Federal Deposit Insurance Corporation

55017th Street N W Washington D.C. 20429-9990 Deputy to the Chairman and CFO

August 22, 2017

MEMORANDUM TO: The Board of Directors

FROM: Steven O. App

Deputy to the Chairman

and Chief Financial Officer

Craig R. Jarvill

Director, Division of Finance

SUBJECT: Second Quarter 2017 CFO Report to the Board

The attached report highlights the FDIC's financial activities and results for the quarter ended

June 30, 2017.

Executive Summary

• During the second quarter of 2017, the Deposit Insurance Fund (DIF) balance increased by

$2.7 billion, from $84.9 billion at March 31, 2017 to $87.6 billion at June 30, 2017. The

quarterly increase was primarily due to $2.6 billion of assessment revenue, $251 million of

interest on U.S. Treasury securities, and a $233 million decrease in provision for insurance

losses, partially offset by $450 million of operating expenses.

• The reserve ratio, which is the ratio of the DIF balance to estimated insured deposits, was 1.24

percent for the second quarter 2017, compared to the first quarter 2017 reserve ratio of 1.20

percent.

• During the second quarter of 2017, the FDIC was named receiver for three failed institutions.

The combined assets at inception for these failed institutions were $4.6 billion with estimated

losses of $1.0 billion. The corporate cash outlay during the second quarter for these failures

was approximately $2.6 billion.

• Through June 30, 2017, overall FDIC Operating Budget expenditures were below budget by 5

percent ($53 million). This variance was primarily the result of vacancies in budgeted

positions in the Ongoing Operations budget. In the Receivership Funding budget component,

the variance was aftributable to lower-than-anticipated expenses for outside legal services and

facility-related expenses.
1. Financial Results (See pages 6 - 7 for detailed data and charts.)

Deposit Insurance Fund

For the six months ending June 30, 2017, the DIF's comprehensive income totaled $4.4 billion

compared to comprehensive income of $5.3 billion for the same period last year. This $884

million decline was primarily the result of a $1.2 billion increase in provision for insurance

losses (year-to-date 2017 positive $532 million versus year-to-date 2016 negative $670

million) and a $527 million lower contribution to year-to-date comprehensive income from

unrealized (loss)/gain on U.S. Treasury securities (year-to-date 2097 unrealized loss of $5

million versus year-to-date 2016 unrealized gain of $522 million), partially offset by a $715

million increase in assessment revenue and a $167 million increase.in interest revenue.

• The provision for insurance losses was $532 million for the first half of 2017, largely

attributable to a $683 million adjustment for higher-than-anticipated losses for the current year

failures, partially offset by a $103 million reduction to the receivership's representation and

warranty liabilities and $63 million in unanticipated recoveries by receiverships,

Assessments

During June, the DIF recognized assessment revenue of $2.6 billion. Of this amount, $1.4

billion represented the estimate for second quarter 2017 insurance coverage and $1.2 billion

represented estimated surcharges on banks with $10 billion or more in assets, Additionally,

the DIF recognized a $43 million adjustment for lower-than-estimated collections for first

quarter 2017 insurance coverage (regular assessments: $37 million and surcharges: $6

million), which decreased assessment revenue.

• On June 30, 2017, the FDIC collected $1.4 billion in DIF assessments and $1.2 billion in

surcharge assessments for first quarker 2017 insurance coverage.

II. Investment Results (See pages 8 - 9 for detailed data and charts.)

DIF Investment Portfolio

• On June 30, 2017, the total liquidity (also total market value) of the DIF investment portfolio

stood at $78.8 billion, up $3,5 billion from its December 31, 2016, balance of $75.3 billion.

During the first half of the year, interest revenue, receivership dividends, and deposit

insurance assessment collections exceeded resolution-related outlays and operating

expenses,

• On June 30, 2017, the DIF investment portfolio's yield was 1.35 percent, up 23 basis points

from its 1.12 percent yield on December 31, 2016. The new Treasury securities purchased

during the first half of the year generally had higher yields than the maturing securities' yields,

some considerably higher.

• In accordance with the approved second quarter 2017 DIF portfolio investment strategy, staff

purchased a total of 13 short- to intermediate-maturity conventional Treasury securities, all

designated as available-for-sale. The 13 securities had a total par value of $8.4 billion, a

weighted average yield of 1.49 percent, and a weighted average maturity of 2.73 years.
111. Budget Results (See pages 10 - 11 for detailed data.)

Approved Budget Modifications

The 2017 Budget Resolution delegated to the Chief Financial Officer (CFO) and selected other

officials the authority to make certain modifications to the 2017 FDIC Operating Budget. The following

budget reallocations were approved during the second quarter in accordance with the authority

delegated by the Board of Directors.

• In April 2017, the CFO approved the following budget increases and realignments, primarily

through the realignment of funds from the Corporate Unassigned contingency reserve:

➢ An increase of $2,718,112 to the Outside Services-Personnel expense category of the

Ongoing Operations budget of the Division of Information Technology (DIT). This increase

provided funding for a technical inventory of IT assets at the FDIC's primary and back-up data

centers ($1,200,000), acquisition support to replace the current backup data center

($500,000), and contract support to enhance the existing enterprise architecture ($481,378)

and program management ($536,734) functions.

➢ An increase of $3,872,639 to the Buildings and Leased Space expense category of the

Ongoing Operations budget of the Division of Administration (DOA) to provide funding for the

Virginia Square Loading Dock project ($2,172,639), the Garage Barriers project ($1,300,000),

and a lighting upgrade at the San Francisco Regional Office ($400,000). This increase was

substantiafiy offset by the subsequent return by DOA in June of approximately $3.2 million in

unused budget authority (see below).

➢ Increases of $1,644,845 in the Outside Services-Personnel category and $3,409,328 in the

Equipment category of DIT's Ongoing Operations budget and $565,580 in the Equipment

category of the Ongoing Operations budget of the Information Security and Privacy Staff

(ISPS) to provide funding for second quarter equipment and software upgrades as part of

DIT's and 15PS's ongoing technology refreshment programs.

➢ Realignment of $447,620 from the Outside Services-Personnel category to the Equipment

category of DIT's Ongoing Operations budget for software purchases related to DIT's fT asset

inventory project.

➢ Increases of $1,841,375 to the Outside Services-Personnel category and $461,440 to the

Equipment category of DIT's Ongoing Operations Budget to provide additional funding for the

Office 365 initiative to migrate e-mail and SharePoinf capabilities to the cloud.

• In May 2017, the CFO approved increases of $3,116,205 to the Outside Services-Personnel

category and $1,525,320 to the Equipment category of ISPS's Ongoing Operations budget to

address identified shortfalls in its operating budget and to fund several high-priority security

initiatives.

• In June 2017, the CFO approved the following budget increases and realignments, primarily

through the realignment of funds to and from the Corporate Unassigned contingency reserve:

➢ Realignment of $199,680 from the Outside Services-Personnel category to the Equipment

category of 1SPS's Ongoing Operations budget to provide funding for software subscription

purchases.

3
Y An increase of $127,544 to the Outside Services-Personnel category of DIT's Ongoing

Operations budget to identify options for the migration of e-mail to the cloud for the Office of

Inspector General.

➢ Reallocations among the Salaries and Compensation categories of both the Ongoing

Operations and Receivership Funding budget components of various divisions and offices to

better reflect projected 2017 funding requirements, based upon an analysis by the Division of

Finance of year-to-date salaries and fringe benefits expenses. Due to the large number of

vacancies in budgeted positions resulting from the early 2017 hiring freeze, these reallocations

resulted in net reductions of $8,995,218 in the Ongoing Operations Salaries and

Compensation budget and $166,358 in the Receivership Funding Salaries and Compensation

budget. In each budgef component, these projected surplus funds were realigned to the

Corporate Unassigned contingency reserve.

➢ Increases of $880,678 in the Outside Services-Personnel category and $11,080,000 in the

Equipment category of DIT's Ongoing Operations budget to provide funding for third and fourth

quarter equipment and software upgrades as part of DIT's ongoing technology refreshment

program.

➢ The transfer of $851,512 from the Outside Services —Personnel budget of DIT to the same

budget category in the Office of Communications (OCOM) iri conjunction with the transfer of

responsibility for Internet services and web content operations from DIT to OCOM.

➢ An increase of $473,468 to the Outside Services-Personnel category of DIT's Ongoing

Operations budget to provide funding for an Endpoint Hardening planning project and a sho~tterm solution to address an audit finding on IT security.

➢ A net reallocation of $5,706,725 was made to the Corporate Unassigned contingency reserve

within the Ongoing Operations budget component, largely due to the reduced contract

spending requirements in the Outside Services-Personnel category of the Division of

Resolutions and Receiverships, DOA, and the Office of Complex Financial Institutions, The

reallocation also included other realignments among various expense categories and divisions

and offices. In the Receivership Funding budget component, a small realignment of DOA's

budget was made between expense categories.

Following all second quarter budget modifications, the balances in the Corporate Unassigned

contingency reserves were $26,414,590 in the Ongoing Operations budget component and

$30,524,390 in the Receivership Funding budget component.

Approved Staffing Modifications

The 2017 Budget Resolution delegated to the CFO the authority to modify approved 2017 staffing

authorizations for divisions and offices, as long as those modifications did not increase the total

approved 2017 FDIC Operating Budget. In the second quarter, there were no approved staffing

modifications.

Spending Variances

Significant spending variances by major expense category and division/office are discussed below,

Significant spending variances for the six months ending June 30, 2017, are defined as those that

either (1) exceed the YTD budget by more than $2 million and represent more than three percent of a

major expense category or total division/office budget; or (2) are under the YTD budget for a major

4
expense category or division/office by an amount that exceeds $10 million and represents more than

ten percent of the major expense category or total division/office budget.

Significant Spending Variances by Major Expense Category

Ongoing Operations

There were no significant spending variances during the second quarter in any major expense

category of the Ongoing Operations budget component of the 2017 FDIC Operating Budget.

Receivership Funding

The Receivership Funding component of the 2017 FDIC Operating Budget includes funding for

expenses that are incurred in conjunction with institution failures and the management and disposition

of the assets and liabilities of the ensuing receiverships, except for salary and benefits expenses for

permanent employees assigned to the receivership management function.

There was a significant spending variance in only one of the seven major expense categories during

the second quarter in the Receivership Funding budget component:

• Outside Services-Personnel expenditures were $20 million, or 20 percent, less than

budgeted. This variance was mostly attributable to the Legal Division, which spent $16 million, or

16 percent, less than budgeted, primarily due to the lower-than-anticipated use of outside legal

counsel.

Office of Inspector General

There were no significant spending variances during the second quarter in any major expense

category of the Office of Inspector General budget component of the 2017 FDIC Operating Budget.

Significant Spending Variances by Division/Offices

The Legal Division was the only division or office that had a significant spending variance through

June 30, 2017. It spent $17 million, or 15%, less than budgeted largely due to a lower than

anticipated use of outside legal counsel.

Other Matters

An analysis of 2017 funding requirements for employee pay and benefits was completed in June, in

accordance with the 2017 Budget Resolution. The analysis determined that the costs related to fringe

benefits had been overestimated during the preparation of the 207 FDIC Operating Budget by

approximately $2.5 million in the Salaries and Compensation expense category. This variance was

primarily due to the inclusion of a small general fringe benefit cost increase that had only partially

materialized as of May 31st. The CFO elected not to exercise his delegated authority to adjust the

2017 FDIC Operating Budget to address this variance, since the net projected budget overage is not

material relative to the total budget,

'Information on division/office variances reflects variances in the FDIC Operating Budget.
FDIC_CFO REPORT TO THE BOARD_-Second Quarter 20.17

~~~~illa~~~~'~~~~.~~~-~.~~~~t~ a {S;t~oali~tlLk~yah~+

Cash and cash equivalents

In~stment in U.S. Treasury securities

-- - -

Assessments receivable, net

Interest receivable on in~stments and other assets, net

Receivables from resolutions, net

Property and equipment, net

Total Assets) ~

Accounts payable and other liabilities

Liabilities due to resolutions

Postretirement benefit liability

Contingent liability for anticipated failures

Contingent liability for litigation losses and other

Total Liabilities ~

FYI: Unrealized gain (loss) on U.S. Treasury securities, net

FYI: Unrealized postretirement benefit (loss) gain

Fund Balance ~

3,362 ~ $ 3,374 C $_ (12)! $ 5,510 ; $ (2,148)

75,043 75,076 !

I~

~_`

$

.~ ~_~M

(~

$

(33)" 64,690

(32), 2,254 ~

(59) 309 '

2,184 9,477 ~______

(16) 361 _f ~._.. _ _..

2,032 _ $~ 82,601 ~ $ _

34 ~ 246

~_ 524 ~ 3,775 f _

- I 233 ~ ~_

(1,218); 437 ~

32 j 0 ~ ___

(628) $ 4,691 1$

-

(12)~ 513 I _ .

- ~ X34), ---

10,353

423

90

533 -- C )

,.~. 

X37)

_ 8,_148_

(4)

(1,240)

-- (1)

(320)

35

(1,530)

(497)

$

2,677 2,709:

399 458

8,944 6,760

324 340

90,749 $ 88,717

242

2,535

208

2,011

232 232

117 1,335

35 3

$ 3,789 ---

28 ~_

3,161

16

X26) X26)

87,588 ( $ 84,928 ~ $ 2,660 $ 77,910 $ - 9,678

Quarterly Reserve Ratio and DIF Balance

1.30% ; 590,000

BI.SBB

84,928

i.zs% -_ ____-- - __- _ _ _- - -_ 

-- --

1 24% 83.182

1 380A00' 1.20% -- -------- - - 1.20% 1.20% -- e i

»~91 1.18% n ,o

! ~~°~ is.tzo x.17% s

p~ i.is% - R

3i 72'800 1.13% ~ 

~'~

z

1.10%

1.11% ~o.~is

~.

1.09

170.000

87.589 v

i.osss

i.o~%

- - - -- - --

i.aosb - -, se0000

2Q15 3Q35 4Q15 1Q16 2Q36 3416 4Q16 SQ17 2Q17

~ Reserve Ratto -+-Fund Balance

The DIF reserve ratio

was 1.24 percent for

the second quarter

2017, up from the

first quarter 2017

reserve ratio of 1.20

percent. The

estimated insured

deposits declined by

0.4 percent during

second quarter 2017.

The second quarter

2017 reserve ratio is

at the highest level

since fourth quarter

2005.

215 3Q15 4Q15 1Q16 2Q16 3Q16 416 1Q17 2Q17

Estimated Insured Deposits

(S in Millions)

6,336,141 6,409,239 6,522,38A 6,fi63,048 6,675,378 6,817,020 6,914,661 7,076,788 7, 45,751
_ ~ - tea^. 3~ ~'+,

• •

e -

1 1 1. ~' 11 1

Assessments $ 5,371 $ ,2,737 $

• ~

2,634 $

•

4,656 $

•

715

Interest on U.S. Treasury securities 478 227

~ 

251 311 A ^_167

Other revenue 6 2 4 9 '~ ___ ___ (3)'

Total Revenue $ 5,855 $ 2,966 $ 2,889 ~ $ 4,976 $

J w ~ 

879

Operating expenses 892 442 450 ~ 856 36

Provision for insurance losses 532 765 (233)) (670) ~~ 1,202

Insurance and other expenses 0 0 0 ~ 2 (2)

Total F~cpenses and Losses $ 1,424 $ 1,207 $ 217 ~ $_ 188 $ ~ 9,236

Netlncome 4,431 1,759 $ 2,672 4,788 f~ ~_~p(357)~

Unrealized gain (loss) on U.S. Treasury securities, net (5) 7 (12) 522 f (527

Unrealized postretirement benefit gain (loss) - - 0 - ( -

Comprehensive Income $ 4,426 $ 1,766 $. 2,660 $ 5,310 $ (884)

-. ~. . •

t~ - • -

•- . .-

Cash and cash equivalents $ 881 $ 879 $ 2 ` $ 872 $ 9

Accumulated deficit (124,607) (124,609) 2 (924,618) ___ _ 11

Total resolution equity 882 880 2 872 ~ ~~_~_ _10~

Total re~nue 3 1 2 1 2 i

Operating expenses 0 0 0 2 f ~ (2 _—_-

Losses related to thrift resolutions 0

$

0

1

0

2~ $

(1)~_

-

1

Net Income (Loss) $ 3

$ in millions ~ ~

Jun-17~~ Jun-16 Change Jun-17', Jun-16 Change Jun-1l Jun-~~ c;nange

Total Receiverships 372' 422 (50) - - - 372 422 (50)

'Assets in Liquidation $ 5,421 $ 4,136 $ 1,285 $ 2 $ 2 $ - $ 5,423 $ 4,138 $ 1,285

YTD Collections $ 718 $ 837 $ (119) $ - j $ 2 $ (2) $ 718 $ 839 $ (121)

YTD DividendlOther Pymts -Cash $ 1,402 $ 2,430 $ (1,028) $ ~ - ~ $ - $ - $ 1,402 ., $ 2,430 $ (1,028)

Receivership Assets in Liquidation

Balance at March 31, 2017

(in billions)

Loans &ORE, 

In House

~~ i ~,~ Other Assets,

Securities,

$0.2, 7%

Securitiza /

SSGNs,

$1.2, 40%

Total Portfiolio = $3.0

LICs,

$1.1, 37%

Receivership Assets in Liquidation

Balance at June 30, 2017

(in billions)

Loans &ORE,

Securities, ~$2.5, 46%

$0.2,4% — — - --_._ .__. _

4'~

Securitizations &

SSGNs, In House

a LLCs, 

$1.1,20% Other Assets,

$1.0,19% $0.6,11%

Total Portfolio = $5.4

7
~-.. . '.

~.

6/30/17 12/31/16 Change

Par Value $78,021 $74,430 $3,591

Amortized Cost $78,424 $74,947 $3,477

Total Market Value (including accrued interest) $78,793 $75,335 $3,458

Primary Resenoe ~ $78,793 $75,335 $3,458

Primary Reserve °/o of Total Portfolio 100.0% 100.0% 0.0%

Yield-to-Maturity 2 1.35% 1.12°/o 0.23%

Weighted A~rage Maturity (in years) 1.92 1.60 0.32

Effecti~ Duration (in years)

Total Portfolio 1.85 1.55 0.30

A~railable-for-Sale Securities 1.94 1.66 0.28

Held-to-Maturity Securities 3 not applicable not applicable not applicable

Primary Reserve is the total market value (including accrued interest) of overnight investments, all available-for-sale (AFS)

securities, and held-to-maturity(HTN~ securities maturing within three months.

zThe Yeld-to-Maturity includes the potential yield of Treasurylnflation-Protected Securities (TIPS), which assumes an

average 2.0%annual increase in the CPI over the remaining life of each TIPS.

31n early August 2008, management reclassified all of the DIF portfolio's HTM securities as AFS securities effective as of

June 30, 2008, because the FDIC could no longer assert it had the positive intent and ability to hold its HTM securities until

their maturitydates.

~.

6/30/17 12/31/16 Change

FRF-FSLI C

Book Value 4 $838 $831 $7

Yield-to-Maturity 0.88% 0.40°/o 0.48%

Weighted A~rage Maturity o~rnight o~rnight no change

4 Due to the current short-term nature of this portfolio, its respective Par, Book, and Market Values are identical for reporting

purposes.

~. -

6/30/17 12/31/16 Change

Book Value 5 $8,047 $8,746 ($699)

Effecti~ Annual Yield 0.85% 0.58°/o 0.27%

Weighted Average Maturity (in days) 43 78 (35)

5 Due to the short-term nature of the NLF portfolio, its Book and Market Values are identical for reporting purposes.
DEPOSIT INSURANCE FUND Strategy for the 2nd Quarter 2017

Purchase up to $14 billion (par value) of Treasurysecurities with maturity dates

between September 30, 2017, and December 31, 2022, subject to the following

additional provisions: all newly purchased securities will be designated as availablefor-sale; no more than $2 billion (adjusted par value) of such securities shall consist

ofTreasuryInflation-Protected Securities; and target at least $4 billion (par value) of

newly purchased securities maturing between January 1, 2020, and December 31,

2022.

Strategy Changes for the 3rd Quarter 2017

Purchase up to $13 billion (par value) of Treasury securities with maturitydates

between December 31, 2017, and December 31, 2022, subject to the following

additional provisions: all newly purchased securities will be designated as availablefor-sale; no more than $2 billion (adjusted par value) ofsuch securities shall consist

of Treasury Inflation-Protected Securities; and target at least $4 billion (par value) of

newly purchased securities maturing between July1, 2020, and December31, 2022.

NATIONAL LIQUIDATION FUND Strategy for the 2nd Quarter 2017

Maintain an overnight deposittargetfloorbalance within a range of$100 million to

$300 million.

Strategically invest the remaining funds in thezero-to 12-month maturity sector.

Strategy Changes for the 3rd Quarter 2017

No strategy changes for the third quarter of 2017.
- ~ ~

~..

Annual YTD YTD % of YTD YTD

Major Expense Category Budget Budget Expenditures Budget Used Variance

FDIC Operating Budget

Ongoing Operations

Salaries &Compensation $1,247,608 $608,796 $592,536 97% ($16,260)

Outside Services -Personnel $253,920 $114,587 $110,588 97°/a ($3,999)

Travel $95,448 $46,988 $43,506 93% ($3,482)

Buildings $101,176 $46,957 $45,697 97% ($1,260)

Equipment $92,293 $33,456 $33,997 102% $541

Outside Services -Other $16,545 $8,346 $8,105 97% ($241)

Other Expenses $14,080 $6,755 $6,605 98% ($150)

Total Ongoing Operations $1,821,070 $865,885 $841,034 97% ($24,851)

Receivership Funding

Salaries &Compensation $37,356 $18,600 $16,368 88% ($2,232)

Outside Services -Personnel $230,152 $100,074 $80,042 80% ($20,032)

Travel $3,284 $1,585 $2,429 153% $844

Buildings $17,700 $8,915 $4,896 55% ($4,019)

Equipment $1,431 $461 $395 86% ($66)

Outside Services -Other $1,273 $661 $763 115% $102

Other Expenses $8,804 $4,398 $3,041 69% ($1,357)

Total Receivership Funding $300,000 $134,694 $107,934 80°/a ($26,760)

Office of Inspector General

Salafies &Compensation $32,770 $16,385 $15,688 96% ($697)

Outside Services -Personnel $1,418 $709 $507 72% ($202)

Travel $1,486 $743 $650 87% ($93)

Buildings $o $o $o $o

Equipment $487 $244 $337 138% $93

Outside Services -Other $169 $84 $4 5% ($80)

Other Expenses $423 $211 $150 71°/a ($61)

Total Office of Inspector General $36,753 $18,376 $17,336 94% ($1,040)

Total FDIC Operating Budget $2,157,823 $1,018,955 $966,304 95% ($52,651)

10
- -

Division/Office

• 1 ••- • •- • -

• t • • -

• • - 1 1

~~ • •

Annual YTD YTD % of YTD

Budget Budget Expenditures Budget Used

YTD

Variance

FDIC Operating Budget

Risk Management Supervision $591,543 $291,001 $281,820 97% ($9,181)

Depositor &Consumer Protection $181,141 $90,554 $87,220 96% ($3,334)

Information Technology $224,911 $102,798 $102,248 99% ($550)

Administration $273,360 $130,146 $128,184 98% ($1,962)

Resolutions &Receiverships $271,786 $136,544 $122,717 90% ($13,827)

Legal $233,804 $115,515 $98,672 85% ($16,843)

Insurance &Research $53,106 $25,964 $24,303 94% ($1,661)

Finance $40,548 $20,158 $19,393 96% ($765)

Inspector General $36,753 $18,376 $17,336 94% ($1,040)

Information Security &Privacy Staff $41,969 $16,288 $15,816 97°/a ($472)

Corporate University -CEP $19,082 $9,222 $9,004 98% ($218)

Corporate University -Corporate $25,133 $12,280 $11,883 97% ($397)

Executive Support' $26,207 $12,071 $11,346 94% ($725)

Executive Offices z $11,023 $5,461 $4,712 86% ($749)

Complex Financial Institutions $20,156 $9,622 $8,938 93% ($684)

CIO Council $50,362 $22,955 $22,712 99% ($243)

Corporate Unassigned $56,939 $0 $0 $0

Total FDIC Operating Budget $2,157,823 $1,018,955 $966,304 95°/ ($52,651)

1) Executive Support includes the Offices of Minority and Women Inclusion, Communications, Ombudsman,

Legislative Affairs, Corporate Risk Management, and Financial Institution Adjudication.

2) Executive Offices include the offices of the Chairman, Vice Chairman, Independent Director, Deputy to the

Chairman and Chief Operating Officer, Deputy to the Chairman and Chief Financial Officer, and Chief Information

Officer.

11