Tax Credit Investments

12 Months Ended

Dec. 31, 2016

INCOME TAXES (Note 13)

Income tax expense for the years ended December 31, 2016, 2015 and 2014 consisted of the following:



	2016		2015			2014
	(in thousands)
Current expense (benefit):
Federal	$	25,176	$	7,978		$	25,156
State	12,904		(493		)	(5,549		)
	38,080		7,485			19,607
Deferred expense:
Federal	10,658		(7,539		)	(13,888		)
State	16,496		23,992			25,343
	27,154		16,453			11,455
Total income tax expense	$	65,234	$	23,938		$	31,062

The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows:



	2016		2015
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	47,485	$	44,382
Depreciation	12,432		15,661
Employee benefits	16,121		16,104
Investment securities, including other-than-temporary impairment losses	17,272		18,697
Net operating loss carryforwards	46,667		57,722
Purchase accounting	33,172		40,585
Other	22,183		21,310
Total deferred tax assets	195,332		214,461
Deferred tax liabilities:
Pension plans	24,575		18,861
Other investments	20,831		15,720
Other	20,418		21,449
Total deferred tax liabilities	65,824		56,030
Net deferred tax asset (included in other assets)	$	129,508	$	158,431

Valley's federal net operating loss carryforwards totaled approximately $77.6 million at December 31, 2016 and expire during the period from 2029 through 2034 and state net operating loss carryforwards totaled approximately $514.3 million at December 31, 2016 and expire during the period from 2017 through 2036. Valley’s federal and state alternative minimum tax credit carryforwards were approximately $1.9 million and $3.7 million at December 31, 2016, respectively, and can be carried forward indefinitely.

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, 2016, 2015 and 2014 were as follows:



	2016			2015			2014
	(in thousands)
Federal income tax at expected statutory rate	$	81,683		$	44,413		$	51,532
Increase (decrease) due to:
State income tax expense, net of federal tax effect	19,197			15,274			12,866
Tax-exempt interest, net of interest incurred to carry tax-exempt securities	(5,308		)	(4,864		)	(4,406		)
Bank owned life insurance	(2,343		)	(2,385		)	(2,237		)
Tax credits from securities and other investments	(25,954		)	(28,988		)	(20,555		)
Reduction in reserve for uncertainties	—			—			(6,971		)
Other, net	(2,041		)	488			833
Income tax expense	$	65,234		$	23,938		$	31,062

A reconciliation of Valley’s gross unrecognized tax benefits for 2016, 2015 and 2014 are presented in the table below:



	2016			2015		2014
	(in thousands)
Beginning balance	$	19,892		$	18,647	$	30,713
Additions based on tax positions related to prior years	3,958			1,245		1,408
Settlements with taxing authorities	(4,820		)	—		(9,050		)
Reductions due to expiration of statute of limitations	(2,886		)	—		(4,424		)
Ending balance	$	16,144		$	19,892	$	18,647

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 $16.1 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 $4.6 million and $5.2 million of interest associated with Valley’s uncertain tax positions at December 31, 2016 and 2015, 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, 2016.

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, 2016 and 2015:



	December 31,
	2016		2015
	(in thousands)
Other Assets:
Affordable housing tax credit investments, net	$	29,567	$	32,094
Other tax credit investments, net	44,763		70,681
Total tax credit investments, net	$	74,330	$	102,775
Other Liabilities:
Unfunded affordable housing tax credit commitments	$	4,850	$	7,330
Unfunded other tax credit commitments	7,276		12,545
Total unfunded tax credit commitments	$	12,126	$	19,875

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, 2016, 2015 and 2014:



	2016		2015		2014
	(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits	$	5,013	$	4,709	$	5,296
Other tax credit investment credits and tax benefits	33,294		23,877		14,357
Total reduction in income tax expense	$	38,307	$	28,586	$	19,653
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses	$	2,077	$	2,594	$	3,184
Affordable housing tax credit investment impairment losses	450		1,321		3,211
Other tax credit investment losses	790		1,079		2,359
Other tax credit investment impairment losses	31,427		22,318		15,442
Total amortization of tax credit investments recorded in non-interest expense	$	34,744	$	27,312	$	24,196