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T he Federal Reserve Bank of Atlanta is one of twelve regional Reserve Banks in the United States that, together with the Board of Governors in Washington, D.C., make up the Federal Reserve System-the nation’s central bank. Since its establishment by an act of Congress in 1913, the Federal Reserve System’sprimary role has been to foster a sound financial system and a healthy economy. To advance this goal, the Atlanta Fed helps formulate monetary policy, supervises and regulates banks and bank holding companies, and provides financial services to depository institutions and the federal government. Through its six facilities in Atlanta, Birmingham, Jacksonville, Miami, Nashville, and New Orleans, the Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which comprises Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee. Message from the President .... . . . .2 Insight into a Changing World ... . . . .5 Directors Officers , . . .22 .. ..... . Financial Reports ,30 . . . . . 34 M E S S A G E F R O M T H E P R E S I D E N T “We want to serve the general public.” So argued Joseph A. McCord, the Federal Reserve Bank of Atlanta’s first governor, at the Federal Reserve’s Fourth Conference of Governors in June 1915. In McCord’s day, the Sixth Federal Reserve District was struggling, with money and credit in short supply. For McCord, therefore-and for the Atlanta Fed’s nine-member board of directors-serving the public meant lowering interest rates. And in 1915, that would have meant lowering the discount rate. Almost everything has changed clear checks, but we also operate the since then. The Sixth Federal Reserve Automated Clearinghouse and Fedwire District is now among the nation’s and are pushing hard for innovations fastest growing regions. The discount like electronic check presentment. We rate is no longer the primary instru- still regulate state-chartered banks that ment of monetary policy. District are members of the Federal Reserve governors are now called presidents. System, but we also now regulate bank And the Federal Reserve Act-the holding companies and supervise 1913 legislation that created the foreign banks operating in the United Federal Reserve System and defined States. We educate banks and others its duties-has about effective community development been amended more efforts. And at the broadest level, the than eight times. Nevertheless, the Fed‘s three principal duties-monetary stabilization, Fed remains the central bank of the United States, though we now carry payments processing, and bank out this domestic mission in an supervision-remain. We continue to environment where the dollar is the Jack Guynn, Atlanta Fed president and CEO (left), and Pat Barron, first vice president and chief operating officer, in the Bank’s boardroom world's reserve currency. At the manifestations of that role, a particularly Atlanta Fed, in 1998 we processed important one in a region as rich in more checks than any other Federal economic, industrial, and social diversity Reserve Bank. We became headquar- as ours. Some of those activities- ters for the Federal Reserve System's economic intelhgence, for example- Retail Payments Office. We supervised are more obvious than others. But all five of the nation's fifty largest banks. contribute to the effective execution Our economists produced research of our duties. focusing on the most innovative Governor McCord's views on mone- and rapidly changing aspects of the tary policy did not carry the day in economy and the financial system. An 1915. Fortunately, however, his vision expanded community service program for the Federal Reserve System in demonstrated our strong commitment general-and to the people of our district, and particular-did prevail. We still want management worked to enhance our to serve the general public. Our attractiveness as an employer. directors help ensure that we succeed Few of these activities would be familiar to Governor McCord. Still, he surely would recognize one thmg that has not changed since 1914: the central role of Reserve Bank directors. The pages that follow examine a few 4 c z u A c U Y 0 z z u m w > E Y (I) Y E the Atlanta Fed in in that mission, and this annual report looks at how they do so. GP JACKGUY" I N S I G H T I N T O A C H A N G I N G W O R L D Federal Reserve Banks uniquely combine public and private elements. As Governor McCord declared long ago, the Federal Reserve System has serious public purposes. Yet Congress, in 1913, chose to organize each bank much like an ordinary private business, complete with a corporate charter, member banks that are shareholders, and a board of directors. In addition to this corporate board, Congress allowed Federal Reserve Banks’ directors to designate directors at each Reserve Bank branch. These corporate parallels help shield the Federal Reserve System’s decision making from the shifting winds of day-to-day political issues, a proper safeguard for an institution charged with stability of the U.S. monetary system. Reserve Banks’ unique structure also gives the Federal Reserve System several ways of fostering stability and efficiency in a world in which change rules the economy and the financial system. Each Reserve Bank and branch board and each Bank’s advisory council on small business, agriculture, and labor plays an important role in accomplishing the Federal Reserve’s mission. The directors and council members, who represent the broad interests of banking, business, labor, agriculture, and consumers, meet the world at their doorsteps every day and must meet its changing demands to be successful in their private pursuits. They brina their varied knowledge and insights to the Reserve Bank. The Federal Reserve Bank of Atlanta particularly benefits from the involvement of these outside leaders. With its main office and five branches, the Atlanta Fed has more directors than any other Fed Bank. These leaders lend a business perspective to implementing the Bank’s strategic plans. The Bank’s advisory council brings focused attention to the specific concerns of small business, agriculture, and labor. Together, the experience and insights of the directors and council members, as well as their observations on current economic developments, give the bank a deeper, more forward-looking perspective into the work of serving the public in a changing economy. The photos and stories that follow feature a small sample of Federal Reserv Bank of Atlanta directors and advisers, the diverse array of economic activities they represent, and the important place this representation has in helping the Atlanta Fed serve the public effectively. I N S I G H T I N T O Technology A t Martin Farm in Courtland, Alabama, autumn hails the cotton harvest, as it has for more than two centuries across the South. But for Larkin Martin, farming is not what it used to be. In industries from cotton farming to space technology and lugh finance, the southeastern economy faces the changes reverberating from breath-taking technological advances and shifting global dynamics. Indeed, these forces are felt worldwide. Directors like Martin are essential to the Bank's success. Martin, like Miami branch director Mark Sodders, a sugarcane and sweet corn producer in south Florida, gives the Fed a window onto agriculture. As a cotton farmer, Martin has accompanied the South's oldest industry into the current environment of globalization and technological advances that have revolutionized the industry. Such experience in using technology to manage challenges-like increasing worker productivity to overcome tght labor markets-helps the Atlanta Fed understand the depth of these changes and the ways businesses are adapting. r I Y array of businesses, nonprofits, and financial L 0 Like Martin, who also oversees family institutions keep the Atlanta Bank mindful that interests in a ginning operation, an agricultural it must not only respond to but also embrace custom application business, and a tractor deal- and lead in d e w with the forces of change. In ership, many of the Bank's directors wear more 1998 one of the biggest challenges the Federal than one hat. The perspectives from a broad Reserve System faced was leading changes in the country's retail payments system. To play a strategic part in these changes, the Federal Reserve Bank of Atlanta took on this charge for the entire Federal Reserve System, with the transfer of the System's Retail Payments Office to the Atlanta Fed. I N S I G H T I N T O Globalization W Me regional industries like cotton farming have long been a focus of Bank staff as they monitor economic and financial conditions, today's scope of analysis is unbounded by regional or national limits. Globalization is behind the way businessesand the Fed-do almost everythug because of the implications for financial systems, payments t A systems, markets for goods, and information Southeast’s textiles, paper, and produce. From flows. Directors like Maria Camila Leiva her post at the Miami Free Zone Corporation, and Carlos Migoya help the Federal Reserve Leiva sees what cannot be conveyed in statistics. make sound, informed decisions in the face of More than just the numbers of inbound contain- global concerns. ers, she knows what’s in them, where they’re As the nation’s eighth-largest seaport, from, and the impact they’re likely to have on Miami is both a point of entry for the world‘s the economy at large. And in 1998, lower-priced largest market and a point of departure for the imports made a very substantial contribution to the low-inflation environment. Increased international trade through ports at Miami and the Gulf Coast is one feature of the southeastern economy today of keen interest to the Bank‘s regional research in support of monetary policy. But the implications of globalization are much broader than trade. The research arm of the Atlanta Fed, headed by Robert Eisenbeis, explores international issues with a view toward formulating effective monetary policy in today’s dynamic and open environment, in which disruptions in exchange rates halfway around the world can send shock waves through U S . financial markets and shake confidence in the domestic economy. In addition, the Atlanta Bank has the charge of examining banks with parent organizations in Latin America and the Caribbean and, generally, providing in-depth information on the region’s financial systems. This information helps other Federal Reserve Banks and the Board of Governors determine whether banks seeking a U.S. charter have comprehensive and consoli- I Supplementingthe formal economic research of Bank staff, Atlanta Fed Senior VP and Director of Research Robert Eisenbeis (center) confers at the Port of Miami with Atlanta director Maria Camila Leiva (left), executive VP of the Miami Free Zone Corp., and Miami branch director Carlos A. Migoya, a reglonal president for First Union National Bank of Florida, about how developments in Asia might affect trade and financial flows to Latin America and the United States. dated supervision in their home countries. l N S l B H T I N T O Financial Systems G lobal and technological changes affect providers of financial services no less than industries like farming and shipping. Credit-scoring models allow loan applications to be approved in seconds. Risk portfolios can be managed with sophisticated computer t r a m strategies. Financial firms offer more products, serve more markets, and take and manage more risks. These broad transformations, combined with regulation, deregulation, and numbingly rapid advancements in the way ventures are financed and c 0 * funds marshaled, offer particular challenges to financial leaders and the Federal Reserve today. Because Federal Reserve Banks serve financial firms directly, supervise them, and depend on them as a path for the influence of monetary policy, leaders in banking and other m m U I- kinds of financial activities make up the largest industry group on Reserve Bank boards. To secure insight from a variety of perspectives, z U 4 banks that are members of the Federal Reserve I- U System elect representatives of commercial Kirk Landon and Hundley Batts, insurance banks of all sizes to the Bank's corporate board. executives, keep the Atlanta Fed up to date and Recognizing the need for a broader perspective loolung ahead on current practices and products on the financial services industry, however, the and on credit flows and quality. Atlanta Fed has also recruited directors from a One of the greatest challenges the Fed faces variety of financial iirms: Whitney Johns, a is to help formulate a modern approach to venture capitalist,.Michael Poole, an investment ensuring financial system safety and soundness, banker, Terry West, a credit union CEO, and one that can prevent or at least contain systemic Page 10 c -- breakdown without impedmg the innovation that has become the hallmark of this industry. The interaction of directors like Johns and Howard McMiUan with Federal Reserve Board Governor Roger Ferguson, a former banking consultant, and Bank staff helps the Fed understand issues like the impacts of deregulation. 1 Atlanta director Howard 1. McMillan Jr. (right), chairman of the Jackson [Mississippi] Advisory Board of Deposit Guaranty National Bank, and Nashville branch director N. Whitney Johns (left), chairman and CEO of Whitney Johns & Co., discuss changes in the financial system and the challenges these pose to the current approach to regulation with Roger W. Ferguson Jr., a member of the Federal Reserve’s Board of Governors. I N S I G H T I N T O Deregulation D irectors David Jones and David Guidry firms. Their input also keeps the Fed close to each manage a business in the energy developments in a part of the economy that has industry, where rapid changes in tech- long been under global influences. Over the past nology and industry economics have recently three decades, the energy industry has been combined with deregulation to provide a central to both recession and recovery in challenging environment. As chairman of the the nation’s economy and a major influence natural gas utility AGL Resources Inc., Jones has on prices. witnessed the Georgia company’s transition from A smgle technological innovation or the a regulated monopoly to a price- and service- deregulation of natural gas services to consumers sensitive provider in a highly competitive market. in a single state may seem trivial in the grand Guidry‘s company, Guico Machine Works, scheme of monetary policy. But the cumulative fabricates metal parts for the oil extraction impact of one innovation and one policy initiative, industry (among others). So when advanced multiplied over fifty states and thousands of horizontal drilling technologies arrived in the energy-consuming industries, is truly macro- Gulf a few years ago, Guidry literally helped economic in its reach. When consumers spend build the platform they stand on. less on energy and energy-consuming products, Along with other directors from the energy they’re able to spend more on other things. industry, like Glenn Pumpelly of Sulphur, Declines in energy prices can offset upward price Louisiana, Jones and Guidry inform the Atlanta pressures in the short run.These kinds of Fed about their industry’s experience with insghts are vital to the Bank as it contributes to deregulation and technological change, which the formulation of monetary policy. complements that of directors from financial I N S l a H T I N T O Health Care A s the impressive instrument towering through acute-care hospitals. Through the over directors Paula Lovell and monthly reports of branch directors, he offers James Dalton and Atlanta Fed an insider’sperspective on technology’s impact executive Ronnie Caldwell suggests, vast on the industry as well as the direction of technological changes have made health care a managed care. major economic concern. While technological One of Caldwell’s responsibilities is the developments in telecommunications, Bank‘s human resources function. As it is for transportation, and energy extraction have . businesses everywhere, the issue of attractmg helped slow price increases or even reduce competent and creative staff is of great concern prices, such developments in the health care to the Atlanta Fed. Both the costs and delivery of industry have not always done so. In assessing health care hold an important place in decisions developments in the overall economy and in on offering attractive employee benefits, so the providmg benefits to employees in businesses Bank values the guidance that directors like throughout the economy, it is essential to take Lovell and Dalton and others in health care- health care issues into account. related organizations, like Florida Blue Lovell’s public relations E m ,like other small CrossBlue Shield chief William Flaherty and companies, faces challenges of providing Teri Fontenot of the Women’s Health Foundation, competitive benefits and working conditions in can provide. If the Bank is to lead, it must also an evolving labor market. She brings that adjust to other labor force changes occurring all particular perspective as well as those of her over the nation. Directors and advisory council large national clients to monetary policy members representing labor organizations, like discussions of the Atlanta board as it considers Bruce Carr of the Alabama AFL-CIO and Saturn’s recommending discount rate changes. Dalton’s Michael Bennett, help keep Bank managers company provides health services directly informed on a variety of labor force issues. voge 14 1 I the health care industry of increasingly sophisticated medical equipment, like this digital angioplasty machine at Vanderbilt University Medical Center in Nashville. I N S I Q H T I N T O Tourism c 0 n the burgeoning Mississippi coast, Lucimarian Roberts, as past president of the Mississippi Coliseum Commis- sion, has been a leader in another of the big changes in the southeastern economy. Over the past thirty years, developments in tourism and business travel have transformed pockets of the region. No longer content to see tourists only in New Orleans’s French Quarter or on Florida’s beaches, fmns and governments throughout the Southeast have built attractions like theme parks, casinos, and convention centers to bring in visitors from the United States and abroad for recreation or meetings - and trade shows. The convention trade, for example, now thrives in cities throughout the region, including Atlanta, Miami, Orlando, Nashviue, and New Orleans, which have expanded aggressively beyond traditional tourism. Tourism includes an array of services, from food service, transportation, and lodging to entertainment. < So in addition to attractmg visitors, tourism also I- z < 4 c provides jobs across a wide range of skill levels. This influx has brought rapid growth to < L places like the Mississippi coast. It has furthered about problems arising from tight markets the region’s economic diversification by giving for labor in fast-growing industries and the it another engine of growth. It has taught sometimes negative effects that rapid growth in managers of businesses and financial institutions industries like gaming can have on consumer that deal with tourism about global develop- welfare. Directors who serve tourists and ments. Recently, it has also generated lessons business travelers, like Roberts and Keith Cobb, 0 r z * m Y > Y (D Y < Y D Y Y past vice chairman and CEO of Alamo Rent A Car Inc. in Fort Lauderdale, Florida, give the Atlanta Bank insights into both consumer and business behavior. I N S I G H T I N T O Gonsumers N A ny public institution must turn to the ultimate user of its services for validation. Thus, the Federal Reserve must turn to the behavior of the general public-ultimately as consumers-to assess the economy in which it operates. Because purchases by U S . consumers account for two-thirds of the country’s gross domestic product, an understanding of consumer behavior is critical to effective monetary policy malung, particularly in a year like 1998, when spending grew faster than income for several months. Director Suzanne Boas, president of the Consumer Credit Counseling Service of Greater Atlanta, gives particularly valuable insights from the consumer’sperspective about the effects of 0 P Y changes in industry, employment, credit practices, and financial institutions generdy. LI Success stones like that of Alpharetta, Georgia, entrepreneur Gordon Wadsworth, who paid off $30,000 of debt, contain the elements of problems consumers face in today’s demandmg society as well as solutions of which the Atlanta Fed can be a part. Wadsworth now helps CCCS c L 1 educate consumers about overcoming problems and malung wiser choices in the future. Boas and other directors like automobile they apply for credit and from misinformation dealer Juanita Baranco, home builder John in the process of choosing financial products. Wieland, and those from financial firms that Through its community affairs activities, the serve individuals and familes also contribute to Bank fosters responsible programs for promoting the Atlanta Bank in another important way. economic development in low- and moderate- Reserve Banks are charged with protecting income communities. The experiences of consumers from bias and unfair practices when directors who sell or lend to consumers or who page 18 A 1 his success in paying off $30,000 of debt and welcome hls help In educating other consumers. , r_- counsel them about credit help the Bank deal with this important responsibility.In addition, directors’ connections with the public and consumers through their businesses or community service help the Atlanta Fed gauge new trends in the economy and public reactions to Federal Reserve policies and programs. L a 1 II S. KIMk. (left), a member of k pmvfde opportunities I N S I G H T I N T O Small Business L ike the directors represented, Willie Kmg daily challenge of anticipating and taking the is in his work environment, or one of them. next step in the various areas of business He is owner of a transmission shop, a taxi responsibilities, it would be easy to lose sight service, a funeral home, and a service that reads of whom the Bank really serves. Directors and gas and electric meters in the Lake Charles, advisory council members like Kmg, leaders in Louisiana, area. In his role on the Bank's Small community service as well as in their own fields, Business, Agriculture, and Labor Advisory serve as role models as the Bank is increasing its Council, he specifically helps address small own commitment to service in the communities business concerns about economic develop- where it operates. ments, financial system changes, and Federal In 1998 the District expanded its community Reserve policy. Like other council members relations programs through several new and directors, he brings somethmg more than initiatives like Christmas in April, a multicity business expertise to the bank, however. Even program to repair and paint houses in older inner as he successfully pursues his entrepreneurial city neghborhoods, and Each One Save One, a goals, Kmg is deeply dedicated to serving mentoring program for students in some of New his community. He is a member of the boards Orleans's most impoverished schools. Directors of fourteen community service organizations and advisory council members help the Bank stay that engage in activities like job training, health aware of community needs and true to the ideal services, and treatment of substance abuse. that a model public institution must also be a It is no accident that community service model corporate citizen. Thus, they help the ILT 0 P Y LT _I c z ranks high among priorities of the Bank's Federal Reserve Bank of Atlanta continue to directors and advisory council members. The pursue the vision James McCord expressed so Federal Reserve System has been entrusted by simply so many years ago. Congress to do the people's business. With the z c (D m m BOARD OF F ederal Reserve Banks each have a board of nine directors. Directors provide economic information, have broad oversight responsibility for their Bank’s operations, and, with Board of Governors approval, appoint the Bank’s president and first vice president. Six directors-three class A, representing the banking industq, and three class B-re elected by banks that are members of the Federal Reserve System. Three class C directors (including the chairman and deputy chairman] are appointed by the Board of Governors. Class B and C directors represent agriculture, commerce, industq, labo?; and consumers in the District; they cannot be oficers, directors, or employees of a bank; class C directors cannot be bank stockholders. Branch banks’ boards have five or seven directors; the majority are appointed by head-ofice directors and the rest by the Board of Governors. DIRECTORS:ATLA David R. Jones D. Paul Jones Jr. CHAIRMAN Chairman AGL Resources Inc. Atlanta, Georgia Chairman and Chief Executive Officer Compass Bancshares hc. B e a m ,Alabama John W&nd Ma& Camila Leiva DEPUTY CHAIRMAN Executive Vice President Miami Free Zone Corp. Miami. Florida Chief Executive Officer and Chairman John Wieland Homes and Neighborhoods Inc. Atlanta, Georgia Juanita P. Baranco Executive Vice President Baranco Automotive Group Morrow, Georgia Suzanne L Boar President Consumer Credit Counseling Service Inc. Atlanta, Georgia Waymon L Hieknrn Chairman and Chief Executive Officer First Farmers and Merchants National Bank Columbia, Tennessee Paula Lorall President Lovell CommunicationsInc. Nashville, Tennessee Howard L McMillan Jr. Chairman Jackson Advisory Board Deposit Guaranty National Bank Jackson, Mississippi FEDERAL ADVISORY COUNCIL M E M B E R Stephen A. H a d President and Chief Executive Officer Hibemia Corp. and Hibemia National Bank New Orleans, Louisiana 1 3’ NOT PICTURED: MsWlLLAN ‘ . P r" I BOAS BARANCO D. PAUL JONES LO\ BRANCH DIRECTORS:BIRMINGHAM PatIiChB.colnpton w. clurkr h y e r Ill CHAIRMAN Senior Executive Vice President AmSouth Bancorporation President, Alabama, Tenness.ee and Georgia Banldng Group Amsouth Bank Birmingham,Alabama President Patco Inc. Georgiana, Alabama Hundley h t t s Sr. Owner and Managing Agent Hundley Bath and Associates Insurance Agency Huntsville, Alabama D. Bruce cam Labor-Relations Liaison Laborers’ District Council of Alabama Gadsden, Alabama 1. Stqhw Ndsffl Chairman and Chief Executive Officer First National Bank of Brewton Brewton, Alabama COUP RolrdFe Chairman Roland push Construction Inc. Northport, Alabama v. Lafkin hl8#thl Managing Partner Martin Farm Courtland, Alabama BRANCH DIRECTORS: JACKSONVILLE Judy R. Jones Wlllhm 6. Smii Jr. CHAIRMAN President J. R. Jones and Associates Tallahassee, Florida President and Chief Executive Officer Capital City Bank Group Tallahassee, Florida William E. Flaherty RaycaB.walden Chairman Blue Cross and Blue Shield of Florida Inc. Jacksonville,Florida President Walden Enterprises Inc. Orlando, Florida Mihad w. TemyRW pode Principal Poole Carbone Capital Partners Inc. Winter Park, Florida President and Chief Executive Officer Jax Navy Federal Credit Union Jacksonville,Florida Marsha 6. Wbeg Partner Foley & Lardner Tampa, Florida N O T PICTURED: JONES I J &I P R T I h I J , ---’ 7 m 1 B R A N C H D I R E C T ~ R SM : IAMI R Mirk landon callor A. Milpya CHAIRMAN Chairman American Bankers Insurance Group Miami, Florida Regional President Dade/Monroe Counties First Union National Bank of Florida Miami, Florida D. Keith Cobb James w. Moorr, Past Vice Chairman and Chief Executive Officer Alamo Rent A Car Lnc. Fort Lauderdale, Florida Past President Gulf Utility Co. Fort Myers, Florida Kaaren Johnron-Sbwt Vice President of Minority Business Development and Urban Initiatives Enterprise Florida Coral Gables, Florida E.AnthonyPast President and Chief Executive Officer Island National Bank and Trust Co. West Palm Beach, Florida WIGOVA Mairk 1.sodden President Lakeview Farms Inc. Pahokee, Florida BRANCH DIRECTORS: Francs F. Marcum CHAIRMAN Chairman and Chief Executive Officer Micro Craft Inc. Tullahoma. Tennessee M k h d E. Benne# UAW Manufacturing Advisor UAW Local 1853 Saturn Corp. Spring Hill, Tennessee U x James E. Dalton Jr. U President and Chief Executive Officer Quorum Health Group Inc. Brentwood, Tennessee c U L Dak W. polky President First American National Bank Nashville, Tennessee Idm E. Sewad Jr. President and Chief Executive Officer Paty Lumber Co. Piney Flats, Tennessee L A. Walker Jr. Chairman and c 4 N A S H V I LL E Chief Executive Officer First National Bank and Trust Co. Athens, Tennessee 0 z 2 U ID Y > LL N. W h i i Johns Chairman and Chief Executive Officer Whitney Johns 81 Co. Nashville, Tennessee Y u) Y LL I NOT P I C T U R E D : BENNETT, WALKER SODOERS JOHNSON-STREET I COBS MARCUM SEWARD BRANCH D I R E C T O R S : N *E]W &LEANS Ludmarian 1. R o b Howell N. Orgs CHAIRMAN Chairman and Chief Executive Officer Merchants Bank Vicksburg, Mississippi Past President Mississippi Coast Coliseum Commission and Community Advocate Biloxi, Mississippi JaclQn H. Ducote President Public Affairs Research council of Louisiana Baton Rouge, Louisiana Tari 6. Fontsnat President and Chief Executive Officer Woman's Health Foundation Baton Rouge, Louisiana Homrd C. blner President, Military Division First USA Partners New Orleans, Louisiana WWlY President and Chief Executive Officer Guico Machine Works Inc. Harvey, Louisiana R Gknn Pumpelly President and Chief Executive Officer Pumpelly Oil Inc. Sulphur, Louisiana NOT PICTURED: DUCOTE SMALL BUSINESS, AGRICULTURE, AND LABOR ADVISORY COUNCIL Stewart Acuff Clark S. Coogan Willii S. King Jr. James E. S m i i President Atlanta Labor Council AFI-CIO Atlanta, Georgia Principal Coogan &Associates, CPAs Jacksonville,Florida Owner/Operator King's Transmission Service King's Funeral Home King's Meter Reading Service Lake Charles, Louisiana Vice President District 3 Communication Workers of America Decatur, Georgia John Hank Luis &mil Principal Bermello, Ajamil & Partners Inc. Miami, Florida Peter E. Black Chief Executive Officer W o k Corp. Decatur, Georgia President Corporate Environments Atlanta, Georgia John lkndrickr President Alabama Cryogenic Engineering Inc. Huntsville, Alabama L a V m L Turpin Richard A. Machek General Manager Mazzoni Farms Inc. Boynton Beach, Florida Wta P. Mitchell Investment Representative Edward Jones Nashville, Tennessee Jarnet A. Hughas Benjamin F. wlrkett Owner B&BFarms Petal, Mississippi Hughes Family Farm Cottonwood,Alabama Danny Rochalle Owner Royal Oaks Farms Nunnelly, Tennessee Owner/Manager LaVergne's Telemessaging Alexandria, Louisiana GAINES ROBERTS Standing: Herr, Elsenbeis, Caldwell, Guynn, Hawkins Seated: Estes, Bamn, DeBeer, Brown ;-+*- 1 MANAGE MENT COMMITTEE Jack Guynn h n n a M. &Beer FraderSekRkT CHAIRMAN Senior Vice President Senior Vice President RMA.&enbeis Rkhard R o l i Senior Vice President and Director of Research Senior Vice President President and Chief Executive Officer Patriek Id Barron VICE CHAIRMAN First Vice President and Chief Operating Officer w. Ronnie C a M l Executive Vice President Y 0 z z U LD ChhrbtopherG.Brorm William B. Estes 111 ADVISER Senior Vice President Vice President and General Auditor Y > = Y u) Jarnet D. Hawkins Y Senior Vice President 4 U EY P w page 31 Y OTHER CORPORATE OFFICERS SENIOR VICE PRESIDENTS Frank 1. Cman Jr. DoluldLNakan Edmund Willingham Senior Vice President Senior Vice President Senior Vice President and General Counsel VICE PRESIDENTS LOiSc.Bedhaume Qnthiac.Goodrrin BobbieH.McCrrcldn Ad~ienneM. Wells Vice President Vice President Vice President and Public Affairs Officer Vice President Suzln~ 1. coatdl0 ZlllhRW Vice President Vice President John D. Pelick Vice President Thonur, 1. Cunningham Vice President khnRb ROMM N. Zhnennan Vice President Vice President Mary S. Rosenbaum Vice President GfimldP.Dwyf#r Vice President 6. F m k King Vice President and Associate Director of Research Lany 1. Schulz Vice President ASSISTANT VICE PRESIDENTS VickihAndanOn Daniel A. Maslaney Melinda 1. Rushing Assistant Vice President Assistant Vice President Assistant Vice President JFoley Assistant Vice President Edward c. Andrrm, Jayne Fox Maw M. Mcconnkk R o b d M. Schenck Assistant Vice President Assistant Vice President and Corporate Secretary Assistant Vice President Assistant Vice President Marie E. McNauy Robart T. sexton Bany 6. Ha8tin 1-( Assistant Vice President Assistant Vice President John H. Atkiman Assistant Vice President Assistant Vice President John S. Branigin Assistant Vice President G3dYllC.W knclir A. Murphy Idgdl David W. slni Assistant Vice President Assistant Vice President Alvin L Filkinton Jr. Aruna W Assistant General Auditor Assistant Vice President Assistant Vice President James L Warn Assistant Vice President Janet h M n g i n Assistant Vice President Ted 6. Rddy 111 Edwina M. Taylor -Hay Assistant General Counsel Assistant Vice President Assistant Vice President Maw M. w Marion P. Rivers 111 Lany D. Wall Assistant Vice President Research Officer W l i m T. Robardr Julius 6. Wrylnan Research Officer Assistant Vice President Joan H. Buchnan Assistant Vice President David F. cam Assistant Vice President Assistant Vice President Roberto 1. chrng Research Officer R d 1. Legeat lnssenadl Assistant Vice President ClUpalkD. Davis Assistant Vice President Albeit L Maltin 111 Assistant General Counsel 1. COuItmy Duhies Assistant Vice President and Community Affairs Officer oage 32 SusanLUobsdsm lGmbedyK.windcl Assistant Vice President Assistant Vice President and Community Relations Officer BRANCH OFFICERS ATLANTA JACKSONVILLE NASHVILLE James M. McKee RobartJ.Shck Vice President and Branch Manager Vice President and Branch Manager Mdvyn K. Purcall Vice President and Branch Manager Ma& C. Gooding ChristoPherLoalday Lee c. knes Assistant Vice President and Assistant Branch Manager Assistant Vice President and Assistant Branch Manager Assistant Vice President and Assistant Branch Manager Christopher N. Alexander Damn 6. Finley Annita T. Moore Assistant Vice President Assistant Vice President Assistant Vice President R0bedA.h JeffreyLWelbkn loel L W a r n Assistant Vice President Assistant Vice President Assistant Vice President BIRMINGHAM MIAMI NEW ORLEANS Andre T. Anderson James T. Curry 111 Rokrt 1. Murw Vice President and Branch Manager Vice President and Branch Manager Vice President and Branch Manager Margaret A. Thomas Juan del Busto Amy S. Goodman Assistant Vice President and Assistant Branch Manager Assistant Vice President and Assistant Branch Manager Assistant Vice President and Assistant Branch Manager Fredric L Fullerton Fred D. Cox W. JeffreyDevine Assistant Vice President Assistant Vice President Assistant Vice President William R. Powell Assistant Vice President chalks w. t i m e Robed A. de Zayas Edward B. Huglles Assistant Vice President Assistant Vice President Assistant Vice President Robert Id Morando Assistant Vice President Assistant Vice President Paticia D. Van de Grad FEDERAL RESERVE BANK OF ATLANTA Financial Reports M A N A G EM ENT’S ASS ERTI 0 N To the Board of Directors of the Federal Reserve Bank of Atlanta The management of the Federal Reserve Bank of Atlanta (FRB of Atlanta) is responsible for the preparation and fair presentation of the Statement of Financial Condition, Statement of Income, and Statement of Changes in Capital as of December 31, 1998 (the “Financial Statements”). The Financial Statements have been prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System and as set forth in the Financial Accounting Manual for the Federal Reserve Banks, and as such, include amounts, some of which are based on judgments and estimates of management. The management of the FRB of Atlanta is responsible for maintaining an effective process of internal controls over financial reporting including the safeguarding of assets as they relate to the Financial Statements. Such internal controls are designed to provide reasonable assurance to management and to the Board of Directors regarding the preparation of reliable Financial Statements. This process of internal controls contains selfmonitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material deficiencies in the process of internal controls are reported to management, and appre priate corrective measures are implemented. Even an effective process of internal controls, no matter how well designed, has inherent limitations, including the possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. The management of the FRB of Atlanta assessed its process of internal controls over financial reporting including the safeguarding of assets reflected in the Financial Statements, based upon the criteria established in the “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the management of the FRB of Atlanta believes that the FRB of Atlanta maintained an effective process of internal controls over financial reporting including the safeguarding of assets as they relate to the Financial Statements. Federal Reserve Bank of Atlanta Jack Guynn President and Chief Executive Officer c z U d c Patrick K. Barron First Vice President and Chief Operating Officer Y 0 z z U m Y > D: Y In Anne M. DeBeer Senior Vice President Y D: d U December 31, 1998 D: Y P Y page 35 Y REPORT O F INDEPENDENT ACCOUNTANTS To the Board of Directors of the Federal Reserve Bank of Atlanta We have examined management's assertion that the Federal Reserve Bank of Atlanta ('FRB of Atlanta") maintained effective internal control over financial reporting and the safeguarding of assets as they relate to the Financial Statements as of December 31, 1998, included in the accompanying Management's Assertion. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants, and accordingly, included obtaining an understanding of the internal control over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control, and such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assertion that the FRB of Atlanta maintained effective internal control over financial reporting and over the safeguarding of assets as they relate to the Financial Statements as of December 31, 1998, is fairly stated, in all material respects, based upon criteria described in 'Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. PricewaterhouseCoopers LLP March 5, 1999 Atlanta, Georgia REPORT O F INDEPENDENT ACCOUNTANTS To the Board of Governors of The Federal Resewe System and The Board of Directors of The Federal Resewe Bank of Atlanta We have audited the accompanying statements of condition of The Federal Reserve Bank of Atlanta (the “Bank”) as of December 31, 1998 and 1997, and the related statements of income and changes in capital for the years then ended. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence s u p porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 3, the financial statements were prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of The Federal Reserve System. These principles, policies, and practices, which were designed to meet the specialized accounting and reporting needs of The Federal Reserve System, are set forth in the “Financial Accounting Manual for Federal Reserve Banks” and constitute a comprehensive basis of accounting other than generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 1998 and 1997, and results of its operations for the years then ended, on the basis of accounting described in Note 3. PricewaterhouseCoopers LLP March 5, 1999 Atlanta, Georgia page 37 STATEMENTS OF CONDITION (in millions) Assets Gold certificates Special drawing rights certificates Coin Items in process of collection Loans to depository institutions U.S. government and federal agency securities, net Investments denominated in foreign currencies Accrued interest receivable lnterdistrict settlement account Bank premises and equipment, net Other assets Total assets Liabilities and capital Liabilities Federal Reserve notes outstanding, net Deposits Depository institutions Other deposits Deferred credit items Surplus transfer due U.S. Treasury Accrued benefit cost Other liabilities Total llabllitles As of December 31,1998 $ 717 602 44 1,050 4 27,779 1,295 262 4,780 137 41 As of December 31,1997 $ 723 602 45 1,287 163 28,961 1,574 274 793 132 23 $36,711 $34,577 $33,103 $30,390 1,769 16 821 75 78 13 2,081 17 1,210 95 74 12 $35,875 $33,879 Capital Capital paid-in Surdus $ 418 418 $ 359 339 Total capital $ 836 $ 698 Total liabilities and capital $36.711 The accompanying notes are an integral part of these financial statements. $34.577 STATEMENTS O F INCOME (in millions) Interest income Interest on U S . government securities Interest on foreign currencies Interest on loans to depository institutions Total interest income Other operating income (loss) Income from services Reimbursable services to government agencies Foreign currency gains (losses), net Government securities gains, net Other income Total other owrating income Ilossl Operating expenses Salaries and other benefits Occupancy expense Equipment expense Cost of unreimbursed Treasury services Assessments by Board of Governors Other expenses Total operating expenses Net income prior to distribution Distribution of net income Dividends paid to member banks Transferred to (from) surplus Payments to U.S. Treasury as interest on Federal Reserve notes Payments to U S . Treasury as required by statute Total distribution The accompanying notes are an integral part of these financial statements. For the years ended December 31,1997 December 31,1998 $ 1,657 $ 1,679 29 1 35 $ 1,687 $ 1,714 $ 108 18 122 3 2 $ 98 11 (239) 1 5 $ 253 $ (124) $ 128 15 22 $ 113 15 20 2 38 72 $ 260 - 39 68 $ 272 $ 1,668 $ 25 79 558 1,006 $ 1,668 $ 1,330 $ 23 (66) 1,373 $ 1,330 STATEMENTS OF CHANGES I N CAPITAL (in millions) For the years ended December 31,1998, and December 31,1997 Capital Paid-In Balance at January 5 1997 (8.5million shares) Net income transferred from surplus Statutory surplus transfer to the U.S. Treasury Net change in capital stock redeemed (1.3million shares) $ 425 Surplus $ 415 (66) (10) Total Capital $ (66) 840 (66) (10) (66) Balance at December 3 5 1997 (7.2million shares) $ Net income transferred to surplus Net change in capital stock issued (1.2million shares) Balance at December 31,1998 (8.4million shares) The accompanying notes are an integral part of these financial statements. 359 $ 339 79 $ 59 $ 418 698 79 59 $ 418 $ 836 NOTES TO FINANCIAL STATEMENTS 1. O R G A N I Z A T I O N The Federal Reserve Bank of Atlanta (“Bank”) is part of the Federal Reserve System (“System”) created by Congress under the Federal Reserve Act of 1913 (“Federal Reserve Act”) which established the central bank of the United States. The System consists of the Board of Governors of the Federal Reserve System (“Board of Governors”) and twelve Federal Reserve Banks (“Reserve Banks”). The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics. Other major elements of the System are the Federal Open Market Committee (“FOMC”), and the Federal Advisory Council. The FOMC is composed of members of the Board of Governors, the president of the Federal Reserve Bank of New York (“FRBNY”) and, on a rotating basis, four other Reserve Bank presidents. structure The Bank and its branches in Birmingham, Alabama, Jacksonville, Florida, Nashville, Tennessee, New Orleans, Louisiana, and Miami, Florida serve the Sixth Federal Reserve District, which includes Georgia, Florida, Alabama, and portions of Louisiana, Tennessee, and Mississippi. In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a Board of Directors. Banks that are members of the System include all national banks and any state chartered bank that applies and is approved for membership in the System. Board of Directors The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving threeyear terms: three directors, includingthose designated as Chairman and Deputy Chairman, are appointed by the Board of Governors, and six directors are elected by member banks. Of the six elected by member banks, three represent the public and three represent member banks. Member banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds. 2. OPERATIONS AND SERVICES The System performs a variety of services and operations. Functions include: formulating and conducting monetary policy: participating actively in the payments mechanism, including largedollar transfers of funds, automated clearinghouse operations and check processing; distribution of coin and currency; fiscal agency functions for the US. Treasury and certain federal agencies; serving as the federal government‘s bank; providing short-term loans to depository institutions; serving the consumer and the community by providing educational materials and information regarding consumer laws; supervising bank holding companies, and state member banks; and administering other regulations of the Board of Governors. The Board of Governors’ operating costs are funded through assessments on the Reserve Banks. The FOMC establishes policy regarding open market operations, oversees these operations, and issues authorizations and directives to the FRBNY for its execution of transactions. Authorized transaction types include direct purchase and sale of securities, matched salepurchase transactions, the purchase of securities under agreements to resell, and the lending of U.S. government securities. Additionally, the FRBNY is authorized by the FOMC to hold balances of and to execute spot and forward foreign exchange and securities contracts in fourteen foreign currencies, maintain reciprocal currency arrange ments (“F/X swaps”) with various central banks, and “warehouse” foreign currencies for the U.S. Treasury and Exchange Stabilization Fund (’ESF) through the Reserve Banks. 3. S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Accounting principles for entities with the unique powers and responsibilities of the nation’s central bank have not been formulated by the Financial Accounting Standards Board. The Board of Governors has developed specialized accounting principles and practices that it believes are appropriate for the significantly different nature and function of a central bank as compared to the private sector. These accounting principles and practices are documented in the “Financial Accounting Manual for Federal Reserve Banks” (“Financial Accounting Manual”), which is issued by the Board of Governors. All Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with the Financial Accounting Manual. a c 2 a 4 c The financial statements have been prepared in accordance with the Financial Accounting Manual. Differences exist between the accounting principles and practices of the System and generally accepted accounting principles (“GAAP”). The primary differences are the presentation of all security holdings at amortized cost, rather than at the fair value presentation requirements of GAAP, and the accounting for matched salepurchase transactions as separate sales and purchases, rather than secured borrowings with pledged collateral, as is required by GAAP. In addition, the Bank has elected not to present a Statement of Cash Flows or a Statement of Comprehensive Income. The Statement of Cash Flows has not been included as the liquidity and cash position of the Bank are not of primary concern to the users of these financial statements. The Statement of Comprehensive Income, which comprises net income plus or minus certain adjustments, such as the fair value adjustment for securities, has not been included because as stated above the securities are recorded at amortized cost and there are no other adjustments in the determination of Comprehensive Income applicable to the Bank. Other information regarding the Bank’s activities is provided in, or may be derived from, the Statements of Condition, Income, and Changes in Capital. Therefore, a Statement of Cash flows or a Statement of Comprehensive * Y 0 z a? d m Y > Y VI Y 2 U Y P w Y Income would not provide any additional useful information. There are no other significant differences between the policies outlined in the Financial Accounting Manual and GAAP. The preparation of the financial statements in conformity with the Financial Accounting Manual requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Unique accounts and significant accounting policies are explained below. a. Gold Certlf7cates The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks to monetize gold held by the U.S. Treasury. Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Treasury. These gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. A t such time, the U.S. Treasury's account is charged and the Reserve Banks' gold certificate accounts are lowered. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates among Reserve Banks once a year based upon Federal Reserve notes outstanding in each District at the end of the preceding year. b. Special DraMng Rlghts Certlf7cates Special drawing rights ('SDRs") are issued by the International Monetary Fund ("Fund") to its members in proportion to each member's quota in the Fund at the time of issuance. SDRs serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for United States participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR certificates, some what like gold certificates, to the Reserve Banks. A t such time, equivalent amounts in dollars are credited to the account established for the U.S. Treasury, and the Reserve Banks' SDR certificate accounts are increased. The Reserve Banks are required to purchase SDRs, at the direction of the U.S. Treasury, for the purpose of financing SDR certificate acquisitions or for financing exchange stabilization operations. The Board of Governors allocates each SDR transaction among Reserve Banks based upon Federal Reserve notes outstanding in each District at the end of the preceding year. c. Loans to l?epos/tory lnstltuffons The Depository Institutions Deregulation and Monetary Control Act of 1980 provides that all depository institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in Regulation D issued by the Board of Governors, have borrowing privileges at the discretion of the Reserve Banks. Borrowers execute certain lending agree ments and deposit sufficient collateral before credit is extended. Loans are evaluated for collectibility, and currently all are considered collectible and fully collateralized. If any loans were deemed to be uncollectible, an appropriate reserve would be established. Interest is recorded on the accrual basis and is charged at the applicable discount rate established at least every fourteen days by the Board of Directors of the Reserve Banks, subject to review by the Board of Governors. However, Reserve Banks retain the option to impose a surcharge above the basic rate in certain circumstances. d. U.S. Government and Federal Agency Securftles and Investments Denomlnated in Forelgn Cumncles The FOMC has designated the FRBNY to execute open market transactions on its behalf and to hold the resulting securities in the portfolio known as the System Open Market Account ("SOMA). In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes and directs the FRBNY to execute operations in foreign markets for major currencies in order to counter disorderly conditions in exchange markets or other needs specified by the FOMC in carrying out the System's central bank responsibilities. Purchases of securities under agreements to resell and matched salepurchase transactions are accounted for as separate sale and purchase transactions. Purchases under agreements to resell are transactions in which the FRBNY purchases a security and sells it back at the rate specified at the commencement of the transaction. Matched sale purchase transactions are transactions in which the FRBNY sells a security and buys it back at the rate specified at the commencement of the transaction. 4 c z 4 4 I- < Y 0 .L Reserve Banks are authorized by the FOMC to lend US. government securities held in the SOMA to U.S. government securities dealers and to banks participating in U.S. government securities clearing arrangements, in order to facilitate the effective functioning of the domestic securities market. These securities-lending transactions are fully collateralized by other U.S. government securities. FOMC policy requires the lending Reserve Bank to take possession of collateral in amounts in excess of the market values of the securities loaned. The market values of the collateral and the securities loaned are monitored by the lending Reserve Bank on a daily basis, with additional collateral obtained as necessary. The securities loaned continue to be accounted for in the SOMA. L < m Y > E Y (I) Y Foreign exchange contracts are contractual agreements between two parties to exchange specified currencies, at a specified price, on a specified date. Spot foreign contracts normally settle two days after the trade date, whereas the settlement date on forward contracts is negotiated between the contracting parties, but will extend beyond two days from the trade date. The FRBNY generally enters into spot contracts, with any forward contracts generally limited to the second leg of a swap/warehousing transaction. 4 < E Y P Y Y page 42 The FRBNY, on behalf of the Reserve Banks, maintains renewable, short-term F/X swap arrangements with authorized foreign central banks. The parties agree to exchange their currencies up to a prearranged maximum amount and for an agreed upon period of time (up to twelve months), at an agreed upon interest rate. These arrangements give the FOMC temporary access to foreign currencies that it may need for intervention operations to support the dollar and give the partner foreign central bank temporary access to dollars it may need to support its own currency. Drawings under the F/X swap arrangements can be initiated by either the FRBNY or the partner foreign central bank, and must be agreed to by the drawee. The F/X swaps are structured so that the party initiating the transaction (the drawer) bears the exchange rate risk upon maturity. The FRBNY will generally invest the foreign currency received under an F/X swap in interest-bearinginstruments. Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury, U.S. dollars for foreign currencies held by the Treasury or ESF over a limited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Treasury and ESF for financing purchases of foreign currencies and related international operations. In connection with its foreign currency activities, the FRBNY, on behalf of the Reserve Banks, may enter into contracts which contain varying degrees of off-balance sheet market risk, because they represent contractual commitments involving future settlement, and counter-party credit risk. The FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and performing daily monitoring procedures. While the application of current market prices to the securities currently held in the SOMA portfolio and investments denominated in foreign currencies may result in values substantially above or below their carrying values, these unrealized changes in value would have no direct effect on the quantity of reserves available to the banking system or on the prospects for future Reserve Bank earnings or capital. Both the domestic and foreign components of the SOMA portfolio from time to time involve transactions that can result in gains or losses when holdings are sold prior to maturity. However, decisions regarding the securities and foreign currencies transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, earnings and any gains or losses resulting from the sale of such currencies and securities are incidental to the open market operations and do not motivate its activities or policy decisions. U.S. government and federal agency securities and investments denominated in foreign currencies comprising the SOMA are recorded at cost, on a settlementdate basis, and adjusted for amortization of premiums or accretion of discounts on a straight-line basis. Interest income is accrued on a straight-line basis and is reported as “Interest on U.S. government securities” or “Interest on foreign currencies,” as appropriate. Income earned on securities lending transactions is reported as a component of “Other income.” Gains and losses resulting from sales of securities are determined by specific issues based on average cost. Gains and losses on the sales of U.S. government and federal agency securities are reported as “Government securities gains, net.” Foreign currency denominated assets are revalued monthly at current market exchange rates in order to report these assets in U.S. dollars. Realized and unrealized gains and losses on investments denominated in foreign currencies are reported as “Foreign currency gains (losses), net.” Foreign currencies held through F/X swaps, when initiated by the counter party, and warehousing arrangements are revalued monthly, with the unrealized gain or loss reported by the FRBNY as a component of “Other assets” or “Other liabilities,” as appropriate. Balances of U.S. government and federal agencies securities bought outright, investments denominated in foreign currency, interest income, amortization of premiums and discounts on securities bought outright, gains and losses on sales of securities, and realized and unrealized gains and losses on investments denominated in foreign currencies, excluding those held under an F/X swap arrangement, are allocated to each Reserve Bank. Securities purchased under agreements to resell and the related premiums, discounts and income, and unrealized gains and losses on the revaluation of foreign currency holdings under F/X swaps and warehousing arrangements are allocated to the FRBNY and not to other Reserve Banks. Income from securities lending transactions is recognized only by the lending Reserve Bank. e. Bank Premlses and Equlpment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straightline basis over estimated useful lives of assets ranging from 2 to 50 years. New assets, major alterations, renovations and improvements are capitalized at cost as additions to the asset accounts. Maintenance, repairs and minor replace ments are charged to operations in the year incurred. I c z < 4 c f. lnterdisMct Settlement Account A t the close of business each day, all Reserve Banks and branches assemble the payments due to or from other Reserve Banks and branches as a result of transactions involving accounts residing in other Districts that occurred during the day’s operations. Such transactions may include funds settlement, check clearing and automated clearinghouse (“ACH”) operations, and allocations of shared expenses. The cumulative net amount due to or from other Reserve Banks is reported as the “Interdistrict settlement account.” I v 0 z = I m Y g. Federal ReSeNe Notes Federal Reserve notes are the circulating currency of the United States. These notes are issued through the various Federal Reserve agents to the Reserve Banks upon deposit with such Agents of certain classes of collateral security, typically U.S. government securities. These notes are identified as issued to a specific Reserve Bank. The Federal Reserve Act provides that the collateral security tendered by the Reserve Bank to the Federal Reserve Agent must be equal to the sum > Y n Y 4 I Y P Y Y of the notes applied for by such Reserve Bank. In accordance with the Federal Reserve Act, gold certificates, special drawing rights certificates, US. government and agency securities, loans allowed under Section 13, and investments denominated in foreign currencies are pledged as collateral for net Federal Reserve notes outstanding. The collateral value is equal to the book value of the collateral tendered, with the exception of securities, whose collateral value is equal to the par value of the securities tendered. The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize the Federal Reserve notes. To satisfy its obligation to provide sufficient collateral for its outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides that certain assets of the Reserve Banks are jointly pledged as collateral for the Federal Reserve notes of all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and para mount lien on all the assets of the Reserve Banks. Finally, as obligations of the United States, Federal Reserve notes are backed by the full faith and credit of the United States government. The “Federal Reserve notes outstanding, net” account represents Federal Reserve notes reduced by cash held in the vaults of the Bank of $11,326 million, and $8,023 million at December 31, 1998 and 1997, respectively. h. Capital Paidn The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to 6% of the capital and surplus of the member bank. As a member bank’s capital and surplus changes, its holdings of the Reserve Bank’s stock must be adjusted. Member banks are those statechartered banks that apply and are approved for membership in the System and all national banks. Currently, only one-half of the subscription is paid-in and the remainder is subject to call. These shares are nonvoting with a par value of $100. They may not be transferred or hypothecated. By law, each member bank is entitled to receive an annual dividend of 6% on the paid-in capital stock. This cumulative dividend is paid semiannually. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it. i. surprus The Board of Governors requires Reserve Banks to maintain a surplus equal to the amount of capital paid-in as of December 31. This amount is intended to provide additional capital and reduce the possibility that the Reserve Banks would be required to call on member banks for additional capital. Reserve Banks are required by the Board of Governors to transfer to the US. Treasury excess earnings, after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. Payments made after September 30, 1998 represent payment of interest on Federal Reserve notes outstanding. The Omnibus Budget Reconciliation Act of 1993 (Public Law 10366, Section 3002) codified the existing Board surplus policies as statutory surplus transfers, rather than as payments of interest on Federal Reserve notes, for federal government fiscal years 1998 and 1997 (which began on October 1,1997 and 1996, respectively). In addition, the legislation directed the Reserve Banks to transfer to the US. Treasury additional surplus funds of $107 million and $106 million during fiscal years 1998 and 1997, respectively. Reserve Banks were not permitted to replenish surplus for these amounts during this time. The Reserve Banks made these transfers on October 1,1997 and October 1,1996, respectively. The Bank’s share of the 1997 transfer is reported as “Statutory surplus transfer to the US. Treasury.” In the event of losses, payments to the US. Treasury are suspended until such losses are recovered through subsequent earnings. Weekly payments to the U.S. Treasury vary significantly. j. Cost of Unre/mbursed Treasury Sedces The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United States. By statute, the Department of the Treasury is permitted, but not required, to pay for these services. The costs of providing fiscal agency and depository services to the Treasury Department that have been billed but will not be paid are reported as the “Cost of unreimbursed Treasury services.” k Taxes The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property, which are reported as a component of “Occupancy expense.” 4 . U.S. G O V E R N M E N T A N D F E D E R A L A G E N C Y S E C U R I T I E S Securities bought outright and held under agreements to resell are held in the SOMA at the FRBNY. An undivided interest in SOMA activity, with the exception of securities held under agreements to resell and the related premiums, discounts and income, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of interdistrict clearings. The settlement, performed in April of each year, equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding. The Bank’s allocated share of SOMA balances was approximately 6.083%and 6.673% at December 31, 1998 and 1997, respectively. The Bank’s allocated share of securities held in the SOMA at December 31, that were bought outright, were as follows (in millions): 1998 Par value Federal agency US. government Bills Notes Bonds 1 Total par value Unamortized premiums Unaccreteddiscounts Total allocated to Bank 21 1997 , 1 11,848 11,430 4,226 13,154 11,625 3,964 27,525 28.789 449 (195) $ 46 27.779 413 (241) $ 28.961 Total SOMA securities bought outright were $456,667 million and $434,001 million at December 31, 1998 and 1997, respectively. The maturities of U.S. government and federal agency securities bought outright, which were allocated to the Bank at December 31, 1998, were as follows (in millions): US. Government Maturities of Securities Held Within 15 days 16 days to 90 days 91 days to 1 year Over 1year to 5 years Over 5 years to 10 years Over 10 years Total Securities $ $ Par value Federal Agency Obligations 70 6,030 8,738 6,553 2,727 3,386 $ 27,504 $ - Total $ 70 6,032 8,742 6,557 2,738 3,386 $ 27,525 2 1 4 11 - 21 A t December 31, 1998, and 1997, matched salepurchase transactions involving U S . government securities with par values of $20,927 million and $17,027 million, respectively, were outstanding, of which $1,273 million and $1,136 million were allocated to the Bank. Matched salepurchase transactions are generally overnight arrangements. 5 . INVESTMENTS DENOMINATED I N FOREIGN C U R R E N C I E S The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments. Foreign government debt instruments held include both securities bought outright and securities held under agreements to resell. These investments are guaranteed as to principal and interest by the foreign governments. Each Reserve Bank is allocated a share of foreigwurrencydenominated assets, the related interest income, and realized and unrealized foreign currency gains and losses, with the exception of unrealized gains and losses on F/X swaps and warehousing transactions. This allocation is based on the ratio of each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31. The Bank’s allocated share of investments denominated in foreign currencies was approximately 6.545% and 9.230% at December 31, 1998 and 1997, respectively. The Bank’s allocated share of investments denominated in foreign currencies, valued at current exchange rates at December 31, were as follows (in millions): German Marks Foreign currency deposits Government debt instruments includingagreements to resell Japanese Yen Foreign currency deposits Government debt instruments includingagreements to resell Accrued interest Total $ $ 1998 1997 684 764 155 297 44 53 406 6 452 8 1.295 $ 1.574 Total investments denominated in foreign currencies were $19,769 million and $17,046 million at December 31, 1998 and 1997, respectively, which include $15 million and $3 million in unearned interest for 1998 and 1997 respectively, collected on certain foreign currency holdings that is allocated solely to the FRBNY. The maturities of investments denominated in foreign currencies which were allocated to the Bank at December 31, 1998, were as follows (in millions): Maturities of Investments Denominatedin Foreign Currencies Within 1 year Over 1 year to 5 years Over 5 years to 10 years Total $ 1,232 33 30 $ 1,295 A t December 31, 1998 and 1997, there were no open foreign exchange contracts or outstanding F/X swaps. At December 31, 1998, the warehousing facility was $5,000 million, with zero outstanding. 6. BANK PREMISES AND EQUIPMENT A summary of bank premises and equipment at December 31 is as follows (in millions): 1998 Bank premises and equipment Land Buildings Buildingmachinery and equipment Construction in progress Furniture and equipment 32 41 11 17 128 Accumulated depreciation 229 (92) Bank premises and equipment, net $ 137 1997 $ 39 41 12 5 121 218 (86) $ 132 Depreciation expense was $14 million and $13 million for the years ended December 31, 1998 and 1997, respectively. The building at 1801 5th Avenue North, Birmingham, Alabama was sold to the Allright Corporation on June 18, 1998 with a loss of approximately $300 thousand. The building at 104 Marietta Street was sold to the State Bar Association on April 1,1997 with a profit of approximately $ 1 million. The expansion block also located on Marietta Street was sold to Turner Enterprises on August 1,1997 for a profit of approximately $ 1 million. The Bank leases unused space to outside tenants. Those leases have terms ranging from 1to 6 years. Rental income from such leases was $ 1 million in each of the years ended December 31, 1998 and 1997. Future minimum lease payments under agreements in existence at December 31, 1998, were (in thousands): 1999 2000 2001 2002 2003 $ 575 192 134 100 83 83 $ 1,167 Thereafter 7. COMMITMENTS AND CONTINGENCIES At December 31, 1998, the Bank was obligated under noncancelable leases for premises and equipment with terms ranging from 1to approximately 6 years. These leases provide for increased rentals based upon increases in real estate taxes, operating costs or selected price indices. Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance and maintenance when included in rent), net of sublease rentals, was $7 million and 53 million for the years ended December 31, 1998 and 1997, respectively. Certain of the Bank's leases have options to renew. Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with terms of one year or more, at December 31, 1998, were (in millions): ODerating 1999 2000 2001 2002 $ 4.2 2.7 1.5 0.2 A t December 31, 1998, other commitments and long-term obligations in excess of one year were $79 million. Under the Insurance Agreement of the Federal Reserve Banks dated as of June 7, 1994, each of the Reserve Banks has agreed to bear, on a per incident basis, a pro rata share of losses in excess of 1% of the capital of the claiming Reserve Bank, up to 50%of the total capital and surplus of all Reserve Banks. Losses are borne in the ratio that a Reserve Bank's capital bears to the total capital of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding under such agreement at December 31, 1998 or 1997. The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these actions, in management's opinion, based on discussions with counsel, the afore mentioned litigation and claims will be resolved without material adverse effect on the financial position or results of operations of the Bank. 8 . R E T I R E M E N T AND T H R I F T PLANS Retirement Plans The Bank currently offers two defined benefit retirement plans to its employees, based on length of service and level of compensation. Substantially all of the Bank's employees participate in the Retirement Plan for Employees of the Federal Reserve System ("System Plan") and the Benefit Equalization Retirement Plan ("BEP"). The System Plan is a multiemployer plan with contributions fully funded by participating employers. No separate accounting is maintained of assets contributed by the participating employers. The Bank's projected benefit obligation and net pension costs for the BEP at December 31, 1998 and 1997, and for the years then ended, are not material. Thrift plan Employees of the Bank may also participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System ("Thrift Plan"). The Bank's Thrift Plan contributions totaled $4 million and $3 million for the years ended December 31, 1998 and 1997, respectively, and are reported as a component of "Salaries and other benefits." 9 . POSTRETIREMENT B E N E F I T S OTHER THAN P E N S I O N S A N D POSTEMPLOYMENT B E N E F I T S Postretirement benefits other than pensions In addition to the Bank's retirement plans, employees who have met certain age and length of service requirements are eligible for both medical benefits and life insurance coverage during retirement. The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets. Net postretirement benefit cost is actuarially determined using a January 1measurement date. Following is a reconciliation of beginning and ending balances of the benefit obligation (in millions): 1998 Accumulated postretirement benefit obligation at January 1 Service cost-benefits earned during the period Interest cost of accumulated benefit obligation Actuarial loss Conttibutions by plan participants Benefits paid Accumulated postretirement benefit obligation at December 31 $ $ 66.3 1997 6 60.6 1.7 1.8 4.2 1.8 0.4 (2.6) 4.5 1.5 0.3 (2.4) 71.8 $ 66.3 Following is a reconciliation of the beginning and ending balance of the plan assets, unfunded postretirement benefit obligation, and the accrued postretirement benefit cost (in millions): 1998 Fair value of plan assets at January 1 Actual retum on plan assets $ Contributions by the employer Contributions by plan participants Benefits paid Fair value of plan assets at December 31 Unfunded postretirement beneft obligation Unrecognized initial net transition asset (obligation) Unrecognized prior service cost Unrecognized net actuarial loss Accrued postretirement beneft cost - 1997 $ - 2.3 0.3 2.0 0.3 (2.6) - (2.3) $ $ - $ 71.8 $ 66.3 $ - - 5.4 (7.1) 5.8 (5.2) 70.1 $ 66.9 Accrued postretirement benefit cost is reported as a component of "Accrued benefit cost." The weighted-average assumption used in developing the postretirement benefit obligation as of December 31 is as follows: Discount rate 1998 1997 6.25% 7.00% For measurement purposes, an 8.5% annual rate of increase in the cost of covered health care benefits was assumed for 1999. Ultimately, the health care cost trend is expected to decrease gradually to 4.75% by 2006, and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 1998 (in millions): 1 Percentage Point Increase Effect on aggregate of service and interest cost components of net periodic postretirementbenefit cost Effect on accumulated postretirement beneft obligation $ 2 19 1 Percentage Point Decrease $ (2) (16) The following is a summary of the components of net periodic postretirement benefit cost for the years ended December 31 (in millions): _______~~ 1998 U c 2 < a I- U Service cost-benefitseamed during the period Interest cost of accumulated benefit obligation Amortization of prior service cost Recognized net actuarial loss $ Net periodic postretirement beneft cost $ 1997 1.7 4.2 (0.4) $ 5.5 $ 1.8 4.4 (0.4) - - 5.8 L 0 Net periodic postretirement benefit cost is reported as a component of "Salaries and other benefits." r 2 U m Y > E Y v) Y E Postemployrnent bene& The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined and include the cost of medical and dental insurances, survivor income, disability benefits, and self-insured workers' compensation expenses. Costs were projected using the same discount rate and health care trend rates as were used for projecting postretirement costs. The accrued postemployment benefit costs recognized by the Bank at December 31, 1998 and 1997, were $8 million in each year. This cost is included as a component of "Accrued benefit cost." Net periodic postemployment benefit costs included in 1998 and 1997 operating expenses were $2 million in each year. a U Y P Y Y Head Office and Atlanta Branch 104 Marietta Street, N.W. Atlanta, Georgia 303032713 Birmingham Branch 1801 Fifth Avenue, North Birmingham, Alabama 35203-2104 Jacksonville Branch 800 West Water Street Jacksonville, Florida 32204-1616 Miami Branch 9100 N.W. 36th Street Miami, Florida 33178-2425 Nashville Branch 301 Eighth Avenue, North Nashville, Tennessee 37203-4407 New Orleans Branch 525 St. Charles Avenue New Orleans, Louisiana 70130-3480 Thanks to Vanderbilt University Medical Center, the Port of Miami, and Production Management Companies Inc. for allowing photography on their premises. a Printed on Recycled Paper For additional copies contact Public Affairs Department Federal Reserve Bank of Atlanta 104 Marietta Street, N.W. Atlanta, Georgia 303032713 404.521.8020 www.frbatlanta.org Federal Reserve Bank of Atlanta l'O4 Marietta Street, N.W. Atlanta, Georgia 30303-2713 404/521-8020 www.frbatlanta.org