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Head Office 230 South LaSalle Street P.O. Box 834 Chicago, Illinois 60690-0834 (312) 322-5322 Detroit Branch 160 West Fort Street P.O. Box 1059 Detroit, Michigan 48231-1059 (313) 961-6880 Des Moines Office 2200 Rittenhouse Street Suite 150 Des Moines, Iowa 50321 (515) 256-6100 Midway Facility 4944 West 73rd Street Bedford Park, Illinois 60638 (708) 924-8900  Federal Reserve Bank of Chicago 2004 Annual Report  F R B C 2004 AN N UAL R E PO RT  ............................................................................... MESSAGE FROM THE PRESIDENT  ............................................................................... With a mandate to promote maximum sustainable economic grow th as well as st able pr ice s, Fed policym aker s must be constantly v igilant. When the economy gathers strength and overcome s a ‘s oft p atch’ or rece s sion, inf l at ion concer ns CONTENTS  typically become more pressing. Such was the case in 2004.  ................................ Message from the President  p. 1  The economy entered the year  was no longer necessary.  Chicago Fed Highlights of 2004  p. 4  with significant momentum,  As a result, the FOMC  Community Banks at Their Best  p. 7  thanks in part to a highly  began to remove its policy  accommodative monetary  accommodation. Beginning  Directors  p. 1 6  policy put in place to help  in June 2004, we increased  Management Committee  p. 1 8  foster a recover y from the  our target for the federal  Executive Officers  p. 1 9  2001 recession. With this  funds rate from 1 percent  Advisory Councils  p. 2 0  momentum, the economy’s  and eventually pushed the  Executive Changes  p. 2 1  vitality spread into areas  rate to 2.75 percent in  Operations Volumes  p. 2 2  that had str uggled in  March 2005.  Auditor Independence  p. 2 3  2004 Financial Reports  p. 2 4  2004 Financial Statements  p. 2 7  Notes to Financial Statements  p. 3 0  Even  the previous two years –  w ith  tighter  specifically the manufactur-  monetary policy, the econ-  ing sector and labor markets.  omy continued to expand  With that in mind,  in 2004. Manufacturing  the Federal Open Market  production grew at the  Committee (FOMC) during  fastest rate in five years,  2004 sharpened its focus  and payroll employment  on inflation. Prices for  increased in all 12 months  many commodities increased  of the year for the first time  during most of the year, but  since 1999. By early 2005,  none drew as widespread  both  attention as oil prices. The  employment surpassed the  price for a barrel of West Texas Intermediate crude (the bellwether of energy prices) topped $55 in October – well  production  and  level of their previous peaks, a sure sign that the economy had shifted from recover y mode to expansion.  above the $30 average that persisted between 2000 and 2002. As 2004 progressed, core inflation measures moved  Community Banks Play Important Role  up from the extremely low rates in late 2003.  in Regional Economy  Even though the uptick in inflation was widely viewed  In this year’s annual report, we are taking a close look at  as temporar y and inf lation expectations remained  community banking. Because of the services they provide  contained, it became clear that the highly accommodative  small businesses, farms and households, community banks  monetary policy that had been needed earlier in the recovery  play an important role in the economy of the Seventh  p. 1  Message from the President  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  Federal Reserve District (Iowa and most of Illinois,  Message from the President  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  The Omaha check-processing office closed in April of  tight deadline and technology challenges, the CRSO rolled  Indiana, Wisconsin and Michigan). We’re home to more  2004, with the Chicago Fed’s Des Moines office picking  out Fedline Advantage, which allows customers to conduct  community banks than any of the other 11 Fed districts.  up the volume.  high-value, high-risk transactions securely v ia the Web.  ●  In July of 2004, the Chicago Fed’s Milwaukee office  In Supervision & Regulation (S&R), Senior Vice  look at the current state of community banks in the U.S. It  closed. Those checks transferred to the Chicago Midway  President Cathy Lemieux was promoted in November to lead  explains why community banks are unique, documents the  office, where we expanded our capacity to handle  the department. Throughout the year, S&R continued to  An essay starting on page 7 offers a comprehensive  ●  additional volume.  reasons for their declining numbers in recent years, and offers a perspective  Non-Cash Payments in 2000 and 2003 ●  on what they must do to be competitive  closed its Peoria office in central  mov ing for ward. The conclusion  Illinois, with that volume shifting  2000  is that in a constantly changing environment, with fierce competition from a wide variety of other financial  The Chicago Fed in October of 2004  to the Chicago Midway office. Check 57%  Credit Card 22%  ●  services providers, those community banks that are well-run and efficiently managed will not only sur v ive,  ACH 9%  but thrive.  Offline Debit 7% Online Debit 4%  Electronic Payment Growth Forces Check-Processing  EBT 1%  Consolidations  ●  2003  payments. Consumers continue to move  Credit Card 23%  Department had more  the Cincinnati office.  articles (21) selected to  In addition, checks being processed  be included in scholarly  at our Detroit branch are slated to  publications than in any  transfer in mid-April of 2005 to  of the 10 years I have  the Cleveland office.  been at the Bank.  Despite this much restructuring,  have gone very well. Our checkprocessing operations are now more efficient, with costs more in line  electronic payment transactions in  with revenue. Our Chicago Midway office is processing roughly 3 million  2003 exceeded check payments for the  checks a day. Overall, more than 2  first time. Between 2000 and 2003,  billion checks were processed in the  check payments declined an average of 4.3 percent, while electronic payment  EBT 1%  transactions jumped an average of 13.2 percent.  Offline Debit 13% Online Debit 7%  Source: 2004 Federal Reserve Payments Study  Seventh District in 2004, with the Check Department achieving local net revenue financial targets. We will monitor trends in the payments industry, and we’re confident  While the shift is beneficial to  Economic Research also had an outstanding year in its  2004, with that volume shifting to  at right). A recent Federal Reserve payment study confirms that U.S.  community banks.  development of informed public policy. The Research  away from paper checks (See chart ACH 11%  reviews and also offered training to almost 600 directors of  office also closed in October of  I’m pleased to say the consolidations Check 45%  roughly 1,100 examinations, inspections and off-site  effort to produce innovative research that leads to the  quality check services to our customers.  is the continued growth of electronic  identification, analysis and resolution. We carried out  The Chicago Fed’s Indianapolis  our staff continued to provide highAnother issue we’re watching closely  improve its risk assessment process by focusing on risk  the payment system, it has had a profound impact on our  we are structured to provide efficient, high-quality service  check-processing operations. We are consolidating Federal  for years to come.  Thanks to our Directors Commitment is also a good word to use when discussing the two teams of directors who provide us with perspective, guidance and counsel. I’d specifically like to thank the directors who retired at the end of 2004: James H. Keyes and Alan R. Tubbs from the Chicago board and Robert E. Churchill from the Detroit board. Their contributions are very much appreciated. In 2005, we welcomed three new members to our boards. Joining our Chicago board are Mindy C. Meads, CEO of Lands’ End, Inc. and executive vice president at Sears, Roebuck and Co., and Jeff Plagge, president and CEO of The First National Bank of Waverly in Waverly, Iowa; president of the First of Waverly Corporation; and CEO of the First National Bank of Cedar Falls and First Insurance Services. Joining the Detroit board  Work was also com-  is Michael M. Magee, Jr.,  pleted at our downtown  president and CEO of  Chicago headquarters  Independent Bank Corp-  on a comprehensive set  oration in Ionia, Michigan.  of building improvements  I am personally  to enhance security and  ver y thankful for the  ensure employee safety. A model of the new Detroit Branch currently under construction and slated to open in January.  In addition, progress  continued on construction of our new Detroit Branch building (See photo), slated to open in January 2006 with improved security and an expanded, state-of-the-art cash vault. Looking at operations across the board, support and  contr ibutions of our directors. With their hard  work and that of our staff, we are well positioned to continue our efforts in 2005 to foster a strong economy and a stable payment system.  overhead costs in the Seventh District were 10% below budget in 2004 without impacting service levels or incurring any undue risk. We also made significant progress in enhancing internal controls. These are just a few of our 2004 highlights. I inv ite you to look over a more comprehensive listing starting on the next page. These would not have been possible  Reserve check-processing facilities across the country. By  without the dedicated commitment of our staff members  Michael H. Moskow  Other 2004 Accomplishments  who remained productive and focused through a  President and Chief Executive Officer  have decreased from 45 to 23. Of all the restructuring  Other notable accomplishments in 2004 include the work  challenging year.  April 1, 2005  throughout the Federal Reserve System, the most took  of our Customer Relations and Support Office (CRSO),  place in the Seventh District. For example:  which serves the entire Federal Reserve System. Despite a  early next year, the number of check-processing sites will  p. 2  p. 3  F R B C 2004 AN N UAL R E PO RT  Chicago Fed Highlights of 2004  F R B C 2004 AN N UAL R E PO RT  .................................................................................... .................................................................................... CHICAGO FED HIGHLIGHTS OF 2004  1  2  3  First Quarter  Second Quarter  ●  Supervision and Regulation starts a successful year in which roughly 1,100 examinations, inspections and off-site rev iews were conducted.  ●  Supervision and Regulation continues efforts to improve its risk assessment process focusing on risk identification, analysis and resolution.  ●  Groundbreaking is held at the site of the Bank’s new Detroit Branch building, which is slated to open in Januar y 2006.  ●  Chicago Fed President Michael Moskow appears on CNBC-T V’s Squawk Box, one of his more than 25 public appearances in 2004 to discuss banking and economic issues.  ●  ●  ●  A new and improved Web site offers users more efficient access to Chicago Fed infor mation. The Bank and Junior Achievement host a jobshadow day for high school students, one of numerous volunteer activ ities for employees throughout the year. The Cash Department kicks off a year in which operational perfor mance is improved and inter nal controls enhanced.  ●  Significant progress is made during the year toward implementing a comprehensive risk management framework and strengthening inter nal controls.  ●  ●  ●  ●  The Bank hosts its 40th annual Conference on Bank Structure and Competition. Titled, How Do Banks Compete? Strategy, Regulation, and Technolog y, it is one of 29 research and public policy conferences conducted throughout the year. (1) Supervision and Regulation starts community bank director training sessions throughout the Seventh District. During the year, more than 600 directors are educated about regulator y compliance and other super v isor y issues. The Bank sponsors a Money Smart Week in both Chicago and Detroit to infor m consumers about managing their personal finances. A public hearing takes place at the Chicago Fed on the proposed merger of Bank One and J.P. Morgan Chase & Co.  4  5  6  Third Quarter  Fourth Quarter  ●  Roughly 70 leaders from across the Federal Reser ve System attend the first segment of a two-part Senior Leadership Conference sponsored by the Chicago Fed.  ●  Work continues at Chicago headquarters on a comprehensive set of building improvements carried out throughout the year to enhance security and ensure employee safety. (2)  ●  Economist Bhashkar Mazumder examines sibling similarities, differences and economic inequality in one of 30 working papers published by Economic Research during the year.  ●  As part of a national consolidation of checkprocessing facilities, the Omaha check-processing office closes, with volume shifting to the Chicago Fed’s Des Moines office.  ●  As part of a national consolidation of checkprocessing facilities, the Milwaukee office closes, with volume shifting to the Chicago Midway office. Construction at Midway is completed to make room for additional processing equipment.  ●  Redesigned $50 bills, containing enhanced security features, are distributed to financial institutions. (5)  ●  ●  People Practices’ Gene Mysliwiec, the Bank’s longest-tenured staff member, retires after 49 years of ser v ice. Staff celebrates the 90th anniversar y of the Bank’s incorporation. Later in the year, the Chicago Fed celebrates the 90th anniversar y of when it opened for business. (4)  p. 4  ●  Work progresses on management of the Federal Reser ve’s national financial services marketing efforts being centralized in the Bank’s Customer Relations and Support Office, improv ing effectiveness and reducing costs.  p. 5  ●  ●  The Bank’s Customer Relations and Support Office introduces Fedline Advantage – enhanced Web technology offering financial institutions more efficient ways to use critical payments ser v ices such as Fedwire Funds, Fedwire Securities and FedACH.  ●  Part of a national consolidation of check-processing facilities, the Peoria and Indianapolis offices close, with volume shifting to the Chicago Midway and Cincinnati offices respectively.  Students from St. Charles North High School in St. Charles, Illinois tour the Bank’s Visitors Center, part of a record 21,000 who v isited the center in 2004.  ●  Throughout the year, Economic Research publishes 16 articles in the Bank’s Economic Perspectives, 12 issues of Chicago Fed Letter, seven special editions of Chicago Fed Letter, four issues of AgLetter, and monthly editions of the CFNAI and CFMMI data releases. (6)  ●  More than 2 billion checks are processed in the Seventh District throughout the year, with the Check department achiev ing local net revenue financial targets.  ●  Economic Research hosts its seventh annual International Finance and Economics Conference, Systemic Financial Crises: Resolving Bank Insolvencies.  ●  Support and overhead costs in the Seventh District drop 10 percent in 2004 without impacting ser v ice levels or incurring any undue risk.  ●  New Check 21 legislation takes effect, with the Fed educating customers and offering related products and ser v ices. (3)  ●  Throughout the year, Economic Research has 21 papers accepted for publication in scholarly jour nals.  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  COMMUNITY BANKS AT THEIR BEST Serving Local Financial Needs  ............................................................................... As the population of community banks continues to decline, some worr y that this most traditional of U.S. financial institutions might no longer be v iable. But a careful look at the data doesn’t square with a path to extinction. Instead, the evidence suggests a process of natural selection in which well-run community banks will thrive. By Robert DeYoung Senior Economist and Economic Advisor  Large banks are everywhere. You’ve paid them more attention lately, especially since they set up shop in your town by buying local banks and changing the signs. They advertise during all the football games you watch on television, and some of the arenas are even named after them. And they always seem to be opening new branches – near your office, in your supermarket, and next to your shopping mall. In fact, following the lead of several tony Chicago suburbs, your town council is considering an ordinance that would ban any new bank branches from opening on Main Street. But there are still small banks in your town. One community bank has been there as long as you can remember. You don’t need a TV commercial to remind you, because you’ve driven or walked past it nearly every day of your life. It’s where your parents took you to open your first savings account, and where you received the mortgage to buy your first home. It finances your neighbor’s business and your brother’s farm, and it manages your parents’ retirement investments. No one would dream of banning this bank from Main Street.  p. 7  C o m mu n i t y B a n k s a t T h e i r B e s t  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  What is a Community Bank? The word “community” infers a smallness and a connectedness – but a separateness as well. From Webster’s Dictionar y, a community is “a group of people with a  C o m mu n i t y B a n k s a t T h e i r B e s t  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  common characteristics, their financial needs can differ  as community banks – and unlike community banks, it  Wisconsin and Michigan) is one of 12 Federal Reserve  from each other in subtle ways. A community bank prospers  uses these assets to generate fee income (origination fees,  Districts, but it is currently home to about one in every six  by focusing on the differences of customers within these  servicing fees) rather than interest income, eventually selling  community banks. But the trend of reduction here has  towns, suburbs, and neighborhoods.  off these loans rather than holding them as investments.  been just as strong – the number of community banks in  common characteristic or interest living together within a  On a dollar-for-dollar basis, community banks make  Compared with community banks, large banks are four  the Seventh District has fallen from about 2,600 in 1985 to  larger society.” Community banks serve the financial needs  nearly three times as many small business loans as the typical  times as likely to finance their investments with overnight  only about 1,300 today.  of community residents – local businesses and households  large banking company, and they rely more than twice as  funds, are more than twice as reliant on fee income, and  – so that they can make their own unique contributions to  much on small deposit accounts for funding. These are  the larger economy.  long-run economic relationships – community banks do  A community bank is a nexus of financial, human,  not sell-off the loans they make to local businesses, and  and social capital not easily described in purely quantitative  they consider their depositors to be permanent customers,  terms. Chiefly important is its local focus. Its owners and  not just sources of funds. To make this banking approach  its managers have a personal economic stake in the local  work, community bankers invest in a portfolio of local  spend three times more on advertising and marketing. This mass retail strategy – similar to that used for  do these numbers imply for the financial viability of the  decades by non-financial consumer product companies –  community bank business model? The most illuminating  has only recently become accessible to banking companies,  way to approach these questions, perhaps, is not to ask  due to deregulation and innovations in financial markets  why so many community banks disappeared in recent years  and information processing. It is a remarkably efficient  – but rather, why were there so many community banks in  A Declining Community Bank Population  halt if it tries to account for the  A Less Hospitable  differences among indiv idual  Averages in 2003 for medium-sized community banks (assets between $100 and $500 million) and large commercial banks (assets greater than $10 billion)  Landscape  customers.  Medium community banks Large banks  Advertising spending per $100 of assets  the U.S. in the first place?  approach to providing financial services, but it can grind to a  Two Very Different Business Models for Large Banks and Medium-Sized Community Banks  Why has the number of community banks plummeted? And are these trends likely to continue? More directly, what  Number of community banks in U. S. (left)  A Shrinking Population of 16,000  Community Banks  The U.S. is a vast nation, with  Number of community banks in 7th District (right)  clusters of economic activ ity 4,000  spaces. And America has a long  Core deposits per 10 ¢ of assets  A general rule of thumb defines Overnight funding per $1 of assets  community banks as those with  Fee income per $1 of assets  less than $1 billion in assets.  12,000  3,000  8,000  2,000  such community commercial  4,000  1,000  (Cents) 0¢ 2  4  6  8  account for about 95% of the total  10 12 14 16 18 20  number of U.S. commercial banks.  the powers held by the 50 state governments to grant local banking charters. In such a world – especially before advances in information  banks in the U.S. today, and they  Consumer loans per $1 of assets  history of local political and economic control – as evidenced by  There are approximately 7,000 Small business loans per $1 of assets  separated by wide geographic  0  0 1985 1990 1995  2000  2003  and communications technologies allowed financial information to travel instantly across these wide  This is a substantial number  spaces – it is not surprising that  of banks: approximately one economy. Its competitive advantage derives directly from  information – gathered by living in these neighborhoods,  community bank for every 40,000 U.S. citizens, a much  the economic infrastructures in the U.S. would in many  its first-hand knowledge of the people, businesses, and  frequenting the local businesses, and participating in  higher multiple than in most other western economies. But  ways be local ones, and would feature large numbers of  institutions driving the local economy.  community events and institutions – and this information  compared with our recent past, this is a very small number  community banks.  allows them to better understand the idiosyncratic financial  of community banks: The population of U.S. community  Federal and state regulations traditionally protected  needs of their customers.  banks has been cut in half since 1985, when they numbered  these local financial institutions from competition. The  To some, the community bank is a manifestation of the Jeffersonian ideal of local economic power, self-employment, and reinvesting local savings in local businesses. In less  By contrast, large retail banking companies are  nearly 14,000. This huge decline would be a small issue if  McFadden Act of 1927 prohibited rival banking companies  grand terms, community banks meet the financial needs of  high-volume operations that focus on the similarities of  community banks’ market share had held steady, but it has  from crossing state borders to compete with one another,  local business people, greet their depositors by name, and  customers across towns, suburbs, and neighborhoods.  not. The share of U.S. banking assets held by community  and in many states banks were prohibited from crossing  carry a more-than-fair share of civic responsibilities.  Economies of scale allow large banks to efficiently market,  banks has declined in near lockstep with their dropping  even county borders. The Federal Reserve’s Regulation Q  The customers served by community banks typically  produce, and distribute standardized financial services –  numbers, from slightly more than 30% in the mid-1980s to  limited the rates that banks could pay to attract depositors,  share a common geography – a suburban town, a rural  such as credit cards, securitized home mortgages, retail  only about 15% today.  further reducing competition. And the Glass-Steagall Act of  county, or an urban neighborhood. Because these communities  stock brokerage, and widespread ATM access – to banking  tend to be small in economic terms, so too are the community  customers across multiple towns, cities, and states.  Here in the upper Midwest, economic and regulatory  1933 prohibited commercial banks from engaging in  conditions have traditionally been ver y hospitable for  the activ ities of investment banks, securities fir ms, and  banks that serve them. But although the households and  Even after adjusting for bank size, the typical large  community banks. For instance, the Seventh Federal  insurance companies (and vice versa), further insulating  businesses in these communities share a number of  banking company holds twice as many consumer loans  Reserve District (all of Iowa and most of Illinois, Indiana,  commercial banks from competition.  p. 8  p. 9  C o m mu n i t y B a n k s a t T h e i r B e s t  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  In terms of size, community banks are trifling compared with regional, super-regional, and nationwide banking companies. The largest U.S. banking company, the Or alternatively, they could choose to earn satisfactory Bank of America, has well over $1 trillion in assets. Those profits and simply lead a quiet life. twelve zeros make it one thousand times larger than the This environment kept the price of financial services biggest community banks of about $1 billion! What if we use artificially high, reduced banks’ incentives to innovate, and a less extreme benchmark, say, the typical regional banking bred a population of community bankers largely inexperienced company with about $50 billion in assets? The biggest with competitive rivalry. When state and federal regulatory community banks are still only about one-fiftieth this size. protections were dismantled in the 1980s and 1990s, There is wide agreement among banking economists community banks began to disappear. Aggressive banking that community banks’ small size puts them at a cost companies starved for growth began to move across state disadvantage relative to their large bank rivals. Scale borders, and the fastest channel for growth was to acquire economies – that is, the reduction in existing community banks. unit costs that a bank captures by Inefficient and poorly run comCommunity Banks Have Been Losing growing larger – are difficult to munity banks made especially Asset Market Share to Large Banks measure exactly for commercial attractive acquisition candidates. If for Two Decades banks. However, there is general a community bank could not flourish agreement that scale economies have under the new competitive conditions, a strong cost-reducing effect for small U.S. market share of it could be purchased for a relatively banks and that scale economies largest 25 banks low price. As an economist would say, continue to generate cost reductions U.S. market share of these banks had a low opportunity community banks for banks with well in excess of $1 50% cost for their capital. Consistent with billion of assets. this, about 95% of the nearly 1,500 40% Size clearly makes a difference. commercial banks that failed during Large banks can operate with less 30% the 1980s and 1990s have been capital because they are well-divercommunity banks, further testimony 20% sified, and their large size and high to the inefficiencies bred by years of profile gives them access to low-cost 10% regulatory protection. sources of equity and debt financing. Viewed in this historical context, 0% Large banks can offer a wider set of the recent decline in the number financial services than community 1985 1990 1995 2000 2003 and market share of community banks – from a full menu of investment banks isn’t necessarily a sign that and insurance products for housecommunity banks can’t be competitive holds to the risk management tools in the future – instead, these changes may simply mark a and investment banking ser v ices demanded by large transformation to a new industry equilibrium. Artificial corporate clients. Large banks can access mass marketing regulatory barriers had supported an over-populated and channels to reach households in multiple geographic markets, use in-house research and development to develop proprietary inefficient community banking sector, and removing those financial products, and reap “convenience dividends” from barriers is allowing the industry to move toward a more their widespread systems of branches and ATMs. ‘normal’ and efficient structure. But size is not everything. For many community banks, research has shown again and again that the largest David and Goliath? source of cost disadvantages is not small scale, but oldIs this process of industry consolidation drawing to a close, fashioned cost inefficiency – this is, most community or is there still a substantial number of community banks banks simply use more inputs (labor, branches, deposits) left to disappear? How do existing community banks – than necessary relative to best-practices community banks. those that have so far survived the consolidation process – As in any industry, poorly managed, high-cost firms will stack up against their larger bank rivals? earn low returns and are unlikely to survive in the long-run.  C o m mu n i t y B a n k s a t T h e i r B e s t  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  This was a fabulous world for community bankers.  Large size can make surprisingly little difference when  Protected from competition, they could earn strong profits.  it comes to using high-tech banking tools. For example, the  p. 1 0  hardware and software needed to provide Internet banking, electronic bill-pay, check imaging, retail portfolio analysis, and loan scoring are increasingly available to small banks at competitive prices. Moreover, the relationship mentality and non-bureaucratic nature of community banks can in many instances allow them to deploy these tools more quickly and more effectively than large banks.  to produce portfolios of loans that are relatively similar in terms, conditions, and credit quality across borrowers. This homogeneity allows banks to re-package large volumes of these loans as asset-backed securities and sell these securities to investors. The financial proceeds can be plowed back into more lending, allowing already large banks to further increase their scale of operations without having to raise more capital. High-volume securitized lending has reduced the cost of  This brings us to a crucial strategic distinction:  producing loans, expanded households’ access to credit, and  By necessity, the decision-makers that run large organizations  supported macroeconomic growth by facilitating an historic number of home mortgage  must operate at a distance from their smaller customers. This distance tends to be reflected in the type of products  Most of the More Than 8,000 Bank Mergers Between 1986 and 2003 Involved at Least One Community Bank  and quality of ser v ice that large banks offer their retail and small business customers – and community banks can be  re-financings in recent years. But it has been a mixed blessing for large banking companies. As mortgages, auto loans, and  Community banks acquiring community banks (61%)  well positioned to exploit this.  Large banks acquiring community banks (33%) Large banks acquiring large banks (6%)  credit cards were turned into financial commodities, lenders lost their pricing power in these lending markets – in effect, a good portion of the cost sav-  Large Banks:  ings from automated lending  High Volume, Low Cost  processes is offset by lower lending rates in fiercely com-  To service tens of thousands of  petitive commoditized markets.  separate retail accounts, large  Despite the pressure on  banks rely on automated inter-  profit margins, this approach  faces rather than in-person contact. On the deposit side,  has proven to be a profitable one  large banks encourage their  for large retail banking compa-  customers to use the Internet,  nies. The keys to a successful  ATMs, remote call centers, and  high-volume, low-cost retail  other electronic channels rather  banking strategy seem to be  than visiting human tellers at  continued expansion to achieve  bank branches. On the lending side, large banks use  further scale and network economies, strong managerial  automated credit scoring models to screen applications for  oversight that holds the line on operating expenses, and  credit cards, auto loans, home mortgages, and increasingly  establishment of a brand image that helps support prices.  for very small business credit lines.  Large banks that cannot do these things successfully tend  Because these automated processes exhibit substantial scale economies, they provide powerful cost advantages for  to become acquisition targets for other large banks seeking to grow.  large banking companies. But the widespread use of these automated processes at large banks has had an additional effect: It has turned traditional banking products into financial commodities. The commoditization of retail banking has important strategic consequences for large and small banks. For example, mortgage lenders can use credit scoring models  p. 1 1  Community Banks: Low Volume, High Quality In contrast to their large bank rivals, community banks are low-volume, high-quality competitors. They eschew mass production and mass marketing, and instead target individual retail and small business customers who need  C o m mu n i t y B a n k s a t T h e i r B e s t  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  customized financial products and desire in-person attention  can lead naturally to the sale of fee-based products – like  – and are willing to pay a premium for these services.  cash management services to business customers or retirement  Relationship banking bonds the community bank to its  planning to household customers – without expensive  customers. The most celebrated relationship-based product  marketing campaigns. If community banks are run well,  is the small business loan. Locally focused community banks  high interest margins and cross-selling opportunities can  have a clear advantage at assessing the creditworthiness,  offset the cost disadvantages of small size.  and monitoring the ongoing condition, of small and medium-  There are other indicators that relationship-based  sized businesses. These loans are customized to reflect the  banking services are in strong demand in local markets.  idiosyncrasies of these borrowers, and cannot be ‘put in a  When a large banking company expands by purchasing a  box’ for credit-scoring and securitization.  local community bank, it is not unusual for 10 percent (or  The low-volume, high-quality strategy is practiced on  more) of the purchased bank’s depositors to move their  the deposit side as well. At a well-run community bank,  accounts to a competing community bank. And there are  business and household depositors can bank at an ATM,  hundreds of community bank start-ups in the U.S. each  over the telephone, or on the Internet. But unlike large  year. More often than not, these brand new banks choose  banking companies that offer their customers cash incentives  cities and towns where large out-of-state banking companies  to use these automated banking channels, community banks encourage their deposit customers  have recently acquired local banks.  Community Banks Earn Higher Interest Margins, But Have to Pay Higher Overhead Expenses  L arge  to v isit the bank for  altered their expansion  personal service.  congenital tendency to make investments in the local community, by  strategies, entering new  Medium-sized community banks Large banks  Community bankers have an almost  banking  companies have recently  markets by opening new branches rather than  Net interest margin per $1 of earning assets  purchasing existing local banks. This has  Non-interest expense per $10 of operating income  funding non-profit insti-  (Cents) 0 ¢  been especially true in 1  2  3  4  5  6  7  Chicago, where Bank  tutions and serving on  of America, Washington  a variety of boards and  Mutual, Fifth Third and  committees. Although  other large banking  these social investments are in many cases altruistic and  companies have opened hundreds of new branches in the  generate only non-monetary returns, these activities also  past several years. This is a telling change. Expansion via  tend to reinforce the bonds between community banks and  branching has become relatively cheaper in part because  their customers. There is a financial symbiosis between the  the price of acquiring the remaining stock of community  bank and its community – a sense that one cannot thrive  banks has increased – a signal that well-run community  without the success of the other. This contrasts with large  banking franchises located in attractive local markets have  banking companies that have an incentive to spend their  a strong economic future.  charitable dollars in big cities where the public relations benefits are larger, and whose managers often rotate through local branches on their way to branches in bigger cities.  Meeting the Challenges  Customers are clearly willing to pay a premium for  While local focus and strong customer relationships give  relationship banking. Community banks receive higher  community banks a powerful competitive advantage, it  interest rates from relationship borrowers, and pay lower  would be premature to conclude that the two-decades-long  interest rates to their core depositors. For example, in 2003  decline in the community banking sector has ended.  interest rate margins at community banks averaged about  Community banks are competing against rivals with  3.8%, substantially larger than the 3.2% margin earned by  increasingly strong competitive advantages of their own:  the typical large banking company. And strong relationships  credit unions with tax-advantaged status; large banking  p. 1 3  C o m mu n i t y B a n k s a t T h e i r B e s t  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  C o m mu n i t y B a n k s a t T h e i r B e s t  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  companies with size-based cost and marketing advantages;  generated a lower return-on-equity (ROE) than the average  investment, they want the bank to minimize its risk of failure  mostly be larger, and many will operate in more than one  and specialized non-bank financial institutions – mortgage  large banking company, and these earnings tended to be  by holding large amounts of capital, which naturally results  town or neighborhood.  brokers, stock brokers, financial advisors, insurance  unstable as well – high in some years, low in others. Such  in lower returns per dollar invested.  agents, finance companies – that can siphon-off community  a pattern of low returns, yet high-return volatility, does not  Nonetheless, the implications are clear. While  and their collective share of U.S. banking markets are not  bank customers product-by-product.  properly compensate bank owners for risk. Were it to persist  community banks won’t need to be nearly so large as their  the most important points. There is a more basic question:  in the long-run, bank owners would eventually re-allocate  multi-state rivals to be financially viable, it is important for  Is the locally focused, person-to-person banking approach  banks and consumer finance companies dominating consumer  their capital to more profitable investments – in other  community banks to achieve some modicum of scale  – that is, community banks at their best – valued in the  credit markets, community banks have increased their  words, their banks would become acquisition targets and  economies. And in the increasingly competitive financial  financial marketplace? The ev idence presented in this  concentrations of real estate loans, a sector in which managing  would disappear from the industry. But these studies also find that two broad classes of for small banks. As consumer payments continue to evolve community banks generate stronger financial returns: larger away from traditional paper-based checks, community community banks and well-managed community banks. As banks must embrace online billcommunity banks increase in pay, check imaging, and other size, they are able to exploit Community Banks’ Profitability Depends on new payments technologies, or economies of scale that drive Bank Size and Management Quality risk losing some of their highestdown per-unit costs and drive valued customers. In direct up profitability. Increased size competition with the securities also reduces income volatility. All large banks “ Best-practices” industr y for core household For community banks with at community banks deposits, community banks least $500 million in assets, “ Worst-practices” community banks must further enhance service returns-per-unit-of-risk were 20% quality and convenience, or comparable to those generated 16% else seek funding from other by very large commercial banks. Management quality (perhaps more expensive) 12% appears to make just as big a sources such as deposit brokers 8% difference. Dividing the popuand Federal Home Loan Bank lation of community banks advances. As large banks continue 4% into small, medium, and large to diversify into securities and 0% size classes, and then separating insurance activities, community Small All large Large Medium the banks in each of these size banks will have to forge partbanks community community community classes into high ROE (above banks banks banks nerships with retail brokerages median, or “best-practices”) and insurance companies to and low ROE (below median, provide their customers access or “worst-practices”) groups, the studies reveal some striking to a broader array of financial products. regularities. Although the smallest community banks face But the first and foremost challenge facing community some of the toughest challenges, the data suggest that wellbanks may be a “Goldilocks” problem. If a community bank managed community banks of all sizes can generate financial is too large, it can lose its local focus and hence its special returns quite comparable to those generated by the average relationships with local businesses and households. But if large commercial bank. a community bank is too small, it misses out on potential  marketplace, simply growing larger is not a cure-all: If a  essay strongly suggests that it is. A substantial portion of  credit risk and interest rate risk has historically been difficult  community bank is not well-managed, its chance of long-  community banks are profitable and growing, the market  run survival is diminished.  values of these community bank franchises are strong, and  scale economies, and its cost structure may be too high to  Apart from these considerations, some community  continue to separate the most efficient and progressive  remain profitable in a competitive marketplace. To remain  bank investors may be willing to accept a somewhat lower  banks from the field – large and small banks alike. The  financially viable over the long haul, a community bank  financial return on their investment. Part of their original  best-run community banks will continue to grow larger,  has to be “just right” in terms of size.  motive for investing in the community bank was non-pecuniary:  while the poorly run will continue to exit the market, with  Average Return on Equity in 2003  Competitive challenges abound. With large credit card  But ultimately the exact number of community banks  Indeed, the typical community bank has been getting  new community bank start-ups are typically being well-  larger. Today the average community bank has around $150  received in the wake of large bank mergers. Collectively,  million in assets, compared with about $100 million in  these obser vations indicate that many households and  1994 and about $70 million in 1984 (in 2004 dollars).  small businesses are willing to pay a premium for this  Much of this growth was achieved by taking a page from  approach to banking – an approach that large banking  the playbook of large banking companies and acquiring  companies find difficult to fully replicate.  nearby community banks. Moreover, about one-in-five  Undoubtedly, the future for community banks will  community banks is affiliated with a multi-community  continue to be fraught with challenges. But there is abundant  bank holding company organization. This allows these  evidence that well-run community banks can meet these  community banks to benefit from additional scale  challenges, and will continue to be a part of the local banking  economies like sharing back-office systems and raising capital  landscape. It appears that there will still be a community  in public markets, but preserves the advantages of local  bank on Main Street.  focus and local decision-making. The median multicommunity bank organization holds about $290 million in assets, and roughly three-out-of-ten hold more than $500 million in community banking assets.  A Promising Future for Well-Run Community Banks  Robert DeYoung is a senior economist and economic advisor in the Research Department at the Federal Reserve Bank of Chicago. DeYoung’s current  From a purely objective economic viewpoint, whether local  research focuses on the changing structure of domestic and international  markets are served by nationwide banks, regional banks or  banking markets and the performance of the financial institutions operating  community banks should make no difference. The structure  in those markets. His analysis and commentary on these and other issues  of the local banking industr y will be decided by local  have appeared in numerous academic journals and industry publications.  consumers and business people, who will reward the banking companies that provide them with the best quality financial  The information in all charts is from the author’s calculations based on  services at the lowest prices.  Federal Reserve Bank of Chicago data.  Although predicting the future can be a fool’s errand, the following scenario seems likely: Competitive forces will  Research performed at the Federal Reserve Bank of  They wished to support an institution that would reinforce  many being acquired by other community banks. As many  Chicago finds that a substantial portion of community  the financial and social fabric of their community. In addition,  as one-third to one-half of existing community banks may  banks have performed poorly in recent years. During the  these investors often have a large share of their wealth  yet disappear before the banking industry reaches a more  late 1990s and early 2000s, the average community bank  invested in the community bank. Because this is an illiquid  stable equilibrium; the remaining community banks will  p. 1 4  p. 1 5  The views expressed in this essay are the authors’ and are not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System.  F R B C 2004 AN N UAL R E PO RT  ............................................................................... BOARD of DIRECTORS  BOARD of DIRECTORS  FEDERAL RESERVE BANK of CHICAGO  Chair man W. James Farrell  Deputy Chair man Miles D. White  Chairman and Chief Executive Officer Illinois Tool Works, Inc. Glenview, Illinois  Chairman and Chief Executive Officer Abbott Laboratories Abbott Park, Illinois  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  John A. Canning, Jr.  Connie E. Evans  Chairman and CEO Madison Dearborn Partners, Inc. Chicago, Illinois  President and Chief Executive Officer WSEP Ventures Chicago, Illinois  Chair man Edsel B. Ford, II Director Ford Motor Company Dearborn, Michigan  ...............................................................................  DETROIT BRANCH  R alph W. Babb, Jr.  Robert E. Churchill  Chairman, President and Chief Executive Officer Comerica, Inc. Detroit, Michigan  Chairman and Chief Executive Officer Citizens National Bank Cheboygan, Michigan  ...............................................................................  Mark T. Gaffney  James H. Keyes  Michael L. Kubacki  William A. Osbor n  Alan R. Tubbs  Roger A. Cregg  Linda Likely  Ir v in D. Reid  Tommi A. White  President Michigan State AFL-CIO Lansing, Michigan  Former Chairman of the Board and Chief Executive Officer Johnson Controls, Inc. Milwaukee, Wisconsin  Chairman, President and Chief Executive Officer Lake City Bank and Lakeland Financial Corp. Warsaw, Indiana  Chairman and Chief Executive Officer Northern Trust Corp. and Northern Trust Co. Chicago, Illinois  President Maquoketa State Bank and Ohnward Bancshares Maquoketa, Iowa  Executive Vice President Pulte Homes, Inc. Bloomfield Hills, Michigan  Director of Housing and Community Development Community Development Department and Housing Commissions Kalamazoo, Michigan  President Wayne State University Detroit, Michigan  Chief Operating Officer Compuware Corporation Detroit, Michigan  ...............................................................................  ...............................................................................  One director joined the Detroit Branch Board in 2005: The new director is Michael M. Magee, Jr., President and Chief Executive Officer of Independent Bank Corporation, Ionia, Michigan. Magee replaces Robert E. Churchill.  Two directors joined the Chicago Board in 2005: The new directors are Mindy C. Meads, President and Chief Executive Officer, Lands’ End, Inc., Dodgeville, Wisconsin, and Jeff Plagge, President and Chief Executive Officer, The First National Bank of Waverly, Waverly, Iowa. Respectively, they replaced James H. Keyes and Alan R. Tubbs, who each completed six years of service.  p. 1 6  p. 1 7  F R B C 2004 AN N UAL R E PO RT  ............................................................................... MANAGEMENT COMMITTEE  F R B C 2004 AN N UAL R E PO RT  ............................................................................... EXECUTIVE OFFICERS  FEDERAL RESERVE BANK of CHICAGO  Michael H. Moskow President and Chief Executive Officer  Gordon Werkema First Vice President and Chief Operating Officer  ............................................................................... Central Bank Activities Economic Research and Programs Michael H. Moskow  Gordon Werkema  Richard P. Anstee*  William A. Barouski  Barbara D. Benson  President and Chief Executive Officer  First Vice President and Chief Operating Officer  Senior Vice President  Senior Vice President Customer Relations and Support Office (CRSO)  Senior Vice President Strategy, Finance and People Practices  ...............................................................................  Charles L. Evans Senior Vice President and Director of Research  William A. Testa Vice President and Economic Advisor  Margaret K. Koenigs  Catharine Lemieux  Senior Vice President and Director of Research  Senior Vice President Detroit Branch, Cash Operations and Corporate Communications  Senior Vice President and General Counsel Legal Relations, Office of the Directors and Enterprise Risk Management  Vice President and General Auditor  Senior Vice President Supervision and Regulation  ...............................................................................  Angela D. Robinson  Robert G. Wiley  Senior Vice President and EEO Officer Technology, Protection, Administration, Statistics  Senior Vice President Financial Services Group  Senior Vice President and Special Advisor to the President Edward J. Green (right) left the Bank in July to assume a teaching position at Pennsylvania State University in State College.  ...............................  * Richard P. Anstee retired on December 31, 2004. Although Anstee was in charge of Technology, Finance, Support Services and Corporate Communications for the majority of the year, his responsibilities transferred to other Management Committee members in October in anticipation of his retirement.  Accounting, Loans and Reserves  Midway Operations  Gerard J. Nick Vice President  Fedline for the Web Ira R. Zilist Vice President and Program Director  David Marshall Vice President and Economic Advisor  Financial Planning and Controls, Budget, Forecasting, Revenue Management  Spencer D. Krane Vice President and Economic Advisor  Microeconomic Policy Research  Richard D. Porter Vice President Thomas G. Ciesielski Vice President  Mary H. Sherburne Vice President, Midway Site Manager  Detroit Branch Operations, Cash Operations and Corporate Communications Glenn C. Hansen Senior Vice President  Jerome D. Nicolas Vice President  Corporate Communications  Support Functions  Margaret K. Koenigs Vice President and General Auditor  National Marketing and Communications  Technology, Protection, Administration, Statistics  Senior Vice President  Laura J. Hughes Vice President and Program Director  Angela D. Robinson Senior Vice President and EEO Officer  National Sales  Technology Group  Sean Rodriguez Vice President and Program Director  David E. Ritter Vice President  Financial Services Group  Operations  Robert G. Wiley Senior Vice President Brian Egan Vice President (Dedicated to the Retail Payments Office)  p. 1 9  Anna M. Voytovich Vice President and Associate General Counsel  Ellen J. Bromagen Vice President and Program Director  Catharine Lemieux Senior Vice President  As of December 31, 2004  Yurii Skorin Vice President and Associate General Counsel  Office of the General Auditor  Richard L. Kuxhausen Vice President and Regional Sales and Strategy Support  Supervision and Regulation  Elizabeth A. Knospe Senior Vice President and General Counsel  Cash Operations  Administrative Services  Alicia Williams Vice President  Legal Relations & Financial Systems Risk Management  G. Douglas Tillett Vice President  Michael J. Hoppe Vice President and Program Manager  Consumer and Community Affairs  Douglas J. Kasl Vice President  p. 1 8  Frank S. McKenna Vice President  William A. Barouski Senior Vice President  Payments Studies  Senior Vice President of Supervision and Regulation James W. Nelson (center) left the Bank in October 2004 to take a position as Chief Risk Officer at Huntington Bancshares in Columbus, Ohio.  Risk Specialists  Customer Relations and Support Office (CRSO)  Daniel G. Sullivan Vice President and Economic Advisor  Senior Vice President of the Financial Services Group Charles W. Furbee (left) retired on March 31, 2004 after 26 years of service.  Jeffrey S. Anderson Vice President  Services to Depository Institutions  Macroeconomic Policy Research  Elizabeth A. Knospe  Budget Reporting  Deborah A. Schneider Vice President  Regional Economic Programs  Douglas D. Evanoff Vice President and Economic Advisor  Glenn C. Hansen  District Check Restructuring  Mark H. Kawa Vice President  Richard C. Cahill Vice President  Banking and Financial Markets  Charles L. Evans  Institutions  Kristi L. Zimmermann Vice President  Richard P. Anstee*  * Richard P. Anstee retired on December 31, 2004. Anstee oversaw Technology, Finance, Support Services, and Corporate Communications for the majority of the year. His responsibilities transferred to other Management Committee members in October in anticipation of his retirement.  Statistics Valerie J. Van Meter Vice President  People Practices, Strategic Planning, Loans and Reserves, Finance and Leadership Development Barbara D. Benson Senior Vice President As of December 31, 2004  F R B C 2004 AN N UAL R E PO RT  ............................................................................... ADVISORY COUNCILS Federal Advisory Council Seventh District Representative Dennis J. Kuester Marshall & Ilsley Corporation Milwaukee, Wisconsin  Seventh District Advisory Council Thomas Kendall Brown Ford Motor Company Dearborn, Michigan Carl T. Camden Kelly Services, Inc. Troy, Michigan Richard L. Clarke Healthcare Financial Management Association Westchester, Illinois Erroll B. Davis, Jr. Alliant Energy Madison, Wisconsin Darcy L. Evon Illinois Institute of Technology Chicago, Illinois Allan B. Hubbard E&A Industries, Inc. Indianapolis, Indiana Katherine M. Hudson Brady Corporation Milwaukee, Wisconsin Christopher P. LaMothe Oxford Financial Group, Ltd. Indianapolis, Indiana Pamela Forbes Lieberman TruServ Corporation Chicago, Illinois  F R B C 2004 AN N UAL R E PO RT  ............................................................................... EXECUTIVE CHANGES  Money Smart Advisory Councils  Directors  Advisory Councils  The Federal Reserve Bank of Chicago and its Detroit Branch coordinate Money Smart Advisory Councils in both Chicago and Detroit. They are made up of representatives of community, financial, government and educational organizations working together to promote financial literacy. Each council sponsors an annual Money Smart Week, which features a variety of activities for consumers that promote financial education. For a list of council members, please visit our Web site at chicagofed.org and go to “Advisory Councils” in the “About the Fed” section.  Members of the Federal Reserve Bank of Chicago’s boards of directors are selected to represent a cross section of the Seventh District economy, including consumers, industry, agriculture, the service sector, labor and commercial banks of various sizes. The Chicago board consists of nine members. Member banks elect three bankers and three non-bankers. The Board of Governors appoints three additional non-bankers and designates the Reserve Bank chair and deputy chair from among its three appointees. The Detroit Branch has a seven-member board of directors. The Board of Governors appoints three non-bankers, and the Chicago Reserve Bank board appoints four additional directors. The Branch board selects its own chair each year, with the approval of the Chicago board. All Reserve Bank and Branch directors serve threeyear terms, with a two-term maximum.  The Federal Advisory Council, which meets quarterly to discuss business and financial conditions with the Board of Governors in Washington, D.C., is composed of one person from each of the 12 Federal Reserve Districts. Each year the Chicago Reserve Bank’s board of directors selects a representative to this group. Dennis J. Kuester, president and chief executive officer, Marshall & Ilsley Corporation, was selected to be the 2005 representative. The Seventh District Advisory Council members meet twice a year to provide their views on current business conditions to Chicago Fed President Michael Moskow and other senior officials of the Bank. Input from Council members on regional economic conditions helps contribute to the Federal Reserve System’s formulation of national monetary policy.  Robert G. Potter United Food and Commercial Workers Local 951 Grand Rapids, Michigan  Director appointments and elections at the Chicago Reserve Bank and its Detroit Branch effective in 2004 were:  Executive Officers  Quintin E. Primo III Capri Capital Chicago, Illinois  Miles D. White designated deputy chairman  Bret R. Maxwell MK Capital Chicago, Illinois Leslie Smith Miller Iowa State Savings Bank Knoxville, Iowa David Newby Wisconsin State AFL-CIO Milwaukee, Wisconsin Matthew Paull McDonald’s Corporation Oak Brook, Illinois  W. James Farrell re-appointed to a second three-year term as a director through 2006 and designated chairman  John A. Canning, Jr. appointed to complete two years of an unexpired term through 2005  James R. Reilly Chicago Convention and Tourism Bureau Chicago, Illinois  Mark T. Gaffney elected a director through 2006 Michael L. Kubacki elected a director through 2006 Edsel B. Ford ll designated Branch chairman  Donald J. Schneider Schneider National, Inc. Green Bay, Wisconsin  Linda S. Likely appointed as Branch director to complete two years of an unexpired term through 2005  Leland Strom Strom Farm Elgin, Illinois  Roger A. Cregg appointed as Branch director through 2006  Ralph W. Babb, Jr. appointed as Branch director through 2006  At year-end 2004 the following appointments and elections to terms beginning in 2005 were announced:  Jim Theisen Theisen Home Farm Auto Dubuque, Iowa Jean Wojtowicz Cambridge Capital Management Corp. Indianapolis, Indiana  The Bank’s board of directors acted on the following vice president and senior vice president promotions during 2004: Catharine Lemieux to Senior Vice President of Supervision and Regulation Ellen Bromagen to Vice President, Customer Relations and Support Office Mark H. Kawa to Vice President, Supervision and Regulation David A. Marshall to Vice President, Research  A new vice president appointed by the board in 2004 was: Richard D. Porter to Vice President, Payments Research  The following executive officers retired during 2004:  W. James Farrell re-appointed to a second one-year term as board chairman through 2006  Richard P. Anstee, Senior Vice President, Technology, Finance, Support Services and Corporate Communication retired after 31 years of service.  Miles D. White re-appointed to a second three-year term as a director through 2007 and a second one-year term as deputy chairman  Charles W. Furbee, Senior Vice President, Financial Services Group, retired after 26 years of service.  Mindy C. Meads elected a director through 2007  James A. Bluemle, Vice President and Division Leader, Supervision and Regulation, retired after 31 years of service.  Jeff Plagge elected a director through 2007  p. 2 0  A number of changes were made among the Bank’s executive officers during 2004.  Michael M. Magee, Jr. appointed a Branch director through 2007  Thomas G. Ciesielski, Vice President, Economic Research, retired after 34 years of service.  Edsel B. Ford ll re-appointed to a second one-year term as Detroit Branch board chairman through 2005  Richard L. Kuxhausen, Vice President, Customer Relations and Support Office, retired after 22 years of service.  Irvin D. Reid re-appointed to serve a second three-year term as a Branch director through 2007  Frank S. McKenna, Vice President, Financial Services Group, retired after 34 years of service.  p. 2 1  ............................................................................... F R B C 2004 AN N UAL R E PO RT  OPERATIONS VOLUMES  2004  Number of Items 2003  2004  2003  Check and Electronic Payments Fine Sort and Packaged Checks Handled Images Captured  1.7 Trillion  1.7 Trillion  2.0 Billion  2.3 Billion  10.3 Billion  10.5 Billion  15.1 Million  16.2 Million  92.3 Million  72.9 Million  —  —  Cash Operations Currency Received and Counted Unfit Currency Destroyed Coin Bags Paid and Received Number of Notes Paid and Received  53.2 Billion  52.5 Billion  3.7 Billion  3.4 Billion  6.5 Billion  7.1 Billion  602.3 Million  615.4 Million  1.7 Billion  1.6 Billion  4.0 Million  3.8 Million  122.1 Billion  122.2 Billion  8.5 Billion  8.4 Billion  1.5 Billion  4.8 Billion  1.3 Thousand  0.6 Thousand  Loans to Depository Institutions Total Loans Made During Year  F R B C 2004 AN N UAL R E PO RT  AUDITOR INDEPENDENCE  Dollar Amount  Checks, NOWs and Share Drafts Processed  ...............................................................................  p. 2 2  ............................................................................... The firm engaged by the Board of Governors for the audits of the individual and combined f in anci al st atement s of the Re s er ve Bank s for 20 04 was PricewaterhouseCoopers LLP (PwC). Fees for these ser v ices totaled $2.0 million. To ensure auditor independence, the Board of Governors requires that PwC be independent in all matters relating to the audit. Specifically, PwC may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reser ve Banks, or in any other way impairing its audit independence. In 2004, the Bank did not engage PwC for any material adv isor y ser v ices.  ...............................................................................  p. 2 3  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  2004 Financial Reports  F R B C 2004 AN N UAL R E PO RT  ............................................................................... PricewaterhouseCoopers LLP One North Wacker Chicago, I L 60606 Telephone (312) 298-2000 Facsimile (312) 298-2001  2004 FINANCIAL REPORTS  ...............................................................................  ...............................................................................  Management Assertion  Report of Independent Accountants  March 2005  To the Board of Directors of The Federal Reserve Bank of Chicago  To the Board of Directors of the Federal Reserve Bank of Chicago We have examined management’s assertion, included in the accompanying Management Assertion, that the Federal The management of the Federal Reserve Bank of Chicago (“FRBC”) is responsible for the preparation and fair presentation  Reserve Bank of Chicago (“FRBC”) maintained effective internal control over financial reporting and the safeguarding of  of the Statement of Financial Condition, Statement of Income, and Statement of Changes in Capital as of December 31,  assets as they relate to the financial statements as of December 31, 2004, based on criteria established in Internal Control  2004 (the “Financial Statements”). The Financial Statements have been prepared in conformity with the accounting  – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. FRBC’s  principles, policies, and practices established by the Board of Governors of the Federal Reserve System and as set forth in  management is responsible for maintaining effective internal control over financial reporting and safeguarding of assets as  the Financial Accounting Manual for the Federal Reserve Banks (“Manual”), and as such, include amounts, some of which  they relate to the financial statements. Our responsibility is to express an opinion on management’s assertion based on our  are based on judgments and estimates of management. To our knowledge, the Financial Statements are, in all material  examination.  respects, fairly presented in conformity with the accounting principles, policies and practices documented in the Manual and include all disclosures necessary for such fair presentation.  Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of internal control over financial  The management of the FRBC is responsible for maintaining an effective process of internal controls over financial reporting including the safeguarding of assets as they relate to the Financial Statements. Such internal controls are designed to provide reasonable assurance to management and to the Board of Directors regarding the preparation of reliable Financial Statements. This process of internal controls contains self-monitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material deficiencies in the process of internal controls are reported to management, and appropriate corrective measures are implemented.  reporting, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Even an effective process of internal controls, no matter how well designed, has inherent limitations, including the  In our opinion, management’s assertion that FRBC maintained effective internal control over financial reporting and  possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable  over the safeguarding of assets as they relate to the financial statements as of December 31, 2004 is fairly stated, in all  financial statements.  material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of  The management of the FRBC assessed its process of internal controls over financial reporting including the safe-  Sponsoring Organizations of the Treadway Commission.  guarding of assets reflected in the Financial Statements, based upon the criteria established in the “Internal Control —  This report is intended solely for the information and use of management and the Board of Directors and Audit  Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based  Committee of FRBC, and any organization with legally defined oversight responsibilities and is not intended to be and  on this assessment, we believe that the FRBC maintained an effective process of internal controls over financial reporting  should not be used by anyone other than these specified parties.  including the safeguarding of assets as they relate to the Financial Statements.  Federal Reserve Bank of Chicago  Michael Moskow  Gordon Werkema  Barbara Benson  President  First Vice President  Senior Vice President  p. 2 4  March 16, 2005  p. 2 5  2004 Financial Reports  F R B C 2004 AN N UAL R E PO RT  ............................................................................... PricewaterhouseCoopers LLP One North Wacker Chicago, I L 60606 Telephone (312) 298-2000 Facsimile (312) 298-2001  F R B C 2004 AN N UAL R E PO RT  ............................................................................... 2004 FINANCIAL STATEMENTS  Statements of Condition, in Millions.  As of December 31,  2004  2003  ............................................................................... Assets Report of Independent Auditors  Gold certificates  To the Board of Governors of The Federal Reserve System and the Board of Directors of The Federal Reserve Bank of Chicago  $  924  $  982  Special drawing rights certificates  212  212  Coin  111  90  Items in process of collection  559  942  December 31, 2004 and 2003, and the related statements of income and changes in capital for the years then ended, which  Loans to depository institutions  14  17  have been prepared in conformity with the accounting principles, policies, and practices established by the Board of  U.S. government securities, net  65,359  68,267  Governors of the Federal Reserve System. These financial statements are the responsibility of the Bank’s management.  Investments denominated in foreign currencies  2,232  2,033  Our responsibility is to express an opinion on these financial statements based on our audits.  Accrued interest receivable  458  510  Interdistrict settlement account  225  –  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial  Bank premises and equipment, net  186  157  statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the  Other assets  40  40  We have audited the accompanying statements of condition of the Federal Reserve Bank of Chicago (the “Bank”) as of  We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe  Total Assets  $  70,320  $  73,250  $  63,471  $  58,694  that our audits provide a reasonable basis for our opinion. As described in Note 3, these financial statements were prepared in conformity with the accounting principles,  Liabilities and Capital  policies, and practices established by the Board of Governors of the Federal Reserve System. These principles, policies,  Liabilities:  and practices, which were designed to meet the specialized accounting and reporting needs of the Federal Reserve System,  Federal Reserve notes outstanding, net  are set forth in the Financial Accounting Manual for Federal Reserve Banks and constitute a comprehensive basis of  Securities sold under agreements to repurchase  accounting other than accounting principles generally accepted in the United States of America.  Deposits:  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2004 and 2003, and results of its operations for the years then ended, on the basis of accounting described in Note 3.  Depository institutions Other deposits  2,773  2,592  1,762  2,350  4  4  Deferred credit items  421  781  Interest on Federal Reserve notes due U.S. Treasury  244  29  –  6,831  Interdistrict settlement account Accrued benefit costs  83  93  Other liabilities  36  28  68,794  71,402  Capital paid-in  763  924  Surplus  763  924  Total Capital  1,526  1,848  Total Liabilities Capital:  March 16, 2005  Total Liabilities and Capital  $  The accompanying notes are an integral part of these financial statements.  p. 2 6  p. 2 7  70,320  $  73,250  2004 Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  Statements of Income, in Millions.  For the years ended December 31,  2004  2003  Statements of Changes in Capital, in Millions. For the years ended December 31, 2004 and December 31, 2003  Interest Income Interest on U.S. government securities  2004 Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  $  Interest on investments denominated in foreign currencies Interest on loans to depository institutions  2,041  $  2,358  28  27  1  –  Balance at January 1, 2003 (17.2 million shares)  Capital Paid-in $  Transferred to surplus Net change in capital stock issued (1.3 million shares)  Total Interest Income  2,070  Interest Expense 28  23  2,042  2,362  Income from services  114  108  7  6  129  276  7  8  257  398  143  169  Occupancy expense  21  22  Equipment expense  16  19  Assessments by Board of Governors  76  75  Other expenses  83  65  Total Operating Expenses  339  350  Reimbursable services to government agencies Foreign currency gains, net Other income  Total Other Operating Income  (3.2 million shares)  $  1,960  $  2,410  $  57  $  53  Distribution of Net Income Dividends paid to member banks Transferred (from)/to surplus  (161)  67  Payments to U.S. Treasury as interest on Federal Reserve notes  2,064  2,290  Total Distribution  $  1,960  $  2,410  The accompanying notes are an integral part of these financial statements.  p. 2 8  $  The accompanying notes are an integral part of these financial statements.  Operating Expenses Salaries and other benefits  857  $  1,714  –  67  67  67  –  67  924  $  924  $  1,848  –  (161)  (161)  (161)  –  (161)  Net change in capital stock redeemed  Balance at December 31, 2004 (15.3 million shares)  Other Operating Income  Net Income Prior to Distribution  $  Transferred (from) surplus  Net Interest Income  $  Total Capital  2,385 Balance at December 31, 2003 (18.5 million shares)  Interest expense on securities sold under agreements to repurchase  857  Surplus  p. 2 9  763  $  763  $  1,526  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  Notes to Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  NOTES TO FINANCIAL STATEMENTS 1. Structure  The Federal Reser ve Bank of Chicago (“Bank”) is part of the Federal Reserve System (“System”) created by Congress under the Federal Reser ve Act of 1913 (“Federal Reser ve Act”) which established the central bank of the United States. The System consists of the Board of Gover nors of the Federal Reser ve System (“Board of Gover nors”) and twelve Federal Reser ve Banks (“Reser ve Banks”). The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank character istics. The Bank and its branch in Detroit, Michigan, ser ve the Seventh Federal Reser ve Distr ict, which includes Iowa and portions of Michigan, Illinois, Wisconsin and Indiana. Other major elements of the System are the Federal Open Market Committee (“FOMC”) and the Federal Adv isor y Council. The FOMC is composed of members of the Board of Gover nors, the president of the Federal Reser ve Bank of New York (“FRBNY”) and, on a rotating basis, four other Reser ve 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 w ith the Federal Reser ve Act, super v ision and control of the Bank is exercised by a Board of Directors. The Federal Reser ve Act specifies the composition of the Board of Directors for each of the Reserve Banks. Each board is composed of nine members ser v ing three-year ter ms: three directors, including those designated as Chair man and Deputy Chair man, are appointed by the Board of Gover nors, 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 div ided 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 Reser ve Bank stock it holds.  2. Operations and Services  The System perfor ms a variety of ser v ices and operations. Functions include: for mulating 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; perfor ming fiscal agency functions for the U.S. Treasur y and certain federal agencies; ser v ing as the federal gover nment’s bank; prov iding short-ter m loans to depositor y institutions; ser v ing the consumer and the community by prov iding educational materials and infor mation regarding consumer laws; super v ising bank holding companies and state member banks; and administering other regulations of the Board of Gover nors. The Board of Governors’ operating costs are funded through assessments on the Reser ve Banks. The FOMC establishes policy regarding open market operations, oversees these operations, and issues authorizations and directives to the FRBNY for its execution of transactions. Authorized transaction types include direct purchase and sale of securities, the purchase of secur ities under agreement s to re s ell, the sale of s ecur it ie s under agreement s to repurchase, and the lending of U.S. gover nment securities. The FRBNY is also authorized by the FOMC to hold balances of, and to execute spot and for ward foreign exchange (“F/ X”) and securities contracts in, nine foreign currencies and to invest such foreign currency holdings ensuring adequate liquidity is maintained. In addition, FRBNY is authorized to maintain reciprocal cur rency ar rangements (“F/ X swaps”) with various central banks, and “warehouse” foreign currencies for the U.S. Treasur y and Exchange  Stabilization Fund (“ESF”) through the Reser ve Banks.  3. Significant Accounting Policies  Accounting pr inciples for entities with the unique powers and responsibilities of the nation’s central bank have not been for mulated 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 pr inciples and practices are documented in the Financial Accounting Manual for Federal Reser ve 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 w ith 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 primar y difference is the presentation of all security holdings at amortized cost, rather than at the fair value presentation requirements of GAAP. In addition, the Bank has elected not to present a Statement of Cash Flows. The Statement of Cash Flows has not been included because the liquidity and cash position of the Bank are not of primar y concer n to the users of these financial statements. Other infor mation regarding the Bank’s activ ities is prov ided in, or may be derived from, the Statements of Condition, Income, and Changes in Capital. A Statement of Cash Flows, therefore, would not prov ide any additional useful infor mation. There are no other significant differences between the policies outlined in the Financial Accounting Manual and GAAP. Each Reser ve Bank prov ides ser v ices on behalf of the System for which  p. 3 0  costs are not shared. Major ser v ices prov ided on behalf of the System by the Bank, for which the costs were not redistributed to the other Reser ve Banks, include national business development and customer support. The preparation of the financial statements in confor mity 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. Certain amounts relating to the prior year have been reclassified to confor m to the current-year presentation. Unique accounts and significant accounting policies are explained below. A. Gold Certificates  The Secretar y of the Treasur y is authorized to issue gold certificates to the Reser ve Banks to monetize gold held by the U.S. Treasur y. 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. Treasur y. These gold certificates held by the Reser ve Banks are required to be backed by the gold of the U.S. Treasur y. The U.S. Treasur y may reacquire the gold certificates at any time and the Reser ve Banks must deliver them to the U.S. Treasur y. At such time, the U.S. Treasury’s account is charged and the Reser ve 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 Gover nors 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 Inter national Monetar y Fund (“Fund”) to its members in proportion to each member’s quota  p. 3 1  in the Fund at the time of issuance. SDRs ser ve as a supplement to international monetar y reser ves and may be transferred from one national monetary authority to another. Under the law prov iding for United States participation in the SDR system, the Secretary of the U.S. Treasur y is authorized to issue SDR certificates, somewhat like gold certificates, to the Reser ve Banks. At such time, equivalent amounts in dollars are credited to the account established for the U.S. Treasur y, and the Reserve Banks’ SDR certificate accounts are increased. The Reser ve Banks are required to purchase SDR certificates, at the direction of the U.S. Treasur y, for the purpose of financing SDR acquisitions or for f in ancing exch ange st abili z at ion operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions among Reser ve Banks based upon Federal Reser ve notes outstanding in each District at the end of the preceding year. There were no SDR transactions in 2004 or 2003. C. Loans to Depository Institutions  The Depository Institutions Deregulation and Monetar y Control Act of 1980 provides that all depository institutions that maintain reser vable transaction accounts or nonpersonal time deposits, as defined in Regulation D issued by the Board of Governors, have borrowing priv ileges 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 any loans were deemed to be uncollectible, an appropriate reserve would be established. Interest is accrued using the applicable discount rate established at least ever y fourteen days by the Board of Directors of the Reserve Banks, subject to rev iew by the Board of Gover nors. 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 carr ying out the System’s central bank responsibilities. Such authorizations are rev iewed and approved annually by the FOMC. The FRBNY has sole authorization by the FOMC to lend U.S. government securities held in the SOMA to U.S. gover nment 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 collaterali zed by other U.S. gover nment 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 nor mally 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 for ward contracts generally limited to the second leg of a swap/ warehousing transaction. The FRBNY, on behalf of the Reser ve Banks, maintains renewable, short-term F/ X swap ar rangements w ith two author i zed foreign central banks. The parties agree to exchange their cur rencies up to a pre-ar ranged maximum amount and for an agreed  Notes to Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  upon period of time (up to twelve months), at an agreed upon interest rate. These arrangements give the FOMC temporar y access to foreign currencies it may need for intervention operations to support the dollar and give the partner foreign central bank temporar y access to dollars it may need to support its own currency. Draw ings 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 Treasur y, U.S. dollars for foreign currencies held by the Treasur y or ESF over a limited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Tre asur y and ESF for f in ancing purchases of foreign cur rencies and related inter national operations. In connection with its foreign currency activ ities, the FRBNY, on behalf of the Reser ve Banks, may enter into contracts that contain var ying degrees of off-balance sheet market risk, because they represent contractual commitments involv ing future settlement and counter-party credit risk. The FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and perfor ming daily monitoring procedures. While the application of cur rent 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 reser ves available to the banking system or on the prospects for future Reser ve Bank ear nings or capital. Both the domestic and foreign  components of the SOMA portfolio from time to time involve transactions that can result in gains or losses when holdings are sold pr ior to matur ity. Decisions regarding the secur ities and foreign cur rencies transactions, including their purchase and sale, are motivated by monetar y policy objectives rather than profit. Accordingly, market values, ear nings 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 activ ities or policy decisions. U.S. gover nment secur ities and investments denominated in foreign currencies comprising the SOMA are recorded at cost, on a settlementdate basis, and adjusted for amortization of premiums or accretion of discounts on a straight-line basis. Securities sold under agreements to repurchase are treated as secured borrowing transactions with the associated interest expense recognized over the life of the transaction. Such transactions are settled by FRBNY. Interest income is accr ued on a straight-line basis. Income ear ned 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. 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.” Activ ity related to U.S. gover nment securities bought outright, securities sold under agreements to repurchase, s ecur it ie s loaned, inve stment s denominated in foreign cur rency, excluding those held under an F/ X swap ar rangement, and deposit accounts of foreign central banks and gover nments above core balances are allocated to each Reser ve Bank. U.S. government securities purchased under agreements to resell and unrealized gains and losses on the revaluation of foreign currency holdings under  F/X swaps and warehousing arrangements are allocated to the FRBNY and not to other Reser ve 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 $6.2 million was allocated to the Bank. The effect of this change was not material; therefore, it was included in the 2003 interest income. E. Bank Premises, Equipment and Software  Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over estimated useful lives of assets ranging from two to fifty years. Major alterations, renovations and improvements are capitalized at cost as additions to the asset accounts and are amortized over the remaining useful life of the asset. Maintenance, repairs and minor replacements are charged to operations in the year incurred. Costs incurred for software, either developed internally or acquired for inter nal use, during the application development stage are capitalized based on the cost of direct services and materials associated with designing, coding, installing, or testing software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which range from two to five years. F. Interdistrict Settlement Account  At the close of business each day, all Reserve Banks and branches assemble the payments due to or from other Reserve Banks and branches as a result of transactions involv ing accounts re siding in other Di st r ict s th at 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 Reser ve Banks is reported as the “Interdistrict settlement account.”  p. 3 2  Notes to Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  G. Federal Reserve Notes  H. Capital Paid-in  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 Reser ve Bank) to the Reser ve Banks upon deposit with such agents of certain classes of collateral security, typically U.S. gover nment securities. These notes are identified as issued to a specific Reser ve Bank. The Federal Reser ve Act prov ides that the collateral security tendered by the Reser ve Bank to the Federal Reser ve agent must be equal to the sum of the notes applied for by such Reser ve Bank.  The Federal Reser ve Act requires that each member bank subscribe to the capital stock of the Reser ve 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 Reser ve Bank 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 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 transfer red or hypothecated. By law, each member bank is entitled to receive an annual div idend 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 tw ice the par value of stock subscribed by it.  Assets eligible to be pledged as collateral security include all Federal Reserve Bank assets. The collateral value is equal to the book value of the collateral tendered, with the exception of securities, whose collateral value is equal to the par value of the secur ities tendered. The par value of securities pledged for securities sold under agreements to repurchase is similarly deducted. The Board of Gover nors may, at any time, call upon a Reser ve Bank for additional secur ity to adequately collaterali ze the Federal Reser ve notes. To satisfy the obligation to prov ide sufficient collateral for outstanding Federal Reser ve notes, the Reser ve Banks have entered into an agreement that prov ides for certain assets of the Reser ve Banks to be jointly pledged as collateral for the Federal Reser ve notes of all Reser ve Banks. In the event that this collateral is insufficient, the Federal Reser ve Act prov ides that Federal Reser ve notes become a first and paramount lien on all the assets of the Reser ve Banks. Finally, as obligations of the United States, Federal Reser ve notes are backed by the full faith and credit of the United States gover nment. The “Federal Reser ve notes outstanding, net” account represents the Bank’s Federal Reser ve notes outstanding, reduced by its currency holdings of $9,046 million, and $8,141 million at December 31, 2004 and 2003, respectively.  p. 3 3  In the event of losses or an increase in capital paid-in, payments to the U.S. Treasur y are suspended and earnings are retained until the surplus is equal to the capital paid-in. Weekly payments to the U.S. Treasury may var y significantly. In the event of a decrease in capital paid-in, the excess surplus, after equating capital paid-in and surplus at December 31, is distributed to the U.S. Treasur y in the follow ing year. This amount is reported as a component of “Payments to U.S. Treasur y as interest on Federal Reser ve notes”. J. Income and Costs related to Treasury Services  The Bank is required by the Federal Reser ve Act to ser ve as fiscal agent and depositor y of the United States. By statute, the Department of the Treasury is permitted, but not required, to pay for these ser v ices.  The Financial Accounting Standards Board (FASB) has deferred the implementation date for SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” for the Bank. When applicable, the Bank will deter mine the impact and prov ide the appropriate disclosures.  K. Taxes  I. Surplus  L. 2004 Restructuring Charges  The Board of Gover nors requires Reser ve Banks to maintain a surplus equal to the amount of capital paidin as of December 31. This amount is intended to prov ide additional capital and reduce the possibility that the Reser ve Banks would be required to call on member banks for additional capital.  In 2003, the System started the restr uctur ing of several operations, pr imar ily check, cash and Treasur y ser v ices. The restructuring included streamlining the management and support str uctures, reducing staff, decreasing the number of processing locations, and increasing processing capacity in the remaining locations. These restructuring activities continued in 2004.  Pursuant to Section 16 of the Federal Reser ve Act, Reser ve Banks are required by the Board of Gover nors to transfer to the U.S. Treasur y as interest on Federal Reser ve notes excess ear nings, after prov iding for the costs of operations, payment of div idends, and reser vation of an amount necessar y to equate surplus with capital paid-in.  The Reser ve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s real property taxes were $2 million and $4 million for the years ended December 31, 20 04 and 20 03, respectively, and are reported as a component of “Occupancy expense.”  Footnote 10 describes the restructur ing and prov ides infor mation about the Bank’s costs and liabilities associated w ith employee separations and contract ter minations. The costs associated w ith the w r itedown of certain Bank assets are di scus s ed in footnote 6. Cost s and  Notes to Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  liabilities associated with enhanced pension benefits for all Reser ve Banks are recorded on the books of the FRBNY.  Maturities of Securities Held  Within 15 days  U.S. Gov’t Securities (Par value)  $  2,761  Securities Sold Under Agreements to Repurchase (Contract amount)  $  2,773  4. U.S. Government and Federal Agency Securities  16 days to 90 days  16,066  –  91 days to 1 year  15,350  –  Securities bought outright are held in the SOMA at the FRBNY. An undivided interest in SOMA activ ity and the related premiums, discounts and income, with the exception of securities purchased under agreements to resell, is allocated to each Reser ve Bank on a percentage basis derived from an annual settlement of interdistrict clearings that occurs in April of each year. The settlement equalizes Reserve Bank gold certificate holdings to Federal Reser ve notes outstanding. The Bank’s allocated share of SOMA balances was approximately 9.008 percent and 10.105 percent at December 31, 2004 and 2003, respectively.  Over 1 year to 5 years  18,760  –  Over 5 years to 10 years  4,898  –  Over 10 years  6,825  –  The Bank’s allocated share of U.S. Gover nment securities, net held in the SOMA at December 31, was as follows (in millions):  2004  64,660  $  $ 23,688 32,503 8,469  Total par value  $ 64,660 $ 847 (148)  $ 24,740 32,676 9,951  67,367 990 (90)  $ 65,359 $ 68,267  The total of SOMA securities bought outright was $725,584 million and $675,569 million at December 31, 2004 and 2003, respectively. The maturity distribution of U.S. government securities bought outright and securities sold under agreements to repurchase, that were allocated to the Bank at December 31, 2004, was as follows (in millions):  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):  At December 31, 2004 and 2003, there were no material open foreign exchange contracts. At December 31, 2004 and 2003, the warehousing facility was $5,000 million, with no balance outstanding.  6. Bank Premises, Equipment and Software  A summar y of bank premises and equipment at December 31 is as follows (in millions):  years. Rental income from such leases was $3 million for each of the years ended December 31, 2004 and 2003. Future minimum lease payments under noncancelable agreements in existence at December 31, 2004, were (in millions): 2005 2006 2007 2008 2009 Thereafter  $  3 3 1 1 1 –  $  9  2,773 2004  At December 31, 2004, U.S. government securities with a par value of $6,609 million were loaned from the SOMA, of which $595 million was allocated to the Bank. At December 31, 2004, securities sold under agreements to repurchase with a contract amount of $30,783 million and a par value of $30,808 million were outstanding. The Bank’s allocated share at December 31, 2004 was $2,773 million of the contract amount and $2,775 million of the par value.  5. Investments Denominated in Foreign Currencies  U.S. government: Bills Notes Bonds  Total allocated to Bank  $  2003  Par value:  Unamortized premiums Unaccreted discounts  Total  surplus to aggregate capital and surplus at the preceding December 31. The Bank’s allocated share of investments denominated in foreign currencies was approximately 10.447 percent and 10.234 percent at December 31, 2004 and 2003, respectively.  Notes to Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  The FRBNY, on behalf of the Reser ve Banks, holds foreign cur rency deposits with foreign central banks and the Bank for Inter national Settlements and invests in foreign government debt instruments. Foreign gover nment debt instruments held include both securities bought outright and secur ities purchased under agreements to resell. These investments are guaranteed as to principal and interest by the foreign gover nments. Each Reserve Bank is allocated a share of foreign-currency-denominated assets, the related interest income, and realized and unrealized foreign currency gains and losses, with the exception of unrealized gains and losses on F/ X swaps and warehousing transactions. This allocation is based on the ratio of e ach Re s er ve Bank’s c apit al and  European Union Euro: Foreign currency deposits  $  2003  633  $  703  Securities purchased under agreements to resell  224  211  Government debt instruments  401  208  161  151  800  751  13  9  Japanese Yen: Foreign currency deposits Government debt instruments Accrued interest  Total  $  2,232  $  2,033  Total System investments denominated in foreign currencies were $21,368 million and $19,868 million at December 31, 2004 and 2003, respectively. The maturity distribution of investments denominated in foreign currencies which were allocated to the Bank at December 31, 2004, was as follows (in millions):  Maturities of Investments Denominated in European Japanese Foreign Currencies Euro Yen Within 1 year Over 1 year to 5 years Over 5 years to 10 years Over 10 years  Total  $  938  $  Bank premises and equipment: Land  N/A  2004  $  2003  9  $  50  153  140  Building machinery and equipment  20  22  22  N /A  41  15  10  66  94  $ 291  $ 281  (105)  (124)  Construction in progress Furniture and equipment Subtotal Accumulated depreciation  Bank premises and equipment, net  $  Depreciation expense, for the years ended  $  186  $  14  $  157 15  Bank premises and equipment at December 31 include the following amounts for leases that have been capitalized (in millions):  2004 Total  10  Buildings  Bank premises and equipment  $  0.6  314  –  314  19  –  19  –  –  –  Capitalized leases, net  $  961 $ 2,232  (0.3)  $  The Bank has capitalized software assets, net of amortization, of $14 million and $10 million at December 31, 2004 and 2003, respectively. Amortization expense was $1 million and $2 million for each of the years ended December 31, 20 04 and 2003, respectively. Assets impaired as a result of the Bank’s restructuring plan as discussed in footnote 10 include software, building, fur niture, and equipment. Asset impairment losses of $0.5 million and $0.4 million for the periods ending December 31, 2004 and 2003, respectively were deter mined using fair values based on quoted market values or other valuation techniques and are reported as a component of “Other expenses.” The Bank recognized an impair ment loss on the Detroit facility of $1.4 million for the period ended December 31, 2004 due to its deter mination that the carr y value exceeded the fair value of the property. The impair ment was deter mined using fair values based on quoted market values or other valuation techniques and is reported as a component of “Other Expenses.”  2003  0.6  961 $ 1,899 Accumulated depreciation  $ 1,271 $  p. 3 4  Maximum Useful Life (in years)  0.3 $  (0.2)  0.4  The Bank leases unused space to outside tenants. Those leases have te r m s r a n g i n g f rom on e to e i gh t  p. 3 5  As of December 31, 2004 the Milwaukee property, valued at $1.4 million, had been moved to Other Real Estate pending its sale.  7. Commitments and Contingencies  At December 31, 2004, the Bank was obligated under noncancelable leases for premises and equipment with  terms ranging from one to approximately seven years. These leases prov ide for increased rentals based upon increases in real estate taxes, operating costs, or selected price indices. Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance and maintenance when included in rent), net of sublease rentals, was $4 million for each of the years ended December 31, 2004 and 2003. Certain of the Bank’s leases have options to renew. Future minimum rental payments under noncancelable operating leases and capital leases, net of sublease rentals, w ith ter ms of one year or more, at December 31, 2004, were (in thousands):  Operating 2005 2006 2007 2008 2009 Thereafter  $  745 647 374 268 274 467  $  2,775  Capital $  418  Amount representing interest  Present value of net minimum lease payments  132 132 132 22 – –  54  $  364  At December 31, 2004, the Bank, acting on its own behalf, entered into other commitments and long-term obligations extending through the year 2005 totaling $61.7 million. As of December 31, 2004, $11.8 million of these commitments was recognized. Purchases of $16.9 million and $4.1 million were made against these commitments during 2004 and 2003, respectively. These commitments represent services related to a new Detroit branch building that will be completed in 2005. Under the Insurance Agreement of the Federal Reser ve Banks dated as of March 2, 1999, each of the Reser ve Banks has agreed to bear, on a per incident basis, a pro rata share of  Notes to Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  losses in excess of one percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all Reser ve Banks. Losses are bor ne in the ratio that a Reser ve Bank’s capital paid-in bears to the total capital paid-in of all Reser ve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding under such agreement at December 31, 2004 or 2003.  Thrift Plan  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.  9. Postretirement Benefits other than Pensions and Postemployment Benefits  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 Reser ve Banks, the Board of Gover nors of the Federal Reserve System, and the Office of Employee Benefits of the Federal Reser ve Employee Benefits System. No separate accounting is maintained of assets contributed by the participating employers. The FRBNY acts as a sponsor of the Plan for the System and the costs associated with the Plan are not redistributed to the Bank. The Bank’s projected benefit obligation and net pension costs for the BEP and the SERP at December 31, 2004 and 2003 and for the years then ended, are not material.  Employees of the Bank may also participate in the defined contribution Thrift Plan for Employees of the Federal Reser ve System (“Thrift Plan”). The Bank’s Thr ift Plan contr ibutions totaled $5.6 million and $5.9 million for the years ended December 31, 2004 and 2003, respectively, and are reported as a component of “Salaries and other benefits.”  Postretirement Benefits other than Pensions  In addition to the Bank’s retirement plans, employees who have met certain age and length of ser v ice requirements are eligible for both medical benefits and life insurance coverage during retirement. The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets. Net postretirement benefit cost is actuarially deter mined using a Januar y 1 measurement date. Follow ing is a reconciliation of beginning and ending balances of the benefit obligation (in millions): 2004 Accumulated postretirement benefit obligation at January 1  $  Service cost-benefits earned during the period  106.5  2003  $  1.9  85.2  1.9  Interest cost of accumulated benefit obligation  5.9  5.5  Actuarial loss  2.3  19.1  Curtailment gain  (1.2)  –  Contributions by plan participants  1.2  0.9  Benefits paid Plan amendments  Accumulated postretirement benefit obligation at December 31  $  (6.6)  (6.1)  (13.0)  –  97.0 $  106.5  At December 31, 2004 and 2003, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 5.75 percent and 6.25 percent, respectively. Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accr ued postretirement benefit cost (in millions): 2004 Fair value of plan assets at January 1  $  –  2003  $  –  Actual return on plan assets  –  –  Contributions by the employer  5.4  5.2  Contributions by plan participants  1.2  0.9  (6.6)  (6.1)  Benefits paid  Fair value of plan assets at December 31  $  Unfunded postretirement benefit obligation  $  97.0  $  –  2.2  Unrecognized prior service cost  14.4  Unrecognized net actuarial loss  Effect on aggregate of service and interest cost components of net periodic postretirement benefit costs  $  Effect on accumulated postretirement benefit obligation  1.3  $  12.2  (44.1)  $  69.5 $  2004  (0.9)  (10.0)  The following is a summar y of the components of net periodic postretirement benefit costs for the years ended December 31 (in millions): 2003  – 18.5 (45.0)  80.0  For me asurement pur pos e s, the assumed health care cost trend rates at December 31 are as follows:  Service cost-benefits earned during the period  $  1.9  $  1.9  Interest cost of accumulated benefit obligation  5.9  5.5  Amortization of prior service cost  (2.6)  (2.5)  2.1  1.1  Recognized net actuarial loss  Total periodic expense  $  Curtailment gain  Net periodic postretirement benefit costs  7.3 $ (12.4)  $  (5.1) $  6.0 –  6.0  2003  Health care cost trend rate assumed for next year  9.00%  10.00%  Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)  4.75%  5.00%  2011  2011  p. 3 6  One Percentage One Percentage Point Increase Point Decrease  106.5  Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs.”  Year that the rate reaches the ultimate trend rate  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 rate s would h ave the follow ing effects for the year ended December 31, 2004 (in millions):  2004  Unrecognized net curtailment gain  Accrued postretirement benefit costs  – $  Notes to Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  At December 31, 2004 and 2003, the weighted-average discount rate assumptions used to deter mine net periodic postretirement benefit costs were 6.25 percent and 6.75 percent, respectively. Net periodic postretirement benefit costs are reported as a component of “Salaries and other benefits.”  p. 3 7  A plan amendment that modified the credited ser v ice per iod eligibility requirements created curtailment gains. The recognition of special ter mination losses is primarily the result of enhanced retirement benefits prov ided to employees during the restructuring described in footnote 10. Because the special ter mination loss is less than $50,000, the amount is not displayed in the tables above. The curtailment gain associated with restructuring programs announced in 2004 that are described in footnote 10 will be offset by the unrecognized actuarial losses and prior ser v ice gains. As a result, an unrecognized net curtailment gain will be recorded in 2005 when the affected employees ter minate employment. The Medicare Prescr iption Dr ug, Improvement and Moder nization Act of 2003 (the “Act”) was enacted in December 2003. The Act established a prescription drug benefit under Medicare (“Medicare Part D”) and a federal subsidy to sponsors of retiree health care benefit plans that prov ide benefits that are at least actuarially equivalent to Medicare Part D. Following the guid ance of the Fin anci al Accounting Standards Board, the Bank elected to defer recognition of the financial effects of the Act until further guidance was issued in May 2004. Benefits provided to certain participants are at least actuarially equivalent to Medicare Part D. The estimated effects of the subsidy, retroactive to January 1, 2004, are reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit costs.  Following is a summar y of the effects of the expected subsidy (in millions):  2004 Decrease in the accumulated postretirement benefit obligation  $  12.4  Decrease in the net periodic postretirement benefit costs  $  1.6  Expected benefit payments:  Without Subsidy With Subsidy 2005 2006 2007 2008 2009 2010-2014  $  Total  $  6.2 6.5 6.5 6.6 6.8 35.3  $  6.2 6.0 6.0 6.0 6.2 31.8  67.9 $  62.2  Postemployment Benefits  The Bank offers benefits to for mer or inactive employees. Postemployment benefit costs are actuarially determined using a December 31, 2004 me asurement d ate and include the cost of medical and dental insurance, survivor income, and disability benefits. For 2004, the Bank changed its practices for projecting postemployment costs and used a 5.25 percent discount rate and the same health care trend rates as were used for projecting postretirement costs. Costs for 2003, however, were projected using the same discount rate and health care trend rates as were used for projecting postretirement costs. The accr ued postemployment benefit costs recognized by the Bank at December 31, 2004 and 2003, were $12 million and $13 million, respectively. This cost is included as a component of “Accrued benefit costs.” Net periodic postemployment benefit costs included in 2004 and 2003 operating expenses were $1 million and $2 million, respectively.  Notes to Financial Statements  F R B C 2004 AN N UAL R E PO RT  ...............................................................................  10. Business Restructuring Charges  In 2003, the Bank announced plans for restructuring to streamline operations and reduce costs, including consolidation of check operations and staff reductions in various functions of the Bank. In 2004, additional consolidation and restructuring initiatives were announced in the check operation. These actions resulted in the following business re st r uct ur ing ch arge s and as s et impair ment costs: Major categories of expense (in millions):  Total Acc. Est. Liab. Total Costs 12/31/03 Charges Employee separation Contract termination  Total  Acc. Total Liab. Paid 12/31/04  $ 8.0 $ 6.7 $ 1.3 $ 4.2 $ 3.8  0.6  0.6  –  –  0.6  Employee separation costs are primarily severance costs related to identified staff reductions of approximately 334, including 262 staff reductions related to restructuring announced in 2003. These costs are reported as a component of “Salaries and other benefits.” Contract ter mination costs include the charges resulting from ter minating existing lease and other contracts and are shown as a component of “Other expenses.” Costs associated with the write-downs of certain Bank assets, including software, fur niture, and equipment are discussed in footnote 6. Costs associated with enhanced pension benefits for all Reser ve Banks are recorded on the books of the FRBNY as discussed in footnote 8. Costs associated w ith enhanced postretirement benefits are disclosed in footnote 9.  OUR MISSION  OUR VISION  ............................................................. The Federal Reserve Bank of Chicago is one of 12 regional  ●  Fu r t h e r t h e p u bl ic i nte re s t b y fostering a sound economy and stable financial system  ●  Prov ide products and ser v ices of unmatched value to those we serve  ●  Set the standard for excellence in the Federal Reserve System  ●  Work together, value diversity, communicate openly, be creative and fair  ●  Live by our core values of integrity, respect, responsibility and excellence  Reserve Banks across the United States that, together with the Board of Governors in Washington, D.C., serve as the nation’s central bank. The role of the Federal Reserve System, since its establishment by an act of Congress passed  $ 8.6 $ 7.3 $ 1.3 $ 4.2 $ 4.4  Future costs associated w ith the restructuring that are not estimable and are not recognized as liabilities will be incurred in 2005.  in 1913, has been to foster a strong economy, supported by  The Bank anticipates substantially completing its announced plans by March 2005.  of national monetary policy; supervises and regulates  a stable financial system. To this end, the Federal Reser ve Bank of Chicago participates in the for mulation and implementation state-member banks, bank holding companies and foreign bank branches; and provides financial services to depository institutions and the U.S. government. Through its head office in Chicago, branch in Detroit, regional office in Des Moines, and facility in Bedford Park, Ill., the Federal Reserve Bank of Chicago serves the Seventh Federal Reserve District, which includes major portions of Illinois, Indiana, Michigan and Wisconsin, plus all of Iowa.  Design: Ping Homeric; Illustration: Ron Magnes  p. 3 8  Head Office 230 South LaSalle Street P.O. Box 834 Chicago, Illinois 60690-0834 (312) 322-5322 Detroit Branch 160 West Fort Street P.O. Box 1059 Detroit, Michigan 48231-1059 (313) 961-6880 Des Moines Office 2200 Rittenhouse Street Suite 150 Des Moines, Iowa 50321 (515) 256-6100 Midway Facility 4944 West 73rd Street Bedford Park, Illinois 60638 (708) 924-8900
Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102