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commonbonds
Why the partnership between the U.S. Treasury
and the Federal Reserve is good for government, and for you

Federal Reserve Bank of St. Louis | 2004 Annual Report

“The best way to describe the
Mounted
lenticular piece

partnership is a long-term,
symbiotic relationship that
leverages the strengths of both
organizations to focus on a
common mission.”

Don Hammond
Fiscal Assistant Secretary
U.S. Department of the Treasury

a message from the president

3
William Poole
President and CEO

president’smessage

Readers of our 2003 annual report will recall our essay detailing a major change
in philosophy for the Federal Reserve Bank of St. Louis. We presented a new mission for our
branch offices, one focusing more on intellectual leadership and less on operational functions. Last year’s report
proved that the Federal Reserve System and the St. Louis Fed in particular face the same challenges as many private
businesses: run a tighter ship, do more with less and leverage your strengths.
This final point—leveraging strengths in order to bring the greatest possible value to customers—sums up why
in this year’s report we write about the symbiotic relationship between the Federal Reserve and the U.S. Treasury.
Furthermore, we discuss how a key leadership role granted to the Eighth District helps to ensure that the Treasury can
continue to count on the Fed as a dependable, dedicated partner.
Our Bank was privileged in 2001 to be chosen as the System’s Treasury relationship office, representing all Reserve
banks. The assignment means that St. Louis is the central point of contact for all Federal Reserve products, services
and objectives relating to the Treasury. The Fed’s commitment to the agency breaks down to approximately 1,600
employees nationwide providing more than $400 million worth of services annually.
For many years prior to 2001, the St. Louis Fed was a proud provider of Treasury-related offerings. Thus, upon
accepting leadership responsibility, we were supremely confident that the knowledge and experience ingrained within
our staff—led by First Vice President LeGrande Rives, Senior Vice President Dave Sapenaro and Vice President Judie
Courtney—would be something our Treasury colleagues would find valuable.

president’smessage
Teaming up with the Treasury is nothing new for the Federal Reserve. The role of fiscal agent and depository of the
Treasury was officially assigned to the Fed in 1915, shortly after the central bank was created. What is new is the type
of work the Fed has performed for the Treasury over the past five to 10 years.
In the early years, Reserve banks accepted taxes and customs duties, held deposits for the Treasury, cleared Treasury
checks and redeemed Treasury coupons. World Wars I and II witnessed the Fed’s involvement in issuing, servicing
and redeeming bonds to defray the costs of the conflicts, with U.S. savings bonds continuing as a popular Treasury
offering to this day. The relationship between the two organizations continued to evolve over the years, with
emerging technologies like the automated clearinghouse network for electronic payments resulting in product and
service advancements on a larger scale.
Since the end of the 1990s, however, the pace of change has quickened. The Treasury has expanded efforts to
produce more convenient, reliable and secure services that are good for both the federal government and the general
public. Whether we’re talking about new forms of Internet payment, stored-value cards or government direct
payment programs, it’s safe to say that the past 10 years have brought more technological change and challenges
than the previous 80 years combined.
For the St. Louis Fed, the daily task of managing and coordinating the Reserve banks’ many contributions to the
Treasury is a momentous challenge unto itself. I invite you to read our 2004 annual report and learn how, in so many
ways and with the St. Louis Fed’s guidance, the Federal Reserve is committed to helping the Treasury achieve its
strategic objectives.

William Poole

commonbonds
WHY THE PARTNERSHIP BETWEEN THE U.S. TREASURY AND THE FEDERAL RESERVE IS GOOD FOR GOVERNMENT, AND FOR YOU

I. Introduction

March 2, 2005

On this late winter’s
day, there is no obvious
connection among the four.
Nina is an 84-year-old greatgrandmother in Denver; Patricia
owns a chain of computer-repair
shops in New Orleans; Andy is a proud,
young father in Jefferson City, Mo.; and Vince
is a U.S. Army first lieutenant on duty in Kuwait.
As they go about their business today, however, one
link does emerge.

ina had been receiving her Social Security check in the mail at the beginning of every month for nearly
20 years. Then, less than a year ago, as Nina’s health began to decline, her grandson convinced her
that switching to direct deposit would reduce some stress in her life. This morning, as a foot of freshly
fallen snow greets Denverites, she calls her grandson to thank him for his advice. Rather than making
the difficult trek to the bank to deposit her check, Nina sits comfortably at home while her money sits

safely and securely in her account.
In New Orleans, Patricia is caught in a more desirable blizzard of sorts. Her computer-repair business is booming.

She arrives at her office at 6:30 a.m. to prepare for a meeting with her five store managers at 8. On the agenda is the
subject of adding to staff to keep up with customer demand. Ten minutes before her managers arrive, Patricia realizes
she still has enough time to complete another task on her jam-packed to-do list. Her quarterly federal tax payment is
due later in the week. She logs on to the Electronic Federal Tax Payment System (EFTPS) web site, enters her information
and sends instructions to have her payment transferred from her bank account on the due date. With seven minutes
remaining before the meeting begins, Patricia steps away to refill her coffee cup.
As first-time father Andy enjoys breakfast with his 3-year-old son, Zach, he smiles, seeing how engrossed the boy
is playing with his toy cars. It suddenly occurs to Andy that, soon enough, the time will come when Zach will be old

! It costs the government 62 cents more per payment to issue a check rather than
pay electronically.

enough to do more than merely imagine being behind the wheel. As his dad had done for him, Andy wants to one day
help his son pay for his first car. He decides that today is the day to start saving for it by choosing a safe investment with
steady growth prospects. Later at work, a colleague recommends a web site to Andy that would enable him to directly
purchase U.S. savings bonds and give them to his son when Zach is ready to pick out something he can drive in a lane
that’s a bit wider than the kitchen table.
Halfway across the globe, Vince has been leading his platoon through relentless training missions for over a month, in
preparation for deployment in Iraq. This afternoon, however, he is able to break away and head into town to purchase
a hand-woven Kuwaiti dress for his sister, who will turn 40 later in the month. Before he leaves, Vince first stops by the
currency exchange office on the base to obtain Kuwaiti currency. Later, he mails the present from the base post office.
For both transactions, Vince uses his Army EagleCash stored-value card, which he had preloaded with funds from his
bank account several days earlier.
The common thread running through the lives of Nina, Patricia, Andy and Vince is
perhaps one that only the U.S. Department of the Treasury and the Federal Reserve can
fully appreciate. But appreciate it they do. These two formidable organizations are working

The

Fed’s

relationship

as the Treasury’s fiscal
agent

has

taken

in tandem to push innovative, electronic mechanisms for government payments, collections extraordinary significance
over the past decade.

! The Federal Reserve manages an application that offsets debt against payment
files, yielding in excess of $20 billion in government delinquent debt to date.

and savings options for the public. The Fed’s long-standing relationship as the Treasury’s fiscal agent has taken on
extraordinary significance over the past decade, as technological advancements in society have increased the likelihood of
the Treasury’s ultimate goal: 100 percent electronic financial transactions. The electronic payment revolution is resulting in
improved efficiencies for the federal government, greater convenience for consumers and cost-savings for both parties.
This annual report examines the critical, but little understood, role that the Fed serves for the Treasury and the central
role played by the Federal Reserve Bank of St. Louis in particular.

II. A Few Treasury Notes
Although the Federal Reserve dedicates many resources to support the goals of the U.S. Treasury, there are, in fact,
many areas of the agency in which the Fed has no involvement at all.
The Treasury Department consists of 12 bureaus and offices, including familiar names like the Internal Revenue Service,
the U.S. Mint, and the Bureau of Engraving and Printing. Although the Fed supports many of these areas in some
capacity, this report will focus on the two bureaus the Fed provides extensive services to—the Financial Management
Service and the Bureau of the Public Debt. We will also discuss the interactions between one of the Treasury’s
policy-making bodies—the Office of the Fiscal Assistant Secretary—and the Federal Reserve Bank of St. Louis,

which oversees all of the products and services the Reserve banks provide to these three entities of the Treasury.
Financial Management Service
The function of the Financial Management Service (FMS) is to manage the U.S. government’s money. The FMS provides
centralized collection, payment and reporting services for the government. Every day, the bureau oversees the cash flow
of nearly $58 billion into and out of federal accounts.
The FMS collects more than $2.3 trillion each year for the federal government. These payments include individual
and corporate income tax deposits, customs duties, fees for government services, fines and loan repayments. On the
other side of the ledger, the bureau disburses more than $1.5 trillion each year to more than 100 million individuals
The FMS reports that through Social Security payments, veteran’s benefits, income tax refunds and other federal
payments.
$1.9 trillion of the $2.3
The stated goal of the FMS is to move toward an all-electronic Treasury for both collection
trillion it collects is and payments. As we will detail in the next section, the Fed has partnered with the FMS
paid through electronic to implement cutting-edge technology that advances the Treasury closer to that objective.
transactions, nearly 80 So, how close are we to an all-electronic environment? The FMS reports that $1.9 trillion
of the $2.3 trillion it collects is through electronic transactions, nearly 80 percent. As for
percent. As for payments,
electronic-related transactions

accounted

for

more than 75 percent in
fiscal year 2004.

! Three Federal Reserve sites process 250 million Treasury checks per year.

payments, electronic-related transactions accounted for more than 75 percent in fiscal year 2004.
In addition to managing collections and payments, the FMS maintains the federal government’s set of accounts and
serves as the repository of information for the government’s financial position. As part of this responsibility, the FMS
assists federal agencies with adopting uniform accounting and reporting standards and systems. The bureau also
assures the continuous exchange of financial information among federal agencies, the executive branch’s Office of
Management and Budget, and financial institutions.
One other main FMS task worth noting is the collection of delinquent debt. The bureau uses a centralized process
to collect delinquent debt owed to the U.S. government (e.g., student, mortgage or small business loans, or fines or
penalties assessed by federal agencies), as well as income tax debts owed to states and overdue child support payments
owed to custodial parents. Since Congress placed debt collection under a single, central authority, the FMS has collected
nearly $21 billion in delinquent debts that otherwise would not have been collected.
Bureau of the Public Debt
The public has been familiar with the products of the Bureau of the Public Debt (BPD) since 1917, when the Treasury
directed the Federal Reserve banks to issue Liberty Loan bonds and Victory notes to help the government finance World
War I. The BPD, whose primary mission is more narrowly defined than that of the FMS, borrows money needed to

operate the government and accounts for the resulting debt.
Each year, the BPD collects about $2 trillion by selling Treasury bills, notes and bonds either at auctions or directly to
customers. That figure is boosted by the sale of savings bonds at 40,000 locations throughout the country. The bureau
pays interest to investors and eventually redeems the loan when the item matures.
Office of the Fiscal Assistant Secretary
Overseeing the aforementioned two bureaus is the Office of the Fiscal Assistant Secretary (OFAS). This office develops
policy on payments, collections, debt financing operations, electronic commerce, government-wide accounting,
government investment fund management and other issues. OFAS also performs two mission-critical functions for
the Treasury: managing the daily cash position of the government, and producing the cash and debt forecasts used to
determine the size and timing of the government’s financing operations.

III. The Federal Reserve—Fiscal Agent of Change
In some ways, the Federal Reserve’s relationship with the Treasury is as different as the world in general was 90 years
ago. Who during Wilsonian times could have imagined a financial environment that eventually would consist of such
complex automation and electronification? And who could have envisioned that the Treasury would depend on the Fed

A Commitment

That Is Deeper Than the Costs

lthough the Federal Reserve and Treasury have always shared
common goals, for more than seven decades their relationship was

uncommon in a very important way. The Fed’s costs for its services to
the Treasury were not explicitly reimbursed from 1917 to 1992, at which
point Congress enacted legislation to provide money to reimburse
the Fed for its services for the Bureau of the Public Debt. A similar law
permitted the Financial Management Service and other federal agencies
to begin reimbursing Reserve banks for expenses incurred on their behalf
beginning in fiscal year 1998.
Both the Fed and the Treasury support the reimbursement of the Fed’s
fiscal agent services for two reasons: 1. If the federal government did
not include in its budget process to Congress the costs incurred by the
Reserve banks on the Treasury’s behalf, Congress would have trouble
determining the true cost to taxpayers of the agencies’ operations; and
2. When services are directly reimbursed, the costs are much more
transparent. As a result, the services are less likely to be overused and
more likely to be used in an efficient manner.
The Treasury in 2004 reimbursed the Reserve banks $385 million. That
figure is expected to rise above $400 million in 2005.

to manage these technologies and play a vital role in maintaining high standards of security, efficiency and reliability?
Today, all Federal Reserve districts provide some kind of business line support for the Treasury. What follows is a
summary of some of the main tasks and functions the Fed provides for the FMS, BPD and OFAS.
Products and Services for the Financial Management Service
Collection: When the Treasury launched the Electronic Federal Tax Payment System (EFTPS) in 1995, the Federal Reserve
was actively involved, helping the Treasury and the IRS implement and market EFTPS to both depository institutions and
taxpayers. EFTPS collects $1.6 trillion in taxes for the government annually. Participating taxpayers can elect to go through
financial institutions to send an electronic tax payment (via the automated clearinghouse or Fedwire®), or they can enter
instructions directly on a web site for their bank account to be debited on the tax due date. The Federal Reserve processes
and settles the tax payments and sends related information to the FMS for cash management reporting.
The Fed is also involved in the Treasury Tax and Loan (TT&L) program. TT&L is a system that enables a financial
institution to collect federal tax payments from its customers on behalf of the Treasury. The Treasury also invests excess
operating funds through the TT&L system at an administratively set rate. Excess funds are also auctioned and placed at
a competitive rate to participating financial institutions through a program called the Term Investment Option (TIO).
The funds can provide a financial institution with a ready source of liquidity for investment opportunities. Through TT&L

! The Fed’s savings bonds operations in 1942 climbed to approximately 4,000
employees, or 20 percent of its work force.

and TIO, the Reserve banks provide the Treasury with a safe and efficient way to manage its funds. The Fed invested
$2 trillion of government funds in the TT&L program in 2004 and $309 billion in TIO, resulting in over $177 million in
earned interest for the U.S. government.
Another innovative initiative the Fed manages for the Treasury is Pay.gov, an Internet portal that some federal agencies
make available to the public for activities such as submitting information via forms and authorizing electronic payments
to agencies. Pay.gov is available for a variety of payments, from a camping license fee required by some national parks
to businesses that lease government buildings. The Federal Reserve operates the computer application for the web site
and manages the vendors that perform technical support. Pay.gov in 2004 processed nearly 306,000 transactions from
73 agencies for approximately $409 million. Since its inception nearly five years ago, Pay.gov has processed slightly over
2 million transactions for approximately $14.2 billion. The Treasury expects the site to increase in popularity as agencies
Since

its

inception rely on the Internet to process financial transactions.

nearly five years ago,

Payments: In the effort to convert all of its payments from paper to electronic, the Treasury

Pay.gov has processed has found an experienced partner in the Federal Reserve. The Fed has been offering electronic
slightly over 2 million services to commercial banks for decades. After the Air Force built a similar system to pay its
transactions for ap- service men and women in the mid-1960s, the Fed in the early 1970s was one of the developers
proximately
billion.

$14.2

of the commercial automated clearinghouse (ACH). The ACH is a nationwide system for electronic transfer of funds
now used by almost all financial institutions in the United States. Sending money to someone through the ACH process
is also known as direct deposit or electronic deposit.
The Reserve banks’ central clearing application for transmitting and receiving ACH payments is called FedACHSM,
which is what the Treasury uses to make approximately 81 percent of all Social Security benefit payments, 98 percent
of all Treasury disbursed federal salary payments and some one-time payments, such as federal tax refunds. The other
Fed system the Treasury uses to make payments is the Fedwire® Funds Service, which provides immediate settlement for
large-dollar payments that must be settled on the same day they are originated.
Reserve banks also participate and support other payments services used by federal agencies, including:
• Grant payments: The Treasury’s Internet-based Automated Standard Application for Payments (ASAP) was
developed and is operated by the Reserve banks. ASAP allows individuals and organizations that receive federal grant
payments to submit payment requests via the Internet (ASAP.gov) and to later receive the payments electronically.
After a request is submitted on ASAP.gov, it is forwarded to a related computer application at a Reserve bank, which
reviews the request, compares it with the parameters established by the granting agency and initiates the payment.
ASAP initiated nearly $400 billion in payments in 2003.

“Fedwire” and “Fedwire Funds Service” are registered trademarks, and “FedACH” is a service mark, of the Federal
Reserve banks. A complete list of marks owned by the Federal Reserve banks is available at www.frbservices.org.

The Paper Chase:

Going, Going, but Not Gone

ith all of the emphasis on electronic forms of payment, one might
think that paper payments have gone the way of the Macarena.

Not quite. The Federal Reserve in 2004 processed nearly 229 million
Treasury checks with a cumulative dollar value of $277 billion. It costs the
government 62 cents more per payment to issue a check rather than pay
electronically.
The Fed also processes postal money orders for the U.S. Postal Service.
Postal money orders are prepaid drafts drawn against the Postal Service’s
account with the Treasury. Individuals purchase them with cash and use
them as they do checks. The Reserve banks processed 186 million postal
money orders in 2003, a decline from 226 million in 1999.
Paper is also dwindling on the collection side. But while only 5 percent
of total business and individual tax dollars (or about $76 billion) were paid
by check in 2003, that still amounted to more than 11 million checks.

! Treasury checks now include sophisticated encryption features that are validated at
Reserve banks to enhance fraud-detection efforts.

•Intra-governmental payments: About 300 government agencies pay one another using a computer application
that electronically transfers information and funds. This service, which the Fed developed at the Treasury’s request,
reduced the need for paper invoices and agency-to-agency checks.
• Vendor payments: The Treasury in 2003 directed the Reserve banks to manage the Internet Payment Platform.
In this pilot program, three federal agencies and their commercial vendors used a central web site to exchange
purchase orders and invoices and to initiate ACH payments. The Treasury has decided to proceed with a permanent
Internet payment program and has asked the Fed for further support.

The

Treasury

has

• Military stored-value cards: By mid-2004, approximately 108,000 stored-value cards decided to proceed
were issued to U.S. military personnel. The Reserve banks’ role is to maintain detailed
with a permanent
transaction and accounting records for the Treasury, to maintain card balances, to pay
payment
participating merchants via the ACH, and to develop and maintain related computer Internet
applications. The Reserve banks also have developed kiosks for several military bases program

and

has

abroad to allow military service personnel to transfer funds from their bank accounts onto asked the Fed for
their stored-value cards.
further support.

Products and Services for the Bureau of the Public Debt
Like the Financial Management Service, the Bureau of the Public Debt is interested in deploying emerging technologies
to achieve its objectives. One example of how the Fed is helping achieve this is through a computer application it
developed that makes Treasury auctions run more smoothly. The Treasury sells marketable securities like Treasury
bills, notes, bonds and inflation-protected securities to investors through periodic auctions. The application the Fed
developed compares all bids submitted in an auction, assists the Treasury in determining the lowest acceptable price
offered and then calculates the amount to be awarded to each bidder.
The highly automated process enables the Treasury to announce its auction results to the public electronically, usually within
two minutes of the auction’s closing. This shortened time frame allows the Treasury and the Reserve banks to decrease the
risk to bidders of changes in market conditions that can occur between the close of bidding and the announcement of results.
The Reserve banks in 2003 supported 202 auctions and processed bids totaling almost $8.2 trillion.
Another important system that the Fed operates is the Fedwire Securities Service. This service initiates transactions
when interest payments are due on securities for the Treasury or other entities (e.g., Fannie Mae or Freddie Mac), as
well as in instances when the Treasury redeems, or buys back, securities from current owners and retires the debt. The
Fedwire Securities Service is also a safekeeping system for certain book-entry securities, meaning that it consists of an
electronic vault that stores records of book-entry securities holdings by account holder. In late 2004, the system held
continued on Page 25

! The public holds approximately $4.5 trillion of the $7.6 trillion total public debt.

Striving To Make
Pulp Fiction

ost people have begun to accept electronic payments as a fast, convenient and—most important—secure
form of payment. But a hardcore segment of the population remains unconvinced.

Seeking answers as to why the paper-loyalists are reluctant to change, the St. Louis Fed, on behalf of the FMS,
formally surveyed federal benefit check recipients in 2004. On one hand, it’s impressive that 78 percent of federal
benefit recipients received their payments electronically via direct deposit in 2003. And while this figure easily beats the 1996 rate
of 56 percent, the conversion rate has slowed in recent years to less than 1 percent a year. The 22 percent that the Treasury and
the Fed are trying to bring into the fold receive about 170 million checks per year from the government.
In the survey, information from more than 4,000 people who receive federal benefit payments was collected to better understand
why some have not signed up for direct deposit.1 The survey showed that the barriers to direct deposit can be grouped into four
general categories:
• Informational – includes those who don’t understand how direct deposit works;
• Emotional – includes those who just prefer to receive checks;
• Inertia – includes those who are receptive to electronic payments, but need to be motivated to sign up; and
• Mechanical – includes those who don’t have bank accounts and, in some cases, don’t want bank accounts.
With baby boomers preparing to retire in droves over the next decade, the Treasury is examining options for increasing direct
deposit participation. From September 2004 to March 2005, the St. Louis Fed, on behalf of the Treasury, conducted a pilot
marketing program called “Go Direct” in cities in Illinois, Tennessee and Texas, as well as in Puerto Rico. Go Direct used a
combination of community outreach, direct mail and various media channels to bring messages about the benefits of direct deposit
using trusted sources in the community.

A research report summarizing the survey is available at www.frbservices.org (click on Treasury Services) and www.fms.treas.gov/eft (click on

Reports & Statistics).

The Treasury’s

Perspective

The following is excerpted
from a discussion with the
three key Treasury officials
who work on a regular
basis with the Federal
Reserve. The St. Louis
Fed’s Treasury Relations
and Support Office (TRSO)
oversees the Fed's overall
relationship with the
Treasury.

Describe the relationship between
the Treasury and the Federal
Reserve.
DH: The best way to describe the partnership is a long-term, symbiotic relationship that
leverages the strengths of both organizations
to focus on a common mission.
VZ: I would characterize it as a principalagent relationship in which the official roles of
principal and agent are largely irrelevant
because of the Federal Reserve’s and
Treasury’s commitment to work together
on Treasury fiscal programs.
DH: If you talk to people outside the relationship, they can’t tell where the Treasury stops
and the Federal Reserve begins. It is truly
seamless to external people.
DG: I think the current relationship is the
best that I’ve seen in my career. The TRSO

Don Hammond,
Fiscal Assistant Secretary

Dick Gregg,
Financial Management Service
Commissioner

has a large part to do with that. In fact, I think
it’s the biggest single factor. The TRSO brings
a business mentality and interest in getting
things done while at the same time asking
good, difficult questions.
VZ: In addition, the TRSO has added an
advocacy component. Within the Federal Reserve System, they have become an advocate
and educator about the Treasury’s programs.
People know what we do. They know that
things aren’t handled behind the curtain;
they’re out there on the table.
How does the Treasury decide
when it wants the Federal Reserve
involved in a function or project?
DG: The expertise that the Federal Reserve
has in the area of payments is, to me, a
natural fit when we look at, for example,
modernizing our payments system. We look at

Van Zeck,
Bureau of the Public Debt
Commissioner

what the Federal Reserve has that can complement the expertise
that we have at the Treasury, whether it’s in dealing with an issue
or developing a new system. We are also looking at whether there
is a cultural match, meaning, we look at the Fed’s senior leadership
and determine if they seem on board with what we are trying to do.
VZ: With the Federal Reserve, there’s a certain sense of stability
and a comfort level culturally and technologically. This allows us
to focus on the best of the best way to get something done, as
opposed to being held somewhat captive to other more structured
and rigid processes. So, the flexibility of our relationship with the
Federal Reserve enables us to concentrate on things that maybe
we wouldn’t have been even able to get to if we were putting
everything out for bid and dealing with a new partner for every
project that came along.
DH: I think that is highlighted when you look at things that are not
standardized commercial processes. If you look at the work that
we have given to the Fed versus our work that is out in the commercial sector, the commercial work is a commodity, meaning we
are looking for someone to help us apply a known process. That’s
a straightforward relationship to manage. We involve the Fed for
things that are a little more fluid and innovative.
What is the future of the relationship? Will the
growth of electronic payments and issuance of
debt instruments necessitate an even deeper
relationship? If and when the time comes when
100 percent of transactions are electronic, will the
partnership have a new focus and purpose?
DH: I can’t imagine a fundamental change in the relationship
looking forward from what we have today. Aspects of it will certainly

be changed as the environment changes, but the relationship itself is
well-positioned to deal with the future.
DG: On that point, when we first talked to the Fed about supporting us on stored-value cards, it was a bit different for all of us. But
the more we thought about it, we realized that this is still related to
payments and really very much in line with what we’ve been doing.
And that’s what will continue to happen: Our missions probably
won’t change that much, but the nature of how we perform those
missions will make for different products.
VZ: Like anyone else, if you can do things at different locations and
achieve efficiencies, you try to do that. So, to the extent that we have
more opportunities to work more efficiently, I’ll expect we’ll rise to the
challenge. Sometimes it’s hard to think what’s beyond all-electronic.
I don’t know that I know. But I think there probably is something
beyond all-electronic, and it may have more to do with customer
relationships and the speed with which information is available. I
think controls and security are going to become increasingly more
of interest. The Federal Reserve and the Treasury will continue to
innovate and find ways to deliver better services, but do it in a way
that both organizations are comfortable with.
Are there times when the Treasury and the Fed
differ on strategies and tactics? If so, how are
those situations resolved?
DH: Obviously, there are differences. And you would hope for
differences, frankly, because everyone brings different perspectives
and experiences. If you didn’t have differences from time to time,
you’d wonder what the nature of the relationship was. From my
standpoint, these types of things get resolved professionally and in
a business-like manner.

DG: The important thing is that people at the Federal
Reserve are willing to provide their perspectives, and
that’s key. If you don’t have that, then what you have
is one side feeling constrained from providing the very
expertise and insight that we are looking for.
VZ: Hopefully, there’s a sense that when we are
asking for something or suggesting a direction, there’s
more to it than just the edict or directive—that there is
a willingness to explain to the Fed why we want to do it.
That indicates our respect for the relationship.
The Fed’s reimbursable services have
gone up over the past few years, even
as some operations (e.g., TreasuryDirect
and savings bonds) have been consolidated. What are the reasons for the
increases? Are the Fed’s costs expected
to level off at some point or keep increasing due to initiatives like software development and new applications?

DG: The reason they’ve been increasing is that we’ve
been asking the Fed to do more. The development of
the TWAI (Treasury Web Application Infrastructure) and
the number of very large development initiatives we
have under way are expensive. I expect that the costs
are going to increase more over the next few years.
But I would hope to see them start leveling off in two
or three years, and then I would also hope to see them
change direction even as we add more work.

VZ: In Public Debt, we’re trying to get more focused
on tightening our costs, particularly our costs per unit.
As we do that, we are making very sure we know where
the bureau’s costs are coming from and where the Fed’s
costs are coming from.
Even as electronic payments have taken
hold so quickly, are you surprised that
there is a hard-core group that remains
so difficult to convert? How do you convince these people that electronic forms
of payment are easy and secure?
DH: I continue to be ever increasingly surprised in
places where I never thought there would be resistance.
I saw a study recently that reported that 58 percent
of employers in the United States do payroll by hand.
When you hear something like this, it gives you an idea
of some of the uphill climb we still have in terms of
universal acceptance of electronics.
DG: In many respects, from my perspective, consumers have been well ahead of industry and banking.
Individuals have been a lot more receptive to innovation. I think there is another 10 percent of the general
public out there that we can pretty easily get if we had
some kind of semi-hard mandate. But there is also a
segment without bank accounts who will continue to
get checks until the next generation comes along with
people who don’t know what a check is.

Each year, consumers
purchase more than
continued from Page 20

$28.5 trillion worth of securities in safekeeping.
Many investors who generally hold their Treasury securities until maturity participate in a Fed-

million

savings

bonds and redeem
nearly 5 million.

operated system known as TreasuryDirect. The Reserve banks issue confirmation notices and
account statements to the TreasuryDirect account holders and credit interest and principal payments to their account with
their depository institutions. TreasuryDirect investors can perform their transactions on the Internet or by telephone. As of
December 2004, TreasuryDirect maintained almost 714,000 accounts, holding a total of $61.7 billion of Treasury securities.
U.S. savings bonds are a long-standing staple of the Treasury’s offerings to the public. As of September 2004, $204
billion in savings bonds—representing 4.7 percent of the federal public debt—was outstanding. Each year, consumers
purchase more than 40 million savings bonds and redeem nearly 5 million. While the Fed is not the only outlet for
issuing, servicing and redeeming savings bonds, it is a primary provider of this service for the BPD.
Products and Services for the Office of the Fiscal Assistant Secretary
The St. Louis Fed in 1998 helped develop a centralized application called CASH TRACK that provides data to OFAS for
use in its daily cash management activities. CASH TRACK collects payment and receipt data from government agencies,
financial institutions and Federal Reserve banks and reports the activities to the Treasury. It also tracks historical data,
which is used to forecast outlay and receipt activity for cash management and debt management purposes.

IV. St. Louis Steps Up
By now, we’ve learned that the Federal Reserve’s work for the Treasury is vast, varied and voluminous. With Reserve
banks across the country performing many unrelated operations, it is essential that one office serve as a centralized
headquarters to coordinate and manage all of the work. In 2001, the Federal Reserve Bank of St. Louis’ formal proposal
to assume this role was approved by the Federal Reserve’s governing body for financial services, the Financial Services
Policy Committee.
The St. Louis Fed’s Treasury Relations and Support Office (TRSO) now has about four years under its belt serving as
the liaison between the Fed and the Treasury. The desire to become the Treasury’s relationship office was not a fleeting
hope. The idea was a Bank strategic objective for several years running before the Fed rotated the office to St. Louis.
Prior to being awarded the office, the St. Louis Fed served as a provider of Treasury services through modernizing
the Treasury Tax and Loan function and through implementing CASH TRACK. Today, the St. Louis Fed still employs a
large staff whose mission is to support Treasury services such as CASH TRACK, the Treasury Investment Program, tax
collections and web development services to agencies for collecting funds and reporting information.
“Our objective was to expand our Bank’s role as a key and trusted business partner of the Treasury,” said LeGrande
Rives, first vice president of the St. Louis Fed and the leader of the bid to obtain the TRSO. “In addition to mentioning
our past successes in our proposal, we strongly emphasized the need to identify strategic initiatives and opportunities

that benefit both organizations, while ensuring that all Treasury-related Fed initiatives are successfully completed.”
The TRSO’s responsibilities fall into three major categories: 1. relationship management; 2. strategic consulting; and
3. oversight of Fed initiatives in support of the Treasury’s strategic directions.
Relationship Management: As the Treasury’s chief advocate within the Federal Reserve System, the TRSO ensures
that the Treasury’s strategic direction and specific initiatives are understood by all relevant Fed System officials. At
the same time, officials identify any System initiatives that may affect the Treasury and incorporate the Treasury’s
interests into the System’s planning, decision-making and scheduling. St. Louis is also the focal point within the
Fed System for the resolution of policy and operational issues. To keep the relationship between the Fed and the
Treasury strong, the TRSO stays in constant contact with the FMS, BPD and OFAS.

“Our objective was to

Strategic Consulting: The TRSO consults with the Treasury as a think tank would— expand our Bank’s role as
immersing itself in information about the Treasury’s strategic needs related to fiscal and a key and trusted business
payment-related activities. If the TRSO identifies any potential gaps between strategic partner of the Treasury.”
direction and work being pursued by the Treasury and/or the Fed System, it looks to
surface ideas for products and services that could fill these gaps. In this capacity, the

LeGrande Rives

TRSO also seeks out ways to share expertise and lessons learned between the Treasury First Vice President
and the Federal Reserve banks.

Federal Reserve Bank
of St. Louis

The TRSO is responsible for
Oversight of Fed Initiatives for the Treasury: The TRSO is responsible for the
completion—on time and within budget—of all fiscal projects the Fed performs

the completion—on time and
within budget—of all fiscal

for the Treasury. For payments-related projects that fall under the domain of other projects the Fed performs
Federal Reserve product offices, the TRSO provides oversight primarily by monitoring for the Treasury.
progress on each project’s key interim deadlines, costs and status of outstanding
issues. The TRSO hosts a number of regular meetings and conference calls to keep Fed System Treasury groups
informed about any updates.

V. Conclusion: Benefits for All
It is not hyperbole to state that the movement to electronic forms of payment has saved the federal government billions
of dollars over the years. Without such staggering amounts saved, the government would look to taxpayers to make
up the difference.
Indeed, with the Fed’s help, not only is the government saving more money, it is earning additional money on those
savings through programs like the Term Investment Option. And the Fed is helping the Treasury collect money that may
never have been recovered through systems developed for collecting delinquent debt.

With the Fed’s help, not
only is the government
saving more money, it
Individuals are benefiting from the Treasury/Fed partnership as well, thanks to the is earning additional
many innovative methods described in this report. The Treasury and the Federal Reserve
continue striving to persuade the remaining holdouts to take advantage of doing business
electronically and join people like Nina, Patricia, Andy and Vince—the four hypothetical,

money

those

savings.

though representative, examples described at the beginning of this essay. Whereas some people have made the transition
from paper to electronics with great confidence, others have done so with a degree of hesitation and trepidation. But,
once converted, nearly everyone has benefited from the convenience, reliability and security that electronic payments
and processing offer.
There is no doubt that the electronic payments movement is on a one-way course. In fact, the Fed confirmed that
electronic payment transactions in the United States exceeded check payments for the first time in 2003. The number
of total electronic payment transactions, including nongovernment transactions, totaled 44.5 billion in 2003, while the
number of checks paid totaled 36.7 billion.
With so much momentum on their side and a nearly century-old partnership defined by common objectives, the
Treasury and the Federal Reserve will continue to work together to achieve the goals that make sense—and cents—for
both the federal government and the public.

! President Franklin D. Roosevelt placed the first order for a $500 Series E Savings
Bond in a radio broadcast on April 30, 1941.

eighth district boards of directors

Thank You
Retiring Board Members

We bid farewell and express our gratitude to those members of the
Eighth District boards of directors who retired in 2004. Our
appreciation and best wishes go out to the following:

Little Rock
Lawrence A. Davis Jr.
Everett Tucker III
Louisville
David H. Brooks
Maria G. Hampton
Memphis
Gregory M. Duckett
Walter L. Morris Jr.
Tom A. Wright

St. Louis
J. Stephen Barger
Bert Greenwalt
Charles W. Mueller
Bradley W. Small
Federal Advisory
Council Member
David W. Kemper

We also extend our deepest sympathies to the family and friends of
Thomas W. Smith, Louisville board member, who passed away in 2004.

FEDERAL RESERVE BANK OF ST. LOUIS
LITTLE ROCK BRANCH
STEPHENS BUILDING, 111 CENTER ST., SUITE 1000
LITTLE ROCK, AR 72201

STEPHEN M. ERIXON

SCOTT T. FORD

SONJA YATES HUBBARD

CEO

President and CEO

CEO

Baxter Regional Medical Center

ALLTEL Corp.

E-Z Mart Stores Inc.

Mountain Home, Ark.

Little Rock

Texarkana, Texas

Chairman

little rockboard of directors

ROBERT A. YOUNG III

DAVID R. ESTES

RAYMOND E. SKELTON

Chairman, President and CEO

President and CEO

Executive Director

Arkansas Best Corp.

First State Bank

The Downtown Partnership

Fort Smith, Ark.

Lonoke, Ark.

Little Rock

SHARON PRIEST

Little Rock

FEDERAL RESERVE BANK OF ST. LOUIS
LOUISVILLE BRANCH
NATIONAL CITY TOWER, 101 S. FIFTH ST., SUITE 1920
LOUISVILLE, KY 40202

NORMAN E. PFAU JR.

CORNELIUS A. MARTIN

Chairman

President and CEO

Geo. Pfau’s Sons Co. Inc.

Martin Management Group

Jeffersonville, Ind.

Bowling Green, Ky.

louisvilleboard of directors

L. CLARK TAYLOR JR.

MARJORIE Z. SOYUGENC

GORDON B. GUESS

STEVEN E. TRAGER

CEO

Executive Director and CEO

Chairman, President and CEO

Chairman and CEO

Ephraim McDowell Health

Welborn Foundation

The Peoples Bank

Republic Bank & Trust Co.

Danville, Ky.

Evansville, Ind.

Marion, Ky.

Louisville

FEDERAL RESERVE BANK OF ST. LOUIS
MEMPHIS BRANCH
200 N. MAIN ST.
MEMPHIS, TN 38103

RUSSELL GWATNEY

MEREDITH B. ALLEN

J. W. GIBSON II

President

Vice President, Marketing

Owner and CEO

Gwatney Companies

Staple Cotton Cooperative Association

Gibson Companies

Memphis

Greenwood, Miss.

Memphis

Chairman

memphisboard of directors

LEVON MATHEWS

JAMES A. ENGLAND

DAVID P. RUMBARGER JR.

THOMAS G. MILLER

President

Chairman, President and CEO

President and CEO

President

Regions Bank

Decatur County Bank

Community Development Foundation

Southern Hardware Co. Inc.

Memphis

Decaturville, Tenn.

Tupelo, Miss.

West Helena, Ark.

FEDERAL RESERVE BANK OF ST. LOUIS
ONE FEDERAL RESERVE BANK PLAZA
BROADWAY AND LOCUST STREET
ST. LOUIS, MO 63102

WALTER L. METCALFE JR.

GAYLE P. W. JACKSON

LEWIS F. MALLORY JR.

LUNSFORD W. BRIDGES

Chairman

Deputy Chairman

Partner

Managing Director

Chairman and CEO

President and CEO

Bryan Cave LLP

FondElec Clean Energy Group Inc.

NBC Capital Corp.

Metropolitan National Bank

St. Louis

Starkville, Miss.

Little Rock

st.louisboard of directors

DAVID R. PIRSEIN

A. ROGERS YARNELL II

PAUL T. COMBS

IRL F. ENGELHARDT

President and CEO

President

Chairman and CEO

First National Bank in Pinckneyville

Yarnell Ice Cream Co. Inc.

Baker Implement Co.

Peabody Energy

Pinckneyville, Ill.

Searcy, Ark.

Kennett, Mo.

St. Louis

WILLIAM POOLE
President and CEO

LEGRANDE RIVES
First Vice President

KARL ASHMAN

Senior Vice President

MARY KARR

ROBERT RASCHE

DAVE SAPENARO

JULIE STACKHOUSE

Senior Vice President

amessagefrommanagement
The Federal Reserve Bank of St. Louis enjoys a tradition of excellent performance.

That

tradition continued in 2004, a year of unprecedented change. Cash and check operations in Little Rock and Louisville were
consolidated into the Memphis and Cincinnati branch locations, respectively. Overall, District check net revenue exceeded Bank
goals. In fact, the Bank met or exceeded every key objective that it had targeted last year, while finishing below its planned
expense budget by $3 million, or 2 percent.
The Branching Out initiative took root in 2004 as the District began looking at new ways to meet community needs in our
branch cities by concentrating more attention on programs related to community affairs, economic education, regional research
and monetary policy.
Our employees continued to focus on four Bank-wide initiatives: risk management, customer service, staff development and
employee communications. The Bank began these initiatives in 1999-2000 to improve performance and increase our System
leadership responsibilities. Improvement in these areas is continuing.
What follows are highlights of the Bank’s 2004 accomplishments:
Financial Services
•

Exceeded the local check net revenue commitment of $10.4 million by $1.4 million.

•

Outperformed cash high-speed processing productivity target of 75 bundles per hour and unit costs of $5.65 for high-speed
processing and $2.75 for paying and receiving.

•

Completed the pre-implementation phase of Check 21.

•

Established outsourced cash depots in Little Rock and Memphis.

U.S. Treasury Support
•

Completed 11 of 13 high-priority Treasury objectives.

•

Initiated a pilot marketing program to convert paper beneficiary payments to electronic payments.

•

Enhanced the Treasury Web Application Infrastructure (TWAI) and shifted 16 web applications to the infrastructure.

•

Expanded the Financial Management Service’s electronic payments and collection programs.

Public Affairs and Community Affairs
•

Co-sponsored an international urban planning conference in Louisville.

44
•

Launched a community development speaker series in Little Rock.

•

Co-sponsored a money and banking summer course for educators.

•

Co-sponsored an education conference for Mississippi teachers.

•

Revamped the format for District Dialogue programs with bankers and other business and community leaders.

Research/Monetary Policy Performance
•

Staff economists completed 34 working papers, published 16 articles in the Bank’s Review and spoke at an average of six public
events per month.

•

Established the Business and Economics Research Group (BERG) in the Eighth District.

•

Implemented the Federal Reserve Archival System for Economic Research (FRASER).

•

With 27.9 million hits, Federal Reserve Economic Data (FRED) web traffic nearly doubled in 2004.

Banking Supervision, Credit and Center for Online Learning
•

Met all examination and inspection mandates.

•

Opened a satellite supervision office in Memphis.

•

Provided internal e-learning consulting and development services for the Federal Reserve System, and developed a course for
bank directors.

•

Chaired the Desktop Services Business Steering Group and the Subcommittee on Credit, Reserves and Risk Management Systems
Task Force.

Administrative Services
•

Completed capital improvement projects, including: opening a new remote screening facility and renovating a parking garage.
Began construction of a pedestrian plaza and screening vestibule.

•

Opened a new District business continuity recovery facility in December. Added a secure area for check deliveries and a new
screening vestibule in Memphis.

Organizational Initiatives
•

Continued rolling out Enterprise Risk Management (ERM) to all financial reporting areas in 2004, including an online Risk
Awareness Training program.

•

Administered the third Bank-wide communications survey since 1999. The results showed steady improvement in the internal
communications environment.

•

Continued the Customer Service Awareness program, which includes goals for key operations.

•

Expanded the Bank’s Staff Development program to include a leadership series.

financial statements
For the years ended December 31, 2004 and 2003
The firm engaged by the Board of Governors for the audits of the individual and combined financial statements of the Reserve
Banks for 2004 was PricewaterhouseCoopers LLP (PwC). Fees for these services totaled $2.0 million. To ensure auditor
independence, the Board of Governors requires that PwC be independent in all matters relating to the audit. Specifically, PwC
may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making
management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2004, the
Bank did not engage PwC for any material advisory services.

47
To the Board of Directors:

March 10, 2005

The management of the Federal Reserve Bank of St. Louis (“the Bank”) 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, 2004 (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 (“Manual”), and as such, include amounts, some of which are based on judgments
and estimates of management. To our knowledge, the Financial Statements are, in all material respects, fairly presented in conformity with the accounting
principles, policies and practices documented in the Manual and include all disclosures necessary for such fair presentation.
The management of the Bank 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 self-monitoring 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 appropriate 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 Bank 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, we believe that the Bank 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 St. Louis

WILLIAM POOLE,
President and Chief Executive Officer

W. LEGRANDE RIVES,
First Vice President and Chief Operating Officer

MARILYN K. CORONA,
Vice President, Chief Financial Officer

48
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of the Federal Reserve Bank of St. Louis:

We have examined management’s assertion, included in the accompanying Management Assertion, that the Federal Reserve Bank of St. Louis (“FRB St.
Louis”) maintained effective internal control over financial reporting and the safeguarding of assets as they relate to the financial statements as of December
31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. FRB St. Louis’ management is responsible for maintaining effective internal control over financial reporting and safeguarding of assets as they
relate to the financial statements. Our responsibility is to express an opinion on management’s assertion based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of internal control over financial reporting, testing and evaluating the design and operating effectiveness
of internal control, and performing 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 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 FRB St. Louis maintained effective internal control over financial reporting and over the safeguarding of assets
as they relate to the financial statements as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
This report is intended solely for the information and use of management and the Board of Directors and Audit Committee of FRB St. Louis, and any organization with legally defined oversight responsibilities and is not intended to be and should not be used by anyone other than these specified parties.

MARCH 16, 2005

49
REPORT OF INDEPENDENT AUDITORS

To the Board of Governors of The Federal Reserve System and the Board of Directors
of The Federal Reserve Bank of St. Louis:

We have audited the accompanying statements of condition of the Federal Reserve Bank of St. Louis (the “Bank”) as of December 31, 2004 and 2003, and
the related statements of income and changes in capital for the years then ended, which have been prepared in conformity with the accounting principles,
policies and practices established by the Board of Governors of the Federal Reserve System. These financial statements are the responsibility of the Bank’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 supporting 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 described in Note 3, these 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 accounting principles generally accepted in the United States of America.
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, 2004
and 2003, and results of its operations for the years then ended, on the basis of accounting described in Note 3.

MARCH 16, 2005

50
FEDERAL RESERVE BANK OF ST. LOUIS

STATEMENTS OF CONDITION
(in millions)

AS OF DECEMBER 31,
2004
2003
ASSETS
Gold certificates
$
325
$
331
Special drawing rights certificates
71
71
Coin 36 53
Items in process of collection
348
341
Loans to depository institutions
2
U.S. government securities, net
21,317
21,254
Investments denominated in foreign currencies
551
472
Accrued interest receivable
149
159
Interdistrict settlement account
1,401
Bank premises and equipment, net
85
67
Other assets
41
31
TOTAL ASSETS
$
24,326
$ 22,779
LIABILITIES AND CAPITAL
Liabilities:
Federal Reserve Notes outstanding, net
$
22,187
$ 19,283
Securities sold under agreements to repurchase
904
807
Deposits:
Depository institutions
479
509
Other deposits
3
3
Deferred credit items
197
308
Interest on Federal Reserve notes due U.S. Treasury
21
13
Interdistrict settlement account
-
1,330
Accrued benefit costs
54
59
Other liabilities
9
11
TOTAL LIABILITIES 23,854 22,323
Capital:
Capital paid-in
236
228
Surplus 236 228
TOTAL CAPITAL 472 456
TOTAL LIABILITIES AND CAPITAL
$
24,326
$ 22,779
The accompanying notes are an integral part of these financial statements.

51
FEDERAL RESERVE BANK OF ST. LOUIS

STATEMENTS OF INCOME
(in millions)

AS OF DECEMBER 31,
2004
2003
Interest income:
Interest on U.S. government securities
$
657
$
727
Interest on investments denominated in foreign currencies
7
6
TOTAL INTEREST INCOME
664
733
Interest expense:
Interest expense on securities sold under agreements to repurchase
9
7
Net interest income
655
726
Other operating income:
Income from services
40
44
Reimbursable services to government agencies
91
60
Foreign currency gains, net
31
64
Other income
2
2
TOTAL OTHER OPERATING INCOME 164 170
Operating expenses:
Salaries and other benefits
82
94
Occupancy expense
9
9
Equipment expense
9
8
Assessments by Board of Governors
23
24
Other expenses
86
66
TOTAL OPERATING EXPENSES 209 201
Net income prior to distribution
$
610
$
695
Distribution of net income:
Dividends paid to member banks
$
13
$
13
Transferred to surplus
8
29
Payments to U.S. Treasury as interest on Federal Reserve notes
589
653
TOTAL DISTRIBUTION
$
610
$
695
The accompanying notes are an integral part of these financial statements.

FEDERAL RESERVE BANK OF ST. LOUIS

STATEMENTS OF CHANGES IN CAPITAL
for the years ended December 31, 2004, and December 31, 2003
(in millions)

CAPITAL PAID-IN

SURPLUS

TOTAL CAPITAL

Balance at January 1, 2003
(4.0 million shares)
$ 199
$ 199
$
Transferred to surplus
29
Net change in capital stock issued
(0.6 million shares)
29
Balance at December 31, 2003
(4.6 million shares)
$ 228
$ 228
$
Transferred to surplus
8
Net change in capital stock issued
(0.1 million shares)
8
Balance at December 31, 2004
(4.7 million shares)
$ 236
$ 236
$
The accompanying notes are an integral part of these financial statements.

398
29
29
456
8
8
472

52
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

NOTE 1

STRUCTURE
The Federal Reserve Bank of St. Louis (“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. The Bank and its branches in Little Rock, Louisville and Memphis serve the Eighth Federal Reserve District, which includes Arkansas, and
portions of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
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. 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
In accordance with the Federal Reserve Act, supervision and control of
the Bank are exercised by a 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 three-year terms:
three directors, including those 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.
NOTE 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 large-dollar transfers of funds,
automated clearinghouse (“ACH”) operations, and check processing;
distributing coin and currency; performing fiscal agency functions for the
U.S. 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, the purchase of securities under agreements to resell, the sale of securities under agreements to repurchase, and
the lending of U.S. government securities. The FRBNY is also authorized
by the FOMC to hold balances of, and to execute spot and forward foreign
exchange (“F/X”) and securities contracts in nine foreign currencies and to
invest such foreign currency holdings ensuring adequate liquidity is maintained. In addition, FRBNY is authorized to maintain reciprocal currency
arrangements (“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.
NOTE 3

SIGNIFICANT ACCOUNTING POLICIES
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 with
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.
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 accounting principles generally accepted
in the United States of America (“GAAP”). The primary difference is the
presentation of all security holdings at amortized cost, rather than at the fair
value presentation requirements of GAAP. In addition, the Bank has elected
not to present a Statement of Cash Flows. The Statement of Cash Flows has
not been included because the liquidity and cash position of the Bank are not
of primary concern to the users of these financial statements. Other information regarding the Bank’s activities is provided in, or may be derived from, the
Statements of Condition, Income and Changes in Capital. A Statement of
Cash Flows, therefore, would not provide any additional useful information.
There are no other significant differences between the policies outlined in the
Financial Accounting Manual and GAAP.
Each Reserve Bank provides services on behalf of the System for which
costs are not shared. Major services provided for the System by the Bank, for
which the costs will not be redistributed to the other Reserve Banks, include
operation of the Treasury Relations and Support Office and the Treasury Relations and Systems Support Department, which provide services to the U.S.
Treasury. These services include: relationship management, strategic consulting, and oversight for fiscal and payments related projects for the Federal
Reserve System; and operational support for the Treasury’s tax collection,

53
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

cash management and collateral monitoring.
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,
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 CERTIFICATES

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. At 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 on average Federal Reserve notes outstanding in each District.
B. SPECIAL DRAWING RIGHTS CERTIFICATES

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, somewhat like gold certificates, to the Reserve Banks.
At 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 SDR
certificates, at the direction of the U.S. Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations. At
the time SDR transactions occur, the Board of Governors allocates SDR
certificate transactions among Reserve Banks based upon Federal Reserve
notes outstanding in each District at the end of the preceding year. There
were no SDR transactions in 2004 or 2003.
C. LOANS TO DEPOSITORY INSTITUTIONS

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 Bank. Borrowers execute certain lending agreements and deposit

sufficient collateral before credit is extended. Loans are evaluated for
collectibility, and currently all are considered collectible and fully collateralized. If loans were ever deemed to be uncollectible, an appropriate reserve
would be established. Interest is accrued using the applicable discount rate
established at least every fourteen days by the Board of Directors of the
Reserve Bank, subject to review by the Board of Governors.
D. U.S. GOVERNMENT AND FEDERAL AGENCY SECURITIES AND INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES

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 to meet other needs specified by the FOMC in carrying out the
System’s central bank responsibilities. Such authorizations are reviewed and
approved annually by the FOMC.
The FRBNY has sole authorization by the FOMC to lend U.S. government securities held in the SOMA to U.S. government securities dealers and
to banks participating in U.S. government securities clearing arrangements
on behalf of the System, 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 FRBNY to take possession of collateral in excess of the market values of
the securities loaned. The market values of the collateral and the securities
loaned are monitored by the FRBNY on a daily basis, with additional collateral
obtained as necessary. The securities lent are accounted for in the SOMA.
F/X 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.
The FRBNY, on behalf of the Reserve Banks, maintains renewable,
short-term F/X swap arrangements with two authorized foreign central
banks. The parties agree to exchange their currencies up to a pre-arranged
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 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-

54
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

bearing instruments.
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 that 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 may result in gains or losses when holdings are sold prior to maturity.
Decisions regarding the securities and foreign currencies transactions,
including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, market values, 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 securities and investments denominated in foreign
currencies comprising the SOMA are recorded at cost, on a settlement-date
basis, and adjusted for amortization of premiums or accretion of discounts
on a straight-line basis. Securities sold under agreements to repurchase are
accounted for as secured borrowing transactions with the associated
interest expense recognized over the life of the transaction. Such transactions are settled by FRBNY. Interest income is accrued on a straight-line
basis. 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. Foreigncurrency-denominated assets are revalued daily at current foreign currency
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, net.”
Activity related to U.S. government securities bought outright, securities
sold under agreements to repurchase, securities loaned, investments
denominated in foreign currency, excluding those held under an F/X swap
arrangement, and deposit accounts of foreign central banks and governments above core balances are allocated to each Reserve Bank. U.S.
government securities purchased under agreements to resell 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.
In 2003, additional interest income of $61 million, representing one day’s
interest on the SOMA portfolio, was accrued to reflect a change in interest
accrual calculations, of which $1.9 million was allocated to the Bank. The
effect of this change was not material; therefore, it was included in the
2003 interest income.
E. BANK PREMISES, EQUIPMENT AND SOFTWARE

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over estimated
useful lives of assets ranging from two to fifty years. Major alterations,
renovations and improvements are capitalized at cost as additions to the
asset accounts and are amortized over the remaining useful life of the asset.
Maintenance, repairs and minor replacements are charged to operations in
the year incurred. Costs incurred for software, either developed internally
or acquired for internal use, during the application development stage are
capitalized based on the cost of direct services and materials associated with
designing, coding, installing or testing software. Capitalized software costs
are amortized on a straight-line basis over the estimated useful lives of the
software applications, which range from two to five years.
F. INTERDISTRICT SETTLEMENT ACCOUNT

At 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 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.”
G. FEDERAL RESERVE NOTES

Federal Reserve notes are the circulating currency of the United States.
These notes are issued through the various Federal Reserve agents (the
Chairman of the Board of Directors of each Reserve Bank) 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 of the notes applied for by such Reserve Bank.
Assets eligible to be pledged as collateral security include all Federal
Reserve Bank assets. 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 par value of securities pledged for securities sold under agreements to repurchase is similarly
deducted.
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 the obligation to provide sufficient collateral for outstanding Federal

55
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

Reserve notes, the Reserve Banks have entered into an agreement that
provides for certain assets of the Reserve Banks to be 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 paramount 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 the
Bank’s Federal Reserve notes outstanding reduced by its currency holdings
of $2,819 million, and $3,961 million at December 31, 2004 and 2003,
respectively.
H. CAPITAL PAID-IN

The Federal Reserve Act requires that each member bank subscribe to
the capital stock of the Reserve Bank in an amount equal to 6 percent of
the capital and surplus of the member bank. As a member bank’s capital
and surplus changes, its holdings of Reserve Bank stock must be adjusted.
Member banks are state-chartered 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 percent 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.
The Financial Accounting Standards Board (FASB) has deferred the
implementation date for SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity” for the Bank.
When applicable, the Bank will determine the impact and provide the appropriate disclosures.
I. SURPLUS

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.
Pursuant to Section 16 of the Federal Reserve Act, Reserve Banks are
required by the Board of Governors to transfer to the U.S. Treasury as interest on Federal Reserve notes 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.
In the event of losses or an increase in capital paid-in, payments to the
U.S. Treasury are suspended and earnings are retained until the surplus is
equal to the capital paid-in. Weekly payments to the U.S. Treasury may vary
significantly.
In the event of a decrease in capital paid-in, the excess surplus, after

equating capital paid-in and surplus at December 31, is distributed to the
U.S. Treasury in the following year. This amount is reported as a component
of “Payments to U.S. Treasury as interest on Federal Reserve notes.”
J. INCOME AND COSTS RELATED TO TREASURY SERVICES

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.
K. TAXES

The Reserve Banks are exempt from federal, state and local taxes, except for
taxes on real property. The Bank’s real property taxes were $477 thousand
and $420 thousand for the years ended December 31, 2004 and 2003,
respectively, and are reported as a component of “Occupancy expense.”
L. RESTRUCTURING CHARGES

In 2003, the System started the restructuring of several operations, primarily
check, cash and Treasury services. The restructuring included streamlining the
management and support structures, reducing staff, decreasing the number
of processing locations and increasing processing capacity in the remaining
locations. These restructuring activities continued in 2004.
Footnote 10 describes the restructuring and provides information about
the Bank’s costs and liabilities associated with employee separations and
contract terminations. The costs associated with the write-down of certain
Bank assets are discussed in footnote 6. Costs and liabilities associated with
enhanced pension benefits for all Reserve Banks are recorded on the books
of the FRBNY.

56
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

NOTE 4

U.S. GOVERNMENT SECURITIES
Securities bought outright are held in the SOMA at the FRBNY. An undivided interest in SOMA activity and the related premiums, discounts and
income, with the exception of securities purchased under agreements to resell, is allocated to each Reserve Bank on a percentage basis derived from an
annual settlement of interdistrict clearings that occurs in April of each year.
The settlement equalizes Reserve Bank gold certificate holdings to Federal
Reserve notes outstanding. The Bank’s allocated share of SOMA balances
was approximately 2.938 percent and 3.146 percent at December 31, 2004
and 2003, respectively.
The Bank’s allocated share of U.S. government securities, net held in the
SOMA at December 31, was as follows (in millions):

2004

2003

PAR VALUE:
U.S. government:
Bills
$
7,726
$
7,703
Notes 10,601 10,173
Bonds 2,762 3,098
TOTAL PAR VALUE 21,089 20,974
Unamortized premiums
276
308
Unaccreted discounts
(48)
(28)
TOTAL ALLOCATED TO BANK
$ 21,317
$ 21,254
The total of the U.S. government securities, net held in the SOMA was
$725,584 million and $675,569 million at December 31, 2004 and 2003,
respectively.
The maturity distribution of U.S. government securities bought outright
and securities sold under agreements to repurchase, that were allocated to
the Bank at December 31, 2004, was as follows (in millions):

MATURITIES OF SECURITIES HELD

Securities
U.S.
Sold Under
Government
Agreements to
Securities
Repurchase
(Par value) (Contract amount)

Within 15 days
$
900
$
16 days to 90 days 5,240
91 days to 1 year 5,007
Over 1 year to 5 years
6,119
Over 5 years to 10 years
1,597
Over 10 years 2,226
TOTAL
$ 21,089
$

904
904

At December 31, 2004 and 2003, U.S. government securities with par values
of $6,609 million and $4,426 million, respectively, were loaned from the

SOMA, of which $194 million and $139 million were allocated to the Bank.
At December 31, 2004 and 2003, securities sold under agreements to
repurchase with contract amounts of $30,783 million and $25,652 million,
respectively, and par values of $30,808 million and $25,658 million, respectively, were outstanding. The Bank’s allocated share at December 31, 2004
and 2003, was $904 million and $807 million, respectively, of the contract
amount and $905 million and $807 million, respectively, of the par value.
NOTE 5

INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES
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 purchased 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 foreign-currency-denominated
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 2.580 percent
and 2.375 percent at December 31, 2004 and 2003, respectively.
The Bank’s allocated share of investments denominated in foreign currencies, valued at current foreign currency market exchange rates at December
31, was as follows (in millions):

2004 2003
European Union Euro:
Foreign currency deposits
$
156
$
163
Securities purchased under
agreements to resell
55
49
Government debt instruments
99
48
Japanese Yen:
Foreign currency deposits
40
35
Government debt instruments
198
175
Accrued interest
3
2
TOTAL
$
551
$
472
Total System investments denominated in foreign currencies were $21,368
million and $19,868 million at December 31, 2004 and 2003, respectively.
The maturity distribution of investments denominated in foreign currencies which were allocated to the Bank at December 31, 2004, was as follows
(in millions):

57
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

MATURITIES OF INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES

European
Japanese
Total
Euro
Yen
Within 1 year
$ 232
$ 237
$ 469
Over 1 year to 5 years 77
-
77
Over 5 years to 10 years
5
-
5
Over 10 years
-
-
TOTAL
$ 314
$ 237
$ 551
At December 31, 2004 and 2003, there were no material open foreign
exchange contracts.
At December 31, 2004 and 2003, the warehousing facility was $5,000
million, with no balance outstanding.
NOTE 6

BANK PREMISES, EQUIPMENT AND SOFTWARE
A summary of bank premises and equipment at December 31 is as follows
(in millions):
Maximum Useful
Life (in years) 2004 2003
Bank premises and equipment:
Land
N/A
$
8
$
7
Buildings
50 66 49
Building machinery
and equipment
20 20
17
Construction in progress
N/A 10
7
Furniture and equipment
10 48
54
Subtotal
$ 152
$ 134
Accumulated depreciation (67)
(67)
BANK PREMISES
AND EQUIPMENT, NET
$ 85
$
67
DEPRECIATION EXPENSE,
FOR THE YEARS ENDED
$
8
$
8
The Bank leases unused space to outside tenants. This lease has a term of
less than one year.
The Bank has capitalized software assets, net of amortization, of $5 million and $2 million at December 31, 2004 and 2003, respectively. Amortization expense was $1 million for each of the years ended December 31,
2004 and 2003, respectively.
Assets impaired as a result of the Bank’s restructuring plan, as discussed
in footnote 10, include building, furniture and equipment. Asset impairment losses of $7 million for the period ending December 31, 2003, were
determined using fair values based on quoted market values or other valuation techniques and are reported as a component of “Other expenses.”
Subsequent to December 31, 2004, the facilities in Louisville and Little
Rock were vacated on January 18, 2005, and February 22, 2005, respectively, as a result of the Bank’s restructuring plan. The facility in Louisville,

including associated furnishings, was sold for $4 million on January 31,
2005, and the facility in Little Rock is available for sale.
NOTE 7

COMMITMENTS AND CONTINGENCIES
At December 31, 2004, the Bank was obligated under noncancelable leases
for premises and equipment with terms ranging from one to approximately
five years. These leases provide for increased rental payments 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 $1 million for each of the years ended December 31, 2004 and 2003,
respectively. Certain of the Bank’s leases have options to renew.
Future minimum rental payments under noncancelable operating leases
and capital leases, net of sublease rentals, with terms of one year or more,
at December 31, 2004, were (in thousands):

O PERATING
2005
$
910
2006 884
2007 461
2008 359
2009 349
Thereafter 15
$
2,978
At December 31, 2004, other commitments and long-term obligations in
excess of one year were immaterial.
Under the Insurance Agreement of the Federal Reserve Banks dated as of
March 2, 1999, each of the Reserve Banks has agreed to bear, on a per incident basis, a pro rata share of losses in excess of one percent of the capital
paid-in of the claiming Reserve Bank, up to 50 percent of the total capital
paid-in of all Reserve Banks. Losses are borne in the ratio that a Reserve
Bank’s capital paid-in bears to the total capital paid-in 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, 2004 or 2003.
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 aforementioned litigation and claims will be resolved without material adverse effect on the financial position or results of operations
of the Bank.

58
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

NOTE 8

RETIREMENT AND THRIFT 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”). In addition, certain Bank officers participate in the
Supplemental Employee Retirement Plan (“SERP”).
The System Plan is a multi-employer plan with contributions fully funded
by participating employers. Participating employers are the Federal Reserve
Banks, the Board of Governors of the Federal Reserve System, and the
Office of Employee Benefits of the Federal Reserve Employee Benefits
System. No separate accounting is maintained of assets contributed by the
participating employers. The FRBNY acts as a sponsor of the Plan for the
System and the costs associated with the Plan are not redistributed to the
Bank. The Bank’s projected benefit obligation and net pension costs for the
BEP and the SERP at December 31, 2004 and 2003, 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 $3 million for each of the years
ended December 31, 2004 and 2003, respectively, and are reported as a
component of “Salaries and other benefits.”
NOTE 9

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS
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 costs are actuarially determined using a January 1 measurement date.

Following is a reconciliation of beginning and ending balances of the benefit
obligation (in millions):

Accumulated postretirement
benefit obligation at January 1
$
Service cost-benefits earned
during the period
Interest cost of accumulated
benefit obligation
Actuarial (gain)/loss
Curtailment gain
Special termination loss
Contributions by plan participants
Benefits paid
Plan amendments
ACCUMULATED POSTRETIREMENT
BENEFIT OBLIGATION AT DECEMBER 31 $

2004

2003

58.5

$ 45.8

1.1

1.2

3.1
(2.2)
-
0.1
0.2
(2.7)
(2.5)

3.4
13.5
(3.3)
0.1
0.2
(2.4)
-

55.6

$ 58.5

At December 31, 2004 and 2003, the weighted average discount rate assumptions used in developing the postretirement benefit obligation were
5.75 percent and 6.25 percent, respectively.
Following is a reconciliation of the beginning and ending balance of the
plan assets, the unfunded postretirement benefit obligation, and the
accrued postretirement benefit costs (in millions):

Fair value of plan assets at January 1
$
Contributions by the employer
Contributions by plan participants
Benefits paid
FAIR VALUE OF PLAN ASSETS
AT DECEMBER 31
$

2004

$
2.5
0.2
(2.7)
-

2003

2.2
0.2
(2.4)
-

Unfunded postretirement benefit obligation
$ 55.6
$ 58.5
Unrecognized net curtailment gain
-
1.4
Unrecognized prior service cost
3.8
6.8
Unrecognized net actuarial loss (11.2) (13.4)
ACCRUED POSTRETIREMENT
BENEFIT COSTS
$ 48.2
$ 53.3

Accrued postretirement benefit costs are reported as a component of
“Accrued benefit costs.”

59
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

For measurement purposes, the assumed health care cost trend rates at
December 31 are as follows:
Health care cost trend rate
assumed for next year
Rate to which the cost trend rate is
assumed to decline
(the ultimate trend rate)
Year that the rate reaches the
ultimate trend rate

2004

2003

9.00%

10.00%

4.75%

5.00%

2011

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, 2004 (in millions):
ONE PERCENTAGE

ONE PERCENTAGE

POINT INCREASE

POINT DECREASE

Effect on aggregate of service and
interest cost components of net
periodic postretirement benefit costs
$
Effect on accumulated postretirement
benefit obligation

0.3

7.9

(0.3)

to employees during the restructuring described in footnote 10. The curtailment gain associated with restructuring programs announced in 2003 was
recognized when employees left the Bank in 2004.
The Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the “Act”) was enacted in December 2003. The act established a
prescription drug benefit under Medicare (“Medicare Part D”) and a federal
subsidy to sponsors of retiree health care benefit plans that provide benefits
that are at least actuarially equivalent to Medicare Part D. Following the
guidance of the Financial Accounting Standards Board, the Bank elected to
defer recognition of the financial effects of the Act until further guidance
was issued in May 2004.
Benefits provided to certain participants are at least actuarially equivalent
to Medicare Part D. The estimated effects of the subsidy, retroactive to
January 1, 2004, are reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit costs.
Following is a summary of the effects of the expected subsidy (in millions):

Decrease in the accumulated postretirement benefit obligation
$
Decrease in the net periodic postretirement benefit costs
$

2004

7.7
1.0

(6.4)
Expected benefit payments:

The following is a summary of the components of net periodic postretirement benefit costs for the years ended December 31 (in millions):

Service cost-benefits
earned during the period
$
Interest cost of accumulated
benefit obligation
Amortization of prior service cost
Recognized net actuarial loss
Total periodic expense
$
Curtailment gain
Special termination loss
NET PERIODIC POSTRETIREMENT
BENEFIT COSTS
$

2004

1.1

2003

1.2

3.1
(0.7)
0.1
3.6
$
(6.3)
0.1

3.4
(0.8)
0.3
4.1
0.1

(2.6)

4.2

At December 31, 2004 and 2003, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were
6.25 percent and 6.75 percent, respectively.
Net periodic postretirement benefit costs are reported as a component of
“Salaries and other benefits.”
A plan amendment that modified the credited service period eligibility
requirements created curtailment gains. The recognition of special termination losses is primarily the result of enhanced retirement benefits provided

WITHOUT SUBSIDY

WITH SUBSIDY

2005
$
2.5
$
2.5
2006 2.6 2.4
2007 2.8 2.5
2008 2.9 2.6
2009 3.1 2.7
2010-2014 17.7 15.6
TOTAL
$
31.6
$
28.3

POSTEMPLOYMENT BENEFITS

The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a December 31, 2004,
measurement date and include the cost of medical and dental insurance,
survivor income, and disability benefits. For 2004, the Bank changed its
practices for estimating postemployment costs and used a 5.25 percent discount rate and the same health care trend rates as were used for projecting
postretirement costs. Costs for 2003, however, 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, 2004 and 2003 were $6 million for each
year. This cost is included as a component of “Accrued benefit costs.” Net
periodic postemployment benefit costs included in 2004 and 2003, operating expenses were $1 million for each year.

60
FEDERAL RESERVE BANK OF ST. LOUIS

NOTES TO FINANCIAL STATEMENTS

NOTE 10

BUSINESS RESTRUCTURING CHARGES
In 2003, the Bank announced plans for restructuring to streamline operations and reduce costs, including consolidation of check, check adjustment and
cash operations and staff reductions in various functions of the Bank. In 2004, additional consolidation and restructuring initiatives were announced in the
marketing and check automation operations. These actions resulted in the following business restructuring charges:
Major categories of expense (in millions):
TOTAL

ACCRUED ACCRUED

ESTIMATED

LIABILITY

TOTAL

LIABILITY

COSTS

12/31/03

CHARGES

PAID

12/31/04

Employee separation
$ 4.1
$ 5.0
$ (1.0)
$ (3.0)
$ 1.0
Contract termination - - - - Other
.4 -
.3 (0.3)
TOTAL
$ 4.5
$ 5.0
$ (0.7)
$ (3.3)
$ 1.0
Employee separation costs are primarily severance costs related to identified
staff reductions of approximately 175, including 168 staff reductions related
to restructuring announced in 2003. These costs are reported as a component of “Salaries and other benefits.” Contract termination costs include
the charges resulting from terminating existing lease and other contracts
and are shown as a component of “Other expenses.”
Restructuring costs associated with the write-downs of certain Bank assets, including software, buildings, leasehold improvements, furniture and

equipment are discussed in footnote 6. Costs associated with enhanced
pension benefits for all Reserve Banks are recorded on the books of the
FRBNY as discussed in footnote 8. Costs associated with enhanced postretirement benefits are disclosed in footnote 9.
Future costs associated with the restructuring that are not estimable and
are not recognized as liabilities will be incurred in 2005.
The Bank anticipates substantially completing its announced plans by
March 31, 2005.

61
Federal Advisory
Council Member

Judith A. Courtney

Kathy A. Freeman

Glenda J. Wilson

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

J. Kenneth Glass

William T. Gavin

Susan F. Gerker

Timothy J. Yeager

CHAIRMAN, PRESIDENT AND CEO

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

Vicki L. Kosydor

Elizabeth A. Hayes

Diane B. Camerlo

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

ASSISTANT COUNSEL

Jean M. Lovati

Paul M. Helmich

Joseph C. Elstner

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

PUBLIC AFFAIRS OFFICER

FIRST HORIZON NATIONAL CORP.
MEMPHIS

Bank Officers
ST. LOUIS OFFICE

Patricia A. Marshall

Edward A. Hopkins

Joel H. James

William Poole

VICE PRESIDENT AND

ASSISTANT VICE PRESIDENT

BANK RELATIONS OFFICER

PRESIDENT AND CEO

DEPUTY GENERAL COUNSEL

James L. Huang

Christopher J. Neely

W. LeGrande Rives

Michael J. Mueller

ASSISTANT VICE PRESIDENT

RESEARCH OFFICER

FIRST VICE PRESIDENT AND COO

VICE PRESIDENT

Gary J. Juelich

Edward M. Nelson

Karl W. Ashman

Kim D. Nelson

ASSISTANT VICE PRESIDENT

RESEARCH OFFICER

SENIOR VICE PRESIDENT

VICE PRESIDENT

Visweswara R. Kaza

Kathy R. Reckert

Mary H. Karr

Kathleen O’Neill Paese

ASSISTANT VICE PRESIDENT

OPERATIONS OFFICER

SENIOR VICE PRESIDENT, GENERAL COUNSEL

VICE PRESIDENT

AND SECRETARY

Robert H. Rasche
SENIOR VICE PRESIDENT AND DIRECTOR OF
RESEARCH

William D. Little
Todd J. Purdy

ASSISTANT VICE PRESIDENT

LITTLE ROCK OFFICE

Raymond McIntyre

Robert A. Hopkins

ASSISTANT VICE PRESIDENT

SENIOR BRANCH EXECUTIVE

VICE PRESIDENT

Steven N. Silvey
VICE PRESIDENT

Michael D. Renfro

John W. Mitchell
ASSISTANT VICE PRESIDENT

LOUISVILLE OFFICE

James A. Price

Maria G. Hampton

ASSISTANT VICE PRESIDENT

SENIOR BRANCH EXECUTIVE

Kathy A. Schildknecht

Thomas A. Boone

ASSISTANT VICE PRESIDENT

VICE PRESIDENT

SENIOR VICE PRESIDENT AND GENERAL

Randall C. Sumner

AUDITOR

VICE PRESIDENT

David A. Sapenaro

Daniel L. Thornton

SENIOR VICE PRESIDENT

VICE PRESIDENT

Julie L. Stackhouse

Carl K. Anderson

SENIOR VICE PRESIDENT

ASSISTANT VICE PRESIDENT

Richard G. Anderson

Barkley Bailey

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

John P. Baumgartner

Dennis W. Blase

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

Timothy A. Bosch

Daniel P. Brennan

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

Timothy C. Brown

Susan K. Curry

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

ASSISTANT GENERAL AUDITOR

James B. Bullard

Hillary B. Debenport

James E. Stephens

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

Ronald L. Byrne

Michael W. DeClue

Howard J. Wall

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

Marilyn K. Corona

Michael J. Dueker

David C. Wheelock

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

Cletus C. Coughlin

William M. Francis Jr.

Sharon N. Williamson

VICE PRESIDENT

ASSISTANT VICE PRESIDENT

Philip G. Schlueter
ASSISTANT VICE PRESIDENT

MEMPHIS OFFICE

Harriet Siering

Martha Perine Beard

ASSISTANT VICE PRESIDENT

SENIOR BRANCH EXECUTIVE

Diane A. Smith

J. Allen Brown

ASSISTANT VICE PRESIDENT

Leisa J. Spalding

Matthew W. Torbett

ASSISTANT VICE PRESIDENT AND

ASSISTANT VICE PRESIDENT

62
FEDERAL RESERVE BANK OF ST. LOUIS

SUMMARY OF OPERATIONS

Summary of Key Operation Statistics for Services Provided to Depository Institutions and the U.S. Treasury (The following schedule is unaudited and has
been included as supplemental information.)
DOLLAR AMOUNT

NUMBER OF ITEMS
(MILLIONS)

2004
2003
2004
2003
Government Checks Processed
73,682,000
78,374,000
89,608
89,051

Postal Money Order Processed
186,918,000
198,320,000
33,973
29,197

Commercial Checks Processed
951,391,000
1,131,023,000
677,151
745,449

Currency Processed
1,098,465,000
1,182,079,000
20,962
19,963

Loans to Depository Institutions
240
200
352
411

Food Coupons Destroyed
1,281,000
30,798,000
4
156

Inside back cover
See other file

The Federal Reserve Bank of St. Louis is one of 12 regional Reserve banks, which, together with the Board of Governors, make up
the nation’s central bank. The Fed carries out U.S. monetary policy, regulates certain depository institutions, provides wholesalepriced services to banks and acts as fiscal agent for the U.S. Treasury. The St. Louis Fed serves the Eighth Federal Reserve District,
which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and
northern Mississippi. Branch offices are located in Little Rock, Louisville and Memphis.

FEDERAL RESERVE BANK OF ST. LOUIS

One Federal Reserve Bank Plaza
Broadway and Locust Street
St. Louis, Missouri 63102
(314) 444-8444
LITTLE ROCK BRANCH

Stephens Building
111 Center Street, Suite 1000
Little Rock, Arkansas 72201
(501) 324-8300
LOUISVILLE BRANCH

National City Tower
101 South Fifth Street, Suite 1920
Louisville, Kentucky 40202
(502) 568-9200
MEMPHIS BRANCH

200 North Main Street
Memphis, Tennessee 38103
(901) 523-7171

AUTHOR OF ESSAY: Stephen Greene
EDITOR: Dan Brennan
DESIGNER: Kathie Lauher
PRODUCTION: Barb Passiglia
REFERENCES

DeCorleto, Donna A. and Trimble, Theresa A. “Federal Reserve
Banks as Fiscal Agents and Depositories of the United States in a
Changing Financial Environment.” Federal Reserve Bulletin, Autumn
2004, pp. 435-446.
www.ustreas.gov
For additional print copies, contact:
Public Affairs Department
Federal Reserve Bank of St. Louis
Post Office Box 442
St. Louis, Missouri 63166
(314) 444-8809
www.stlouisfed.org
PA0501 4/05