Full text of Annual Report of the Federal Reserve Bank of Philadelphia : Putting Money in Motion: Telling Our Story : 2003 Annual Report

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Mission
The Federal Reserve Bank of Philadelphia is one of 12 regional
Reserve Banks in the United States that, together with the Board of
Governors in Washington, D.C., make up the Federal Reserve System
– the nation’s central bank. The System’s primary role is to ensure a sound
financial system and a healthy economy.
To foster this goal, the Federal Reserve Bank of Philadelphia
helps formulate and implement monetary policy, supervises banks and
bank holding companies, and provides financial services to depository
institutions and the federal government. The Philadelphia Fed serves the
Third District, which is composed of eastern Pennsylvania, southern New
Jersey, and Delaware.

Annual Report 2003
2

President’s Message

Money in Motion Opens at the Philadelphia Fed

Telling the Fed’s Story Through Money in Motion

Check Clearing for the 21st Century

Changing Platforms:
The Check Standardization Project

The New Color of Money

Payment Cards Center

Board of Directors

Councils

Operating Statistics

Current Officers

Statement of Auditor Independence

Financial Reports

Key Bank Phone Numbers

Putting Money in Motion: Telling Our Story
The Federal Reserve Bank of Philadelphia has literally
been putting money in motion since it opened in 1914. But
many people have not had the opportunity to fully understand
what we do and why.
With the debut of our permanent exhibit, “Money in Motion,” in July 2003, we opened our doors to the public to help
clarify the Fed’s role in the financial system throughout its history. Using cutting edge technology and innovative concepts,
we’ve made learning about the Fed fun and entertaining.
But the theme for this year’s annual report refers to
more than the exhibit. Our story is also told through changes
taking place in the check arena and a new $20 bill redesigned
for additional security.
Please read on to see how the Federal Reserve has
evolved along with the financial services industry.

President’s Message

he Federal Reserve has literally been “putting money in motion” for 90 years.
We have come a long way from the simplicity of our origins as facilitator of
the payments system. Today, as the central bank of the United States, the

Federal Reserve is at the center of a complex and ever-changing financial system.
As our mission evolves in concept and scope, always foremost in our minds
is that our institution is built on integrity and efficiency and wields vast influence over
our nation’s economy. We recognize the magnitude of our responsibilities, we take
our stewardship seriously, and we work diligently to reach and exceed our goals.
Despite the Fed’s rich and intriguing past, its story, and in particular that of
the Federal Reserve Bank of Philadelphia, has not been well known. Now, with our
Money in Motion exhibit, we are working to change that.

Money in Motion: The Exhibit Tells Our Story
The Federal Reserve works as a stage manager for the financial system—
critical to its smooth operation but entirely behind the scenes. Particularly since the
events of 9/11, when the Federal Reserve proved instrumental in maintaining stability
in financial markets, consumers need and
want a better understanding of what the Fed
does and why we do it.
For the Philadelphia Fed in particular, providing a historical context for the role
of central banking seems quite appropriate,
given our city’s standing as the birthplace
of both our nation and banking. Indeed, the
buildings that were home to the first and second Bank of the United States are in close
proximity to our own building on
Independence Mall.
Money in Motion, our new financial
and historical exhibit, was born of the notion
that people of all ages should possess a
solid understanding of money and finance.

Dr. Anthony M. Santomero,
President

Since opening to great fanfare in July 2003, the exhibit has told the story
of central banking in the United States as it has never been told before.
As we trace our roots through the exhibit, we provide a powerful reminder
of the ingenuity, the political battles, and the colorful cast of characters that
brought our nation’s central bank to life.

Money in Motion: Change Abounds at the Fed
While the exhibit itself is a physical manifestation of the Federal
Reserve’s activities, there have also been many changes in the details
of our work. In fact, 2003 was a year that involved intense change in our
Reserve Bank on a number of fronts.
First, it marked our conversion to a new check processing platform. This transition was driven primarily by the need to install a uniform
national platform for financial services across the Federal Reserve System. Also, a standardized platform facilitates our move toward the more
modern payments system emerging out of recent legislation. Known as
“Check 21,” this act facilitates the use of new technology in check payments, creating a more efficient system of check collection and processing. First Vice President Bill Stone provides more details on this exciting
new technology in a later section of this report.
This year also marked the introduction of the new $20 bill. In addition to their new look and color, the new notes are safer, smarter, and
more secure than ever before. The Treasury plans to issue a new $50

The Federal
Reserve works
as a stage
manager for the
financial
system—critical
to its smooth
operation but
entirely behind
the scenes.

bill this fall, and we are working hard to build awareness about currency
authenticity and to combat counterfeiters.
Meanwhile, as credit cards, debit cards, and other new methods of
payment become more popular and pervasive, the Philadelphia Fed’s Payment Cards Center continues its work to provide meaningful insights into
this emerging sector of the financial services industry.
Our economic education initiatives are yet another element of the
ongoing efforts by the Federal Reserve Bank of Philadelphia to open its
doors and help the public understand what we do. Around our District,
we’re helping young people understand the workings of the economy and
the financial system. We’re helping low- and moderate-income communities protect people from unscrupulous business practices and evaluate
risks and alternatives. And we hold seminars and workshops here at the
Bank to teach the importance of economic and financial education.

The economic
recovery is
gaining traction,
and we look
forward to solid
expansion in
2004, with GDP
growing at a
healthy pace and
job growth
accelerating as
we move through
the year.

Money in Motion:
The Economy in Motion
A key part of the Federal Reserve’s mission is to ensure the robust
health of the U.S. economy. Our Research Department advances this effort through its in-depth analyses of the economy and innovative research
on policy issues. The department’s contributions to economic policymaking were supported by our third annual Policy Forum, which was held last
fall and focused on “Managing the Recovery in Uncertain Times.” The
event brought together widely recognized experts from around the world to
discuss the central policy issues that emerged during the ongoing recovery.
At the Philadelphia Fed, our outlook for this economic recovery
is bright. The economic recovery is gaining traction, and we look forward
to solid expansion in 2004, with GDP growing at a healthy pace and job
growth accelerating as we move through the year. Meanwhile, inflation
should remain subdued.
For the longer term, changes in technology and the globalization
of markets will continue to present the U.S. economy with new challenges
and new opportunities. By responding as we always have—with ingenuity
and innovation—we will ensure continued improvement in living standards
both here and around the world.
The Third District’s economy weathered the recent business cycle
reasonably well, and our region’s economy continues to evolve along with
the nation’s. Looking ahead, we are well positioned to take advantage of
the ongoing economic expansion.

Real GDP Growth*

As the expansion unfolds, monetary policy will begin returning to
5.0**

4.3

4.5

a more neutral stance. Likewise, the stage will be set for fiscal policy to
pursue a more balanced posture. However, both these policy changes are
likely to occur only slowly and in response to the acceleration of growth.
In short, the U.S. economy is on the right path—a path of sustained

2.8

growth with low inflation—and that is a good place to be.

2.2

Board of Directors
As always, we are truly grateful for the valuable contributions of all
0.0
2000

2001

who assisted us in the past year. Special thanks go to our Board of Direc2002

2003

2004

* Seasonally adjusted annual rate
** Central tendency of economic projections
of Federal Reserve Governors and Reserve
Bank presidents, Monetary Policy Report to
the Congress, February 11, 2004.

tors. Their role is critical to putting money in motion. Their broad experience and keen acumen allowed us to accomplish a great deal in 2003.
I am pleased to report the following election results:

Ronald J. Naples, chairman and CEO of Quaker Chemical Corporation, has been appointed Chairman of the Board, and Doris M. Damm,
president and CEO of ACCU Staffing Services, was appointed Deputy
Chairman.
We look forward to the insight and guidance of our newest Board
members: William F. Hecht, chairman, president, and CEO of PPL Corporation, and Eugene W. Rogers, CEO and director of Newfield National
Bank.
In addition, Rufus A. Fulton, Jr., chairman and CEO of Fulton Financial Corporation, has been reappointed to represent the Third District
on the Federal Advisory Council to the Board of Governors.
Finally, we wish to offer our sincere thanks to those who completed their terms of service on our Board of Directors: our former Chairman
Glenn A. Schaeffer, president emeritus of the Pennsylvania Building and
Construction Trades Council, and Robert J. Vanderslice, president and
COO of Pennsville National Bank.

The U.S.
economy is on
the right path
—a path of
sustained
growth with low
inflation—

Closing Thoughts
In closing, I want to point out that 2004 marks the 90th anniversary of an important date in central banking history. On November 16, 1914,
the nation’s 12 Federal Reserve Banks opened their doors for business.
At the time, the Federal Reserve Bank of Philadelphia operated out of a
modest two-room office at 4th and Chestnut streets. Ninety years have
brought tremendous change. Throughout 2004, we will celebrate this

and that is a
good place
to be.

milestone and honor the progressiveness of our forefathers in their classic
example of addressing competing concerns—a decentralized central bank
that successfully balances private and public interests.
We hope you enjoy this year’s annual report, “Putting Money in
Motion: Telling Our Story.” It expresses the spirit in which we pursue new
initiatives to strengthen our role as a central bank. Likewise, it explains
the origins of our core convictions and commitments. But most important,
it demonstrates our focus on helping our region continue to grow and
prosper.

Anthony M. Santomero
President
April 2004
7

Money in Motion Opens at the Philadelphia Fed

The day after Federal Reserve Chairman Alan Greenspan’s
visit, the new Money in Motion exhibit opened to the public. The
first day drew 125 people. Since then, we’re proud to report that
Money in Motion has attracted more than 15,000 visitors.

he Bank’s new permanent exhibit, Money in Motion, continues to garner
rave reviews from employees, visitors, and the media. It took the efforts
of nearly 100 employees, a design firm, and other vendors over the

course of almost two years to make it happen.
Like all good productions, Money in Motion had a series of rehearsals.
Several groups were invited to preview the exhibit before it went “prime time.” The
Bank’s officers and managers, Bank employees and their families, and the press
were asked to celebrate the installation of the exhibit and test it out. The official
unveiling by Fed Chairman Alan Greenspan on July 2, 2003, was the culmination
of the activities leading up to the exhibit’s public debut on July 3.
The Bank’s officers and managers got first crack at the exhibit. They were
generally impressed with the professional design of the exhibit elements, particularly the many interactive features. President Santomero noted that the exhibit is
consistent with the Bank’s strategic goal of engaging the Philadelphia community.
He added, “The exhibit is what we envisioned. It puts Philadelphia’s role in central
banking in context.”
Sunday, June 22, was earmarked for Family Day. Hundreds of employees
brought spouses, children, and grandchildren to see Money in Motion. Typical
responses from employees included one from Ray Smith, Treasury Services, who
declared the exhibit “very classy, top shelf.” Sheila Harris, Records Management,
called it “very interesting; great for schools and kids.”
Next, we invited regional business reporters to the Bank for a “sneak
peek.” They explored each of the exhibit’s elements, and Public Affairs staff members were on hand to answer their questions.

“Among the displays are
powerful reminders of a
history of central banking
in this country that had
its origins in [a] classic
edifice on Third Street in
Philadelphia.”
—Alan Greenspan

Finally, on July 2, 2003, Federal Reserve Chairman Alan Greenspan made the journey to Philadelphia to

Greenspan told the

officially open Money in Motion.

assembly that it was

ness and financial services community, Bank officers, and

particularly appropriate
for the Philadelphia
Reserve Bank to install
this exhibit, given
Philadelphia’s
“key part in
our country’s

Hundreds of invited guests from the region’s busireporters from local print and electronic media crammed
into Eastburn Court, the Bank’s main lobby, to hear the
Chairman’s remarks. As cameras clicked and recorders
whirred, Greenspan told the assembly that it was particularly
appropriate for the Philadelphia Reserve Bank to install this
exhibit, given Philadelphia’s “key part in our country’s founding, and especially given the historic significance of this
neighborhood for the development of banking in the U.S.”
Greenspan was referring to the Bank’s location in
the heart of the city’s historic district. The Federal Reserve
Bank of Philadelphia’s current home at 6th and Arch streets
is near the Liberty Bell, Independence Hall, and the new

founding...and in

National Constitution Center, which opened July 4, 2003.

the development of

central banking predecessors: the first Bank of the United

banking in the U.S.”

The Bank also lies just a few blocks from the sites of its
States and the second Bank of the United States.
The Chairman’s remarks offered a capsule of the
history of central banking. He concluded with these words:
“The current structure of the Federal Reserve System and
the wide recognition of the value of political independence
to ensure the effective administration of our nation’s monetary policy reflect, in part, the understanding by our System’s founders of our early central banking history. Among
the displays of the Money in Motion exhibit are powerful
reminders of a history of central banking in this country that
had its origins in that classic edifice on Third Street in Philadelphia” [a reference to the first Bank of the United States].
Before his speech, Greenspan took a private tour of Money
in Motion. Upon completing it, he remarked, “Good exhibit.
Even better than I expected.”

Telling the Fed’s Story Through Money in Motion

our elements of the Money in Motion exhibit—“In &
Out,” “Eye on the Money,” “Swipe It,” and “Moving Money
at Near Light Speed”—inform visitors about some of

the activities of the Federal Reserve Bank of Philadelphia and
the Federal Reserve System and the various ways in which the
Fed puts money in motion.

“In & Out” and “Eye on the Money”

The Fed distributes both
new and circulated
bills to meet the demand
for currency from
financial institutions.

In telling the public what the Fed does, we knew it was
important to explain our role in the payments system. That’s
why we’ve included the 25-foot tower of shredded money,
which dominates the “In & Out” portion of the exhibit. This
tower brings home the fact that the Philadelphia Fed alone
shreds $20 million in unfit currency on an average day.
In the exhibit, we also explain that circulated notes
—used money—come in from local financial institutions that
have too much currency on hand, or that need to increase the
amount of money they must hold on deposit with the Fed. The
Fed counts the money and replaces worn or torn bills with new
money. Worn or torn notes are automatically routed to stainless steel blades on the Fed’s high-speed currency shredders,
which crosscut notes into confettilike shreds. New money is printed
by the Bureau of Engraving and
Printing in Washington, D.C., and
Fort Worth, Texas, and issued by the
Federal Reserve Banks to financial
institutions.
The Fed distributes both
new and circulated bills to meet the
11

demand for currency from financial institutions in
the Third Federal Reserve District. A related exhibit
element, “Eye on the Money,” tracks the journey of
newly printed and circulated money within the Federal Reserve Bank of Philadelphia.
Another part of “In & Out” is a currency container that displays what more than $1 million in new
$5 bills looks like when stored in a currency cart.
The Philadelphia Fed uses these containers to move
large numbers of bills in its vault.

“Swipe It”
Consumers are using payment cards more
and more to purchase a variety of items both in brickand-mortar stores and online. This increased usage
has led to rising concern among consumers and in

Increased usage of
payment cards
has led to rising
concern about credit

the financial services industry about credit card fraud, identity
theft, and the problems associated with mounting personal
debts.
The “Swipe It” component of the exhibit teaches visitors about the various forms of credit and debit cards. It provides information on how consumers can protect themselves
against credit card fraud and identity theft. It also lets them

card fraud, identity

use a debt calculator to see how long it takes to pay off credit

theft, and the

This element also answers some frequently asked questions

problems associated

card debt, especially when minimum payments are made.
about credit cards.
“Swipe It” ties in with the work of the Federal Reserve

with mounting

Bank of Philadelphia’s Payment Cards Center. This unit,

personal debts.

ments in the payment cards industry. During 2003 the Center

which was established in 2000, provides insight into developproduced a number of analytical papers on the subject and
hosted a series of conferences that brought together representatives from the industry, academia, and the policy arena.

Wire transfers can move trillions of dollars—
at near light speed—from one account
to another. Fedwire electronically transfers
approximately $3 trillion each day.
“Moving Money at Near Light Speed”
In this modern age, moving money can mean more than just the physical
processing of checks or cash or using plastic. Wire transfers can move trillions of
dollars—at near light speed—from one account to another. That’s the role Fedwire plays in our nation’s payments system.
The Fedwire system is an electronic funds transfer and book-entry
securities transfer service. It links the Federal Reserve Banks and approximately
10,000 depository institutions nationwide.
Fedwire electronically transfers approximately $3 trillion each day. About
60 percent of that total represents payments made by financial institutions acting
on behalf of themselves or their customers. The balance is transfers of U.S. government and agency securities.
Fedwire transfers are immediate and not revocable. Although many transfers are for less than $1,000, the average runs in the millions of dollars.
13

Check Clearing for the 21st Century

“At the Federal
Reserve Bank of
Philadelphia, we
look forward to the
opportunities and
potential afforded by
Check 21. We are
working to help banks
prepare so they can
take full advantage of
its benefits and pass
them along to their
own customers.”
~ First Vice President Bill Stone

y facilitating the use of new technologies, Check 21
will improve the efficiency and reduce the cost of
the nation’s check collection system, while providing

better services to bank customers. Banks will achieve this by
simply replacing original checks with electronically created
substitute checks, both of which contain identical payment information. These substitute checks are paper reproductions
that are the legal equivalent of the original checks.
Our nation’s check payments system has changed a
great deal. Just half a century ago, millions of checks were
sorted by hand every day. Then, in the 1960s, mechanical
high-speed processing equipment emerged as the most
high-tech means to read and sort checks.
But change is constant in the banking industry. What
was once touted as the latest technology is considered both
costly and labor-intensive in today’s fast-paced world. With
around 40 billion checks processed each year, the industry is
constantly challenged to become faster and more efficient to
keep pace with change.
Despite the fact that check payments in the United
States likely peaked in the mid-1990s and have declined
gradually since, they still represent approximately half of the
nation’s noncash payment transactions. Checks are still the
most popular form of retail payments in the U.S. after cash.
To stay ahead of the ever-changing industry curve, the Federal Reserve System approached the U.S. Congress in late
2001 with a proposal that promised to bring check payments
into the 21st century.
The Check Clearing for the 21st Century Act, also
known as Check 21, will take effect on October 28, 2004.

This legislation facilitates the use of new technology in check payments, allowing
for a more efficient system of check collection and processing. Under Check 21,
financial institutions will be able to create substitute checks, using digital images
and electronic check information, which will allow them to collect and return checks
more quickly.
Check 21 is part of the broader process of electronic check presentment
(ECP), whereby checks are cleared based on information gathered electronically
rather than from the actual paper checks. The process is technologically sophisticated, yet quite simple: digital images of checks are transmitted electronically from
banks where the checks were deposited to the “paying bank” (the check writer’s
bank), central operations center, or other service provider. From there, banks can
elect to accept checks forwarded for collection either in electronic form or in the
form of a substitute check.
The original checks are truncated, or stopped, before reaching the paying bank. The substitute checks—not the images themselves—serve as the legal
equivalent of the original check. For the most part, Check 21 will be transparent to
the consumer. However, bank customers who currently receive cancelled checks

First Vice President William H. Stone, Jr.
(front) looked over the new check processing machines with (left to right) Assistant
Vice President Ronald R. Sheldon, Vice
President Arun Jain, and Assistant Vice
President John P. Kelly.

Check Out
the Benefits of
Check 21

back may begin to receive some substitute checks
after Check 21 becomes effective. Over time, customers’ monthly statements may include only copies of
check images or may simply list each transaction.
To prepare for this bold initiative, the Federal

More choices:
By taking advantage of electronic
check presentment and return capabilities, banks can offer an alternative
to today’s paper-based system.
Increased efficiencies:
By reengineering their infrastructure
with electronics, banks can expedite
the collection or return of checks,
streamline internal processes, reduce operating costs, and realize
greater efficiencies.
Greater innovation:
By providing innovative new services,
banks can broaden their deposit options or extend deposit cutoff hours.

Reserve is actively involved in a number of projects
focused on analysis, design, and development to
ensure the readiness of our operations and to achieve
strategic alignment with the financial services industry.
The Federal Reserve System recently standardized its
check processing platforms nationwide. In addition,
Reserve Banks around the country intend to introduce
a broad array of new and improved products, services, and solutions, supporting Check 21 and offering
customers more options than ever before.
When asked about the future of checks, First
Vice President Bill Stone had this to say:

“This new infrastructure for checks will
enhance our capabilities and leverage
our strengths in the dynamic payments
environment. At the Philadelphia Fed, we
continue to embrace technology and innovation as we seek ways to enhance our
services. These changes will pave the way
for new methods of operation, improved
efficiency, and cost reduction in the nation’s
check processing system. The bottom line
is better services for bank customers. Most
important, it will enable us to more quickly
and effectively respond to our customers’
needs, which remain, as always, our foremost priority.”

Changing Platforms:

The Check Standardization Project

utting money in motion certainly involves processing
checks. This was especially evident in 2003, when
the Federal Reserve Bank of Philadelphia’s Retail

Payments area underwent a significant change: the conversion of the check processing platform from Unisys application
software and hardware to an IBM-based check processing
system.
This “check conversion” is all part of a larger Federal
Reserve System effort called the Check Modernization Project, an umbrella term that covers four areas: Check Standardization, Enterprise-wide Adjustments, Image Services System,
and Electronic Access and Delivery. Check Standardization is,
by far, the largest and most important component, and it’s the
one that encompasses the conversion of the check processing
platform.
Why the switch? Several considerations led the Federal Reserve System to switch platforms. Philadelphia, like the
other Reserve Banks, has more national customers now, and

The change in check
processing platforms
was driven by the
need to have
uniformity across the
Federal Reserve
System and to carry
out provisions
of Check 21.

they’re demanding more uniform services from the Reserve
Banks. Because of the variety of platforms in use around the
Federal Reserve System, depository institutions weren’t getting uniform service and products.
In addition, having a standard
processing platform makes it easier to
adapt to Check 21, the legislation that
provided the impetus for the switch.
If the Federal Reserve System had
to equip each of 37 offices with new
systems, it would take five years to

implement Check 21.
One platform makes it
easier to deploy a system nationwide.
Cutting costs is another reason for changing platforms. Now,
when something goes
wrong with the system,
one solution fixes the
problem for all of the
(Left to right): Gary Swasey, Joe Basile, and Tom Ballay, of Retail Payments,
go over some figures.

Reserve Banks. That
way, the Fed doesn’t
have to have software
and support experts at

each Reserve Bank, Branch, or regional check processing
center.

Having a common
platform will increase

At the Federal Reserve System level, having a common platform will make some functions easier to perform and
increase efficiency. A common platform also allows a more

efficiency...and allow

dynamic environment. Restructuring check operations—for

a more dynamic

because the infrastructure is already in place. Furthermore,

environment.

as an enhanced ability for reconcilements using images of

example, because of additional bank mergers—will be easier
the new setup offers tools the Fed didn’t have before, such
rejected items.
Of course, the switch to a common platform has an
impact on the Federal Reserve Banks. A national system
certainly means less autonomy for the individual Banks. In
Philadelphia’s case, historically, we’ve been known for our
quick response to customers. Working with a uniform system
could make that harder to do.

Philadelphia was the last Reserve Bank to cut over
to the new system. The switchover was designed that way
because Philadelphia is the largest check processor in the
System, and its check operation is more complex. For example, Philadelphia provides payor bank services, which involves
the electronic transmission of check data and certain other
services for large corporate customers. Our Delaware banks
are the biggest users of this product. The Philadelphia Fed
also performs imaging services for several other large customers. Going last allowed Philadelphia to minimize the platform
conversion’s impact on its customers. It also allowed us to
learn from those Reserve Banks that converted before us.
In fact, Philadelphia did its cutover in four distinct
phases; all the other Reserve Banks made the switch in a
single event. The four phases began on September 18, 2003,
and ended on October 30, 2003. Each phase allowed us to
use a little bit more of the system.
Besides the advantages to the Federal Reserve, how
does the new system benefit the Fed’s customers? Because

The switch to the
new check processing
platform means
more efficiency and
lower costs for the
Federal Reserve
System and better
service for its
customers.

the new system allows the Fed to improve its check imaging
services, Fed customers will get better service in that area. In
addition, the more efficient, image-based medium-speed platform will work better with return items, thereby cutting down
on the number of adjustments.
Also, the IBM-based platform offers the Fed’s customers more options. For example, when customers use the
new system in conjunction with FedLine for the Web, they’ll
be able to access check images through the Internet.
All in all, the switch to the new check processing platform means more efficiency and lower costs for the Federal
Reserve System and better service for its customers.

The New Color of Money

“Every aspect of
the redesign was
coordinated
through the
Reserve Banks.
Each followed
identical procedures when
storing and
releasing the
new currency.”
~ Michelle Scipione

he Federal Reserve Bank of Philadelphia believes its
participation in the Series 2004 $20 outreach campaign will
pay off for consumers and businesses in its District.

Before the colorful new notes were distributed to the approximately
300 financial institutions in the Third District, Philadelphia’s Cash
and Public Affairs departments directed an extensive educational
outreach program to introduce the enhanced security features.
Our Cash Department’s first forum, which followed the May
2003 unveiling, introduced the new design to the District’s 10 largest
financial institutions and regional armored carriers. More detailed
seminars, open to all customers, followed and involved the United
States Secret Service. “Every aspect of the redesign was coordinated throughout the Federal Reserve System,” said Philadelphia Fed
Cash Officer Michelle Scipione, who helped develop the procedures
as well as the training materials for banks and retailers. “Each of
the Federal Reserve Banks distributed the same training materials
to customers and followed identical procedures when storing and
releasing the new currency,” Scipione explained.
Expanded training made a difference in this campaign. The
Philadelphia Fed conducted seminars for Southeastern Pennsyl-

Cash Officer Michelle Scipione
points out new security features on
the $20 bill.

vania Transit Authority (SEPTA) managers and supervisors. During
the 1998 currency rollout, the U.S. Treasury and the Fed learned an
important lesson when some transit authorities discovered that the
new $20s were not compatible with the older software in their bill-acceptance machines. This time, the Fed worked with businesses and
cash machine vendors to prevent any glitches. In fact, the Bureau of
Engraving and Printing (BEP) met with vendors as the prototypes of
the new $20 were being designed and also provided them with test
notes early in 2003.
The SEPTA training was filmed and featured along with

other new currency programs
in a news release videotape
distributed by the Treasury that
aired on more than 200 stations
nationwide when the currency
was rolled out. Weeks earlier,
advertisements and placements
of the new $20 aired on popular
programs such as Who Wants

(Left to right): Bureau of Engraving and Printing Director Tom Ferguson, Treasury
Secretary John W. Snow, Federal Reserve Board Chairman Alan Greenspan,
U.S. Treasurer Rosario Marin, and U.S. Secret Service Director W. Ralph Basham
unveil the new design for the $20 bill.

to Be a Millionaire?, America’s
Funniest Home Videos, Jeopardy, and Live with Regis and Kelly, all paid for
by the Treasury as part of the $53 million, five-year currency campaign to
build awareness.
“Educating people on how to authenticate currency is crucial,” said

What’s Next
for U.S.
Currency

Bob McCarthy, Philadelphia Fed Public Affairs manager. McCarthy gave interviews and speeches on the currency around the District. He found the public
was eager to see the new color of money. Although the remake featured
subtle peach and blue background colors and striking eagle icons, McCarthy
encouraged consumers to check their currency for the portrait watermark,
color-shifting ink, and security thread.
The Public Affairs and Cash departments invited the press to be
among the first to see and spend the new $20s on October 9, 2003, when
they were released into circulation. The Federal Reserve Banks’ seamless distribution of currency to financial institutions across the country required careful advance planning. Months earlier, each Federal Reserve Bank received

This fall, the
Treasury
expects to
issue the new
$50 bill, followed
by the $100 in
2005. Designs

and secured large inventories of the new $20 notes based on their customers’

will be

needs. Although all the Federal Reserve Banks released the new $20s to their

introduced

customers on the same day (October 9, 2003), most of the public didn’t have
the bills in their hands until a few days later.
The Federal Reserve System, the U.S. Treasury, the Bureau of Engraving and Printing, and the U.S. Secret Service are coordinating efforts,
expanding training, and building awareness about the new currency here and
abroad. The Philadelphia Fed will also continue its role in educating its con-

every seven to
10 years to stay
ahead of
counterfeiters.

stituencies and maintaining the public’s confidence in American currency.
21

Payment Cards Center

s credit cards, debit cards, and other new methods
of payment become more popular and pervasive,
the Philadelphia Fed’s Payment Cards Center con-

tinues its work to provide meaningful insights into this realm

The Center was
created to address
payment card issues
and serve as a source
of expertise on this

of retail payments.
The Center was created to address payment card
issues and serve as a source of expertise on this emerging
sector of the financial services industry. By studying innovations in retail payments through research and analysis, workshops, and conferences, the Center encourages dialogue
among industry participants, academics, and policymakers.
Importantly, the Center’s staff draws on the expertise of their
Reserve Bank colleagues, from retail risk quantification spe-

emerging sector

cialists in Supervision, Regulation and Credit to payments-

of the financial

Here are just a few of the Center’s 2003 activities,

services industry.

focused economists in the Research Department.
which shed light on important trends and developments in the
payment cards industry.

Conferences
“Asset-Backed Securities and Credit Cards” (December 3, 2003) brought together industry practitioners and the
bank regulatory community to explore the role of securitization in the credit card industry and discuss emerging issues.
“Financial Privacy: Perspectives from the Payment
Cards Industry” (March 21, 2003) included legal and industry
experts who provided insights into the controversy surrounding the financial privacy debate and addressed steps being
taken to safeguard personal financial information.

“Innovations at the Point of Sale” (February 27, 2003) highlighted
emerging developments, trends, and challenges in consumer payments with
a special emphasis on merchants’ perspectives.

Discussion Papers
“Consumer Bankruptcy: How Unsecured Lenders Fare” (November
2003), a discussion paper by Payment Cards Center Industry Specialist
Mark Furletti, assesses trends and developments in bankruptcy filings and
their impact on unsecured lenders, especially credit card issuers.
“Credit Card Pricing Developments and Their Disclosure” (January
2003), a discussion paper also by Mark Furletti, considers changes in credit
card pricing over the past two decades and describes how new technologies, increasing competition, and consumer awareness have influenced card
pricing and broadened the availability of unsecured credit.

Research Working Papers
“An Introduction to the Economics of Payment Card Networks”
(June 2003), a Research Department working paper by Philadelphia Fed

To learn more
about the Center’s
conferences and
papers, or to obtain
more information
on other Payment
Cards Center
activities, please
visit our web site at
www.phil.frb.org/
pcc.

economist Robert Hunt, provides an overview of the
economics of the payment card industry, examining
the antitrust issues arising from the vast coordination
among financial institutions, retailers, and consumers
in open payment card networks.
“Credit Card Securitization and Regulatory
Arbitrage” (April 2003), a Research Department working paper by Charles Calomiris (Columbia Business
School, the National Bureau of Economic Research,
and the American Enterprise Institute), and Joseph
Mason (Drexel University and Payment Cards Center
visiting scholar), explores the motivations and desirability of off-balance-sheet financing of credit card
receivables by banks.

(Left to right): Oliver Ireland, attorney, Morrison & Foerster; Peter Swire, professor of law, the Moritz College
of Law, Ohio State University; Andy Navarrete, associate general counsel, Capital One; and Bill Brooks, chief
privacy officer, MBNA, participate in a panel discussion
during a Payment Cards Center symposium on privacy
issues in the payment card industry.

Federal Reserve Bank of Philadelphia
Board of Directors
Robert E. Chappell (5)
Board member since 2000. Member, Budget and Operations and Personnel committees. Chairman and CEO of
Penn Mutual Life Insurance Company. Member, Insurance Federation of Pennsylvania, Taxation and Financial
Services Steering Committee for American Council of
Life Insurance. Serves on boards of Quaker Chemical
Corporation, South Chester Tube Company, LOMA, and
Wharton Financial Institutions Center at the University of
Pennsylvania.
Walter E. Daller, Jr. (4)
Board member since January 2002. Member, Budget
and Operations and Personnel committees. Chairman,
President & CEO of Harleysville National Corporation.
Chairman of Harleysville National Bank and Trust Company. Member of the Board of Directors of Independent
Community Bankers of America and the TCM Bank of
Tampa, Florida. Serves on the boards of the North Penn
United Way, the Lower Salford Historical Society, the
Muhlenberg House, Montgomery County Lands Trust,
and the Perkiomen Valley Watershed. Previously served
as Federal Reserve Bank of Philadelphia’s representative
to the Federal Advisory Council.
Doris M. Damm (3)
Board member since January 2001. Member, Budget
and Operations and Personnel committees. President
and Chief Executive Officer of ACCU Staffing Services.
Other affiliations include Cerebral Palsy of New Jersey,
Cherry Hill Economic Development Council, Our Lady of
Lourdes Medical Center, Our Lady of Lourdes Foundation, and Cherry Hill Regional Chamber of Commerce.
Garry L. Maddox (6)
Board member since January 2003. Member, Audit and
Research and External Affairs committees. CEO of A.
Pomerantz & Company. Founding President of World
Wide Concessions, Inc. Corporate Marketing Representative, Philadelphia Phillies Organization. Partner of
Aramark, Food and Beverage Concession at the Airport.
Founder & Executive Director of LPGA Urban Youth Golf
Program of Greater Atlantic City, Founder & President of
the Youth Golf & Academics Program. Serves on boards
of the Boys and Girls Clubs of Camden County, Greater
Philadelphia Chamber of Commerce, Chamber of Commerce of Southern New Jersey, Fairmount Park Commission, Philadelphia Sports Congress, and the Corporate
Alliance for Drug Education. Director Emeritus of the
Philadelphia Child Guidance Center. Member of the
Board of Governors of the National Adoption Center.

Ronald J. Naples (2)
Deputy Chairman, Federal Reserve Bank of Philadelphia Board of Directors. Board member since January
2001. Member, Audit and Research and External Affairs
committees. Chairman and Chief Executive Officer of
Quaker Chemical Corporation. Chairman of the Board of
the University of the Arts. Serves on boards of Glatfelter,
Philadelphia Museum of Art, Franklin Institute, Foreign
Policy Research Institute, Rock School of the Pennsylvania Ballet, and American Red Cross - Southeastern
Pennsylvania Chapter.
Glenn A. Schaeffer (1)
Chairman, Federal Reserve Bank of Philadelphia Board
of Directors. Board member since 1998. President
Emeritus, Pennsylvania Building and Construction Trades
Council in Harrisburg. Co-founder, Capital Area Labor
Management Committee. Coordinator, Capital Area Labor
Management Construction Partnership Coordination Project. Serves on the board of Capital Blue Cross.
Kenneth R. Shoemaker (9)
Board member since January 2003. Member, Audit and
Research and External Affairs committees. President and
CEO of Orrstown Bank, President and CEO of Orrstown
Financial Services. Member, Pennsylvania Bankers Association. Chairman of the Council of Trustees of Shippensburg University. Serves on boards of Cumberland
Valley School of Music and the Carlisle Regional Medical
Center. Founding President of the Mainstreet Non-Profit
Redevelopment Corporation.
P. Coleman Townsend, Jr. (8)
Board member since January 2002. Member, Budget and
Operations and Personnel committees. Chairman and
CEO of Townsends, Inc. Member of the Board of Trustees of the University of Delaware, Winterthur Museum,
and Christiana Care. Serves on the Council of Advisors
for Delaware Center for Horticulture, Lehman Art Center
Advisory Committee, Liberty Mutual Advisory Committee,
and the Board of Overseers for Delaware College of Art
and Design.
Robert J. Vanderslice (7)
Board member since January 2001. Member, Audit and
Research and External Affairs committees. President and
COO of Pennsville National Bank, Vice President of Penn
Bancshares, Inc. Serves on the board of Memorial Hospital of Salem County. Professional affiliations: Pennsville
Economic Development Commission, Penns Grove Rotary
Club, Salem County Technical and Vocational School Advisory Board, Salem County Community College Foundation, and Salem County Chamber of Commerce.

Federal Reserve Bank of Philadelphia
Councils
2003 Business Council
CHAIRMAN
John K. Ball (2)
Chairman, President, &
CEO
R.M. Shoemaker Co.
West Conshohocken, PA
Lynn Banta (8)
Owner
Twin Stacks
Development Co. Inc.
Dallas, PA
Michael F. Camardo*
Executive Vice President
Lockheed Martin
Technology
Cherry Hill, NJ

Douglass C. Henry, Jr.
(4)
CEO
Henry Molded Products
Lebanon, PA

Albert Morrison, III (7)
Chairman, President, &
CEO
Burnham Holdings
Lancaster, PA

Dennis E. Klima (1)
President & CEO
Bayhealth Inc.
Dover, DE

Audrey S. Oswell*
President & COO
Resorts Atlantic City
Atlantic City, NJ

John Milligan (10)
President
Milligan & Company
Philadelphia, PA

Jeffrey J. Trester (5)
Director & Co-CEO
PriceSCAN.com, Inc.
Malvern, PA

Mitchell L. Morgan (9)
President
Morgan Properties
King of Prussia, PA

William L. Wilson (6)
Principal-in-Charge
Synterra
Philadelphia, PA
Mark S. Stellini (3)
President & CEO
InfoSystems
Wilmington, DE

* Not Shown

2003 Community Bank Council
Joseph E. Chippie (2)
President & CEO
First National Bank of
Wyoming
Wyoming, DE
Robert E. Forse (5)
Chairman, President, &
CEO
Woodlands Bank
Williamsport, PA
Mark D. Gainer (3)
President & CEO
Union National
Community Bank
Mt. Joy, PA
Aaron L. Groff (7)
Chairman, President, &
CEO
Ephrata National Bank
Ephrata, PA

John W. Ord*
President & CEO
Peoples National Bank
Hallstead, PA
CHAIRMAN
Frederick C. (Ted)
Peters II (1)
Chairman, President, &
CEO
The Bryn Mawr Trust
Company
Bryn Mawr, PA
Eugene W. Rogers (4)
CEO
Newfield National Bank
Newfield, NJ

Patrick M. Ryan*
President and CEO
The Yardville National
Bank
Hamilton, NJ
William F. Snell (9)
President & CEO
Farmers and Merchants
Trust Co.
Chambersburg, PA
Wayne R. Weidner (6)
Chairman, President, &
CEO
National Penn
Bancshares, Inc.
Boyertown, PA

* Not Shown

George W. Nise (8)
President & CEO
Beneficial Savings Bank
Philadelphia, PA

Federal Reserve Bank of Philadelphia
Councils
2003 Credit Union Council
CHAIRMAN
Paula M. Albanese (1)
President
Diamond State FCU
New Castle, DE
Barbara Arrowsmith*
Manager
New Castle County
Delaware Employees
FCU
New Castle, DE
David W. Clendaniel (10)
President & CEO
Dover FCU
Dover, DE
Eileen Crean (11)
President & CEO
CUMCO FCU
Vineland, NJ

John LaRosa (6)
COO & Treasurer
Police and Fire FCU
Philadelphia, PA

Thomas A. Phillips (9)
General Manager
Lakehurst Naval FCU
Lakehurst, NJ

Louise P. Lingenfelser
(8)
President & CEO
UGI Employees FCU
Wyomissing, PA

Diana L. Roberts (5)
President & CEO
Hershey FCU
Hershey, PA

Robert L. Marquette (7)
President & CEO
Members 1st FCU
Mechanicsburg, PA
James F. McCaw (2)
President & CEO
K of C FCU
Philadelphia, PA

Judith M. Supplee (3)
President & CEO
Keystone FCU
West Chester, PA
Virginia F. Williams (4)
CEO
FAA Technical Center
FCU
Northfield, NJ

* Not Shown

Operating Statistics
In 2003, Philadelphia’s total volume of

rency processed increased by 4 percent while

commercial checks processed decreased by

the related dollar value increased 3 percent,

3 percent and the dollar value of transactions

both attributable to normal growth. With the

decreased by 5 percent. A significant increase

August 2002 elimination of coin weighing (with

in U.S. government check volume was expe-

the exception of dollar coins) for greater opera-

rienced in 2003, attributable to Philadelphia’s

tional efficiency, the volume measurement was

assuming responsibility, on a phased basis

changed from bags weighed to bags processed

beginning in January 2002, for processing all

in both years. Because we gained a large

government checks for the First, Second, Third,

customer in 2003, there was an 88 percent

Fourth, and a portion of the Fifth Federal Re-

increase in processed coin volume and a 79

serve Districts.

percent increase in processed coin value.

The Philadelphia Bank continued to

In 2003, both the number and value

be a major processor of cash in the Federal

of loans to depository institutions were higher

Reserve System in 2003. The volume of cur-

than in the previous year.

SERVICES TO DEPOSITORY INSTITUTIONS

Check processing:
U.S. Government
Commercial checks

2003
Volume

2003
Dollar Value

2002
Volume

2002
Dollar Value

81.9 million checks

$100.0 billion

52.8 million checks

$64.5 billion

1,239.6 million checks $2,457.1 billion 1,282.6 million checks $2,594.7 billion

Cash operations:
Currency processed

2,212.0 million notes

$43.0 billion

2,116.7 million notes

$41.2 billion

Coin processed

430.9 thousand bags

$204.6 million

229.1 thousand bags

$114.1 million

99 loans

$308.3 million

68 loans

$210.3 million

Loans to
depository institutions

Note: Because of the consolidation of Federal Reserve System food coupon operations to other Federal Reserve offices,
related statistics are no longer shown here.

Federal Reserve Bank of Philadelphia
Current Officers
Anthony M. Santomero
President
William H. Stone, Jr.
First Vice President
Donald F. Doros
Executive Vice President
Richard W. Lang
Executive Vice President
Michael E. Collins
Senior Vice President
and Lending Officer
Loretta J. Mester
Senior Vice President and
Director of Research
John B. Shaffer
Senior Vice President and
General Auditor
Milissa M. Tadeo
Senior Vice President
Cash Services and Treasury
Services
John G. Bell
Vice President
Financial Statistics
Robert J. Bucco
Vice President
Wholesale Product Office
Peter P. Burns
Vice President and Director
Payment Cards Center
Theodore M. Crone
Vice President and Economist
John J. Deibel
Vice President and Chief
Administrative Officer
Supervision, Regulation and
Credit
Patrick L. Donahue
Vice President
Customer Relations
Michael Dotsey
Vice President and Senior
Economic Policy Advisor

Richard A. Elliott
Vice President
Facilities, Records, and
Document Services
Donna L. Franco
Vice President and
Chief Financial Officer
Faith P. Goldstein
Vice President
Public Affairs
Mary Ann Hood
Vice President
Human Resources
Arun K. Jain
Vice President
Retail Payment Services
Henry T. Kern
Vice President
Cash Services
William W. Lang
Vice President
Supervision, Regulation and
Credit
Edward M. Mahon
Vice President and General
Counsel
Stephen A. Meyer
Vice President and
Senior Economic Policy
Advisor
Mary DeHaven Myers
Vice President and
Community Affairs Officer
A. Reed Raymond, III
Vice President
Supervision, Regulation and
Credit
Patrick M. Regan
Vice President
Information Technology
Services
Richard A. Sheaffer
Vice President
Treasury Services
Herbert E. Taylor
Vice President and
Corporate Secretary

30
Includes promotions through February 2004

Vish P. Viswanathan
Vice President and
Discount Officer
Supervision, Regulation and
Credit
Kei-Mu Yi
Vice President and Economist
Eileen P. Adezio
Assistant Vice President
Supervision, Regulation and
Credit
Mitchell S. Berlin
Assistant Vice President and
Economist
Shirley L. Coker
Assistant Vice President and
Counsel
William L. Gaunt
Assistant Vice President
Supervision, Regulation and
Credit
Stephen G. Hart
Assistant Vice President
Human Resources
Howard M. James, Jr.
Assistant Vice President
Supervision, Regulation and
Credit
John P. Kelly
Assistant Vice President
Retail Payment Services
Elisabeth V. Levins
Assistant Vice President
Supervision, Regulation and
Credit
Alice Kelley Menzano
Assistant Vice President
Information Technology
Services
Camille M. Ochman
Assistant Vice President
Treasury Services
Anthony T. Scafide, Jr.
Assistant Vice President
Customer Relations
Ronald R. Sheldon
Assistant Vice President
Retail Payment Services

Eric A. Sonnheim
Assistant Vice President
Supervision, Regulation and
Credit
Marie Tkaczyk
Assistant Vice President
Information Technology
Services
Richard A. Valente
Assistant Vice President and
Assistant General Auditor
Constance H. Wallgren
Assistant Vice President
Supervision, Regulation and
Credit
Anthony J. White
Assistant Vice President
Customer Relations
Michael P. Zamulinsky
Assistant Vice President
Supervision, Regulation and
Credit
Aileen C. Boer
Research Support Officer
Donna L. Brenner
Budget and Procurement
Officer
Maryann T. Connelly
Assistant Counsel
Michael T. Doyle
Business Planning and
Analysis Officer
Suzanne W. Furr
Wholesale Product Officer
Linda K. Kirson
Office Automation
Support Officer
Information Technology
Services
Joseph L. McCann
Administrative Services
and Security Officer
Michelle M. Scipione
Cash Services Officer
Stephen J. Smith
Assistant Counsel

Statement of Auditor Independence

he firm engaged by the Board of Governors for the audits
of the individual and combined financial statements of the
Reserve Banks for 2003 was PricewaterhouseCoopers

LLP (PwC). Fees for these services totaled $1.4 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 2003, the Bank did
not engage PwC for advisory services.

Financial Reports Contents

Letter to Directors

Report of Independent Accountants

Report of Independent Auditors

Statements of Condition

Statements of Income

Statements of Changes in Capital

Notes to Financial Statements

Letter to Directors

Report of Independent Accountants

Report of Independent Auditors

FEDERAL RESERVE BANK OF PHILADELPHIA

Statements of Condition
As of December 31, 2003 and December 31, 2002 (in millions)
2003

2002

ASSETS
Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
U.S. government and federal agency securities, net
Investments denominated in foreign currencies
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets
Total assets

380
83
37
493
21,121
552
158
905
80
97

430
83
61
494
24,576
510
210
73
96

$ 23,906

$ 26,533

$ 21,347
802

$ 18,624
811

719
2
451
9
52
7

577
3
556
47
5,391
51
7

23,389

26,067

258
259

233
233

517

466

$ 23,906

$ 26,533

LIABILITIES AND CAPITAL
Liabilities:
Federal Reserve notes outstanding, net
Securities sold under agreements to repurchase
Deposits:
Depository institutions
Other deposits
Deferred credit items
Interest on Federal Reserve notes due U.S. Treasury
Interdistrict settlement account
Accrued benefit costs
Other liabilities
Total liabilities
Capital:
Capital paid-in
Surplus
Total capital
Total liabilities and capital

The accompanying notes are an integral part of these financial statements.

FEDERAL RESERVE BANK OF PHILADELPHIA

Statements of Income
For the years ended December 31, 2003 and December 31, 2002 (in millions)
2003
Interest income:
Interest on U.S. government and federal agency securities
Interest on investments denominated in foreign currencies

Total interest income

2002

742
7

984
8

749

992

742

991

Other operating income:
Income from services
Reimbursable services to government agencies
Foreign currency gains, net
U.S. government securities gains, net
Other income

40
20
75
3

46
20
62
3
3

Total other operating income

138

134

Operating expenses:
Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by Board of Governors
Other expenses

84
9
13
36
29

81
9
13
21
29

171

153

Interest expense:
Interest expense on securities sold under agreements to
repurchase
Net interest income

Total operating expenses
Net income prior to distribution
Distribution of net income:
Dividends paid to member banks
Transferred to surplus
Payments to U.S. Treasury as interest on Federal
Reserve notes
Total distribution

709

972

15
26

14
12

668
$

709

946
$

972

The accompanying notes are an integral part of these financial statements.

FEDERAL RESERVE BANK OF PHILADELPHIA

Statements of Changes in Capital
For the years ended December 31, 2003 and December 31, 2002 (in millions)
Capital Paid-in
Balance at January 1, 2002
(4.4 million shares)

Net income transferred to surplus
Net change in capital stock issued
(0.2 million shares)

Balance at December 31, 2002
(4.6 million shares)

Net income transferred to surplus
Net change in capital stock issued
(0.6 million shares)
Balance at December 31, 2003
(5.2 million shares)

221

Total Capital

442

233

466

258

The accompanying notes are an integral part of these financial statements.

Surplus

259

517

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
1. Structure
The Federal Reserve Bank of Philadelphia (“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 in Philadelphia serves the Third Federal
Reserve District, which includes Delaware and portions of New Jersey and
Pennsylvania. 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.

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 shortterm 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

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
costs are funded through assessments on the Reserve Banks.
The FOMC establishes policy regarding open market operations,
oversees these operations, and issues authorizations and directives to the
FRBNY for its execution of transactions. Authorized transaction types include
direct purchase and sale of securities, matched sale-purchase transactions, 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, 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.

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 differences are
the presentation of all security holdings at amortized cost, rather than at the fair
value presentation requirements of GAAP, and the accounting for matched salepurchase transactions as separate sales and purchases, rather than secured
borrowings with pledged collateral, as is generally required by 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 on behalf of the System
by the Bank, for which the costs were not redistributed to the other Reserve
Banks, include: Collateral Management System, Electronic Cash Letter System,

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
Groupware Leadership Center, Subcommittee on Credit, Reserves, and Risk
Management Administration Office, and Treasury Direct Central Business
Administration Function.
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 2003 or 2002.
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

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
Board of Governors, have borrowing privileges at the discretion of the Reserve
Banks. 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 Boards of Directors of the Reserve Banks, subject to review
by the Board of Governors. Loans to depository institutions are reported as
“Other assets.”
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.
In December 2002, the FRBNY replaced matched sale-purchase
(“MSP”) transactions with securities sold under agreements to repurchase.
MSP transactions, accounted for as separate sale and purchase transactions,
are transactions in which the FRBNY sells a security and buys it back at the
rate specified at the commencement of the transaction. Securities sold under
agreements to repurchase are treated as secured borrowing transactions with the
associated interest expense recognized over the life of the transaction.
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 loaned continue to be 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,

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
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-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 and federal agency 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. Interest income is accrued on a straightline basis and is reported as “Interest on U.S. government and federal agency
securities” or “Interest on investments denominated in foreign currencies,” as
appropriate. Income earned on securities lending transactions is reported as a
component of “Other income.” Gains and losses resulting from sales of securities
are determined by specific issues based on average cost. Gains and losses

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
on the sales of U.S. government and federal agency securities are reported as
“U.S. government securities gains, net.” Foreign-currency-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.” Foreign currencies held through F/X swaps, when initiated
by the counter-party, and warehousing arrangements are revalued daily with the
unrealized gain or loss reported by the FRBNY as a component of “Other assets”
or “Other liabilities,” as appropriate.
Balances of U.S. government and federal agency securities bought
outright, securities sold under agreements to repurchase, securities loaned,
investments denominated in foreign currency, interest income and expense,
securities lending fee income, amortization of premiums and discounts on
securities bought outright, gains and losses on sales of securities, and realized
and unrealized gains and losses on investments denominated in foreign
currencies, excluding those held under an F/X swap arrangement, are allocated
to each Reserve Bank. Securities purchased under agreements to resell and
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 methods, of which $2 million was allocated to the Bank. Interest
accruals and the amortization of premiums and discounts are now recognized
beginning the day that a security is purchased and ending the day before the
security matures or is sold. Previously, accruals and amortization began the day
after the security was purchased and ended on the day that the security matured
or was sold. 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. 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

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
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. In 2003, the Federal Reserve Act was amended to expand the assets
eligible to be pledged as collateral security to include all Federal Reserve
Bank assets. Prior to the amendment, only gold certificates, special drawing
rights certificates, U.S. government and federal agency securities, securities
purchased under agreements to resell, loans to depository institutions, and
investments denominated in foreign currencies could be pledged as collateral.
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. 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 order
to satisfy their obligation of providing sufficient collateral for outstanding Federal
Reserve notes. 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
$8,288 million, and $6,893 million at December 31, 2003 and 2002, 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 the Reserve Bank’s stock must be adjusted.
Member banks are those state-chartered banks that apply and are approved for
membership in the System and all national banks. Currently, only one-half of

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
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.
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 a substantial increase in capital, payments to the
U.S. Treasury are suspended until such losses are recovered through subsequent
earnings. Weekly payments to the U.S. Treasury may vary significantly.
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.
Beginning January 1, 1998, the reimbursement process for all Reserve
Banks was centralized at the Bank that included the transfer of each Reserve
Bank’s Treasury reimbursement receivable to the Bank. The centralized portion
of the Bank’s reimbursement receivable, reported in “Other assets,” totaled
$74 million and $73 million at December 31, 2003 and 2002, respectively. The
centralized portion of the Bank’s Costs of unreimbursed Treasury services,
reported in “Other expense,” totaled $69 thousand at December 31, 2003.
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 $2 million
for both years ended December 31, 2003 and 2002, and are reported as a
component of “Occupancy expense.”
l. Recent Accounting Developments
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity.” SFAS No. 150, which will become applicable for the Bank
in 2004, establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and imposes certain additional disclosure requirements. When adopted, there may be
situations in which the Bank has not yet processed a member bank’s application

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
to redeem its Reserve Bank stock. In those situations, this standard requires that
the portion of the capital paid-in that is mandatorily redeemable be reclassified as
debt.
m. 2003 Restructuring Charges
In 2003, the System restructured several operations, primarily in the check
and cash 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.
Footnote 10 describes the restructuring and provides information about
the Bank’s costs and liabilities associated with employee separations and contract
terminations. Costs and liabilities associated with enhanced pension benefits for
all Reserve Banks are recorded on the books of the FRBNY as discussed in footnote 8 and those associated with the Bank’s enhanced postretirement benefits are
disclosed in footnote 9.

4. U.S. Government and Federal Agency 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. The settlement, performed in April of each
year, equalizes Reserve Bank gold certificate holdings to Federal Reserve notes
outstanding. The Bank’s allocated share of SOMA balances was approximately
3.126 percent and 3.845 percent at December 31, 2003 and 2002, respectively.
The Bank’s allocated share of securities held in the SOMA at
December 31, that were bought outright, was as follows (in millions):
2003
Par value:
U.S. government:
Bills
Notes
Bonds
Total par value
Unamortized premiums
Unaccreted discounts
Total allocated to Bank

2002

7,654
10,110
3,079

$ 8,717
11,455
4,031

20,843

24,203

306
(28)
$ 21,121

414
(41)
$ 24,576

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
The total of SOMA securities bought outright was $675,569 million and
$639,125 million at December 31, 2003 and 2002, respectively.
As noted in footnote 3, the FRBNY replaced MSP transactions with
securities sold under agreements to repurchase in December 2002. At
December 31, 2003 and 2002, securities sold under agreements to repurchase
with a contract amount of $25,652 million and $21,091 million, respectively,
were outstanding, of which $802 million and $811 million were allocated to the
Bank. At December 31, 2003 and 2002, securities sold under agreements to
repurchase with a par value of $25,658 million and $21,098 million, respectively,
were outstanding, of which $802 million and $811 million were allocated to the
Bank.
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, 2003, was as follows (in millions):

Maturities of Securities Held
Within 15 days
16 to 90 days
91 days to 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Over 10 years
Total

U.S. Government
Securities
(Par value)

Securities Sold
Under Agreements
to Repurchase
(Contract amount)

$ 1,492
4,357
5,130
5,848
1,604
2,412

802
-

$ 20,843

802

At December 31, 2003 and 2002, U.S. government securities with par
values of $4,426 million and $1,841 million, respectively, were loaned from the
SOMA, of which $138 million and $71 million were allocated to the Bank.

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

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
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 2.778 percent and 3.015
percent at December 31, 2003 and 2002, 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):
2003
European Union Euro:
Foreign currency deposits
Government debt instruments including
agreements to resell

Japanese Yen:
Foreign currency deposits
Government debt instruments including
agreements to resell
Accrued interest
Total

2002

191

168

114

204

186

552

510

Total investments denominated in foreign currencies were $19,868 million
and $16,913 million at December 31, 2003 and 2002, respectively.
The maturity distribution of investments denominated in foreign
currencies which were allocated to the Bank at December 31, 2003, was as
follows (in millions):
Maturities of Investments Denominated in Foreign Currencies

Within 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Total

507
36
9

552

At December 31, 2003 and 2002, there were no outstanding F/X swaps
or material open foreign exchange contracts.
At December 31, 2003 and 2002, the warehousing facility was $5,000
million, with no balance outstanding.

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
6. Bank Premises, Equipment, and Software
A summary of Bank premises and equipment at December 31 is as follows
(in millions):
2003
Bank premises and equipment:
Land
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment
Subtotal

2002

3
72
11
1
71

3
66
11
1
64

158

145

Accumulated depreciation

(78)

(72)

Bank premises and equipment, net

Depreciation expense, for the years ended

The Bank leases unused space to an outside tenant. This lease has a
term of 2 years. Rental income from such lease was $1 million for both years
ended December 31, 2003 and 2002. Future minimum lease payments under the
noncancelable agreement in existence at December 31, 2003, were $2 million for
years 2004 through 2005.
The Bank has capitalized software assets, net of amortization, of $6
million and $5 million at December 31, 2003 and 2002, respectively. Amortization
expense was $1 million for both years ended December 31, 2003 and 2002.
A software asset was impaired as a result of the decision to standardize
check processing in the System. Asset impairment losses of $1 million were
reported as a component of “Other expenses” for the period ending December
31, 2003.

7. Commitments and Contingencies
At December 31, 2003, the Bank was obligated under noncancelable
leases for premises and equipment with terms ranging from one to approximately
3 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

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
$1 million for both years ended December 31, 2003 and 2002, respectively.
Certain of the Bank’s leases have options to renew. The Bank has no capital
leases.
Future minimum rental payments under noncancelable operating leases
with terms of one year or more, at December 31, 2003, were $540 thousand,
$360 thousand, and $70 thousand for the years 2004, 2005, and 2006,
respectively.
At December 31, 2003, the Bank has no other commitments and longterm obligations in excess of one year.
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 paidin 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, 2003 or 2002.
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.

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, 2003 and 2002, 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

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
Bank’s Thrift Plan contributions totaled $3 million for both years ended December
31, 2003 and 2002, respectively, and are reported as a component of “Salaries
and other benefits.”

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):
2003

2002

Accumulated postretirement benefit obligation
at January 1 $
Service cost-benefits earned during the period
Interest cost of accumulated benefit obligation
Actuarial loss (gain)
Contributions by plan participants
Benefits paid
Plan amendments

35.1
0.9
2.7
13.3
0.5
(2.1)
-

$ 37.2
0.7
2.2
(2.6)
0.2
(2.4)
(0.2)

Accumulated postretirement benefit obligation
at December 31$

50.4

$ 35.1

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
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):
2003

2002

Fair value of plan assets at January 1
Actual return on plan assets
Contributions by the employer
Contributions by plan participants
Benefits paid

1.6
0.5
(2.1)

2.2
0.2
(2.4)

Fair value of plan assets at December 31

Unfunded postretirement benefit obligation
Unrecognized prior service cost
Unrecognized net actuarial loss

50.4
12.4
(19.0)

35.1
14.3
(6.2)

Accrued postretirement benefit costs

43.8

43.2

Accrued postretirement benefit costs are reported as a component of
“Accrued benefit costs.”
At December 31, 2003 and 2002, the weighted average discount rate assumptions used in developing the benefit obligation were 6.25 percent and 6.75
percent, respectively.
For measurement purposes, a 10.00 percent annual rate of increase in
the cost of covered health care benefits was assumed for 2004. Ultimately, the
health care cost trend rate is expected to decrease gradually to 5.00 percent by
2011 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects for the year
ended December 31, 2003 (in millions):
One Percentage
Point Increase
Effect on aggregate of service and interest
cost components of net periodic
postretirement benefit costs
Effect on accumulated postretirement
benefit obligation

0.2
2.5

One Percentage
Point Decrease

0.4
4.0

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements
The following is a summary of the components of net periodic postretirement benefit costs for the years ended December 31 (in millions):
2003

2002

Service cost-benefits earned during the period
Interest cost of accumulated benefit obligation
Amortization of prior service cost
Recognized net actuarial loss

0.9
2.7
(1.9)
0.5

0.7
2.2
(1.9)
0.1

Net periodic postretirement benefit costs

2.2

1.1

Net periodic postretirement benefit costs are reported as a component of
“Salaries and other benefits.”
The recognition of a special termination loss is the result of enhanced
retirement benefits provided to employees during the restructuring described in
footnote 10. Because the special termination loss is less than $50 thousand, the
amount is not displayed in the tables above.
Following the guidance of the Financial Accounting Standards Board, the
Bank elected to defer recognition of the financial effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 until further guidance is
issued. Neither the accumulated postretirement benefit obligation at December
31, 2003 nor the net periodic postretirement benefit cost for the year then ended
reflect the effect of the Act on the plan.
Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined and include the cost of medical and dental insurance, survivor income, and disability benefits. Costs were
projected using the same discount rate and health care trend rates as were used
for projecting postretirement costs. The accrued postemployment benefit costs
recognized by the Bank at December 31, 2003 and 2002 were $8 million and $7
million, respectively. This cost is included as a component of “Accrued benefit
costs.” Net periodic postemployment benefit costs included in 2003 and 2002
operating expenses were $1 million for both years.

10. Business Restructuring Charges and
Asset Impairments
In 2003, the System announced plans for consolidation and restructuring
to streamline operations and reduce costs, including consolidation of operations
and staff reductions in various functions of several Banks. The Bank’s
restructuring costs associated with the restructuring are not material.

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elements.
The virtual tour even lets you sample certain interactive features of the exhibit. With a click of your mouse,
you can answer questions testing your knowledge of
central banking or learn more about economic indicators.
You can also explore the history of currency in America as
you examine the Bank’s own collection of rare and valuable
coins and paper notes.

KEY FEDERAL RESERVE
BANK OF PHILADELPHIA
PHONE NUMBERS
Customer Relations
1-877-574-1776
Community Affairs
215-574-6458
Financial Statistics/
Regulatory Reporting
215-574-6455
Human Resources
215-574-6150
Library & Research Center
215-574-6540
Payment Cards Center
215-574-7110
Public Affairs
215-574-6113
Research
215-574-6448
Supervision, Regulation and Credit
215-574-6480
Consumer Complaints
1-800-372-1220
Treasury Services
215-574-4332

Explore Money in Motion online today!

Full text of Annual Report of the Federal Reserve Bank of Philadelphia : Putting Money in Motion: Telling Our Story : 2003 Annual Report

FRASER