Income Taxes

12 Months Ended

Dec. 31, 2018

INCOME TAXES (Note 13)

The U.S. Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduced the U.S. statutory corporate tax rate from 35 percent to 21 percent.

In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a one-year measurement period for companies to complete the accounting. Valley reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent Valley’s accounting for certain income tax effects of the Tax Act is incomplete but it can determine a reasonable estimate, Valley recorded a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, Valley made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017. The accounting for the tax effects of the Tax Act was completed with the final 2017 tax returns in the fourth quarter of 2018, resulting in a $2.3 million tax benefit for the year ended December 31, 2018.

Income tax expense for the years ended December 31, 2018, 2017 and 2016 consisted of the following:



	2018			2017		2016
	(in thousands)
Current expense:
Federal	$	51,147		$	8,483	$	25,176
State	28,898			5,500		12,904
	80,045			13,983		38,080
Deferred (benefit) expense:
Federal	(17,463		)	49,169		10,658
State	5,683			27,679		16,496
	(11,780		)	76,848		27,154
Total income tax expense	$	68,265		$	90,831	$	65,234

The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows:



	2018		2017
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	42,882	$	34,885
Depreciation	19,111		8,336
Employee benefits	13,301		10,596
Investment securities, including other-than-temporary impairment losses	13,222		5,021
Net operating loss carryforwards	21,570		30,658
Purchase accounting	33,629		18,819
Capital loss carryforward	830		—
Other	21,274		21,930
Total deferred tax assets	165,819		130,245
Deferred tax liabilities:
Pension plans	18,786		18,912
Other investments	17,758		13,234
Deferred income	—		37,952
Core deposit intangibles	14,223		5,182
Other	8,858		7,469
Total deferred tax liabilities	59,625		82,749
Valuation Allowance	733		—
Net deferred tax asset (included in other assets)	$	105,461	$	47,496

Valley's federal net operating loss carryforwards totaled approximately $80.2 million at December 31, 2018 and expire during the period from 2029 through 2034. Valley's capital loss carryforwards totaled $3.1 million at December 31, 2018 and expire at December 31, 2023. State net operating loss carryforwards totaled approximately $104 million at December 31, 2018 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 year ended December 31, 2018, and 35 percent for the years ended December 31, 2017 and 2016 were as follows:



	2018			2017			2016
	(in thousands)
Federal income tax at expected statutory rate	$	69,235		$	88,458		$	81,683
Increase (decrease) due to:
State income tax expense, net of federal tax effect	23,851			21,046			19,197
Tax-exempt interest, net of interest incurred to carry tax-exempt securities	(3,974		)	(5,245		)	(5,308		)
Bank owned life insurance	(1,734		)	(2,568		)	(2,343		)
Tax credits from securities and other investments	(20,798		)	(27,037		)	(25,954		)
FDIC insurance premium	3,318			—			—
Impact of the Tax Act	(2,274		)	15,441			—
Other, net	641			736			(2,041		)
Income tax expense	$	68,265		$	90,831		$	65,234

A reconciliation of Valley’s gross unrecognized tax benefits for 2018, 2017 and 2016 are presented in the table below:



	2018			2017			2016
	(in thousands)
Beginning balance	$	4,238		$	16,144		$	19,892
Additions based on tax positions related to prior years	—			1,121			3,958
Settlements with taxing authorities	—			(13,027		)	(4,820		)
Reductions due to expiration of statute of limitations	(4,238		)	—			(2,886		)
Ending balance	$	—		$	4,238		$	16,144

The entire balance of unrecognized tax benefits, if recognized, would favorably affect our effective income tax rate. Valley’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Valley accrued approximately $1.8 million and $4.6 million of interest associated with Valley’s uncertain tax positions at December 31, 2017 and 2016, respectively.

Valley believes no provisions for income tax uncertainties consistent with ASC 740 should be recorded as of December 31, 2018. Valley is evaluating the possibility of recording an uncertain tax position liability in 2019 with regards to its investments in mobile solar generators sold and managed by DC Solar and its affiliates (DC Solar). For further information, see Note 23 - Subsequent Events.

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 2013. 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 12 months. Valley has considered, for all open audits, any potential adjustments in establishing our reserve for unrecognized tax benefits as of December 31, 2018.

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, 2018 and 2017:



	December 31,
	2018		2017
	(in thousands)
Other Assets:
Affordable housing tax credit investments, net	$	36,961	$	22,135
Other tax credit investments, net	68,052		42,015
Total tax credit investments, net	$	105,013	$	64,150
Other Liabilities:
Unfunded affordable housing tax credit commitments	$	4,520	$	3,690
Unfunded other tax credit commitments	8,756		15,020
Total unfunded tax credit commitments	$	13,276	$	18,710

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, 2018, 2017 and 2016:



	2018		2017		2016
	(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits	$	6,713	$	7,383	$	5,013
Other tax credit investment credits and tax benefits	21,351		35,530		33,294
Total reduction in income tax expense	$	28,064	$	42,913	$	38,307
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses	$	1,880	$	2,748	$	2,077
Affordable housing tax credit investment impairment losses*	2,544		4,684		450
Other tax credit investment losses	1,970		2,866		790
Other tax credit investment impairment losses*	17,806		31,449		31,427
Total amortization of tax credit investments recorded in non-interest expense	$	24,200	$	41,747	$	34,744


*	As a result of the Tax Act, Valley incurred additional impairment of $2.2 million and $2.1 million related to affordable housing tax credit investments and other tax credit investments, respectively, during the fourth quarter of 2017.