Income Taxes (Tables)

12 Months Ended

Dec. 31, 2015

Components of income tax expense (benefit)

Total income taxes were as follows:



Year Ended December 31,	2015			2014			2013
	(in millions)
Provision (benefit) for income taxes	$	230		$	(56	)	$	156
Income taxes related to adjustments included in common shareholders' equity:
Unrealized gains (losses) on investment securities, net	(242		)	114			(697		)
Unrealized gains (losses) on derivatives classified as cash flow hedges	2			(46		)	82
Employer accounting for post-retirement plans	—			(4		)	6
Other-than-temporary impairment on debt securities	—			43			(43		)
Total income taxes	$	(10	)	$	51		$	(496	)

The components of income tax expense (benefit) were as follows:



Year Ended December 31,	2015		2014			2013
	(in millions)
Current:
Federal	$	3	$	(35	)	$	102
State and local	35		(222		)	35
Foreign	2		16			17
Total current	40		(241		)	154
Deferred	190		185			2
Total income tax expense (benefit)	$	230	$	(56	)	$	156

The significant components of deferred provision attributable to income were:



Year Ended December 31,	2015			2014		2013
	(in millions)
Deferred income tax provision (excluding the effects of other components)	$	201		$	144	$	31
Increase in Federal operating loss carryforwards	—			1		—
(Decrease) increase in State valuation allowance	(5		)	11		—
Increase in State capital loss carryforwards	(6		)	—		—
(Increase) decrease in foreign and general business tax credits	—			29		(29		)
Deferred income tax provision	$	190		$	185	$	2

Effective Tax Rates

The following table provides an analysis of the difference between effective rates based on the total income tax provision attributable to pretax income and the statutory U.S. Federal income tax rate:



Year Ended December 31,	2015					2014					2013
	(dollars are in millions)
Tax expense (benefit) at the U.S. Federal statutory income tax rate	$	196		35.0	%	$	104		35.0	%	$	(64	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	20			3.6		15			5.0		22			12.1
Adjustment of tax rate used to value deferred taxes⁽¹⁾	47			8.4		63			21.1		—			—
Non-deductible goodwill impairment⁽²⁾	—			—		—			—		215			118.1
Other non-deductible / non-taxable items⁽³⁾	1			0.2		—			—		(11		)	(6.0	)
Items affecting prior periods⁽⁴⁾	(7		)	(1.3	)	(29		)	(9.7	)	(13		)	(7.1	)
Uncertain tax positions⁽⁵⁾	4			0.7		(192		)	(64.4	)	20			11.0
Impact of foreign operations⁽⁶⁾	—			—		—			—		13			7.1
Low income housing tax credit investments	(26		)	(4.6	)	(26		)	(8.7	)	(28		)	(15.4	)
Change in valuation allowances reserves⁽⁷⁾	(5		)	(.9	)	10			3.4		—			—
Other	—			—		(1		)	(0.3	)	2			1.1
Total income tax expense (benefit)	$	230		41.1	%	$	(56	)	(18.8	)%	$	156		85.7	%


⁽¹⁾	For 2015, the amount mainly relates to the effects of revaluing our deferred tax assets for New York City Tax Reform that was enacted on April 13, 2015. For 2014, the amount mainly relates to the effects of revaluing our deferred tax assets for New York State Tax Reform that was enacted on March 31, 2014.


⁽²⁾	Represents non-deductible goodwill impairment related to our GB&M reporting unit in 2013.


⁽³⁾	For 2013, the amount includes a reversal of penalty exposure.

⁽⁴⁾

For 2014, the amount relates to changes in estimates as a result of filing the Federal and State income tax returns and a change in State tax expense as a result of filing amended State tax returns upon the closing of the Federal audits for the 2006 - 2009 tax years. For 2013, the amount relates to adjustments to current and deferred tax balance sheet accounts and changes in estimates as a result of filing the Federal and State income tax returns.


⁽⁵⁾	For 2014, the amount mainly reflects the resolution and settlement with taxation authorities of certain significant State and local tax audits during the second quarter of 2014 which is discussed further below. For 2013, the amount relates to changes in State uncertain tax positions which no longer meet the more likely than not requirement for recognition.


⁽⁶⁾	For 2013, the amount relates to foreign (United Kingdom) tax expense for which no foreign tax credits were allowed.


⁽⁷⁾	For 2014, the amount relates to the establishment of a valuation allowance against our deferred tax assets as a result of New York State Tax Reform that was enacted on March 31, 2014.

Components of net deferred tax position

The components of the net deferred tax asset are presented in the following table:



At December 31,	2015			2014
	(in millions)
Deferred tax assets:
Allowance for credit losses	$	346		$	265
Employee benefit accruals	124			130
Accrued expenses	79			143
Bond premium amortization	20			284
Interests in real estate mortgage investment conduits⁽¹⁾	561			453
Partnerships	104			105
Other	480			315
Total deferred tax assets	1,714			1,695
Valuation allowance	(6		)	(11		)
Total deferred tax assets, net of valuation allowance	1,708			1,684
Deferred tax liabilities:
Fair value adjustments	137			71
Unrealized gain on investment securities	—			103
Mortgage servicing rights	52			62
Capitalized costs	—			42
Other	45			53
Total deferred tax liabilities	234			331
Net deferred tax asset	$	1,474		$	1,353

¹⁾

Real estate mortgage investment conduits ("REMICs") are investment vehicles that hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. HSBC Bank USA holds portfolios of noneconomic residual interests in a number of REMICs. This item represents tax basis in such interests which has accumulated as a result of tax rules requiring the recognition of income related to such noneconomic residuals.

Reconciliation of unrecognized tax benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions is as follows:



	2015		2014			2013
	(in millions)
Balance at January 1,	$	14	$	540		$	478
Additions based on tax positions related to the current year	4		18			16
Reductions based on tax positions related to the current year	—		(10		)	(5		)
Additions for tax positions of prior years	8		5			66
Reductions for tax positions of prior years	—		(337		)	(15		)
Reductions related to settlements with taxing authorities	—		(202		)	—
Balance at December 31,	$	26	$	14		$	540