US Bank 2003 Annual Report Download - page 102

the guarantee or through the exercise of other recourse debtors, and/or the right to liquidate the underlying
provisions can offset some or all of the maximum potential collateral, if any, and retain the proceeds. Based on its
future payments made under these guarantees. The established loan-to-value guidelines, the Company believes
estimated fair value of guarantees, other than standby the recourse available is sufficient to recover future
letters of credit, was approximately $132 million at payments, if any, under the loan buy-back guarantees.
December 31, 2003. Merchant Processing The Company, through its subsidiary
Third-Party Borrowing Arrangements The Company NOVA Information Systems, Inc., provides merchant
provides guarantees to third-parties as a part of certain processing services. Under the rules of credit card
subsidiaries’ borrowing arrangements, primarily representing associations, a merchant processor retains a contingent
guaranteed operating or capital lease payments or other liability for credit card transactions processed. This
debt obligations with maturity dates extending through contingent liability arises in the event of a billing dispute
2014. The maximum potential future payments guaranteed between the merchant and a cardholder that is ultimately
by the Company under these arrangements was resolved in the cardholder’s favor. In this situation, the
approximately $1.5 billion at December 31, 2003. The transaction is ‘‘charged back’’ to the merchant and the
Company’s recorded liabilities as of December 31, 2003, disputed amount is credited or otherwise refunded to the
included $40.7 million representing outstanding amounts cardholder. If the Company is unable to collect this amount
owed to these third-parties and required to be recorded on from the merchant, it bears the loss for the amount of the
balance sheet in accordance with generally accepted refund paid to the cardholder.
accounting principles. The guaranteed operating lease A cardholder, through its issuing bank, generally has
payments are also included in the disclosed minimum lease until the latter of up to four months after the date the
obligations. transaction is processed or the receipt of the product or
service to present a charge-back to the Company as the
Commitments from Securities Lending The Company merchant processor. The absolute maximum potential
participates in securities lending activities by acting as the liability is estimated to be the total volume of credit card
customer’s agent involving the loan or sale of securities. The transactions that meet the associations’ requirements to be
Company indemnifies customers for the difference between valid charge-back transactions at any given time.
the market value of the securities lent and the market value Management estimates that the maximum potential
of the collateral received. Cash collateralizes these exposure for charge-backs would approximate the total
transactions. The maximum potential future payments amount of merchant transactions processed through the
guaranteed by the Company under these arrangements was credit card associations for the last four months. For the
approximately $13.2 billion at December 31, 2003, and last four months of 2003, this amount totaled
represented the market value of the securities lent to third- approximately $36.8 billion. In most cases, this contingent
parties. At December 31, 2003, the Company held assets liability is unlikely to arise, as most products and services
with a market value of $13.6 billion as collateral for these are delivered when purchased and amounts are refunded
arrangements. when items are returned to merchants. However, where the
Asset Sales The Company has provided guarantees to product or service is not provided until a future date
certain third-parties in connection with the sale of certain (‘‘future delivery’’), the potential for this contingent liability
assets, primarily loan portfolios and low-income housing increases. To mitigate this risk, the Company may require
tax credits. These guarantees are generally in the form of the merchant to make an escrow deposit, may place
asset buy-back or make-whole provisions that are triggered maximum volume limitations on future delivery transactions
upon a credit event or a change in the tax-qualifying status processed by the merchant at any point in time, or may
of the related projects, as applicable, and remain in effect require various credit policy enhancements (including letters
until the loans are collected or final tax credits are realized, of credit and bank guarantees). Also, merchant processing
respectively. The maximum potential future payments contracts may include event triggers to provide the
guaranteed by the Company under these arrangements were Company more financial and operational control in the
approximately $784.9 million at December 31, 2003, and event of financial deterioration of the merchant. At
represented the total proceeds received from the buyer in December 31, 2003, the Company held $28.6 million of
these transactions where the buy-back or make-whole merchant escrow deposits as collateral.
provisions have not yet expired. Recourse available to the The Company currently processes card transactions for
Company includes guarantees from the Small Business several of the largest airlines in the United States. In the
Administration (for SBA loans sold), recourse against the event of liquidation of these airlines, the Company could
correspondent that originated the loan or to the private become financially liable for refunding tickets purchased
mortgage issuer, the right to collect payments from the
100 U.S. Bancorp