 2018 was $11.85 per share. Included in the RSAs granted (in the table above) during 2018 and 2017, 60 thousand and 45 thousand shares, respectively, were issued to Valley directors. In 2018 and 2017, each non-management director received $60 thousand and $50 thousand, respectively, of RSAs as part of their annual retainer. The RSAs were granted on the date of the annual shareholders’ meeting with the number of RSAs determined using the closing market price on the date prior to grant. The RSAs vest on the earlier 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 of Directors.

During 2014, 240 thousand shares of performance-based RSAs were granted to executive officers and vested based on the same performance measures for the RSU grants discussed below. During 2017 and 2016, 85 thousand and 53 thousand restricted shares, respectively, vested related to the performance-based RSAs. The total remaining unvested performance-based RSAs were forfeited during 2017 due to failure to meet the performance and market conditions at the final year of vesting.

Restricted Stock Units (RSUs). 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, 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 $12.36, $11.05 and $8.32 per share for the years ended December 31, 2018, 2017, and 2016, respectively. Compensation costs related to RSUs totaled $5.5 million, $3.8 million and $2.8 million, and were included in total stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016, respectively.

The following table sets forth the changes in RSUs outstanding for the years ended December 31, 2018, 2017 and 2016:



	Restricted Stock Units Outstanding
	2018		2017	2016
Outstanding at beginning of year	1,114,962		744,281	313,212
Acquired from USAB	336,379		—	—
Granted	509,725		370,681	431,069
Vested	(503,879	)	—	—
Forfeited	(78,301	)	—	—
Outstanding at end of year	1,378,886		1,114,962	744,281

In connection with the USAB acquisition on January 1, 2018, Valley assumed 336 thousand time-based RSUs (of which 179 thousand remained unvested and outstanding as of December 31, 2018). The stock plan under which the stock awards were issued is no longer active. Stock-based compensation expense related to the USAB RSUs totaled $1.6 million for the year ended December 31, 2018.

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, 2018, 2017 and 2016 and changes during the years ended on those dates:



	2018				2017				2016
			Weighted Average Exercise				Weighted Average Exercise				Weighted Average Exercise
Stock Options	Shares		Price		Shares		Price		Shares		Price
Outstanding at beginning of year	446,980		$	13	732,489		$	14	1,383,365		$	16
Acquired from USAB	1,803,165		5		—		—		—		—
Exercised	(975,325	)	5		—		—		—		—
Forfeited or expired	(223,033	)	14		(285,509	)	16		(650,876	)	18
Outstanding at end of year	1,051,787		7		446,980		13		732,489		14
Exercisable at year-end	604,003		7		446,980		13		632,489		14

In connection with the USAB acquisition on January 1, 2018, Valley assumed stock option awards totaling 1.8 million shares of Valley common stock (of which options for 813 thousand shares remained outstanding as of December 31, 2018) at a weighted average exercise price of $5.47.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2018:



Options Outstanding and Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price
$2-$4	40,870	2.9	$	3
4-6	284,912	5.1	5
6-10	42,094	7.6	7
10-18	236,127	1.9	12
	604,003	3.9	7

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 terminated in April 2018 when the remaining restricted stock under the plan vested.

The following table sets forth the changes in director’s restricted stock awards outstanding for the years ended December 31, 2018, 2017 and 2016:



	Restricted Stock Awards Outstanding
	2018		2017		2016
Outstanding at beginning of year	17,885		55,510		80,117
Vested	(17,885	)	(37,625	)	(24,607	)
Outstanding at end of year	—		17,885		55,510