INCOME TAXES (Note 14)

Income tax expense for the years ended December 31, 2011, 2010, and 2009 consisted of the following:


	2011			2010		2009
	(in thousands)
Current expense:
Federal	$	52,207		$	24,195	$	49,790
State		26,610			11,400		12,592

		78,817			35,595		62,382
Deferred expense (benefit):
Federal and State		(15,285	)		20,176		(10,898	)

Total income tax expense	$	63,532		$	55,771	$	51,484

The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:


	2011		2010
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	54,880	$	51,118
Depreciation		1,666		5,009
Pension plans		2,771		8,080
Employee benefits		9,102		6,535
Investment securities, including other-than-temporary impairment losses		35,569		3,875
State net operating loss carryforwards		63,806		59,267
Other		21,669		18,413

Total deferred tax assets		189,463		152,297
Deferred tax liabilities:
Purchase accounting		8,727		20,636
Other		16,778		26,406

Total deferred tax liabilities		25,505		47,042

Net deferred tax asset (included in other assets)	$	163,958	$	105,255

Valley's state net operating loss carryforwards totaled approximately $1.2 billion at December 31, 2011 and expire during the period from 2012 through 2031.

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, 2011, 2010, and 2009 were as follows:


	2011			2010			2009
	(in thousands)
Federal income tax at expected statutory rate	$	69,015		$	65,429		$	58,641
(Decrease) increase due to:
Tax-exempt interest, net of interest incurred to carry tax-exempt securities		(3,736	)		(3,451	)		(3,257	)
Bank owned life insurance		(2,583	)		(2,158	)		(1,995	)
State income tax expense (benefit), net of federal tax effect		12,727			629			(4	)
Tax credits		(12,760	)		(5,071	)		(2,632	)
Other, net		869			393			731

Income tax expense	$	63,532		$	55,771		$	51,484

A reconciliation of Valley's gross unrecognized tax benefits for 2011, 2010, and 2009 are presented in the table below:


	2011			2010			2009
	(in thousands)
Beginning balance	$	21,142		$	21,965		$	21,261
Additions based on tax positions related to the current year		—			—			484
Additions based on tax positions related to prior years		13,366			732			762
Reductions due to expiration of statute of limitations		(1,508	)		(1,555	)		(542	)

Ending balance	$	33,000		$	21,142		$	21,965

Valley recorded an incremental state tax provision (expense) of $8.5 million in 2011 to increase its liability for uncertain tax positions due to a change in state tax law. The total amount of net unrecognized tax benefits at December 31, 2011 that, if recognized, would affect the tax provision and the effective income tax rate was $23.6 million.

Valley's policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Valley has accrued approximately $4.9 million and $1.6 million of interest associated with Valley's uncertain tax positions at December 31, 2011 and 2010, 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 2007. The statute of limitations could expire for certain tax returns over the next 12 months, which could result in decreases to Valley's unrecognized tax benefits associated with uncertain tax positions. Such adjustments are not expected to have a material impact on Valley's effective tax rate.