UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 1-7436

HSBC USA Inc.
(Exact name of registrant as specified in its charter)

Maryland	13-2764867
(State of Incorporation)	(I.R.S. Employer Identification No.)
452 Fifth Avenue, New York, New York	10018
(Address of principal executive offices)	(Zip Code)
(716) 841-2424 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and a large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

At October 31, 2007, there were 706 shares of the registrant’s Common Stock outstanding, all of which are owned by HSBC North America Inc.

DOCUMENTS INCORPORATED BY REFERENCE

None

HSBC USA Inc.
Form 10-Q

TABLE OF CONTENTS

Part I	FINANCIAL INFORMATION
		Page
Item 1.	Consolidated Financial Statements
	Statements of Income	3
	Balance Sheets	4
	Statements of Changes in Shareholders’ Equity	5
	Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
	Forward-Looking Statements	27
	Executive Overview	27
	Basis of Reporting	30
	Balance Sheet Review	33
	Results of Operations	36
	Segment Results	50
	Credit Quality	57
	Off-Balance Sheet Arrangements	64
	Risk Management	65
	Average Balances and Interest Rates	72
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74
Item 4.	Controls and Procedures	74
Part II	OTHER INFORMATION
Item 1A.	Risk Factors	75
Item 6.	Exhibits	75
Signature		76

2

HSBC USA Inc. Consolidated Statements of Income (Unaudited)
	Three months ended September 30,					Nine months ended September 30,
	2007			2006		2007			2006
	(in millions)
Interest income:
Loans	$	1,586		$	1,444	$	4,505		$	4,112
Securities		317			289		879			826
Trading assets		167			107		476			317
Short-term investments		241			209		719			528
Other		60			27		135			64
Total interest income		2,371			2,076		6,714			5,847
Interest expense:
Deposits		993			828		2,841			2,246
Short-term borrowings		90			91		266			237
Long-term debt		365			380		1,087			1,077
Total interest expense		1,448			1,299		4,194			3,560
Net interest income		923			777		2,520			2,287
Provision for credit losses		402			207		871			586
Net interest income after provision for credit losses		521			570		1,649			1,701
Other revenues:
Trust income		26			22		73			66
Service charges		53			52		158			149
Credit card fees		225			148		601			409
Other fees and commissions		118			110		312			302
HSBC affiliate income		46			61		134			182
Other (loss) income		(187	)		157		(135	)		165
Residential mortgage banking revenue		6			6		69			57
Trading revenues		28			52		477			600
Securities gains, net		59			6		96			16
Total other revenues		374			614		1,785			1,946
Operating expenses:
Salaries and employee benefits		337			317		1,016			953
Occupancy expense, net		63			54		181			163
Support services from HSBC affiliates		280			273		844			785
Other expenses		211			175		571			479
Total operating expenses		891			819		2,612			2,380
Income before income tax expense		4			365		822			1,267
Income tax (credit) expense		(17	)		121		237			429
Net income	$	21		$	244	$	585		$	838

The accompanying notes are an integral part of the consolidated financial statements.

3

HSBC USA Inc. Consolidated Balance Sheets (Unaudited)
	September 30, 2007				December 31, 2006
	(in millions)
Assets
Cash and due from banks		$	2,585			$	3,359
Interest bearing deposits with banks			8,126				1,921
Federal funds sold and securities purchased under resale agreements			11,070				13,775
Trading assets			31,582				23,630
Securities available for sale			21,609				19,783
Securities held to maturity (fair value $2,973 million and $3,040 million at September 30, 2007 and December 31, 2006, respectively)			2,946				2,972
Loans			92,666				90,237
Less - allowance for credit losses			1,058				897
Loans, net			91,608				89,340
Properties and equipment, net			557				540
Intangible assets			579				521
Goodwill			2,716				2,716
Other assets			12,043				6,260
Total assets		$	185,421			$	164,817
Liabilities
Deposits in domestic offices:
Noninterest bearing		$	12,027			$	12,813
Interest bearing (includes $1,754 million and $1,322 million of deposits recorded at fair value at September 30, 2007 and December 31, 2006, respectively)			67,592				61,538
Deposits in foreign offices:
Noninterest bearing			1,261				727
Interest bearing			29,928				27,068
Total deposits			110,808				102,146
Trading liabilities			16,819				12,314
Short-term borrowings			9,404				5,073
Interest, taxes and other liabilities			8,246				3,771
Long-term debt			28,131				29,252
Total liabilities			173,408				152,556
Shareholders’ equity
Preferred stock			1,690				1,690
Common shareholder’s equity:
Common stock ($5 par; 150,000,000 shares authorized; 706 shares issued and outstanding at September 30, 2007 and December 31, 2006)			—	(1)			—	(1)
Capital surplus			8,123				8,124
Retained earnings			2,536				2,661
Accumulated other comprehensive loss			(336	)			(214	)
Total common shareholder’s equity			10,323				10,571
Total shareholders’ equity			12,013				12,261
Total liabilities and shareholders’ equity		$	185,421			$	164,817

The accompanying notes are an integral part of the consolidated financial statements.

(1) Less than $500 thousand

4

HSBC USA Inc. Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
	Nine months ended September 30,
	2007				2006
	(in millions)
Preferred stock
Balance, January 1,		$	1,690			$	1,316
Preferred stock issuance			—				374
Balance, September 30,			1,690				1,690
Common stock
Balance, January 1 and September 30,			—	(1)			—	(1)
Capital surplus
Balance, January 1,			8,124				8,118
Capital contribution from parent			2				15
Preferred stock issuance costs			—				(9	)
Employee benefit plans and other			(3	)			4
Balance, September 30,			8,123				8,128
Retained earnings
Balance, January 1,			2,661				2,172
Net income			585				838
Cash dividends declared on preferred stock			(75	)			(62	)
Cash dividends declared on common stock			(635	)			(455	)
Cumulative effect of change in accounting for mortgage servicing assets			—				(4	)
Balance, September 30,			2,536				2,489
Accumulated other comprehensive income
Balance, January 1,			(214	)			(12	)
Net change in net unrealized losses on securities available for sale, net of tax			(45	)			(113	)
Net change in net unrealized (losses) gains on derivatives classified as cash flow hedges, net of tax			(90	)			(73	)
Net change in net unrealized gains on interest only strip receivables, net of tax			—				(6	)
Unrecognized actuarial gains, transition obligation and prior service costs relating to pension and postretirement benefits, net of tax			10				—
Foreign currency translation adjustments, net of tax			3				(2	)
Other comprehensive loss, net of tax			(122	)			(194	)
Balance, September 30,			(336	)			(206	)
Total shareholders’ equity, September 30,		$	12,013			$	12,101
Comprehensive income
Net income		$	585			$	838
Other comprehensive loss			(122	)			(194	)
Comprehensive income		$	463			$	644

The accompanying notes are an integral part of the consolidated financial statements.

(1) Less than $500 thousand

5

HSBC USA Inc. Consolidated Statements of Cash Flows (Unaudited)
	Nine months ended September 30,
	2007				2006
	(in millions)
Cash flows from operating activities
Net income		$	585			$	838
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation, amortization and deferred taxes			69				294
Provision for credit losses			871				586
Net change in other assets and liabilities			(4,529	)			1,452
Net change in loans held for sale to HSBC Markets (USA) Inc. (HMUS):
Loans acquired from originators			(5,295	)			(13,024	)
Sales of loans to HMUS			5,749				12,657
Net change in other loans held for sale			(2,154	)			132
Net change in loans attributable to tax refund anticipation loans program:
Originations of loans			(17,433	)			(16,100	)
Sales of loans to HSBC Finance Corporation, including premium			17,645				16,100
Net change in trading assets and liabilities			(52	)			(1,803	)
Net change in fair value of derivatives and hedged items			642				733
Net cash (used in) provided by operating activities			(3,902	)			1,865
Cash flows from investing activities
Net change in interest bearing deposits with banks			(6,205	)			(2	)
Net change in federal funds sold and securities purchased under resale agreements			2,705				(10,126	)
Net change in securities available for sale:
Purchases of securities available for sale			(12,947	)			(5,981	)
Proceeds from sales of securities available for sale			3,736				2,366
Proceeds from maturities of securities available for sale			7,332				1,799
Net change in securities held to maturity:
Purchases of securities held to maturity			(187	)			(761	)
Proceeds from maturities of securities held to maturity			213				941
Net change in loans:
Originations, net of collections			15,491				16,616
Loans purchased from HSBC Finance Corporation			(17,136	)			(16,849	)
Net cash used for acquisitions of properties and equipment			(71	)			(51	)
Other, net			(123	)			(211	)
Net cash used in investing activities			(7,192	)			(12,259	)
Cash flows from financing activities
Net change in deposits			8,662				6,536
Net change in short-term borrowings			4,331				676
Net change in long-term debt:
Issuance of long-term debt			5,019				5,685
Repayment of long-term debt			(6,981	)			(3,113	)
Preferred stock issuance, net of issuance costs			—				365
Other (decreases) increases in capital surplus			(1	)			19
Dividends paid			(710	)			(517	)
Net cash provided by financing activities			10,320				9,651
Net change in cash and due from banks			(774	)			(743	)
Cash and due from banks at beginning of period			3,359				4,441
Cash and due from banks at end of period		$	2,585			$	3,698

The accompanying notes are an integral part of the consolidated financial statements.

6

Notes to Consolidated Financial Statements

Note 1. Organization and Basis of Presentation

HSBC USA Inc. is an indirect wholly owned subsidiary of HSBC North America Holdings Inc. (HNAH), which is an indirect wholly owned subsidiary of HSBC Holdings plc (HSBC). The accompanying unaudited interim consolidated financial statements of HSBC USA Inc. and its subsidiaries (collectively, HUSI), including its principal subsidiary, HSBC Bank USA, National Association (HBUS), have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information, as well as in accordance with predominant practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. These unaudited interim financial statements should be read in conjunction with HUSI’s Annual Report on Form 10-K for the year ended December 31, 2006 (the 2006 Form 10-K). Certain reclassifications have been made to prior period amounts to conform to the current period presentations. The accounting and reporting policies of HUSI are consistent, in all material respects, with those used to prepare the 2006 Form 10-K, except for the impact of new accounting pronouncements summarized in Note 15 of these unaudited interim consolidated financial statements.

The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Interim results should not be considered indicative of results in future periods.

Note 2. Trading Assets and Liabilities

Trading assets and liabilities are summarized in the following table.

	September 30, 2007			December 31, 2006
	(in millions)
Trading assets:
U.S. Treasury		$	408		$	646
U.S. Government agency			3,178			1,902
Asset backed securities			2,926			3,053
Corporate bonds			1,362			1,420
Other securities			5,787			4,903
Precious metals			4,659			2,716
Fair value of derivatives			13,262			8,990
Total		$	31,582		$	23,630
Trading liabilities:
Securities sold, not yet purchased		$	1,804		$	1,914
Payables for precious metals			1,814			1,336
Fair value of derivatives			13,201			9,064
Total		$	16,819		$	12,314

During the second quarter of 2007, HUSI adopted the reporting requirements of FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39 (refer to Note 15 of these consolidated financial statements). In accordance with this standard, HUSI offsets fair value amounts recognized for the obligation to return cash collateral or the right to reclaim cash collateral against the fair value of derivative instruments executed with the same counterparty under a master netting agreement. As a result of application of this standard, certain reclassifications have been made to the December 31, 2006 consolidated balance sheet, as noted below.

At September 30, 2007 and December 31, 2006, the fair value of derivatives included in trading assets have been reduced by $3.9 billion and $2.4 billion, respectively, of amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties. At December 31, 2006, these amounts were originally reported as interest bearing deposits.

7

At September 30, 2007 and December 31, 2006, the fair value of derivatives included in trading liabilities have been reduced by $4.1 billion and $1.7 billion, respectively, of amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties. At December 31, 2006, $.4 billion of these amounts were originally reported as interest bearing deposits with banks and $1.3 billion were reported as other assets.

Note 3. Securities

At September 30, 2007 and December 31, 2006, HUSI held no securities of any single issuer (excluding the U.S. Treasury, U.S. Government agencies and U.S. Government sponsored enterprises) with a book value that exceeded 10% of shareholders’ equity. The amortized cost and fair value of the securities available for sale and securities held to maturity portfolios are summarized in the following tables.

September 30, 2007	Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
	(in millions)
Securities available for sale:
U.S. Treasury		$	607		$	—		$	(5	)		$	602
U.S. Government sponsored enterprises (1)			12,105			37			(363	)			11,779
U.S. Government agency issued or guaranteed			3,489			4			(77	)			3,416
Obligations of U.S. states and political subdivisions			670			1			(8	)			663
Asset backed securities			1,691			2			(20	)			1,673
Other domestic debt securities			2,701			11			(23	)			2,689
Foreign debt securities			760			1			(4	)			757
Equity securities			29			2			(1	)			30
Total		$	22,052		$	58		$	(501	)		$	21,609
Securities held to maturity:
U.S. Government sponsored enterprises (1)		$	1,854		$	34		$	(25	)		$	1,863
U.S. Government agency issued or guaranteed			539			18			(3	)			554
Obligations of U.S. states and political subdivisions			274			14			(5	)			283
Other domestic debt securities			174			—			(6	)			168
Foreign debt securities			105			—			—				105
Total		$	2,946		$	66		$	(39	)		$	2,973

December 31, 2006	Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
	(in millions)
Securities available for sale:
U.S. Treasury		$	1,535		$	3		$	(8	)		$	1,530
U.S. Government sponsored enterprises (1)			10,682			30			(257	)			10,455
U.S. Government agency issued or guaranteed			3,793			6			(72	)			3,727
Obligations of U.S. states and political subdivisions			515			4			(1	)			518
Asset backed securities			578			1			(3	)			576
Other domestic debt securities			1,343			3			(19	)			1,327
Foreign debt securities			860			7			(3	)			864
Equity securities			775			11			—				786
Total		$	20,081		$	65		$	(363	)		$	19,783
Securities held to maturity:
U.S. Government sponsored enterprises (1)		$	1,845		$	43		$	(17	)		$	1,871
U.S. Government agency issued or guaranteed			584			25			(2	)			607
Obligations of U.S. states and political subdivisions			325			19			—				344
Other domestic debt securities			167			2			(2	)			167
Foreign debt securities			51			—			—				51
Total		$	2,972		$	89		$	(21	)		$	3,040

(1) Includes primarily mortgage backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).

8

Gross unrealized losses and related fair values, classified as to the length of time the losses have existed, are summarized in the following tables.

	One Year or Less									Greater Than One Year
September 30, 2007	Number of Securities		Gross Unrealized Losses				Aggregate Fair Value of Investment			Number of Securities		Gross Unrealized Losses				Aggregate Fair Value of Investment
	($ in millions)
Securities available for sale:
U.S. Treasury		1		$	(1	)		$	154		3		$	(4	)		$	447
U.S. Government sponsored enterprises (1)		75			(71	)			1,940		634			(292	)			6,811
U.S. Government agency issued or guaranteed		139			(12	)			608		739			(65	)			2,246
Obligations of U.S. states and political subdivisions		76			(8	)			496		2			*				22
Asset backed securities		37			(17	)			1,070		17			(3	)			210
Other domestic debt securities		28			(8	)			579		55			(15	)			848
Foreign debt securities		6			(2	)			81		6			(2	)			144
Equity securities		—			—				—		1			(1	)			23
Total		362		$	(119	)		$	4,928		1,457		$	(382	)		$	10,751
Securities held to maturity:
U.S. Government sponsored enterprises (1)		17		$	(3	)		$	237		24		$	(22	)		$	377
U.S. Government agency issued or guaranteed		2			*				51		106			(3	)			40
Obligations of U.S. states and political subdivisions		5			(5	)			2		—			—				—
Other domestic debt securities		5			(2	)			96		8			(4	)			71
Foreign debt securities		5			—				105		—			—				—
Total		34		$	(10	)		$	491		138		$	(29	)		$	488

	One Year or Less									Greater Than One Year
December 31, 2006	Number of Securities		Gross Unrealized Losses				Aggregate Fair Value of Investment			Number of Securities		Gross Unrealized Losses				Aggregate Fair Value of Investment
	($ in millions)
Securities available for sale:
U.S. Treasury		8		$	(1	)		$	527		6		$	(7	)		$	566
U.S. Government sponsored enterprises (1)		211			(114	)			3,158		482			(143	)			5,042
U.S. Government agency issued or guaranteed		691			(40	)			2,334		268			(32	)			1,076
Obligations of U.S. states and political subdivisions		12			(1	)			85		3			*				27
Asset backed securities		6			*				81		19			(3	)			293
Other domestic debt securities		10			(1	)			153		56			(18	)			910
Foreign debt securities		6			(1	)			191		11			(2	)			227
Total		944		$	(158	)		$	6,529		845		$	(205	)		$	8,141
Securities held to maturity:
U.S. Government sponsored enterprises (1)		23		$	*			$	15		22		$	(17	)		$	389
U.S. Government agency issued or guaranteed		49			*				21		169			(2	)			35
Obligations of U.S. states and political subdivisions		1			*				*		9			*				4
Other domestic debt securities		2			*				22		4			(2	)			33
Foreign debt securities		2			*				51		—			—				—
Total		77		$	*			$	109		204		$	(21	)		$	461

(1)	Included primarily mortgaged-backed securities issued by FNMA and FHLMC.
*	Less than $500 thousand

9

G ross unrealized losses within the available for sale securities portfolio increased during the nine months ended September 30, 2007 due to the impact of general increases in market interest rates on HUSI’s portfolios, which are primarily fixed rate securities. Since substantially all of these securities are high credit grade (i.e., AAA or AA), and HUSI has the ability and intent to hold these securities until maturity or a market price recovery, they are not considered to be other than temporarily impaired.

Note 4. Loans

A distribution of the loan portfolio, including loans held for sale, is summarized in the following table.

	September 30, 2007									December 31, 2006
	Loans Held for Sale			All Other Loans			Total Loans			Loans Held for Sale			All Other Loans			Total Loans
	(in millions)
Commercial loans:
Construction and other real estate		$	382		$	8,526		$	8,908		$	102		$	8,816		$	8,918
Other commercial			1,892			24,646			26,538			—			20,564			20,564
			2,274			33,172			35,446			102			29,380			29,482
Consumer loans:
Sub-prime residential mortgages held for sale to HMUS			2,120			—			2,120			2,582			—			2,582
Other residential mortgages			1,532			33,077			34,609			1,645			35,581			37,226
Credit card receivables			—			18,044			18,044			—			18,260			18,260
Other consumer			497			1,950			2,447			394			2,293			2,687
			4,149			53,071			57,220			4,621			56,134			60,755
Total loans		$	6,423		$	86,243		$	92,666		$	4,723		$	85,514		$	90,237

Loans pledged as collateral are summarized in Note 14 beginning on page 21 of this Form 10-Q.

Loans Held for Sale

HUSI originates commercial loans in connection with its participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as other commercial loans held for sale at September 30, 2007. Commercial loans held for sale under this program were $1.9 billion at September 30, 2007.

Residential mortgage loans held for sale include sub-prime residential mortgage loans acquired from unaffiliated third parties and from HSBC Finance Corporation, with the intent of selling the loans to an HSBC affiliate, HSBC Markets (USA) Inc. (HMUS). Also included in residential mortgage loans held for sale are prime mortgage loans originated and held for sale to HMUS, and various governmental agencies. Residential mortgage loans held for sale to HMUS were $2.8 billion at September 30, 2007 and $3.1 billion at December 31, 2006, of which $2.1 billion and $2.6 billion respectively were sub-prime loans.

Student loans held for sale to government agencies are included in other consumer loans.

10

Commercial loans held for sale are recorded at the lower of cost or market value. Residential mortgage loans and student loans held for sale are recorded at the lower of aggregate cost or market value. The cost of commercial loans held for sale exceeded market value at September 30, 2007. The aggregate cost of consumer loans held for sale exceeded market value at September 30, 2007 and December 31, 2006. Changes in the valuation allowance utilized to adjust loans held for sale to market value, that is included in the determination of net income, are summarized in the following table and reflect the recording of substantial valuation adjustments as a result of adverse conditions in the corporate credit and U.S. residential mortgage markets. Also, see commentary regarding changes in the valuation allowance included in the Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A) on pages 41 and 42 of this Form 10-Q.

	2007												2006
	Valuation Allowance Related to												Valuation Allowance Related to
	Residential Mortgages Loans Held for Sale to HMUS				All Other Loans Held for Sale				Total				Residential Mortgages Loans Held for Sale to HMUS				All Other Loans Held for Sale				Total
	(in millions)
Three months ended September 30:
Balance at beginning of period		$	(49	)		$	(9	)		$	(58	)		$	(83	)		$	(20	)		$	(103	)
Valuation allowance increase for changes in market value			(146	)			(72	)			(218	)			29				14				43
Releases of valuation allowance for loans sold			3				2				5				53				—				53
Balance at end of period		$	(192	)		$	(79	)		$	(271	)		$	(1	)		$	(6	)		$	(7	)
Nine months ended September 30:
Balance at beginning of period		$	(26	)		$	(3	)		$	(29	)		$	(11	)		$	(15	)		$	(26	)
Valuation allowance increase for changes in market value			(221	)			(78	)			(299	)			(123	)			9				(114	)
Releases of valuation allowance for loans sold			55				2				57				133				—				133
Balance at end of period		$	(192	)		$	(79	)		$	(271	)		$	(1	)		$	(6	)		$	(7	)

Loans held for sale are subject to credit risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions as well as the interest rate and credit environment. Interest rate risk for the residential mortgage loans held for sale to HMUS is partially mitigated through an economic hedging program to offset changes in the fair value of the loans held for sale. Trading related revenues related to this economic hedging program, which include net interest income and trading revenues, were $32 million and $110 million for the first nine months of 2007 and 2006, respectively.

Note 5. Allowance for Credit Losses and Credit Quality Statistics

Changes in the allowance for credit losses are summarized in the following table.

	Three months ended September 30						Nine months ended September 30
	2007			2006			2007			2006
	(in millions)
Beginning balance		$	902		$	869		$	897		$	846
Allowance related to disposition of certain private label credit card relationships			—			—			—			(6	)
Net charge offs:
Charge offs			305			253			903			722
Recoveries			59			63			193			182
			246			190			710			540
Provision for credit losses			402			207			871			586
Ending balance		$	1,058		$	886		$	1,058		$	886

11

Credit Quality Statistics

Nonaccruing loans are summarized in the following table.

	September 30,			December 31,
	2007			2006
	(in millions)
Nonaccruing loans:
Commercial:
Construction and other real estate		$	40		$	33
Other commercial			93			69
Total commercial			133			102
Consumer:
Residential mortgages			512			182
Other consumer			1			1
Total consumer			513			183
Total nonaccruing loans		$	646		$	285
Interest income on nonaccruing loans is summarized in the following table.
Nine months ended September 30	2007			2006
	(in millions)
Interest income on nonaccruing loans:
Amount which would have been recorded had the associated loans been current in accordance with their original terms		$	32		$	16
Amount actually recorded			6			7
Additional credit quality statistics are summarized in the following table.
	September 30,			December 31,
	2007			2006
	(in millions)
Accruing loans contractually past due 90 days or more as to principal or interest:
Total commercial loans		$	62		$	22
Consumer:
Residential mortgages			3			11
Credit card receivables			357			339
Other consumer loans			24			16
Total consumer loans			384			366
Total		$	446		$	388
Impaired loans:
Balance at end of period		$	133		$	100
Amount with impairment reserve			59			35
Impairment reserve			18			13
Other real estate and owned assets:
Balance at end of period		$	63		$	53
Note 6. Intangible Assets
The composition of intangible assets is summarized in the following table.
	September 30,			December 31,
	2007			2006
	(in millions )
Mortgage servicing rights		$	537		$	474
Other			42			47
Total intangible assets		$	579		$	521

12

Mortgage Servicing Rights (MSRs)

HUSI recognizes the right to service mortgage loans as a separate and distinct asset at the time they are acquired or when originated loans are sold. Servicing fees collected by HUSI are included in residential mortgage banking revenue, and were $85 million and $74 million for the first nine months of 2007 and 2006, respectively.

MSRs are subject to credit and interest rate risk, in that their value will fluctuate as a result of changes in the interest rate environment. Interest rate risk is mitigated through an active economic hedging program that uses securities and derivatives to offset changes in the fair value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques, which are addressed in more detail beginning on page 65 of this Form 10-Q.

MSRs are initially measured at fair value at the time that the related loans are sold, and periodically remeasured using the fair value measurement method. This method requires that MSRs be measured at fair value at each reporting date with changes in fair value of the asset reflected in residential mortgage banking revenue in the period that the changes occur. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. The reasonableness of these valuation models is periodically validated by reference to external independent broker valuations and industry surveys.

Fair value of MSRs is calculated using the following critical assumptions.

	September 30,				December 31,
	2007				2006
Annualized constant prepayment rate (CPR)			17.30	%			20.80	%
Constant discount rate			10.75	%			10.34	%
Weighted average life		5.5 years				4.8 years
MSRs activity is summarized in the following table.
		2007				2006
	(in millions )
Three months ended September 30:
Fair value of MSRs:
Beginning balance		$	552			$	499
Additions related to loan sales			28				24
Changes in fair value due to:
Change in valuation inputs or assumptions used in the valuation models			(29	)			(43	)
Realization of cash flows			(14	)			(21	)
Ending balance		$	537			$	459
Nine months ended September 30:
Fair value of MSRs:
Beginning balance		$	474			$	418
Additions related to loan sales