Income Taxes (Tables)

12 Months Ended

Dec. 31, 2014

Components of income tax expense (benefit)

Total income taxes for continuing operations were as follows:



Year Ended December 31,	2014			2013			2012
	(in millions)
Provision (benefit) for income taxes	$	(56	)	$	156		$	422
Income taxes related to adjustments included in common shareholder’s equity:
Unrealized gains (losses) on investment securities, net	114			(697		)	76
Unrealized gains (losses) on derivatives classified as cash flow hedges	(46		)	82			17
Employer accounting for post-retirement plans	(4		)	6			5
Other-than-temporary impairment on debt securities	43			(43		)	—
Total	$	51		$	(496	)	$	520

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



Year Ended December 31,	2014			2013		2012
	(in millions)
Current:
Federal	$	(35	)	$	102	$	238
State and local	(222		)	35		173
Foreign	16			17		(28		)
Total current	(241		)	154		383
Deferred	185			2		39
Total income tax expense (benefit)	$	(56	)	$	156	$	422

The significant components of deferred provision (benefit) attributable to income from continuing operations were:



Year Ended December 31,	2014		2013			2012
	(in millions)
Deferred income tax provision (benefit) (excluding the effects of other components)	$	144	$	31		$	(86	)
Increase in Federal operating loss carryforwards	1		—			—
Increase in state valuation allowance	11		—			—
(Increase) decrease in foreign and general business tax credits	29		(29		)	125
Deferred income tax provision (benefit)	$	185	$	2		$	39

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,	2014					2013					2012
	(dollars are in millions)
Tax expense (benefit) at the U.S. federal statutory income tax rate	$	104		35.0	%	$	(64	)	(35.0	)%	$	(289	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit	15			5.0		22			12.1		46			5.6
Adjustment of tax rate used to value deferred taxes⁽¹⁾	63			21.1		—			—		(13		)	(1.6	)
Non-deductible expense accrual related to certain regulatory matters⁽²⁾	—			—		—			—		483			58.5
Non-deductible goodwill related to branch sale⁽²⁾	—			—		—			—		139			16.8
Non-deductible goodwill impairment⁽³⁾	—			—		215			118.1		—			—
Other non-deductible / non-taxable items⁽⁴⁾	—			—		(11		)	(6.0	)	(4		)	(0.5	)
Items affecting prior periods⁽⁵⁾	(29		)	(9.7	)	(13		)	(7.1	)	—			—
Uncertain tax positions⁽⁶⁾	(192		)	(64.4	)	20			11.0		45			5.4
Impact of foreign operations⁽⁷⁾	—			—		13			7.1		51			6.2
Low income housing tax credit investments⁽⁸⁾	(26		)	(8.7	)	(28		)	(15.4	)	(29		)	(3.5	)
Change in valuation allowances reserves⁽⁹⁾	10			3.4		—			—		—			—
Other	(1		)	(0.3	)	2			1.1		(7		)	(.8	)
Total income tax expense (benefit)	$	(56	)	(18.8	)%	$	156		85.7	%	$	422		51.1	%


⁽¹⁾	For 2014, the amount relates to the effects of revaluing our deferred tax assets as a result of New York State Tax Reform that was enacted on March 31, 2014.


⁽²⁾	Represents non-deductible expense relating to certain regulatory matters and non-deductible goodwill related to the branches sold to First Niagara in 2012.


⁽³⁾	Represents non-deductible goodwill impairment related to our GB&M reporting unit in 2013.


⁽⁴⁾	The amounts mainly relate to tax exempt interest income net of non-deductible interest expense. For 2013, the amount includes a reversal of penalty exposure.

⁽⁵⁾

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 corrections to current and deferred tax balance sheet accounts and changes in estimates as a result of filing the Federal and State income tax returns.


⁽⁶⁾	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 and 2012, the amounts relate to changes in state uncertain tax positions which no longer meet the more likely than not requirement for recognition.


⁽⁷⁾	For 2013 and 2012, the amounts relate to foreign (United Kingdom) tax expense for which no foreign tax credits were allowed.


⁽⁸⁾	The amounts reflect the early adoption of ASU 2014-01 which permits an investor to amortize its Low Income Housing Tax Credit investments in proportion to the Low Income Housing tax benefits and present such benefits net of investment amortization in the tax line.


⁽⁹⁾	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,	2014			2013
	(in millions)
Deferred tax assets:
Allowance for credit losses	$	265		$	250
Employee benefit accruals	130			142
Accrued expenses	143			111
Unused tax benefit carry-forwards	16			46
Bond premium amortization	284			226
Future federal tax benefit of state uncertain tax reserves	6			171
Interests in real estate mortgage investment conduits⁽¹⁾	453			309
Other	398			499
Total deferred tax assets	1,695			1,754
Valuation allowance⁽²⁾	(11		)	—
Total deferred tax assets less valuation allowance	1,684			1,754
Deferred tax liabilities:
Fair value adjustments	71			22
Unrealized gain (loss) on investment securities	103			(8		)
Mortgage servicing rights	62			96
Capitalized costs	42			34
Others	53			53
Total deferred tax liabilities	331			197
Net deferred tax asset	$	1,353		$	1,557

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.


²⁾	The deferred tax valuation allowance is attributed to state temporary differences that, based on available evidence, it is more-likely-than-not that the deferred tax asset will not be realized. The valuation allowance was established as a result of New York State Tax Reform that was enacted on March 31, 2014.

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:



	2014			2013			2012
	(in millions)
Balance at January 1,	$	540		$	478		$	416
Additions based on tax positions related to the current year	18			16			86
Reductions based on tax positions related to the current year	(10		)	(5		)	(31		)
Additions for tax positions of prior years	5			66			32
Reductions for tax positions of prior years	(337		)	(15		)	(15		)
Reductions related to settlements with taxing authorities	(202		)	—			(10		)
Balance at December 31,	$	14		$	540		$	478