US Bank 2011 Annual Report Download - page 51

Because retail residual valuations tend to be less volatile
for longer-term leases, relative to the estimated residual at
inception of the lease, the Company actively manages lease
origination production to achieve a longer-term portfolio. At
December 31, 2011, the weighted-average origination term of
the portfolio was 42 months, compared with 44 months at
December 31, 2010. Since the beginning of 2009, used vehicle
prices have increased substantially as sales of new vehicles
were affected by the financial condition of the automobile
manufacturers, various government programs and
involvement with the manufacturers, and consumers
preference for used, instead of new, vehicles due to
uncertainty about the economy.
At December 31, 2011, the commercial leasing portfolio
had $620 million of residuals, compared with $661 million at
December 31, 2010. At year-end 2011, lease residuals related
to trucks and other transportation equipment were 32.3
percent of the total residual portfolio. Business and office
equipment represented 22.6 percent of the aggregate portfolio,
while railcars represented 12.9 percent. No other
concentrations of more than 10 percent existed at
December 31, 2011.
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, unauthorized access to its
computer systems, the execution of unauthorized transactions
by employees, errors relating to transaction processing and
technology, breaches of internal controls and in data security,
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, unauthorized access or 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 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 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.
Interest Rate Risk Management In the banking industry,
changes in interest rates are a significant risk that can impact
earnings, market valuations and safety and soundness of an
entity. To minimize the volatility of net interest income and
the market value of assets and liabilities, the Company
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