US Bank 2014 Annual Report Download - page 58

Although the Company determines the amount of each
element of the allowance separately and considers this
process to be an important credit management tool, the
entire allowance for credit losses is available for the entire
loan portfolio. The actual amount of losses incurred can vary
significantly from the estimated amounts.
Residual Value Risk Management The Company manages
its risk to changes in the residual value of leased assets
through disciplined residual valuation setting at the inception
of a lease, diversification of its leased assets, regular
residual asset valuation reviews and monitoring of residual
value gains or losses upon the disposition of assets.
Commercial lease originations are subject to the same well-
defined underwriting standards referred to in the “Credit
Risk Management” section which includes an evaluation of
the residual value risk. Retail lease residual value risk is
mitigated further by originating longer-term vehicle leases
and effective end-of-term marketing of off-lease vehicles.
Included in the retail leasing portfolio was
approximately $4.8 billion of retail leasing residuals at
December 31, 2014, compared with $4.6 billion at
December 31, 2013. The Company monitors concentrations
of leases by manufacturer and vehicle “make and model.” As
of December 31, 2014, vehicle lease residuals related to
sport utility vehicles were 33.6 percent of the portfolio, while
auto and crossover vehicle classes represented
approximately 32.1 percent and 24.8 percent of the portfolio,
respectively. At year-end 2014, the largest vehicle-type
concentration represented 8.2 percent of the aggregate
residual value of the vehicles in the portfolio. At
December 31, 2014, the weighted-average origination term of
the portfolio was 39 months, compared with 40 months at
December 31, 2013.
At December 31, 2014, the commercial leasing portfolio
had $543 million of residuals, compared with $542 million at
December 31, 2013. At year-end 2014, lease residuals related
to trucks and other transportation equipment were 32.8
percent of the total residual portfolio. Business and office
equipment represented 27.1 percent of the aggregate
portfolio, while manufacturing equipment represented 12.4
percent and railcars represented 11.9 percent. No other
concentrations of more than 10 percent existed at
December 31, 2014.
Operational Risk Management Operational risk is the risk
of loss resulting from inadequate or failed internal
processes, people, or systems, or from external events,
including the risk of loss resulting from fraud, litigation and
breaches in data security. The Company operates in many
different businesses in diverse markets and relies on the
ability of its employees and systems to process a high
number of transactions. Operational risk is inherent in all
business activities, and the management of this risk is
important to the achievement of the Company’s objectives.
Business lines have direct and primary responsibility and
accountability for identifying, controlling, and monitoring
operational risks embedded in their business activities.
Business managers maintain a system of controls with the
objective of providing proper transaction authorization and
execution, proper system operations, proper oversight of
third parties with whom they do business, safeguarding of
assets from misuse or theft, and ensuring the reliability and
security of financial and other data.
Business continuation and disaster recovery planning is
also critical to effectively managing operational risks. Each
business unit of the Company is required to develop,
maintain and test these plans at least annually to ensure that
recovery activities, if needed, can support mission critical
functions, including technology, networks and data centers
supporting customer applications and business operations.
While the Company believes it has designed effective
processes to minimize operational risks, there is no absolute
assurance that business disruption or operational losses
would not occur from an external event or internal control
breakdown. On an ongoing basis, management makes
process changes and investments to enhance its systems of
internal controls and business continuity and disaster
recovery plans.
In the past, the Company has experienced attack
attempts on its computer systems including various denial-
of-service attacks on customer-facing websites. The
Company has not experienced any material losses relating to
these attempts, as a result of its controls, processes and
systems to protect its networks, computers, software and
data from attack, damage or unauthorized access. However,
attack attempts on the Company’s computer systems are
increasing and the Company continues to develop and
enhance its controls and processes to protect against these
attempts.
Compliance Risk Management The Company may suffer
legal or regulatory sanctions, material financial loss, or
damage to reputation through failure to comply with laws,
regulations, rules, standards of good practice, and codes of
conduct. The Company has controls and processes in place
to ensure assessment, identification, monitoring,
management and reporting of compliance risks and issues.
The significant increase in regulation and regulatory
oversight initiatives over the past several years has
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