Tax Credit Investments

12 Months Ended

Dec. 31, 2015

INCOME TAXES (Note 13)

Income tax expense for the years ended December 31, 2015, 2014 and 2013 consisted of the following:



	2015			2014			2013
	(in thousands)
Current expense (benefit):
Federal	$	7,978		$	25,156		$	13,203
State	(493		)	(5,549		)	3,447
	7,485			19,607			16,650
Deferred expense:
Federal and State	16,453			11,455			30,329
Total income tax expense	$	23,938		$	31,062		$	46,979

The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2015 and 2014 are as follows:



	2015		2014
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	44,382	$	42,574
Depreciation	15,661		15,082
Employee benefits	16,104		17,893
Investment securities, including other-than-temporary impairment losses	18,697		15,972
Net operating loss carryforwards	57,722		39,462
Purchase accounting	40,585		31,327
Other	21,310		18,138
Total deferred tax assets	214,461		180,448
Deferred tax liabilities:
Pension plans	18,861		13,081
Other investments	15,720		14,662
Other	21,449		21,127
Total deferred tax liabilities	56,030		48,870
Net deferred tax asset (included in other assets)	$	158,431	$	131,578

Valley's federal net operating loss carryforwards totaled approximately $86.5 million at December 31, 2015 and expire during the period from 2029 through 2034 and state net operating loss carryforwards totaled approximately $733.5 million at December 31, 2015 and expire during the period from 2016 through 2034.

Based upon taxes paid and projections of future taxable income over the periods in which the net deferred tax assets are deductible, management believes that it is more likely than not that Valley will realize the benefits of these deductible differences and loss carryforwards.

Reconciliation between the reported income tax expense and the amount computed by multiplying consolidated income before taxes by the statutory federal income tax rate of 35 percent for the years ended December 31, 2015, 2014 and 2013 were as follows:



	2015			2014			2013
	(in thousands)
Federal income tax at expected statutory rate	$	44,413		$	51,532		$	62,629
(Decrease) increase due to:
Tax-exempt interest, net of interest incurred to carry tax-exempt securities	(4,864		)	(4,406		)	(4,876		)
Bank owned life insurance	(2,385		)	(2,237		)	(2,087		)
State income tax expense, net of federal tax effect	15,274			12,866			9,904
Tax credits from securities and other investments	(28,988		)	(20,555		)	(17,408		)
Reduction in reserve for uncertainties	—			(6,971		)	(1,821		)
Other, net	488			833			638
Income tax expense	$	23,938		$	31,062		$	46,979

A reconciliation of Valley’s gross unrecognized tax benefits for 2015, 2014 and 2013 are presented in the table below:



	2015		2014			2013
	(in thousands)
Beginning balance	$	18,647	$	30,713		$	31,052
Additions based on tax positions related to prior years	1,245		1,408			1,482
Settlements with taxing authorities	—		(9,050		)	(1,216		)
Reductions due to expiration of statute of limitations	—		(4,424		)	(605		)
Ending balance	$	19,892	$	18,647		$	30,713

The entire balance of unrecognized tax benefits, if recognized, would favorably affect our effective income tax rate. It is reasonably possible that the liability for unrecognized tax benefits could increase or decrease in the next twelve months due to completion of tax authorities’ exams or the expiration of statutes of limitations. Management estimates that the liability for unrecognized tax benefits could decrease by $19.9 million within the next twelve months.

Valley’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Valley has accrued approximately $5.2 million and $4.5 million of interest associated with Valley’s uncertain tax positions at December 31, 2015 and 2014, respectively.

Valley files income tax returns in the U.S. federal and various state jurisdictions. With few exceptions, Valley is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2009. Valley is under examination by the IRS and also currently under routine examination by various state jurisdictions, and we expect the examinations to be completed within the next twelve months. Valley has considered, for all open audits, any potential adjustments in establishing our reserve for unrecognized tax benefits as of December 31, 2015.

TAX CREDIT INVESTMENTS (Note 14)

Valley’s tax credit investments are primarily related to investments promoting qualified affordable housing projects, and other investments related to community development and renewable energy sources. Some of these tax-advantaged investments support Valley’s regulatory compliance with the Community Reinvestment Act. Valley’s investments in these entities generate a return primarily through the realization of federal income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction of income tax expense.

Valley’s tax credit investments are carried in other assets on the consolidated statements of financial condition. Valley’s unfunded capital and other commitments related to the tax credit investments are carried in accrued expenses and other liabilities on the consolidated statements of financial condition. Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense of the consolidated statements of income using the equity method of accounting. An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value.

The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at December 31, 2015 and 2014:



	December 31,
	2015		2014
	(in thousands)
Other Assets:
Affordable housing tax credit investments, net	$	32,094	$	36,009
Other tax credit investments, net	70,681		66,023
Total tax credit investments, net	$	102,775	$	102,032
Other Liabilities:
Unfunded affordable housing tax credit commitments	$	7,330	$	8,800
Unfunded other tax credit commitments	12,545		418
Total unfunded tax credit commitments	$	19,875	$	9,218

The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the years ended December 31, 2015, 2014 and 2013:



	2015		2014		2013
	(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits	$	4,709	$	5,296	$	4,722
Other tax credit investment credits and tax benefits	23,877		14,357		12,285
Total reduction in income tax expense	$	28,586	$	19,653	$	17,007
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses	$	2,594	$	3,184	$	1,755
Affordable housing tax credit investment impairment losses	1,321		3,211		913
Other tax credit investment losses	1,079		2,359		1,630
Other tax credit investment impairment losses	22,318		15,442		10,054
Total amortization of tax credit investments recorded in non-interest expense	$	27,312	$	24,196	$	14,352