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FEDERALRESERVE BANK OF PHILADELPHIA ANNUAL REPORT1982 Federal Reserve Bank of Philadelphia Annual Report 1982 CONTENTS President's Message Check Services Cash Services Wire Transfer Services Securities Services Business Planning and Development Directors Officers Executive Changes Statement of Condition Earnings and Expenses Summary of Operations 3 4 6 8 10 12 14 15 16 18 19 20 Throughout much of its history the Federal Reserve provided free services, mostly to member banks. By 1982 the System was charging fees for those services that are not unique responsibilities of a central bank and making them available to all depository institutions. During the year this Bank was adjusting its operations and policies to this new "pricing" environment. This Report highlights a number of our most important services, as now constituted, and some of the people who keep them operating efficiently. PRESIDENTS MESSAGE I believe that 1982 will be remembered as one of the most challenging years in the seven decades of the Federal Reserve. Monetary policy had to walk a narrow line between nourishing recovery from a prolonged recession and stirring up fears of renewed inflation. The difficulty of this task was increased by deregulation and the changes it brought in depository instruments. Nevertheless, heartening progress was made against inflation and interest rates came down dramatically. Even though unemployment was at post-war highs, the elements of recovery seemed to be in place as the year ended. Legislation, both on the state and national levels, had particular impact on this Bank in 1982. Delaware's law encouraging out-ofstate holding companies to set up banks there resulted in the birth of The Monetary Control Act of 1980 required the Federal Reserve to price services and make them available to a broad base of potential users. Congress also charged us to match the costs and revenues from priced services and this Bank undertook a variety of 12 such institutions. Pennsylvania passed a new liberalized branching cost containment measures ranging from new extensive automation through an increased work week to law and many major holding companies announced intentions to old fashioned vigilance. In order to become more sensitive to meeting merge. Since Reserve Banks examine all bank holding the needs of our customers, we created a Business Planning and Development Department in 1982. companies and approve their mergers these new state laws increased substantially the workload of our Supervision and Regulation Department. It combined existing activities such as field visits with special functions such as market research and pricing analysis. Although it is too early to say how successful the Bank will be in its new pricing environment, I am confident that we are making significant progress. One of the things that pleases me most is the way thinking and attitudes have changed and our employees have stretched out to become more sensitive and service oriented. I believe that 1982 also will be remembered as the year this Bank sharpened its organizational focus and enhanced the strengths, talent and flexibility needed to make the most of our challenges. Pý. ý "ý. , Edward G. Boehne President 3 CHECKSERVICES Since its inception, the Federal Reserve System has worked to 0 make the nation's payments mechanism more efficient. A major objective all along has been to reduce the time required to process and collect checks and make funds available for use as early as possible. We continue to strive for these goals. The Federal Reserve Bank of Philadelphia offers a full line of check programs for the processing, collection, and settlement of checks drawn on depository institutions throughout the Third District and the nation. Our service options range from a mixed cash letter service, which allows depository institutions to deposit checks with little or no presorting, to a fine-sort program, which requires a significant amount of sorting before checks can be deposited ready for presentation to the payor institution. Depository institutions select the appropriate check services based on their volume, location and sorting capabilities. A series of pick-up points around the District are used to transport checks to our processing facility. In response to market demands and to improve the payments mechanism, the Federal Reserve 4 ii ý a The Federal Re,erve's Automated Clearing Hnu, e network is a way to make payments with magnetic tape and electronic transmission instead of paper checks. Led by commercial paynments entries, ACH transactions in the Third District increased 30 percent in 1982. First vice president Richard L. Smoot (seated), executive vice president lohn D. Johnson (right), and senior vice president William H. Stone, Ir., (left) are part of the management team that is guiding the Bank in its new business environment. Systemdeveloped a number of major improvements in its check services during 1982. These changes, which are to be implemented in early 1983, will allow the Federal Reserveto collect many more checks overnight than has been possible previously, while allowing depositing institutions to deliver their checks to us at a later hour. Theseimprovements should be most significant for depositors attempting to collect checks drawn in other reserve districts. Such service improvements were made possible by a restructuring of the Federal Reserve's interdistrict nationwide network for clearing electronic payments between transportation system (ITS). ITS is an air transportation network financial institutions. Automated comprised of private carriers under contract to deliver checks among Federal Reserve offices. It has been redesigned into a network of hub and spoke cities which greatly expedites nationwide check clearing by making efficient use of air transportation. In addition to its conventional check collection services, the Federal Reservealso operates a Clearing Houses provide a means for exchanging debit and credit entries on magnetic tape or by online transmission. Recurring items such as social security and other government payments, commercial payrolls, mortgage payments, utility bills, and insurance premiums can be processed through ACH. Third District ACH volume surged by 30 percent in 1982 to a record 13.5 million entries. 5 CASH SERVICES As a central bank one of our responsibilities is to insure that the public, through its depository institutions, has a sufficient supply of currency and coin to meet its transaction needs. To accomplish this, our Cash Department pays out new and reusable currency and coin to depository institutions and accepts for deposit those amounts which exceed immediate needs. This Bank's currency processing volumes doubled in the last five in processing and recirculating currency has improved significantly. In 1982, we years and productivity completed a two-year program to replace manual sorting and counting equipment with new highspeed automated systems. Seven currency processors, designed by Recognition Equipment Incorporated, were installed and now are being used to process about two-thirds of our currency volume. This proportion will increase gradually to include all currency. Notes speed through the special REI sensors at a rate of 20 per second. Each note in a deposit is counted and checked for denomination, genuineness and fitness. Any wrong denominations and counterfeits are sorted out, and those notes not fit for reuse are automatically destroyed. Notes that can be reused are packaged for recirculation. Thesenew systems not only have expanded our processing capabilities, but they have greatly improved the efficiency of currency destruction by automatically shredding unfit notes. Becauseof their higher level of quality control, the machines will improve the quality of currency that is put back into circulation. This is of particular benefit to the public in general and to depository institutions that make widespread use of automated teller subject to pricing. Feesfor this service were initiated in January 1982; it was the last of our major services to be priced. As 1982 ended, our cash personnel were exploring new ways to improve our services including offering a wrapped coin service and the expansion of our quality assuranceprograms. machines which require a consistent and high quality currency to function properly. The procedures of issuing, sorting and verifying currency are performed for the public good and therefore are not priced. Only the costs incurred by this Bank in contracting with private armored carriers to transport cash to and from depository institutions are High-speed, automated currency processors are replacing manual equipment to provide greater efficiency in our fastgrowing currency operations. The new systemswill have the added benefit of improving the quality of currency that is returned to circulation. .... ý'ý ýý ý-ý d ý1 .. ý ý, ý_ _ý °: ý.=:ý __._:rý.--ý-ý, _ýICeý"ýý"ý%r \;; .. 'ýý ýý:. . reýF ý 3ý_v . WIRETRANSFERSERVICES The Federal Reserve wire transfer services can be a vital tool in managing a financial institution's cash and reserve positions. By means of FedWire, funds can be transferred in minutes from an account with the Fed to the account of another depository institution in this or another Federal Reserve District. Each business day more than 200,000 wires totalling over $350 billion are transferred over FedWire in the nation. Transferscan be originated in one of two ways: off-line, using the telephone, or on-line, using either a terminal device linked to the Federal Reserve'scommunication switches or by a computer-tocomputer link. On-line transfers require no manual processing en route. This enhances quality and, for institutions with sufficient transfer volumes, reduces operating expenses. The pricing of wire transfer services has had very little discernible effect on demand during the two years since it began. Demand has been growing in the 20 percent range in recent years and this trend continued in 1982. The volume of transactions handled through our wire transfer facilities grew from 1.6 million in 1981 to 2.0 million in 1982, or by 25 percent. The dollar value of these transactions 8 [his is our new communications network controller which will he operational in 1983; it is designed to provide improved and expanded communications services to Third District depository institutions. The new messageswitch facility will interface with the Federal Reserve's expanded FRCS-80 communications network. increased 26 percent in the same period. To insure that the Federal Reserve can continue to serve the growing funds transfer needs of the financial community, the System in 1982 unveiled a new and advanced communications network known as FRCS-80.The previous FedWire system, which had been in operation since 1970, transmitted all transfersthrough a single switching center located in Culpeper, Virginia. FRCS-80 utilizes a series of interconnected communications processorswhich connect each Federal Reserve Bank with two or more other Reserve Banks. At this Bank a new communications network controller, which will allow us to operate with the new expanded Systemwide communications network, will be operational technological in 1983. These changes will enable us to deliver more and better services to our wire transfer customers in the future. Funds and securities can be transferred anywhere in the country over the Federal Reserve's nationwide communications network. Demand for FedWire services has grown rapidly in recent years and more and more Third District institutions are gaining on-line accessto the network. SECURITIES SERVICES The Philadelphia Reserve Bank offers a wide range of securities services. Functions performed as an agent for the U. S. Treasury are not generally priced, while services provided for the convenience of depository institutions have carried fees since October 1981. The Federal Reserve Banksact as the Treasury'sagent in issuing, servicing and redeeming U. S. Government bills, notes and bonds. Declining interest rates during 1982 caused some slackening in the demand by individuals for new Treasury bills. However, a major effort to automate the Bank's savings bond processing function is expected to produce substantial efficiencies in that area in the years ahead. Through the Bank's trading facilities an institution can buy or sell fixedincome securities in the secondary market either for its own account or on behalf of its customers. This service was expanded in 1982 to include the purchase and sale of corporate and municipal securities; prior to this time trading was limited to Treasury and Government Agency obligations only. Our trading desk obtains three or more quotes to get the best possible price. Completed transactions are debited or credited to the institution's reserve or clearing account at this Bank and 10 This Bank will buy or sell fixed-income securities in the open market and maintain them in safekeeping for depository institutions; such services are available at a fee. There is no charge for functions performed in our capacity as fiscal agent for the U.S. Treasury. When interest coupons on securities held here in safekeeping mature, they are clipped and presented for payment. the securities are deposited to or withdrawn from its safekeeping account here. instruments are stored in definitive (certificate) form in automated retrieval files in our vault. As interest coupons on these instruments mature, the Bank presentsthen for payment and Institutions also may elect to hold securities-both their own and their customers'-in safekeepingat the Bank. Thesefacilities are available for general safekeeping requirements or for holding against Treasury tax and loan accounts, public funds deposits and discount window borrowings. entry form or by means of a The form in which a safekeeping account is held depends primarily on the type of securities involved. Municipal and corporate computer entry in our records. Interest on these instruments is automatically credited when it cones due, as is the face value when the instrument matures. makes the appropriate entries to the depository institution's reserve or clearing account. Treasury and Government Agency obligations are held only in book- In 1982 the Bank inaugurated a new automated securities system which enables users to exercise a maximum degree of control over their book-entry accounts. With the new system, institutions that are linked to this Bank with electronic message terminals are able to deposit and withdraw securities directly from their accounts, transfer securities to other depository institutions, and receive immediate confirmation of all transactions. The system eliminates the need for dealing with intermediaries which makes these transactions more immediate and secure. 11 BUSINESS PLANNING AND DEVELOPMENT As is appropriate in a new business environment, the Bank reviewed its management structure and processes in 1982 and made some modifications. Many of these changesshould put us in a better position to develop and deliver services that are responsive to market needs. One important organizational change was establishment of the Business Planning and Development Department headed by senior vice president, Ron Watson. This new department combined activities previously performed by Operations, Planning and Research and the Bank Services departments, and added new responsibilities for marketing. Roll ýVaboflscatt'd 11aß Ila1T? CU ýc'HIUl 1Lt')Jlt"Jucnr `; t' 11) L11,11; of the newly formed BusinessPlanningand Degelopment Department in 1982. The Bank'scustomerservice effort was given new strength with the appointment of vice president Terry O'Brien (left). Under Ron's direction this new organization was divided into three areas: (1) business planning and development which is responsible for strategic planning, new product development and quality assurance; (2) marketing services which encompasses market research and and (3) financial communications; The Bank's new logo will appear on our communications printed materials. and services which includes the account management program and customer services. The Bank also acquired special new expertise. A vice president with extensive experience in the private sector, Terry O'Brien, was 12 qIJORESERVE FEDERAL BANKOF PHILADELPHIA appointed to oversee our marketing and financial services efforts, and additional personnel were brought in to provide specialized skills in these areas. Among the projects already undertaken by the marketing group has been the development of a unified identification program for the Bank. This includes the design of a new Bank logo which you see here, and on the cover of this report. The logo eventually will appear on all of the Bank's comniunicatiorns and printed materials. Through their one-to-one contact with IinancidI executives, account managers provide the personal link between this Bank and depository institutions. Shown here (left to right) are our account managers Ed Fox, Ann Dwyer, Ed Ellis, Craig Obeck, and Pat Donahue. In the new BusinessPlanning and Development Department, Mary Labareeis managerof the marketing supportdivision and Bill Herbst overseesthe financial servicesand customerservices functions. i; DIRECTORS Chairman Robert M. Landis, Partner Dechert, Price & Rhoads Philadelphia, Pennsylvania Deputy Chairman Nevius M. Curtis, President and Chief Executive Officer Delmarva Power & Light Company Wilmington, Delaware George E. Bartol, III, Chairman Hunt Manufacturing Company Philadelphia, Pennsylvania JoAnne Brinzey, Cashier and Chief Executive Officer First National Bank at Gallitzin Gallitzin, Pennsylvania Eberhard Faber, IV, Chairman and Chief Executive Officer Eberhard Faber, Inc. Wilkes-Barre, Pennsylvania Richard P. Hauser, Chairman and Chief Executive Officer John Wanamaker Philadelphia, Pennsylvania Roger S. Hillas, Chairman and President Provident National Bank Philadelphia, Pennsylvania Harry A. Jensen, President and Chief Executive Officer Armstrong World Industries, Inc. Lancaster, Pennsylvania Douglas E. Johnson, Chairman and President Ocean County National Bank Point Pleasant, New Jersey Member of the Federal Advisory Council John H. Walther, Chairman New Jersey National Bank Trenton, New Jersey 14 January 1,1983 OFFICERS Edward G. Boehne President Richard L. Smoot First Vice President Konstanty G. Adack Executive Vice President John D. Johnson Executive Vice President Thomas K. Desch Senior Vice President Donald F. Doros Senior Vice President James F. Gaylord Senior Vice President Hiliary H. Holloway Senior. Vice President and General Counsel Richard W. Lang Vice Presidentand Associate Director of Research Donald J. McAneny Vice President and General Auditor Lawrence C. Murdoch, Jr. Vice Presidentand Secretary Terence B. O'Brien Vice President Alan L. Kiel Staffing and Development Officer Robert H. Klein Assistant Vice President Thomas B. Lambinus Budget Officer Frederick M. Manning Assistant Vice President, Assistant Secretary, and Community Affairs Officer Lawrence C. Santana, Jr. Vice President Janice M. Moulton Jack P. Besse Assistant Vice President Joseph J. Ponczka Examining Officer James E. Burns Aris Protopapadakis ResearchOfficer and Economist Financial Accounting Officer ResearchOfficer and Economist James M. Cleary Technical Services Officer Edward G. Rutizer Examining Officer Edward J. Coia Assistant Vice President Louis N. Sanfelice Assistant Vice President Barry J. Cummings Data Communications Officer John B. Shaffer Assistant General Auditor Robert A. Dobie Assistant Vice President Ronald P. Sheldon Data Services Officer Ronald D. Watson Senior Vice President John M. L. Gruenstein Charles J. Sullivan, Jr. Assistant Vice President Peter M. DiPlacido Vice President Judith H. Helmuth Operations Planning and Control Officer Alexander A. Kudelich Senior Vice President Donald J. Mullineaux Senior Vice President and Chief Economist William H. Stone, Jr. Senior Vice President James B. Duffy Vice President Ronald G. Foley Vice President Stanley J. Forst Vice President Research Officer and Economist Eugene E. Hendrzak Statistical Officer Jerry Katz Compensation and Benefits Officer and Assistant Secretary Vish P. Viswanathan Assistant Vice President Elizabeth S. Webb Assistant Counsel January 1,1983 15 EXECUTIVE CHANGES The Federal Reserve Board of Governors designated Robert M. Landis, partner in the Philadelphia law firm of Dechert Price & Rhoads, to be Chairman of the Board of the Philadelphia Reserve Bank for 1983. He succeeded Dr. Jean A. Crockett, professor of finance at the Wharton School of the University of Pennsylvania in Philadelphia, whose term as a director expired at year-end. Nevius M. Curtis, president and chief executive officer of Delmarva Power & Light Company, Wilmington, Delaware, was named Deputy Chairman for 1983. Mr. Curtis also was appointed to a three-year term as a Class C director of this Bank. An election for two directors was held in the fall. JoAnne Brinzey, cashier and chief executive officer of The First National Bank at Gallitzin, Gallitzin, Pennsylvania, was elected a Class A director by small member banks in the Third District. She succeeded Donald J. Seebold, president of The First National Bank of Danville, Danville, Pennsylvania. Eberhard Faber, IV, chairman and chief executive officer of Eberhard Faber 16 Inc., Wilkes-Barre, Pennsylvania, was elected to a second consecutive term as a Class B director by large member banks. The Board of Directors of this Bank reappointed John H. Walther, chairman and chief executive officer of New Jersey National Bank, Trenton, New Jersey, to represent the Third District on the Federal Advisory Council in 1983. Mr. Walther also served in this capacity in 1981 and 1982. The following changes in the Bank's official staff were made in 1982. Donald F. Doros was promoted to senior vice president of computer services. William H. Stone, Jr., was named senior vice president of check operations; he had been vice president of bank services. Ronald D. Watson was appointed to the new position of senior vice president for business planning and development. Terence O'Brien joined the Bank's official staff in October as vice president for marketing. Edward J. Coia moved up from securities officer to assistantvice president in the fiscal operations department. In check operations, Robert H. Klein and Charles J. Sullivan, Jr., were promoted to assistant vice president. Eugene E. Hendrzak moved up from manager to statistical officer in the accounting department. In November the following promotions were announced to become effective January 1,1983. JamesB. Duffy was named vice president of cash operations; Richard W. Lang was promoted from researchofficer to vice president and associate director of research; and Stanley J. Forstwas promoted to vice president, automation planning, in the computer services department. New appointments to the official staff were JamesE. Burns, financial accounting officer; Thomas P. Lambinus, budget officer; and Ronald P. Sheldon, data services officer in computer services. Assistant vice presidents D. Russell Connor and Paul E. Kirn, Jr., and statistical officer Edwin C. Lodge retired from Bank service, and GLIV H. Edwards resigned his position as senior vice president of computer services. FINANCIAL SUMMARY STATEMENTOF CONDITION ASSETS December 31,1982 Gold certificate account .................... Special drawing rights certificates ............ Other cash ................................ Loansand securities: Discounts and advances .................. Federal Agency obligations ................ United States Government securities....... Total Loans and Securities $ 554,000,000 225,000,000 13,379,786 December 31,1981 ý 19,063,240 100,470,000 297,836,122 $4,917,662,751 ............. 213,165,000 326,573,208 4,571,411,08 5 4,519,356,629 . 531,000,000 141,000,000 $5,111,149,293 Other assets: Cash items in process of collection ........ Bank premises-net ..................... Operating equipment-net ............... All other ................................ Interdistrict settlement account ............. Total Assets ......................... 299,075,089 51,170,428 7,884,894 334,446,700 363,665,237 399,777,506 51,583,442 8,238,242 321,476,223 - 255,365,925 $6,766,284,885 $6,327,922,021 $5,560,027,923 $5,287,526,407 815,918,349 0 8,610,000 21,204,701 664,584,428 0 . LIABILITIES & CAPITAL ACCOUNTS Note liabilities: Federal Reservenotes .................... Deposits: Reserveaccounts of depository institutions .................. U.S. Treasury-general account ........... Foreign ................................. All other ................................ Total Deposits ....................... Other liabilities: Deferred availability cash items ............ All other ................................ Total Liabilities ...................... Capital accounts: Capital paid in .......................... Surplus ................................. Total Liabilities and Capital Accounts .............. 18 ý 845,733,050 172,841,270 68,101,342 12,122,000 9,660,680 b 686,367,108 159,161,850 88,893,456 S6,646,703,585 $6,221,948,821 59,90,650 59,790,650 52,986,600 52,986, $6,766,284,885 $6,327,922,021 EARNINGSAND EXPENSES 1982 1981 From U.S. Government securities .................... From discounts, advancesand miscellaneous sources ............................ From services to depository institutions ...................................... $524,668,313 $549,249,289 28,640,328 32,967,007 14,867,390 5,626,703 Total current earnings .......................... $568,176,031 $587,842,999 45,509,325 4,524,082 1,392,678 41,171,010 3,968,335 174,136 $ 51,426,085 $ 45,313,481 $516,749,946 $542,529,518 Current earnings: Net expenses: Operating expenses(after deducting reimbursable or recoverable expenses) .............. Federal Reservecurrency ........................... Cost of earnings credits* ............................ Total net expenses Current net earnings ............................. .................................. Additions to current net earnings: Gain on sales of Government securities ............... Miscellaneous nonoperating income .................. Total additions 2,806,247 631 (4,874,159) 458,269 2,806,878 $ (4,415,890) 2,579,800 6,134,101 46,687 2,402,000 11,627,690 142,963 8,760,588 $ 14,172,653 5,953,710 18,588,543 510,796,236 523,940,975 $ ................................. Deductions from current net earnings: Assessmentfor expensesof the Board of Governors .............................. Loss on foreign currency transactions ................. Miscellaneous nonoperating expenses ................ Total deductions Net deductions ............................... $ ...................................... Net earnings before payment to U. S. Treasury Dividends paid ...................................... Paid to U.S. Treasury (interest on Federal Reserve notes) .............................. Transferred to Surplus, additions ....................... '\t°\% t3tcý, r, r\ in I'rt; '. 1L"e 111,til V)": m! Rc'n0+t>ncm. ei till, the c, rlriirm Lu mm-', ý reüL u"rri i'\ \ i.?ýtituhiut. $ 3,393,998 $ 2,798,462 500,598,188 6,804,050 $514,110,063 7,032,450 $510,796,236 $523,940,975 tern a<3 cieductiun from current net earnings under 19 SUMMARY OF OPERATIONS OPERATING STATISTICS MILLIONS OF DOLLARS Loans to depository institutions ............................. Currency received and counted ............................ Coin received and counted ................................ Checks handled: U. S. Government checks ................................ Postal money orders .................................... All other .............................................. Issues, redemptions and exchanges of U. S. Government securities ............................. Transfers of funds ......................................... Food stamps redeemed .................................... 1982 S 20,309 8,923 147 1981 $ 17,192 7,572 142 49,388 306 315,351 44,420 301 342,785 789,506 2,267,636 443 205,091 1,806,570 484 THOUSANDS OF ITEMS PROCESSED Loans to depository institutions ............................. Currency received and counted ............................ Coin received and counted ................................ Checks handled: 1,750* 780,200 907,100 2,351 * 688,500 891,800 U. S. Government ...................................... Postalmoney orders .................................... All other .............................................. Issues, redemptions and exchanges of 34,300 6,200 605,900 33,900 6,200 655,600 14,200 2,000 118,600 18,800 1,600 134,900 U. S. Government securities ............................. Transfers of funds ......................................... Food stamps redeemed .................................... "Unrounded data 20 4IF'RESERVE FEDERAL BANKOF f'H I LADELPHIA Ten Independence Mall, Philadelphia, PA 19106
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