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 2018, resulting in a $2.3 million tax benefit for the year ended December 31, 2018.



	2019		2018			2017
	(in thousands)
Current expense:
Federal	$	95,317	$	51,147		$	8,483
State	36,457		28,898			5,500
	131,774		80,045			13,983
Deferred expense (benefit):
Federal	10,444		(17,463		)	49,169
State	4,784		5,683			27,679
	15,228		(11,780		)	76,848
Total income tax expense	$	147,002	$	68,265		$	90,831



	2019		2018
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	44,486	$	42,882
Depreciation	—		19,111
Employee benefits	28,263		13,301
Investment securities, including other-than-temporary impairment losses	—		13,222
Net operating loss carryforwards	19,768		21,570
Purchase accounting	41,857		33,629
Other	19,904		22,104
Total deferred tax assets	154,278		165,819
Deferred tax liabilities:
Pension plans	19,686		18,786
Depreciation	4,527		—
Investment securities, including other-than-temporary impairment losses	2,319		—
Other investments	7,731		17,758
Core deposit intangibles	16,620		14,223
Other	13,665		8,858
Total deferred tax liabilities	64,548		59,625
Valuation Allowance	916		733
Net deferred tax asset (included in other assets)	$	88,814	$	105,461

Valley's federal net operating loss carryforwards totaled approximately $72.1 million at December 31, 2019 and expire during the period from 2029 through 2034. Valley's capital loss carryforwards totaled $3.1 million at December 31, 2019 and expire at December 31, 2023. State net operating loss carryforwards totaled approximately $85.3 million at December 31, 2019 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 years ended December 31, 2019 and 2018, and 35 percent for the year ended December 31, 2017 were as follows:



	2019			2018			2017
	(in thousands)
Federal income tax at expected statutory rate	$	95,927		$	69,235		$	88,458
Increase (decrease) due to:
State income tax expense, net of federal tax effect	32,581			23,851			21,046
Tax-exempt interest, net of interest incurred to carry tax-exempt securities	(3,118		)	(3,974		)	(5,245		)
Bank owned life insurance	(1,637		)	(1,734		)	(2,568		)
Tax credits from securities and other investments	(11,636		)	(20,798		)	(27,037		)
FDIC insurance premium	2,507			3,318			—
Impact of the Tax Act	—			(2,274		)	15,441
Addition to reserve for uncertainties	31,123			—			—
Other, net	1,255			641			736
Income tax expense	$	147,002		$	68,265		$	90,831

The federal energy investment tax credit (FEITC) program encourages the use of renewable energy, including solar energy. The energy program reduces federal income taxes by offering a 30 percent tax credit to owners of energy property that meets established performance and quality standards. In addition, there are other returns from tax losses and cash flows generated by the investment. Typically, an owner and the tax credit investor, such as Valley, establish a limited partnership. The tax credit investor usually has a substantial, but passive, interest in the partnership and the owner of the solar energy property has a small interest. The ownership structure permits the tax benefits to pass through to the tax credit investor with an expected exit from ownership after five years.

The amount of the FEITC is calculated based on the total cost of a renewable energy property. From 2013 to 2015, Valley invested in three FEITC funds (Fund VI, Fund XII and Fund XIX) sponsored by DC Solar to purchase a total of 512 mobile solar generator units. The valuation of the unit price of the solar units was supported by an appraisal prepared by a well-recognized national appraisal firm. The total tax credits of $22.8 million were used to reduce Valley’s federal income taxes payable in its consolidated financial statements from 2013 to 2015.

The full value of the FEITC is earned immediately when a solar energy property is placed in service. However, the tax credit is subject to recapture for federal tax purposes for a five-year compliance period, if the property ceases to remain eligible for the tax credit. A property may become ineligible during the compliance period due to (i) a sale or disposal of the property, (ii) lease of the property to a tax exempt entity or (iii) its removal from service (i.e., no longer available for lease). During the first year after the property has been placed in service, the recapture rate is 100 percent of the tax credit. The rate declines by 20 percent each year thereafter until the end of the fifth year. The compliance period expires at the end of the fifth year after the property has been placed in service. All three funds leased the mobile solar generator units to DC Solar distributions, which stated its intention to sublease the units to third parties.

An entity shall initially recognize the financial statement effects of a tax position when it is more likely than not (or a likelihood of more than 50 percent), based on the technical merits, that the position will be sustained upon examination. The level of evidence that is necessary and appropriate to support an entity's assessment of the technical merits of a tax position is a matter of judgment that depends on all available information. At each of the investment dates, Valley obtained two tax opinions from national law firms that, based upon the facts recited, support the recognition of the tax credits in its tax returns. Based upon management's review of the tax opinions on the investment’s legal structure, Valley recognized and measured each tax position at 100 percent of the tax credit.

Valley's subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances, and information available at the latest quarterly reporting date. A change in judgment that results in subsequent derecognition or change in measurement of a tax position taken in a prior annual period (including any related interest and penalties) is recognized as a discrete item in the period in which the change occurs.

In late February 2019, Valley learned of Federal Bureau of Investigation allegations of fraudulent conduct by DC Solar, including information about asset seizures of DC Solar property and assets of its principals and ongoing federal investigations. Since learning of the allegations, Valley conducted an ongoing investigation coordinated with other DC Solar fund investors, investors' outside counsel and a third party specialist. The facts uncovered to date by the investor group impact each investor differently, affecting their likelihood of loss and the ultimate amount of tax benefit likely to be recaptured. To date, over 97 percent of the 512 solar generator units purchased by Valley's three funds have been positively identified by a third party specialist at several leasee and other locations throughout the United States. Valley also learned through its investigation that the IRS has challenged the valuation appraisals of similar solar generator units that were used to determine the federal renewable energy tax credits related to another DC Solar fund owned by an unrelated investor.

Given the circumstances that Valley was aware of during the first nine months of 2019, including the aforementioned IRS challenge of the appraisals of similar units used by an unrelated fund investor, and management's best judgments regarding the settlement of the tax positions that it would ultimately accept with the IRS, Valley expected a partial loss and tax benefit recapture. During the fourth quarter 2019, several of the co-conspirators pleaded guilty to fraud in the on-going federal investigation. Based upon this new information, Valley deemed that its tax positions related to the DC Solar funds did not meet the more likely than not recognition threshold (discussed above) in Valley's tax reserve assessment at December 31, 2019. As result of this assessment and a partial reserve recognized by Valley in the first quarter 2019, Valley's net income for the year ended December 31, 2019 includes an increase to Valley's provision for income taxes of $31.1 million reflecting the reserve for uncertain tax liability positions established in 2019 (shown in the table below). As of December 31, 2019, Valley believes it is fully reserved for the renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest. However, Valley can provide no assurance that it will not recognize additional tax provisions related to this uncertain tax liability in the future.



	2019		2018			2017
	(in thousands)
Beginning balance	$	—	$	4,238		$	16,144
Additions based on tax positions related to prior years	31,918		—			1,121
Settlements with taxing authorities	—		—			(13,027		)
Reductions due to expiration of statute of limitations	—		(4,238		)	—
Ending balance	$	31,918	$	—		$	4,238

The entire balance of unrecognized tax benefits, if recognized, would favorably affect Valley's 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 $6.1 million and $1.8 million of interest expense associated with Valley’s uncertain tax positions at December 31, 2019 and 2017, respectively. There was no interest expense accrued for uncertain tax positions during the year ended December 31, 2018.

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 2014. Valley is 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, 2019.

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. After initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair values are increased to reflect Valley's share of income of the investee and are reduced to reflect its share of losses of the investee, dividends received and other-than-temporary impairments, if applicable. See the "Other-Than-Temporary Impairment Analysis" section below.

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, 2019 and 2018:



	December 31,
	2019		2018
	(in thousands)
Other Assets:
Affordable housing tax credit investments, net	$	25,049	$	36,961
Other tax credit investments, net	59,081		68,052
Total tax credit investments, net	$	84,130	$	105,013
Other Liabilities:
Unfunded affordable housing tax credit commitments	$	1,539	$	4,520
Unfunded other tax credit commitments	1,139		8,756
Total unfunded tax credit commitments	$	2,678	$	13,276



	2019		2018		2017
	(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits	$	6,757	$	6,713	$	7,383
Other tax credit investment credits and tax benefits	10,205		21,351		35,530
Total reduction in income tax expense	$	16,962	$	28,064	$	42,913
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses	$	2,184	$	1,880	$	2,748
Affordable housing tax credit investment impairment losses	3,295		2,544		4,684
Other tax credit investment losses	5,668		1,970		2,866
Other tax credit investment impairment losses	9,245		17,806		31,449
Total amortization of tax credit investments recorded in non-interest expense	$	20,392	$	24,200	$	41,747

An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value. The determination of whether a decline in value of a tax credit investment is other-than-temporary requires significant judgment and is performed separately for each investment. The tax credit investments are reviewed for impairment quarterly, or whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. These circumstances can include, but are not limited to, the following factors:

On a quarterly basis, Valley obtains financial reporting on its underlying tax credit investment assets for each fund from the fund manager who is independent of Valley and the Fund Sponsor. The financial reporting is reviewed for deterioration in the financial condition of the fund, the level of cash flows and any significant losses or impairment charges. Valley also regularly reviews the condition and continuing prospects of the underlying operations of the investment with the fund manager, including any observations from site visits and communications with the Fund Sponsor, if available. Annually, Valley obtains the audited financial statements prepared by an independent accounting firm for each investment, as well as the annual tax returns. Generally, none of the aforementioned review factors are individually conclusive and the relative importance of each factor will vary based on facts and circumstances. However, the longer the expected period of recovery, the stronger and more objective the positive evidence needs to be in order to overcome the presumption that the impairment is other than temporary. If management determines that a decline in value is other than temporary per its quarterly and annual reviews, including current probable cash flow projections, the applicable tax credit investment is written down to its estimated fair value through an impairment charge to earnings, which establishes the new cost basis of the investment.

The aggregate unamortized investment related to three federal renewable energy tax credit funds sponsored by DC Solar represented approximately $2.4 million (or approximately $800 thousand for each fund) of the $59.1 million of net other tax credit investments reported as of December 31, 2019. These funds are disclosed in detail in Note 14. During the first quarter 2019, Valley determined that future cash flows related to the remaining investments in all three funds were not probable based upon new information available, including the sponsor’s bankruptcy proceedings which were reclassified to Chapter 7 from Chapter 11 in late March 2019. As a result, Valley recognized an other-than-temporary impairment charge for the entire aggregate unamortized investment of $2.4 million during the first quarter 2019, which is included within amortization of tax credit investments for the year ended December 31, 2019.