US Bank 2009 Annual Report Download - page 51

result of higher fuel prices and weak economic conditions. In
2009, sales of vehicles were affected by the financial
condition of the automobile manufacturers and various
government programs and involvement with the
manufacturers. Used vehicle pricing improved substantially
throughout 2009. As a result, residual value losses for the
retail leasing portfolio decreased in 2009, compared with
2008. Currently, management expects used vehicle values in
2010 to remain at levels similar to those experienced in
2009.
At December 31, 2009, the commercial leasing portfolio
had $701 million of residuals, compared with $690 million
at December 31, 2008. At year-end 2009, lease residuals
related to trucks and other transportation equipment were
30.1 percent of the total residual portfolio. Business and
office equipment represented 18.3 percent of the aggregate
portfolio, while railcars and aircraft were 16.3 percent and
10.1 percent, respectively. No other significant
concentrations of more than 10 percent existed at
December 31, 2009.
Operational Risk Management Operational risk represents
the risk of loss resulting from the Company’s operations,
including, but not limited to, the risk of fraud by employees
or persons outside the Company, the execution of
unauthorized transactions by employees, errors relating to
transaction processing and technology, breaches of the
internal control system and compliance requirements, and
business continuation and disaster recovery. This risk of loss
also includes the potential legal actions that could arise as a
result of an operational deficiency or as a result of
noncompliance with applicable regulatory standards, adverse
business decisions or their implementation, and customer
attrition due to potential negative publicity.
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. In the event of a breakdown in
the internal control system, improper operation of systems
or improper employees’ actions, the Company could suffer
financial loss, face regulatory action and suffer damage to its
reputation.
The Company manages operational risk through a risk
management framework and its internal control processes.
Within this framework, the Risk Management Committee of
the Company’s Board of Directors provides oversight and
assesses the most significant operational risks facing the
Company within its business lines. Under the guidance of
the Risk Management Committee, enterprise risk
management personnel establish policies and interact with
business lines to monitor significant operating risks on a
regular basis. 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,
safeguarding of assets from misuse or theft, and ensuring the
reliability of financial and other data. Business managers
ensure that the controls are appropriate and are
implemented as designed.
Each business line within the Company has designated
risk managers. These risk managers are responsible for,
among other things, coordinating the completion of ongoing
risk assessments and ensuring that operational risk
management is integrated into business decision-making
activities. The Company’s internal audit function validates
the system of internal controls through regular and ongoing
risk-based audit procedures and reports on the effectiveness
of internal controls to executive management and the Audit
Committee of the Board of Directors. Management also
provides various operational risk related reporting to the
Risk Management Committee of the Board of Directors.
Customer-related business conditions may also increase
operational risk, or the level of operational losses in certain
transaction processing business units, including merchant
processing activities. Ongoing risk monitoring of customer
activities and their financial condition and operational
processes serve to mitigate customer-related operational risk.
Refer to Note 22 of the Notes to Consolidated Financial
Statements for further discussion on merchant processing.
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 that it has designed
effective methods to minimize operational risks, there is no
absolute assurance that business disruption or operational
losses would not occur in the event of a disaster. On an
ongoing basis, management makes process changes and
investments to enhance its systems of internal controls and
business continuity and disaster recovery plans.
U.S. BANCORP 49