US Bank 2006 Annual Report Download - page 101

Third-Party Borrowing Arrangements The Company Merchant Processing The Company, through its
provides guarantees to third-parties as a part of certain subsidiaries, provides merchant processing services. Under
subsidiaries’ borrowing arrangements, primarily representing the rules of credit card associations, a merchant processor
guaranteed operating or capital lease payments or other retains a contingent liability for credit card transactions
debt obligations with maturity dates extending through processed. This contingent liability arises in the event of a
2013. The maximum potential future payments guaranteed billing dispute between the merchant and a cardholder that
by the Company under these arrangements were is ultimately resolved in the cardholder’s favor. In this
approximately $444 million at December 31, 2006. The situation, the transaction is ‘‘charged-back’’ to the merchant
Company’s recorded liabilities as of December 31, 2006, and the disputed amount is credited or otherwise refunded
included $5 million representing outstanding amounts owed to the cardholder. If the Company is unable to collect this
to these third-parties and required to be recorded on the amount from the merchant, it bears the loss for the amount
Company’s balance sheet in accordance with accounting of the refund paid to the cardholder.
principles generally accepted in the United States. A cardholder, through its issuing bank, generally has
until the latter of up to four months after the date the
Commitments from Securities Lending The Company transaction is processed or the receipt of the product or
participates in securities lending activities by acting as the service to present a charge-back to the Company as the
customer’s agent involving the loan of securities. The merchant processor. The absolute maximum potential
Company indemnifies customers for the difference between liability is estimated to be the total volume of credit card
the market value of the securities lent and the market value transactions that meet the associations’ requirements to be
of the collateral received. Cash collateralizes these valid charge-back transactions at any given time.
transactions. The maximum potential future payments Management estimates that the maximum potential
guaranteed by the Company under these arrangements were exposure for charge-backs would approximate the total
approximately $13.8 billion at December 31, 2006, and amount of merchant transactions processed through the
represented the market value of the securities lent to third- credit card associations for the last four months. For the
parties. At December 31, 2006, the Company held assets last four months this amount totaled approximately
with a market value of $14.2 billion as collateral for these $64.9 billion. In most cases, this contingent liability is
arrangements. unlikely to arise, as most products and services are delivered
Assets Sales The Company has provided guarantees to when purchased and amounts are refunded when items are
certain third-parties in connection with the sale of certain returned to merchants. However, where the product or
assets, primarily loan portfolios and low-income housing service is not provided until a future date (‘‘future
tax credits. These guarantees are generally in the form of delivery’’), the potential for this contingent liability
asset buy-back or make-whole provisions that are triggered increases. To mitigate this risk, the Company may require
upon a credit event or a change in the tax-qualifying status the merchant to make an escrow deposit, may place
of the related projects, as applicable, and remain in effect maximum volume limitations on future delivery transactions
until the loans are collected or final tax credits are realized, processed by the merchant at any point in time, or may
respectively. The maximum potential future payments require various credit enhancements (including letters of
guaranteed by the Company under these arrangements were credit and bank guarantees). Also, merchant processing
approximately $489 million at December 31, 2006, and contracts may include event triggers to provide the
represented the proceeds or the guaranteed portion received Company more financial and operational control in the
from the buyer in these transactions where the buy-back or event of financial deterioration of the merchant.
make-whole provisions have not yet expired. Recourse The Company’s primary exposure to future delivery is
available to the Company includes guarantees from the related to merchant processing for airlines, cruise lines and
Small Business Administration (for SBA loans sold), large tour operators. The Company currently processes card
recourse against the correspondent that originated the loan transactions for airlines, cruise lines and large tour
or to the private mortgage issuer, the right to collect operators in the United States, Canada and Europe. In the
payments from the debtors, and/or the right to liquidate the event of liquidation of these merchants, the Company could
underlying collateral, if any, and retain the proceeds. Based become financially liable for refunding tickets purchased
on its established loan-to-value guidelines, the Company through the credit card associations under the charge-back
believes the recourse available is sufficient to recover future provisions. Charge-back risk related to these merchants is
payments, if any, under the loan buy-back guarantees. evaluated in a manner similar to credit risk assessments
and, as such, merchant processing contracts contain various
provisions to protect the Company in the event of default.
At December 31, 2006, the value of airline, cruise line and
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