ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

The following tables present the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at June 30, 2019 and December 31, 2018. The assets presented under “nonrecurring fair value measurements” in the tables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized).



	June 30, 2019		Fair Value Measurements at Reporting Date Using:
	June 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available for sale:
U.S. Treasury securities	$	50,741	$	50,741	$	—	$	—
U.S. government agency securities	33,028		—		33,028		—
Obligations of states and political subdivisions	186,697		—		186,017		680
Residential mortgage-backed securities	1,372,979		—		1,372,979		—
Corporate and other debt securities	35,905		—		35,905		—
Total available for sale	1,679,350		50,741		1,627,929		680
Loans held for sale ⁽¹⁾	36,641		—		36,641		—
Other assets ⁽²⁾	140,496		—		140,496		—
Total assets	$	1,856,487	$	50,741	$	1,805,066	$	680
Liabilities
Other liabilities ⁽²⁾	$	33,502	$	—	$	33,502	$	—
Total liabilities	$	33,502	$	—	$	33,502	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	43,707	$	—	$	—	$	43,707
Foreclosed assets	5,587		—		—		5,587
Total	$	49,294	$	—	$	—	$	49,294



			Fair Value Measurements at Reporting Date Using:
	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)
Recurring fair value measurements:
Assets
Investment securities:
Available for sale:
U.S. Treasury securities	$	49,306	$	49,306	$	—	$	—
U.S. government agency securities	36,277		—		36,277		—
Obligations of states and political subdivisions	197,092		—		197,092		—
Residential mortgage-backed securities	1,429,782		—		1,429,782		—
Corporate and other debt securities	37,087		—		37,087		—
Total available for sale	1,749,544		49,306		1,700,238		—
Loans held for sale ⁽¹⁾	35,155		—		35,155		—
Other assets ⁽²⁾	48,979		—		48,979		—
Total assets	$	1,833,678	$	49,306	$	1,784,372	$	—
Liabilities
Other liabilities ⁽²⁾	$	23,681	$	—	$	23,681	$	—
Total liabilities	$	23,681	$	—	$	23,681	$	—
Non-recurring fair value measurements:
Collateral dependent impaired loans ⁽³⁾	$	45,245	$	—	$	—	$	45,245
Loan servicing rights	273		—		—		273
Foreclosed assets	5,673		—		—		5,673
Total	$	51,191	$	—	$	—	$	51,191

The following valuation techniques were used for financial instruments measured at fair value on a recurring basis. All the valuation techniques described below apply to the unpaid principal balance, excluding any accrued interest or dividends at the measurement date. Interest income and expense are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.

Available for sale securities. All U.S. Treasury securities, certain corporate and other debt securities, and certain preferred equity securities are reported at fair value utilizing Level 1 inputs. The majority of other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The 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.

In calculating the fair value of one impaired special revenue bond (within obligations of states and political subdivisions in the table above) under Level 3, Valley prepared its best estimate of the present value of the cash flows to determine an internal price estimate. In determining the internal price, Valley utilized recent financial information and developments provided by the issuer, as well as other unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing of the defaulted security. A quoted price received from an independent pricing service was weighted with the internal price estimate to determine the fair value of the instrument at June 30, 2019. See Note 6 for additional information regarding this impaired security.

Loans held for sale. Residential mortgage loans originated for sale are reported at fair value using Level 2 inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. The market prices represent a delivery price, which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at June 30, 2019 and December 31, 2018 based on the short duration these assets were held, and the high credit quality of these loans.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair values of Valley’s derivatives are determined using third party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves. The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at June 30, 2019 and December 31, 2018), is determined based on the current market prices for similar instruments. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at June 30, 2019 and December 31, 2018.

The following valuation techniques were used for certain non-financial assets measured at fair value on a nonrecurring basis, including impaired loans reported at the fair value of the underlying collateral, loan servicing rights and foreclosed assets, which are reported at fair value upon initial recognition or subsequent impairment as described below.

Impaired loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values are estimated using Level 3 inputs, consisting of individual appraisals that may be adjusted based on certain discounting criteria. At June 30, 2019, certain appraisals were discounted based on specific market data by location and property type. During the quarter ended June 30, 2019, collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral. The collateral dependent loan charge-offs to the allowance for loan losses totaled $938 thousand for the three and six months ended June 30, 2019. The collateral dependent loan charge-offs to the allowance for loan losses for the three and six months ended June 30, 2018 were immaterial. At June 30, 2019, collateral dependent impaired loans with a total recorded investment of $73.4 million were reduced by specific valuation allowance allocations totaling $29.7 million to a reported total net carrying amount of $43.7 million.

Loan servicing rights. Fair values for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third party vendor that requires inputs that are both significant to the fair value measurement and unobservable (Level 3). The fair value model is based on various assumptions, including but not limited to, prepayment speeds, internal rate of return (“discount rate”), servicing cost, ancillary income, float rate, tax rate, and

inflation. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At June 30, 2019, the fair value model used a blended prepayment speed (stated as constant prepayment rates) of 11.0 percent and a discount rate of 9.5 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. At June 30, 2019, loan servicing rights were not re-measured at fair value and were carried at amortized cost. Valley recorded net recoveries of impairment charges on its loan servicing rights totaling $107 thousand and $84 thousand for the three and six months ended June 30, 2019, respectively, as compared to net impairment charges totaling $90 thousand and $317 thousand for the three and six months ended June 30, 2018, respectively.

Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is adjusted based on certain discounting criteria, similar to the criteria used for impaired loans described above. There were no discount adjustments of the appraisals of foreclosed assets at June 30, 2019. At June 30, 2019, foreclosed assets included $5.6 million of assets that were measured at fair value upon initial recognition or subsequently re-measured at June 30, 2019. The foreclosed assets charge-offs to the allowance for the loan losses totaled $653 thousand and $649 thousand for the three months ended June 30, 2019 and 2018, respectively, and $1.4 million and $1.2 million for the six months ended June 30, 2019 and 2018, respectively. The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in net losses of $160 thousand and $145 thousand for the within non-interest expense for the six months ended June 30, 2019 and 2018, respectively. The net loss from re-measurement of foreclosed assets at fair value subsequent to their initial recognition for the three months ended June 30, 2019 and 2018 was immaterial.

The fair value estimates presented in the following table were based on pertinent market data and relevant information on the financial instruments available as of the valuation date. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portfolio of financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation, trust and investment management departments) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.



	Fair Value Hierarchy	June 30, 2019				December 31, 2018
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(in thousands)
Financial assets
Cash and due from banks	Level 1	$	276,291	$	276,291	$	251,541	$	251,541
Interest bearing deposits with banks	Level 1	178,905		178,905		177,088		177,088
Investment securities held to maturity:
U.S. Treasury securities	Level 1	138,436		144,655		138,517		142,049
U.S. government agency securities	Level 2	8,049		8,092		8,721		8,641
Obligations of states and political subdivisions	Level 2	536,778		549,050		585,656		586,033
Residential mortgage-backed securities	Level 2	1,415,409		1,419,066		1,266,770		1,235,605
Trust preferred securities	Level 2	37,314		31,372		37,332		31,486
Corporate and other debt securities	Level 2	32,250		32,557		31,250		31,129
Total investment securities held to maturity		2,168,236		2,184,792		2,068,246		2,034,943
Net loans	Level 3	25,647,057		25,207,831		24,883,610		24,068,755
Accrued interest receivable	Level 1	99,065		99,065		95,296		95,296
Federal Reserve Bank and Federal Home Loan Bank stock⁽¹⁾	Level 1	260,490		260,490		232,080		232,080
Financial liabilities
Deposits without stated maturities	Level 1	17,435,741		17,435,741		17,388,990		17,388,990
Deposits with stated maturities	Level 2	7,338,188		7,338,945		7,063,984		7,005,573
Short-term borrowings	Level 1	2,387,784		2,388,299		2,118,914		2,091,892
Long-term borrowings	Level 2	1,800,182		1,840,862		1,654,268		1,751,194
Junior subordinated debentures issued to capital trusts	Level 2	55,544		57,040		55,370		55,692
Accrued interest payable ⁽²⁾	Level 1	36,031		36,031		25,762		25,762