US Bank 2005 Annual Report Download - page 99

Third-Party Borrowing Arrangements The Company services. Under the rules of credit card associations, a
provides guarantees to third-parties as a part of certain merchant processor retains a contingent liability for credit
subsidiaries’ borrowing arrangements, primarily representing card transactions processed. This contingent liability arises
guaranteed operating or capital lease payments or other in the event of a billing dispute between the merchant and a
debt obligations with maturity dates extending through cardholder that is ultimately resolved in the cardholder’s
2013. The maximum potential future payments guaranteed favor. In this situation, the transaction is ‘‘charged back’’ to
by the Company under these arrangements were the merchant and the disputed amount is credited or
approximately $466 million at December 31, 2005. The otherwise refunded to the cardholder. If the Company is
Company’s recorded liabilities as of December 31, 2005, unable to collect this amount from the merchant, it bears
included $8 million representing outstanding amounts owed the loss for the amount of the refund paid to the
to these third-parties and required to be recorded on the cardholder.
Company’s balance sheet in accordance with accounting A cardholder, through its issuing bank, generally has
principles generally accepted in the United States. until the latter of up to four months after the date the
transaction is processed or the receipt of the product or
Commitments from Securities Lending The Company service to present a charge-back to the Company as the
participates in securities lending activities by acting as the merchant processor. The absolute maximum potential
customer’s agent involving the loan of securities. The liability is estimated to be the total volume of credit card
Company indemnifies customers for the difference between transactions that meet the associations’ requirements to be
the market value of the securities lent and the market value valid charge-back transactions at any given time.
of the collateral received. Cash collateralizes these Management estimates that the maximum potential
transactions. The maximum potential future payments exposure for charge-backs would approximate the total
guaranteed by the Company under these arrangements were amount of merchant transactions processed through the
approximately $13.0 billion at December 31, 2005, and credit card associations for the last four months. For the
represented the market value of the securities lent to third- last four months this amount totaled approximately $49.0
parties. At December 31, 2005, the Company held assets billion. In most cases, this contingent liability is unlikely to
with a market value of $13.4 billion as collateral for these arise, as most products and services are delivered when
arrangements. purchased and amounts are refunded when items are
Asset Sales The Company has provided guarantees to returned to merchants. However, where the product or
certain third-parties in connection with the sale of certain service is not provided until a future date (‘‘future
assets, primarily loan portfolios and low-income housing delivery’’), the potential for this contingent liability
tax credits. These guarantees are generally in the form of increases. To mitigate this risk, the Company may require
asset buy-back or make-whole provisions that are triggered the merchant to make an escrow deposit, may place
upon a credit event or a change in the tax-qualifying status maximum volume limitations on future delivery transactions
of the related projects, as applicable, and remain in effect processed by the merchant at any point in time, or may
until the loans are collected or final tax credits are realized, require various credit enhancements (including letters of
respectively. The maximum potential future payments credit and bank guarantees). Also, merchant processing
guaranteed by the Company under these arrangements were contracts may include event triggers to provide the
approximately $843 million at December 31, 2005, and Company more financial and operational control in the
represented the proceeds or guaranteed portion received event of financial deterioration of the merchant.
from the buyer in these transactions where the buy-back or The Company’s primary exposure to future delivery is
make-whole provisions have not yet expired. Recourse related to merchant processing for the airline industry. The
available to the Company includes guarantees from the Company currently processes card transactions for various
Small Business Administration (for SBA loans sold), airlines in the United States and Europe. In the event of
recourse against the correspondent that originated the loan liquidation of these airlines, the Company could become
or to the private mortgage issuer, the right to collect financially liable for refunding tickets purchased through the
payments from the debtors, and/or the right to liquidate the credit card associations under the charge-back provisions.
underlying collateral, if any, and retain the proceeds. Based Charge-back risk related to an airline is evaluated in a
on its established loan-to-value guidelines, the Company manner similar to credit risk assessments and as such
believes the recourse available is sufficient to recover future merchant processing contracts consider the potential risk of
payments, if any, under the loan buy-back guarantees. default. Under certain situations, the Company may obtain
various forms of collateral to minimize the risk of charge-
Merchant Processing The Company, through its backs. At December 31, 2005, the value of airline tickets
subsidiaries NOVA Information Systems, Inc. and NOVA purchased to be delivered at a future date was
European Holdings Company, provides merchant processing
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