US Bank 2015 Annual Report Download - page 147

Guarantees Guarantees are contingent commitments issued
by the Company to customers or other third parties. The
Company’s guarantees primarily include parent guarantees
related to subsidiaries’ third party borrowing arrangements;
third party performance guarantees inherent in the
Company’s business operations, such as indemnified
securities lending programs and merchant charge-back
guarantees; indemnification or buy-back provisions related to
certain asset sales; and contingent consideration
arrangements related to acquisitions. For certain guarantees,
the Company has recorded a liability related to the potential
obligation, or has access to collateral to support the
guarantee or through the exercise of other recourse
provisions can offset some or all of the maximum potential
future payments made under these guarantees.
Third Party Borrowing Arrangements The Company
provides guarantees to third parties as a part of certain
subsidiaries’ borrowing arrangements. The maximum
potential future payments guaranteed by the Company under
these arrangements were approximately $8 million at
December 31, 2015.
Commitments from Securities Lending The Company
participates in securities lending activities by acting as the
customer’s agent involving the loan of securities. The
Company indemnifies customers for the difference between
the fair value of the securities lent and the fair value of the
collateral received. Cash collateralizes these transactions. The
maximum potential future payments guaranteed by the
Company under these arrangements were approximately $4.2
billion at December 31, 2015, and represent the fair value of
the securities lent to third parties. At December 31, 2015, the
Company held $4.4 billion of cash as collateral for these
arrangements.
Asset Sales The Company has provided guarantees to
certain third parties in connection with the sale or syndication
of certain assets, primarily loan portfolios and tax-advantaged
investments. These guarantees are generally in the form of
asset buy-back or make-whole provisions that are triggered
upon a credit event or a change in the tax-qualifying status of
the related projects, as applicable, and remain in effect until
the loans are collected or final tax credits are realized,
respectively. The maximum potential future payments
guaranteed by the Company under these arrangements were
approximately $5.1 billion at December 31, 2015, and
represented the proceeds received from the buyer or the
guaranteed portion in these transactions where the buy-back
or make-whole provisions have not yet expired. At
December 31, 2015, the Company had reserved $89 million
for potential losses related to the sale or syndication of tax-
advantaged investments.
The maximum potential future payments do not include
loan sales where the Company provides standard
representation and warranties to the buyer against losses
related to loan underwriting documentation defects that may
have existed at the time of sale that generally are identified
after the occurrence of a triggering event such as
delinquency. For these types of loan sales, the maximum
potential future payments is generally the unpaid principal
balance of loans sold measured at the end of the current
reporting period. Actual losses will be significantly less than
the maximum exposure, as only a fraction of loans sold will
have a representation and warranty breach, and any losses
on repurchase would generally be mitigated by any collateral
held against the loans.
The Company regularly sells loans to GSEs as part of its
mortgage banking activities. The Company provides
customary representations and warranties to the GSEs in
conjunction with these sales. These representations and
warranties generally require the Company to repurchase
assets if it is subsequently determined that a loan did not
meet specified criteria, such as a documentation deficiency or
rescission of mortgage insurance. If the Company is unable to
cure or refute a repurchase request, the Company is generally
obligated to repurchase the loan or otherwise reimburse the
counterparty for losses. At December 31, 2015, the Company
had reserved $30 million for potential losses from
representation and warranty obligations, compared with $46
million at December 31, 2014. The Company’s reserve
reflects management’s best estimate of losses for
representation and warranty obligations. The Company’s
repurchase reserve is modeled at the loan level, taking into
consideration the individual credit quality and borrower activity
that has transpired since origination. The model applies credit
quality and economic risk factors to derive a probability of
default and potential repurchase that are based on the
Company’s historical loss experience, and estimates loss
severity based on expected collateral value. The Company
also considers qualitative factors that may result in anticipated
losses differing from historical loss trends.
As of December 31, 2015 and 2014, the Company had
$12 million and $19 million, respectively, of unresolved
representation and warranty claims from the GSEs. The
Company does not have a significant amount of unresolved
claims from investors other than the GSEs.
Merchant Processing The Company, through its
subsidiaries, provides merchant processing services. Under
the rules of credit card associations, a merchant processor
retains a contingent liability for credit card transactions
processed. This contingent liability arises in the event of a
billing dispute between the merchant and a cardholder that is
ultimately resolved in the cardholder’s favor. In this situation,
—145 —