Federal Deposit Insurance Corporation

550.1.7th Street N.W., Washington, D.C. 20429-9990 Deputy to the Chairman antl CFO

August 21, 2015

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 2015 CFO Report to the Board

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

June 30, 2015.

Executive Summary

• During the second quarter of 2015, the Deposit Insurance Fund (DIF) balance increased by

$2.3 billion, from $65.3 billion to $67.6 billion. This quarterly increase was primarily due to

$2.3 billion of assessment revenue and a $317 million decrease in the provision for insurance

losses, partially offset by $434 million of operating expenses.

• During the second quarter of 2015, the FDIC was named receiver for 1 failed institution. The

assets at inception for this failed institution were $94 million with an estimated loss of $17

million. The corporate cash outlay during the second quarter for this failure was approximately

$29 million.

Through June 30, 2015, overall Corporate Operating Budget expenditures were below budget

by 7 percent ($74 million). Spending in the Ongoing Operations component was $36 million,

or 4 percent, under budget, largely due to underspending for salaries and compensation,

equipment, and contractual services. Spending in the Receivership Funding component was

$37 million, or 16 percent, under budget, primarily due to lower-than-budgeted spending for

contractual services related to failed financial institutions.
I. Corporate Fund Financial Results (See pages 7 - 8 for detailed data and charts.)

Deposit Insurance Fund

• For the six months ending June 30, 2015, the DIF's comprehensive income totaled $4.8 billion

compared to comprehensive income of $3.9 billion for the same period last year. This $941

million increase was mostly due to a $887 million decrease in provision for insurance losses.

• The provision for insurance losses was a negative $743 million for the first half of 2015. The

negative provision primarily resulted from a $929 million decrease in the estimated losses for

institutions that failed in current and prior years, partially offset by a $188 million increase in

the estimated losses for anticipated failures.

Assessments

During June, the DIF recognized a total of $2.3 billion in assessment revenue. Of this amount,

the estimate for second quarter 2015 insurance coverage totaled $2.2 billion. Additionally, the

DIF recognized a net adjustment of $151 million that increased assessment revenue. This

adjustment consisted of $14 million in prior period amendments and a $137 million increase to

the estimate for first quarter 2015 insurance coverage recorded at March 31, 2015. The latter

adjustment was primarily due to higher than estimated assessment base and rates.

On June 30, 2015, the FDIC collected $2.2 billion in DIF assessments for first quarter 2015

insurance coverage.

II. Investment Results (See pages 9 — 10 for detailed data and charts.)

DIF Investment Portfolio

• On June 30, 2015, the total liquidity (also total market value) of the DIF investment portfolio

stood at $58.9 billion, up $6.6 billion from its December 31, 2014, balance of $52.3 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, 2015, the DIF investment portfolio's yield was 0.76 percent, up 6 basis points

from its December 31, 2014, yield of 0.70 percent. The increase largely reflected the new

Treasury securities purchased during the first half of the year generally having considerably

higher yields than the maturing securities.

• In accordance with the approved second quarter 2015 DIF portfolio investment strategy, staff

purchased a total of 10 short-to intermediate-maturity conventional Treasury securities, all

designated as available-for-sale. The 10 securities had a total par value of $6.9 billion, a

weighted average yield of 0.68 percent, and a weighted average maturity of 1.60 years.
III. Budget Results (See pages 11 — 12 for detailed data.)

Approved Budget Modifications

The 2015 Budget Resolution delegated to the Chief Financial Officer (CFO) and selected other

officials the authority to make certain modifications to the 2015 Corporate Operating Budget. The

following budget reallocations were made during the second quarter in accordance with the

authority delegated by the Board of Directors. None of these modifications changed the total

2015 Corporate Operating Budget as approved by the Board in December 2014.

In May 2015, the CFO approved modifications to the Salaries and Compensation budgets of

divisions and offices within the Ongoing Operations component based on an analysis of yearto-date spending for salaries, bonuses/lump-sum payments, and fringe benefits. That

reallocation realigned existing budget authority among most divisions and offices, but resulted

in no change to the total corporate budget for either the Ongoing Operations or Receivership

Funding budget components. The Corporate Unassigned contingency reserve in the Ongoing

Operations budget component was increased by $6 million as a result of these reallocations.

• In June 2015, the CFO approved the net reallocation of $22,756 between accounts in the

Salaries and Compensation category of the Ongoing Operation component of the budget for

the Office of the Inspector General (OIG). This reallocation resulted in no change to the total

Ongoing Operations budget approved for the OIG.

In June 2015, the CFO approved a reallocation within the Ongoing Operations and

Receivership Funding components of the 2015 Corporate Operating Budget following

corporate-wide mid-year reassessment of actual and projected spending for the first half of the

year. The budgets for all major expense categories and most divisions and offices were

adjusted in both budget components, with increases and decreases totaling $3 million and $1

million, respectively, in the Ongoing Operations component and $1 million and $26 million in

the Receivership Funding component.

The most significant increase in the Ongoing Operations budget component was a net

increase of over $2 million to the budget of the CIO Council to support transition costs

associated with the award of new Information Technology Application Services

contracts for IT systems development and maintenance. The most significant reduction

within that component was a decrease of $800,000 in the budget of the Information

Security and Privacy Staff due to contract re-negotiations and savings from the

temporary elimination of a security subscription.

The most significant increase in the Receivership Funding budget component was to the

budget of the Division of Information Technology (DIT), which received an increase of

over $1 million to cover unbudgeted equipment purchases to support a major bank

closing. The Legal Division had the largest Receivership Funding budget reduction ($26

million) as a result of an unexpected decrease in professional liability program

expenses.

The mid-year budget reallocation reduced the Corporate Unassigned contingency reserve by

nearly $2 million in the Ongoing Operations budget and increased it by $24 million in the

Receivership Funding budget component. The unused amounts remaining within the

Corporate Unassigned budgets for the Ongoing Operations and the Receivership Funding

budget components were $23,519,593 and $47,008,947, respectively, as of June 30, 2015.
Approved Staffing Modifications

The 2015 Budget Resolution delegated to the CFO the authority to modify approved 2015

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

the total approved 2015 Corporate Operating Budget. The following changes were approved

by the CFO in accordance with the authority delegated to him by the Board of Directors:

• In March 2015, the CFO approved an increase of three authorized permanent positions

within the Capital Market Branch of RMS. This increase to the 2015 Authorized Staffing

was determined necessary to address increases in the permanent workload within the

branch, including the increased volume of work associated with the implementation of the

Volcker Rule.

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, 2015, are defined

as those that either (1) exceed the YTD budget by $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 expense category or division/office by an amount that exceeds $3 million

and represents more than five percent of the major expense category or total division/office

budget.

Significant Spending Variances by Major Expense Category

Onaoina Oaerations

There was a significant spending variance in two major expense categories during the second

quarter in the Ongoing Operations component of the 2015 Corporate Operating Budget:

Outside Services -Personnel expenditures were $8 million, or 7 percent, less than

budgeted. The Division of Resolutions and Receiverships (DRR) spent $2 million less than

budgeted, primarily due to delays in initiating projects in its Complex Financial Institutions

and Planning and Resource Management Branches. The Division of Administration (DOA)

spent $1 million less than budgeted, largely due to delays in the pay, performance, and

competency modeling components of the Workforce Development Initiative. DIT spent $1

million less than budgeted, primarily due to underspending on the infrastructure services

support contract. The Executive Offices spent nearly $700,000 less than budgeted

because actual audit expenses were lower than projected. Corporate University also spent

nearly $700,000 less than budgeted, largely due to lower-than-projected expenses for

development of the new Resolutions and Receivership training curriculum.

Equipment expenditures were approximately $8 million, or 24 percent, less than budgeted.

DIT spent $6 million less than budgeted, largely due to delays in planned purchases and

the processing of hardware and software maintenance contracts. In addition, DOA spent

$2 million less than budgeted due to delays in the Identity, Credential, and Access

Management (ICAM) project and the realization of furniture, fixtures and equipment (FF&E)

cost savings through the redeployment of excess FF&E that became available as a result

of the exercise of leased space contraction rights in the Dallas Regional Office.
Receivershia Fundin

The Receivership Funding component of the 2015 Corporate 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 were significant spending variances in two of the seven major

expense categories through the second quarter in the Receivership Funding component of the

2015 Corporate Operating Budget:

• Outside Services-Personnel expenditures were $29 million, or 18 percent, less than

budgeted. This variance was attributable to a decline in resolutions, asset management

and marketing costs at a faster rate than projected. This resulted in lower-than-budgeted

expenses for contracts supporting owned real estate, loan servicing, environmental

services, asset valuation, failed bank data, and capital markets.

• Other Expenses were $3 million, or 31 percent, less than budgeted. This variance was

attributable to the transfer of banking operations and the disposition of failed banks' assets

more quickly than expected.

Significant Spending Variances by Division/Office

Four organizations had significant spending variances through the end of the second quarter:

• DRR spent $32 million, or 14 percent, less than budgeted, mostly due to less-thanbudgeted spending for resolution and receivership workload for the reasons described

above.

• DIT spent $10 million, or 10 percent, less than budgeted. This variance was largely

attributable to less than anticipated spending on the infrastructure services support

contract, delays in planned equipment purchases, and delays in the processing of

hardware and software maintenance contracts.

DOA spent $8 million, or 6 percent, less than budgeted. This variance was largely

attributable to lower-than budgeted spending in its Ongoing Operations budget component

for equipment ($2 million) for the ICAM initiative and FF&E; salaries and compensation ($1

million) due to vacancies in budgeted positions; buildings ($1 million) due to delays in the

Student Residence Center plumbing project; and contractual support ($1 million) due to

delays in the pay, performance and competency modeling components of the Workforce

Development Initiative. In addition, DOA spent approximately $2 million less than

budgeted in the Receivership Funding budget component to support bank closings.

The Legal Division spent $8 million, or 6 percent, less than budgeted. This variance was

largely due to under-spending of approximately $5 million in the Outside Services —

Personnel expense category due to lower-than-projected outside counsel expenses for

receivership-related litigation, and $2 million in the Salaries and Compensation expense

category due to vacancies in budgeted non-permanent positions and slower-than-projected

hiring to fill those vacancies.

5
Other Matters

An analysis of 2015 funding requirements for employee pay and benefits was completed in

May in accordance with the 2015 Budget Resolution. The analysis determined that those

costs had been underestimated during the preparation of the 2015 Corporate Operating

Budget by approximately $6 million in the Salaries and Compensation expense category,

primarily due to an unbudgeted increase in the FDIC's contribution rate for most employees

under the Federal Employees Retirement System that became effective late in 2014. The

CFO elected not to exercise his delegated authority to adjust the 2015 Corporate Operating

Budget to address this shortfall, since the net projected budget shortfall is not material relative

to the total 2015 Corporate Operating Budget, and there is excess budget authority available

to cover the shortfall in other accounts within the Salaries and Compensation expense

category.
FDIC CFO REPORT TO THE BOARD -Second Quarter 201 S

Cash and cash equivalents $ 2,544 $ 3,729 $ (1,185) $ 2,409 $ 135

In~stmenf in U.S. Treasury obligations, net 55,850 50,591 5,259 45,416 10,434

Assessments receivable, net 2,177 2,051 126 2,204 (27)

Interest receivable on in~stments and other assets, net 590 373 217 577 13

Receivables from resolutions, net 14,862 - 17,258 (2,396) 14,211 651

Property and equipment, net 364 365 (1) 359 5

Total Assets ~ 76,387 $ 74,367 $ 2,020 $ 65,176 $ 11,211

Accounts payable and other liabilities 278 243 35 256 22

Liabilities due to resolutions 7,593 7,868 (275) 12,169 (4,576)

Postretirement benefit liability 243 243 194 49

Contingent liability for anticipated failures 684 717 (33) 1,493 (809)

Contingent liability for litigation losses 0 0 0 5 (5)

Total Liabilities $ 8,798 $ 9,071 $ (273) $ 14,117 $ (5,319)

FYI: Unrealized gain (loss) on U.S. Treasury in~stments, net 248 282 (34) 118 130

FYI. Unrealized postretirement benefit (loss) gain (58) (58) (16) (42)

Fund Balance $ 67,589 $ 65,296 $ 2,293 $ 51,059 $ 16,530

DI F Resolution Activity

(Dollars in Billions)

Number Assets Est. Losses Outlays

YTD 2015 ' 5 $5.4 $0.8 $1.7

2014 18 $3.0 ' $0.4 $0.9

2013' 24 ~ $5.8 $1.3 ~ $1.6

2012 51 ~ $11.8 $2.7 $4.6

2011 ' 92 { $36.6 $7.1 i $9.3

2010' 157 ~ $93.2 $16.9 { $32.9

2009 140 $171.2 $27.7 ~ $48.0

2008 25 $361.6 $18.3 ( $31.7

Total 512 $688.6 $75.2 $130.7

• Estimated Losses

exclude Transaction

Account Guarantee

Losses under the

FDIC's Temporary

Liquidity Guarantee

Program.

• 2008 includes

Washington Mutual

failure with total

assets of $299 billion

and zero estimated

losses and outlays to

the DIF.

_~
•

~ ~. -

Assessments

-.

$ 4,517 $

~• ~.

2,189 $

~-

2,328 $ 4,617 $

.-

(100)

Interest on U.S. Treasury obligations 173 60 113 132 41

Other re~nue 10 6 4 15 (5)

Total Revenue $ 4,700 $ 2,255 $ 2,445 $ 4,764 $ (64)

Operating expenses 830 396 434 850 (20)

Provision for insurance losses (743) (426) (317) 144 (887)

Insurance and other expenses 1 - 1 - 1

Total 6cpenses and Losses $ 88 $ (30) $ 118 $ 994 $ (906)

Net Income 4,612 2,285 $ 2,327 3,770 842

Unrealized gain (loss) on U.S. Treasury in~stments, net 197 231 (34) 98 59

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

Comprehensive Income $ 4,809 $ 2,516 $ 2,293 $ 3,868 $ 941

•. ..

Cash and cash equivalents $ 872 $ 872

.-

$ - $ 872 $

.-

-

Accumulated deficit (124,523) (124,460) (63) (124,460) (63)

Total resolution equity 872 872 - 873 (1)

Total revenue 2 1 1 1

Operating expenses 1 - 1 -

Provision for losses - - (1) 1

Goodwill litigation expenses 63 - - 63

Net Income (Loss]

$ in millions

Jun-15

$

~

Jun-14 Change

(63)

Jun-15

$ 1

i

Jun-14 Change

~

$ 1

~

Jun-15 Jun

$

~

-14

(64)

Change

Total Receiverships 480 489 (9) 480 489 (9)

Assets in Liquidation $ 6,337 $ 9,168 $ (2,831) $ 5 $ 5 $ - $ 6,342 $ 9,173 $ (2,831)

YTD Collections $ 2,001 $ 2,698 $ (697) $ 2 $ 2 $ - $ 2,003 $ 2,700 $ (697)

YTD Dividend/Other Pymts -Cash $ 4,708 $ 2,897 $ 1,811 $ - $ - $ - $ 4,708 $ 2,897 $ 1,811

Quarterly Assessment Collections

September 2013 through June 2015

$3'~~

2,542

$2,500

N $2,000

c

0

$1,500

c

`" $1,000

$500

$~ .

2,389 2,355 2,286 2,202 2.141 ~ i nn 7.133

SeP'13 ~e~ 13 ~a< 10. ~o~` 1R SeQ.1A ~e~1R lac 1y , J~'1c~

Assessment collections

decreased consecutively for

six quarters from $2.5 billion

to $2.1 billion, beginning in

September 2013 to December

2014. This steady decline was

attributable to declining

assessment rates that resulted

from the improved condition

of insured institutions. For

the first two quarters in 2015,

assessment collections

increased from $2.1 billion to

$2.2 billion. This increase is

the result of stabilizing

assessment rates and an

increase in the assessment

base for insuredinstituHons.
~-..

~..

• '.

-

6/30/15 12/31/14 Change

Par Value $57,437 $50,739 $6,698

Amortized Cost $58,133 $51,655 $6,478

Total Market Value (including accrued interest) $58,918 $52,302 $6,616

Primary Reserve ~ $58,918 $52,302 $6,616

Primary Reserve % of Total Portfolio 100.0% 100.0% 0.0%

Yield-to-Maturity 2 0.76% 0.70% 0.06%

Weighted A~rage Maturity (in years) 1.50 1.66 -0.16

Effecti~ Duration (in years)

Total Portfolio 1.47 1.63 -0.16

Available-for-Sale Securities 1.54 1.69 -0.15

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

~ Primary Reserve is the total marketvalue (including accrued interest) of overnight investments, all available-for-sale

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

2The Yeld-to-Maturity includes the potential yield ofTreasuryInflation-Protected Securities (TIPS), which presentlyassumes

an average 1.8%annual increase in the CPI over the remaining life of each TIPS.

3 1n 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 maturity dates.

• • . • ' •• •

~. -

6/30/15 12/31/14 Change

FRF-FSLIC

Book Value 4 $826 $827 ($1)

Yield-to-Maturity 0.00% 0.03°/o -0.03%

Weighted A~rage Maturity overnight overnight no change

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

purposes.

~. _ -

6/30/15 12/31/14 Change

Book Value 5 $10,970 $14,139 ($3,169)

Effecti~ Annual Yield 0.15°/o 0.11 % 0.04%

Weighted A~rage Maturity (in days) 80 75 5

5 Due to the short-term nature of the NLF, the portfolio's Book and Market Values are identical for reporting purposes.
•

DEPOSIT INSURANCE FUND Strategy for the 2nd Quarter 2015

Purchase up to $10 billion (par value) of Treasury securities with maturity dates

between September 30, 2015, and September 30, 2020, subject to the following

additional provisions: all newly purchased securities will be designated as available

for-sale (AFS); and no more than $2 billion (adjusted par value) ofsuch securities

shall consist of Treasurylnflation-Protected Securities (TIPS).

Strategy Changes for the 3rd Quarter 2015

Purchase up to $11 billion (par value) of Treasury securities with maturitydates

between December 31, 2015, and December 31, 2020, subject to the following

additional provisions: all newly purchased securities will be designated as available

for-sale (AFS); and no more than $2 billion (adjusted par value) of such securities

shall consist of Treasurylnflation-Protected Securities (TIPS).

NATIONAL LIQUIDATION FUND Strategy for the 2nd Quarter 2015

Maintain an overnight deposit target floor balance within a range of $100 million to

$300 million.

Strategically invest the remaining funds in the zero- to 12-month maturitysector.

Strategy Changes for~the 3rd Quarter 2015

No strategy changes for the third quarter of 2015.

10
~ . ~ ~- -~•

~ ~ - 1 1

t• ~ ~

Annual YTD YTD % of YTD YTD

Major Expense Category Budget Budget Expenditures Budget Used Variance

Corporate Operating Budget

Ongoing Operations

Salaries &Compensation $1,226,834 X593,998 $579,754 98% ($14,244)

Outside Services -Personnel 252,177 114,471 106,340 93% (8,131)

Travel 98,816 48,522 46,293 95% (2,229)

Buildings 94,330 44,375 43,304 98% (1,071)

Equipment 87,259 35,106 26,821 76% (8,285)

Outside Services -Other 17,420 9,142 7,920 87% (1,222)

Other Expenses 16,861 7,729 6,724 87% (1,005)

Total Ongoing Operations $1,793,697 $853,341 $817,156 96°/ ($36,185)

Receivership Funding

Salaries &Compensation $90,360 $48,223 $45,843 95% ($2,380)

Outside Services -Personnel 376,053 163,695 134,647 82% (29,048)

Travel 9,083 3,795 4,270 113% 475

Buildings 17,328 8,624 7,368 85% (1,256)

Equipment 5,285 3,108 2,568 83% (540)

Outside Services -Other 4,044 2,112 976 46°/a (1,136)

Other Expenses 22,847 11,390 7,902 69°/a (3,488)

Total Receivership Funding $525,000 $240,948 $203,574 84°/ ($37,374)

Total Corporate Operating Budget $2,318,697 $1,094,290 $1,020,730 93°/ ($73,560)

11
• C

Division/Office

•~- • •• - • t • • -

• • - 1 1

t• • •

Annual YTD YTD % of YTD

Budget Budget Expenditures Budget Used

YTD

Variance

Corporate Operating Budget

Risk Management Supervision $574,424 $279,199 $272,113 97% ($7,086)

Resolutions &Receiverships 437,511 220,506 188,836 86% (31,670)

Administration 268,572 129,590 121,978 94°/a (7,613)

Legal 253,978 123,464 115,897 94% (7,567)

Information Technology 226,289 105,993 95,526 90% (10,467)

Depositor &Consumer Protection 172,111 85,445 83,512 98% (1,933)

Insurance &Research 51,146 24,940 24,885 100% (55)

CIO Council 52,553 24,691 24,496 99% (195)

Finance 39,832 19,459 18,634 96% (826)

Inspector General 33,715 16,772 15,082 90% (1,690)

Information Security &Privacy Staff 33,856 14,440 14,196 98% (244)

Corporate University -Corporate 25,682 12,410 11,684 94% (726)

Executive Support' 26,248 12,521 11,567 92°/a (954)

Corporate University -CEP 18,270 8,798 8,877 101% 79

Complex Financial Institutions 21,863 10,217 8,362 82% (1,855)

Executive Offices z 12,118 5,844 5,086 87% (758)

Corporate Unassigned 70,529 0 0 N/A 0

Total, Corporate Qperating Budget $2,318,697 $1,094,290 $1,020,730 93°/ ($73,560)

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 ChaiiYnan and Chief

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

12