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The Federal Reserve Bank of St. Louis Financial Statements as of and for the Years Ended December 31, 2011 and 2010 and Independent Auditors’ Report THE FEDERAL RESERVE BANK OF ST. LOUIS Table of Contents Management’s Report on Internal Control over Financial Reporting Independent Auditors’ Report Abbreviations Page 1-2 3-4 5 Financial Statements: Statements of Condition as of December 31, 2011 and December 31, 2010 6 Statements of Income and Comprehensive Income for the years ended December 31, 2011 and December 31, 2010 7 Statements of Changes in Capital for the years ended December 31, 2011 and December 31, 2010 8 Notes to Financial Statements 9-36 Deloitte & Touche LLP 100 South Fourth Street Suite 300 St. Louis, MO 63102-1821 USA Tel: +1 314 342 4900 Fax: +1 314 840 1100 www.deloitte.com INDEPENDENT AUDITORS’ REPORT To the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Reserve Bank of St. Louis: We have audited the accompanying Statements of Condition of the Federal Reserve Bank of St. Louis (“FRBSTL”) as of December 31, 2011 and 2010, and the related Statements of Income and Comprehensive Income, and of Changes in Capital for the years then ended, which have been prepared in conformity with accounting principles established by the Board of Governors of the Federal Reserve System. We also have audited the internal control over financial reporting of the FRBSTL as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The FRBSTL’s management is responsible for these Financial Statements, for maintaining effective internal control over financial reporting, and for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these Financial Statements and an opinion on the FRBSTL's internal control over financial reporting based on our audits. We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the Financial Statements included examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. The FRBSTL’s internal control over financial reporting is a process designed by, or under the supervision of, the FRBSTL’s principal executive and principal financial officers, or persons performing similar functions, and effected by the FRBSTL’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes in accordance with the accounting principles established by the Board of Governors of the Federal Reserve System. The FRBSTL’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the FRBSTL; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Financial Statements in accordance with the accounting principles established by the Board of Governors of the Federal Reserve System, and that receipts and expenditures of the Member of Deloitte Touche Tohmatsu Limited FRBSTL are being made only in accordance with authorizations of management and directors of the FRBSTL; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the FRBSTL’s assets that could have a material effect on the Financial Statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As described in Note 4 to the Financial Statements, the FRBSTL has prepared these Financial Statements in conformity with accounting principles established by the Board of Governors of the Federal Reserve System, as set forth in the Financial Accounting Manual for Federal Reserve Banks, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. The effects on such Financial Statements of the differences between the accounting principles established by the Board of Governors of the Federal Reserve System and accounting principles generally accepted in the United States of America are also described in Note 4. In our opinion, such Financial Statements present fairly, in all material respects, the financial position of the FRBSTL as of December 31, 2011 and 2010, and the results of its operations for the years then ended, on the basis of accounting described in Note 4. Also, in our opinion, the FRBSTL maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. March 20, 2012 FEDERAL RESERVE BANK OF ST. LOUIS Abbreviations: ACH AMLF ASU Bureau FAM FASB Fannie Mae Freddie Mac FOMC FRBA FRBNY GAAP GSE IMF MBS OEB OFR SDR SOMA TAF TBA TDF TOP TSLF Automated clearinghouse Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility Accounting Standards Update Bureau of Consumer Financial Protection Financial Accounting Manual for Federal Reserve Banks Financial Accounting Standards Board Federal National Mortgage Association Federal Home Loan Mortgage Corporation Federal Open Market Committee Federal Reserve Bank of Atlanta Federal Reserve Bank of New York Accounting principles generally accepted in the United States of America Government-sponsored enterprise International Monetary Fund Mortgage-backed securities Office of Employee Benefits of the Federal Reserve System Office of Financial Research Special drawing rights System Open Market Account Term Auction Facility To be announced Term Deposit Facility Term Securities Lending Facility Options Program Term Securities Lending Facility 5 FEDERAL RESERVE BANK OF ST. LOUIS STATEMENTS OF CONDITION As of December 31, 2011 and December 31, 2010 (in millions) 2011 ASSETS Gold certificates Special drawing rights certificates Coin Loans to depository institutions System Open Market Account: Treasury securities, net Government-sponsored enterprise debt securities, net Federal agency and government-sponsored enterprise mortgage-backed securities, net Foreign currency denominated assets, net Central bank liquidity swaps Accrued interest receivable Bank premises and equipment, net Items in process of collection Other assets Total assets $ 2010 319 150 34 - $ 324 150 35 2 $ 27,483 3,940 25,879 244 1 367 153 12 31 58,621 $ LIABILITIES AND CAPITAL Federal Reserve notes outstanding, net System Open Market Account: Securities sold under agreements to repurchase Other liabilities Deposits: Depository institutions Other deposits Interest payable to depository institutions Accrued benefit costs Deferred credit items Accrued interest on Federal Reserve notes Interdistrict settlement account Other liabilities Total liabilities $ 33,128 2,041 16,055 211 814 373 150 5 35 53,315 29,899 $ 27,858 1,891 26 12,012 1 1 92 36 53 8,856 8 52,875 Capital paid-in Surplus (including accumulated other comprehensive loss of $11 million and $10 million at December 31, 2011 and 2010, respectively) Total capital Total liabilities and capital The accompanying notes are an integral part of these financial statements. 6 10,492 56 1 88 67 69 18,011 9 58,189 220 $ 1,538 - 216 220 440 53,315 216 432 58,621 $ FEDERAL RESERVE BANK OF ST. LOUIS STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the years ended December 31, 2011 and December 31, 2010 (in millions) 2011 INTEREST INCOME System Open Market Account: Treasury securities, net Government-sponsored enterprise debt securities, net Federal agency and government-sponsored enterprise mortgage-backed securities, net Foreign currency denominated assets, net Total interest income 2010 870 65 804 2 1,741 780 105 1,329 2 2,216 1 2 30 31 1,710 28 30 2,186 43 1 3 106 1 154 25 5 4 105 1 140 112 13 6 111 13 6 24 3 89 247 25 87 242 Net income prior to distribution 1,617 2,084 Change in prior service costs related to benefit plans Change in actuarial losses related to benefit plans Comprehensive income prior to distribution (1) 1,616 (3) 4 2,085 INTEREST EXPENSE System Open Market Account: Securities sold under agreements to repurchase Deposits: Depository institutions Total interest expense Net interest income NON-INTEREST INCOME System Open Market Account: Treasury securities gains, net Federal agency and government-sponsored enterprise mortgage-backed securities gains, net Foreign currency gains, net Compensation received for service costs provided Reimbursable services to government agencies Other Total non-interest income OPERATING EXPENSES Salaries and benefits Occupancy Equipment Assessments: Board of Governors operating expenses and currency costs Bureau of Consumer Financial Protection and Office of Financial Research Other Total operating expenses $ Distribution of comprehensive income: Dividends paid to member banks Transferred to (from) surplus and change in accumulated other comprehensive loss Payments to Treasury as interest on Federal Reserve notes Total distribution $ $ The accompanying notes are an integral part of these financial statements. 7 13 4 1,599 1,616 $ $ $ 14 (24) 2,095 2,085 FEDERAL RESERVE BANK OF ST. LOUIS STATEMENTS OF CHANGES IN CAPITAL For the years ended December 31, 2011 and December 31, 2010 (in millions, except share data) Surplus Capital paid-in Balance at January 1, 2010 (4,805,613 shares) Net income retained Accumulated other comprehensive loss $ $ $ 240 251 (11) Total surplus $ 240 Total capital $ 480 Net change in capital stock redeemed (482,293 shares) (24) - - - (24) Transferred from surplus and change in accumulated other comprehensive loss - (25) 1 (24) (24) Balance at December 31, 2010 (4,323,320 shares) $ Net change in capital stock issued (76,669 shares) Transferred to surplus and change in accumulated other comprehensive loss Balance at December 31, 2011 (4,399,989 shares) 216 $ 226 $ (10) $ 216 $ 432 4 - - 4 $ - 5 (1) 4 4 220 $ 231 $ (11) $ The accompanying notes are an integral part of these financial statements. 8 220 $ 440 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 1. STRUCTURE The Federal Reserve Bank of St. Louis (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 Eighth Federal Reserve District, which includes Arkansas, and portions of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. 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 national 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 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 large-dollar 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, and U.S. offices of foreign banking organizations pursuant to authority delegated by the Board of Governors. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which was signed into law and became effective on July 21, 2010, changed the scope of some services performed by the Reserve Banks. Among other things, the Dodd-Frank Act established a 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 under delegated authority from the Board of Governors in connection with those institutions’ compliance with consumer protection statutes; limited the Reserve Banks’ authority to provide loans in unusual and exigent circumstances to lending programs or facilities with broadbased eligibility or to designated financial market utilities; and vested the Board of Governors with all supervisory and rule-writing authority for savings and loan holding companies. The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and issues authorizations and directives to the FRBNY to execute transactions. The 9 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 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, 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 System Open Market Account (SOMA). The FRBNY is authorized to lend the Treasury securities and federal agency and GSE debt securities that are held in the SOMA. In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes the FRBNY to conduct operations in foreign markets in order to counter disorderly conditions in exchange markets or to meet other needs specified by the FOMC to carry out the System’s central bank responsibilities. Specifically, the FOMC authorizes and directs the FRBNY to hold balances of, and to execute spot and forward foreign exchange and securities contracts for, 14 foreign currencies and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY is authorized and directed by the FOMC 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. 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 and for which the costs were not reimbursed by the other Reserve Banks include operation of the Treasury Relations and Support Office and the Treasury Relations and Systems Support Department, which provide services to the Treasury. These services include: relationship management, strategic consulting, and monitoring of Federal Reserve System operations and technology support for the Treasury. In addition, operational support is provided for the Treasury’s cash management and accounting functions. 3. FINANCIAL STABILITY ACTIVITIES The Reserve Banks have implemented the following programs that support the liquidity of financial institutions and foster improved conditions in financial markets. Large-Scale Asset Purchase Programs and Reinvestment of Principal Payments On March 18, 2009, the FOMC authorized and directed the FRBNY to purchase $300 billion of longer-term Treasury securities to help improve conditions in private credit markets. The FRBNY began the purchases of these Treasury securities in March 2009 and completed them in October 2009. On August 10, 2010, the FOMC announced that the Federal Reserve would maintain the level of domestic securities holdings in the SOMA portfolio by reinvesting principal payments from GSE debt securities and federal agency and GSE MBS in longer-term Treasury securities. On November 3, 2010, the FOMC announced its intention to expand the SOMA portfolio holdings of longer-term Treasury securities by an additional $600 billion and completed these purchases in June 2011. On June 22, 2011, the FOMC announced that the Federal Reserve would maintain its existing policy of reinvesting principal payments from all domestic securities in Treasury securities. On September 21, 2011, the FOMC announced that the Federal Reserve intends to purchase, by the end of June 2012, $400 billion par value of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less, of which $133 billion has been purchased and $134 billion sold as of December 31, 2011. In addition, the FOMC announced that it will maintain its existing policy of rolling over maturing Treasury securities at auction and, rather than reinvesting principal payments from GSE debt securities and federal agency and GSE MBS in Treasury securities, such payments will be reinvested in federal agency and GSE MBS. 10 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS The FOMC authorized and directed the FRBNY to purchase GSE debt securities and federal agency and GSE MBS, with a goal to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. The FRBNY was authorized to purchase up to $175 billion in fixed-rate, non-callable GSE debt securities and $1.25 trillion in fixed-rate federal agency and GSE MBS. Purchases of GSE debt securities began in November 2008, and purchases of federal agency and GSE MBS began in January 2009. The FRBNY completed the purchases of GSE debt securities and federal agency and GSE MBS in March 2010. The settlement of all federal agency and GSE MBS transactions was completed by August 2010. As discussed above, on September 21, 2011, the FOMC announced that the Federal Reserve will begin to reinvest principal payments from its holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS. Central Bank Liquidity Swaps The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which could be structured as either U.S. dollar liquidity or foreign currency liquidity swap arrangements. In May 2010, U.S. dollar liquidity swap arrangements were re-authorized with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank through January 2011. Subsequently, these arrangements were extended through February 1, 2013. There is no specified limit to the amount that may be drawn by the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank under these swap arrangements; the Bank of Canada may draw up to $30 billion under the swap arrangement with the FRBNY. In addition to the central bank liquidity swap arrangements, the FOMC has authorized reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico, as discussed in Note 2. Foreign currency liquidity swap arrangements were authorized with 4 foreign central banks and provided the Reserve Banks with the capacity to offer foreign currency liquidity to U.S. depository institutions. The authorization for these swap arrangements expired on February 1, 2010. In November 2011, as a contingency measure, the FOMC agreed to establish temporary bilateral liquidity swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank so that liquidity can be provided in any of their currencies if necessary. The swap lines are authorized until February 1, 2013. Lending to Depository Institutions The Term Auction Facility (TAF) promoted the efficient dissemination of liquidity by providing term funds to depository institutions. The last TAF auction was conducted on March 8, 2010, and the related loans matured on April 8, 2010. Lending to Primary Dealers The Term Securities Lending Facility (TSLF) promoted liquidity in the financing markets for Treasury securities. Under the TSLF, the FRBNY could lend up to an aggregate amount of $200 billion of Treasury securities held in the SOMA to primary dealers on a secured basis for a term of 28 days. The authorization for the TSLF expired on February 1, 2010. The Term Securities Lending Facility Options Program (TOP) offered primary dealers the opportunity to purchase an option to draw upon short-term, fixed-rate TSLF loans in exchange for eligible collateral. The program was suspended effective with the maturity of the June 2009 TOP options, and authorization for the program expired on February 1, 2010. Other Lending Facilities The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) provided funding to depository institutions and bank holding companies to finance the purchase of eligible high-quality asset- 11 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS backed commercial paper from money market mutual funds. The Federal Reserve Bank of Boston administered the AMLF and was authorized to extend these loans to eligible borrowers on behalf of the other Reserve Banks. The authorization for the AMLF expired on February 1, 2010. 4. SIGNIFICANT ACCOUNTING POLICIES Accounting principles for entities with the unique powers and responsibilities of a 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 and the financial statements have been prepared in accordance with the FAM. Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the United States of America (GAAP), 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 primary differences are the presentation of all SOMA securities holdings at amortized cost and the recording of SOMA securities on a settlement-date basis. Amortized cost, rather than the fair value presentation, more appropriately reflects 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 have no direct effect on the quantity of reserves available to the banking system or on the prospects for future Bank earnings or capital. 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 motivated by monetary policy 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 Banks’ 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, Income and Comprehensive Income, and Changes in Capital, and the accompanying notes to the financial statements. There are no other significant differences, other than those described above, between the policies outlined in the FAM and 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. Unique accounts and significant accounting policies are explained below. a. Consolidation The Dodd-Frank Act established the Bureau as an independent bureau within the System, and 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. Section 152 of the Dodd-Frank Act established the Office of Financial Research (OFR) within the Treasury. The Board of Governors funds the Bureau and OFR through assessments on the Reserve Banks as required by the Dodd-Frank Act. The Reserve Banks 12 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS reviewed the law and evaluated the design of and their relationships to the Bureau and the OFR and determined that neither should 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 and special drawing rights (SDR) 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. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on the average Federal Reserve notes outstanding at each Reserve Bank. SDR certificates 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. SDR certificates 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 transactions occur, the Board of Governors allocates SDR certificate transactions among the Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding year. SDRs are recorded by the Bank at original cost. There were no SDR transactions during the years ended December 31, 2011 and 2010. 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. 13 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These repurchase transactions are settled through a triparty arrangement. In a triparty arrangement, two commercial custodial banks manage the collateral clearing, settlement, pricing, and pledging, and provide cash and securities custodial services for and on behalf of the Bank 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 transactions primarily includes Treasury securities (including Treasury Inflation-Protected Securities and Separate Trading of Registered Interest and Principal of Securities); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac); and pass-through MBS of Fannie Mae, Freddie Mac, and Government National Mortgage Association. The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with primary dealers and, beginning August 2010, with selected money market funds. The list of eligible counterparties was subsequently expanded to include GSEs, effective in May 2011, and bank and savings institutions, effective in July 2011. These reverse repurchase transactions may be executed through a triparty arrangement as an open market operation, similar to repurchase transactions. Reverse repurchase transactions 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, and federal agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These transactions 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 “Other liabilities” in the Statements of Condition. Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers to facilitate the effective functioning of the domestic securities markets. The amortized cost basis of securities lent continues to be reported as “Treasury securities, net” or “Government-sponsored enterprise debt securities, net,” as appropriate, in the Statements of Condition. Overnight securities lending transactions are fully collateralized by Treasury securities that have fair values in excess of the securities lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of “Non-interest income: Other” in the Statements of Income and Comprehensive Income. Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, 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 GovernmentSponsored Enterprise Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing Agreements Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets comprising the SOMA is accrued on a straight-line basis. 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 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 14 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 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 Income and Comprehensive Income. 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 or purchase TBA MBS on a specified future date. In 2010, the FRBNY also executed a limited number of TBA MBS coupon swap transactions, which involve a simultaneous sale of a TBA MBS and purchase of another TBA MBS of a different coupon rate. During the year-ended December 31, 2010, the FRBNY’s participation in the dollar roll and coupon swap markets furthered the MBS purchase program goals of providing support to the mortgage and housing markets and of fostering improved conditions in financial markets more generally. During the year-ended December 31, 2011, the FRBNY executed dollar rolls primarily to facilitate settlement. The FRBNY accounts for outstanding commitments under dollar roll and coupon swaps as purchases or sales on a settlement-date basis. Net gains resulting from dollar roll and coupon swap transactions are reported as “Non-interest income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income. Foreign currency denominated assets, which can include foreign currency deposits, securities purchased under agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Realized and unrealized gains and losses on foreign currency denominated assets are reported as “Non-interest income: System Open Market Account: Foreign currency gains, net” in the Statements of Income and Comprehensive Income. 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 assets, including the premiums, discounts, and realized and unrealized gains and losses, is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of U.S. dollars for foreign currencies held by the Treasury over a limited period. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international operations. Warehousing agreements are designated as held-for-trading purposes and are valued daily at current market exchange rates. Activity related to these agreements is allocated to each Reserve Bank based on the ratio 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 liquidity or foreign currency liquidity swap arrangements. Central bank liquidity swaps activity, including the related income and expense, is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued daily at current foreign currency market exchange rates. 15 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 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. The foreign central bank compensates the FRBNY based on the foreign currency amounts it holds for the FRBNY. The Bank’s allocated portion of the amount of compensation received for the years ended December 31, 2011 and 2010 was immaterial. Foreign currency liquidity swaps The structure of foreign currency liquidity swap transactions involves 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 amount received would be reported as a liability by the Bank. 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. Costs incurred for software during the application development stage, whether developed internally or acquired for internal use, are capitalized based on the purchase cost and 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 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 At the close of business each day, 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. 16 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 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 securities sold under agreements to repurchase is deducted from the eligible collateral value. 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 $4,018 million and $4,381 million at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, all Federal Reserve notes issued to the Reserve Banks were fully collateralized. At December 31, 2011, all gold certificates, all special drawing right certificates, and $1,018 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2011, no investments denominated in foreign currencies were pledged as collateral. k. Deposits Depository Institutions Depository institutions’ deposits represent the reserve and service-related balances, such as required clearing balances, in the accounts that depository institutions hold at the Bank. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMCestablished target range for the federal funds rate. Interest payable is reported as “Interest payable to depository institutions” 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 payable is reported as “Interest payable to depository institutions” in the Statements of Condition. There were no deposits held by the Bank under the TDF at December 31, 2011 and 2010. Other Other deposits include foreign central bank and foreign government deposits held at the FRBNY that are allocated to the Bank. l. Items in Process of Collection and Deferred Credit Items “Items in process of collection” primarily represents amounts attributable to checks that have been deposited for collection and that, as of the balance sheet date, have not yet been presented to the paying bank. “Deferred credit items” is the counterpart liability to items in process of collection. The amounts in this account arise from deferring credit for deposited items until the amounts are collected. The balances in both accounts can vary significantly. 17 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS m. 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. By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paidin capital stock. This cumulative dividend is paid semiannually. To meet the Federal Reserve Act requirement that annual dividends be deducted from net earnings, dividends are presented as a distribution of comprehensive income in the Statements of Income and Comprehensive Income. n. Surplus The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paidin. On a daily basis, surplus is adjusted to equate the balance to capital paid-in. Accumulated other comprehensive income 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 income is provided in Notes 12 and 13. o. Interest on Federal Reserve Notes The Board of Governors requires 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. This amount is reported as “Payments to Treasury as interest on Federal Reserve notes” in the Statements of Income and Comprehensive Income. The amount due to the Treasury is reported as “Accrued interest on Federal Reserve notes” in the Statements of Condition. If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital paid-in, payments to the Treasury are suspended. A deferred asset is recorded that represents the amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. This deferred asset is periodically reviewed for impairment. p. 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, 2011 and 2010, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent. q. Compensation Received for Service Costs Provided The Federal Reserve Bank of Atlanta (FRBA) has overall responsibility for managing the Reserve Banks’ provision of check and ACH services to depository institutions and, as a result, recognizes total System revenue for these services in its Statements of Income and Comprehensive Income. Similarly, the FRBNY manages the Reserve Banks’ provision of Fedwire funds and securities services and recognizes total System revenue for these services in its Consolidated Statements of Income and Comprehensive Income. The FRBA and the FRBNY compensate the applicable Reserve Banks for the costs incurred to provide these services. The Bank reports this compensation as “Non-interest income: Compensation received for service costs provided” in the Statements of Income and Comprehensive Income. r. Assessments 18 revenue for these services in its Statements of Income and Comprehensive Income. Similarly, the FRBNY manages the Reserve Banks’ provision of Fedwire funds and securities services and recognizes total System revenue FEDERAL RESERVE BANK OF ST.Statements of Income and Comprehensive for these services in its Consolidated LOUIS NOTES TO FINANCIAL STATEMENTS Income. The FRBA and the FRBNY compensate the applicable Reserve Banks for the costs incurred to FEDERAL RESERVE BANK OF ST. LOUIS provide these services. The Bank reports this compensation as “Non-interest income: Compensation NOTES Reserve Banks to fund its operations, The received for service costs provided” in the Statements of Income and Comprehensive Income. Bureau and, Board of Governors assesses theTO FINANCIAL STATEMENTS the operations of the for a two-year period FEDERAL RESERVE BANK OF ST. LOUIS Dodd-Frank Act, the OFR. These following the July 21, 2010 effective date of the NOTES Reserve Banks to based on each r. Assessments of Governors assesses theTO Reserve Bank STATEMENTSReserve Bank’s capital Bureau and, The assessments are allocated to each FINANCIAL fund its operations, the operations of the and surplus Board for a two-year December 31 of the July year for effective of of the Dodd-Frank Act, the OFR. most balances as of period following the prior 21, 2010 the BoarddateGovernors’ operations and as of theThese assessments are theassesses and OFR operations. basedBoard of GovernorsBank’s of the Bureau and, The recent quarter forallocated to the Reserve Banks to fund its operations, the operationscapitaleach Reserve Board of Governors Bureau each Reserve Bank The on each Reserve also assesses and surplus Bank two-year period followingby the Treasury to the BoarddateGovernors’ operationsnotes as of theThese balances as of December 31 of the prior 21, 2010 produce and retire Federal Reserve and based on most for a for the expenses incurred the July year for effective of of the Dodd-Frank Act, the OFR. each 18 Reserve Bank’s share Bureau and OFR notes comprising on each Reserve liability capitaleach surplus recent quarter forallocated to number of operations. basedBoard of GovernorsBank’s for Federal Reserve assessments are the of the each Reserve Bank The the System’s net also assesses and Bank on December 31 incurred by year. year for the Board of retire Federal Reserve notes as of the most notes for as of December the prior the Treasury to produce and Governors’ operations and based on each balances the expenses of 31 of the prior Reserve Bank’s share Bureau number of operations. The Board of Governors also assesses each Reserve recent quarter for the of the and OFR notes comprising the System’s net liability for Federal notes for the expenses incurred by year. During theon December to the Bureau transfer date ofto produce and retire was no limit on the funding provided Bank period prior 31 of the prior the Treasury July 21, 2011, there Federal Reserve notes based on each to the Bureau and assessed to the Reserve Banks; the Board of Governors liability for Federal Reserve Reserve Bank’s share of the number of notes comprising the System’s net was required to provide the During theon estimated by the Bureau transfer date of July 21, 2011, there was nothe authorities granted to the amount December 31 of Secretary of notes period prior to thethe prior year. the Treasury needed to carry out limit on the funding provided Bureau under and assessed to Act and other federal law. The Governors Act requires that, after to the Bureau the Dodd-Frank the Reserve Banks; the Board of Dodd-Frankwas required to provide the transfer date, the Board Bureau transfer date of July 21, 2011, there not to limit onathe funding provided amount estimated to the Governors the Treasury needed to carry out exceed fixed percentage of During the period prior by theofSecretary offund the Bureau in an amountwas nothe authorities granted to the Bureau under and assessed to Act and other federal law. the Board of Governors’ 2009 annual report, thethe Bureau the Dodd-Frank the Reserve Banks; the Board of Dodd-Frankwas required to provide the to total operating expenses of the System as reported in The Governors Act requires that, after transfer date, $4.98 billion. The fixed the Treasury needed amount out expenses of the percentage 10 which totaled the Board ofSecretary offund the Bureautotal 2009 carrynot tothe authorities granted to the amount estimated by the Governors percentage of in an to operating exceed a fixed System is of the totalunder the Dodd-Frank Act and other federal million) for 2012, and 12 percent ($597.6 after the percent ($498.0 million) for 2011, 11 percent ($547.8 law. the Board of Governors’ 2009 annualmillion) Bureau operating expenses of the System as reported in The Dodd-Frank Act requires that, report, for 2013. After 2013, the amountfixed be adjusted of total 2009 operating provisionsof the percentage 10 which totaled the Board of Governors fund the Bureauaccordance with the expenses fixed System is of transfer date, $4.98 billion. The will percentage in in an amount not to exceed a of the Dodd-Frank Act.total($498.0 million) for 2011, 11 percent ($547.8 million) Board of Governors’ 2009 annualmillion) percent operating expenses of for Bureau funding is reportedfor 2012, and 12 percent ($597.6 report, the The Bank’s assessment the System as reported in the as “Assessments: Bureau of Consumer for 2013. Protection billion. The fixed be adjusted of totalthe Statements of Income and theSystem is 10 Financial After 2013, the amount will percentage in accordanceoperating provisionsof the Dodd-Frank which totaled $4.98 and Office of Financial Research” in 2009 with the expenses of Comprehensive Act. The Bank’s assessment for 11 percent ($547.8 million) for 2012, and 12 percent ($597.6 million) Income.($498.0 million) for 2011, Bureau funding is reported as “Assessments: Bureau of Consumer percent Financial After 2013, the amount Financial Research” in the Statements provisions of Comprehensive for 2013. Protection and Office of will be adjusted in accordance with theof Income and the Dodd-Frank Income. Governors assesses the Reserve Banks to fund the operations of the OFR Bureau of Consumer The Act. The Bank’s assessment for Bureau funding is reported as “Assessments:for the two-year period Board of following Protection and Office of Financial Research” thethe Statements of Income and Comprehensive Financial enactment of the Dodd-Frank Act; thereafter, in OFR will be funded by fees assessed on bank The holding companies and nonbank Reserve Banks to fund the meet the criteria specified the the Dodd-Frank Board of Income. Governors assesses the financial companies that operations of the OFR for in two-year period Act. following enactment of the Dodd-Frank Act; thereafter, the OFR will be funded by fees assessed on bank The holding companies and nonbank Reserve Banks to fund the meet the criteria specified the the Dodd-Frank Board of Governors assesses the financial companies that operations of the OFR for in two-year period following enactment of the Dodd-Frank Act; thereafter, the OFR will be funded by fees assessed on bank s. Taxes Act. holding companies and nonbank financial companies that meet the criteria specified in the Dodd-Frank s. Taxes Act. 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, 2011 and 2010, and The Reserve Banks a exempt from “Operating expenses: Occupancy” in the Statements property. and s. Taxes are reported as arecomponent of federal, state, and local taxes, except for taxes on real of Income The Comprehensive Income. Bank’s real property taxes were $1 million for each of the years ended December 31, 2011 and 2010, and The are reported as arecomponent of federal, state, and local taxes, except for taxes on real of Income The Reserve Banks a exempt from “Operating expenses: Occupancy” in the Statements property. and Comprehensive Income. Bank’s real property taxes were $1 million for each of the years ended December 31, 2011 and 2010, and are reported as a component of “Operating expenses: Occupancy” in the Statements of Income and Comprehensive Income. t. Restructuring Charges t. 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 The another, or a fundamental restructuring charges for exit or disposal operations. Restructuring charges may Reserve Banks recognize reorganization that affects the nature of costs incurred as part of the closure of t. Restructuring Charges include activities in a with employee the relocation of business activities from one location to business costs associatedparticular location,separations, contract terminations, and asset impairments. Expenses are recognized restructuring inthat affects the nature of costs incurred as part of charges may The another, or a fundamental in the period charges for exit or disposaloperations. Restructuringthe closure or Reserve Banks recognize reorganization which the Bank commits to a formalized restructuring plan of executes the specific actions contemplated inthe relocation of business financial statement location to the plan contract terminations, and asset impairments. include costs associatedparticular location,separations,and all criteria foractivities from one recognition business activities in a with employee have been met. Expenses are fundamentalin the period inthat affects the nature of operations. Restructuring charges may another, or a recognized reorganization which the Bank commits to a formalized restructuring plan or executes costs associated with employee in the plan and all criteria for financial statement recognition include the specific actions contemplated separations, contract terminations, and asset impairments. Notehavedescribes recognized in the period initiatives the Bank commits to a formalized restructuring plan or 14 been met. Expenses are the Bank’s restructuring in which and provides information about the costs and liabilities associated with employee separations and in the plan and all criteria for financial statement recognition executes the specific actions contemplated contract terminations. Costs and liabilities associated with Noteenhanced pension Bank’s restructuring initiatives and provides information about the costs and Banks are 14 been met. havedescribes the benefits in connection with the restructuring activities for all of the Reserve liabilities recorded on the employee separations associated with books of the FRBNY. and contract terminations. Costs and liabilities associated with Noteenhanced pension Bank’s restructuring initiatives and provides activities forabout the costs andBanks are 14 describes the benefits in connection with the restructuring information all of the Reserve liabilities The recorded onwith books ofrestructuring activities in 2011 and 2010. Costs and liabilities associated with Bank had significant the FRBNY. associatednothe employee separations and contract terminations. enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are The Bank hadon the books ofrestructuring activities in 2011 and 2010. recorded no significant the FRBNY. The Bank had no significant restructuring activities in 2011 and 2010. 19 19 19 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS u. Recently Issued Accounting Standards In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires additional disclosures about the allowance for credit losses and the credit quality of loan portfolios. The additional disclosures include a rollforward of the allowance for credit losses on a disaggregated basis and more information, by type of receivable, on credit quality indicators, including the amount of certain past-due receivables and troubled debt restructurings and significant purchases and sales. The adoption of this update is effective for the Bank for the year ended December 31, 2011, and did not have a material effect on the Bank’s financial statements. In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, which clarifies accounting for troubled debt restructurings, specifically clarifying creditor concessions and financial difficulties experienced by borrowers. This update is effective for the Bank for the year ended December 31, 2012, and is not expected to have a material effect on the Bank’s financial statements. In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements, which reconsidered the effective control for repurchase agreements. This update prescribes when the Bank may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. This determination is based, in part, on whether the Bank has maintained effective control over the transferred financial assets. This update is effective for the Bank for the year ended December 31, 2012, and is not expected to have a material effect on the Bank’s financial statements. In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which requires a reporting entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. The update is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items by presenting the components reported in other comprehensive income. The Bank has adopted the update in this ASU effective for the year ended December 31, 2011, and the required presentation is reflected in the Bank’s financial statements. In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This update will require a reporting entity to present enhanced disclosures for financial instruments and derivative instruments that are offset or subject to master netting agreements or similar such agreements. This update is effective for the Bank for the year ended December 31, 2013, and is not expected to have a material effect on the Bank’s financial statements. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update indefinitely defers the requirements of ASU 2011-05 related to presentation of reclassification adjustments. 5. LOANS Loans outstanding at December 31, 2011, and 2010, were as follows (in millions): 2011 Loans to depository institutions $ 20 2010 - $ 2 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS Loans to Depository Institutions The Bank offers primary, secondary, and seasonal loans to eligible borrowers, and each program has its own interest rate. 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. The financial condition of borrowers is monitored by the Bank and, 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. Allowance for Loan Loss At December 31, 2011 and 2010, the Bank did not have any impaired loans and no allowance for loan losses was required. There were no impaired loans during the years ended December 31, 2011 and 2010. 6. TREASURY SECURITIES; GOVERNMENT-SPONSORED ENTERPRISE DEBT SECURITIES; FEDERAL AGENCY AND GOVERNMENT-SPONSORED ENTERPRISE MORTGAGE-BACKED SECURITIES; SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL; SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE; AND SECURITIES LENDING The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA. The Bank’s allocated share of SOMA balances was approximately 1.893 percent and 2.576 percent at December 31, 2011 and 2010, respectively. 21 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 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 was as follows (in millions): 2011 Unaccreted discounts Unamortized premiums $ 349 24,346 6,789 $ 508 1,161 $ (23) (2) Total amortized cost $ 349 24,831 7,948 $ 31,484 $ 1,669 $ (25) $ 33,128 $ 36,275 GSE debt securities $ 1,968 $ 73 $ - $ 2,041 $ 2,162 Federal agency and GSE MBS $ 15,855 $ 220 $ (20) $ 16,055 $ 16,949 Par Bills Notes Bonds Total Treasury securities Par Bills Notes Bonds Total Treasury securities $ 2010 Unaccreted discounts Unamortized premiums $ $ 474 19,919 5,919 26,312 GSE debt securities $ Federal agency and GSE MBS $ $ Total amortized cost $ 474 20,261 6,748 $ 27,483 Fair value 349 26,298 9,628 Fair value 474 20,728 7,464 $ 28,666 $ $ 362 843 1,205 $ (20) (14) (34) $ 3,798 $ 143 $ (1) $ 3,940 $ 4,038 25,556 $ 363 $ (40) $ 25,879 $ 26,428 The total of the Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31 was as follows (in millions): 2011 Bills Notes Bonds Total Treasury securities Amortized cost $ 18,423 1,311,917 419,937 $ 1,750,277 GSE debt securities $ Federal agency and GSE MBS $ 2010 $ Fair value 18,423 1,389,429 508,694 1,916,546 107,828 $ 114,238 $ 152,972 $ 156,780 848,258 $ 895,495 $ 1,004,695 $ 1,026,003 $ Amortized cost $ 18,422 786,575 261,955 $ 1,066,952 $ $ Fair value 18,422 804,703 289,757 1,112,882 The fair value amounts in the above tables are presented solely for informational purposes. Although the fair value of 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. The fair value of federal agency and GSE MBS was determined using a model-based approach that considers observable inputs for similar securities; fair value for all other SOMA security holdings was determined by reference to quoted prices for identical securities. The fair value of the fixed-rate Treasury securities, GSE debt securities, and federal agency and GSE MBS in the SOMA’s holdings is subject to market risk, arising from movements in market variables, such as interest rates 22 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS and securities prices. 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 following table provides additional information on the amortized cost and fair values of the federal agency and GSE MBS portfolio at December 31 (in millions): Distribution of MBS holdings by coupon rate Allocated to the Bank: 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% Total Total SOMA: 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% Total 2011 2010 Amortized cost $ $ $ $ 25 368 3,056 7,693 3,454 1,264 173 22 16,055 1,313 19,415 161,481 406,465 182,497 66,795 9,152 1,140 848,258 Fair value $ $ $ $ Amortized cost 25 372 3,213 8,161 3,647 1,326 182 23 16,949 $ 1,336 19,660 169,763 431,171 192,664 70,064 9,616 1,221 895,495 $ 9 4,319 12,819 5,961 2,398 333 40 25,879 $ 341 167,675 497,672 231,420 93,119 12,910 1,558 1,004,695 $ $ $ Fair value 9 4,338 13,106 6,119 2,469 344 43 26,428 $ 352 168,403 508,798 237,545 95,873 13,376 1,656 1,026,003 $ There were no transactions related to securities purchased under agreements to resell during the years ended December 31, 2011 and 2010. Financial information related to securities sold under agreements to repurchase for the years ended December 31 was as follows (in millions): 2011 Allocated to the Bank: Contract amount outstanding, end of year Average daily amount outstanding, during the year Maximum balance outstanding, during the year Securities pledged (par value), end of year Securities pledged (market value), end of year 2010 $ 1,891 1,480 2,357 1,629 1,891 $ 1,538 1,730 3,045 1,124 1,538 $ 99,900 72,227 124,512 86,089 99,900 $ 59,703 58,476 77,732 43,642 59,703 Total SOMA: Contract amount outstanding, end of year Average daily amount outstanding, during the year Maximum balance outstanding, during the year Securities pledged (par value), end of year Securities pledged (market value), end of year The contract amounts for securities sold under agreements to repurchase approximate fair value. FRBNY executes transactions for the purchase of securities under agreements to resell primarily to temporarily add reserve balances to the banking system. Conversely, transactions to sell securities under agreements to repurchase are 23 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS executed to temporarily drain reserve balances from the banking system and as part of a service offering to foreign official and international account holders. The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2011, was as follows (in millions): Within 15 days Treasury securities (par value) GSE debt securities (par value) Federal agency and GSE 16 days to 90 days 91 days to 1 year Over 1 year to 5 years Over 5 years to 10 years $ $ $ $ $ MBS (par value)1 Securities sold under agreements to repurchase (contract amount) 1 307 513 1,702 12,297 Over 10 years 12,301 $ Total 4,364 $ 31,484 47 95 373 1,147 262 44 1,968 - - - - 1 15,854 15,855 1,891 - - - - - 1,891 The par amount shown for Federal agency and GSE MBS is the remaining principal balance of the underlying mortgages. Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities at December 31, 2011, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, is approximately 2.4 years. The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA at December 31 was as follows (in millions): Allocated to the Bank Amortized cost Par value 2011 2010 2011 2010 Treasury securities $ 286 $ 583 $ 265 $ 569 GSE debt securities 24 43 23 41 Total SOMA Amortized cost 2011 Treasury securities GSE debt securities $ 15,121 1,276 Par value 2010 $ 22,627 1,686 2011 $ 13,978 1,216 2010 $ 22,081 1,610 The FRBNY enters into commitments to buy Treasury and GSE debt securities and records the related securities on a settlement-date basis. As of December 31, 2011, the total purchase price of the Treasury securities under outstanding commitments was $3,200 million. The total purchase price of outstanding commitments allocated to the Bank was $61 million. These commitments had contractual settlement dates extending through January 3, 2012. As of December 31, 2011, the fair value of Treasury securities under outstanding purchase commitments was $3,208 million, of which $61 million was allocated to the Bank. 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, 2011, the total purchase price of the federal agency 24 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS and GSE MBS under outstanding purchase commitments was $41,503 million, of which $513 million was related to dollar roll transactions. The total purchase price of outstanding purchase commitments allocated to the Bank was $786 million, of which $10 million was related to dollar roll transactions. As of December 31, 2011, the total sales price of the federal agency and GSE MBS under outstanding sales commitments was $4,430 million, all of which was related to dollar roll transactions. The total sales price of outstanding sales commitments allocated to the Bank was $84 million, all of which was related to dollar roll transactions. These commitments, which had contractual settlement dates extending through February 2012, are for the purchase and sale 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, 2011, the fair value of federal agency and GSE MBS purchases and sales, net under outstanding commitments was $41,873 million and $4,473 million, respectively, of which $793 million and $85 million, respectively, was allocated to the Bank. These 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 commitments as part of the risk management practices used to mitigate the counterparty credit risk. Other liabilities, which are 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 securities 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 was as follows (in millions): Allocated to the Bank 2011 Cash margin Obligations from MBS transaction fails Total $ $ Total SOMA 2010 24 2 26 $ - 2011 $ 1,271 97 $ 1,368 2010 $ $ - During the years ended December 31, 2011 and 2010, the Reserve Banks recorded net gains from federal agency and GSE MBS transactions of $10 million and $782 million, respectively, of which $.2 million and $25 million, respectively, were allocated to the Bank. These net gains are reported as “Non-interest income: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income. 25 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS during the year ended December 31, 2011, is summarized as follows (in millions): Allocated to the Bank Bills Balance December 31, 2010 $ Purchases1 474 $ $ 6,748 $ 4,993 - $ (7,559) 24,831 15,789 (2,552) $ (2,120) 7,948 2,696 - $ 3,940 $ 25,879 - 798 (2,607) (102) 22 $ 27,483 Federal agency and GSE MBS GSE debt securities 24,534 - 43 (1,384) (91) 27 (125) 349 $ 3,400 (2,607) (4,993) $ 20,261 Bonds 16,141 - Realized gains, net2 Principal payments and maturities Amortization of premiums and discounts Inflation adjustment on inflation-indexed securities Supplemental information - par value of transactions: Purchases Proceeds from sales $ 4,993 Sales1 Annual reallocation adjustment3 Balance December 31, 2011 Notes Total Treasury securities - - 43 (6,377) (193) 49 $ $ (9,804) 33,128 23,478 (2,552) (936) (36) $ (927) 2,041 $ - (4,074) (67) (6,481) 16,055 $ $ 775 - Total SOMA Bills Balance December 31, 2010 $ Purchases1 Supplemental information - par value of transactions: Purchases Proceeds from sales 18,422 $ 239,487 Sales1 Realized gains, net2 Principal payments and maturities Amortization of premiums and discounts Inflation adjustment on inflation-indexed securities Balance December 31, 2011 Notes $ Bonds $ 731,252 - $ 786,575 $ 239,494 - $ 2,258 (67,273) (4,445) 1,283 1,311,917 713,878 (134,829) 261,955 $ 161,876 (137,733) (239,494) 8 18,423 Total Treasury securities $ $ 127,802 - $ $ $ 2,258 (306,767) (9,422) 2,374 1,750,277 1,081,174 (134,829) $ $ $ 1,004,695 42,145 - (137,733) 152,972 - 1,132,615 (4,985) 1,091 419,937 1,066,952 Federal agency and GSE MBS GSE debt securities - (43,466) (1,678) 107,828 - $ (195,413) (3,169) 848,258 $ 40,955 - 1 Purchases and sales are reported on a settlement-date basis and include payments and receipts related to principal, premiums, discounts, and inflation compensation included in the basis of inflation-indexed securities. The amount reported as sales also includes realized gains, net. 2 Adjustments for realized gains, net is required because these amounts do not affect the reported amount of the related securities. Excludes gains and losses that result from net settled MBS TBA transactions. 3 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 4f. 7. FOREIGN CURRENCY DENOMINATED ASSETS The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments are guaranteed as to principal and interest by the issuing foreign governments. In addition, the FRBNY enters into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain. 26 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS The Bank’s allocated share of foreign currency denominated assets was approximately .815 percent and .937 percent at December 31, 2011 and 2010, respectively. The Bank’s allocated share of foreign currency denominated assets, including accrued interest, valued at amortized cost and foreign currency market exchange rates at December 31 was as follows (in millions): 2011 Euro: Foreign currency deposits Securities purchased under agreements to resell German government debt instruments French government debt instruments Japanese yen: Foreign currency deposits Japanese government debt instruments Total allocated to the Bank $ $ 2010 76 15 22 32 66 211 $ 66 23 17 26 37 75 244 $ At December 31, 2011 and 2010, the fair value of foreign currency denominated assets, including accrued interest, allocated to the Bank was $213 million and $246 million, respectively. The fair value of government debt instruments was determined by reference to quoted prices for identical securities. The cost basis of foreign currency deposits and securities purchased under agreements to resell, adjusted for accrued interest, approximates fair value. Similar to Treasury securities, GSE debt securities, and federal agency and GSE MBS discussed in Note 6, unrealized gains or losses have no effect on the ability of a Reserve Bank, as the central bank, to meet its financial obligations and responsibilities. The fair value is presented solely for informational purposes. Total Reserve Bank foreign currency denominated assets were $25,950 million and $26,049 million at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, the fair value of the total Reserve Bank foreign currency denominated assets, including accrued interest, was $26,116 million and $26,213 million, respectively. The remaining maturity distribution of foreign currency denominated assets that were allocated to the Bank at December 31, 2011, was as follows (in millions): Euro Japanese yen Total Within 15 days $ 44 34 $ 78 16 days to 90 days $ 24 5 $ 29 91 days to 1 year $ 17 26 $ 43 Over 1 year to 5 years $ 28 33 $ 61 Total $ $ 113 98 211 At December 31, 2011 and 2010, the authorized warehousing facility was $5 billion, with no balance outstanding. There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico during the years ended December 31, 2011 and 2010. There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2011. 27 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 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, 2011, there were $216 million of outstanding commitments to purchase Euro-denominated government debt instruments, of which $2 million was allocated to the Bank. These securities settled on January 4, 2012, and replaced Euro-denominated government debt instruments held in the SOMA that matured on that date. As of December 31, 2011, the fair value of Eurodenominated government debt instruments under outstanding commitments was $216 million, of which $2 million was allocated to the Bank. 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 daily monitoring procedures. 8. CENTRAL BANK LIQUIDITY SWAPS U.S. Dollar Liquidity Swaps The Bank’s allocated share of U.S. dollar liquidity swaps was approximately .815 percent and .937 percent at December 31, 2011 and 2010, respectively. The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2011 and 2010, was $99,823 million and $75 million, respectively, of which $814 million and $1 million, respectively, was allocated to the Bank. The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31 was as follows (in millions): Within 15 days Euro 2011 16 days to 90 days $ $ Japanese yen 417 Total $ 697 $ 1 Total $ 1 74 $ 40 114 - - 2 Swiss franc Total 280 2010 Within 15 days 1 3 - - 356 $ 458 $ 814 $ 1 $ 1 Foreign Currency Liquidity Swaps There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2011 and 2010. 28 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 9. BANK PREMISES, EQUIPMENT, AND SOFTWARE Bank premises and equipment at December 31 were as follows (in millions): 2011 Bank premises and equipment: Land and land improvements Buildings Building machinery and equipment Construction in progress Furniture and equipment Subtotal $ Accumulated depreciation 2010 12 153 20 1 36 222 $ (72) 12 149 21 2 37 221 (68) Bank premises and equipment, net $ 150 $ 153 Depreciation expense, for the years ended December 31 $ 11 $ 10 The Bank leases space to outside tenants with remaining lease terms of less than one year. Rental income from such leases was immaterial for the years ended December 31, 2011 and 2010. Future minimum lease payments that the Bank will receive under noncancelable lease agreements in existence at December 31, 2011, were immaterial. The Bank had capitalized software assets, net of amortization, of $5 million and $2 million at December 31, 2011 and 2010, respectively. Amortization expense was $1 million for each of the years ended December 31, 2011 and 2010. 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 Income and Comprehensive Income. 10. COMMITMENTS AND CONTINGENCIES 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, 2011, the Bank was obligated under noncancelable leases for premises and equipment with remaining terms ranging from one to approximately four years. These leases provide for increased rental 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, 2011 and 2010. Certain of the Bank’s leases have options to renew. 29 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2011, are as follows (in thousands): 2012 2013 2014 2015 Future minimum rental payments Operating leases $ 496 500 469 61 $ 1,526 At December 31, 2011, there were no material unrecorded unconditional purchase commitments or obligations in excess of one year. 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, 2011 and 2010. 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. 11. 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). Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan and transferees from other governmental organizations can elect to participate in the System Plan. In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan and certain Reserve Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks. The System Plan provides retirement benefits to employees of the Reserve Banks, Board of Governors, OEB, and certain employees of the Bureau. 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. During the year ended December 31, 2011, certain costs associated with the System Plan were reimbursed by the Bureau. During the year ended December 31, 2010, costs associated with the System Plan were not reimbursed by other participating employers. The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2011 and 2010, and for the years then ended, were not material. 30 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 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, 2011 and 2010, and are reported as a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income. 12. 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 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. Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions): 2011 Accumulated postretirement benefit obligation at January 1 Service cost benefits earned during the period Interest cost on accumulated benefit obligation Net actuarial loss (gain) Contributions by plan participants Benefits paid Medicare Part D subsidies Accumulated postretirement benefit obligation at December 31 $ $ 2010 76.4 2.3 3.8 0.2 1.3 (4.3) 0.4 80.1 $ $ 75.5 2.6 4.3 (3.2) 1.2 (4.4) 0.4 76.4 At December 31, 2011 and 2010, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.50 percent and 5.25 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. 31 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit costs (in millions): 2011 Fair value of plan assets at January 1 Contributions by the employer Contributions by plan participants Benefits paid Medicare Part D subsidies Fair value of plan assets at December 31 $ Unfunded obligation and accrued postretirement benefit cost 2010 $ $ 2.6 1.3 (4.3) 0.4 - $ 2.8 1.2 (4.4) 0.4 - $ 80.1 $ 76.4 $ 1.4 (11.7) (10.3) Amounts included in accumulated other comprehensive loss are shown below: Prior service cost Net actuarial loss Total accumulated other comprehensive loss $ $ 0.4 (11.9) (11.5) $ Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition. For measurement purposes, the assumed health-care cost trend rates at December 31 are as follows: 2011 7.50% 2010 8.00% 5.00% 2017 Health-care cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate 5.00% 2017 Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A 1 percentage point change in assumed health-care cost trend rates would have the following effects for the year ended December 31, 2011 (in millions): 1 percentage point increase Effect on aggregate of service and interest cost components of net periodic postretirement benefit costs Effect on accumulated postretirement benefit obligation 32 1 percentage point decrease $ $ 1.0 11.3 (0.8) (9.3) FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31 (in millions): 2011 Service cost-benefits earned during the period Interest cost on accumulated benefit obligation Amortization of prior service cost Amortization of net actuarial loss Total periodic expense Curtailment gain Net periodic postretirement benefit expense $ 2010 2.3 3.8 (1.0) 5.1 5.1 $ $ $ 2.6 4.3 (3.1) 1.2 5.0 (0.2) 4.8 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2012 are shown below: Prior service cost Net actuarial loss Total $ $ (0.1) 0.5 0.4 Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2011 and 2010, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 5.25 percent and 5.75 percent, respectively. Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income. A deferred curtailment gain was recorded in 2007 as a component of accumulated other comprehensive loss; the gain was recognized in 2010 when the related employees terminated employment. 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. Federal Medicare Part D subsidy receipts were $.3 million in each of the years ended December 31, 2011 and 2010. Expected receipts in 2012, related to benefits paid in the years ended December 31, 2011 and 2010, are $.2 million. 33 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS Following is a summary of expected postretirement benefit payments (in millions): Without subsidy With subsidy 2012 $ 4.1 $ 3.8 2013 4.4 4.0 2014 4.6 4.1 2015 4.8 4.3 2016 4.9 4.4 2017 - 2021 27.2 23.7 Total $ 50.0 $ 44.3 Postemployment Benefits The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a December 31 measurement date and include the cost of medical and dental insurance, survivor income, and disability benefits. The accrued postemployment benefit costs recognized by the Bank at December 31, 2011 and 2010, were $8 million and $7 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit expense included in 2011 and 2010 operating expenses were $2 million and $1 million, respectively, and are recorded as a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income. 34 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 13. ACCUMULATED OTHER COMPREHENSIVE INCOME AND OTHER COMPREHENSIVE INCOME Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss (in millions): Amount related to postretirement benefits other than retirement plans Balance at January 1, 2010 $ (11.4) Change in funded status of benefit plans: Amortization of prior service cost Change in prior service costs related to benefit plans $ $ (3.1) (3.1) $ $ $ $ 3.2 (0.2) 1.2 4.2 Change in funded status of benefit plans - other comprehensive income $ 1.1 Balance at December 31, 2010 $ (10.3) Change in funded status of benefit plans: Amortization of prior service cost $ (1.0) $ (1.0) $ $ (0.2) (0.2) Change in funded status of benefit plans - other comprehensive loss $ (1.2) Balance at December 31, 2011 $ (11.5) Net actuarial gain arising during the year Amortization of deferred curtailment gain Amortization of net actuarial loss Change in actuarial gain related to benefit plans Change in prior service costs related to benefit plans Net actuarial loss arising during the year Change in actuarial loss related to benefit plans Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 12. 35 FEDERAL RESERVE BANK OF ST. LOUIS NOTES TO FINANCIAL STATEMENTS 14. BUSINESS RESTRUCTURING CHARGES Before 2010, announcements included restructuring plans associated with the U.S. Treasury’s Collections and Cash Management Modernization initiative. Following is a summary of financial information related to the restructuring plans (in millions): 2009 and prior restructuring plans Information related to restructuring plans as of December 31, 2011: Total expected costs related to restructuring activity Estimated future costs related to restructuring activity Expected completion date $ $ Reconciliation of liability balances: Balance at January 1, 2010 Employee separation costs Adjustments Payments Balance at December 31, 2010 Employee separation costs Contract termination costs Adjustments Payments Balance at December 31, 2011 0.9 2012 1.2 0.1 (0.1) 1.2 0.1 (0.6) (0.2) 0.5 $ $ 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 Income and Comprehensive Income. 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 Income and Comprehensive Income. Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY as discussed in Note 11. 15. SUBSEQUENT EVENTS There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2011. Subsequent events were evaluated through March 20, 2012, which is the date that the Bank issued the financial statements. 36
