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Fair Value Measurement of Assets and Liabilities

3 Months Ended

Mar. 31, 2022

Fair Value Measurement of Assets and Liabilities

ASC Topic 820, “Fair Value Measurements” 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:

•Level 1 - Unadjusted exchange quoted prices in active markets for identical assets or liabilities, or identical liabilities traded as assets that the reporting entity has the ability to access at the measurement date.

•Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly (i.e., quoted prices on similar assets) for substantially the full term of the asset or liability.

•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Assets and Liabilities Measured at Fair Value on a Recurring and Non-Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at March 31, 2022 and December 31, 2021. The assets presented under “non-recurring 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).


	March 31, 2022		Fair Value Measurements at Reporting Date Using:
			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:
Equity securities (1)	$	30,528	$	19,009	$	—	$	—
Trading debt securities	11,739		—		11,739		—
Available for sale debt securities:

U.S. government agency securities	18,332		—		18,332		—
Obligations of states and political subdivisions	67,951		—		67,951		—
Residential mortgage-backed securities	795,554		—		795,554		—
Corporate and other debt securities	133,197		—		133,197		—
Total available for sale debt securities	1,015,034		—		1,015,034		—
Loans held for sale (2)	77,632		—		77,632		—
Other assets (3)	176,270		—		176,270		—
Total assets	$	1,311,203	$	19,009	$	1,280,675	$	—
Liabilities
Other liabilities (3)	$	189,682	$	—	$	189,682	$	—
Total liabilities	$	189,682	$	—	$	189,682	$	—
Non-recurring fair value measurements:

Collateral dependent loans	$	47,603	$	—	$	—	$	47,603

Foreclosed assets	1,176		—		—		1,176
Total	$	48,779	$	—	$	—	$	48,779


			Fair Value Measurements at Reporting Date Using:
	December 31, 2021		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:
Equity securities (1)	$	32,844	$	21,284	$	—	$	—
Trading debt securities	38,130		—		38,130		—
Available for sale debt securities:

U.S. government agency securities	20,925		—		20,925		—
Obligations of states and political subdivisions	79,890		—		79,890		—
Residential mortgage-backed securities	904,502		—		904,502		—

Corporate and other debt securities	123,492		—		123,492		—
Total available for sale debt securities	1,128,809		—		1,128,809		—

Loans held for sale (2)	139,516		—		139,516		—
Other assets (3)	181,500		—		181,500		—
Total assets	$	1,520,799	$	21,284	$	1,487,955	$	—
Liabilities
Other liabilities (3)	$	52,376	$	—	$	52,376	$	—
Total liabilities	$	52,376	$	—	$	52,376	$	—
Non-recurring fair value measurements:
Collateral dependent loans	$	47,871	$	—	$	—	$	47,871
Foreclosed assets	2,931		—		—		2,931
Total	$	50,802	$	—	$	—	$	50,802

(1)Includes equity securities measured at net asset value (NAV) per share (or its equivalent) as a practical expedient totaling $11.5 million and $11.6 million at March 31, 2022 and December 31, 2021, respectively. These securities have not been classified in the fair value hierarchy.

(2)Represents residential mortgage loans held for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $79.1 million and $136.3 million at March 31, 2022 and December 31, 2021, respectively.

(3)Derivative financial instruments are included in this category.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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.

Equity securities. The fair value of equity securities consists of a publicly traded mutual fund, Community Reinvestment Act (CRA) investment fund and an investment related to the development of new financial technologies that are carried at quoted prices in active markets. Valley also has privately held CRA funds measured at NAV, which are excluded from fair value hierarchy levels in the tables above.

Trading debt securities. The fair value of trading debt securities, consisting of municipal bonds, is 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. Management reviews the data and assumptions used in

pricing the securities by its third-party provider to ensure the highest level of significant inputs are derived from market observable data.

Available for sale debt securities. U.S. Treasury 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. Management reviews the data and assumptions used in pricing the securities by its third-party provider to ensure the highest level of significant inputs are derived from market observable data. In addition, Valley reviews the volume and level of activity for all available for sale debt securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume.

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 March 31, 2022 and December 31, 2021 based on the short duration these assets were held, and the 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, Overnight Index Swap and Secured Overnight Financing Rate (SOFR) curves for all cleared derivatives. 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 March 31, 2022 and December 31, 2021), 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 March 31, 2022 and December 31, 2021.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

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

Collateral Dependent Loans. Collateral dependent loans are loans when foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and substantially all of the repayment is expected from the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral. Collateral values are estimated using Level 3 inputs, consisting of individual third-party appraisals that may be adjusted based on certain discounting criteria. Certain real estate appraisals may be discounted based on specific market data by location and property type. At March 31, 2022, collateral dependent loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses based on the fair value of the underlying collateral. At March 31, 2022, collateral dependent loans with a total amortized cost of $114.4 million, including our taxi medallion loan portfolio, were reduced by specific allowance for loan losses allocations totaling $66.8 million to a reported total net carrying amount of $47.6 million.

Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets included in other assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value

using Level 3 inputs, consisting of a third-party appraisal less estimated cost to sell. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If further declines in the estimated fair value of the asset occur, an asset is re-measured and reported at fair value through a write-down recorded in non-interest expense. There were no adjustments to the appraisals of foreclosed assets at March 31, 2022.

Other Fair Value Disclosures

ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

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.

The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at March 31, 2022 and December 31, 2021 were as follows:


	Fair Value Hierarchy	March 31, 2022				December 31, 2021
		Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(in thousands)
Financial assets
Cash and due from banks	Level 1	$	424,035	$	424,035	$	205,156	$	205,156
Interest bearing deposits with banks	Level 1	306,885		306,885		1,844,764		1,844,764
Equity securities (1)	Level 3	5,464		5,464		3,629		3,629
Held to maturity debt securities:
U.S. Treasury securities	Level 1	67,401		68,932		67,558		71,661
U.S. government agency securities	Level 2	5,572		5,453		6,265		6,378
Obligations of states and political subdivisions	Level 2	319,160		318,021		337,962		344,164
Residential mortgage-backed securities	Level 2	2,594,295		2,440,498		2,166,142		2,152,301
Trust preferred securities	Level 2	37,027		31,733		37,020		31,916
Corporate and other debt securities	Level 2	49,750		49,214		53,750		54,185
Total held to maturity debt securities (2)		3,073,205		2,913,851		2,668,697		2,660,605
Net loans	Level 3	35,001,895		33,815,930		33,794,455		33,283,251
Accrued interest receivable	Level 1	102,667		102,667		96,882		96,882
Federal Reserve Bank and Federal Home Loan Bank stock (3)	Level 2	195,536		195,536		206,450		206,450
Financial liabilities
Deposits without stated maturities	Level 1	32,232,968		32,232,968		31,945,368		31,945,368
Deposits with stated maturities	Level 2	3,414,368		3,365,608		3,687,044		3,670,113
Short-term borrowings	Level 1	484,181		478,300		655,726		637,490
Long-term borrowings	Level 2	1,409,142		1,336,303		1,423,676		1,404,184
Junior subordinated debentures issued to capital trusts	Level 2	56,500		39,578		56,413		46,306
Accrued interest payable (4)	Level 1	8,016		8,016		4,909		4,909

(1)Represents equity securities without a readily determinable fair value measured at cost less impairment, if any.

(2)The carrying amount is presented gross without the allowance for credit losses.

(3)Included in other assets.

(4)Included in accrued expenses and other liabilities.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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