 |
1996 Annual Report
Notes to Financial Statements
- Organization:
The Federal Reserve Bank of San Francisco ("Bank") is part of the
Federal Reserve System ("System") created by Congress under the Federal
Reserve Act of 1913 ("Federal Reserve Act") which established the
central bank of the United States. The System consists of the Board
of Governors of the Federal Reserve System ("Board of Governors")
and twelve Federal Reserve Banks ("Reserve Banks"). The Reserve Banks
are chartered by the federal government and possess a unique set of
governmental, corporate, and central bank characteristics. Other major
elements of the System are the Federal Open Market Committee ("FOMC")
and the Federal Advisory Council. The Reserve Banks are exempt from
federal, state, and local taxes, except for taxes on real property.
Structure:
The Bank and its branches in Los Angeles, California, Portland,
Oregon, Salt Lake City, Utah, and Seattle, Washington serve the Twelfth
Federal Reserve District that includes Alaska, California, Hawaii,
Idaho, Nevada, Oregon, Utah, Washington, and the commonwealths or
territories of American Samoa, Guam, and the Northern Mariana Islands.
In accordance with the Federal Reserve Act, supervision and control
of the Bank is exercised by a Board of Directors chosen partly by
nomination and election by member banks and partly by the Board of
Governors. Banks that are members of the System include all national
banks and any state chartered bank that applies and is approved for
membership in the System.
Board of Directors:
The Federal Reserve Act specifies the composition of Bank boards
of directors. Each board is composed of nine members serving three-year
terms: three directors, including those designated as Chairman and
Deputy Chairman, are appointed by the Board of Governors and six directors
are elected by member banks. Of the six elected by member banks, three
represent the public and three represent member banks. Member banks
are divided into three classes according to size. Member banks in
each class elect one director representing member banks and one representing
the public. In any election of directors, each member bank receives
one vote, regardless of the number of shares of Reserve Bank stock
it holds.
- Operations and Services:
The System performs a variety of services and operations. Functions
include: formulating and conducting monetary policy; participating
actively in the payments mechanism, including large-dollar transfers
of funds, automated clearing house operations and check processing;
distribution of coin and currency; fiscal agency functions for the
U. S. Treasury and certain federal agencies; serving as the federal
government's bank; providing short-term loans to depository institutions;
serving the consumer and the community by providing educational materials
and information regarding consumer laws; supervising bank holding
companies and state member banks; and administering other regulations
of the Board of Governors. The Board of Governors' operating costs
are funded through assessments on the Reserve Banks.
- Significant Accounting Policies:
Specialized accounting principles for entities with the unique powers
and responsibilities of the nation's central bank have not been formulated
by the Financial Accounting Standards Board. The Board of Governors
has developed specialized accounting principles and practices that
it believes are appropriate for the significantly different nature
and function of a central bank as compared to the private sector.
These accounting principles and practices are generally documented
in the "Financial Accounting Manual for Federal Reserve Banks" (the
"Financial Accounting Manual"), which is published by the Board of
Governors. All Reserve Banks are required to adopt and apply accounting
policies and practices that are consistent with the Financial Accounting
Manual. The financial statements have been prepared in accordance
with the Financial Accounting Manual. Differences exist between the
policies of the Reserve Banks and generally accepted accounting principles
("GAAP"). The primary differences are the presentation of all security
holdings at amortized cost rather than at the fair value presentation
requirements of GAAP, and the accounting for matched sale-purchase
transactions as separate sales and purchases, rather than secured
borrowings with pledged collateral, as is required by GAAP. Accounting
policies and practices for U. S. government and federal agency securities
and investments denominated in foreign currencies are further described
in note 3(d). In addition, the Bank has elected not to include a Statement
of Cash Flows, as the liquidity and cash position of the Bank are
not of primary concern to users of these financial statements. Other
information regarding the Bank's activities is provided in, or may
be derived from, the Statements of Condition, Income, and Changes
in Capital. Therefore, a Statement of Cash Flows would not provide
any additional useful information. There are no other significant
differences between the policies outlined in the Financial Accounting
Manual and GAAP. The preparation of the financial statements in conformity
with the Financial Accounting Manual requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates. Unique accounts and significant accounting policies are
explained below.
a. Gold Certificates
The Secretary of the Treasury is authorized to issue gold
certificates to the Reserve Banks to monetize gold held by the U.
S. Treasury. Payment for the gold certificates by the Reserve Banks
is made by crediting equivalent amounts in dollars into the account
established for the U. S. Treasury. These gold certificates held by
the System are required to be backed by the gold of the U. S. Treasury.
The U. S. Treasury may reacquire the gold certificates at any time
and the Reserve Banks must deliver them to the U. S. Treasury. At
such time, the U. S. Treasury's account is charged and the Reserve
Banks' gold certificate account is lowered. The value of gold for
purposes of backing the gold certificates is set by law at $42 2/9
a fine troy ounce. The Board of Governors allocates the gold certificates
among Reserve Banks once a year based upon Federal Reserve notes outstanding
in each district.
b. Special Drawing Rights Certificates
Special drawing rights ("SDRs") are issued by the International
Monetary Fund ("the Fund") to its members in proportion to each member's
quota in the Fund at the time of issuance. SDRs serve as a supplement
to international monetary reserves and may be transferred from one
national monetary authority to another. Under the law providing for
United States participation in the SDR system, the Secretary of the
U. S. Treasury is authorized to issue SDR certificates, somewhat like
gold certificates, to the Reserve Banks. At such time, equivalent
amounts in dollars are credited to the account established for the
U. S. Treasury, and the Reserve Banks' SDR certificate account is
increased. The Reserve Banks are required to purchase SDRs, at the
direction of the U.S. Treasury, for the purpose of financing SDR certificate
acquisitions or for financing exchange stabilization operations.
c. Loans to Depository Institutions
The Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that all depository institutions that maintain
reservable transaction accounts or nonpersonal time deposits, as defined
in Regulation D issued by the Board of Governors, have borrowing privileges
at the discretion of the Reserve Banks. Borrowers execute certain
lending agreements and deposit sufficient collateral before credit
is extended. Loans are evaluated for collectibility, and currently
all are considered collectible and fully collateralized. If any loans
were deemed to be uncollectible, an appropriate reserve would be established.
Interest is recorded on the accrual method and is charged at the discount
rate established at least every fourteen days by the Board of Directors
of the Reserve Banks, subject to review by the Board of Governors.
However, Reserve Banks retain the option to impose a surcharge above
that rate in certain circumstances.
d. U. S. Government and Federal Agency Securities and Investments
Denominated in Foreign Currencies
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. The FOMC
has designated the FRBNY to execute open market transactions on its
behalf and to hold the resulting securities in the portfolio known
as the System Open Market Account ("SOMA"). The FOMC establishes policy
regarding open market operations, oversees these operations, and issues
authorizations and directives to the FRBNY for its execution of transactions.
Authorized transaction types include direct purchases and sales of
securities, matched sale-purchase transactions, and the purchase of
securities under agreements to resell. These transactions are conducted
in U.S. government and federal agency securities. All balances and
related income arising from these transactions, other than securities
purchased under agreements to resell, are participated, or designated,
to each Reserve Bank.
Specifically, the FRBNY provides or absorbs reserve deposits of
depository institutions by purchasing or selling government securities,
respectively, in the open market. While the application of current
market prices to the securities currently held by the Reserve Banks
may result in values substantially above or below their carrying
values, these unrealized changes in value would have no necessary
effect on the quantity of reserves available to the banking system
or on the prospects for future Reserve Bank earnings or capital.
Matched sale-purchase transactions are generally overnight transactions
in which the FRBNY sells a security and buys it back the next day
at the rate specified at the commencement of the transaction. These
transactions are accounted for as separate sale and purchase transactions.
At December 31, 1996, and December 31, 1995, matched sale-purchase
transactions involving U.S. government securities with par values
of $ 15 billion and $ 12 billion, respectively, were outstanding.
In addition to authorizing and directing operations in the domestic
securities market, the FOMC authorizes and directs the FRBNY to
execute operations in foreign markets for major currencies and,
to the extent possible, invest the resulting balances. The portfolio
for each foreign currency shall generally have an average duration
of no more than eighteen months. Balances and changes in balances
of investments denominated in foreign currencies arise from transactions
to counter disorderly conditions in exchange markets and other needs
specified by the FOMC in carrying out the System's central bank
responsibilities.
Although the portfolios of U.S. government and federal agency
securities and investments denominated in foreign currencies generate
interest income and transactions can result in gains or losses when
holdings are sold prior to maturity, decisions regarding these securities
and investments, including their purchase and sale, are motivated
by monetary policy objectives rather than profit. Accordingly, earnings
and any gains or losses resulting from the sale of such securities
and investments are incidental to the open market and foreign currency
operations and do not motivate activities or policy decisions.
IIn accordance with the Federal Reserve Act, and as further explained
in note 3(g), all domestic securities and investments denominated
in foreign currencies held by the Bank are pledged as collateral
for net Federal Reserve notes outstanding.
e. Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line basis
over estimated useful lives of assets ranging from 2 to 50 years.
New assets, major alterations, renovations and improvements are capitalized
at cost as additions to the asset accounts. Maintenance, repairs and
minor replacements are charged to operations in the year incurred.
f. Interdistrict Settlement Account
At the close of business each day, all Reserve Banks and
branches assemble the payments due to or from other Reserve Banks
and branches as a result of transactions involving accounts residing
in other Districts that occurred during the day's operations. Such
transactions may include funds settlement, check and automated clearinghouse
("ACH") clearing operations, and allocations of shared expenses. The
cumulative net amount owed from or due to other Reserve Banks is reported
as the "Interdistrict settlement account."
g. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the
United States. These notes are issued through the various Federal
Reserve agents to the Reserve Banks upon deposit with such agents
of certain classes of collateral security, typically U. S. government
securities. These notes are identified as issued to a specific Reserve
Bank. The Federal Reserve Act provides that the collateral security
tendered by the Reserve Bank to the Federal Reserve agent must be
equal to the sum of the notes applied for by such Reserve Bank. The
collateral value is equal to the par value of the securities tendered.
The Board of Governors may, at any time, call upon a Reserve Bank
for additional security to adequately collateralize the Federal Reserve
notes. To satisfy its obligation to provide sufficient collateral
for its outstanding Federal Reserve notes, the Reserve Banks have
entered into an agreement that provides that certain assets of the
Reserve Banks are jointly pledged as collateral for the Federal Reserve
notes of all Reserve Banks. In the event that this collateral is insufficient,
the Act provides that Federal Reserve notes become a first and paramount
lien on all the assets of the Reserve Banks. Finally, as obligations
of the United States, Federal Reserve notes are backed by the full
faith and credit of the United States government. The "Federal Reserve
notes outstanding, net" account represents Federal Reserve notes reduced
by cash held in the vaults of the Reserve Banks of $14 billion, and
$11 billion at December 31, 1996 and December 31, 1995, respectively.
h. Capital Paid-in
The Federal Reserve Act requires that each member bank
subscribe to the capital stock of the Reserve Bank in an amount equal
to 6% of the capital and surplus of the member bank. As a member bank's
capital and surplus changes, its holdings of the Reserve Bank's stock
must be adjusted. Member banks are those state-chartered banks that
apply and are approved for membership in the System and all national
banks. Currently, only one-half of the subscription is paid-in and
the remainder is subject to call. These shares are nonvoting with
a par value of $100. They may not be transferred or hypothecated.
By law, each member bank is entitled to receive an annual dividend
of 6% on the paid-in capital stock. This cumulative dividend is paid
semiannually. A member bank is liable for Reserve Bank liabilities
up to twice the par value of stock subscribed by it.
i. Surplus
The Board of Governors requires Reserve Banks to maintain
a surplus equal to the amount of capital paid-in as of December 31
of the prior year. This amount is intended to provide additional capital
and reduce the possibility that the Reserve Banks would be required
to call on member banks for additional capital. Reserve Banks are
required by the Board of Governors to transfer to the U.S. Treasury
excess earnings, after providing for the costs of operations, payment
of dividends, and reservation of an amount necessary to equate surplus
with capital paid-in. Prior to October 1, 1996, this payment represented
payment of interest on Federal Reserve notes outstanding.
The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66,
Section 3002) codified the existing Board surplus policies as statutory
surplus transfers, rather than as payments of interest on Federal
Reserve notes, for federal government fiscal years 1997 (which began
on October 1, 1996) and 1998. In addition, the legislation directs
the Reserve Banks to transfer to the U.S. Treasury additional surplus
funds of $106 million and $107 million during fiscal years 1997
and 1998, respectively. Reserve Banks are not permitted to replenish
surplus for these amounts during this time. The Reserve Banks transferred
$106 million to the U.S. Treasury on October 1, 1996. The Bank transferred
$15 million from surplus on October 1, 1996, as its share of this
payment.
In the event of losses, payments to the U. S. Treasury are suspended
until such losses are recovered through subsequent earnings. Weekly
payments to the U. S. Treasury vary significantly.
j. Cost of Unreimbursed Treasury Services
The Bank is required by the Federal Reserve Act to serve
as fiscal agent and depository of the United States. By statute, the
Department of the Treasury is permitted, but not required, to pay
for these services. The costs of providing fiscal agency and depository
services to the Treasury Department that have been billed but will
not be paid are reported as the "Cost of unreimbursed Treasury services."
k. Accounting Change
Effective January 1, 1995, the Financial Accounting Manual
was changed to require the Bank to use the accrual method of accounting
to recognize the obligation to provide benefits to former or inactive
employees, consistent with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits." Prior to 1995, the Bank recognized costs
for postemployment benefits when paid. The cumulative effect of this
change in accounting for benefits was recognized by the Bank as a
one-time charge to expense of $6 million. Additionally, the Bank recognized
an increase in 1995 operating expenses of approximately $1 million
as a result of the change in accounting for these costs.
Effective January 1, 1995, the Bank also began accruing a liability
for employees' rights to receive compensation for future absences
consistent with SFAS No. 43, "Accounting for Compensated Absences."
Prior to 1995, the Bank recognized these costs when paid. The cumulative
effect of this change in accounting for compensated absences was
recognized by the Bank as a one-time charge to expense of $350 thousand.
Ongoing operating expenses for the year ended December 31, 1995,
were not materially affected by the change in accounting for these
costs.
- U. S. Government and Federal Agency Securities:
U.S. government and federal agency securities represent the Bank's
designated interest in securities bought outright, which are held
in the SOMA at the FRBNY. The Bank's designated interest is derived
from an annual settlement, performed in April of each year, of interdistrict
clearings and equalization among the Reserve Banks of gold certificate
holdings to Federal Reserve notes outstanding. The Bank's designated
interest in securities bought outright was approximately 8.470% and
7.937% at December 31, 1996 and December 31, 1995, respectively.
U.S. government and federal agency securities are recorded at cost
on a settlement-date basis, adjusted for the amortization of premiums
and accretion of discounts. Gains and losses resulting from sales
of securities are determined for each specific issue based on average
cost. Interest income is recorded on the accrual method. Interest
income and gains and losses on the sale of these securities are allocated
to the Bank based on its designated interest in the total portfolio
and are reported as "Interest on U.S. government securities" and "Government
securities gains, net", respectively.
Total U.S. government and federal agency securities bought outright,
which are held in the SOMA, and the Bank's designated interest at
December 31, 1996 and December 31, 1995, were as follows (in millions):
|
December 31, 1996
|
December 31, 1995
|
|
Total bought
outright |
Designated
to Bank |
Total bought
outright |
Designated
to Bank |
| Par value: |
| Federal agency |
$ 2,225 |
$ 188 |
$ 2,634 |
$ 209 |
| U.S. Government: |
|
Bills |
190,646 |
16,147 |
183,116 |
14,533 |
|
Notes |
150,922 |
12,783 |
151,013 |
11,986 |
|
Bonds |
49,339 |
4,179 |
44,069 |
3,498 |
|
Total par value |
393,132 |
33,297 |
380,832 |
30,226 |
| Unamortized premiums |
4,677 |
396 |
4,508 |
358 |
| Unaccreted discounts |
(3,548) |
(300) |
(3,477) |
(276) |
|
$ 394,261 |
$ 33,393 |
$ 381,863 |
$ 30,308 |
The maturities of U.S. government and federal agency securities bought
outright, which are held in the SOMA, at December 31, 1996, were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value, December 31, 1996
|
Maturities of
Securities Held
|
U.S. Government Securities
|
Federal Agency Obligations
|
Total
|
| Within 15 days |
$ 7,875 |
$ 450 |
$ 8,325 |
| 16 days to 90 days |
89,036 |
541 |
89,577 |
| 91 days to 1 year |
122,780 |
232 |
123,012 |
| Over 1 year to 5 years |
95,608 |
520 |
96,128 |
| Over 5 years to 10 yrs |
33,782 |
457 |
34,239 |
| Over 10 years |
41,826 |
25 |
41,851 |
|
Total |
$ 390,907 |
$ 2,225 |
$ 393,132 |
The maturities of U.S. government and federal agency securities bought
outright, which are designated to the Bank, at December 31, 1996,
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value, December 31, 1996
|
Maturities of
Securities Held
|
U.S. Government Securities
|
Federal Agency Obligations
|
Total
|
| Within 15 days |
$ 667 |
$ 38 |
$ 705 |
| 16 days to 90 days |
7,541 |
46 |
7,587 |
| 91 days to 1 year |
10,399 |
19 |
10,418 |
| Over 1 year to 5 years |
8,098 |
44 |
8,142 |
| Over 5 years to 10 yrs |
2,861 |
39 |
2,900 |
| Over 10 years |
3,543 |
2 |
3,545 |
|
Total |
$ 33,109 |
$ 188 |
$ 33,297 |
- Investments Denominated in Foreign Currencies:
The FRBNY, on behalf of the Reserve Banks, holds foreign currency
deposits with foreign central banks and the Bank for International
Settlements and invests in foreign government debt instruments. Foreign
government debt instruments include both securities bought outright
and securities held under agreements to resell. These investments
are guaranteed as to principal and interest by the foreign governments.
Each Reserve Bank is allocated a share of foreign-currency-denominated
assets based upon the ratio of its capital and surplus to aggregate
capital and surplus at the preceding December 31. The Bank's allocated
share of investments denominated in foreign currencies was approximately
13.656% and 13.906% at December 31, 1996 and December 31, 1995, respectively.
Investments denominated in foreign currencies are recorded at cost
on a settlement date basis, adjusted for amortization of premiums
and accretion of discounts. Foreign currency-denominated assets of
the Reserve Banks are revalued monthly at current market exchange
rates in order to report these assets in U.S. dollars. Gains and losses
resulting from sales of securities are determined using the average
cost method. Interest income is recorded on the accrual basis. Realized
and unrealized foreign currency gains and losses and interest income
are allocated to the Bank based on its designated interest in the
total portfolio and are reported as "Foreign currency gains (losses),
net", and "Interest on foreign currencies", respectively.
Total investments denominated in foreign currencies, valued at current
exchange rates at December 31, 1996 and December 31, 1995, and the
Bank's designated share, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 1996
|
December 31, 1995
|
|
Total foreign currencies |
Designated
to Bank |
Total foreign currencies |
Designated
to Bank |
| German Marks: |
|
Foreign currency deposits |
$ 10,253 |
$ 1,400 |
$ 12,329 |
$ 1,715 |
|
Government debt instruments including agreements to
resell |
2,777 |
379 |
1,186 |
165 |
| Japanese Yen: |
|
Foreign currency deposits |
637 |
87 |
739 |
103 |
|
Government debt instruments including agreements to
resell |
5,515 |
753 |
6,130 |
852 |
| Mexican Pesos: |
|
Foreign currency swap |
--- |
--- |
602 |
84 |
| Accrued interest |
87 |
12 |
118 |
16 |
| Total foreign currencies |
$ 19,269 |
$ 2,631 |
$ 21,104 |
$ 2,935 |
The FRBNY is authorized by the FOMC to hold balances of and to execute
spot and forward foreign exchange contracts to receive or to deliver
the currencies of fourteen foreign countries. Foreign exchange contracts
are contractual agreements between two parties to exchange specified
currencies, at a specified price, on a specified date. Spot foreign
contracts normally settle two days after the trade date, whereas the
settlement date on forward contracts is negotiated between the contracting
parties, but will extend beyond two days from the trade date. FRBNY
generally enters into spot contracts, with any forward contracts generally
limited to the second leg of a swap/warehousing transaction. Foreign
exchange contracts involve off-balance-sheet market risk for the future
settlement of currencies and counterparty credit risk. The FRBNY controls
credit risk by obtaining credit approvals, establishing transaction
limits, and performing daily monitoring procedures. As of December
31, 1996 and December 31, 1995, the FRBNY had no open foreign exchange
contracts except as noted below.
At the direction of the FOMC, the FRBNY is authorized to maintain
reciprocal currency arrangements ("F/X swaps") for periods up to a
maximum of 12 months with various foreign central banks. An F/X swap
is a renewable, short-term reciprocal currency arrangement, generally
for up to one year, between two parties, the FRBNY, on behalf of the
Reserve Banks, and an authorized foreign central bank, who agree to
exchange their currencies up to a prearranged maximum amount and for
an agreed upon period of time, at an agreed upon interest rate. These
arrangements give the Federal Reserve temporary access to the foreign
currencies that it needs for intervention operations to support the
dollar and give the partner foreign central bank temporary access
to dollars it needs to support its own currencies. Drawings under
the F/X swap arrangements can be initiated by either the FRBNY or
the partner foreign central bank.
The F/X swaps are structured so that the party initiating the transaction
(the drawer) bears the exchange rate risk upon maturity. The FRBNY
will generally invest the foreign currency received under an F/X swap
in interest-bearing instruments. Interest income on the resulting
foreign currency holdings is accrued and reported as "Interest on
foreign currencies." Unrealized gains and losses on revaluation of
the resulting currency holdings are reported by the FRBNY as a component
of "Other assets" or "Other liabilities," since there is no exchange
rate risk to the FRBNY at the maturity of the F/X swap. As of December
31, 1996, there were no open F/X swaps. As of December 31, 1995, there
was an open F/X swap of $650 million which was drawn at the direction
of the Bank of Mexico.
The FOMC has an agreement to "warehouse" foreign currencies for
the U.S. Treasury and the Exchange Stabilization Fund ("ESF"). This
is an arrangement under which the FOMC agrees to exchange, at the
request of the Treasury, U.S. dollars for foreign currencies held
by the Treasury or ESF over a limited period of time. The purpose
of the warehousing facility is to supplement the U.S. dollar resources
of the Treasury and ESF for financing purchases of foreign currencies
and related international operations. This facility was $20 billion,
with nothing outstanding, as of December 31, 1996 and December 31,
1995.
- Bank Premises and Equipment:
A summary of bank premises and equipment at December 31, 1996 and
December 31, 1995 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 1996
|
December 31, 1995
|
| Bank premises and equipment: |
|
Land |
$ 23 |
$ 23 |
|
Buildings |
145 |
139 |
|
Building machinery & equipment |
35 |
35 |
|
Construction in progress |
2 |
2 |
|
Furniture and equipment |
124 |
115 |
|
329 |
314 |
| Less: Accumulated depreciation |
109 |
108 |
| Bank premises and equipment, net |
$ 220 |
$ 206 |
Depreciation expense was $16 million and $15 million for the years
ended December 31, 1996 and December 31, 1995, respectively.
The Bank leases unused space to outside tenants. These leases have
terms ranging from 1 to 2 years. Rental income from such leases was
$1 million and $2 million for the years ended December 31, 1996 and
December 31, 1995, respectively. Future minimum lease payments under
agreements in existence at December 31, 1996, are not material.
- Commitments and Contingencies:
At December 31, 1996, the Bank was obligated under noncancelable
leases for premises and equipment with terms of approximately 1 year.
These leases provide for increased rentals based upon increases in
real estate taxes, operating costs or selected price indices.
Rental expense under operating leases for certain operating facilities,
warehouses, and data processing and office equipment (including taxes,
insurance and maintenance when included in rent), net of sublease
rentals, was $459 thousand and $1 million for the years ended December
31, 1996 and December 31, 1995, respectively. Certain of the Bank's
leases have options to renew. Future minimum rental payments under
noncancelable operating leases and capital leases, net of sublease
rentals, with terms of one year or more, at December 31, 1996, are
not material.
There were no other material commitments and long-term obligations
in excess of one year at December 31, 1996.
Under the Insurance Agreement of the Federal Reserve Banks dated
as of June 7, 1994, each of the Reserve Banks has agreed to bear on
a per incident basis, a pro rata share of losses in excess of 1% of
the capital of the claiming Reserve Bank, up to 50% of total capital
and surplus of all Reserve Banks. No claims were outstanding under
such agreement at December 31, 1996 or December 31, 1995.
The Bank is involved in certain legal actions and claims arising
in the ordinary course of business. Although it is difficult to predict
the ultimate outcome of these actions, in management's opinion, based
on discussions with counsel, the aforementioned litigation and claims
will be resolved without material adverse effect on the financial
position or results of operations of the Bank.
- Retirement and Thrift Plans:
Retirement plans:
The Bank currently offers two defined benefit retirement plans to
its employees, based on length of service and level of compensation.
Substantially all of the Bank's employees participate in the Retirement
Plan for Employees of the System (the "System Plan") and the Benefit
Equalization Retirement Plan (the "BEP"). These plans cover employees
of the 12 Reserve Banks, the Board of Governors, and the Plan Administrative
Office.
The System Plan is a multi-employer plan. Contributions are actuarially
determined and fully funded by participating employers at amounts
prescribed by the Plan Administrator (with the exception of a mandatory
contribution of 7% of salary by certain employees of the Board of
Governors that participate in the plan). No separate accounting is
maintained of assets contributed by the participating employers, and
net pension cost allocated to the Bank for the period is the Bank's
required contribution for the period. No contributions to the System
Plan were required during 1996 or 1995.
The BEP is an unfunded plan that was established January 1, 1996.
Net pension cost for the period is actuarially determined and is based
on the same economic and mortality assumptions used for the System
plan. The Bank's projected benefit obligation and net pension costs
for the BEP at December 31, 1996 and for the year then ended are not
material.
Thrift Plan:
Employees of the Bank may also participate in the Thrift Plan for
Employees of the Federal Reserve System (the "Thrift Plan"). The Thrift
Plan is a defined contribution plan. Under the Thrift Plan, employees
may contribute a percentage of their salaries up to a maximum 19%
limit as prescribed by the Internal Revenue Service. Matching contributions
by the Bank are based on a fixed percentage of each employee's basic
contribution. Currently, the Bank matches 80% of the first 6% of salary
contributed by the employee. The Bank's Thrift Plan contributions
totaled $5 million and $4 million for the years ended December 31,
1996 and December 31, 1995, respectively, and are reflected on the
Statement of Income as a component of "Salaries and other benefits."
- Postretirement Benefits Other Than Pensions and Postemployment
Benefits:
Postretirement benefits other than pensions:
In addition to the Bank's defined benefit 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 retiree medical plan is contributory and provides benefits to
retirees, their covered dependents, and beneficiaries. The life insurance
plan is noncontributory and covers retirees only.
The Bank funds benefits payable under the medical and life insurance
plans as due. Net postretirement benefit cost is actuarially determined,
using a January 1 measurement date. The following is a reconciliation
between the plan's funded status and the amounts recognized in the
Bank's balance sheet as of December 31, 1996 and December 31, 1995
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 1996
|
December 31, 1995
|
| Accumulated postretirement benefit obligation: |
|
Retirees and covered spouses |
$ 22 |
$ 22 |
|
Actives eligible to retire |
3 |
3 |
|
Other actives and disableds |
10 |
10 |
|
Total accumulated postretirement benefit obligation |
35 |
35 |
|
Unrecognized net gain |
11 |
9 |
|
Unrecognized prior service cost |
16 |
17 |
|
Accrued postretirement benefit cost |
$ 62 |
$ 61 |
The assumptions used in developing the postretirement benefit obligation
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
1995
|
| Discount rate |
7.25 % |
7.00 % |
| Rate of increase in health care costs - initial |
9.50 % |
10.00 % |
| Rate of increase in health care costs - ultimate |
5.50 % |
5.50 % |
| The ultimate health care cost rate is expected
to be achieved in 2004. |
The following is a summary of the components of net periodic postretirement
cost for the years ended December 31, 1996 and December 31, 1995 (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
1995
|
| Service cost |
$ 1 |
$ 1 |
| Interest cost of accumulated benefit obligation |
2 |
2 |
| Net amortization and deferral |
(2) |
(2) |
|
Net periodic postretirement cost |
$ 1 |
$ 1 |
These costs are reflected on the Statement of Income as a component
of "Salaries and other benefits."
Changing the assumed health care cost trend rates by one percentage
point in each year would change the accumulated postretirement benefit
obligation at December 31, 1996 and December 31, 1995, by approximately
$4 million and $3 million , respectively, and would change the aggregate
service and interest cost components of net periodic postretirement
benefit cost for both of the years ended December 31, 1996 and December
31, 1995, by approximately $300 thousand.
Postemployment benefits:
The Bank began using the accrual method of accounting to recognize
the obligation to provide benefits to former or inactive employees,
consistent with SFAS No. 112 "Employers Accounting for Postemployment
Benefits," effective January 1, 1995. Benefits include medical and
dental insurance, survivor income and disability benefits. Costs were
projected using the same discount rate and the same health care trend
rates as were used for projecting postretirement costs. The accrued
postemployment benefit costs recognized by the Bank at December 31,
1996 and December 31, 1995, was $8 million and $7 million, respectively.
This cost is included as a component of "Accrued benefit cost" on
the Statement of Condition. Net periodic postemployment benefit costs
included in both 1996 and 1995 operating expenses was $2 million.
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|
