INCOME TAXES (Note 13)

Income tax expense for the years ended December 31, 2013, 2012, and 2011 consisted of the following:


	2013		2012		2011
	(in thousands)
Current expense:
Federal	$	13,203	$	35,684	$	52,207
State		3,447		2,666		26,610

		16,650		38,350		78,817
Deferred expense (benefit):
Federal and State		30,329		28,398		(16,111	)

Total income tax expense	$	46,979	$	66,748	$	62,706

The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:


	2013		2012
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	48,042	$	53,407
Depreciation		13,327		4,972
Deferred compensation		—		5,075
Employee benefits		14,325		11,775
Investment securities, including other-than-temporary impairment losses		24,735		24,196
Net operating loss carryforwards		53,926		62,053
Purchase accounting		6,863		14,251
Accrued interest		—		12,515
Other		21,063		23,416

Total deferred tax assets		182,281		211,660
Deferred tax liabilities:
Pension plans		21,774		—
Other investments		11,096		11,182
Deferred income		—		15,886
Other		17,811		13,353

Total deferred tax liabilities		50,681		40,421

Net deferred tax asset (included in other assets)	$	131,600	$	171,239

Valley’s state net operating loss carryforwards totaled approximately $926 million at December 31, 2013 and expire during the period from 2014 through 2031. Valley also has federal alternative minimum tax credit carryforwards of approximately $1.6 million at December 31, 2013, which are available to reduce future federal regular income taxes, over an indefinite period.

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, 2013, 2012, and 2011 were as follows:


	2013			2012			2011
	(in thousands)
Federal income tax at expected statutory rate	$	62,629		$	73,631		$	68,326
(Decrease) increase due to:
Tax-exempt interest, net of interest incurred to carry tax-exempt securities		(4,876	)		(4,478	)		(3,736	)
Bank owned life insurance		(2,087	)		(2,399	)		(2,583	)
State income tax expense, net of federal tax effect		9,904			8,204			12,727
Tax credits		(17,408	)		(10,070	)		(12,760	)
Other, net		(1,183	)		1,860			732

Income tax expense	$	46,979		$	66,748		$	62,706

A reconciliation of Valley’s gross unrecognized tax benefits for 2013, 2012, and 2011 are presented in the table below:


	2013			2012			2011
	(in thousands)
Beginning balance	$	31,052		$	33,000		$	21,142
Additions based on tax positions related to prior years		1,482			4,195			13,366
Settlements with taxing authorities		(1,216	)		(5,038	)		—
Reductions due to expiration of statute of limitations		(605	)		(1,105	)		(1,508	)

Ending balance	$	30,713		$	31,052		$	33,000

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 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 $27.9 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 $4.4 million of interest associated with Valley’s uncertain tax positions at December 31, 2013 and 2012, 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 also currently under routine examination by U.S. federal and 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, 2013.