INCOME TAXES (Note 13)

Income tax expense for the years ended December 31, 2012, 2011, and 2010 consisted of the following:


	2012		2011			2010
	(in thousands)
Current expense:
Federal	$	35,684	$	52,207		$	24,195
State		2,666		26,610			11,400

		38,350		78,817			35,595
Deferred expense (benefit):
Federal and State		28,398		(16,111	)		19,334

Total income tax expense	$	66,748	$	62,706		$	54,929

The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows:


	2012		2011
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	53,407	$	54,880
Depreciation		4,972		1,666
Pension plans		5,075		2,771
Employee benefits		11,775		9,102
Investment securities, including other-than-temporary impairment losses		24,196		35,569
Net operating loss carryforwards		62,053		63,806
Purchase accounting		14,251		—
Accrued interest		12,515		9,050
Other		23,416		20,869

Total deferred tax assets		211,660		197,713
Deferred tax liabilities:
Purchase accounting		—		8,727
Other investments		11,182		6,614
Deferred income		15,886		—
Other		13,353		10,164

Total deferred tax liabilities		40,421		25,505

Net deferred tax asset (included in other assets)	$	171,239	$	172,208

Valley’s state net operating loss carryforwards totaled approximately $1.0 billion at December 31, 2012 and expire during the period from 2014 through 2031. Valley’s federal net operating loss carryforwards totaled approximately $8.5 million at December 31, 2012 and expire in 2029, these losses are subject to certain limitations which we do not expect to limit our utilization of these federal losses. Valley’s capital loss carryforwards totaled approximately $2.2 million at December 31, 2012 and expire in 2018. Valley also has a federal alternative minimum tax credit carryforward of approximately $1.6 million at December 31, 2012. The tax credit carryforward has no time limitation associated with it.

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, 2012, 2011, and 2010 were as follows:


	2012			2011			2010
	(in thousands)
Federal income tax at expected statutory rate	$	73,631		$	68,326		$	64,727
(Decrease) increase due to:
Tax-exempt interest, net of interest incurred to carry tax-exempt securities		(4,478	)		(3,736	)		(3,451	)
Bank owned life insurance		(2,399	)		(2,583	)		(2,158	)
State income tax expense, net of federal tax effect		8,204			12,727			629
Tax credits		(10,070	)		(12,760	)		(5,071	)
Other, net		1,860			732			253

Income tax expense	$	66,748		$	62,706		$	54,929

A reconciliation of Valley’s gross unrecognized tax benefits for 2012, 2011, and 2010 are presented in the table below:


	2012			2011			2010
	(in thousands)
Beginning balance	$	33,000		$	21,142		$	21,965
Additions based on tax positions related to prior years		4,195			13,366			732
Settlements with taxing authorities		(5,038	)		—			—
Reductions due to expiration of statute of limitations		(1,105	)		(1,508	)		(1,555	)

Ending balance	$	31,052		$	33,000		$	21,142

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, 2012 that, if recognized, would affect the tax provision and the effective income tax rate was $22.6 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 $4.4 million and $4.9 million of interest associated with Valley’s uncertain tax positions at December 31, 2012 and 2011, 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 2008. State Bancorp, which was merged into Valley effective January 1, 2012, is currently under U.S. federal examination for the years 2010 through 2012. The examination has recently commenced, however, we do not anticipate any examination related adjustments that would result in a material change to Valley’s financial position or results of operations in future periods. Valley is also currently under examination by various state jurisdictions, and we expect the examinations to be completed within the next twelve months. Valley does not anticipate any adjustments would result in a material change to its financial position. However, Valley anticipates that it is reasonably possible that an additional tax payment in the range of $3.0 million to $5.0 million will be made during 2013.