US Bank 2011 Annual Report Download - page 56

European Exposures Certain European countries have
recently experienced severe credit deterioration. The Company
does not hold sovereign debt of any European country,
however the Company may have indirect exposure to
sovereign debt through its investments in and transactions
with European banks. At December 31, 2011, the Company
had investments in perpetual preferred stock issued by
European banks with amortized cost totaling $169 million
and unrealized losses totaling $48 million. The Company also
transacts with various European banks as counterparties to
interest rate swaps and foreign currency transactions for its
hedging and customer-related activities, however none of
these banks are domiciled in the countries experiencing the
most significant credit deterioration. These derivative
transactions are subject to master netting and collateral
support agreements which significantly limit the Company’s
exposure to loss as they generally require daily posting of
collateral. At December 31, 2011, the Company was in a net
payable position to each of these European banks.
The Company has not bought or sold credit protection
on the debt of any European country or any company
domiciled in Europe, nor does it provide retail or commercial
lending services in Europe. However, it does provide financing
to domestic multinational corporations that generate revenue
from customers in European countries. While an economic
downturn in Europe could have a negative impact on these
customers’ revenues, it is unlikely that any effect on the
overall credit worthiness of these multinational corporations
would be material to the Company. The Company also
provides merchant processing services directly to merchants in
Europe and through banking affiliations in Europe. The direct
exposure to European banks or governments through this
business is not material to the Company.
The money market funds managed by an affiliate of the
Company do not have any investments in European sovereign
debt. Other than an investment in a bank domiciled in the
Netherlands, those funds also do not have any unsecured
investments in banks domiciled in the Eurozone.
Off-Balance Sheet Arrangements Off-balance sheet
arrangements include any contractual arrangement to which an
unconsolidated entity is a party, under which the Company has
an obligation to provide credit or liquidity enhancements or
market risk support. Off-balance sheet arrangements also
include any obligation under a variable interest held by an
unconsolidated entity that provides financing, liquidity, credit
enhancement or market risk support. The Company has not
utilized private label asset securitizations as a source of funding.
Commitments to extend credit are legally binding and
generally have fixed expiration dates or other termination
clauses. Many of the Company’s commitments to extend
credit expire without being drawn, and therefore, total
commitment amounts do not necessarily represent future
liquidity requirements or the Company’s exposure to credit
loss. Commitments to extend credit also include consumer
credit lines that are cancelable upon notification to the
consumer. Total contractual amounts of commitments to
extend credit at December 31, 2011 were $194.1 billion. The
Company also issues various types of letters of credit,
including standby and commercial. Total contractual amounts
of letters of credit at December 31, 2011 were $19.6 billion.
For more information on the Company’s commitments to
extend credit and letters of credit, refer to Note 22 in the
Notes to Consolidated Financial Statements.
The Company’s off-balance sheet arrangements with
unconsolidated entities primarily consist of community-based
tax-advantaged investments in affordable housing or business
development entities that provide capital for communities
located in low-income districts and for historic rehabilitation
projects. In addition to providing investment returns, these
arrangements in many cases assist the Company in complying
with requirements of the Community Reinvestment Act. The
investments in these entities generate a return primarily
through the realization of federal and state income tax credits.
The entities in which the Company invests are generally
considered variable interest entities. The Company’s recorded
investment in these entities as of December 31, 2011 was
approximately $1.8 billion.
The Company also has non-controlling financial
investments in private funds and partnerships considered
variable interest entities. The Company’s recorded investment
in these entities was approximately $47 million at
December 31, 2011 and the Company had unfunded
commitments to invest an additional $16 million. For more
information on the Company’s interests in unconsolidated
variable interest entities, refer to Note 8 in the Notes to
Consolidated Financial Statements.
Guarantees are contingent commitments issued by the
Company to customers or other third parties requiring the
Company to perform if certain conditions exist or upon the
occurrence or nonoccurrence of a specified event, such as a
scheduled payment to be made under contract. The
Company’s primary guarantees include commitments from
securities lending activities in which indemnifications are
provided to customers; indemnification or buy-back
provisions related to sales of loans and tax credit investments;
merchant charge-back guarantees through the Company’s
involvement in providing merchant processing services; and
minimum revenue guarantee arrangements. For certain
guarantees, the Company may have access to collateral to
support the guarantee, or through the exercise of other
recourse provisions, be able to offset some or all of any
payments made under these guarantees.
The Company and certain of its subsidiaries, along with
other Visa U.S.A. Inc. member banks, have a contingent
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