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Feaeral Reserve Bank of
San Franc-isco
Financial Statements
December 31, 1998
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
February 11, 1999
To: PricewaterhouseCoopers LLP
The management of the Federal Reserve Bank of San Francisco (FRB-SF) is responsible for the preparation
and fair presentation of the Statement of Financial Condition, Statement of Income, and Statement of Changes in
Capital as of December 31, 1998 (the "Financial Statements"). The Financial Statements have been prepared in
conformity with the accounting principles, policies, and practices established by the Board of Governors of the
Federal Reserve System and as set forth in the Financial Accounting Manual for the Federal Reserve Banks, and as
such, include amounts, some of which are based on judgments and estimates of management.
The management of the FRB-SF is responsible for maintaining an effective process of internal controls over
financial reporting including the safeguarding of assets as they relate to the Financial Statements. Such internal
controls are designed to provide reasonable assurance to management and to the Board of Directors regarding the
preparation of reliable Financial Statements. This process of internal controls contains self-monitoring mechanisms,
including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material
deficiencies in the process of internal controls are reported to management, and appropriate corrective measures are
implemented.
Even an effective process of internal controls, no matter how well designed, has inherent limitations,
including the possibility of human error, and therefore can provide only reasonable assurance with respect to the
preparation of reliable financial statements.
The management of the FRB-SF assessed its process of internal controls over financial reporting including
the safeguarding of assets reflected in the Financial Statements, based upon the criteria established in the "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, the management of the FRB-SF believes that the FRB-SF
maintained an effective process of internal controls over financial reporting including the safeguarding of assets as
they relate to the Financial Statements.
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Federal Reserve Bank of St. Louis
Federal Reserve Bank of San Francisco
by
Robert T. Parry
President
by
John F. Moore
First Vice President
~T
/JRICEWA1i:RHOU5E(aJPERS
I
Report of Independent Accountants
To the Board of Directors of the
Federal Reserve Bank of San Francisco
We have examined management's assertion that the Federal Reserve Bank of San Francisco ("FRB San Francisco")
maintained effective internal control over financial reporting and the safeguarding of assets as they relate to the
Financial Statements as of December 31, 1998, included in the accompanying Management's Assertion.
Our examination was made in accordance with standards established by the American Institute of Certified Public
Accountants, and accordingly, included obtaining an understanding of the internal control over financial reporting,
testing, and evaluating the design and operating effectiveness of the internal control, and such other procedures as we
considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our
opinion.
Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be
detected. Also, projections of any evaluation of the internal control over financial reporting to future periods are
subject to the risk that the internal control may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assertion that the FRB San Francisco maintained effective internal control over
financial reporting and over the safeguarding of assets as they relate to the Financial Statements as of December 31,
1998, is fairly stated, in all material respects, based upon criteria described in " Internal Control - Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.
San Francisco, California
March 5, 1999
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Federal Reserve Bank of St. Louis
fJR/cEWATfRHOUsE[CXJPER5
I
Report of Independent Accountants
To the Board of Governors of The Federal Reserve System
and the Board of Directors of the Federal Reserve
Bank of San Francisco
We have audited the accompanying statements of condition of the Federal Reserve Bank of San Francisco (the
"Bank") as of December 31, 1998 and 1997, and the related statements of income and changes in capital for the years
then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to
express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 3, the financial statements were prepared in conformity with the accounting principles, policies,
and practices established by the Board of Governors of The Federal Reserve System. These principles, policies, and
practices, which were designed to meet the specialized accounting and reporting needs of The Federal Reserve
System, are set forth in the Financial Accounting Manual for Federal Reserve Banks and constitute a comprehensive
basis of accounting other than generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of the Bank as of December 31, 1998 and 1997, and the results of its operations for the years then ended, on the basis
of accounting described in Note 3.
San Francisco, California
March 5, 1999
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Federal Reserve Bank of St. Louis
Federal Reserve Bank of San Francisco
Statements of Income
(in millions)
As of December 31,
1997
1998
Assets
Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Loans to depository institutions
U.S. government and federal agency securities, net
Investments denominated in foreign currencies
Accrued interest receivable
Bank premises and equipment, net
Other assets
Total assets
Liabilities and Capital
Liabilities
Federal Reserve notes outstanding, net
Deposits
Depository institutions
Other deposits
Deferred credit items
Surplus transfer due U.S. Treasury
Interdistrict settlement account
Accrued benefit cost
Other liabilities
$
1,465
1,241
52
1,122
1
57,488
3,574
543
219
28
$
1,420
1,241
69
2,210
335
54,604
3,270
517
218
56
$
65,733
$
63,940
$
50,984
$
54,617
Total liabilities
Capital
Capital paid-in
Surplus
Total capital
Total liabilities and capital
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Federal Reserve Bank of St. Louis
$
3,699
29
1,102
219
7,673
69
14
3,676
32
1,893
55
1,658
70
14
63,789
62,015
972
972
980
945
1,944
1,925
65,733
$
The accompanying notes are an integral part of these financial statements.
2
63,940
Federal Reserve Bank of San Francisco
Statements of Income
(in millions)
For the years ended
December 31,
1998
1997
Interest income
Interest on U.S. government securities
Interest on foreign currencies
Interest on loans to depository institutions
$
3,337
79
1
$
2,877
70
1
3,417
2,948
Other operating income (loss)
Income from services
Reimbursable services to government agencies
Foreign currency gains/(losses ), net
Government securities gains, net
Other income
84
29
338
5
7
85
19
(497)
2
6
Total other operating income (loss)
463
(385)
Operating expenses
Salaries and other benefits
Occupancy expense
Equipment expense
Cost of unreimbursed Treasury services
Assessments by Board of Governors
Other expenses
155
15
21
1
80
75
147
16
19
5
82
86
347
355
Total interest income
Total operating expenses
Net income prior to distribution
Distribution of net income
Dividends paid to member banks
Transferred to surplus
Payments to U.S. Treasury as interest on Federal Reserve notes
Payments to U.S. Treasury as required by statute
Total distribution
$
3,533
$
2,208
$
59
27
1,188
2,259
$
56
100
3,533
$
$
2,052
The accompanying notes are an integral part of these financial statements.
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Federal Reserve Bank of St. Louis
3
2,208
Federal Reserve Bank of San Francisco
Statements of Changes in Capital
For the Years Ended December 31, 1998 and December 31, 1997
(in millions)
Capital
Paid-in
Balance at January 1, 1997 (18 million shares)
Net income transferred to surplus
Statutory surplus transfers to the U.S. Treasury
Net change in capital stock issued (2 million shares)
$
Surplus
$
865
100
(20)
$
100
Balance at December 31, 1997 (20 million shares)
Net income transferred to surplus
Net change in capital stock redeemed
(.162 million shares)
Balance at December 31, 1998 (19 million shares)
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Federal Reserve Bank of St. Louis
880
Total
Capital
980
$
(8)
972
$
945
27
1,925
27
972
(8)
1,944
$
The accompanying notes are an integral part of these financial statements.
4
1,745
100
(20)
100
Federal Reserve Bank of San Francisco
Notes to Financial Statements
1.
Organization
The Federal Reserve Bank of San Francisco ("Bank") is part of the Federal Reserve System ("System") created
by Congress under the Federal Reserve Act of 1913 ("Federal Reserve Act") which established the central bank
of the United States. The System consists of the Board of Governors of the Federal Reserve System ("Board of
Governors") and twelve Federal Reserve Banks ("Reserve Banks"). The Reserve Banks are chartered by the
federal government and possess a unique set of governmental, corporate, and central bank characteristics. Other
major elements of the System are the Federal Open Market Committee ("FOMC"), and the Federal Advisory
Council. The FOMC is composed of members of the Board of Governors, the president of the Federal Reserve
Bank of New York ("FRBNY") and, on a rotating basis, four other Reserve Bank presidents.
Structure
The Bank and its branches in Los Angeles, California, Portland, Oregon, Salt Lake City, Utah, and
Seattle, Washington serve the Twelfth Federal Reserve District, which includes Alaska, Arizona,
California, Hawaii, Idaho, Nevada, Oregon, Utah, Washington, and the commonwealths or territories of
American Samoa, Guam, and the Northern Mariana Islands. In accordance with the Federal Reserve Act,
supervision and control of the Bank is exercised by a Board of Directors. Banks that are members of the
System include all national banks and any state chartered bank that applies and is approved for
membership in the System.
Board of Directors
The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve
Banks. Each board is composed of nine members serving three-year terms: three directors, including
those designated as Chairman and Deputy Chairman, are appointed by the Board of Governors, and six
directors are elected by member banks. Of the six elected by member banks, three represent the public
and three represent member banks. Member banks are divided into three classes according to size.
Member banks in each class elect one director representing member banks and one representing the
public. In any election of directors, each member bank receives one vote, regardless of the number of
shares of Reserve Bank stock it holds.
2.
Operations And Services
The System performs a variety of services and operations. Functions include: formulating and conducting
monetary policy; participating actively in the payments mechanism, including large-dollar transfers of funds,
automated clearinghouse operations and check processing; distribution of coin and currency; fiscal agency
functions for the U.S. Treasury and certain federal agencies; serving as the federal government's bank; providing
short-term loans to depository institutions; serving the consumer and the community by providing educational
materials and information regarding consumer laws; supervising bank holding companies, and state member
banks; and administering other regulations of the Board of Governors. The Board of Governors' operating costs
are funded through assessments on the Reserve Banks.
The FOMC establishes policy regarding open market operations, oversees these operations, and issues
authorizations and directives to the FRBNY for its execution of transactions. Authorized transaction types
include direct purchase and sale of securities, matched sale-purchase transactions, the purchase of securities
under agreements to resell, and the lending of U.S. government securities. Additionally, the FRBNY is
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Federal Reserve Bank of St. Louis
5
Federal Reserve Bank of San Francisco
Notes to Financial Statements
authorized by the FOMC to hold balances of and to execute spot and forward foreign exchange and securities
contracts in fourteen foreign currencies, maintain reciprocal currency arrangements ("F/X swaps") with various
central banks, and "warehouse" foreign currencies for the U.S. Treasury and Exchange Stabilization Fund
(" ESF") through the Reserve Banks.
3.
Significant Accounting Policies
Accounting principles for entities with the unique powers and responsibilities of the nation's central bank have
not been formulated by the Financial Accounting Standards Board. The Board of Governors has developed
specialized accounting principles and practices that it believes are appropriate for the significantly different
nature and function of a central bank as compared to the private sector. These accounting principles and
practices are documented in the "Financial Accounting Manual for Federal Reserve Banks" ("Financial
Accounting Manual"), which is issued by the Board of Governors. All Reserve Banks are required to adopt and
apply accounting policies and practices that are consistent with the Financial Accounting Manual.
The financial statements have been prepared in accordance with the Financial Accounting Manual. Differences
exist between the accounting principles and practices of the System and generally accepted accounting principles
("GAAP"). The primary differences are the presentation of all security holdings at amortized cost, rather than at
the fair value presentation requirements of GAAP, and the accounting for matched sale-purchase transactions as
separate sales and purchases, rather than secured borrowings with pledged collateral, as is required by GAAP. In
addition, the Bank has elected not to present a Statement of Cash Flows or a Statement of Comprehensive
Income. The Statement of Cash Flows has not been included as the liquidity and cash position of the Bank are
not of primary concern to the users of these financial statements. The Statement of Comprehensive Income,
which comprises net income plus or minus certain adjustments, such as the fair value adjustment for securities,
has not been included because as stated above the securities are recorded at amortized cost and there are no other
adjustments in the determination of Comprehensive Income applicable to the Bank. Other information regarding
the Bank's activities is provided in, or may be derived from, the Statements of Condition, Income, and Changes
in Capital. Therefore, a Statement of Cash Flows or a Statement of Comprehensive Income would not provide
any additional useful information. There are no other significant differences between the policies outlined in the
Financial Accounting Manual and GAAP.
The preparation of the financial statements in conformity with the Financial Accounting Manual requires
management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ from those estimates. Unique
accounts and significant accounting policies are explained below.
Gold Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks to monetize
gold held by the U.S. Treasury. Payment for the gold certificates by the Reserve Banks is made by
crediting equivalent amounts in dollars into the account established for the U.S. Treasury. These gold
certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The
U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to
the U.S. Treasury. At such time, the U.S. Treasury's account is charged and the Reserve Banks' gold
certificate accounts are lowered. The value of gold for purposes of backing the gold certificates is set by
law at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates among Reserve
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Federal Reserve Bank of St. Louis
6
Federal Reserve Bank of San Francisco
Notes to Financial Statements
Banks once a year based upon Federal Reserve notes outstanding in each District at the end of the
preceding year.
Special Drawing Rights Certificates
Special drawing rights ("SDRs") are issued by the International Monetary Fund ("Fund") to its members
in proportion to each member's quota in the Fund at the time of issuance. SDRs serve as a supplement to
international monetary reserves and may be transferred from one national monetary authority to another.
Under the law providing for United States participation in the SDR system, the Secretary of the U.S.
Treasury is authorized to issue SDR certificates, somewhat like gold certificates, to the Reserve Banks.
At such time, equivalent amounts in dollars are credited to the account established for the U.S. Treasury,
and the Reserve Banks' SDR certificate accounts are increased. The Reserve Banks are required to
purchase SDRs, at the direction of the U.S. Treasury, for the purpose of financing SDR certificate
acquisitions or for financing exchange stabilization operations. The Board of Governors allocates each
SDR transaction among Reserve Banks based upon Federal Reserve notes outstanding in each District at
the end of the preceding year.
Loans to Depository Institutions
The Depository Institutions Deregulation and Monetary Control Act of 1980 provides that all depository
institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in
Regulation D issued by the Board of Governors, have borrowing privileges at the discretion of the
Reserve Banks. Borrowers execute certain lending agreements and deposit sufficient collateral before
credit is extended. Loans are evaluated for collectibility, and currently all are considered collectible and
fully collateralized. If any loans were deemed to be uncollectible, an appropriate reserve would be
established. Interest is recorded on the accrual basis and is charged at the applicable discount rate
established at least every fourteen days by the Board of Directors of the Reserve Banks, subject to review
by the Board of Governors. However, Reserve Banks retain the option to impose a surcharge above the
basic rate in certain circumstances.
U.S. Government and Federal Agency Securities and Investments Denominated in Foreign
Currencies
The FOMC has designated the FRBNY to execute open market transactions on its behalf and to hold the
resulting securities in the portfolio known as the System Open Market Account ("SOMA"). In addition to
authorizing and directing operations in the domestic securities market, the FOMC authorizes and directs
the FRBNY to execute operations in foreign markets for major currencies in order to counter disorderly
conditions in exchange markets or other needs specified by the FOMC in carrying out the System's
central bank responsibilities.
Purchases of securities under agreements to resell and matched sale-purchase transactions are accounted
for as separate sale and purchase transactions. Purchases under agreements to resell are transactions in
which the FRBNY purchases a security and sells it back at the rate specified at the commencement of the
transaction. Matched sale-purchase transactions are transactions in which the FRBNY sells a security and
buys it back at the rate specified at the commencement of the transaction.
Reserve Banks are authorized by the FOMC to lend U.S. government securities held in the SOMA to U.S.
government securities dealers and to banks participating in U.S. government securities clearing
arrangements, in order to facilitate the effective functioning of the domestic securities market. These
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Federal Reserve Bank of St. Louis
7
Federal Reserve Bank of San Francisco
Notes to Financial Statements
securities-lending transactions are fully collateralized by other U.S. government securities. FOMC policy
requires the lending Reserve Bank to take possession of collateral in amounts in excess of the market
values of the securities loaned. The market values of the collateral and the securities loaned are
monitored by the lending Reserve Bank on a daily basis, with additional collateral obtained as necessary.
The securities loaned continue to be accounted for in the SOMA.
Foreign exchange contracts are contractual agreements between two parties to exchange specified
currencies, at a specified price, on a specified date. Spot foreign contracts normally settle two days after
the trade date, whereas the settlement date on forward contracts is negotiated between the contracting
parties, but will extend beyond two days from the trade date. The FRBNY generally enters into spot
contracts, with any forward contracts generally limited to the second leg of a swap/warehousing
transaction.
The FRBNY, on behalf of the Reserve Banks, maintains renewable, short-term FIX swap arrangements
with authorized foreign central banks. The parties agree to exchange their currencies up to a pre-arranged
maximum amount and for an agreed upon period of time (up to twelve months), at an agreed upon interest
rate. These arrangements give the FOMC temporary access to foreign currencies that it may need for
intervention operations to support the dollar and give the partner foreign central bank temporary access to
dollars it may need to support its own currency. Drawings under the FIX swap arrangements can be
initiated by either the FRBNY or the partner foreign central bank, and must be agreed to by the drawee.
The FIX swaps are structured so that the party initiating the transaction (the drawer) bears the exchange
rate risk upon maturity. The FRBNY will generally invest the foreign currency received under an FIX
swap in interest-bearing instruments.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the
Treasury, U.S. dollars for foreign currencies held by the Treasury or ESF over a limited period of time.
The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Treasury and
ESF for financing purchases of foreign currencies and related international operations.
In connection with its foreign currency activities, the FRBNY, on behalf of the Reserve Banks, may enter
into contracts which contain varying degrees of off-balance sheet market risk, because they represent
contractual commitments involving future settlement, and counter-party credit risk. The FRBNY controls
credit risk by obtaining credit approvals, establishing transaction limits, and performing daily monitoring
procedures.
While the application of current market prices to the securities currently held in the SOMA portfolio and
investments denominated in foreign currencies may result in values substantially above or below their
carrying values, these unrealized changes in value would have no direct effect on the quantity of reserves
available to the banking system or on the prospects for future Reserve Bank earnings or capital. Both the
domestic and foreign components of the SOMA portfolio from time to time involve transactions that can
result in gains or losses when holdings are sold prior to maturity. However, decisions regarding the
securities and foreign currencies transactions, including their purchase and sale, are motivated by
monetary policy objectives rather than profit. Accordingly, earnings and any gains or losses resulting
from the sale of such currencies and securities are incidental to the open market operations and do not
motivate its activities or policy decisions.
U.S. government and federal agency securities and investments denominated in foreign currencies
comprising the SOMA are recorded at cost, on a settlement-date basis, and adjusted for amortization of
premiums or accretion of discounts on a straight-line basis. Interest income is accrued on a straight-line
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Federal Reserve Bank of St. Louis
8
Federal Reserve Bank of San Francisco
Notes to Financial Statements
basis and is reported as " Interest on U.S. government securities" or " Interest on foreign currencies," as
appropriate. Income earned on securities lending transactions is reported as a component of " Other
income." Gains and losses resulting from sales of securities are determined by specific issues based on
average cost. Gains and losses on the sales of U.S. government and federal agency securities are reported
as " Government securities gains, net". Foreign currency denominated assets are revalued monthly at
current market exchange rates in order to report these assets in U.S. dollars. Realized and unrealized
gains and losses on investments denominated in foreign currencies are reported as "Foreign currency
gains (losses), net". Foreign currencies held through FIX swaps, when initiated by the counter party, and
warehousing arrangements are revalued monthly, with the unrealized gain or loss reported by the FRBNY
as a component of "Other assets" or "Other liabilities," as appropriate.
Balances of U.S. government and federal agencies securities bought outright, investments denominated in
foreign currency, interest income, amortization of premiums and discounts on securities bought outright,
gains and losses on sales of securities, and realized and unrealized gains and losses on investments
denominated in foreign currencies, excluding those held under an FIX swap arrangement, are allocated to
each Reserve Bank. Securities purchased under agreements to resell and the related premiums, discounts
and income, and unrealized gains and losses on the revaluation of foreign currency holdings under FIX
swaps and warehousing arrangements are allocated to the FRBNY and not to other Reserve Banks.
Income from securities lending transactions is recognized only by the lending Reserve Bank.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated
on a straight-line basis over estimated useful lives of assets ranging from 2 to 50 years. New assets,
major alterations, renovations and improvements are capitalized at cost as additions to the asset accounts.
Maintenance, repairs and minor replacements are charged to operations in the year incurred.
Interdistrict Settlement Account
At the close of business each day, all Reserve Banks and branches assemble the payments due to or from
other Reserve Banks and branches as a result of transactions involving accounts residing in other Districts
that occurred during the day's operations. Such transactions may include funds settlement, check clearing
and automated clearinghouse ("ACH") operations, and allocations of shared expenses. The cumulative net
amount due to or from other Reserve Banks is reported as the "Interdistrict settlement account."
Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes are issued through
the various Federal Reserve agents to the Reserve Banks upon deposit with such Agents of certain classes
of collateral security, typically U.S. government securities. These notes are identified as issued to a
specific Reserve Bank. The Federal Reserve Act provides that the collateral security tendered by the
Reserve Bank to the Federal Reserve Agent must be equal to the sum of the notes applied for by such
Reserve Bank. In accordance with the Federal Reserve Act, gold certificates, special drawing rights
certificates, U.S. government and agency securities, loans allowed under Section 13, and investments
denominated in foreign currencies are pledged as collateral for net Federal Reserve notes outstanding.
The collateral value is equal to the book value of the collateral tendered, with the exception of securities,
whose collateral value is equal to the par value of the securities tendered. The Board of Governors may,
at any time, call upon a Reserve Bank for additional security to adequately collateralize the Federal
Reserve notes. To satisfy its obligation to provide sufficient collateral for its outstanding Federal Reserve
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Federal Reserve Bank of St. Louis
9
Federal Reserve Bank of San Francisco
Notes to Financial Statements
notes, the Reserve Banks have entered into an agreement that provides that certain assets of the Reserve
Banks are jointly pledged as collateral for the Federal Reserve notes of all Reserve Banks. In the event
that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a
first and paramount lien on all the assets of the Reserve Banks. Finally, as obligations of the United
States, Federal Reserve notes are backed by the full faith and credit of the United States government.
The "Federal Reserve notes outstanding, net" account represents Federal Reserve notes reduced by cash
held in the vaults of the Bank of $17,310 million, and $18 billion at December 31, 1998 and 1997,
respectively.
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% of the capital and surplus of the member bank. As a member bank's
capital and surplus changes, its holdings of the Reserve Bank's stock must be adjusted. Member banks
are those state-chartered banks that apply and are approved for membership in the System and all national
banks. Currently, only one-half of the subscription is paid-in and the remainder is subject to call. These
shares are nonvoting with a par value of $100. They may not be transferred or hypothecated. By law,
each member bank is entitled to receive an annual dividend of 6% on the paid-in capital stock. This
cumulative dividend is paid semiannually. A member bank is liable for Reserve Bank liabilities up to
twice the par value of stock subscribed by it.
Surplus
The Board of Governors requires Reserve Banks to maintain a surplus equal to the amount of capital
paid-in as of December 31. This amount is intended to provide additional capital and reduce the
possibility that the Reserve Banks would be required to call on member banks for additional capital.
Reserve Banks are required by the Board of Governors to transfer to the U.S. Treasury excess earnings,
after providing for the costs of operations, payment of dividends, and reservation of an amount necessary
to equate surplus with capital paid-in. Payments made after September 30, 1998, represent payment of
interest on Federal Reserve notes outstanding.
The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66, Section 3002) codified the existing
Board surplus policies as statutory surplus transfers, rather than as payments of interest on Federal
Reserve notes, for federal government fiscal years 1998 and 1997 (which began on October 1, 1997 and
1996, respectively). In addition, the legislation directed the Reserve Banks to transfer to the U.S.
Treasury additional surplus funds of $107 million and $106 million during fiscal years 1998 and 1997,
respectively. Reserve Banks were not permitted to replenish surplus for these amounts during this time.
The Reserve Banks made these transfers on October 1, 1997 and October 1, 1996, respectively. The
Bank's share of the 1997 transfer is reported as "Statutory surplus transfer to the U.S. Treasury."
In the event of losses, payments to the U.S. Treasury are suspended until such losses are recovered
through subsequent earnings. Weekly payments to the U.S. Treasury vary significantly.
Cost of Unreimbursed Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United
States. By statute, the Department of the Treasury is permitted, but not required, to pay for these services.
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Federal Reserve Bank of St. Louis
10
Federal Reserve Bank of San Francisco
Notes to Financial Statements
The costs of providing fiscal agency and depository services to the Treasury Department that have been
billed but will not be paid are reported as the "Cost of unreimbursed Treasury services."
Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property,
which are reported as a component of "Occupancy expense."
4.
U.S. Government And Federal Agency Securities
Securities bought outright and held under agreements to resell are held in the SOMA at the FRBNY. An
undivided interest in SOMA activity, with the exception of securities held under agreements to resell and the
related premiums, discounts and income, is allocated to each Reserve Bank on a percentage basis derived from
an annual settlement of interdistrict clearings. The settlement, performed in April of each year, equalizes
Reserve Bank gold certificate holdings to Federal Reserve notes outstanding. The Bank's allocated share of
SOMA balances was approximately 12.589% and 12.582% at December 31, 1998 and 1997, respectively.
The Bank's allocated share of securities held in the SOMA at December 31, that were bought outright, were as
follows (in millions):
1998
Par value
Federal agency
U.S. government
Bills
Notes
Bonds
$
Total par value
Unamortized premiums
Unaccreted discounts
1997
42
$
24,519
23,654
8,746
24,801
21,918
7,474
56,961
54,279
930
(403)
Total allocated to Bank
$
86
57,488
780
(455)
$
54,604
Total SOMA securities bought outright were $456,667 million and $434,001 million at December 31, 1998 and
1997, respectively.
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Federal Reserve Bank of St. Louis
11
Federal Reserve Bank of San Francisco
Notes to Financial Statements
The maturities of U.S. government and federal agency securities bought outright, which were allocated to the
Bank at December 31, 1998, were as follows (in millions):
Maturities of Securities Held
U.S.
Government
Securities
Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years
Over 5 years to l 0 years
Over 10 years
Total
$
$
Par Value
Federal
Agency
Obligations
146
12,479
18,082
13,562
5,642
7,008
$
56,919
$
Total
$
146
12,482
18,091
13,570
5,664
7,008
$
56,961
3
9
8
22
42
At December 31, 1998, and 1997, matched sale-purchase transactions involving U.S. government securities with
par values of $20,927 million and $17,027 million, respectively, were outstanding, of which $2,634 million and
$2,142 million were allocated to the Bank. Matched sale-purchase transactions are generally overnight
arrangements.
At December 31, 1998 and 1997, U.S. government securities with par values of $35 million and $0 million,
respectively, were loaned by the Bank.
5.
Investments Denominated In Foreign Currencies
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and the
Bank for International Settlements and invests in foreign government debt instruments. Foreign government debt
instruments held include both securities bought outright and securities held under agreements to resell. These
investments are guaranteed as to principal and interest by the foreign governments.
Each Reserve Bank is allocated a share of foreign-currency-denominated assets, the related interest income, and
realized and unrealized foreign currency gains and losses, with the exception of unrealized gains and losses on
FIX swaps and warehousing transactions. This allocation is based on the ratio of each Reserve Bank's capital
and surplus to aggregate capital and surplus at the preceding December 31. The Bank's allocated share of
investments denominated in foreign currencies was approximately 18.064% and 19.180% at December 31, 1998
and 1997, respectively.
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Federal Reserve Bank of St. Louis
12
Federal Reserve Bank of San Francisco
Notes to Financial Statements
The Bank's allocated share of investments denominated in foreign currencies, valued at current exchange rates at
December 31, were as follows (in millions):
1997
1998
German Marks
Foreign currency deposits
Government debt instruments including agreements
to resell
Japanese Yen
Foreign currency deposits
Government debt instruments including agreements
to resell
Accrued interest
$
$
Total
1,888
$
1,586
429
617
120
110
1,119
18
940
17
3,574
$
3,270
Total investments denominated in foreign currencies were $19,769 million and $17,046 million at December 31,
1998 and 1997, respectively, which include $15 million and $3 million in unearned interest for 1998 and 1997
respectively, collected on certain foreign currency holdings that is allocated solely to the FRBNY.
The maturities of investments denominated in foreign currencies which were allocated to the Bank at December
31, 1998, were as follows (in millions):
Maturities of Investments Denominated in
Foreign Currencies
Within 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Over 10 years
Total
$
3,401
90
83
$
3,574
At December 31, 1998 and 1997, there were no open foreign exchange contracts or outstanding FIX swaps.
At December 31, 1998, the warehousing facility was $5,000 million, with zero outstanding.
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Federal Reserve Bank of St. Louis
13
Federal Reserve Bank of San Francisco
Notes to Financial Statements
6.
Bank Premises And Equipment
A summary of bank premises and equipment at December 31 is as follows (in millions):
1998
Bank premises and equipment
Land
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment
$
Accumulated depreciation
$
Bank premises and equipment, net
23
154
35
5
133
350
(131)
219
1997
$
$
23
150
35
1
128
337
(119)
218
Depreciation expense was $17 million and $16 million for the years ended December 31, 1998 and 1997,
respectively.
The Bank had no Bank premises and equipment at December 31 for leases that have been capitalized.
The Bank leases unused space to outside tenants. Those leases have terms ranging from 1 to 9 years. Rental
income from such leases was $1 million for each year ended December 31, 1998 and 1997. Future minimum
lease payments under agreements in existence at December 31, 1998, were not material.
7.
Commitments And Contingencies
At December 31, 1998, the Bank was obligated under noncancelable leases for premises and equipment with
terms ranging from 1 to approximately 4 years. These leases provide for increased rentals based upon increases
in real estate taxes, operating costs or selected price indices.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office
equipment (including taxes, insurance and maintenance when included in rent), net of sublease rentals, was $589
thousand and $438 thousand for the years ended December 31, 1998 and 1997, respectively. Certain of the
Bank's leases have options to renew.
Future minimum rental payments under noncancelable operating leases and capital leases, net of sublease
rentals, with terms of one year or more, at December 31, 1998, were not material.
There were no other commitments or long-term obligations in excess of one year at December 31, 1998.
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Federal Reserve Bank of St. Louis
14
Federal Reserve Bank of San Francisco
Notes to Financial Statements
Under the Insurance Agreement of the Federal Reserve Banks dated as of June 7, 1994, each of the Reserve
Banks has agreed to bear, on a per incident basis, a pro rata share of losses in excess of 1% of the capital of the
claiming Reserve Bank, up to 50% of the total capital and surplus of all Reserve Banks. Losses are borne in the
ratio that a Reserve Bank's capital bears to the total capital of all Reserve Banks at the beginning of the calendar
year in which the loss is shared. No claims were outstanding under such agreement at December 31, 1998 or
1997.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is
difficult to predict the ultimate outcome of these actions, in management's opinion, based on discussions with
counsel, the aforementioned litigation and claims will be resolved without material adverse effect on the
financial position or results of operations of the Bank.
8.
Retirement And Thrift Plans
Retirement Plans
The Bank currently offers two defined benefit retirement plans to its employees, based on length of
service and level of compensation. Substantially all of the Bank's employees participate in the Retirement
Plan for Employees of the Federal Reserve System ("System Plan") and the Benefit Equalization
Retirement Plan ("BEP"). The System Plan is a multi-employer plan with contributions fully funded by
participating employers. No separate accounting is maintained of assets contributed by the participating
employers. The Bank's projected benefit obligation and net pension costs for the BEP at December 31,
1998 and 1997, and for the years then ended, are not material.
Thrift plan
Employees of the Bank may also participate in the defined contribution Thrift Plan for Employees of the
Federal Reserve System ("Thrift Plan"). The Bank's Thrift Plan contributions totaled $5 million for each
year ended December 31, 1998 and 1997 and are reported as a component of "Salaries and other
benefits."
9.
Postretirement Benefits Other Than Pensions And Postemployment Benefits
Postretirement benefits other than pensions
In addition to the Bank's retirement plans, employees who have met certain age and length of service
requirements are eligible for both medical benefits and life insurance coverage during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has
no plan assets. Net po~tretirement benefit cost is actuarially determined using a January 1 measurement
date.
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Federal Reserve Bank of St. Louis
15
Federal Reserve Bank of San Francisco
Notes to Financial Statements
Following is a reconciliation of beginning and ending balances of the benefit obligation (in millions):
1998
1997
Accumulated postretirement benefit obligation at January 1
Service cost - benefits earned during the period
Interest cost of accumulated benefit obligation
Actuarial gain
Contributions by plan participants
Benefits paid
Plan amendments, acquisitions, foreign currency exchange
rate changes, business combinations, divestitures,
curtailments, settlements, special termination benefits
$
32.1
0.7
2.0
(0.3)
0.2
(1.6)
$
34.5
0.7
2.2
(4.9)
0.2
(0.6)
Accumulated postretirement benefit obligation at December 31
$
33.1
$
32.1
Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded
postretirement benefit obligation, and the accrued postretirement benefit cost (in millions):
1998
Fair value of plan assets at January 1
Actual return on plan assets
Contributions by the employer
Contributions by plan participants
Benefits paid
$
Fair value of plan assets at December 31
$
Unfunded postretirement benefit obligation
Unrecognized initial net transition asset
Unrecognized prior service cost
Unrecognized net actuarial gain
Accrued postretirement benefit cost
$
33.1
$
15.9
11.1
60.1
1997
$
1.4
0.2
(1.6)
0.4
0.2
(0.6)
$
$
32.1
$
17.6
11.4
61.1
Accrued postretirement benefit cost is reported as a component of "Accrued benefit cost."
The weighted-average assumption used in developing the postretirement benefit obligation as of
December 31 is as follows:
1998
6.25%
Discount rate
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Federal Reserve Bank of St. Louis
16
1997
7.00%
Federal Reserve Bank of San Francisco
Notes to Financial Statements
For measurement purposes, an 8.5% annual rate of increase in the cost of covered health care benefits was
assumed for 1999. Ultimately, the health care cost trend rate is expected to decrease gradually to 4.75%
by 2006, and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for health care
plans. A one percentage point change in assumed health care cost trend rates would have the following
effects for the year ended December 31, 1998 (in millions):
1 Percentage
Point
Increase
Effect on aggregate of service and interest cost
components of net periodic postretirement
benefit cost
Effect on accumulated postretirement benefit
obligation
$
0.1
1 Percentage
Point
Decrease
$
1.1
(0.3)
(3.3)
The following is a summary of the components of net periodic postretirement benefit cost for the years
ended December 31 (in millions):
1998
Service cost-benefits earned during the period
Interest cost of accumulated benefit obligation
Amortization of prior service cost
Recognized net actuarial loss
Net periodic postretirement benefit cost
$
$
0.6
2.0
(1.6)
(0.6)
0.4
1997
$
$
0.7
2.2
(1.6)
(0.5)
0.8
Net periodic postretirement benefit cost is reported as a component of "Salaries and other benefits."
Postemployment benefits:
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined
and include the cost of medical and dental insurance, survivor income, and disability benefits. Costs were projected
using the same discount rate and health care trend rates as were used for projecting postretirement costs. The accrued
postemployment benefit costs recognized by the Banks at December 31, 1998 and 1997, were $9 million for each
year. This cost is included as a component of "Accrued benefit cost." Net periodic postemployment benefit costs
included in 1998 and 1997 operating expenses were $2 million for each year.
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Federal Reserve Bank of St. Louis
17
Twelfth Federal Reserve District
San Francisco Office
P.O. Box 7702
San Francisco, California 94120
Los Angeles Branch
P.O. Box 2077, Terminal Annex
Los Angeles, California 90051
Portland Branch
P.O. Box 3436
Portland, Oregon 97208
Salt Lake City Branch
P.O. Box 30780
Salt Lake City, Utah 84130
Seattle Branch
P.O. Box 3567, Terminal Annex
Seattle, Washington 98124
Twelfth District web site:
http://www.frbsf.org
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Federal Reserve Bank of St. Louis
18
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
@FedFRASER