Note 12. Income Taxes

Income tax expense included in net income consisted of the following components:



	Years Ended December 31,
(in thousands)	2016		2015		2014
Included in net income
Current federal	$	43,777	$	17,378	$	41,441
Current state		1,689		4,241		1,487
Total current provision		45,466		21,619		42,928
Deferred federal		(6,127)		15,457		21,483
Deferred state		(1,712)		1,228		2,054
Total deferred provision		(7,839)		16,685		23,537
Total included in net income	$	37,627	$	38,304	$	66,465

Income tax expense does not reflect the tax effects of amounts recognized in other comprehensive income and in AOCI, a separate component of stockholder’s equity. These amounts include unrealized gains and losses on securities available for sale or transferred to held to maturity, unrealized gains and losses on derivatives and hedging transactions, and valuation adjustments of defined benefit and other post-retirement benefit plans. Refer to Note 10 for additional information on stockholder’s equity and AOCI.

Income tax expense(benefit) resulting from stock transactions under the company’s stock based compensation plans are reflected in capital surplus, a component of stockholder’s equity. The amounts impacting capital surplus for the years 2016, 2015 and 2014 were a decrease of $0.4 million, an increase of $0.2 million and an increase of $0.9 million, respectively.

Temporary differences arise between the tax bases of assets or liabilities and their carrying amounts for financial reporting purposes. The expected tax effects when these differences are resolved are recorded currently as deferred tax assets or liabilities.

Significant components of the Company’s deferred tax assets and liabilities were as follows:



	December 31,
(in thousands)	2016		2015
Deferred tax assets:
Allowance for loan losses	$	89,120	$	72,940
Employee compensation and benefits		28,401		26,853
Loan purchase accounting adjustments		12,047		18,977
Tax credit carryforward		29,085		42,850
Securities		23,169		5,038
State net operating loss		1,690		1,910
Other		14,583		10,928
Gross deferred tax assets		198,095		179,496
State valuation allowance		(1,690)		(1,910)
Subtotal valuation allowance		(1,690)		(1,910)
Net deferred tax assets		196,405		177,586
Deferred tax liabilities:
Fixed assets & intangibles		(74,518)		(80,389)
FDIC indemnification asset		(6,293)		(10,688)
Other		(11,159)		(10,679)
Gross deferred tax liabilities		(91,970)		(101,756)
Net deferred tax asset	$	104,435	$	75,830

Reported income tax expense differed from amounts computed by applying the statutory income tax rate of 35% to earnings before income taxes. The primary differences are due to tax-exempt income and federal and state tax credits. The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. These investments are made primarily in the markets the Company serves and are directed at tax credits issued under the Qualified Zone Academy Bonds (QZAB), Qualified School Construction Bonds (QSCB), as well as Federal and State New Market Tax Credit (NMTC) and Low-Income Housing Tax Credit (LIHTC) programs. The investments generate tax credits which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes. A summary of the factors that impacted income tax expense follows:



	Years Ended December 31,
	2016				2015				2014
($ in thousands)	Amount		%		Amount		%		Amount		%
Taxes computed at statutory rate	$	65,423	35.0	%	$	59,418	35.0	%	$	84,766	35.0	%
Increases (decreases) in taxes resulting from:
State income taxes, net of federal income
tax benefit		1,917	1.0			2,595	1.5			4,649	1.9
Tax-exempt interest		(14,497)	(7.8)			(7,849)	(4.6)			(6,301)	(2.6)
Bank owned life insurance		(4,833)	(2.6)			(3,798)	(2.2)			(3,554)	(1.5)
Tax credits		(10,518)	(5.6)			(12,495)	(7.4)			(16,577)	(6.8)
Other, net		135	0.1			433	0.3			3,482	1.4
Income tax expense	$	37,627	20.1	%	$	38,304	22.6	%	$	66,465	27.4	%

As of December 31, 2016, the Company had approximately $29 million in federal and state tax credit carryforwards that originated in the tax years from 2013 through 2016. The federal and state carryforwards begin expiring in 2035 and 2020, respectively. These carryforwards are primarily from investments in federal and state NMTC projects. The Company had approximately $33 million in state net operating loss carryforwards that originated in the tax years 2004 through 2016 and that begin expiring in 2019. A valuation allowance has been established for the state net operating loss carryforwards. The impact of this valuation allowance is immaterial to the financial statements. The Company recognized benefits from federal and state NMTC, LIHTC, QZAB, and QSCB.

The tax benefit of a position taken or expected to be taken in a tax return should be recognized when it is more likely than not that the position will be sustained on its technical merits. The liability for unrecognized tax benefits was immaterial at December 31, 2016, 2015 and 2014. The Company does not expect the liability for unrecognized tax benefits to change significantly during 2017. Hancock recognizes interest and penalties, if any, related to income tax matters in income tax expense, and the amounts recognized during 2016, 2015 and 2014 were insignificant.

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. Generally, the returns for years prior to 2013 are no longer subject to examination by taxing authorities.