US Bank 2009 Annual Report Download - page 120

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, primarily representing
guaranteed operating or capital lease payments or other debt
obligations with maturity dates extending through 2013. The
maximum potential future payments guaranteed by the
Company under these arrangements were approximately
$135 million at December 31, 2009.
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 market value of the securities lent and the market value
of the collateral received. Cash collateralizes these
transactions. The maximum potential future payments
guaranteed by the Company under these arrangements were
approximately $6.0 billion at December 31, 2009, and
represented the market value of the securities lent to third-
parties. At December 31, 2009, the Company held assets
with a market value of $6.2 billion as collateral for these
arrangements.
Assets Sales The Company has provided guarantees to
certain third-parties in connection with the sale or
syndication of certain assets, primarily loan portfolios and
low-income housing tax credits. 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 $780 million at
December 31, 2009, and represented the proceeds or the
guaranteed portion received from the buyer in these
transactions where the buy-back or make-whole provisions
have not yet expired. Recourse available to the Company
includes guarantees from the Small Business Administration
(for SBA loans sold), recourse against the correspondent that
originated the loan or to the private mortgage issuer, the
right to collect payments from the debtors, and/or the right
to liquidate the underlying collateral, if any, and retain the
proceeds. Based on its established loan-to-value guidelines,
the Company believes the recourse available is sufficient to
recover future payments, if any, under the loan buy-back
guarantees.
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, 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 $65.5 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
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