SVB FINANCIAL GROUP

Income Taxes

We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal and California tax returns as major tax filings. Our U.S. federal tax returns for 2014 and subsequent years remain open to full examination. Our California tax returns for 2012 and subsequent tax years remain open to full examination.

The components of our provision for income taxes for 2017, 2016 and 2015 were as follows:



	Year ended December 31,
(Dollars in thousands)	2017		2016			2015
Current provision:
Federal	$	263,231	$	195,249		$	191,194
State	67,046		59,319			50,815
Deferred expense (benefit):
Federal	24,654		(3,560		)	(11,270		)
State	532		(675		)	(1,985		)
Income tax expense	$	355,463	$	250,333		$	228,754

Our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests. The reconciliation between the federal statutory income tax rate and our effective income tax rate for 2017, 2016 and 2015, is as follows:



	December 31,
(Dollars in thousands)	2017		2016		2015
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of the federal tax effect	5.8		5.9		5.7
Net deferred tax assets revaluation (TCJ Act)	4.3		—		—
Meals and entertainment	0.3		0.4		0.3
Disallowed officer's compensation	0.1		0.1		0.3
Share-based compensation expense on incentive stock options and ESPP	(2.1	)	—		—
Qualified affordable housing project tax credits	(0.4	)	(0.5	)	(0.5	)
Tax-exempt interest income	(0.3	)	(0.2	)	(0.2	)
Valuation allowance benefit	—		(0.3	)	(0.4	)
Other, net	(0.7	)	(0.9	)	(0.3	)
Effective income tax rate	42.0	%	39.5	%	39.9	%

Deferred tax assets and liabilities at December 31, 2017 and 2016, consisted of the following:



	December 31,
(Dollars in thousands)	2017			2016
Deferred tax assets:
Allowance for loan losses	$	84,812		$	110,248
Net unrealized losses on AFS debt securities	12,404			—
Share-based compensation expense	9,418			15,498
State income taxes	9,186			12,682
Accrued compensation	8,336			6,799
Deferred rent	8,169			10,050
Other accruals	7,165			20,502
Net operating loss	2,300			4,116
Loan fee income and costs	1,189			8,266
Other	3,639			2,168
Deferred tax assets	146,618			190,329
Valuation allowance	(2,624		)	(4,440		)
Net deferred tax assets after valuation allowance	143,994			185,889

Deferred tax liabilities:
Derivative equity warrant assets	(29,127		)	(36,406		)
Change in accounting method (section 481(a))	(15,953		)	(35,262		)
Net unrealized gains on AFS equity securities	(11,145		)	—
Non-marketable and other securities	(10,724		)	(6,075		)
Premises and equipment and other intangibles	(9,223		)	(11,956		)
Net unrealized gains on AFS debt securities	—			(17,970		)
Other	(3,977		)	(6,380		)
Deferred tax liabilities	(80,149		)	(114,049		)
Net deferred tax assets	$	63,845		$	71,840

At December 31, 2017 we revalued our net deferred tax assets based on the lower corporate tax rate associated with the TCJ Act enacted into law on December 22, 2017. The TCJ Act resulted in increases to income tax expense of $33.8 million related to the revaluation of our deferred tax assets, incorporating the new federal tax rate related to the TCJ Act.

At December 31, 2017 and 2016, federal net operating loss carryforwards totaled $3 million and $4 million, respectively. Our foreign net operating loss carryforwards totaled $11 million and $16 million at December 31, 2017 and 2016, respectively. These net operating loss carryforwards expire at various dates beginning in 2022.

Currently, we believe that it is more likely than not that the benefit from these net operating loss carryforwards, which are associated with our former eProsper business unit, part of SVB Analytics, and our UK operations, will not be realized in the near term due to uncertainties in the timing of future profitability in those businesses. In recognition of this, our valuation allowance is $3 million on the deferred tax assets related to these net operating loss carryforwards and research and development credits at December 31, 2017. We believe it is more likely than not that the remaining deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. Therefore, no valuation allowance was provided for the remaining deferred tax assets.

At December 31, 2017, our unrecognized tax benefit was $12 million, the recognition of which would reduce our income tax expense by $9 million. We do not expect that our unrecognized tax benefit will materially change in the next 12 months.

We recognize interest and penalties related to income tax matters as part of income before income taxes. Interest and penalties were not material for the years ended December 31, 2017, 2016 and 2015.

A summary of changes in our unrecognized tax benefit (including interest and penalties) for December 31, 2017, 2016 and 2015 is as follows:



(Dollars in thousands)	Reconciliation of Unrecognized Tax Benefit			Interest & Penalties			Total
Balance at December 31, 2014	$	3,397		$	100		$	3,497
Additions for tax positions for current year	1,208			—			1,208
Additions for tax positions for prior years	—			228			228
Reduction for tax positions for prior years	(1,228		)	(22		)	(1,250		)
Lapse of the applicable statute of limitations	(20		)	(5		)	(25		)
Balance at December 31, 2015	$	3,357		$	301		$	3,658
Additions for tax positions for current year	793			—			793
Additions for tax positions for prior years	1,427			166			1,593
Reduction for tax positions for prior years	(271		)	(16		)	(287		)
Lapse of the applicable statute of limitations	(37		)	(9		)	(46		)
Balance at December 31, 2016	$	5,269		$	442		$	5,711
Additions for tax positions for current year	3,141			—			3,141
Additions for tax positions for prior years	3,378			754			4,132
Reduction for tax positions for prior years	(223		)	(1		)	(224		)
Lapse of the applicable statute of limitations	(60		)	(17		)	(77		)
Balance at December 31, 2017	$	11,505		$	1,178		$	12,683