US Bank 2005 Annual Report Download - page 45

lease, diversification of its leased assets, regular residual wholesale values for automobiles have performed better
asset valuation reviews and monitoring of residual value than trucks, experiencing an increase in average wholesale
gains or losses upon the disposition of assets. Commercial prices of 13.6 percent during 2005, while trucks have seen
lease originations are subject to the same well-defined an increase of 2.8 percent. The smaller increase in truck
underwriting standards referred to in the ‘‘Credit Risk values is attributed to a market decline in demand for full
Management’’ section which includes an evaluation of the size, midsize, and luxury sport utility vehicles. These models
residual risk. Retail lease residual risk is mitigated further have not experienced price increases as great as automobiles
by originating longer-term vehicle leases and effective end- due to the impact of higher gas prices on consumer buying
of-term marketing of off-lease vehicles. Also, to reduce the patterns, an oversupply in the marketplace, and the
financial risk of potential changes in vehicle residual values, emergence of the crossover segments. The improvement in
the Company maintains residual value insurance. The the used car marketplace combined with the mix of the
catastrophic insurance maintained by the Company provides Company’s lease residual portfolio have reduced the
for the potential recovery of losses on individual vehicle exposure to retail lease residual impairments relative to a
sales in an amount equal to the difference between: year ago.
(a) 105 percent or 110 percent of the average wholesale At December 31, 2005, the commercial leasing
auction price for the vehicle at the time of sale and (b) the portfolio had $678 million of residuals, compared with
vehicle residual value specified by the Automotive Lease $769 million at December 31, 2004. At year-end 2005,
Guide (an authoritative industry source) at the inception of lease residuals related to trucks and other transportation
the lease. The potential recovery is calculated for each equipment were 25.1 percent of the total residual portfolio.
individual vehicle sold in a particular policy year and is Railcars represented 17.7 percent of the aggregate portfolio,
reduced by any gains realized on vehicles sold during the while business and office equipment and aircraft were
same period. The Company will receive claim proceeds 17.2 percent and 16.6 percent, respectively. No other
under this insurance program if, in the aggregate, there is a significant concentrations of more than 10 percent existed
net loss for such period. In addition, the Company obtains at December 31, 2005. In 2005, residual values in general
separate residual value insurance for all vehicles at lease improved or remained stable. The transportation industry
inception where end of lease term settlement is based solely residual values improved for marine, rail and corporate
on the residual value of the individual leased vehicles. aircraft. Commercial aircraft continues to experience lower
Under this program, the potential recovery is computed for values due to the abundance of supply and technological
each individual vehicle sold and does not allow the efficiencies on newer models.
insurance carrier to offset individual determined losses with Operational Risk Management Operational risk represents
gains from other leases. This individual vehicle coverage is the risk of loss resulting from the Company’s operations,
included in the calculation of minimum lease payments including, but not limited to, the risk of fraud by employees
when making the capital lease assessment. To reduce the or persons outside the Company, the execution of
risk associated with collecting insurance claims, the unauthorized transactions by employees, errors relating to
Company monitors the financial viability of the insurance transaction processing and technology, breaches of the
carrier based on insurance industry ratings and available internal control system and compliance requirements and
financial information. business continuation and disaster recovery. This risk of
Included in the retail leasing portfolio was loss also includes the potential legal actions that could arise
approximately $4.3 billion of retail leasing residuals at as a result of an operational deficiency or as a result of
December 31, 2005, compared with $4.0 billion at noncompliance with applicable regulatory standards,
December 31, 2004. The Company monitors concentrations adverse business decisions or their implementation, and
of leases by manufacturer and vehicle ‘‘make and model.’’ customer attrition due to potential negative publicity.
At year-end 2005, no vehicle-type concentration exceeded The Company operates in many different businesses in
five percent of the total number of vehicles in the aggregate diverse markets and relies on the ability of its employees
portfolio. Because retail residual valuations tend to be less and systems to process a high number of transactions.
volatile for longer-term leases, relative to the estimated Operational risk is inherent in all business activities, and the
residual at inception of the lease, the Company actively management of this risk is important to the achievement of
manages lease origination production to achieve a longer- the Company’s objectives. In the event of a breakdown in
term portfolio. At December 31, 2005, the weighted- the internal control system, improper operation of systems
average origination term of the portfolio was 51 months. or improper employees’ actions, the Company could suffer
Since early 2003, the wholesale market for used vehicles has financial loss, face regulatory action and suffer damage to
been in a period of sustained recovery, resulting in the its reputation.
improvement of residual values. Within vehicle categories,
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