US Bank 2008 Annual Report Download - page 109

situation, the transaction is “charged-back” to the merchant
and the disputed amount is credited or otherwise refunded
to the cardholder. If the Company is unable to collect this
amount from the merchant, it bears the loss for the amount
of the refund paid to the cardholder.
A cardholder, through its issuing bank, generally has
until the latter of up to four months after the date the
transaction is processed or the receipt of the product or
service to present a charge-back to the Company as the
merchant processor. The absolute maximum potential
liability is estimated to be the total volume of credit card
transactions that meet the associations’ requirements to be
valid charge-back transactions at any given time.
Management estimates that the maximum potential
exposure for charge-backs would approximate the total
amount of merchant transactions processed through the
credit card associations for the last four months. For the last
four months this amount totaled approximately
$66.2 billion. In most cases, this contingent liability is
unlikely to arise, as most products and services are delivered
when purchased and amounts are refunded when items are
returned to merchants. However, where the product or
service is not provided until a future date (“future
delivery”), the potential for this contingent liability
increases. To mitigate this risk, the Company may require
the merchant to make an escrow deposit, may place
maximum volume limitations on future delivery transactions
processed by the merchant at any point in time, or may
require various credit enhancements (including letters of
credit and bank guarantees). Also, merchant processing
contracts may include event triggers to provide the Company
more financial and operational control in the event of
financial deterioration of the merchant.
The Company’s primary exposure to future delivery is
related to merchant processing for airlines. The Company
currently processes card transactions in the United States,
Canada and Europe for airlines. In the event of liquidation
of these merchants, the Company could become financially
liable for refunding tickets purchased through the credit card
associations under the charge-back provisions. Charge-back
risk related to these merchants is 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, 2008,
the value of airline tickets purchased to be delivered at a
future date was $3.4 billion. The Company held collateral of
$885 million in escrow deposits, letters of credit and
indemnities from financial institutions, and liens on various
assets. With respect to future delivery risk for other
merchants, the Company held $83 million of merchant
escrow deposits as collateral. In addition to specific
collateral or other credit enhancements, the Company
maintains a liability for its implied guarantees associated
with future delivery. At December 31, 2008, the liability was
$38 million primarily related to these airline processing
arrangements.
In the normal course of business, the Company has
unresolved charge-backs that are in process of resolution.
The Company assesses the likelihood of its potential liability
based on the extent and nature of unresolved charge-backs
and its historical loss experience. At December 31, 2008, the
Company had a recorded liability for potential losses of
$18 million.
Contingent Consideration Arrangements The Company has
contingent payment obligations related to certain business
combination transactions. Payments are guaranteed as long
as certain post-acquisition performance-based criteria are
met or customer relationships are maintained. At
December 31, 2008, the maximum potential future
payments required to be made by the Company under these
arrangements was approximately $9.5 million. If required,
the majority of these contingent payments are payable
within the next 12 months.
Minimum Revenue Guarantees In the normal course of
business, the Company may enter into revenue share
agreements with third party business partners who generate
customer referrals or provide marketing or other services
related to the generation of revenue. In certain of these
agreements, the Company may guarantee that a minimum
amount of revenue share payments will be made to the third
party over a specified period of time. At December 31,
2008, the maximum potential future payments required to
be made by the Company under these agreements was
$16 million.
Other Guarantees On September 25, 2008, the Company
entered into a support agreement with a money market fund
managed by FAF Advisors, Inc., an affiliate of the Company.
Under the terms of this agreement, the Company will
provide a contribution to the fund upon the occurrence of
specified events related to certain assets held by the fund.
The Company is required to recognize the contingent
obligation to provide a contribution to the fund at the
estimated fair value in accordance with the Statement of
Financial Accounting Standards No. 133, “Accounting for
Derivatives and Hedge Activities,” and Financial Accounting
Standards Board Interpretation No. 45 (“FIN 45”),
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others.” The maximum potential payments under the
agreement are $68 million. While the estimation of any
potential losses related to this agreement requires judgment,
the Company recognized a derivative liability and related
charge of approximately $37 million at December 31, 2008.
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