US Bank 2014 Annual Report Download - page 147

As of December 31, 2014 and 2013, the Company had
$19 million and $89 million, respectively, of unresolved
representation and warranty claims from the GSEs. The
Company does not have a significant amount of unresolved
claims from investors other than the GSEs.
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 later 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 $89.7 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, place maximum volume limitations on future
delivery transactions processed by the merchant at any point
in time, or 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 currently processes card transactions in
the United States, Canada, Europe, Mexico and Brazil
through wholly-owned subsidiaries and joint ventures with
other financial institutions. In the event a merchant was
unable to fulfill product or services subject to delayed
delivery, such as airline tickets, 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,
2014, the value of airline tickets purchased to be delivered at
a future date was $5.2 billion. The Company held collateral of
$429 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 $23 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, 2014, the liability was
$48 million primarily related to these airline processing
arrangements.
In the normal course of business, the Company has
unresolved charge-backs. 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, 2014, the Company held $70
million of merchant escrow deposits as collateral and had a
recorded liability for potential losses of $10 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, 2014, the maximum potential future payments
required to be made by the Company under these
arrangements was approximately $2 million. If required, the
majority of these contingent payments are payable within the
next 12 months.
Tender Option Bond Program Guarantee As discussed in
Note 8, the Company sponsors a municipal bond securities
tender option bond program and consolidates the program’s
entities on its Consolidated Balance Sheet. The Company
provides financial performance guarantees related to the
program’s entities. At December 31, 2014, the Company
guaranteed $2.7 billion of borrowings of the program’s
entities, included on the Consolidated Balance Sheet in
short-term borrowings. The Company also included on its
Consolidated Balance Sheet the related $2.9 billion of
available-for-sale investment securities serving as collateral
for this arrangement.
U.S. BANCORP The power of potential
145