Income Taxes (Tables)

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Components of income tax expense (benefit)

Total income taxes was as follows:

Year Ended December 31,	2020		2019		2018
	(in millions)
Provision (benefit) for income taxes	$	(42)	$	157	$	266
Income tax expense (benefit) included in common equity related to:
Unrealized gains (losses) on investment securities	274		128		(68)
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread	8		(98)		103
Unrealized gains (losses) on derivatives designated as cash flow hedges	23		3		12
Employer accounting for post-retirement plans	(1)		(5)		3
Cumulative effect adjustment to initially apply new accounting guidance for stranded tax effects resulting from Tax Legislation(1)	—		—		91
Total income taxes	$	262	$	185	$	407

(1)Reflects the adoption of new accounting guidance in 2018 which resulted in a cumulative effect adjustment as of January 1, 2018 to reclassify the stranded tax effects resulting from the change in the Federal corporate income tax rate from accumulated other comprehensive income (loss) to retained earnings.

The components of the provision for income taxes were as follows:

Year Ended December 31,	2020		2019		2018
	(in millions)
Current:
Federal	$	(45)	$	(3)	$	68
State and local	(9)		35		41
Foreign	(13)		16		6
Total current	(67)		48		115
Deferred	25		109		151
Provision (benefit) for income taxes	$	(42)	$	157	$	266

Effective Tax Rates

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

Year Ended December 31,	2020				2019				2018
	(dollars are in millions)
Tax expense (benefit) at the U.S. Federal statutory income tax rate	$	(206)	(21.0)	%	$	57	21.0	%	$	123	21.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	(2)		(.2)		23		8.5		40		6.8
Adjustment of Federal tax rate used to value deferred taxes(1)	—		—		—		—		(31)		(5.3)
Non-deductible FDIC assessment fees	15		1.5		5		1.9		27		4.6
Non-deductible goodwill impairment(2)	165		16.8		77		28.5		—		—
Other non-deductible / non-taxable items(3)	9		.9		—		—		107		18.3
Items affecting prior periods(4)	3		.3		7		2.6		(1)		(.2)
Uncertain tax positions	(8)		(.8)		5		1.9		6		1.1
Low income housing and other tax credit investments	(14)		(1.4)		(13)		(4.8)		(5)		(.9)
Other	(4)		(.4)		(4)		(1.5)		—		—
Provision (benefit) for income taxes	$	(42)	(4.3)	%	$	157	58.1	%	$	266	45.4	%

(1)The amount primarily relates to tax return adjustments on certain deferred tax assets impacted by the change in the Federal corporate income tax rate.

(2)For 2020, the amount represents non-deductible goodwill impairment related to our previously separate Retail Banking and Wealth Management and Private Banking businesses. For 2019, the amount represents non-deductible goodwill impairment related to our previously separate Retail Banking and Wealth Management business.

(3)The amounts primarily relate to non-deductible penalties related to legal matters.

(4)For 2020, the amount primarily relates to prior year State audit settlements, partially offset by changes in estimates as a result of filing the 2019 Federal and State income tax returns. For 2019, the amount primarily relates to changes in estimates as a result of filing the 2018 Federal income tax return and a reduction in a State and local capital loss carryback claim, partially offset by prior year State audit adjustments.

Components of net deferred tax position

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

At December 31,	2020		2019
	(in millions)
Deferred tax assets:
Allowance for credit losses	$	245	$	153
Accrued expenses	108		76
Interests in real estate mortgage investment conduits(1)	158		181
Unrealized losses on investment securities	—		36
Capitalized costs(2)	501		595
Lease liabilities	152		190
Other	268		285
Total deferred tax assets	1,432		1,516
Valuation allowance	—		(8)
Total deferred tax assets, net of valuation allowance	1,432		1,508
Deferred tax liabilities:
Lease ROU assets	127		172
Unrealized gains on investment securities	237		—
Other	57		36
Total deferred tax liabilities	421		208
Net deferred tax asset	$	1,011	$	1,300

(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)Reflects our tax return election to capitalize certain service costs.

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:

	2020		2019		2018
	(in millions)
Balance at January 1,	$	30	$	24	$	17
Additions based on tax positions related to the current year	—		—		2
Additions for tax positions of prior years	—		7		6
Reductions for tax positions of prior years	(1)		(1)		—
Reductions related to settlements with taxing authorities	(9)		—		(1)
Balance at December 31,	$	20	$	30	$	24