Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES (Note 13)

Income tax expense for the years ended December 31, 2021, 2020 and 2019 consisted of the following:

	2021		2020		2019
	(in thousands)
Current expense:
Federal	$	92,823	$	96,057	$	95,317
State	47,249		48,463		36,457
	140,072		144,520		131,774
Deferred expense (benefit):
Federal	19,709		(3,109)		10,444
State	7,118		(1,951)		4,784
	26,827		(5,060)		15,228
Total income tax expense	$	166,899	$	139,460	$	147,002

The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2021 and 2020 were as follows:

	2021		2020
	(in thousands)
Deferred tax assets:
Allowance for credit losses	$	102,704	$	96,508
Employee benefits	22,587		20,888
Net operating loss carryforwards	15,859		17,814
Purchase accounting	8,971		10,354
Other	11,689		24,677
Total deferred tax assets	161,810		170,241
Deferred tax liabilities:
Pension plans	30,119		22,705
Depreciation	10,343		3,829
Investment securities	3,728		12,690
Other investments	12,069		9,584
Core deposit intangibles	11,888		12,960
Other	14,133		12,226
Total deferred tax liabilities	82,280		73,994
Valuation Allowance	916		916
Net deferred tax asset (included in other assets)	$	78,614	$	95,331

Valley's federal net operating loss carryforwards totaled approximately $56.0 million at December 31, 2021 and expire during the period from 2029 through 2034. Valley's capital loss carryforwards totaled $3.1 million at December 31, 2021 and begin to expire at December 31, 2022. State net operating loss carryforwards totaled approximately $86.2 million at December 31, 2021 and expire during the period from 2029 through 2038.

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, net of an immaterial valuation allowance, 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 21 percent for the years ended December 31, 2021, 2020, and 2019 were as follows: 

	2021		2020		2019
	(in thousands)
Federal income tax at expected statutory rate	$	134,556	$	111,314	$	95,927
Increase (decrease) due to:
State income tax expense, net of federal tax effect	42,950		36,744		32,581
Tax-exempt interest, net of interest incurred to carry tax-exempt securities	(2,298)		(2,786)		(3,118)
Bank owned life insurance	(1,759)		(2,026)		(1,637)
Tax credits from securities and other investments	(9,942)		(10,071)		(11,636)
FDIC insurance premium	2,457		3,283		2,507
Addition to reserve for uncertainties	—		—		31,123
Other, net	935		3,002		1,255
Income tax expense	$	166,899	$	139,460	$	147,002

We invest in certain tax-advantaged investments that support qualified affordable housing projects and community development. Our investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. Third parties perform diligence on these investments for us on which we rely both at inception and on an on-going basis. We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, may fail to meet certain government compliance requirements and may not be able to be realized.

We previously invested in mobile solar generators sold and leased back by DC Solar and its affiliates (DC Solar). DC Solar had its assets frozen in December 2018 by the U.S. Department of Justice. DC Solar and related entities are in Chapter 7 bankruptcy. A group of investors who purchased mobile solar generators from, and leased them back to DC Solar, including Valley received tax credits for making these renewable resource investments. During the fourth quarter 2019, several of the co- conspirators pleaded guilty to fraud in the on-going federal investigation. Based upon this information, Valley deemed that its tax positions related to the DC Solar funds did not meet the more likely than not recognition threshold in Valley's tax reserve assessment at December 31, 2019. The principals pleaded guilty to fraud in early 2020.

As of December 31, 2021, 2020, and 2019, Valley believes that it was fully reserved for the renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. Valley will continue to evaluate all of its existing tax positions, however, there can be no assurance that Valley will not recognize additional tax provisions related to this uncertain tax liability in the future.

A reconciliation of Valley’s reserve for uncertain tax liability positions for 2021, 2020 and 2019 is presented in the table below:

	2021		2020		2019
	(in thousands)
Beginning balance	$	31,918	$	31,918	$	—
Additions based on tax positions related to prior years	—		—		31,918
Settlements with taxing authorities	(1,559)		—		—
Ending balance	$	30,359	$	31,918	$	31,918

The entire balance of the reserve for uncertain tax liability positions, if recognized, would favorably affect Valley's effective income tax rate. It is reasonably possible that the reserve for uncertain tax liability positions could increase or decrease in the next twelve months due to completion of tax authorities’ exams or the expiration of statutes of limitations. The United States Bankruptcy Court approved the sale of the mobile solar generators resulting in a tax credit recapture of $1.6 million in 2021. Management estimates that the reserve for uncertain tax liability positions could decrease by $7.0 million within the next twelve months. Valley’s policy is to report interest and penalties, if any, related to the reserve for uncertain tax liability positions in income tax expense. Valley accrued approximately $8.7 million, $7.6 million, and $6.1 million of interest expense associated with Valley’s uncertain tax positions at December 31, 2021, 2020, and 2019, respectively.

Valley monitors its tax positions for the underlying facts, circumstances, and information available including the federal investigation of DC Solar and changes in tax laws, case law and regulations that may necessitate subsequent de-recognition of previous tax benefits.

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 2017. Valley is under examination by the IRS and also under routine examination by various state jurisdictions, and we expect the examinations to be completed within the next 12 months. Valley has considered, for all open audits, any potential adjustments in establishing our reserve for uncertain tax liability positions as of December 31, 2021.

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 in the consolidated statements of income using the equity method of accounting. After initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair values are increased to reflect Valley's share of income of the investee and are reduced to reflect its share of losses of the investee, dividends received and impairments, if applicable. See the "Impairment Analysis" section below.

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, 2021 and 2020:

	December 31,
	2021		2020
	(in thousands)
Other Assets:
Affordable housing tax credit investments, net	$	15,343	$	20,074
Other tax credit investments, net	57,006		47,301
Total tax credit investments, net	$	72,349	$	67,375
Other Liabilities:
Unfunded affordable housing tax credit commitments	$	1,360	$	1,379
Total unfunded tax credit commitments	$	1,360	$	1,379

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, 2021, 2020 and 2019:

	2021		2020		2019
	(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits	$	3,525	$	5,414	$	6,757
Other tax credit investment credits and tax benefits	9,320		8,065		10,205
Total reduction in income tax expense	$	12,845	$	13,479	$	16,962
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses	$	1,895	$	2,714	$	2,184
Affordable housing tax credit investment impairment losses	1,416		2,209		3,295
Other tax credit investment losses	811		2,234		5,668
Other tax credit investment impairment losses	6,788		6,178		9,245
Total amortization of tax credit investments recorded in non-interest expense	$	10,910	$	13,335	$	20,392

Impairment Analysis

An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value. The determination of whether a decline in value of a tax credit investment is other-than-temporary requires significant judgment and is performed separately for each investment. The tax credit investments are reviewed for impairment quarterly, or whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. These circumstances can include, but are not limited to, the following factors:

•Evidence that Valley does not have the ability to recover the carrying amount of the investment;

•The inability of the investee to sustain earnings;

•A current fair value of the investment based upon cash flow projections that is less than the carrying amount; and

•Change in the economic or technological environment that could adversely affect the investee’s operations.

On a periodic basis, Valley obtains financial reporting on its underlying tax credit investment assets for each fund. The financial reporting is reviewed for deterioration in the financial condition of the fund, the level of cash flows and any significant losses or impairment charges. Valley also regularly reviews the condition and continuing prospects of the underlying operations of the investment with the fund manager, including any observations from site visits and communications with the Fund Sponsor, if available. Annually, Valley obtains the audited financial statements prepared by an independent accounting firm for each investment, as well as the annual tax returns. Generally, none of the aforementioned review factors are individually conclusive and the relative importance of each factor will vary based on facts and circumstances. However, the longer the expected period of recovery, the stronger and more objective the positive evidence needs to be in order to overcome the presumption that the impairment is other than temporary. If management determines that a decline in value is other than temporary per its quarterly and annual reviews, including current probable cash flow projections, the applicable tax credit investment is written down to its estimated fair value through an impairment charge to earnings, which establishes the new cost basis of the investment.

During the first quarter 2019, Valley determined that future cash flows related to the remaining investments in three federal renewable energy tax credit funds sponsored by DC Solar (previously reported in other tax credit investments, net) were not probable based upon new information available, including the sponsor’s bankruptcy proceedings which were reclassified to Chapter 7 from Chapter 11 in late March 2019. As a result, Valley recognized an impairment charge for the entire aggregate unamortized investment of $2.4 million in the first quarter 2019, which is included within amortization of tax credit investments for the year ended December 31, 2019.