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2016

Annual Report

Helping Our Communities Prosper

The Federal Reserve Bank of Philadelphia is one of 12
regional Reserve Banks in the United States that, together
with the Board of Governors in Washington, D.C., make up
the Federal Reserve System — the nation’s central bank.
The System’s primary role is to ensure a sound financial
system and a healthy economy. The Philadelphia Fed
serves the Third District, which is composed of eastern and
central Pennsylvania, southern New Jersey, and Delaware.

Cover photos (from top to bottom):
Cranberry bog harvest, Browns Mills, NJ
Image: Olivier Le Queinec / Shutterstock.com
Fed Chair Janet Yellen meets with entrepreneurs,
Philadelphia, PA
9th Street Italian Market, Philadelphia, PA
Employees at a Supervision, Regulation, and Credit
Department Town Hall at the Philadelphia Fed

2016 Annual Report
Letter from the President. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 2
Conversation with the First Vice President .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 4
Helping our Communities Prosper
Fed Chair Sees Philadelphia Workforce Development in Action.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 8
A Core Mission: Safeguarding the Financial System .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 10
Camden Rising: President Harker Tours a City in Transition .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 14
The Philadelphia Fed Lands a ‘Library for the Digital Age’. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 16
Field Meetings Allow Fed Leaders to Engage with Local Bankers.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 18
Conference Explores How Towns Transform Themselves.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 20
Our Engaged Staff. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 22
Board of Directors .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 26
Economic and Community Advisory Council .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 28
Community Depository Institutions Advisory Council. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 29
Management Committee. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 30
Additional Bank Officers.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 31
Financial Statements.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 35

www.philadelphiafed.org

1

Letter from the President
Patrick T. Harker

An annual report is supposed to be a summation
of the year gone by, but it’s also a chance to look
forward. This year, I’m doing exactly that, viewing 2016
as the springboard for the exciting trajectory of our
future work.
In 2016, we announced two bold initiatives that will
build on the foundation of the Philadelphia Fed’s
strengths. These could not have been conceived
of, much less embarked on, had it not been for the
exceptional work that has defined this organization
since its inception.
Both the Consumer Finance Institute and the Economic Growth & Mobility Project are rooted in our exceptional research capabilities and talent for putting
theory into practice.

2

Why have we chosen this path? First and foremost,
it supports the Federal Reserve System’s mission
of creating a strong economic foundation for the
country. Additionally, it directly relates to our goal of
maximum employment. We also have exceptional research capabilities at the Philadelphia Fed — including System expertise in consumer credit issues and
an outstanding Community Development team — so
tapping those resources just makes sense.
But we are also in a unique position. The Third District is a microcosm of the economic realities facing
the United States — a mix of urban, rural, suburban,
and post-industrial towns and cities that span our
geography. While the economy of the country as a
whole has returned more or less to full strength, that
is an average of a vast and varied nation, and there

Federal Reserve Bank of Philadelphia

are still pockets dotting the landscape, from Scranton
to Sacramento, that have not yet reaped the good
fortunes of the recovery.
As we work with our partners and find real, practical
solutions for some of the most deeply entrenched
barriers to economic mobility, we can create road-

Regions do best when all their communities do well.
And the investments we make now to give people the
tools to find solid footing will come back to us. That’s
why we call it an investment.
If we are going to succeed as a community, a region,
or a country, we have to remember that improving
everyone’s prospects for growth
and mobility is good for all of us.
Whether financial literacy or skills
development, we’re helping to
create a stronger workforce and
increase the capacity of people to
contribute to the economy. That’s
especially important as the baby
boom generation begins its march
into retirement. From retraining
workers to preparing the next
generation for their entry into the
labor force, the more value we put in, the more we
get out of it.

“As we work with our partners and find real,
practical solutions for some of the most deeply
entrenched barriers to economic mobility, we
can create roadmaps for communities all over
the country.”
maps for communities all over the country. Our
approaches can be adopted and adapted by communities across America while concentrating on helping
those in our own backyard achieve economic stability
and self-sufficiency.
On a personal note, although it’s not often an area of
commentary for data-driven policymakers, I believe
there is a moral imperative to this vein of work. I see
it as our obligation to help people have an equal
chance of success.
It is, however, also in our economic self-interest to
ensure that the playing field is level. We don’t live in
isolation. We don’t exist in siloed economic citadels:
Our economic fates are intertwined with that of our
neighbors.

www.philadelphiafed.org

In the coming pages, you’ll read more about how we
helped our communities to prosper in 2016. I look
forward to building on that work for an even more
outstanding report next year.

			

Patrick T. Harker

3

A Conversation with the First Vice President
James D. Narron

James D. Narron joined the Federal Reserve Bank of
Philadelphia in April 2016. His nearly three decades
of experience working in the Federal Reserve System
has given him an expert eye on how the Fed safeguards the financial system. He shares his views on
this important Fed responsibility.
One of the Federal Reserve’s primary goals is to
secure a safe and sound financial system. What contribution does the Philadelphia Fed make?
I think of the financial system as the lifeblood of
the U.S. economy; if it stops running smoothly, the
economy would be unable to function. As consumers,
we need to be able to use our purchasing power on
demand, whether that’s our credit cards, our access
to savings and checking accounts, or credit in general.
The same goes for businesses: They need to access
their deposits, to be sure payments are processed in

4

minimal time, and to know that funds are available
when they need them. That’s how we pay our bills,
buy food, keep roofs over our heads, and run the dayto-day operations of any business. So, the Federal
Reserve System as a whole and the Philadelphia Fed
in particular work with the financial services industry
to ensure a fast, secure payments system.
How does the Federal Reserve think about the costs
and benefits of financial regulation?
Regulation by its very nature means different things
to different people. In the wake of the financial crisis,
the pendulum swung perhaps a little too far in the
direction of overcorrection. Most people don’t think
that’s a bad thing when they view it in the context
of maintaining the stability of systemically important financial institutions. But that same regulation
became too much when looked at through the eyes of

Federal Reserve Bank of Philadelphia

small and community banks. There’s no disagreement
that one-size-fits-all regulation just doesn’t work —
you can’t impose the same strictures on a local bank
in Johnstown that you can on a massive national or
multinational institution.
How does that play out in the Third District?
Here in the Third District, our banks are disproportionately smaller ones. So, from that perspective, the
regulatory burden has been something we’ve seen
firsthand. A lot of work has already been done to ease
that burden, and as we move farther away from the
point of crisis, the pendulum will start to swing back
in its arc — not all the way, but to a more sustainable
middle ground. That’s not unique to this particular
post-crisis environment; it’s a pattern we’ve seen
throughout history, which is why we can comfortably
predict an eventual realignment. In any event, it’s
always a good idea to revisit regulation as the economy evolves; the rules we made for yesterday aren’t
always the best ones for today.
One of the most talked about subjects for bankers
these days is cybersecurity. What is the Philadelphia
Fed doing to help the banking community and its
customers stay safe?

www.philadelphiafed.org

While cybersecurity is an issue for all banks, it can be
a particular financial burden for smaller institutions
to stay safe because they just don’t have the economies of scale that larger organizations do.
But big or small, banks’ security is vital, because
we’re talking about the financial safety of families
and businesses across the country. I’m proud to say
that we have some of the best cybersecurity experts
in the System right here in Philadelphia, and we’re
out in the District sharing our knowledge.
Expertise is important when it comes to security. How
does the Bank get this knowledge out to bankers?
One of the things that sets the Philadelphia Fed apart
from the other Banks is our field meetings, where we
meet with bankers in their own towns and cities and
discuss the realities of businesses on the ground.
Our cybersecurity experts often come with us, giving
updates and sharing best practices. We also host conferences with specialists from agencies such as the
FBI, CIA, Secret Service, and National Security Agency
to ensure people are guided to the right resources
and understand cost-effective ways to significantly
improve their defenses.

5

Helping Our Communities Prosper

9th Street Italian Market, Philadelphia, PA

The Federal Reserve Bank of Philadelphia is
committed to engaging and communicating
with the communities of the Third District,
which covers central and eastern Pennsylvania,
southern New Jersey, and all of Delaware. The
Bank engages and supports local communities
through field meetings with local bankers,
community tours, and outreach programs for
community development.
The Bank also champions expert research
that identifies best practices to grow local and
regional economies and help households move
up the income ladder. These essays highlight
how the Philadelphia Fed helped Third District
communities prosper in 2016.

6

President Patrick Harker visiting the Cristo Rey High School

Federal Reserve Bank of Philadelphia

Table of Essays

Fed Chair Sees Philadelphia
Workforce Development
in Action

A Core Mission: Safeguarding
the Financial System

Camden Rising: President Harker
Tours a City in Transition
President Harker tours Camden, NJ,
to see how local leadership, state
and federal support, and private
sector investment, helped by the
Community Reinvestment Act, are
revitalizing the city.

Fed Chair Janet Yellen visits the
Philadelphia Fed and tours the
West Philadelphia Skills Initiative
and The Enterprise Center to see
workforce development in action.

Led by the work of its Information Security and Supervision,
Regulation, and Credit teams, the
Philadelphia Fed helps to ensure
the safety and efficiency of the U.S.
financial system.

Page 8

Page 10

Page 14

The Philadelphia Fed Lands a
‘Library for the Digital Age’

Field Meetings Allow Fed Leaders
to Engage with Local Bankers

Conference Explores How Towns
Transform Themselves

The Philadelphia Fed will house a
new Federal Statistical Research
Data Center. The designation
highlights the expert knowledge
that makes the Philadelphia Fed an
important source of research.
Page 16

www.philadelphiafed.org

Held in eight cities throughout the
District each year, field meetings
allow Fed officials to listen to bankers’ concerns as the Philadelphia
Fed works to ensure a safe and
robust financial system.
Page 18

The Community Development Studies & Education Department hosts
its Reinventing Our Communities
(ROC) symposium, which explores
how communities successfully
move from poverty to prosperity.
Page 20

7

Helping Our Communities Prosper
Chair Yellen meets with entrepreneurs, Philadelphia, PA

Fed Chair Sees Philadelphia Workforce Development in Action
The Federal Reserve System has a dual mandate
handed down from Congress. The Fed should support
circumstances that enable full employment while at
the same time work to ensure price stability. The first
half of the mandate — full employment — took center
stage when Federal Reserve Chair Janet Yellen visited
Philadelphia in June 2016.
Indeed, Chair Yellen has long been interested in
workforce development, and the idea of jobs — how
to create them, how to find them — threaded through
her daylong visit.
The Chair began with a speech to the World Affairs
Council of Philadelphia, a private, nonpartisan organization that promotes education. In her speech,
she noted the vast improvement in U.S. labor markets since the Great Recession. The accommodative
policies put in place by the Fed have helped spur
business activity such as car sales and homebuilding,
which in turn led to better job creation. Still, the Chair
noted, “While the general picture of the labor market

8

is largely positive, some people are still struggling,” in
particular African Americans and Hispanics.
The challenge of workforce development in minority
neighborhoods has been a major focus at the Philadelphia Fed. The Bank’s Community Development
Studies & Education (CDS&E) Department works sideby-side with District outreach groups to research how
economic change impacts towns and households and
to discover what programs successfully connect workers, particularly disadvantaged workers, with jobs.
President Patrick T. Harker and CDS&E members took
Chair Yellen to see some of these successful programs. The group stopped at the West Philadelphia
Skills Initiative (WPSI), operated by the University City
District (UCD). The work training and placement program helps unemployed West Philadelphia residents
learn the skills necessary to land and keep jobs with
local employers. Since it began six years ago, the
WPSI has trained 610 job seekers, 95 percent of whom
landed positions.

Federal Reserve Bank of Philadelphia

It was there that Chair Yellen sat down with students.
The seven current and former students described
how — despite having the correct credentials — they
could not land decent-paying employment. They discussed the discouragement of living and job hunting
in the shadows of large, successful businesses in
need of good employees.
One of those students was Joyce Bacon, a West Philadelphia single mother of four. She detailed the fruitless, yearlong job search she endured after being laid
off. Then, Bacon learned about the WPSI. In addition
to training for a career in health care, she received
coaching on her resume and interview skills.
Next, the WPSI presented to Bacon an advantage
prized by many job seekers: a foot in the door. It
arranged for her to interview for a position as a patient sitter at The Children’s Hospital of Philadelphia.
Access to employers like a major hospital generally
isn’t available to people like her, she said. “There’s a
disconnect between the residents (of West Philadelphia) and the premier employers such as Children’s
Hospital, Drexel University, and such,” Bacon said.
“The jobs are viewed by locals as out of reach.”
The participants’ stories highlighted one challenge
for the Fed and its 12 District Banks, including the
Philadelphia Fed. Residents who need employment
and local companies that need workers look past one
another. The Chair noted the gap goes beyond Philadelphia, saying “A lot of people have faced challenges
— even when there are jobs — in being able to get
hired and be successful in those jobs.”
WPSI’s program shows that connecting workers to
employers can be done. Thanks to the media entourage that shadowed the Fed Chair, her presence
shone a light on an economic success story in the nation’s poorest large city. Several major media outlets
featured the visit in their news coverage that day.
The Yellen visit was not the first — or last — time the
UCD and the Philadelphia Fed have collaborated. The
two institutions regularly share information, research,
and experiences in their mutual goal of alleviating
poverty through employment.
“You could describe it as a partnership of two different entities trying to accomplish the same thing,” said

www.philadelphiafed.org

Sheila Ireland, vice president, Workforce Solutions for
UCD. She added that Chair Yellen was keenly interested in the specific details of the ways in which UCD
accomplishes its mission. Nearly a year later, Ireland
said Chair Yellen’s visit continues to bolster UCD’s
stature with business partners and donors. “When we
mention Chair Yellen’s visit, they are impressed,” she
said.
Following the WPSI roundtable, the Chair visited other
Philadelphia success stories that help residents get
jobs and move up the economic ladder. First she
stopped at the 52nd Street Commercial Corridor, an
emerging business district supported by The Enterprise Center (TEC), which assists minority enterprise.
She also tasted a few confections at TEC’s Dorrance H.
Hamilton Center for Culinary Enterprises, which offers
commercial kitchen facilities and technical assistance
to entrepreneurs. “Chair Yellen is a big foodie, so we
made sure to go there,” Harker said.
Chair Yellen’s road tour wound up back at the Philadelphia Fed’s headquarters, where she held a town
hall meeting before a standing-room-only crowd that
spilled into overflow rooms with video feeds.
When asked to reflect on the day’s events, Chair
Yellen emphasized her interest in workforce development issues. “For me, studying economics, this
has always been my focus: unemployment and what
enables people to find satisfying work,” she said.
The Chair also applauded the Bank’s “very distinguished” community development efforts to support the maximum-employment mandate through
research that identifies what strategies work and then
disseminating that knowledge throughout the District
and beyond. “We can use the tools we have,” she
said. “And I really want to encourage the System to
promote these successful efforts.”
Harker observed that the Chair’s visit to the Bank
“reminded people that what we do here is important.
We are part of the leading central bank in the world.”
The Philadelphia Fed plans to expand its focus on
economic mobility in 2017, and Chair Yellen’s visit reinforced for all employees that creating an economic
environment that fosters job creation remains a core
objective of the Fed System.

9

Helping Our Communities Prosper

Employees at a Supervision, Regulation, and Credit Department Town Hall at the Philadelphia Fed

A Core Mission: Safeguarding the Financial System
The Philadelphia Fed works to protect the safety and
soundness of the U.S. banking system. As with the
11 other District Banks, the Philadelphia Fed aims to
fulfill the Federal Reserve System’s mission to ensure
a robust financial system that promotes economic
growth and provides a fair and transparent consumer
financial services market.
The Philadelphia Fed’s Supervision, Regulation, and
Credit (SRC) team supervises 22 state member banks
to evaluate whether they are complying with governmental regulations and meeting the needs of the
communities in which they operate. Supervision efforts assess whether banks offer safe financial products to consumers and are managing risks effectively.
“From a supervisory standpoint, we want to make
sure that consumers have confidence that banking
organizations are looking out for the interests of their
customers and are conducting their business in a

10

safe and sound manner,” said William Spaniel, senior
vice president, SRC.
The Philadelphia Fed is also responsible for helping
its member banks satisfy their obligations under the
Community Reinvestment Act (CRA), which requires
financial institutions to meet the needs of the geographical areas in which they operate. That includes
extending credit opportunities to low- and moderate-income communities — something especially vital
in the Third District, which contains many struggling
urban, suburban, and rural areas seeking to revitalize.
According to Spaniel, CRA’s benefits extend beyond
guaranteeing access to credit. “The more we can lift
up low- and moderate-income households, the more
we can lift up the financial sector and the economy in
the Third District,” he said.
When it comes to helping banks comply with appli-

Federal Reserve Bank of Philadelphia

cable laws and regulations, the Philadelphia Fed has
taken on a leadership role by publishing two newsletters for community bankers on behalf of the System.
With each issue, the Philadelphia Fed distributes
more than 10,000 copies of Community Banking
Connections, which focuses on safety and soundness,
and nearly 25,000 copies of Consumer Compliance
Outlook, which covers consumer compliance topics.
The Bank also collaborates with other Federal Reserve Banks and the Board of Governors in the Comprehensive Capital Analysis and Review (CCAR) program. Put in place in 2011 in response to the financial
crisis, CCAR evaluates whether the largest U.S.-based
bank holding companies have enough capital and
robust processes in place to survive a severe stress to
the economy.

Members of the CCAR team: (seated) Larry Cordell, Chellappan
Ramasamy, and Paul Calem; (standing) Andrew Kish and
Matthew Frame

CCAR evaluations include both quantitative and
qualitative assessments. The former uses models
to project what remaining capital banks would have
in a stressful environment and whether that capital
is sufficient, while the latter attempts to determine
whether banks have appropriate risk management,
internal controls, and governance to develop an effective capital plan. “The goal is to mitigate the risk of
another financial crisis, which occurred when banks
were undercapitalized at the peak of the crisis,” said
Larry Cordell, vice president, SRC.
SRC is responsible for developing supervisory stress
test models used in the quantitative assessment for
four core retail banking products — credit cards, auto
loans, and first- and second-lien mortgages — as
well as some securities models. Additionally, the Risk
Assessment, Data Analysis, and Research (RADAR)

www.philadelphiafed.org

Chantel Gerardo and Jessica Weber of the Writing Center
coach examiners Darren Wolfe and Kevin Clark

Writing Center Improves
the Bank’s Impact in the
District
While opening a writing center may seem
like an odd move for a Federal Reserve Bank,
the Philadelphia Fed did just that in 2013.
The SRC Writing Center was an innovative
response to an identified challenge: Bankers
could not always understand the detailed
reports from bank examiners describing what
changes management needed to make to
comply with regulations. “We clearly had a
need. We needed to communicate better, and
we needed to communicate more clearly,”
said Spaniel.
The center operates much like those usually
found in a college or university setting, offering voluntary, one-on-one writing coaching
and group sessions conducted by Jessica
Weber and Chantel Gerardo, examination
report review analysts. The center has proven
a success, with Weber and Gerardo conducting more than 400 consultations to date. An
evaluation found the reports that had gone
through the program showed a 36 percent
improvement in overall quality and a 48 percent improvement in clarity.
The SRC Writing Center is just another unique
way the Philadelphia Fed serves its member
banks and fulfills its mission. According to
Spaniel, “Our messages to bankers are much
clearer about what our expectations are, so
the banking system is stronger.”

11

Group, led by Cordell, provides data management for
the stress tests. “Data quality is of critical importance
for a model’s predictive accuracy,” said Paul Calem,
vice president, retail risk group in SRC.
In 2016, the Philadelphia Fed assumed a yet larger role in CCAR, contributing leadership to a System oversight group that manages the day-to-day

William Spaniel

operations of the program and supervises the work
of evaluation teams responsible for the qualitative
assessment. The Philadelphia Fed contributes to the
retail risk evaluation team and provides expertise in
assessing risk in banks’ securities portfolios. Overall,
about 50 Philadelphia Fed staff members contribute
to the System-wide CCAR workforce.
Managing cybersecurity risk is another significant
factor to ensure the safety of the banking system,
and the Philadelphia Fed is at the forefront of these
efforts.
At the District level, annual field meetings provide
an opportunity for Bank experts to share information on emerging issues in the cybersecurity space
with member bankers. In addition, the Bank hosts a
series of conferences with member and nonmember
financial institutions in an effort to share approaches
to and lessons learned from cybersecurity incidents.
The events “create a forum to ensure that all financial institutions gain access to knowledge, resources,
and relationships that are available but they may not
know about,” said Keith Morales, the Bank’s vice president, information security and data privacy officer.
Within the System, Morales cochairs the Information Security Officers Group, and the Philadelphia
Fed leads initiatives that aim to transform how the
System provides information security services and

12

how cybersecurity risk is measured and managed.
Morales worked with researchers at Carnegie Mellon
University who specialize in insider risk, resilience,
and risk assessment to create a model to be used by
the System. The model helps to prioritize investment
in risk-reducing activities, increases the Philadelphia
Fed’s ability to debate differences of perspective in
risk, and anticipates post-investment risk levels. “The
model brings structure and discipline to describing
cybersecurity risk to enable transparent debate and
drive investment decisions,” he said. The Bank is also
currently working to patent a process for new technology that will increase the security of devices used
by employees around the System, and Morales’ team
leads internal efforts such as the Insider Threat and
Privacy programs.
Outside of the System, Morales’ group maintains
strong and mutually beneficial relationships with
federal law enforcement and the intelligence community. The Bank has played a leadership role in
critical infrastructure protection initiatives, including
the FBI’s InfraGard Program and the Secret Service’s
Electronic Crimes Taskforce. The Bank also partners
with universities in the region, including the University of Pennsylvania, Drexel University, and the University of Delaware to drive curricula to ensure that the
next generation of cybersecurity experts has the right
skills and access to cutting-edge information and
research in cybersecurity risk management.

Keith Morales

“We recognize the criticality of cybersecurity to Third
District financial institutions and to our national security,” said Morales. “We make it our mission to leverage
every available relationship, piece of knowledge, and
experience to make all of our constituents and our
critical infrastructure partners as capable as possible
in protecting their organization and our country.”

Federal Reserve Bank of Philadelphia

This page was intentionally left blank

www.philadelphiafed.org

13

Helping Our Communities Prosper

Practice site of Philadelphia 76ers under construction, Camden, NJ

Camden Rising: President Harker Tours a City in Transition
Community tours are a crucial part of the Philadelphia Fed’s outreach in the Third District. They allow
Fed leadership and staff to engage directly with local
residents and leaders and witness economic conditions on the ground firsthand. In the view of President Patrick T. Harker, “Understanding the barriers to
economic prosperity is important for the Philadelphia Fed in our community development work, our
economic education outreach, and in understanding
the role of financial institutions in lifting our communities well into the middle class.”
In the past few years, Camden, NJ, has become a
prime example of how collaborative efforts can take
down those barriers to prosperity and help a community lift itself up. Camden was the poorest large
municipality in the U.S. as recently as 2012, according
to the U.S. Census Bureau. But thanks to the combined work of municipal and civic leadership, state
and federal support, and private sector investment,

14

the city appears to be on an upswing after years of
disinvestment and decline.
In April 2016, Harker took a community tour through
the post-industrial city of 77,000 residents. In the
morning, Harker delivered opening remarks at a
conference cosponsored by the Bank’s Community
Development Studies & Education Department, the
Federal Deposit Insurance Corporation, and the City
of Camden. The event focused on Camden’s progress
with respect to the Community Reinvestment Act
(CRA), which requires financial institutions to meet
the needs of communities — including low- and moderate-income communities — in which they operate.
Speaking to representatives from the banking and
nonprofit sectors as well as city, state, and federal
government, Harker emphasized how important CRA
capital was to local entrepreneurs who could take
care of their families and create jobs, and to young
couples who, through an affordable mortgage, could

Federal Reserve Bank of Philadelphia

fulfill their dream of becoming homeowners, build
equity, and make an investment in their city.
Afterward, Camden Mayor Dana Redd spoke, highlighting data on Camden’s progress. Camden has seen
business investment blossom since state legislation
passed in 2013 committed more than $1 billion in tax
incentives to firms with plans to relocate to the area. In
2014, the city received its first Standard & Poor’s investment grade rating in more than 15 years, recognizing
the fiscal controls it has instituted to improve and stabilize the city’s finances. In 2015, Camden was named
a Promise Zone. The federal designation guarantees
priority funding and support for high-poverty areas.

The “eds and meds” sector also continues to grow
and create jobs in the city. Health care and education
account for nearly 40 percent of all employment in
Camden, a trend that shows no sign of reversing. The
planned Joint Health Sciences Center in downtown
Camden, slated to open in 2018, is anticipated to add
approximately 580 jobs. In a recent speech, Redd
credited the industry in helping to drive the unemployment rate down. Average annual unemployment
in Camden fell from 19 percent in 2010 to just below
10 percent in 2016, according to the Bureau of Labor
Statistics.
While Camden has made attempts to reinvent itself in
the past, it has never seen quite the same concerted
push from the public, private, nonprofit, and civic sectors. “It’s a team
effort,” said Harker. “It’s the city, it’s
the business community, it’s a lot of
organizations and people working together, and that makes a difference.”

Redd is a vocal advocate of collaboration. When she appeared at the
Philadelphia Fed’s Reinventing Our
Communities conference in September 2016, she stressed the imperative of approaching revitalization
in a “holistic manner” and “taking
the next step” to communicate with
Mayor Dana Redd (right) talks to (left to right) Maria T. Maio-Messano, director, New
stakeholders. To ensure community
Jersey State Office, U.S. Department of Housing and Urban Development; Patrick T. Harker,
buy-in, Camden has set up a special
Philadelphia Fed President; and Novella Hinson, chief of staff to Mayor Redd
congress with representatives from
each neighborhood. The representaAfter the mayor presented Harker with the key to the
tives meet regularly with city staff to hear new plans
city, representatives from local grassroots organiand report back to their neighbors.
zations took Harker, Redd, and others on a tour of
“We are beginning to see unprecedented change and
revitalizing areas.
exciting outcomes throughout our city,” said Redd.
There are new schools, parks, public housing de“I believe that Camden’s Promise Zone designation
velopments, and future corporate sites in various
points to a smart and more cooperative approach to
stages of completion. The Philadelphia 76ers rerevitalizing a distressed community. It demonstrates
cently finished a training facility on a complex that
how the federal government is making a strong effort
will include front office space and an entrepreneur
to take a ‘bottom-up’ approach by engaging with local
incubator. Subaru America will relocate its headquargovernment and communities.”
ters to Camden, consolidating facilities and moving
The Philadelphia Fed will continue to closely monitor
600 regional employees into the area. The energy
Camden’s progress and remain an active partner as
technology firm Holtec International is constructing a
the city grows and finds solutions to its most press50-acre campus that will include two manufacturing
ing challenges. “The Philadelphia Fed looks forward
facilities and an engineering center. In addition, Libto working with the community and supporting the
erty Property Trust — a multibillion-dollar real estate
leaders of Camden in their efforts to foster a strong,
investment firm — has plans for an $800 million
vibrant, and inclusive economy,” said Harker.
waterfront project that will include a hotel, homes,
offices, shops, and restaurants.

www.philadelphiafed.org

15

Helping Our Communities Prosper

Iourii Manovskii, Jeffrey Lin, and Keith Sill look over blueprints for the new data center

The Philadelphia Fed Lands a ‘Library for the Digital Age’
For economists, demographers, and policymakers, the
Federal Reserve System is a key source for unbiased
data and expert knowledge. The primacy of the Philadelphia Fed’s research expertise was corroborated
in July 2016 when the U.S. Census Bureau named the
Bank as a new site for a Federal Statistical Research
Data Center (FSRDC).

16

definite positive in advancing the understanding of
the local economy and the national economy.

“Being selected to house a Census data center builds
on the Philadelphia Fed’s reputation for high-quality
social science research,” said Jeffrey Lin, an economist at the Bank who will be codirector of the center,
with Iourii Manovskii, an economics professor at the
University of Pennsylvania.

The data center housed at the Philadelphia Fed will
benefit the Third District in two ways. First and foremost, good research leads to good policies within the
District and beyond. Policymakers must understand
what programs work and how the economy is evolving in order to guide policy in the most effective direction. “The purpose of the data center is to connect
us to the best social science research on individuals,
businesses, neighborhoods, cities, and the nation as
a whole to make better choices and contribute to the
working of the economy,” said Lin.

The Philadelphia Fed facility will be run as a branch
of the center based at Pennsylvania State University
in State College, PA. Mark Roberts, economics professor at Penn State, heads up the university’s center
and said another center in the Third District is a

Industry data also give insight into why some companies prosper and hire, while others do not. “What we
know about the life cycle of firms comes from studying businesses at the micro level — the data available
in the data center,” said Roberts. That’s important for

Federal Reserve Bank of Philadelphia

District households because past research has shown
job creation comes mostly from young firms. Communities that are reinventing themselves will want solid
research that identifies the policies and infrastructure that these towns can put in place to support
start-ups and fledging enterprises.
Second, the ability to attract and retain researchers
will keep the Philadelphia area at the forefront as
an educational and knowledge hub. Education along
with health care have been job generators for the
area and the nation. “A local research center will
make Philadelphia more attractive to researchers
doing empirical work,” said Roberts.
The process begins with formulating a research
proposal. A Census Bureau administrator on site can
help with the proposal, but the idea must benefit the
bureau and ensure the data remain anonymous. The
Census Bureau then reviews each application. When
a proposal is approved, the researcher receives an
access card for entry into the facility. The researcher
then has a five-year window in which to conduct and
complete the project. The results must be reviewed

available down to a level as specific as a city block.
Each data center gives researchers access to an estimated 60–70 data sets, each containing thousands of
observations. The data centers are unique in that the
information cannot be taken off site. But researchers in different centers can collaborate. Roberts, for
instance, has worked at the Penn State site with an
economist at the Federal Reserve Bank of Atlanta.
The granular nature of the data allows researchers
to look at economic, health-care, or demographic
trends across various but specific geographic areas.
For instance, economists can correlate income growth
with households’ proximity to mass transit. A healthcare expert can try and compare the incidences of a
disease with the nearness of certain production sites.
An FSRDC “is a library for the digital age,” said Keith
Sill, senior vice president and associate director of
Research at the Philadelphia Fed, who spearheaded
the effort to house the new center.
The process to bring a center to the Philadelphia Fed
began when Sill approached Roberts to head the
application effort. The Bank
then banded with Drexel
University and the University
of Pennsylvania to assemble the bid and submit the
application to the Census
Bureau where it was reviewed. The consortium of
four institutions — the Philadelphia Fed, Penn State,
Drexel, and Penn — will share the cost of the two
Pennsylvania facilities.

The data centers are a way for researchers to access
millions of data points the Census Bureau collects
and approved by the bureau to make sure they meet
the bureau’s requirements on confidentiality before
the results can be presented to the public in research
articles or conference presentations.
The data centers are a way for researchers to access
millions of data points the Census Bureau collects
through the decennial census of the population
and surveys of households and firms for economic
reports. The center will also include data from the
National Center for Health Statistics and eventually
the Bureau of Labor Statistics. Published data are
aggregated from the individual responses, and economists use publications such as the monthly retail
sales report and the durable goods report to gauge
economic activity. Census officials wanted to make
the individual information available to researchers to
do deeper dives into economic trends but only after
the data had been scrubbed of any detail that would
allow a person to be identified.
The Census Bureau decided on creating data centers in which the anonymized information would be

www.philadelphiafed.org

Construction began in January 2017 to build the facility on the first floor of the Bank. “One advantage Federal Reserve Banks have over other buildings is their
security,” said Sill, which includes cement floors and
security entrances. In addition to the Philadelphia
Fed, the Federal Reserve Banks of Atlanta, Kansas City,
and Chicago host data centers.
The new center highlights how the Philadelphia Fed
works to engage local economies and households
and help them prosper. Research done by the Bank’s
economists furthers that effort, and the new center
will allow them to work beyond the published data.
“The center gives researchers the ability to further
our understanding of the underlying structure of the
economy in ways that go beyond what’s available
from public, aggregated data,” Lin said.

17

Helping Our Communities Prosper

Bill Guinan and Bond Kraemer meet with community bankers

Field Meetings Allow Fed Leaders to Engage with Local Bankers
Field meetings have been a staple of the Philadelphia
Fed’s relationship building for more than 70 years.
The gathering of local bankers and Fed officials started as an event to sell war bonds for the federal government during World War II. Today the field meetings
afford the Philadelphia Fed’s senior management
the opportunity to meet directly with bankers to gain
their perspectives on local banking conditions, the
local economy, and the bank regulatory environment.
Field meetings are unique to the Philadelphia Fed.
The meetings typically involve a reception, presentations by senior Bank officials, and a dinner speech
by President Patrick T. Harker. Harker spoke on
three topics during the 2016 meetings: his economic
outlook, monetary policy, and his role in the Federal
Open Market Committee (FOMC), the policy-setting
group that meets at the Board in Washington, D.C.

18

Also in 2016, the field meetings introduced a feature called “Chat with Pat” that was extremely well
received. Presentations covered a regulatory update,
economic update, and cybersecurity.
More than 700 executives representing a high percentage of community banks attended the eight field
meetings, the highest attendance in four years. Over
90 percent of Third District community banks were
represented at the meetings. The locations were chosen to accommodate the most banks within a reasonable driving distance. Meetings were held in Hershey,
State College, Williamsport, Gladwyne, Scranton, and
Allentown, PA; Newark, DE; and Haddonfield, NJ.
Anthony Scafide, assistant vice president, Financial
Institutions Relations, and his experienced team of
Bond Kraemer, Bill Guinan, Tony White, and Janet

Federal Reserve Bank of Philadelphia

Rizzo, manage the Bank’s relationship with financial institutions around the Third District. But the
highlights of the year are the eight trips that bring
senior executives of the Bank to meet groups of local
bankers in central locations. “The field meetings are
a culmination of the outreach we do all year,” Scafide
said.
Scafide, a 38-plus year veteran of the Philadelphia
Fed, has throughout his career been engaged with
Third District institutions and has spent the last
15 years maintaining and strengthening the Bank’s
relationships with Third District financial institutions,
including credit unions, community banks, banking
associations, and others. That experience has allowed
him to see how community banks represent the backbone of communities and occupy a critical part of the
financial system and local economies: “Community
bankers know everything and everybody in their trade
area. They see their customers in church, supermarkets, restaurants, and walking down the streets. They
sit down at the kitchen table with their customers
and provide sound financial service and advice to
their customers.”
“We understand and emphasize the value of a community bank to the community it serves by making
loans; providing access to funds; managing deposits;
giving advice; making mortgages, small business
loans, and agriculture loans; and by supporting and
being active in their communities,” said Scafide.
The interaction that takes place with bankers at the
field meetings is essential for the Philadelphia Fed
as it seeks to gather on-the-ground knowledge about
the District’s economy. “These are the people who
deal with the local community — individuals and
commercial enterprises, including small businesses
that employ most of the people in the country,” said
James D. Narron, first vice president, who joined the
Philadelphia Fed in April 2016 and used the meetings
to introduce himself to the bankers in the District.
Mifflin County Savings (MCS) Bank in Lewistown, PA,
is one of those banks. Chartered in 1923, MCS has
six locations and $141 million in assets. In 2013, MCS
opened its fifth full-service branch in a hardware
store in a local, predominantly Amish community
after the abrupt departure of a large regional bank
left the locals in a lurch.
MCS Bank Chief Executive Terry Foster, along with his
colleagues, have been attending the field meetings

www.philadelphiafed.org

for 20 years. “We have found the venue to be an invaluable opportunity to interact with the Federal Reserve Bank staff and the incumbent president and to
be able to directly share our perspectives on banking
and economic conditions and issues within the Third
District,” Foster said.
The understanding goes both ways, according to Scafide. “The information we glean from the bankers is
as important as the information they learn from us,”
he said. “The field meetings are one of the ways Pat
gets insights into the local economies and happenings in the communities. They keep our Research area
informed of economic events, as well as pass along
information to our Supervision, Regulation, and Credit
team and others in various areas of the Bank that
interact with bankers.”

Anthony Scafide

Harker agreed. “Field meetings are good for me
because, in addition to getting out and meeting the
community bankers and hearing their concerns, I
also get to see the challenges and opportunities our
District communities face. The FOMC provides an
overall look at the average health of the U.S. economy, but there are communities that aren’t reaping the
benefits that others are. And seeing this firsthand is
valuable.”
The anecdotes shared across the dinner table can
provide early insight into changes in the economy.
For example, talks at the Williamsport, PA, meetings
in 2007 and 2008 enabled the Philadelphia Fed to
be one of the first to identify the potential economic
impact of the Marcellus Shale natural gas drilling
project.
The Philadelphia Fed will continue this process
of talking to community banks. It is another way
the Bank engages with local communities, gaining
knowledge that can benefit areas beyond the Third
District.

19

Helping Our Communities Prosper

Theresa Singleton addresses the Reinventing Our Communities conference

Conference Explores How Towns Transform Themselves
The loss of manufacturing industries and boarded-up
Main Streets have left many of the nation’s aging
industrial cities with daunting economic and social
prospects, even as the U.S. economy expands and
unemployment remains low nationwide.
The dichotomy is clearly visible in the Third District,
where areas of extreme wealth bump up against
pockets of poverty and despair. The Philadelphia Fed
has long been committed to furthering the research
needed to better understand how poverty affects
the economy and to use those findings to inform
policymakers and promote economic mobility. The
Bank believes that the best approach to transforming
struggling communities is to combine practices that
are based on solid research and research informed
by proven practices.
Toward that end, every other year, the Community
Development Studies & Education Department of the

20

Philadelphia Fed convenes a three-day conference
that focuses on developing tools and strategies for
revitalizing the nation’s struggling communities in the
face of growing inequality.
In 2016, the name of the seventh biennial conference
was changed from “Reinventing Older Communities”
to “Reinventing Our Communities” (ROC) to broaden
the conference’s focus area, according to Theresa Singleton, vice president and community affairs officer.
“‘Our’ may be a small word, but it signifies the importance of working together so that all have the tools to
prosper,” she said.
Close to 100 scholars and practitioners came to
Philadelphia on September 21–23 to present their
research and share their experiences and approaches
to creating equitable and inclusive economies.
In his opening remarks to the conference, keynote

Federal Reserve Bank of Philadelphia

speaker Xavier de Souza Briggs of the Ford Foundation, stressed the importance of fostering inclusive
economic opportunity, amid growing evidence that
inequality “saps growth” and “affects us all, not just
the disadvantaged.”
It is a sentiment that resonates with the Philadelphia
Fed and its President Patrick T. Harker, who participated in his first conference as head of the Bank. “Our
own economic fates are tied to the well-being of our
neighbors,” he said.
In between the opening keynote address and the
closing remarks was a jam-packed schedule of
educational and networking opportunities. Some
430 community developers, planners, policymakers,
researchers, and foundation representatives from
across the country and Canada attended receptions,
workshops, and plenary sessions. For the first time,
the ROC conference offered off-site “deep-dive”
learning labs that provided an opportunity to explore
the topics of resident engagement and the Community Reinvestment Act.
On the first day of the conference, as a way to
connect research to practice, there were tours of
Schuylkill Banks and Grays Ferry Crescent, as well as
the Mt. Airy neighborhood. Participants were able to
see how the Schuylkill River Trail, when completed,
will link disadvantaged neighborhoods to job and
cultural opportunities throughout the city.
Conferees then returned to the ROC site at the Hilton
Philadelphia to attend workshops that focused on
affordable housing, success stories in the work to
address extreme poverty, and the importance of getting revitalizing communities connected with needed
capital.
Day 2 featured a global perspective on economic development and community transformation presented
by leaders of the Organisation for Economic Co-operation and Development and the World Economic
Forum. At lunch, a panel of mayors of major U.S. cities
shared stories of what their governments and constituents are doing to revitalize their communities.
Attendees could also choose from among 10 different
workshops during the day.
The highlight of the third day was a Q&A session
moderated by National Public Radio’s Michel Martin
with three regional Fed presidents: Philadelphia’s
Harker, Loretta J. Mester from the Cleveland Fed, and

www.philadelphiafed.org

Dennis Lockhart from the Atlanta Fed.
“The conference feedback was overwhelmingly positive, and participants underscored the importance
of bridging perspectives from research and practice
throughout the event,” Singleton said.
The key takeaways from the ROC conference emphasized the need for collaboration, patience, and
access. Indeed, no single approach can achieve
sustainable economic growth on the local level.
Progress takes time and is not immediately evident
sometimes. Stakeholders need to understand this
and commit for the long haul.
Finally, the only way a community will reach its full
economic growth is if every resident has access to the
tools that allow each to achieve their full potential.
These tools include a good education and access
to child care, health care, affordable housing, and a
dependable transit system.
As it has done with every conference, the Bank
partnered with cosponsors and other Reserve Banks,
seven of which collaborated in 2016, to plan and
execute the conference. Ten cosponsors, including
the University of Pennsylvania’s Institute for Urban
Research, provided supporting research in many of
the sessions.
Cosponsors play a key role in shaping the conferences by “providing key insights on emerging topics
and leading speakers, which enable us to develop
rich content while reaching a broad audience,” Singleton said.
In addition to the cosponsors, 66 organizations
supported the 2016 conference by promoting it within
their own broad networks, helping to spread the word
even farther.
“We were able to host a world-class, signature conference because of the dedication and work of our staff,
cosponsors, and our network of community development professionals,” Singleton said.
The Philadelphia Fed will continue its research into
economic mobility with more conferences in the
future and a new initiative for 2017 that will build on
the work laid out at the 2016 ROC meeting. “I want
Philadelphia to be a leader in this work because I see
it as a fundamental part of the long-term economic
health of the region and the country,” Harker said.

21

Our Engaged Staff
Employees at a Philadelphia Fed Town Hall

At the heart of any organization are its people. The
Philadelphia Fed’s 900 employees not only make their
mark within the four walls of the Bank, they reach
out across the Federal Reserve System and the local
community to partner on a variety of projects.
Collaboration is key when Bank employees work
with colleagues at government agencies or across
the 12 Districts of the Fed System. For example, Paul
Calem, vice president in the retail risk group of the
Supervision, Regulation, and Credit (SRC) Department, began working with the Consumer Financial
Protection Bureau (CFPB) and indirectly with the
Federal Housing Finance Agency in 2016. The CFPB, a
government watchdog for the financial industry, has
fielded more than 1 million consumer complaints and
has helped more than 27 million consumers to date.
Calem is working on applications for the new National Mortgage Database, designed partly to evaluate the
impact of the rule that measures a borrower’s ability
to repay a qualified mortgage and to explore what
kind of impact the rule has had on banks that serve
certain segments of the mortgage market.

22

“My work involves bridging the gaps between the raw
data,” said Calem, “to create a user-friendly database with applications for research and policy.” The
experience has also reconnected him with System
colleagues, which should lead to more collaboration.
“We’ve developed and solidified relationships that I
expect to continue in the future,” said Calem.
Critical research work was done in 2016 to evaluate
the Fed’s missions of monetary policy and bank
regulation. Roc Armenter, Research vice president and
economist, and Benjamin Lester, senior economic
advisor and economist, were part of a System-wide
initiative to evaluate a host of possible long-run
frameworks to implement and conduct monetary
policy. They developed a model to investigate the role
of interest paid on excess reserves and the overnight
reverse repurchase (ON RRP) facility in monetary
policy. In early 2017, the Review of Economic Dynamics published their ground-breaking work, “Excess
Reserves and Monetary Policy Implementation.”
Research senior economic advisor and economist
Ronel Elul has also been working on System initiatives,

Federal Reserve Bank of Philadelphia

most notably the Dodd–Frank Act Stress Tests (DFAST).
Elul has been working with the System’s central point
for retail supervisory modeling, the Philadelphia
team led by Chellappan Ramasamy, SRC assistant vice
president. Their core work is developing stress testing
models for first-lien mortgages, home equity, credit
cards, and auto loans.
“What the modeling teams build are generally models
of default risk for individual loans or classes of loans,”
said Elul, who began working with modeling teams
at the Chicago and Minneapolis Feds prior to supporting efforts at home base. Potential crises can be
simulated, and the teams can determine what kind of
potential losses the banks would then bear on these
loans. In addition to benefiting from what he learns
through interacting with the teams, Elul values his work
because it not only strengthens Philadelphia’s contribution to the System project but also
aligns well with the Bank’s initiatives
on consumer credit.
The Bank also rolled out innovative
new products, such as the Aruoba
Term Structure of Inflation Expectations (ATSIX), launched by the Research Department’s Real-Time Data
Research Center in March 2016. Tom
Stark, assistant director of the center,
coordinated the efforts in publishing
this new measure of inflation expectations that provides forecasts for any
point in time between three and 120
months in the future. The ATSIX uses
a statistically optimal method that
combines several major surveys: the
Survey of Professional Forecasters,
published by the Philadelphia Fed,
and the Blue Chip Economic Indicators and Blue Chip
Financial Forecasts, published by Wolters Kluwer Law &
Business.
“The great appeal of the ATSIX is that it is based on
rigorous statistical methods designed to extract an
optimal signal about inflation expectations, a variable
that is central in modern-day macroeconomic models,” said Stark, who sees the benefits of the model’s
broad reach to firms and households in future decision
making. “The ATSIX provides additional information to
policymakers, researchers, and business analysts for
studying how inflation expectations and real interest
rates evolve and respond to monetary policy,” said Fatima Mboup, a senior research assistant in the center.

www.philadelphiafed.org

For Dan Kutschera, budget manager in the Enterprise Risk Management Department, his foray into a
System initiative opened the door to new perspectives. He spent two months working with the Board
of Governors’ Division of Reserve Bank Operations
and Payment Systems, helping to plan the System’s
annual budget meeting and to analyze proposed
cost-accounting changes and budget guidance targets
for 2017. Reflecting on the experience, he said it was
“eye opening to see the vastness of what the System
does.”
The Bank’s employees work hard to engage communities, especially in the area of financial education.
Andrew Hill and Todd Zartman, economic educators
in the Community Development Studies & Education
Department, work with Third District teachers on
economic and personal financial education programs,

Employees of PhillyFedCARES at Philabundance

including Keys to Financial Success and Making Sense
of Money and Banking. “Most teachers have little
experience teaching about personal finance, economics, and the Federal Reserve,” Hill said. “We’re here to
teach them how best to approach the topic.”
Last year, Hill built on the programs’ previous successes and created online modules to reach a nationwide audience. Specifically geared to K–12 teachers,
the four-module course offered last summer helped
more than 80 participants from Florida to Washington state who signed up for “The Case of the Gigantic
$100,000 Bill” to learn how fractional reserve banking
works and how banks create money when they make
loans.

23

“We expanded into more geographic areas to reach
teachers who wouldn’t be able to attend the in-house
program at the Bank,” said Hill, who partnered with
the Council of Economic Education’s nationwide
network and other Reserve Banks to spread the word.
“We succeeded in engaging with educators from
across the country with one of our best lessons.”
Whether it’s called corporate or social responsibility,
lending a helping hand in the community resonates
with employees. The Bank’s PhillyFedCARES is an
initiative spearheaded by a nine-member Volunteer
Advisory Council and carried out by employees who
give of their time and talent in select events yearround. On Martin Luther King Jr. Day, Bank employees
wearing PhillyFedCARES T-shirts spent the day at
the Andrew Jackson Elementary School in Philadelphia, sprucing up the building and the grounds. “The
school has come to depend on the Bank to help out
with much-needed projects every year,” said Bob
Mucerino, vice president of Collateral Management

President Patrick Harker visiting the Cristo Rey High School

program, which began last November. And during the
holidays, volunteers gathered at the Salvation Army
Citadel Corps Community Center in Philadelphia to
sort and display toys destined for underprivileged
children in the Third District.
One of the Bank’s outreach programs has engaged
local youths in a special workstudy program with Philadelphia’s
Cristo Rey High School. For the
third consecutive year, the Bank
— along with nearly 100 other
companies — partnered with the
high school, giving students a
chance to work in a professional
environment while they are still
in school. In 2016, eight students
worked with mentors in two Bank
departments in accordance with
their skill sets and interests: Information Technology Services and Supervision, Regulation, and Credit.
President Patrick T. Harker understands the value
of mentorship programs, noting that the skills he
learned in his youth through mentoring could be easily transferred to any job when he started his career
years later.

For the third consecutive year, the Bank —
along with nearly 100 other companies — partnered with the local Philadelphia high school,
giving students a chance to work in a professional environment while they are still in school.
and Administrative Services and a member of the
Volunteer Advisory Council. “Not everyone can participate in the actual event, but those who still want to
help do so by donating school supplies and clothing.”
In 2016, PhillyFedCARES’ volunteers rolled up their
sleeves at many other events. They helped the Philabundance Hunger Relief Center in South Philadelphia
process, sort, and package more than 12,000 pounds
of food items and 3,400 pounds of apples for local
food distribution centers. To commemorate September 11, more than 60 employees and their families
signed up for the annual Bank-sponsored 9/11 Heroes
Run in Fairmount Park, a portion of the proceeds of
which went to the Fraternal Order of Police Survivors
Fund and the Philadelphia Firefighters Widows Fund.
Bank employees helped first and second graders at
the General George A. McCall Elementary and Middle School in Philadelphia better understand money through the Teach Children the Value of Money

24

“The program is part of the Bank’s community outreach, building a real-life experience for students in
the workplace,” said Donna Koller, staffing manager in
Human Resources. “Students sharpen their communication and computer skills and learn about the importance of collaboration in a corporate setting while
helping the Bank,” said Koller. “Like all our community
involvement, it’s a win-win for both of us.”

Federal Reserve Bank of Philadelphia

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www.philadelphiafed.org

25

2016 Board of Directors
Sitting, from left: Patricia Hasson, William S. Aichele, and Carol J. Johnson; standing, from left: David R. Hunsicker,
Edward J. Graham, Jon Evans, Phoebe A. Haddon, and Brian M. McNeill; not pictured: Michael J. Angelakis

BOARD MEMBERS
CHAIRMAN
Michael J. Angelakis (a, d)
Chairman and CEO
Atairos Management, L.P.
Bryn Mawr, PA
DEPUTY CHAIRMAN
Brian M. McNeill (a, c, d)
President and CEO
TouchPoint, Inc
Concordville, PA

26

William S. Aichele (a, c)
Chairman
Univest Corporation of Pennsylvania
Souderton, PA

Patricia Hasson (a, c)
President and Executive Director
Clarifi
Philadelphia, PA

Jon Evans (a, b)
President and CEO
Atlantic Community Bankers Bank
Camp Hill, PA

David R. Hunsicker (a, b, d)
Chairman, President, and CEO
New Tripoli Bank
New Tripoli, PA

Edward J. Graham (a, b, d)
Former Chairman and CEO
South Jersey Industries
Folsom, NJ

Carol J. Johnson (a, c)
Former President and COO
AlliedBarton Security Services
Conshohocken, PA

Phoebe A. Haddon (a, b)
Chancellor
Rutgers University–Camden
Camden, NJ

(a) Executive Committee
(b) Audit Committee
(c) Management & Budget Committee
(d) Nominating & Governance Committee

Federal Reserve Bank of Philadelphia

Our Directors Weigh In
Phoebe A. Haddon
Phoebe A. Haddon serves as a Class C director. She has been the chancellor of
Rutgers University–Camden since 2014 and is responsible for the daily administration of more than 6,600 students in 39 undergraduate and 28 graduate programs.
Previously, she was dean of the University of Maryland Francis King Carey School of
Law. Before that, she was a faculty member at Temple University’s Beasley School
of Law for nearly 30 years. Haddon has written extensively on equality in education
and access to counsel for civil litigants.
“Being chancellor at Rutgers and
a director at the Philadelphia
Fed gives me a greater ability
to share my insights about the
impact of student loan debt and
other perspectives from our
students and graduates in the
Third District.”

Haddon is a member of the American Bar Association’s Commission on the Future
of Legal Services, the CEO Council for Growth, the board of the Philadelphia Museum of Art, and the board of trustees for the Cooper University Health System. She
also served on the board of trustees at Smith College from 1999 to 2009 and as the
board’s vice chair from 2004 to 2009. Haddon graduated cum laude with a J.D. from
Duquesne University School of Law, has an LL.M. (master of laws) from Yale Law
School, and has a bachelor’s degree from Smith College.

Patricia Hasson
Patricia Hasson serves as a Class B director. She is the president and executive
director of Clarifi in Philadelphia. Before joining Clarifi in 1998, she spent more than
12 years as a banking executive.

“As a director, I can see the Fed
working with its partners and I
get to see the great work that is
being done at the Bank from a
different perspective.”

Hasson was appointed to the inaugural Consumer Advisory Board of the Consumer
Financial Protection Bureau in 2012 and serves on the Oversight Board for the Philadelphia Mayor’s Office of Community Empowerment & Opportunity. She also was on
the Federal Reserve Board Consumer Advisory Council (CAC) and chaired the CAC’s
Housing & Community Development Committee. Hasson has an M.B.A. from Villanova University and bachelor’s degree in finance from the University of Dayton.

Jon Evans
Jon Evans serves as a Class A director. For 36 years, he has served banks in the
mid-Atlantic region, ranging from small community to regional institutions. He
worked in operation and credit positions before managing the Financial Institutions
Group at Summit Bank in Princeton, NJ, in 1996. Evans became the CEO of Atlantic
Community Bankers Bank in 2001. He founded ACBB-BITS in 2005 and continues to
chair the subsidiary, a privately owned telecommunications company created to
help U.S. financial institutions simplify and enhance their telecommunication needs.

“Being a Philadelphia Fed
director helps me provide
better two-way communication
between the Federal Reserve
and local bankers for improved
collaboration and best practices.”
www.philadelphiafed.org

Evans serves on several state and national banking trade associations as well as the
national Bankers’ Bank Council. He graduated from Rutgers University with a bachelor’s degree in economics.

27

Economic and Community Advisory Council
Sitting, from left: John A. Fry, Madeline Bell, Patrick J. Eiding, Edward L. Dandridge; standing, from left: Staci Berger, Daniel Betancourt, Patrick
Magri, Michael K. Pearson, Thomas J. Doll, Ernest Dianastasis; not pictured: Chris Gheysens, Michael A. Nutter, Maria Rodale, Linda Thomson

The Economic Advisory Council, created in 2008, was expanded and renamed the Economic and Community Advisory Council in 2016. It is now composed of up to 15 leaders who represent businesses of different sizes and
industry sectors as well as nonprofit and philanthropic organizations, academic institutions, the public sector,
and organized labor. The council advises Federal Reserve officials on emerging trends, market conditions, and
economic growth opportunities in the Third District and the nation.
Madeline Bell
President and CEO
The Children’s Hospital of Philadelphia
Philadelphia, PA

Thomas J. Doll
President and COO
Subaru of America
Cherry Hill, NJ

Staci Berger
President and CEO
Housing and Community Development
Network of New Jersey
Trenton, NJ

Patrick J. Eiding
President
Philadelphia Council AFL-CIO
Philadelphia, PA

Daniel Betancourt
President and CEO
Community First Fund
Lancaster, PA
Edward L. Dandridge
Chief Marketing and Communications
Officer
Marsh & McLennan Companies
New York, NY
Ernest Dianastasis
Founder and CEO
The Precisionists, Inc.
Wilmington, DE
28

John A. Fry
President
Drexel University
Philadelphia, PA
Chris Gheysens
President and CEO
Wawa, Inc.
Wawa, PA
Patrick Magri
Senior Vice President
U.S. Hospital and Specialty Business Unit
Merck & Co., Inc.
North Wales, PA

Michael A. Nutter
David N. Dinkins Professor of
Professional Practice of Urban and
Public Policy, Columbia University, and
Former Mayor of the City of Philadelphia
Philadelphia, PA
Michael K. Pearson
President and CEO
Union Packaging
Yeadon, PA
Maria Rodale
Chairman and CEO
Rodale, Inc.
Emmaus, PA
Linda Thomson
President and CEO
JARI
Johnstown, PA

Federal Reserve Bank of Philadelphia

Community Depository Institutions Advisory Council
Sitting, from left: William Wood, Matthew P. Prosseda, J. Bradley Scovill, and Marcie Barber; standing, from left: David J. Hanrahan,
Richard Stipa, Jeane M. Coyle, Rory Ritrievi, Christopher D. Maher, and Ed Dietzler; not pictured: Angela M. Snyder, Mark E. Huntley

The Community Depository Institutions Advisory Council, created in 2011, includes representatives from commercial banks, thrift institutions, and credit unions. The council provides information, advice, and recommendations
to the Federal Reserve Bank of Philadelphia from the perspective of community depository institutions.

Marcie Barber
President and CEO
Juniata Valley Financial Corporation
and The Juniata Valley Bank
Mifflintown, PA
Jeane M. Coyle
President and CEO
Penn Community Bank
Bristol, PA
Ed Dietzler
President
The Bank of Princeton
Princeton, NJ
David J. Hanrahan
President and CEO
Capital Bank of New Jersey
Vineland, NJ

www.philadelphiafed.org

Mark E. Huntley
President and CEO
Artisans’ Bank
Wilmington, DE

J. Bradley Scovill
President and CEO
Citizens & Northern Bank
Wellsboro, PA

Christopher D. Maher
President and CEO
OceanFirst Bank
Toms River, NJ

Angela M. Snyder
Chairwoman and CEO
Fulton Bank of New Jersey
Mount Laurel, NJ

Matthew P. Prosseda
President and CEO
First Keystone Community Bank
Berwick, PA

Richard Stipa
CEO
TruMark Financial Credit Union
Fort Washington, PA

Rory Ritrievi
President and CEO
Mid Penn Bancorp and Mid Penn Bank
Millersburg, PA

William Wood
Chairman
CBT Financial
Chairman
CBT Bank
Clearfield, PA

29

Management Committee
Sitting, from left: James D. Narron, Patrick T. Harker, Deborah L. Hayes, Mary Ann Hood; standing, from left: Donna L Franco,
Michael Dotsey, Jeanne R. Rentezelas, Patricia Wilson, Arun K. Jain, William G. Spaniel, Terry E. Harris

The Management Committee is composed of the Bank’s President and CEO, the first vice president and COO,
he chief of staff, and senior vice presidents. Members advise the president and first vice president on matters
of Bank policy and strategy.

Patrick T. Harker
President and Chief Executive Officer
James D. Narron
First Vice President and Chief Operating Officer
Michael Dotsey
Executive Vice President of Research
Research, Financial Statistics, and Payment Cards Center
Donna L. Franco
Senior Vice President and Chief Financial Officer
Financial Management Services, Enterprise Risk Management,
Business Continuity, and Strategic Planning
Terry E. Harris
Senior Vice President and Chief Information Officer
Information Technology Services

Mary Ann Hood
Senior Vice President and EEO Officer, Human Resources
Director, Office of Diversity and Inclusion
Arun K. Jain
Senior Vice President
Treasury and Financial Services
Jeanne R. Rentezelas
Senior Vice President and General Counsel
Legal
William G. Spaniel
Senior Vice President and Lending Officer
Supervision, Regulation, and Credit
Patricia Wilson
Senior Vice President, Chief of Staff, and Corporate Secretary

Deborah L. Hayes
Senior Vice President
Corporate Affairs

30

Federal Reserve Bank of Philadelphia

Additional Bank Officers
SENIOR VICE PRESIDENTS
Robert Hunt

Senior Vice President and Director
Payment Cards Center

Keith Sill

Senior Vice President and Director
Real-Time Data Research Center
Research

VICE PRESIDENTS

Robert F. Mucerino

ASSISTANT VICE
PRESIDENTS

Robin P. Myers

Joanne M. Branigan

Vice President
Treasury Services

Vice President
Supervision, Regulation, and Credit

Leonard Nakamura

Vice President and Economist
Research

A. Reed Raymond III

Assistant Vice President
Supervision, Regulation, and Credit

Brian W. Calderwood

Assistant Vice President
Groupware Leadership Center

Julia Cheney

Vice President
Cash Services

Vice President and Chief
Administrative Officer
Supervision, Regulation, and Credit

Assistant Vice President and
Assistant Director
Payment Cards Center

Roc Armenter

Michelle S. Reardon

Vice President and Economist
Research

Vice President
Public Affairs

Kori Ann Connelly

Mitchell S. Berlin

Patrick M. Regan

Donna L. Brenner

Perry Santacecilia

John D. Ackley

Vice President and Economist
Research

Vice President
Information Technology Services

Vice President
Enterprise Risk Management

Vice President
Supervision, Regulation, and Credit

Paul S. Calem

Michelle Scipione

Vice President
Supervision, Regulation, and Credit

Vice President and General Auditor
Audit

Jennifer E. Cardy

Stanley J. Sienkiewicz

Vice President
Financial Management Services

Larry Cordell

Vice President
Supervision, Regulation, and Credit

Joseph O. Dietzmann

Vice President and Collaborations
Services Executive
Groupware Leadership Center

Michael T. Doyle
Vice President
Treasury Payments

Gregory Fanelli

Vice President
Information Technology Services

Stephen G. Hart
Vice President
Human Resources

Vice President
Research Support
Research

Theresa Y. Singleton

Vice President and Community
Affairs Officer
Community Development Studies
& Education

Patrick F. Turner

Vice President and Managing
Officer
Groupware Leadership Center

Assistant Vice President and
Counsel
Legal

Maryann T. Connelly

Assistant Vice President and
Counsel
Legal

Michael T. Costello

Assistant Vice President
Supervision, Regulation, and Credit

Heather C. Derbyshire
Assistant Vice President
Financial Statistics

Suzanne W. Furr

Assistant Vice President and
General Auditor
Audit

Christopher C. Henderson

Assistant Vice President
Supervision, Regulation, and Credit

Jill Hettinger

Assistant Vice President
Supervision, Regulation, and Credit

Vish P. Viswanathan

Christopher L. Ivanovski

Vice President and Discount Officer
Supervision, Regulation, and Credit

Assistant Vice President
Facilities - Plant Operations

Constance H. Wallgren

John P. Kelly

Vice President
Supervision, Regulation, and Credit

Assistant Vice President
Financial Management Services

James K. Welch

Andrew A. Kish

John J. Munera III

Assistant Vice President
Supervision, Regulation, and Credit

Wanda Preston

Assistant Vice President
Supervision, Regulation, and Credit

Chellappan Ramasamy

Assistant Vice President
Supervision, Regulation, and Credit

Gregory A. Ramick

Assistant Vice President
Cash Services

Anthony T. Scafide Jr.

Assistant Vice President
Financial Institutions Relations

Stephen J. Smith

Assistant Vice President and
Counsel
Legal

Kimberly J. Taylor

Assistant Vice President
Human Resources

H. Robert Tillman

Assistant Vice President
Supervision, Regulation, and Credit

Gail L. Todd

Assistant Vice President and Credit
Officer
Supervision, Regulation, and Credit

Linda Van Valkenburg

Assistant Vice President
Information Technology Services

OFFICERS
Kimberly Caruso

Officer
Collateral Data Administration
Support Group

James W. Corkery Jr.

Officer
Supervision, Regulation, and Credit

Daniel W. Crouthamel

Vice President
Financial Statistics

Vice President
Law Enforcement and Facilities
Management

Assistant Vice President
Supervision, Regulation, and Credit

Research Information Technology
Support Officer
Research

Keith Morales

William T. Wisser

James K. Lofton

Michael O’Brien

Assistant Vice President
Cash Services

Charles Kirkland

Vice President and Information
Security Officer
Information Technology Services

Vice President
Supervision, Regulation, and Credit

Officer
Law Enforcement

Includes promotions through January 2017

www.philadelphiafed.org

31

Statement of Auditor Independence
The Federal Reserve Board engaged KPMG to audit
the 2016 combined and individual financial statements of the Reserve Banks.1  
In 2016, KPMG also conducted audits of internal controls over financial reporting for each of the Reserve
Banks. Fees for KPMG services totaled $6.7 million.
To ensure auditor independence, the Board requires
that KPMG be independent in all matters relating
to the audits. Specifically, KPMG may not perform
services for the Reserve Banks or others that would
place it in a position of auditing its own work, making
management decisions on behalf of the Reserve
Banks, or in any other way impairing its audit independence. In 2016, the Bank did not engage KPMG for
any non-audit services.

In addition, KPMG audited the Office of Employee Benefits of the
Federal Reserve System (OEB), the Retirement Plan for Employees
of the Federal Reserve System (System Plan), and the Thrift Plan for
Employees of the Federal Reserve System (Thrift Plan). The System
Plan and the Thrift Plan provide retirement benefits to employees
of the Board, the Federal Reserve Banks, the OEB, and the Consumer
Financial Protection Bureau.
1

32

Federal Reserve Bank of Philadelphia

Financial Statements Contents
Management’s Report on Internal Control over Financial Reporting.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 36
Independent Auditors’ Report. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 37
Abbreviations .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 39
Financial Statements:
Statements of Condition as of December 31, 2016 and December 31, 2015 .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 40
Statements of Operations for the years ended December 31, 2016 and
December 31, 2015.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 41
Statements of Changes in Capital for the years ended December 31, 2016
and December 31, 2015. .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 42
Notes to Financial Statements.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 43

www.philadelphiafed.org

35

Management’s Report on Internal Control over Financial Reporting

FEDERAL RESERVE BANK
OF PHILADELPHIA
										

March 8, 2017

To the Board of Directors
The management of the Federal Reserve Bank of Philadelphia (Bank) is responsible for the preparation and fair
presentation of the Statements of Condition as of December 31, 2016 and 2015, and the Statements of Operations,
and Statements of Changes in Capital for the years then ended (the financial statements). The financial statements
have been prepared in conformity with the accounting principles, policies, and practices established by the Board of
Governors of the Federal Reserve System as set forth in the Financial Accounting Manual for Federal Reserve Banks
(FAM), and, as such, include some amounts that are based on management judgments and estimates. To our knowledge, the financial statements are, in all material respects, fairly presented in conformity with the accounting principles, policies, and practices documented in the FAM and include all disclosures necessary for such fair presentation.
The management of the Bank is responsible for establishing and maintaining effective internal control over financial
reporting as it relates to the financial statements. The Bank’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external reporting purposes in accordance with the FAM. The Bank’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Bank’s assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with FAM and that
the Bank’s receipts and expenditures are being made only in accordance with authorizations of its management and
directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Bank’s assets that could have a material effect on its financial statements.
Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of
human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial
statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of the Bank assessed its internal control over financial reporting based upon the criteria established
in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, we believe that the Bank maintained effective internal control over
financial reporting.

Patrick T. Harker, President and Chief Executive Officer

James D. Narron, First Vice President and Chief Operating Officer

Donna L. Franco, Senior Vice President and Chief Financial Officer

36

Federal Reserve Bank of Philadelphia

Independent Auditors’
Report
KPMG
LLP

1601 Market Street
Philadelphia, PA 19103-2499
KPMG LLP
1601 Market Street
Philadelphia, PA 19103-2499

Independent Auditors’ Report
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and the Board of Directors of the Federal
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Bank of Philadelphia:
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policies or procedures may deteriorate.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projectionsKPMG
of LLP
any
of effectiveness
future periods are subject to the risk that
is a evaluation
Delaware limited liability
partnership and the U.S.to
member
firm of the KPMG network of independent member firms affiliated with
controls may become inadequate
because
of
changes
in
conditions,
or
KPMG International Cooperative (“KPMG International”), a Swiss entity. that the degree of compliance with the
policies or procedures may deteriorate.
www.philadelphiafed.org

KPMG LLP is a Delaware limited liability partnership and the U.S. member
firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.

37

Independent Auditors’ Report

As described in Note 3 to the financial statements, the FRB Philadelphia has prepared these financial
statements in conformity with the accounting principles established by the Board, as set forth in the FAM, which
is a basis of accounting other than U.S. generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the FRB Philadelphia as of December 31, 2016 and 2015, and the results of its operations for the
years then ended, on the basis of accounting described in Note 3. Also, in our opinion, the FRB Philadelphia
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

Philadelphia, Pennsylvania
March 8, 2017

38

Federal Reserve Bank of Philadelphia

Abbreviations
ACH	

Automated clearinghouse

ASC	

Accounting Standards Codification

ASU	

Accounting Standards Update

BEP	

Benefit Equalization Retirement Plan

Bureau	

Bureau of Consumer Financial Protection

FAM	

Financial Accounting Manual for Federal Reserve Banks

FASB	

Financial Accounting Standards Board

FAST Act	

Fixing America’s Surface Transportation Act

FOMC	

Federal Open Market Committee

FRBNY	

Federal Reserve Bank of New York

GAAP	

Accounting principles generally accepted in the United States of America

GSE	

Government-sponsored enterprise

IMF	

International Monetary Fund

MAPD	

Medicare Advantage and Prescription Drug

MBS	

Mortgage-backed securities

OEB	

Office of Employee Benefits of the Federal Reserve System

SDR	

Special drawing rights

SERP	

Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks

SOMA	

System Open Market Account

TBA	

To be announced

TDF	

Term Deposit Facility

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39

Statements of Condition
As of December 31, 2016 and December 31, 2015 (in millions)

ASSETS										
Gold certificates 		

2016	
$

359 	

2015	
$

340

Special drawing rights certificates 		

210 	

210

Coin 		

159 	

129

69,711 	

64,186

System Open Market Account: 	

Note 5

Treasury securities, net (of which $684 and $472 is lent as of
December 31, 2016 and 2015, respectively) 		
Government-sponsored enterprise debt securities, net (of which
$1 and $4 is lent as of December 31, 2016 and 2015, respectively) 		

452 	

839

Federal agency and government-sponsored enterprise mortgage-backed securities, net 		

48,738 	

44,780

Foreign currency denominated investments, net 		

1,070 	

1,093

Central bank liquidity swaps 		

306 	

56

Accrued interest receivable 		

697 	

634

85 	

89

Interdistrict settlement account 		

-	

17,050

Other assets 		

31 	

27

Bank premises and equipment, net 	

Note 6 	

Total assets 		

$

121,818 	

$

129,433

$

45,544 	

$

43,954

LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net 		
System Open Market Account: 	

Note 5

Securities sold under agreements to repurchase 		

19,691 	

17,719

Other liabilities 		

27 	

13

52,334 	

65,374

Other deposits 		

2	

2

Interest payable to depository institutions and others 		

11 	

7

Deposits:
Depository institutions 		

Accrued benefit costs 	

Notes 8 and 9 	

121 	

119

Accrued remittances to the Treasury 		

75 	

56

Interdistrict settlement account 		

1,824 	

-

Other liabilities 		

14 	

15

Total liabilities 		

119,643 	

127,259

Capital paid-in 		

1,637 	

1,624

$14 and $16 at December 31, 2016 and 2015, respectively) 		

538	

550

Total capital		

2,175 	

2,174

Surplus (including accumulated other comprehensive loss of

Total liabilities and capital 		

$

121,818 	

$

129,433

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

40

Federal Reserve Bank of Philadelphia

Statements of Operations
For the years ended December 31, 2016 and December 31, 2015 (in millions)
		 2016 	
INTEREST INCOME
System Open Market Account: 	
Note 5
Treasury securities, net 		
$ 1,694 	
Government-sponsored enterprise debt securities, net 		
25 	
Federal agency and government-sponsored enterprise mortgage-backed securities, net 		
1,223 	
Foreign currency denominated investments, net 		
-	
Total interest income 		

2015

$

1,560
33
1,203
2

2,942 	

2,798

INTEREST EXPENSE
System Open Market Account: 	
Note 5
Securities sold under agreements to repurchase 		
Deposits:
Depository institutions and others 		
Term Deposit Facility 		

30 	

6

314 	
6	

160
14

Total interest expense 		

350 	

180

Net interest income 		

2,592 	

2,618

NON-INTEREST INCOME (LOSS)
System Open Market Account: 	
Note 5
Federal agency and government-sponsored enterprise
mortgage-backed securities gains, net 		
Foreign currency translation losses, net 		
Other 		
Compensation received for service costs provided 		
Reimbursable services to government agencies 		
Other 		

1	
(5) 	
1	
2	
24 	
3	

1
(91)
3
34
3

Total non-interest income (loss) 		

26 	

(50)

127 	
15 	
5	
46 	

130
16
6
48

69 	
33 	

72
27

Total operating expenses 		

295 	

299

Net income before providing for remittances to the Treasury 		
Earnings remittances to the Treasury: 	
Note 12
Interest on Federal Reserve notes 		
Required by the Federal Reserve Act 	
Note 3n 	

2,323 	

2,269

-	
2,300 	

1,994
1,234

Note 12 	

2,300 	

3,228

Net income (loss) after providing for remittances to the Treasury 		

23 	

(959)

Note 9 	
Note 9 	

2	
-	

9

Total other comprehensive income 		

2	

9

OPERATING EXPENSES
Salaries and benefits 		
Occupancy 		
Equipment		
Other 		
Assessments:
Board of Governors operating expenses and currency costs 		
Bureau of Consumer Financial Protection 		

Total earnings remittances to the Treasury 	

Change in prior service costs related to benefit plans 	
Change in actuarial gains related to benefit plans 	

Comprehensive income (loss) 		

$

25 	

$

(950)

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

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41

Statements of Changes in Capital
For the years ended December 31, 2016 and December 31, 2015 (in millions, except share data)

Surplus

Capital
paid-in

Net income
retained

Balance at December 31, 2014
(31,932,556 shares) 	

$

1,597 	

$

1,622 	

Accumulated
other
comprehensive
income (loss)
$

(25) 	

Total
surplus
$

1,597 	

Total
capital
$

3,194

Net change in capital stock issued
(539,655 shares) 	

27 	

-	

-	

-	

27

Net loss 	

-	

Other comprehensive income 	

-	

(959)	

-	

(959)	

(959)

-	

9	

9	

9

-	

(97)	

-	

(97)	

(97)

27 	

(1,056) 	

9	

(1,047) 	

(1,020)

Comprehensive income:

Dividends on capital stock 	
Net change in capital 	
Balance at December 31, 2015
(32,472,211 shares) 	

$

1,624 	

$

566 	

$

(16)	

$

550	

$

2,174

Net change in capital stock issued
(263,257 shares) 	

13 	

-	

-	

-	

13

Net income 	

-	

23	

-	

23	

23

Other comprehensive income 	

-	

-	

2	

2	

2

-	

(37)	

-	

(37)	

(37)

13 	

(14)	

2	

(12)	

1

Comprehensive income:

Dividends on capital stock 	
Net change in capital 	
Balance at December 31, 2016
(32,735,468 shares) 	

$

1,637 	

$

552	

$

(14)	

$

538 	

$

2,175

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

42

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
(1) Structure
The Federal Reserve Bank of Philadelphia (Bank) is part of the Federal Reserve System (System) and is one of
the 12 Federal Reserve Banks (Reserve Banks) created by Congress under the Federal Reserve Act of 1913 (Federal
Reserve Act), which established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics. The Bank
serves the Third Federal Reserve District, which includes Delaware and portions of New Jersey and Pennsylvania.
In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a board of directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks.
Each board is composed of nine members serving three-year terms: three directors, including those designated
as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System (Board
of Governors) to represent the public, and six directors are elected by member banks. Banks that are members
of the System include all nationally-chartered banks and any state-chartered banks that apply and are approved
for membership. Member banks are divided into three classes according to size. Member banks in each class elect
one director representing member banks and one director representing the public. In any election of directors,
each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal
Open Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is
composed of members of the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY),
and, on a rotating basis, four other Reserve Bank presidents.

(2) Operations and Services
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary policy; participating in the payment system, including transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal
agency functions for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities;
serving as the federal government’s bank; providing short-term loans to depository institutions; providing loans
to participants in programs or facilities with broad-based eligibility in unusual and exigent circumstances; serving
consumers and communities by providing educational materials and information regarding financial consumer
protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign
banking organizations, edge and agreement corporations, and certain financial market utilities that have been
designated as systemically important. Certain services are provided to foreign official and international account
holders, primarily by the FRBNY.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations and
oversees these operations. The FOMC has selected the FRBNY to execute open market transactions for the System
Open Market Account (SOMA) as provided in its annual authorization. The FOMC authorizes and directs the FRBNY
to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities (MBS);
the purchase of these securities under agreements to resell; and the sale of these securities under agreements to
repurchase. The FRBNY holds the resulting securities and agreements in a portfolio known as the SOMA. The FRBNY is authorized and directed to lend the Treasury securities and GSE debt securities that are held in the SOMA.

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43

Notes to Financial Statements
To be prepared to meet the needs specified by the FOMC to carry out the System’s central bank responsibilities, the
FOMC has authorized and directed the FRBNY to execute standalone spot and forward foreign exchange transactions
in the resultant foreign currencies, to hold balances in those currencies, and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY holds these securities and agreements in the SOMA. The FOMC
has also authorized and directed the FRBNY to maintain reciprocal currency arrangements with the Bank of Canada
and the Bank of Mexico in the maximum amounts of $2 billion and $3 billion, respectively, and to warehouse foreign
currencies for the Treasury and the Exchange Stabilization Fund in the maximum amount of $5 billion.
Because of the global character of bank funding markets, the System has, at times, coordinated with other central
banks to provide liquidity. The FOMC authorized and directed the FRBNY to maintain standing U.S. dollar liquidity
swap arrangements and standing foreign currency liquidity swap arrangements with the Bank of Canada, the
Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The FRBNY holds
amounts outstanding under these swap lines in the SOMA. These swap lines, which were originally established as
temporary arrangements, were converted to standing arrangements on October 31, 2013, and will remain in place
until further notice.
The FOMC has authorized and directed the FRBNY to conduct small-value exercises periodically for the purpose
of testing operational readiness.
Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to
achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and
product or function offices that have responsibility for the delivery of certain services on behalf of the Reserve
Banks. Various operational and management models are used and are supported by service agreements between
the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks
are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other
Reserve Banks. Major services provided by the Bank on behalf of the System for which the costs were not reimbursed by the other Reserve Banks include Collateral Management System; Groupware Leadership Center; Retail
Credit Risk Center; Risk Assessment, Data Analysis, and Research; Supervision Team Site Support Office; and Video
Conferencing Network.

(3) Significant Accounting Policies
Accounting principles for entities with the unique powers and responsibilities of the nation’s central bank have
not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized
accounting principles and practices that it considers to be appropriate for the nature and function of a central
bank. These accounting principles and practices are documented in the Financial Accounting Manual for Federal
Reserve Banks (FAM), which is issued by the Board of Governors. The Reserve Banks are required to adopt and
apply accounting policies and practices that are consistent with the FAM. The financial statements and associated
disclosures have been prepared in accordance with the FAM.
Due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central bank and given
the System’s unique responsibility to conduct monetary policy, the Board has adopted accounting principles and
practices in the FAM that differ from accounting principles generally accepted in the United States of America
(GAAP). The more significant differences are the presentation of all SOMA securities holdings at amortized cost,
adjusted for credit impairment, if any, the recording of all SOMA securities on a settlement-date basis, and the use
of straight-line amortization of premiums and discounts for Treasury securities, GSE debt securities, and foreign
currency denominated investments. Amortized cost, rather than the fair value presentation, more appropriately
reflects the financial position associated with the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy. Although the application of fair value measurements to the securities holdings
may result in values substantially greater or less than their carrying values, these unrealized changes in value

44

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
have no direct effect on the quantity of reserves available to the banking system or on the ability of the Reserve
Banks, as the central bank, to meet their financial obligations and responsibilities. Both the domestic and foreign
components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold
before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and
sale, are primarily motivated by monetary policy and financial stability objectives rather than profit. Accordingly,
fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental
to open market operations and do not motivate decisions related to policy or open market activities. Accounting
for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, better reflects
the timing of the transaction’s effect on the quantity of reserves in the banking system. The cost bases of Treasury
securities, GSE debt securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest method required by GAAP.
In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and
cash position of the Bank are not a primary concern given the Reserve Bank’s unique powers and responsibilities
as a central bank. Other information regarding the Bank’s activities is provided in, or may be derived from, the
Statements of Condition, Operations, and Changes in Capital, and the accompanying notes to the financial statements. Other than those described above, the accounting policies described in FAM are generally consistent with
those in GAAP and the references to GAAP in the notes to the financial statement highlight those areas where FAM
is consistent with GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities, the 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.
The Statements of Operations have been renamed to better reflect the underlying nature of the activity reported
and, in the prior year, had been titled the Statements of Income and Comprehensive Income.
Significant accounts and accounting policies are explained below.

a. Consolidation
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau
of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority over some institutions previously supervised by the Reserve Banks in connection with those institutions’
compliance with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial
statements of the Bureau are not to be consolidated with those of the Board of Governors or the System. The
Board of Governors funds the Bureau through assessments on the Reserve Banks as required by the Dodd-Frank
Act. The Reserve Banks reviewed the law and evaluated the design of and their relationship to the Bureau and
determined that it should not be consolidated in the Bank’s financial statements.

b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks. Upon authorization, the
Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for
the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the
Treasury. The Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver them
to the Treasury. At such time, the Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts
are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy
ounce. Gold certificates are recorded by the Reserve Banks at original cost. The Board of Governors allocates the

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45

Notes to Financial Statements
gold certificates among the Reserve Banks once a year based on each Reserve Bank’s average Federal Reserve
notes outstanding during the preceding 12 months.
Special drawing rights (SDR) are issued by the International Monetary Fund (IMF) to its members in proportion to
each member’s quota in the IMF at the time of issuance. SDRs serve as a supplement to international monetary
reserves and may be transferred from one national monetary authority to another. Under the law providing for
U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks’ SDR certificate accounts are increased.
The Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the purpose of
financing SDR acquisitions or for financing exchange-stabilization operations. At the time SDR certificate transactions occur, the Board of Governors allocates the SDR certificates among the Reserve Banks based upon each
Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding calendar year. SDR certificates are
recorded by the Reserve Banks at original cost.

c. Coin
The amount reported as coin in the Statements of Condition represents the face value of all United States coin
held by the Bank. The Bank buys coin at face value from the U.S. Mint in order to fill depository institution orders.

d. Loans
Loans to depository institutions are reported at their outstanding principal balances and interest income is recognized on an accrual basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive
the principal and interest that are due in accordance with the contractual terms of the loan agreement. Impaired
loans are evaluated to determine whether an allowance for loan loss is required. The Bank has developed procedures for assessing the adequacy of any allowance for loan losses using all available information to identify
incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers,
and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Bank would discontinue recognizing interest income on impaired loans until the borrower’s
repayment performance demonstrates principal and interest would be received in accordance with the terms
of the loan agreement. If the Bank discontinues recording interest on an impaired loan, cash payments are first
applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of
amounts previously deemed uncollectible, if any, and then as interest income.

e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to
Repurchase, and Securities Lending
The FRBNY may engage in purchases of securities under agreements to resell (repurchase agreements) with primary dealers. Transactions under these repurchase agreements are typically settled hrough a tri-party arrangement. In the United States, there are currently two commercial custodial banks that provide these services. In
a tri-party arrangement, a commercial custodial bank manages the collateral clearing, settlement, pricing, and
pledging, and provides cash and securities custodial services for and on behalf of the FRBNY and counterparty.
The collateral pledged must exceed the principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under
repurchase agreements primarily includes Treasury securities (including Treasury Inflation-Protected Securities,
Separate Trading of Registered Interest and Principal of Securities, Treasury securities, and Treasury Floating
Rate Notes); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage

46

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks; and pass-through federal
agency and GSE MBS. The repurchase agreements are accounted for as financing transactions with the associated
interest income recognized over the life of the transaction. These repurchase agreements are reported at their
contractual amounts as “System Open Market Account: Securities purchased under agreements to resell” and the
related accrued interest receivable is reported as a component of “System Open Market Account: Accrued interest
receivable” in the Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase agreements)
with primary dealers and with a set of expanded counterparties that includes banks, savings associations, GSEs,
and domestic money market funds. Transactions under these reverse repurchase agreements are designed to
have a margin of zero and are settled through a tri-party arrangement, similar to repurchase agreements. Reverse
repurchase agreements may also be executed with foreign official and international account holders as part of
a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE debt securities, or federal agency and GSE MBS that are held in the SOMA. Reverse repurchase agreements are accounted for as financing transactions, and the associated interest expense is recognized over the life
of the transaction. These reverse repurchase agreements are reported at their contractual amounts as “System
Open Market Account: Securities sold under agreements to repurchase” and the related accrued interest payable
is reported as a component of “System Open Market Account: Other liabilities” in the Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight,
to facilitate the effective functioning of the domestic securities markets. The amortized cost basis of securities
lent continues to be reported as “System Open Market Account: Treasury securities, net” and “System Open Market Account: Government-sponsored enterprise debt securities, net,” as appropriate, in the Statements of Condition. Securities lending transactions are fully collateralized by Treasury securities based on the fair values of the
securities lent increased by a margin determined by the FRBNY. The FRBNY charges the primary dealer a fee for
borrowing securities, and these fees are reported as a component of “Non-interest income (loss): System Open
Market Account: Other” in the Statements of Operations.
Activity related to repurchase agreements, reverse repurchase agreements, and securities lending is allocated to
each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year.

f.

Treasury Securities, Government-Sponsored Enterprise Debt Securities, Federal Agency and
Government-Sponsored Enterprise Mortgage-Backed Securities, and Foreign Currency Denominat
ed Investments

Interest income on Treasury securities, GSE debt securities, and foreign currency denominated investments included in the SOMA is recorded when earned and includes amortization of premiums and discounts on the
straight-line method. Interest income on federal agency and GSE MBS is accrued using the interest method and
includes amortization of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized or accreted over the term
of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated
when principal payments are received. Gains and losses resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are
reported net of premiums and discounts in the Statements of Condition and interest income on those securities
is reported net of the amortization of premiums and accretion of discounts in the Statements of Operations.
In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters
into dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to
be announced” (TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell

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47

Notes to Financial Statements
or purchase TBA MBS on a specified future date. During the years ended December 31, 2016 and 2015, the FRBNY
executed dollar rolls to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls as individual purchases and sales, on a settlement-date basis. Accounting for these
transactions as purchases and sales, rather than as financing transactions, is appropriate because the purchase
or sale component of the MBS TBA dollar roll is paired off or assigned prior to settlement and, as a result, there
is no transfer and return of securities. Net gains (losses) resulting from MBS transactions are reported as a component of “Non-interest income (loss): System Open Market Account: Federal agency and government-sponsored
enterprise mortgage-backed securities gains, net” in the Statements of Operations.
Foreign currency denominated investments, which can include foreign currency deposits, repurchase agreements,
and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to
report these assets in U.S. dollars. Any negative interest associated with these foreign currency denominated investments is included as a component of “Interest income: System Open Market Account: Foreign currency denominated
investments, net” in the Statements of Operations. Foreign currency translation gains and losses that result from the
daily revaluation of foreign currency denominated investments are reported as “Non-interest income (loss): System
Open Market Account: Foreign currency translation losses, net” in the Statements of Operations.
Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign
government debt instruments and records the related securities on a settlement-date basis in accordance with
the FAM, the related outstanding commitments are not reflected in the Statements of Condition.
Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived
from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year.
Activity related to foreign currency denominated investments, including the premiums, discounts, and realized
and unrealized gains and losses, is generally allocated in the first quarter of each year to each Reserve Bank
based on the ratio, updated in the first quarter of the year, of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31.

g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related income and expense, is generally allocated in the first
quarter of each year to each Reserve Bank based on the ratio, updated in the first quarter of the year, of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31.

U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified
amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market
exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. The Bank’s allocated portion
of the foreign currency amounts that the FRBNY acquires are reported as “System Open Market Account: Central
bank liquidity swaps” in the Statements of Condition. Because the swap transaction will be unwound at the same
U.S. dollar amount and exchange rate that were used in the initial transaction, the recorded value of the foreign
currency amounts is not affected by changes in the market exchange rate.

48

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
The foreign central bank compensates the FRBNY based on the amount outstanding and the rate under the swap
agreement. The Bank’s allocated portion of the amount of compensation received during the term of the swap
transaction is reported as “Interest income: System Open Market Account: Central bank liquidity swaps” in the
Statements of Operations.

Foreign currency liquidity swaps
Foreign currency liquidity swap transactions involve the transfer by the FRBNY, at the prevailing market exchange
rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency.
The foreign currency amounts that the FRBNY receives are recorded as a liability.

h. 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 the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations,
renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over
the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or
improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred.
Reserve Banks may transfer assets to other Reserve Banks or may lease property of other Reserve Banks.
Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the application development stage to develop internal-use software are capitalized based on the cost of direct services
and materials associated with designing, coding, installing, and testing the software. Capitalized software costs
are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally range from two to five years. Maintenance costs and minor replacements related to software are charged to
operating expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount
of assets or asset groups is not recoverable and significantly exceeds the assets’ fair value.

i. Interdistrict Settlement Account
Each Reserve Bank aggregates the payments due to or from other Reserve Banks. These payments result from transactions between the Reserve Banks and transactions that involve depository institution accounts held by other Reserve
Banks, such as Fedwire funds and securities transfers and check and ACH transactions. The cumulative net amount due
to or from the other Reserve Banks is reflected in the “Interdistrict settlement account” in the Statements of Condition.
An annual settlement of the interdistrict settlement account occurs in the second quarter of each year. As a result
of the annual settlement, the balance in each Bank’s interdistrict settlement account is adjusted by an amount
equal to the average balance in the account during the previous twelve-month period ended March 31. An equal
and offsetting adjustment is made to each Bank’s allocated portion of SOMA assets and liabilities.

j. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Bank’s assets are eligible to be pledged as
collateral. The collateral value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of reverse
repurchase agreements is deducted from the eligible collateral value.

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49

Notes to Financial Statements
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding
Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain assets of the
Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the
event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a
first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of
the United States government.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve
notes outstanding, reduced by the Bank’s currency holdings of $6,254 million and $5,357 million at December 31,
2016 and 2015, respectively.
At December 31, 2016 and 2015, all Federal Reserve notes outstanding, net, were fully collateralized. At December 31,
2016, all gold certificates, all SDR certificates, and $1,447 billion of domestic securities held in the SOMA were pledged
as collateral. At December 31, 2016, no investments denominated in foreign currencies were pledged as collateral.

k. Deposits
Depository Institutions
Depository institutions’ deposits represent the reserve and service-related balances in the accounts that depository
institutions hold at the Bank. Required reserve balances are those that a depository institution must hold to satisfy
its reserve requirement. Reserve requirements are the amount of funds that a depository institution must hold in
reserve against specified deposit liabilities. Excess reserves are those held by the depository institutions in excess
of their required reserve balances. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMC-established target range for the federal funds rate. Interest
expense on depository institutions’ deposits is accrued daily at the appropriate rate. Interest payable is reported as
a component of “Interest payable to depository institutions and others” in the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the
Reserve Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest
expense on depository institutions’ deposits is accrued daily at the appropriate rate. Interest payable is reported
as a component of “Interest payable to depository institutions and others” in the Statements of Condition. There
were no deposits held by the Bank under the TDF at December 31, 2016 and 2015.

Other
Other deposits include the Bank’s allocated portion of foreign central bank and foreign government deposits held
at the FRBNY.

l. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in
an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting, with a
par value of $100, and may not be transferred or hypothecated. As a member bank’s capital and surplus changes,
its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in, and
the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of
stock subscribed by it.

50

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
The Fixing America’s Surface Transportation Act (FAST Act), which was enacted on December 4, 2015, amended section 7 of the Federal Reserve Act related to Reserve Bank surplus and the payment of dividends to member banks.
Until January 1, 2016, each Reserve Bank was required by law to pay each member bank an annual dividend of 6
percent on the paid-in capital stock. Effective January 1, 2016, the FAST Act changed the dividend rate for member
banks with more than $10 billion of consolidated assets to the smaller of 6 percent or the rate equal to the high
yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend. The
FAST Act did not change the 6 percent dividend rate for member banks with $10 billion or less of total consolidated assets. The dividend is paid semiannually and is cumulative.

m. Surplus
Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to maintain a surplus
equal to the amount of capital paid-in. On a daily basis, surplus was adjusted to equate the balance to capital
paid-in. Effective December 4, 2015, the FAST Act limits aggregate Reserve Bank surplus to $10 billion. Reserve
Bank surplus is allocated among the Reserve Banks based on the ratio of each Bank’s capital paid-in to total
Reserve Bank capital paid-in as of December 31 of each year. The amount reported as surplus by the Bank as of
December 31, 2016 and 2015 represents the Bank’s allocated portion of surplus.
Accumulated other comprehensive loss is reported as a component of “Surplus” in the Statements of Condition
and the Statements of Changes in Capital. Additional information regarding the classifications of accumulated
other comprehensive loss is provided in Notes 9 and 10.

n. Earnings Remittances to the Treasury
Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve notes after providing for the costs of operations, payment of
dividends, and reservation of an amount necessary to equate surplus with capital paid-in. The Federal Reserve
Act, as amended by the FAST Act effective December 4, 2015, requires that any amounts of the surplus funds of the
Reserve Banks that exceed, or would exceed, the aggregate surplus limitation of $10 billion shall be transferred
to the Board of Governors for transfer to the Treasury. The Bank remits excess earnings to the Treasury after
providing for the cost of operations, payment of dividends, and reservation of an amount necessary to maintain
surplus at the Bank’s allocated portion of the $10 billion aggregate surplus limitation. Remittances to the Treasury
are made on a weekly basis. The amount of the remittances to the Treasury that were required under the Board
of Governor’s policy is reported as “Earnings remittances to the Treasury: Interest on Federal Reserve notes” in
the Statements of Operations. The amount of the remittances to the Treasury that are required by the FAST Act is
reported as “Earnings remittances to the Treasury: Required by the Federal Reserve Act” in the Statements of Operations. The amount due to the Treasury is reported as “Accrued remittances to the Treasury” in the Statements
of Condition. See Note 12 for additional information on earnings remittances to the Treasury.
Under the previous Board of Governor’s policy, if earnings during the year were not sufficient to provide for the
costs of operations, payment of dividends, and equating surplus and capital paid-in, remittances to the Treasury
were suspended, and under the FAST Act, if earnings during the year are not sufficient to provide for the costs of
operations, payment of dividends, and maintaining surplus at an amount equal to the Bank’s allocated portion of
the $10 billion aggregate surplus limitation, remittances to the Treasury are suspended. This decrease in earnings
remittances to the Treasury results in a deferred asset that represents the amount of net earnings a Reserve Bank
will need to realize before remittances to the Treasury resume.

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Notes to Financial Statements
o. Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Bank is required by the Federal Reserve Act to serve as fiscal
agent and depositary of the United States Government. By statute, the Treasury has appropriations to pay for
these services. During the years ended December 31, 2016 and 2015, the Bank was reimbursed for all services
provided to the Treasury as its fiscal agent.

p. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta has overall responsibility for managing the Reserve Banks’ provision of
check and ACH services to depository institutions, the FRBNY has overall responsibility for managing the Reserve
Banks’ provision of Fedwire funds and securities services, and the Federal Reserve Bank of Chicago has overall
responsibility for managing the Reserve Banks’ provision of electronic access services to depository institutions.
The Reserve Bank that has overall responsibility for managing these services recognizes the related total System
revenue in its Statements of Operations. The Bank is compensated for costs incurred to provide these services
by the Reserve Banks responsible for managing these services and reports this compensation as “Non-interest
income (loss): Compensation received for service costs provided” in its Statements of Operations.

q. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau.
These assessments are allocated to each Reserve Bank based on each Reserve Bank’s capital and surplus balances. The Board of Governors also assesses each Reserve Bank for expenses related to producing, issuing, and retiring Federal Reserve notes based on each Reserve Bank’s share of the number of notes comprising the System’s
net liability for Federal Reserve notes on December 31 of the prior year.
The Dodd-Frank Act requires that, after the transfer of its responsibilities to the Bureau on July 21, 2011, the Board
of Governors fund the Bureau in an amount not to exceed a fixed percentage of the total operating expenses of
the System as reported in the Board of Governor’s 2009 annual report, which totaled $4.98 billion. After 2013, the
amount will be adjusted annually in accordance with the provisions of the Dodd-Frank Act. The percentage of
total operating expenses of the System for the years ended December 31, 2016 and 2015 was 12.68 percent ($631.7
million) and 12.42 percent ($618.7 million), respectively. The Bank’s assessment for Bureau funding is reported as
“Assessments: Bureau of Consumer Financial Protection” in the Statements of Operations.

r. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s
real property taxes were $1 million for each of the years ended December 31, 2016 and 2015, and are reported as
a component of “Operating expenses: Occupancy” in the Statements of Operations.

s. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of
business activities in a particular location, the relocation of business activities from one location to another, or a
fundamental reorganization that affects the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the
period in which the Bank commits to a formalized restructuring plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition have been met.

52

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
In 2014, the Treasury announced plans to consolidate the provision of substantially all fiscal agent services for the
U.S. Treasury at the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Kansas City, the FRBNY, and
the Federal Reserve Bank of St. Louis. The consolidation is expected to be completed in future years.
Note 11 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY.
The Bank had no significant restructuring activities in 2016 and 2015.

t. Accounting Policy Change and Recently Issued Accounting Standards
The Board of Governors approved, effective January 2017, accounting for Treasury securities, GSE debt securities,
and foreign government debt instruments held in the SOMA using the effective interest method. Previously, the
cost bases of these securities were adjusted for amortization of premiums or accretion of discounts on a straightline basis. This change will be applied prospectively. This update is not expected to have a material effect on the
Bank’s financial statements for the year ended December 31, 2017.
Other than the significant differences described in Note 3, the accounting policies described in FAM are generally
consistent with those in GAAP. The following items represent recent GAAP accounting standards and describes
how FAM was or will be revised to be consistent with these standards.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers (Topic 606). This update was issued to create common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The guidance is applicable to all
contracts for the transfer of goods or services regardless of industry or type of transaction. This update requires
recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for
the transfer of goods or services to customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the required effective date of
this accounting by one year. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which provided
clarity regarding what constitutes the transfer of a good or service. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This
update provides further criteria to help identify whether goods or services within a contract are separately identifiable and, consequently, should be deemed distinct revenue streams. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
which provides guidance on assessing collectability, noncash consideration, and how contract modifications and
completed contracts should be treated during the transition to new accounting guidance. This revenue recognition accounting guidance is effective for the Bank for the year ending December 31, 2019, although the Bank may
elect to adopt the guidance earlier. The Bank is continuing to evaluate the effect of this new guidance on the
Bank’s financial statements.
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 35040). The amendments in this update provide guidance to customers about whether a cloud computing arrangement
includes a software license. If a cloud computing arrangement includes a software license, then the customer should
account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the
arrangement as a service contract. Consequently, all software licenses within the scope of subtopic 350-40 will be
accounted for consistent with other licenses of intangible assets. This update is effective prospectively for the Bank
for the year ended December 31, 2016, and did not have a material effect on the Bank’s financial statements.

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53

Notes to Financial Statements
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The amendments in this update eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments
measured at amortized cost on the balance sheet. This update is effective for the Bank for the year ending December 31, 2019. The Bank is continuing to evaluate the effect of this new guidance on the Bank’s financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update revises the model to assess how a
lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets and
lease liabilities on the balance sheet. The update is effective for the Bank for the year ended December 31, 2020,
although earlier adoption is permitted. The Bank is continuing to evaluate the effect of this new guidance on its
financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. This update revises the methodology for assessing expected credit losses and requires consideration of reasonable and supportable information to inform credit loss estimates. The
update is effective for the Bank for the year ending December 31, 2021, although earlier adoption is permitted. The
Bank is continuing to evaluate the effect of this new guidance on its financial statements.

(4) Loans
Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal loans to eligible borrowers (depository institutions that maintain reservable transaction accounts or nonpersonal time deposits and have established discount window borrowing privileges). Each program has its own interest rate and interest is accrued using the applicable interest
rate established at least every 14 days by the Bank’s board of directors, subject to review and determination by
the Board of Governors. Primary and secondary loans are extended on a short-term basis, typically overnight,
whereas seasonal loans may be extended for a period of up to nine months.
Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Bank to reduce credit risk.
Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities;
GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities; corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the Bank,
which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily to ensure
that borrowers continue to meet eligibility requirements for these programs. If a borrower no longer qualifies for
these programs, the Bank will generally request full repayment of the outstanding loan or, for primary or seasonal
loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily against outstanding
obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are required to
provide additional collateral or to make partial or full repayment.
The Bank had no loans outstanding as of December 31, 2016 and 2015.
At December 31, 2016 and 2015, the Bank did not have any loans that were impaired, restructured, past due, or on
non-accrual status, and no allowance for loan losses was required. There were no impaired loans during the years
ended December 31, 2016 and 2015. Interest income attributable to loans to depository institutions was immaterial during the years ended December 31, 2016 and 2015.

54

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
(5) System Open Market Account
a. Domestic Securities Holdings
The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting
securities in the SOMA.
Pursuant to FOMC directives, the FRBNY has continued to reinvest principal payments from its holdings of GSE
debt securities and federal agency and GSE MBS in federal agency and GSE MBS and to roll over maturing Treasury
securities at auction. During the years ended December 31, 2016 and 2015, the FRBNY continued the reinvestments
and rollovers.
The Bank’s allocated share of activity related to domestic open market operations was 2.715 percent and 2.487
percent at December 31, 2016 and 2015, respectively.
The Bank’s allocated share of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31, 2016 and 2015 was as follows (in millions):
2016
Par

Unamortized
premiums

Unaccreted
discounts

Total
amortized cost

Treasury securities
Notes 	

$

Bonds 	
Total Treasury securities 	

44,480 	

$

22,413 	

401 	

$

2,816 	

(152) 	

$

(247) 	

44,729
24,982

$

66,893 	

$

3,217 	

$

(399) 	

$

69,711

GSE debt securities 	

$

439 	

$

13 	

$

-	

$

452

Federal agency and GSE MBS 	

$

47,283 	

$

1,466 	

$

(11) 	

$

48,738

2015
Par

Unamortized
premiums

Unaccreted
discounts

Total
amortized cost

Treasury securities
Notes 	

$

Bonds 	
Total Treasury securities 	

40,659 	

$

20,563 	
$

61,222 	

GSE debt securities 	

$

819 	

Federal agency and GSE MBS 	

$

43,462 	

521 	

$

2,836 	
$
$
$

(161) 	

$

(232) 	

41,019
23,167

3,357 	

$

(393) 	

$

64,186

20 	

$

-	

$

839

1,336 	

$

(18) 	

$

44,780

There were no material transactions related to repurchase agreements during the years ended December 31, 2016
and 2015.
During the years ended December 31, 2015 and 2016, the FRBNY entered into reverse repurchase agreements as
part of its monetary policy activities. From September 23, 2013 through December 16, 2015, these operations were
for the purpose of further assessing the appropriate structure of such operations in supporting the implemen-

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55

Notes to Financial Statements
tation of monetary policy during normalization. Since then these operations have been undertaken as necessary
to maintain the federal funds rate in a target range. In addition, reverse repurchase agreements are entered into
as part of a service offering to foreign official and international account holders. Financial information related
to reverse repurchase agreements for the years ended December 31, 2016 and 2015 was as follows (in millions):
Allocated to
the Bank
2016 	

	

Total SOMA

2015 	

2016 	

2015

Primary dealers and expanded counterparties:
Contract amount outstanding, end of year 	

$

Average daily amount outstanding, during the year 	

12,717 	

$

11,804 	

$

468,355 	

$

474,592

2,817 	

3,086 	

105,648 	

125,656

Maximum balance outstanding, during the year 	

12,717 	

11,804 	

474,592 	

474,592

Securities pledged (par value), end of year 	

12,050 	

10,893 	

443,799 	

437,961

Securities pledged (fair value), end of year 	

12,742 	

11,825 	

469,282 	

475,422

Foreign official and international accounts:
Contract amount outstanding, end of year 	

$

6,974 	

$

5,915 	

$

256,855 	

$

237,809

Average daily amount outstanding, during the year 	

6,414 	

3,894 	

241,848 	

157,929

Maximum balance outstanding, during the year 	

7,196 	

5,915 	

265,041 	

237,809

Securities pledged (par value), end of year 	

6,772 	

5,729 	

249,417 	

230,333

Securities pledged (fair value), end of year 	

6,975 	

5,915 	

256,897 	

237,825

Total contract amount outstanding, end of year 	

$

19,691 	

$

17,719 	

$

8	

$

$

725,210 	

$

712,401

2	

$ 303 	

$

84

4	

819 	

Supplemental information - interest expense:
Primary dealers and expanded counterparties 	
Foreign official and international accounts 	

22 	

164

Total interest expense - securities sold under
agreements to repurchase 	

$

30 	

$

6	

$

1,122 	

$

248

Securities pledged as collateral, at December 31, 2016 and 2015, consisted solely of Treasury securities. The contract
amount outstanding as of December 31, 2016 of reverse repurchase agreements that were transacted with primary
dealers and expanded counterparties had a term of one business day and matured on January 3, 2017. The contract
amount outstanding as of December 31, 2016 of reverse repurchase agreements that were transacted with foreign
official and international account holders had a term of one business day and matured on January 3, 2017.

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Federal Reserve Bank of Philadelphia

Notes to Financial Statements
The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS
bought outright, and reverse repurchase agreements that were allocated to the Bank at December 31, 2016 and
2015 was as follows (in millions):
Within 15 16 days to
days
90 days

December 31, 2016:

Over 5
91 days Over 1 year
years to
to 1 year to 5 years
10 years

Over 10
years

Total

Treasury securities
(par value) 	

$

402 	

$ 1,120 	 $ 4,094 	

$ 33,244 	

$ 10,841 	

$ 17,192	

$ 66,893

GSE debt securities
(par value) 	

-	

77 	

243	

55 	

-	

64 	

439

-	

-	

-	

2	

287	

46,994 	

47,283

19,691 	

-	

-	

-	

-	

-	

19,691

961 	 $ 4,415 	

$ 27,815 	

$ 12,168 	

$ 15,863 	

$ 61,222

Federal agency and GSE
MBS (par value)1	
Securities sold under
agreements to repurchase
(contract amount) 	
December 31, 2015:
Treasury securities
(par value) 	

$

-	

$

GSE debt securities
(par value) 	

-	

92 	

325 	

344	

-	

58	

819

-	

-	

-	

12 	

224 	

43,226 	

43,462

17,719 	

-	

-	

-	

-	

-	

17,719

Federal agency and GSE
MBS (par value)1	
Securities sold under
agreements to repurchase
(contract amount) 	
1

The par amount shown for federal agency and GSE MBS is the remaining principal balance of the securities.

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted-average
life of these securities, which differs from the stated maturity primarily because it factors in scheduled payments
and prepayment assumptions, was approximately 7.2 and 6.5 years as of December 31, 2016 and 2015, respectively.
The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA
under securities lending agreements at December 31, 2016 and 2015 were as follows (in millions):
Allocated to the Bank
	
Treasury securities (amortized cost) 	
Treasury securities (par value) 	

2016 	
$

684 	

Total SOMA

2015 	
$

472 	

2016 	
$

25,195 	

2015
$

18,960

671 	

449 	

24,698 	

18,055

GSE debt securities (amortized cost) 	

1	

4	

44 	

146

GSE debt securities (par value) 	

1	

3	

44 	

137

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Notes to Financial Statements
Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31,
2016 and 2015 consisted solely of Treasury securities. The securities lending agreements outstanding as of December 31, 2016 had a term of one business day and matured on January 3, 2017.
The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a
settlement-date basis. As of December 31, 2016, the total purchase price of the Treasury securities under outstanding commitments was $11,679 million of which $317 million was allocated to the Bank. These commitments
had contractual settlement dates extending through January 2017.
The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on a settlement-date basis. As of December 31, 2016, the total purchase price of the federal agency and GSE
MBS under outstanding purchase commitments was $35,787 million, none of which was related to dollar rolls. The
total purchase price of outstanding purchase commitments allocated to the Bank was $972 million, none of which
was related to dollar rolls. These commitments, which had contractual settlement dates extending through January 2017, are for the purchase of TBA MBS for which the number and identity of the pools that will be delivered to
fulfill the commitment are unknown at the time of the trade. As of December 31, 2016, there were no outstanding
sales commitments for federal agency and GSE MBS. MBS commitments are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY requires
the posting of cash collateral for MBS commitments as part of its risk management practices used to mitigate the
counterparty credit risk.
Other liabilities, which are primarily related to federal agency and GSE MBS purchases and sales, includes the
FRBNY’s obligation to return cash margin posted by counterparties as collateral under commitments to purchase
and sell federal agency and GSE MBS. In addition, other liabilities includes obligations that arise from the failure
of a seller to deliver MBS to the FRBNY on the settlement date. Although the FRBNY has ownership of and records
its investments in the MBS as of the contractual settlement date, it is not obligated to make payment until the
securities are delivered, and the amount included in other liabilities represents the FRBNY’s obligation to pay
for the securities when delivered. The amount of other liabilities allocated to the Bank and held in the SOMA at
December 31, 2016 and 2015 was as follows (in millions):

Allocated to the Bank
	

2016 	

Total SOMA

2015 	

2016 		

2015

Other liabilities:
Cash margin 	

$

27 	

$

12 	

$

983 		

$

486

Obligations from MBS transaction fails 	

-	

-	

9 		

16

Other 	

-	

1	

20 		

6

13 	

$ 1,012 		

Total other liabilities 	

$

27 	

$

$

508

Accrued interest receivable on domestic securities holdings held in the SOMA was $25,517 million and $25,354
million as of December 31, 2016 and 2015, respectively, of which $693 million and $630 million, respectively, was
allocated to the Bank. These amounts are reported as a component of “System Open Market Account: Accrued
interest receivable” in the Statements of Condition.

58

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE
MBS allocated to the Bank and held in the SOMA during the years ended December 31, 2016 and 2015, is summarized as follows (in millions):
Allocated to the Bank
Notes
Balance at December 31, 2014 	

Total
Treasury
securities

Bonds

$ 39,646 	

$ 22,552 	

$ 62,198 	

68 	

19 	

-	

-	

Purchases1 	
Sales1 	
Realized gains, net 	

GSE debt
securities
$

Federal
agency and
GSE MBS

958 	

$ 42,861

87 	

-	

8,793

-	

-	

(11)

-	

-	

-	

-	

-

(74) 	

(14) 	

(88)	

(140) 	

(8,209)

(135) 	

(252) 	

(387)	

(13)	

(289)

2

Principal payments and maturities 	
Amortization of premiums and
accretion of discounts, net 	

Inflation adjustment on inflation-indexed securities 	

2	

5	

7	

-	

-

1,512 	

857 	

2,369 	

34 	

1,635

$ 41,019 	

$ 23,167 	

$ 64,186 	

839 	

$ 44,780

5,052 	

368 	

5,420 	

-	

10,318

(15)	

(2)	

(17)	

-	

(6)

(1) 	

1	

-	

-	

1

(4,964) 	

(445)	

(5,409)	

(446)	

(10,147)

(133) 	

(267) 	

(400) 	

(9)	

(358)

Inflation adjustment on inflation-indexed securities 	 16 	

40	

56	

-	

-

3,755	

2,120 	

5,875 	

68	

150

$ 44,729 	

$ 24,982 	

$ 69,711	

$

452 	

$ 48,738

$

$

$

-	

Annual reallocation adjustment3 	
Balance at December 31, 2015 	
Purchases1 	
Sales 	
1

Realized gains, net2 	
Principal payments and maturities 	

$

Amortization of premiums and accretion
of discounts, net 	
Annual reallocation adjustment 	
3

Balance at December 31, 2016 	
Year-ended December 31, 2015

Supplemental information - par value of transactions:
Purchases4 	

$

68 	

Sales	

-	

19 	
-	

87 	
-	

$

-	

8,486
(10)

Year-ended December 31, 2016
Supplemental information - par value of transactions:
Purchases4 	
Sales 	

$

5,059	
(15) 	

$

368 	
(1)	

$

5,427 	

$

(16)	

-	
-	

$

9,945
(6)

Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to
the basis of inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and
sales exclude MBS TBA transactions that are settled on a net basis.
1

2

Realized gains, net is the offset of the amount of realized gains and losses included in the reported sales amount.

Reflects the annual adjustment to the Bank’s allocated portion of the related SOMA securities that results from the annual settlement of the
interdistrict settlement account, as discussed in Note 3i.
3

4

Includes inflation compensation.

www.philadelphiafed.org

59

Notes to Financial Statements
Total SOMA

Notes
Balance at December 31, 2014	

Total
Treasury
securities

Bonds

Federal
agency and
GSE MBS

GSE debt
securities

$ 1,654,901 	

$ 941,340 	

$ 2,596,241 	

$ 39,990 	

$ 1,789,083

2,736 	

761	

3,497 	

-	

356,976

-	

-	

-	

-	

(464)

Purchases1 	
Sales1	
Realized gains, net 	

-	

-	

-	

-	

16

(2,977)	

(543)	

(3,520) 	

(5,733)	

(333,441)

(5,485) 	

(10,253) 	

(15,738) 	

(509) 	

(11,721)

53 	

143 	

196	

-	

-

$ 1,649,228	

$ 931,448 	

$ 2,580,676 	

$ 33,748 	

$ 1,800,449

190,992 	

13,882 	

204,874 	

-	

387,210

(534)	

(62)	

(596)	

-	

(213)

2

Principal payments and maturities 	
Amortization of premiums and accretion
of discounts, net 	
Inflation adjustment on inflation-indexed securities 	
Balance at December 31, 2015 	
Purchases1 	
Sales1 	
Realized gains, net 	

(22) 	

7	

(15)	

-	

6

(187,843) 	

(16,597)	

(204,440)	

(16,764) 	

(379,065)

(5,049) 	

(10,033) 	

(15,082) 	

(336) 	

(13,384)

567 	

1,438	

2,005 	

-	

-

$ 1,647,339	

$ 920,083 	

$ 2,567,422 	

$ 16,648 	

$ 1,795,003

$

$

2

Principal payments and maturities 	
Amortization of premiums and accretion
of discounts, net 	

Inflation adjustment on inflation-indexed securities 	
Balance at December 31, 2016 	
Year-ended December 31, 2015
Supplemental information - par value of transactions:
Purchases3 	

$

2,747 	

Sales 	

$

-	

766 	

$ 3,513 	

-	

-	

13,868	

$ 205,099	

(45)	

(600)	

-	
-	

344,505
(435)

Year-ended December 31, 2016
Supplemental information - par value of transactions:
Purchases3 	
Sales 	

$

191,231 	
(555) 	

$

$

-	
-	

$

373,197
(203)

Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to
the basis of inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and
sales exclude MBS TBA transactions that are settled on a net basis.
1

2

Realized gains, net is the offset of the amount of realized gains and losses included in the reported sales amount.

3

Includes inflation compensation.

b. Foreign Currency Denominated Investments
The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting foreign
currency denominated investments in the SOMA.
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements
and invests in foreign government debt instruments of France, Germany, the Netherlands, and Japan. These for-

60

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
eign government debt instruments are backed by the full faith and credit of the issuing foreign governments. In
addition, the FRBNY may enter into repurchase agreements to purchase government debt securities for which the
accepted collateral is the debt instruments issued by a foreign government.
At December 31, 2016 and 2015, there were no repurchase agreements outstanding and, consequently, no related
foreign securities held as collateral.
The Bank’s allocated share of activity related to foreign currency operations was 5.502 percent and 5.588 percent
at December 31, 2016 and 2015, respectively.
Information about foreign currency denominated investments recorded at amortized cost and valued at foreign
currency market exchange rates held in the SOMA and allocated to the Bank at December 31, 2016 and 2015 was
as follows (in millions):
Allocated to the Bank
	

2016 	

Total SOMA

2015 	

2016 	

2015

Euro:
Foreign currency deposits	

$

231 	

$

347 	

$

4,205 	

$

6,218

French government debt instruments 	

214 	

186 	

3,892 	

3,325

German government debt instruments 	

104 	

126 	

1,884 	

2,261

81 	

-	

1,462	

-

Foreign currency deposits 	

257 	

144 	

4,668 	

2,568

Japanese government debt instruments 	

183 	

290 	

3,331 	

5,195

$ 1,070 	

$ 1,093 	

$ 19,442 	

$ 19,567

Dutch government debt instruments 	
Japanese yen:

Total 	

Net interest income earned on foreign currency denominated investments held in the SOMA for the years ended
December 31, 2016 and 2015 was as follows (in millions):
Total SOMA
	

2016 	

2015

Net interest income:

1

Euro 	

$

Japanese yen 	
Total net interest income 	

(11) 	

$

4	
$

(7) 	

24
7

$

31

As a result of negative interest rates in certain foreign currency denominated investments held in the SOMA, interest income on foreign currency denominated investments, net contains negative interest of $32 million and $13 million for the years ended December 31, 2016 and 2015,
respectively.
1

Accrued interest receivable on foreign currency denominated investments, net was $79 million and $64 million
as of December 31, 2016 and 2015, respectively, of which $4 million was allocated to the Bank. These amounts are
reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of
Condition.

www.philadelphiafed.org

61

Notes to Financial Statements
The remaining maturity distribution of foreign currency denominated investments that were allocated to the
Bank at December 31, 2016 and 2015 was as follows (in millions):

Within 15
days

16 days to
90 days

$

$

91 days
to 1 year

Over 1 year
to 5 years

Over 5
years to
10 years

$

$

Total

December 31, 2016:
Euro 	
Japanese yen 	
Total 	

234 	
266 	

18 	

$

64 	

19 	

74 	

37 	

$ 138 	

$

$

$

$

500 	

$

$

119 	

$ 248 	

153 	

20 	

90 	

272 	

$ 268 	

$ 149	

175 	
81 	

139 	

$

630

-	

440
$ 1,070

256 	

$

139 	

214 	

$

19	

December 31, 2015:
Euro 	
Japanese yen 	
Total 	

$

59 	

171 	
$

385	

$

$

659

-	

434

19	

$ 1,093

There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31,
2016.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date basis. As of December 31, 2016, there were no outstanding commitments to purchase
foreign government debt instruments. During 2016, there were purchases and maturities of foreign government
debt instruments of $3,524 million and $3,767 million, respectively, of which $194 million and $208 million, respectively, were allocated to the Bank. There were no sales of foreign government debt instruments in 2016.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement.
The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral
in some cases, and performing monitoring procedures.
Foreign currency working balances held and foreign exchange contracts executed by the Bank to facilitate international payments and currency transactions made on behalf of foreign central banks and U.S. official institution
customers were immaterial as of December 31, 2016 and 2015.

c. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was 5.502 percent and 5.588 percent at December 31, 2016
and 2015, respectively.
The total foreign currency held under U.S. dollar liquidity swaps held in the SOMA at December 31, 2016 and
2015 was $5,563 million and $997 million, respectively, of which $306 million and $56 million, respectively, was
allocated to the Bank.

62

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31,
2016 and 2015 was as follows (in millions):

Euro 	

2016

2015

Within 15 days

Within 15 days

$

Japanese yen 	
Total 	

239 	

$

52

67 	
$

306 	

4
$

56

Foreign Currency Liquidity Swaps
At December 31, 2016 and 2015, there was no balance outstanding related to foreign currency liquidity swaps.

d. Fair Value of SOMA Assets and Liabilities
The fair value amounts below are presented solely for informational purposes and are not intended to comply
with the fair value disclosures required by FASB Accounting Standards Codification (ASC) Topic 820 (ASC 820), Fair
Value Measurement. Although the fair value of SOMA security holdings can be substantially greater than or less
than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the
Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Because SOMA securities are recorded at amortized cost, cumulative unrealized gains (losses) are not recognized in the Statements
of Condition and the changes in cumulative unrealized gains (losses) are not recognized in the Statements of
Operations.
The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government
debt instruments held in the SOMA is subject to market risk, arising from movements in market variables such as
interest rates and credit risk. The fair value of federal agency and GSE MBS is also affected by the expected rate of
prepayments of mortgage loans underlying the securities. The fair value of foreign government debt instruments
is also affected by currency risk. Based on evaluations performed as of December 31, 2016 and 2015, there are no
credit impairments of SOMA securities holdings.

www.philadelphiafed.org

63

Notes to Financial Statements
The following table presents the amortized cost, fair value, and cumulative unrealized gains (losses) on the Treasury securities, GSE debt securities, and federal agency and GSE MBS held in the SOMA and allocated to the Bank
at December 31, 2016 and 2015 (in millions):
Allocated to the Bank
2016
Amortized
cost

2015
Cumulative
unrealized
gains
(losses), net

Fair value

Amortized
cost

Cumulative
unrealized
gains, net

Fair value

Treasury securities:
Notes 	

$

Bonds 	
Total Treasury securities 	

44,729 	 $

44,992 	

24,982	

26,709	

1,727	

23,167	

25,034 	

1,867

69,711	

71,701 	

1,990	

64,186	

66,555 	

2,369

452	

474 	

22	

839	

875	

36

48,738 	

48,533	

(205)	

44,780 	

45,024 	

244

1,807 	

$ 109,805	

$ 112,454 	

$ 2,649

$

$

$

GSE debt securities 	
Federal agency and GSE MBS 	

$

263	

$

41,019	

$

41,521 	

$

502

Total domestic SOMA portfolio
securities holdings 	

$ 118,901	 $ 120,708 	

$

$

$

Memorandum - Commitments for:
Purchases of Treasury securities 	

Purchases of Federal agency and GSE MBS 	

317 	 $

318	

972	

977	

5	

552	

551	

(1)

-	

-	

-	

-	

-	

-

Sales of Federal agency and GSE MBS	

1	

-	

-	

-

Total SOMA
2016
Amortized
cost

2015
Cumulative
unrealized
gains
(losses), net

Fair value

Amortized
cost

Cumulative
unrealized
gains, net

Fair value

Treasury securities:
Notes 	

$ 1,647,339 	 $ 1,657,026 	

Bonds 	

$

9,687 	

$ 1,649,228 	 $ 1,669,395 	

$ 20,167

920,083 	

983,680	

63,597 	

931,448	

1,006,514 	

75,066

2,567,422 	

2,640,706	

73,284 	

2,580,676 	

2,675,909	

95,233

16,648 	

17,442 	

794 	

33,748	

35,165 	

1,417

1,795,003 	

1,787,484 	

(7,519)	

1,800,449 	

1,810,256	

9,807

$ 4,379,073 	 $ 4,445,632 	

$ 66,559 	

$ 4,414,873	 $ 4,521,330 	

$ 106,457

$

$

$

$

Total Treasury securities 	
GSE debt securities	
Federal agency and GSE MBS 	
Total domestic SOMA portfolio
securities holdings 	
Memorandum - Commitments for:
Purchases of Treasury securities 	

11,679	 $

11,719 	

40	

-	 $

-	

-

35,787 	

35,974	

187	

22,187	

22,170 	

(17)

-	

-	

-	

-	

-	

-

Purchases of Federal agency
and GSE MBS 	
Sales of Federal agency and GSE MBS	

64

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide
market consensus prices based on indicative quotes from various market participants. The fair value of federal
agency and GSE MBS was determined using a pricing service that utilizes a model-based approach that considers
observable inputs for similar securities.
The cost bases of repurchase agreements, reverse repurchase agreements, central bank liquidity swaps, and
other investments held in the SOMA portfolio approximate fair value. Due to the short-term nature of these
agreements and the defined amount that will be received upon settlement, the cost basis is estimated to approximate fair value.
At December 31, 2016 and 2015, the fair value of foreign currency denominated investments held in the SOMA was
$19,510 million and $19,630 million, respectively, of which $1,073 million and $1,097 million, respectively, was allocated to the Bank. The fair value of foreign government debt instruments was determined using pricing services
that provide market consensus prices based on indicative quotes from various market participants. The fair value
of foreign currency deposits was determined by reference to market interest rates.
The following table provides additional information on the amortized cost and fair values of the federal agency
and GSE MBS portfolio held in the SOMA and allocated to the Bank at December 31, 2016 and 2015 (in millions):
2016

Distribution of MBS
holdings by coupon rate

Amortized cost

Allocated to the Bank:
2.0% 	

$

287 	

2015
Fair value
$

Amortized cost

278 	

$

Fair value

279 	

$

273

2.5% 	

3,294 	

3,221	

2,898 	

2,861

3.0% 	

18,831 	

18,370 	

13,790 	

13,512

3.5% 	

15,240	

15,219 	

14,411	

14,474

4.0% 	

7,484 	

7,599 	

8,982 	

9,167

4.5%	

2,345 	

2,501	

2,883 	

3,085

5.0% 	

997 	

1,063	

1,217 	

1,306

5.5%	

225 	

243	

277 	

298

6.0% 	

31 	

34 	

38	

41

6.5% 	

4	

5	

5	

7

Total 	

$

48,738 	

$

10,556 	

$

48,533	

$

10,243 	

$

44,780 	

$

11,198	

$

45,024

Total SOMA:
2.0%	

$

10,993

2.5% 	

121,326 	

118,641	

116,527	

115,018

3.0% 	

693,524	

676,572	

554,430 	

543,270

3.5% 	

561,271	

560,510	

579,403	

581,940

4.0%	

275,650	

279,877 	

361,149	

368,576

4.5% 	

86,351	

92,111 	

115,914	

124,043

5.0% 	

36,708 	

39,159	

48,931	

52,523

5.5%	

8,298	

8,939 	

11,138	

11,989

6.0% 	

1,155	

1,253 	

1,542	

1,666

6.5% 	

164	

179	

217 	

238

Total 	

www.philadelphiafed.org

$

1,795,003 	

$

1,787,484 	

$

1,800,449 	

$

1,810,256

65

Notes to Financial Statements
The following tables present the realized gains (losses) and the change in the cumulative unrealized gains (losses) related to SOMA domestic securities holdings during the years ended December 31, 2016 and 2015 (in millions):
Allocated to Bank
2016
Realized gains,
net1
Treasury securities 	

$

-	

2015
Change in
cumulative
unrealized gains
(losses)2, 3
$

Realized gains

1

(797)	

$

Change in
cumulative
unrealized gains
(losses)2, 3

-	

$

(1,159)

GSE debt securities 	

-	

(17)	

-	

(27)

Federal agency and GSE MBS 	

1	

(540) 	

1	

(551)

Total 	

$

1	

$

(1,354)	

$

1	

$

(1,737)

Total SOMA
2016
Realized gains,
net1, 4
Treasury securities 	

$ (15) 	

GSE debt securities 	
Federal agency and GSE MBS 	
Total	

$

2015
Change in
cumulative
unrealized gains
(losses)2
$

(21,949) 	

Realized gains1

$

-	

Change in
cumulative
unrealized gains
(losses)2
$

(44,819)

-	

(623)	

-	

(1,092)

19 	

(17,326) 	

43	

(21,654)

4	

$

(39,898) 	

$

43	

$

(67,565)

Realized gains for federal agency and GSE MBS are reported in “Non-interest income (loss): System Open Market Account: Federal agency and
government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Operations.
1

Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Statements
of Operations.
2

The amount reported as change in cumulative unrealized gains (losses) allocated to the Bank is affected by the annual adjustment to the Bank’s
allocated portion of the related SOMA securities, as discussed in Note 3f.
3

Realized losses for Treasury securities are reported in “Non-interest income (loss): System Open Market Account: Treasury securities losses, net”
in the Statements of Operations.
4

The amount of change in cumulative unrealized gains (losses) position, net related to foreign currency denominated investments was a gain of $5 million and a loss of $33 million for the years ended December 31, 2016 and
2015, respectively, of which $277 thousand and $2 million, respectively, were allocated to the Bank.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair
value hierarchy that distinguishes between assumptions developed using market data obtained from independent sources (observable inputs) and the Bank’s assumptions developed using the best information available in
the circumstances (unobservable inputs). The three levels established by ASC 820 are described as follows:

66

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
•	

Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.

•	

Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the market.

•	

Level 3 – Valuation is based on model-based techniques that use significant inputs and assumptions not
observable in the market. These unobservable inputs and assumptions reflect the Bank’s estimates of inputs
and assumptions that market participants would use in pricing the assets and liabilities. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques.

Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments
are classified as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and
other observable inputs obtained from independent pricing services. The fair value hierarchy level of SOMA financial assets is not necessarily an indication of the risk associated with those assets.

(6) Bank Premises, Equipment, and Software
Bank premises and equipment at December 31, 2016 and 2015 were as follows (in millions):
	

2016 	

2015

Bank premises and equipment:
Land and land improvements 	

$

Buildings 	
Building machinery and equipment 	

8	

$

8

116 	

120

29 	

32

Construction in progress 	

1	

1

Furniture and equipment 	

47 	

47

201 	

208

(116) 	

(119)

Subtotal 	
Accumulated depreciation 	
Bank premises and equipment, net 	

$

85 	

$

89

Depreciation expense, for the years ended December 31 	

$

9	

$

9

www.philadelphiafed.org

67

Notes to Financial Statements
The Bank leases space to outside tenants with remaining lease terms ranging from 5 to 9 years. Rental income
from such leases was $2 million for each of the years ended December 31, 2016 and 2015, and is reported as a
component of “Non-interest income (loss): Other” in the Statements of Operations. Future minimum lease payments that the Bank will receive under non-cancelable lease agreements in existence at December 31, 2016, are
as follows (in millions):

2017 	

$

2

2018 	

3

2019 	

3

2020 	

3

2021 	

1

Thereafter 	

1

Total 	

$

13

The Bank had capitalized software assets, net of amortization, of $15 million and $9 million at December 31, 2016
and 2015, respectively. Amortization expense was $3 million for each of the years ended December 31, 2016 and
2015. Capitalized software assets are reported as a component of “Other assets” in the Statements of Condition
and the related amortization is reported as a component of “Operating expenses: Other” in the Statements of
Operations.

(7) Commitments and Contingencies
In conducting its operations, the Bank enters into contractual commitments, normally with fixed expiration dates
or termination provisions, at specific rates and for specific purposes.
At December 31, 2016, the Bank was obligated under non-cancelable leases for premises and equipment with remaining terms ranging from two to approximately three years. These leases provide for increased lease payments
based upon increases in real estate taxes, operating costs, or selected price indexes.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and
office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals,
was $1 million for each of the years ended December 31, 2016 and 2015. Certain of the Bank’s leases have options
to renew.
Future minimum lease payments under non-cancelable operating leases, net of sublease rentals, with remaining
terms of one year or more, at December 31, 2016, are as follows (in thousands):
	

Operating leases

2017 	

$

492

2018 	

498

2019 	

41

Future minimum lease payments	

$

1,031

At December 31, 2016, there were no material unrecorded unconditional purchase commitments or obligations in
excess of one year.

68

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per-incident basis, a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank,
up to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s
capital paid-in to the total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the
loss is shared. No claims were outstanding under the agreement at December 31, 2016 and 2015.
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 legal actions and claims will be resolved without material adverse effect on the financial position or
results of operations of the Bank.

(8) Retirement and Thrift Plans
Retirement Plans
The Bank currently offers three defined benefit retirement plans to its employees, based on length of service and
level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of
Employee Benefits of the Federal Reserve System (OEB) participate in the Retirement Plan for Employees of the
Federal Reserve System (System Plan).1 Under the Dodd-Frank Act, newly hired Bureau employees are eligible to
participate in the System Plan and, during the years ended December 31, 2016 and 2015, certain costs associated
with the System Plan were reimbursed by the Bureau. In addition, employees at certain compensation levels
participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate in the
Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP).
The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System Plan in its consolidated financial statements. The Bank reports the net cost related to the BEP and SERP as
a component of “Operating expenses: Salaries and benefits” in its Statements of Operations and reports the net
liability as a component of “Accrued benefit costs” in its Statements of Condition.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at
December 31, 2016 and 2015, and for the years then ended, were immaterial.

Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve
System (Thrift Plan). The Bank matches 100 percent of the first 6 percent of employee contributions from the
date of hire and provides an automatic employer contribution of 1 percent of eligible pay. The Bank’s Thrift Plan
contributions totaled $5 million for each of the years ended December 31, 2016 and 2015, and are reported as a
component of “Operating expenses: Salaries and benefits” in the Statements of Operations.

(9) Postretirement Benefits other than Retirement Plans and Postemployment Benefits
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical and life insurance benefits during retirement.
The Bank and plan participants fund benefits payable under the medical and life insurance plans as due and the
plans have no assets.
1

The OEB was established by the System to administer selected System benefit plans.

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69

Notes to Financial Statements
Following is a reconciliation of the beginning and ending balances of the benefit obligation for the years ended
December 31, 2016 and 2015 (in millions):
	

2016 	

Accumulated postretirement benefit obligation at January 1 	

$

103.8 	

2015
$

106.6

Service cost benefits earned during the period 	

3.2 	

3.5

Interest cost on accumulated benefit obligation 	

4.3	

4.3

Net actuarial loss (gain)	

0.5 	

(7.2)

-	

0.1

Special termination benefits loss 	
Contributions by plan participants 	
Benefits paid 	
Medicare Part D subsidies 	
Plan amendments 	
Accumulated postretirement benefit obligation at December 31 	

$

2.0 	

1.8

(6.5) 	

(5.7)

0.4	

0.4

(2.4)	

-

105.3 	

$

103.8

At December 31, 2016 and 2015, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.07 percent and 4.31 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the plan’s benefits when due. The System Plan discount rate assumption setting convention uses
an unrounded rate.
Following is a reconciliation of the beginning and ending balance of the plan assets, and the unfunded postretirement benefit obligation and accrued postretirement benefit costs for the years ended December 31, 2016 and
2015 (in millions):
	

2016 	

Fair value of plan assets at January 1 	

$

Contributions by the employer 	
Benefits paid 	
Medicare Part D subsidies 	

Unfunded obligation and accrued postretirement benefit cost	

$

4.1 	

Contributions by plan participants 	

Fair value of plan assets at December 31 	

-	

2015
3.5

2.0	

1.8

(6.5) 	

(5.7)

0.4 	

0.4

$

-	

$

-

$

105.3 	

$

103.8

2.2 	

$

Amounts included in accumulated other comprehensive loss are shown below:
Prior service credit (cost)	

$

Net actuarial loss	
Total accumulated other comprehensive loss 	

(15.8)	
$

(13.6) 	

(0.3)
(15.5)

$

(15.8)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements
of Condition.

70

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
For measurement purposes, the assumed health-care cost trend rates at December 31, 2016 and 2015 are provided
in the table below. The current health-care cost trend rate for next year is expected to decline ratably each year
until achieving the ultimate trend rate in 2022:
	

2016	

2015

Health-care cost trend rate assumed for next year	

6.60% 	

7.00%

4.75% 	

4.75%

2022 	

2022

Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate) 	
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 rates would have the following effects for the
year ended December 31, 2016 (in millions):
One percentage 	
point increase 	

	
	

One percentage
point decrease

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

$

Effect on accumulated postretirement benefit obligation 	

0.3 	

$

4.4 	

(1.0)
(10.9)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31, 2016 and 2015 (in millions):
	

2016	

Service cost-benefits earned during the period 	

$

2015

3.2	

$

3.5

Interest cost on accumulated benefit obligation 	

4.4 	

4.3

Amortization of prior service cost 	

0.1	

0.2

Amortization of net actuarial loss 	

0.2 	

2.0

Total periodic expense 	

7.9 	

10.0

-	

0.1

Special termination benefits loss	
Net periodic postretirement benefit expense	

$

7.9 	

$

10.1

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2017 are shown below:
Prior service cost 	

$

Net actuarial loss 	
Total 	

(0.4)
0.7

$

0.3

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1,
2016 and 2015, the weighted-average discount rate assumptions used to determine net periodic postretirement
benefit costs were 4.31 percent and 3.96 percent, respectively.

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71

Notes to Financial Statements
Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and
benefits” in the Statements of Operations.
The recognition of special termination benefit losses is primarily the result of enhanced retirement benefits provided to employees during the restructuring described in Note 11.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug
benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans
that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the
Bank’s plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug
benefit. The estimated effects of the subsidy are reflected in actuarial loss in the accumulated postretirement
benefit obligation and net periodic postretirement benefit expense.
During 2016, the Reserve Banks adopted an amendment to their health benefits program that added a Medicare
Advantage and Prescription Drug (MAPD) plan to the program effective January 1, 2017. The MAPD plan is a fully
insured product that combines into one integrated benefit Medicare and Medicare Supplement coverages, as well
as prescription drug coverage. The plan amendment resulted in a change in the Bank’s accumulated postretirement benefit obligation in the amount of $2.4 million as of December 31, 2016, with an equivalent change in the
prior service component of accumulated other comprehensive loss.
Federal Medicare Part D subsidy receipts were $351 thousand and $313 thousand in the years ended December 31,
2016 and 2015, respectively. Expected receipts in 2017, related to benefits paid in the years ended December 31,
2016 and 2015, are $113 thousand and $60 thousand, respectively.
Following is a summary of expected postretirement benefit payments (in millions):
	

Without subsidy 	

2017 	

$

5.0 	

With subsidy
$

4.7

2018 	

5.4 	

5.1

2019 	

5.5	

5.2

2020	

5.8	

5.4

2021 	

6.0 	

5.6

33.8	

31.6

2022 - 2026 	
Total	

$

61.5 	

$

57.6

Postemployment Benefits
The Bank offers benefits to former qualifying or inactive employees. Postemployment benefit costs are actuarially
determined using a December 31 measurement date and include the cost of providing disability; medical, dental,
and vision insurance; and survivor income benefits. The accrued postemployment benefit costs recognized by the
Bank at December 31, 2016 and 2015 were $5.5 million and $6.8 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit (credit)
expense included in 2016 and 2015 operating expenses were ($469) thousand and $866 thousand, respectively,
and are recorded as a component of “Operating expenses: Salaries and benefits” in the Statements of Operations.

72

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
(10) Accumulated Other Comprehensive Income and Other Comprehensive Income
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss as of
December 31, 2016 and 2015 (in millions):
2016 	

	
	
	
	

2015

Amount related to	
Amount related to
postretirement	postretirement
benefits other than	
benefits other than

	

retirement plans	

Balance at January 1 	

$

retirement plans

(15.8)	

$

(25.2)

Change in funded status of benefit plans:
Prior service costs arising during the year 	
Amortization of prior service cost	
Change in prior service costs related to benefit plans 	

2.4 	

-

0.1 1 	

0.2 1

2.5 	

0.2

Net actuarial (loss) gain arising during the year	

(0.5) 	

7.2

Amortization of net actuarial loss 	

0.2 	

2.0 1

(0.3) 	

9.2

2.2 	

9.4

1

Change in actuarial (losses) gain related to benefit plans 	
Change in funded status of benefit plans other comprehensive income	
Balance at December 31	
1

$

(13.6)	

$

(15.8)

Reclassification is reported as a component of “Operating expenses: Salaries and benefits” in the Statements of Operations.

Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 9.

(11) Business Restructuring Charges
In 2014, the Treasury announced a plan to consolidate the number of Reserve Banks providing fiscal agent services to the Treasury from ten to four. As a result of this initiative, the Government Entity Accounting and Reporting System and Treasury Collection Management and Monitoring operations performed by the Federal Reserve
Bank of Philadelphia were transitioned to the Federal Reserve Bank of St. Louis in 2015. In addition, the phased
transition of the Treasury Software Quality Assurance functions to Kansas City started in 2015. The Post Payment
System and its associated quality assurance function will transition to Kansas City over the next couple of years
The Bank had no material business restructuring charges in 2016 and 2015.

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73

Notes to Financial Statements
Following is a summary of financial information related to the restructuring plans (in millions):
	

2014 and prior

	

restructuring plans

Information related to restructuring
plans as of December 31, 2016:
Total expected costs related to restructuring activity 	

$

Estimated future costs related to restructuring activity	

2.5
-

Expected completion date 	

2014

Reconciliation of liability balances:
Balance at December 31, 2014 	

$

2.9

Adjustments 	

(0.2)

Payments	

(0.3)

Balance at December 31, 2015 	

$

2.4

Adjustments 	

(0.2)

Payments 	

(0.2)

Balance at December 31, 2016 	

$

2.0

Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements are
recorded based on the accumulated benefit earned by the employee. Separation costs that are provided under the
terms of one-time benefit arrangements are generally measured based on the expected benefit as of the termination date and recorded ratably over the period to termination. Restructuring costs related to employee separations
are reported as a component of “Operating expenses: Salaries and benefits” in the Statements of Operations.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are
shown as a component of the appropriate expense category in the Statements of Operations.
Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY
as discussed in Note 8. Costs associated with enhanced postretirement benefits are disclosed in Note 9.

74

Federal Reserve Bank of Philadelphia

Notes to Financial Statements
(12) Distribution of Comprehensive Income
The following table presents the distribution of the Bank’s comprehensive income for the years ended December
31, 2016 and 2015 (in millions):
	
Dividends on capital stock	

2016	2015
$

Transfer from surplus 	

37 	

$

97

(12) 	

(1,047)

-	

1,994

2,300	

1,234

Earnings remittances to the Treasury:
Interest on Federal Reserve notes 	
Required by the Federal Reserve Act 	
Total distribution 	

$

2,325	

$

2,278

Before the enactment of the FAST Act, the amount reported as transfer from surplus represented the amount
necessary to equate surplus with capital paid-in, in accordance with the Board of Governor’s policy. Subsequent
to the enactment of the FAST Act, the amount reported as transfer from surplus represents the amount necessary
to maintain surplus at an amount equal to the Bank’s allocated portion of the aggregate surplus limitation.
On December 28, 2015, the Reserve Banks reduced the aggregate surplus to the $10 billion limit in the FAST Act by
remitting $19.3 billion to the Treasury. The Bank’s share of this remittance was $1,066 million, which is reported as
a component of “Earnings remittances to the Treasury: Required by the Federal Reserve Act” in the Bank’s Statements of Operations, and in the table above.

(13) Subsequent Events
There were no subsequent events that require adjustments to or disclosures in the financial statements as of
December 31, 2016. Subsequent events were evaluated through March 8, 2017, which is the date that the financial
statements were available to be issued.

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75

Federal
ReserveRBank
of Philadelphia
FEDERAL
ESERVE
BANK
OF PHILADELPHIA
Ten Independence Mall, Philadelphia, PA 19106
www.philadelphiafed.org


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102