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TheFederal Reserve Bank OfPhiladelphia Table of Contents ý. , 2 President's Letter 3 ýI3 ýýis A Message From Our First Vice President Nineteen Ninety-Three: A Watershed Year For Banking Board of Directors Officers Advisory Councils Statement of Condition Earnings and Expenses Operating Statistics ý ý- 7 16 18 20 22 23 24 J President's Letter The national and District economies showed marked improvement in 1993. The year began with lingering concerns about the strength of the recovery and ended with a well-entrenched expansion. Nearly 2 million jobs were created and the rate of inflation remained low. Although the District economy lagged behind improvements nationally, the region clearly ended the year on a positive trend. Monetary policy played a key role in helping to stimulate a durable expansion. Interest rates reached 20- and 30-year lows. As 1994 begins, the emphasis of monetary policy is on fostering sustainable economic and job growth against a background of low inflation. Although a very accommodative monetary stance was appropriate to get the economy moving, a more neutral stance is essential to sustain growth. Lightening up on the monetary accelerator in a timely fashion is better than slamming on the brakes later. Banking in the District and the nation also improved notably in 1993. Bankers focused on cutting costs,broadening revenue sources,and reducing problem assets. With favorable interest rate spreads The ongoing and an expanding economy, balance sheets and earnings strengthened considerably. challenge for banking is to industry of establish a profitable place in the fast-pacedfinancial services the future. An accompanying banking. article in this report focusesmore closely on Here at the Federal Reserve Bank of Philadelphia, new technologies,changing regulations,and a dynamic competitive environment are affecting every aspect of our operations. Our emphasis is on Our ever-higher levels of quality and productivity with a strong service and people orientation. investments in people and new technologies are yielding positive results and positioning us well for the future. £&' h. EdwardG. Boehnc President A Message FromOurFirstVicePresident sa provider of payment services,we face the same challenges every bank facestoday. "technology and the regulatory environment are changing. Our customersare demanding better A service. And competition is driving us to respond more efficiently. In 1993 we began major efforts to prepare ourselvesand our customersfor significant changesin the check-handling and funds-transfer businesses. In the check area, we began installing a new processing system that will allow us to use electronics more and handle paper less. We also began preparing for the introduction in 1994 of new check presentment rules known as "same-day settlement. " To better position itself for same-daysettlement, the Federal Reservehas introduced an attractive package of new check products. Meanwhile, we have helped many smaller institutions around the District prepare to receive more presentments directly from private-sector institutions. In the areaof electronic funds, the Fed moved closer to fully implementing new rules regarding daylight overdrafts. These rules will limit the risks to the payment system associatedwith large unfunded money transfers. We have District financial institutions made every effort to help Third adjust to the new rules. In October, we gave them the capability to better track their reserveaccount activity. They can now check their account balanceswith us at any time via computer. The payment system is changing. The regulations are tougher. The competition is keener. The but we are need for service is is stronger. We recognize that no organization's success assured, prepared to meet the challenge. ýý ýýý. William H. Stone, Jr. First Vice President forBanking Nineteen Year Ninety-Three: AWatershed The decade of the 1990sbegan with the nation's hanks weathering a torrent of economic and financial pressures. Now they are seeing some light on the horizon. The immediate problems have passed. Banks have taken advantage of an improving economy,favorable interest rates, and aggressive cost-cutting to strengthen themselves. But they still must face the challenge of surviving in a rapidly changing financial services industry. For a number of years, one problem after another cascadedover banking. The competitive pressuresof the 1980shad pushed too many banks into unwise excessesand, ultimately, failure. By 1990, a crisis atmosphere had developed, putting banks and their regulatorson the defensive. The turmoil in banking rippled out into the economy, deepening the recessionand slowing the processof recovery. Meanwhile, Congress, concerned about the loss of public confidence and taxpayer dollars due the thrift crisis, to enacted the sweeping FDIC Improvement Act (FDICIA) of 1991. The Act, which contains some 123 provisions, raisedbankers' concerns about soaring compliance costs and burdensome new red tape. FirstFidelity Bank i'hiladennsyivano Bank FirstFidelity Pemisylvonia Phladelphia, With loan portfolios shrinking, revenues declining, and the regulatory burden mounting, some questioned whether the banking industry could survive. But bankers went to work, making the necessary adjustments, and their efforts paid off. l lac scar 1993 brml-hr Llcar signs that banks have begun to turn things around. Both the number and size of failing banks continued to decrease. The bank insurance fund is no longer losing Harney closing institutions and is beginning to rebuild its reýuurces. Banks' financial statements are much improved. Fueled by favorable interest rate spreadsand aggressive cost-cutting, bank earnings rose to record highs. Bank capital is at its highest levels since the 1960s. Loan quality at most banks has improved dramatically. With the national economy picking up speed. loan demand is beginning to recover. Meanwhile, a sensible implementation process for FDICIA has kept it from stifling the industry- as much as some bankers had feared. In addition. the more prudent banking climate fostered by FDICIA will benefit banking over the long haul. In the end, I Bethlehem Office of MOO Bankof theCommonw Allentown, PennsylvoAk I I Railroad Branch Farmers TrustBank Lebanon, Pennsylvania ýI TheBrynMawr TrustCompany BrynMawr,Pennsylvania prompt corrective action, more frequent examinations, and risk-based deposit insurancepremiums will discourageexcessive risk-taking and reduce the number of bank failures. In short, banking has reached a watershed, a turning point. It has overcome its immediate difficulties that threatened. But as they look to the future, bankers recognize that their work of restoring the industry to long-run prosperity has just begun. Although banks experienced record profits in 1993, they also experienced some of the sharpestlossesof market share in the industry-'shistory. Mutual funds, mortgage companies,and finance companies are growing substantially faster than the banks. Recognizing this, banks are finding new ways to reclaim their business. They and exploring share of the financial services are aggressively cutting costs new revenue opportunities. Lending has long been its growth the core business of banks, but potential is limited. As the economy picks up momentum, loan demand banks arc «-ill grow. But bank getting a smaller share of the business. Longtime customershave been turning to capital markets and finance companies for credit. Even consumer loans are being replaced by home equity lines of credit-many through nonbank lenders. Bank of Philadelphia Reserve TheFederal Pennsylvania Philadelphia, I Recognizing the need for reliable flows of fee income, banks have become creative in developing a wider array of financial services. They have strengthened their existing service lines: credit cards, data processing. correspondent services, services to low and moderate income customers, and letters of credit. And they have also introduced new ones: annuities and mutual funds for consumers,and derivatives for risk-management. As a result, noninterest income has already become major component of rc%Cn[I Ii r[lnIc I rlll, I)j, Hank,. incluýliný 7rll is !e revolution in information-transfer technology Bank,N.A. Commerce CherryHilt NewJersey changing the ways financial firms provide services. Delivering products to bank customers via telephone and computer. exchanging information across V-11,1 networks, accessingand processing massive amounts o information quickly-these are the grounds on Whi"11 banks «"ill compete. Competition and the high fixed costs of developing these infomation networks will drive the banking industry toward ,rcarcr \onetheless, there will always be a role for coil"""'t(ý oriented banks to serve the needs of towns and diver'` neighborhoods. These banks will need to keel) their fcxus on the basics: providing customer service. "111" fostering strong and healthy commllnir\ relations `ý (040m91 ý Ne arm I i Banks are making a heroic effort to adapt to a new financial environment. But the industncannot make all the necessanchangesunless government changes too. To compete effectively-locally; nationally, and internationally-banks need more freedom to operate. They need the freedom that other financial service Providershave to offer a wide array of Products on a nationwide basis. And they need some relief from what has become a disproportionately burdensome regulatorv structure. Changing banks' legal and regulator environment Will not be ease. It will require careful judgment on the narr of 1a« --makers and regulators. With technological change and market competition driving banks to be more like other financial firms, policymakers must refine their concept of What makes banks unique. And they must begin to focus on the issue of which activities, rather than Which institutions, require regulation. "he banking doWnturnis over. Now the focusmust beon the long-term challengesahead. With continued hard Workand prudent management-and under proper regulation-banks in the Third District and across the nation can build on their recent successes andassulrP L_ -- 11emselves vCJ a leading role in a dynamic f nanciaý environment. Bank FirstPennsylvania CoreStates Office Independence Pennsylvania Philadelphia, 1 Board of Directors Board of Directors and n 1993,Jane G. Pepper was appointed chairperson of the James M. Mead was appointed a Class C director and deputy chairman. Carl L. Campbell I Samuel A. McCullough. J. Richard Jones was was elected a Class A director, replacing Mead, and David W. Huggins was elected a Class B director, replacing James M. reelected a Class B director. Chairperson Jane G. Pepper President The Pennsylvania I lorticultural SociCt\ Philadelphia, PA Deputy Chairman Janes M. Me-ad President and Chief I"xcciltl\'c Officer Capital Blue Cross Harrisburg, PA Carl L. Campbell 1're. ident and Chief Executive O icer keystone Financial, Inc. I Iarrishur,. P:\ Donald J. Kennedy Business Manager International Brotherhood of ElectricalWorkerslocal Union : '69 Trenton. \J H. "ernard hrý1jde1jt l. N-nch and (: Iticf I: xecutivc Otliccr ýl'irst. I)ltinnal ' \\ý. Ih Dank ýminý, Gan_ l; Simn1ennýtn " esitcdºdc nt andChief Executi\-e t Officer Chern. ankJSnrth. N. A. Hill`\-J jam Chairman11, l ,ircýºdcnt Chief h'ýcýutiýc and (, o Officer nsolid. I'hiladelh ý k; il (: c)rp.l(: O\RAI1. º 1.Richard Jones officer . (Thief Executive I'ic, idcnt and Jackson-(;rosy(umpany I'hiladelphia. 1 \ 1)avid \\'. Hu#;#;ins Exccutiýe officer President and (thief lnc. R\IS'ICchnologics, Marlton. NJ I Officers n 1993,John B. Shaffer became vice president and general auditor in the Audit Department. replacing I Donald J. \IcAnenv, who retired. In the Check Operations Department, Arun Jain was promoted to assistant rice president. Henri- T. Kern, assistant%-iCC president, took charge of Check ProcessingOperations, and assistant vice president Kevin J. McCabe took charge of the Check Adjustments Division. In the Department of Credit, Examination, Supervision and Regulation, the following changeswere made: Michael E. Collins, vice president, assumed responsibility for Financial Institutions Surveillance and Support Services and for the Automation function. Louis N. Sanfclice, vice president, assumed responsibility for International Examinations, and Stephen M. Hoffman accepted the position of assistant director at the Board of Governors. In the Legal Department, Jeanette Paladino was promoted to assistant counsel. Edward G. Boehne President Michael E. Collins Vice President William H. Stone, Jr. E:firstVice President Robert A. Dobie \icc President Donald F. Doros Executive Vice President Patrick L. Donahue Vice President Edward J. Coia Senior Vice President William Evans, Jr. Vice President Thomas K. Desch Senior Vice President and Lending Officer Joanna H. Frociin , Vice President and Check Product Manager Eileen PAdezio Assistant Vice President Peter `I. DiPlacido Senior \ icc President Jem- Katz Vice President John G. Bell ResearchO iccr Richard \V. Lang Edward M. Mahon Vice President and General Counsel Gerard A. Call-mm Assistant Vice President and Planning Officer Frederick M. Manning Shirley L. Coker Assistant (: cninscl Senior Vice President and Director of Research Ronald B. Lankford Senior Vice President D. Blake Prichard Senior Vice President Robert .I. Bucco \ice Prc, ident J. Wau-ren Bowman, .Ir. Vice President ® Vice President and CommnuinityAffairs Ofticcr Stephen A. Meyer Vice President and Associate Director of Re, carch Louis N. Sanfelice Vice President John B. Shaffer Vice President and General Auditor MIilissa M. Tadeo V Ice President Herbert E. Taylor Vice President and Secretary \ish P. \iswunathzui I)cpurN- Check Product \Ianal-lcr Theodore \ 1. Crone Assistant Vice President and Economist Dean Cmushore Research( )nicer and hconoI1 t John J. Deibel assistantVicc President Robe NT rt Downes,Jr. As, ji tansVice President JohnV. Heelan International ExaminationsOfficer Eugene E. Hendrzak Assistant Vice President JoanM. Immel Examination ReviewOfficer Arun Jain Assistant Vice President T. Kern ' Assistant Vice President Alan an L. Ejel Vice President Man_ M. Labaree Assistant General Auditor Thomas P. Lambinus ant \Vicc President in J. McCabe Ass, Assistant Vice President Joseph I \IeCai, Administrati\-e n Sen ices Officer Alice J. Menzano Disaster-Recovery Planning and Quality- Assurance Officer Loretta J. Mester Research Officer and Economist Edward Morrison s-,stems Development Officer Camille MI. Ochman AssistantVice President Jeanette Paladino _AssistantCounsel Patrick M. Regan Vice President .\ssistant t; d%-. -,u-d G. Rutizer :lssistant Vice President Sherrill Shaffer Assistant Vice President and Economist Itiehm-d A. Sheaffer Vicc }'residcnt :\., istant Ronald R. Sheldon Assistant Vice President Marie Tkaczyk Assistant Vice President Sharon N. Tomlinson Assistant Vice President Thomas L. Tweedale Assistant Vice President Annie R. Ward Operations Officer Elizabeth S. Webb Assistant Counsel Bernard M. Wennemer Assistant Vice President Anthony J. White Officer Financial Services Richard A. Valente Audit Officer Councils Advisory Bank's four advisory councils include representatives from many of the Third District's leading The industries. The regular meetings between members of the councils and the Bank's senior officers pnn ide a venue for the exchange of important information about local business and the economy. The 1993 members of the advisory councils are listed below. Small Business/Agriculture Adyisory Council aairpuson Lozelle DeLuz President DeLuz \Ianagcnicnt Wilmington, DE Cbnnon Deputy Raymond L. Blew, Jr. President Centerton Nurseries Bridgeton, NJ William R. Carnerer, III Owner Camerer's Farm Jersey Shore, PA G. Wallace Caulk, Sr. President Exchange Tract Limited Woodside, DE John L. Coates President Tri-County Hardware lBerwick, R-1 Arlene Coggins Secretar Coggins Waste Management, Inc. Ocean Cite, NJ I Kernel G. Dawkins President Kernrodco Development and Construction, Inc. Philadelphia, PA 18 C. William Haines President Larchmont Farms Mount Laurel, NJ Tamara M. Ciccioli \Ianager/Measurer Bridgeton Onized FCt Bridgeton, NJ Allan Hawkins Owner Hawkins Cleaning Service Philadelphia, PA Linda Dolinger 'Measurer/\lanager Capital Health System Ct' Harrisburg, PA William J. Oyler Owner Ovler's Farm Biglerville, PA Albert F. Farnschlader John C. Simms, A'MMD Burnt dill Veterinary Center Shippensburg. PA Gregory L. Sutliff President Sutliff Chevrolet Company Harrisburg, P-A Credit Union Advisor- Council Chairman Anthony LaRosa President and CEO Police and Fire FCU Philadelphia, PA DeputyChairman I)avid Baker President lark Educational FCt York, PA Susan Bicking CEO Mobil 1167 FC[' Paulsboro, NJ President and CE0 Lehigh Valley Postal Employees FCU Allentown, PA Linda Fischer CEO Barrington FCV Barrington,NJ Andrew L. Jaeger CEO and Manager NJDOI' C[ Trenton, NJ ChristineM. Kacznlýuvzvk Manager DEXS'I'A FCU ilnlin"gton, 1)1 Roger base President Dover ECU Dover, DE Thomas S"ierzýPresident and CEO timithhlinc Employees FCl Philadelphia. PA John 1). t n. ugst President Franklin Mint FCI Media, PA Thrift Institution AdvisotlCouncil Chairman Edward J. Molnar President : and CEO Har1ey-sN-ille Savings Bank Harley-sN-ille, P-\ Cepu Chairman William H, Kiick Prcý'ýIcnt and CEO First Federal Savings Bank Hanover, P--\ Gregor. DiPaolo ExecutiN e Vice President SouthJersey Savings and Loan Association 'lurnersville, NJ Ste\, G. pre,.en H arrisit: President Artisans. and CEU Savings Bank Wilmington, DE John D. Hollenbach President first Saý-in« perkasie, ,s Bank p.\ HerbertHOt president nsby CapeSavings Bank,SLA C PC\la. Court House.NJ R. Hostler president kcliarice and (: 1=. 0 Savings Association : na, IA leil ann Roberts . President 1 irst Tina 1)o\%-ningtn`ý. n1Savings Bank PASA Patricia A. Saunders SecretarMorton Savings and Loan Association Morton. PA Joseph J. Tryon Presidcnt I Iatboro Fcdcral Savin,,,s Hatboro, P:1 Thomas H. Nan Arsdale President Franklin First Savings Wilkes-Barre, PA Craig W. ) ates President Farmers' & Mechanics' Savings Bank, SL\ Burlington. NJ CommunityBank Advisory Council Chairman Paul 1 1. Myl-wider President and CEO I)clamarc \ationai Bank (; eor,,ctOvvn. DE DeputyChairman Ray L. \\ioIfe Presidcnt and I: armcrs Tust (omhany Carlisle, R\ J. Gerald &vewicz President and CF() The First National Bank cif Renwick Bcnwick. PA S. Eric Beattie President and CEO Nazareth National Bank Nazareth, PA Frederick W Bisbee President and CEO First National Trust Bank Sunbury. PA Betsy Z. Cohen Chairperson and CEO The Jefferson Bank Haverford, PA Joseph H. Doble President \Iullica Hill Farmers National Bank of Mullica Hill, NJ Owen O. Freeman, Jr. Chairman Coll, mon«'ealth State Bank Newtown, PA John H. O'Neill President and CEO Mount Holly State Bank Mount Holly. NJ Marelin K. Sites Executive Vice President \lercersburg First National Bank of Nlerccrsburg, PA Harold L. Slatcher President County Bank Rehoboth Beach. DE Harry W Van Sciver President Burlington County Bank Burlington, NJ Statement of Condition 1991 1993 ASSETS Goldcertificate account: drawing Special rightscertificates: Other cash-coin: Loans andsecurities: Discounts and advances Federal agency-obligations ['. S. government securities 7btalloansand securities Cash items in processof collection Bank premises-net Operating equipment-net Foreign currencies Interest/premium on securities Other assets: All other S399,000,000 303,000,000 lxxl y3-47.1)lXl. 303A1xl.0l 1-1,909,088 2,3. 2 1.,ý(4 -3 ; ()lSSO.lxx' 1(r4.746,28,97933(ý . $9535 ýh-' . 7,675,000 173,784,193 12,582,512,457 S12,765.971,650 69.101 ; 45 09.) ýý '4y' 5444,950,469 47,217,110 20,629,762 857,ti; 5,500 270,021,524 '; 4 166.504-- I 2.90,04X) 1.1,991,019 Interdistrict settlement account: 9 'iti. ib ý 920,991.595 - ,x "totalassets S16,059.5ISO 17 1-0 , 14.''(,. n_ Noteliabilities: Federal reserve notes 51i, 0?i, 9i 1,909 $11i-11,: 10"1`I Deposits: I)chositor\ institutions' rescnc. Forcign LIABILITIES AND CAPITAL ACCOUNTS All othcr iOtnl deposits Other liabilities: $2.260.673,190 Deferred availabilitc cash items All Other 7r'itnlliabilities Capital accounts: ' In, luddsq(/le ri] doe'io Ii'i. c rv 43 US12,54) 113 ),614,769 2.20-1.l(xti"Xý i, ý(ý ý" ýý ýý '_'(1"iýý 1ý i(kti"(ý'ý,ý 1ti,=. h_'"O Sl5,8,3 2,0%2,41 i Capital Surplus iOtal liabilities 2.248,443.648 5.33i. b01) (,,ti91,942' 113,722,, S(M) 113,i 22.ti1O and capital 51 n, lº5ka,; 1S,Il 1; 11i "' 1ý'ýXý 117, Earnings Expenses and 1992 1993 Current earnings: From V. S. government securities From discounts. advancesand miscellaneous sources From services to depository institutions Total current earnings Netexpenses: Operating expenses dedumm- rcimhun. ihlc c\lpcmc, .Mier Cost of earningscredits Total net expenses Current Additions tocurrent netearnings; ºiet earnings (Tairaon alc, of o%crnmcnt sccuritics (rain on foreign currency transactions \lisccllancous non/operating income 76ta1additions Deductions from netearnings;current I. Ossun tiorcign currency transactions Miscellaneous non/operating expenses I'o. t retirement benefit obligation :Assessmentby the Board of (; oycrnors: Boardexpenditures FederalReservecurrency Total deductions Ne1odditionskdrducrions) Nt't 'i"n'ufiOn ofearrings: earnings ºufon pýýnxnt t., l ý. 'Ircn. unl . I )1% l, icn,i, I,.ud Paid to V. S. Trca%urý Rctaincd to equate surplus to capital del earrings .I "'udes (-O-clOf urrr: r; '. " r.: . .... $598,122,497 48,571,087 39,574,727 $686,268,311 $77,310,333 23,892,111 ; 3(}4,183.274 85.651,898 41.061.467 S630.996,639 1?7 5i0.SOS. 19.217.932 $101,202,444 6.059 ý90.0? $585,065,867 $540.970.580 $1,372,820 10,195,174 S3.494.576 0 9.953 14,126 $11,582,120 0 1,654,422* 33,089,175 5,218,700 12,787,760 0.57 $52,75o, ($41,167,937) $543,897.930 $6,873,347 540,61903 (3,595,100) $3.504.529 4?. 716.399 1,468,1ii* 0 5,135.i00 10.348.66? $59.869.416 6.. ý ; 4.4, hii\nýa; S6.8i6.095 46i,ii?. 198 1?.?1i. -100 S4-4 $543,897.930 887 1 1,! 1ý . Operating Statistics 1993 1993 1992 199 Volume Valu Dollar SERVICES TO DEPOSITORY INSTITUTIONS Volume Wiretransfers of funds: ACH: 5.8 million transfers Government Commercial Check processing: U.S. Government All others DollarValue $15.3 trillion 43.9 million items $64.6 billion 120.8 million items S47 billion 21.4 million checks $23.8 billion 1.2 billion S1.7 trillion Currency received and counted Coin received and counted Loans to depository institutions: 943 million notes 101 thousand bags 715 $16.9 trilli111 37.3 million $ä?.2 b1111 ICCIIIS 111.2million $313.2 hillioýý items 22.6 million IlioI $,27.91)i11io checks checks Cashoperations: 5.3 million transfers 1.2 billion ý $1.4 rrillioýý i checks 511.9 billion I billion $13.1 hilh0'n notes $67.3 million 126 thousand bags S830million $174 mi'hOII ýI 1?47 $2.7bill'oo $14.3 trillion' t SERVICES TOU.S.TREASURY book Electronic entrytransfers: bonds Savings issued: Food stamps redeemed: 997.1 thousand transfers $13.5 trillion 9,87.9thousand transfers 2.5 million bonds 5514.3 million 5.2 million bonds 145.4 million Coupons S751.1 million 162.4million $91.1W11110 $ti13 n)illion BANKLIBRARY FEDERALRESERVE ýýýYlil 131111'iA'ýI41i1`I Designed by \(; S Associatcs PhototýmPby by H. Mark Weidman Project Coordination by RossanaMancini Printin: t thc 1"CdcLa1 Rc, cr, c R.iRE. mf1'hiladclphia