Federal Deposit Insurance Corporation

550 17th Street, N.W., Washington, D.C. 20429-9990 Deputy to the Chairman and CFO

 August 30, 2019

MEMORANDUM TO: The Board of Directors

FROM: Bret Edwards

Deputy to the Chairman

and Chief Financial Officer

SUBJECT: Second Quarter 2019 CFO Report to the Board 

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

June 30, 2019.

Executive Summary

• During the second quarter of 2019, the Deposit Insurance Fund (DIF) balance rose to $107.4 

billion, up $2.6 billion from March 31, 2019. The quarterly increase was primarily due to $1.2 billion 

in assessment revenue, $1.2 billion in interest and unrealized gains on U.S. Treasury securities, 

and a $610 million increase in negative provision for insurance losses, partially offset by $459 

million in operating expenses.

• The reserve ratio, which is the ratio of the DIF balance to estimated insured deposits, was 1.40 

percent as of June 30, 2019. The reserve ratio was four basis points higher than March 31, 2019;

growth to the DIF was strong while insured deposit growth stayed flat. 

• During the second quarter of 2019, the FDIC was named receiver for one failed financial institution. 

The assets at inception for this failed institution was $37 million with an estimated loss of $28

million. The corporate cash outlay during the second quarter for this failure was approximately $30

million.

• Through June 30, 2019, overall FDIC Operating Budget expenditures were below the year-to-date 

budget by nine percent ($90 million). This variance was primarily the result of underspending in 

the Salaries and Compensation, Outside Services – Personnel, and Equipment expense 

categories in the Ongoing Operations budget component and the Outside Services – Personnel 

expense category in the Receivership Funding budget component.
I. Financial Results (See pages 6 — 7 for detailed data and charts.)

Deposit Insurance Fund

• For the six months ending June 30, 2019, the DIF's comprehensive income totaled $4.8 billion,

matching comprehensive income from the same period last year. Although assessment revenue

declined by $2.9 billion year-over-year, this was fully offset by an $800 million increase in negative

provision for insurance losses and a $2.1 billion increase in interest and fair value adjustments on U.S.

Treasury securities.

• Assessment revenue was $2.6 billion for the first half of 2019, compared to $5.4 billion for the same

period last year. The $2.9 billion year-over-year decrease was primarily due to the cessation of the

surcharge assessment on large institutions effective October 1, 2018, as a result of the reserve ratio

exceeding the required minimum of 1.35 percent as of September 30, 2018.

The provision for insurance losses was a negative $1.0 billion for the first half of 2019, compared to a

negative $206 million for the same period last year. The negative provision for 2019 primarily resulted

from a $413 million reduction of receiverships' shared-loss liability estimates due to expirations and

pending early terminations, $416 million in unanticipated recoveries from litigation settlements and

professional liability claims by receiverships, and a $113 million reduction in future receivership

expense estimates.

Assessments

• During June, the DIF recognized assessment revenue of $1.1 billion, representing the estimate for the

second quarter 2019 insurance coverage. Gross assessment revenue of $1.4 billion was reduced by

$313 million for expected small bank assessment credit usage. Additionally, the DIF recognized a $119

million adjustment for prior period amendments and a $9 million adjustment for higher-than-estimated

first quarter 2019 collections, both of which increased assessment revenue.

On June 28, 2019, the FDIC collected $1.5 billion in DIF assessments for first quarter 2019 insurance

coverage.

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

DIF Investment Portfolio

• On June 30, 2019, the total liquidity (also total market value) of the DIF investment portfolio stood at

$104.0 billion, up $5.0 billion from its December 31, 2018, balance of $99.0 billion. During the first half

of the year, interest revenue, receivership dividends, and deposit insurance assessment collections far

exceeded resolution-related outlays and operating expenses.

• On June 30, 2019, the DIF investment portfolio's yield was 2.12 percent, up 7 basis points from its 2.05

percent yield on December 31, 2018. The new Treasury securities purchased during the first half of

the year had higher yields than the maturing securities' yields.

• In accordance with the approved second quarter 2019 DIF portfolio investment strategy, staff

purchased a total of 7short-maturity conventional Treasury securities, all designated as available-forsale. The 7 securities had a total par value of $6.1 billion, a weighted average yield of 2.19 percent,

and a weighted average maturity of 0.92 years.

2
III. Budget Results (See pages 10 — 11 for detailed data.)

Approved Budget Modifications

The 2019 Budget Resolution delegated to the Chief Financial Officer (CFO) and selected other

officials the authority to make certain modifications to the 2019 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, the CFO approved the realignment of $13.1 million in budget authority from Division of

Information Technology (DIT) to the new Office of CIO Management Services (OCMS) to

implement a reorganization approved in March 2019 that separated the Business Administration

Branch from DIT to establish OCMS as a separate office reporting to the Chief Information Officer

(CIO). The budget adjustment involved the realignment of funding in four major expense

categories in the Ongoing Operations budget component: Salaries and Compensation, $7.5

million; Outside Services —Personnel, $5.6 million; Travel, $25,259; and Other Expenses,

$29,115.

In April, the CFO also approved a budget realignment of $2.5 million in the Ongoing Operations

budget component from the Office of Chief Information Security Officer (OCISO) to DIT, including

$1.9 million in the Outside Services —Personnel expense category and $625,568 in the

Equipment expense category. This realignment provided funding to DIT for access management

activities that are largely managed by DIT and performance of the firewall management function

that is shared by DIT and OCISO. Both functions were previously budgeted only in OCISO.

In May 2019, the CFO approved budget reallocations in the Salaries and Compensation expense

category of the Ongoing Operations budgets of all divisions and offices, except OCISO. Net

reductions totaling approximately $13.5 million were approved in the Salaries and Compensation

budgets of most of the affected organizations based on unused first quarter spending authority.

The Salaries and Compensation budgets of several organizations were increased to reflect

projected spending in excess of budget authority, including an increase of $3.4 million in

Corporate University-Corporate (CU-Corp) due to its heavy use of employees on long-term detail

assignments. The net result of these salary adjustments was an $8.1 million reallocation to the

Corporate Unassigned contingency reserve.

• In June, the CFO approved the transfer of approximately $208,000 in the Salaries and

Compensation expense category of the Ongoing Operations budget component from Office of

Chief Information Officer (OCIO) to OCMS to support the transfer of one authorized permanent

position from OCIO to OCMS.

In June, the CFO approved the following mid-year adjustments to 2019 Ongoing Operations

budgets.

An increase of $4.5 million in the Outside Services —Personnel budget of the Legal Division

for a substantial projected increase in expenses associated with ongoing litigation.

An increase of $550,000 in the Outside Services —Personnel budget of the Division of Risk

Management Supervision (RMS) to provide funding for an interagency agreement to improve

the analysis and sharing of cybersecurity threat information with financial institutions.

A net increase of $4.9 million in the combined budgets of the CIO organizations. This included

an increase of $5.6 million in various expense categories for completion of the migration to a

3
new Backup Data Center and an increase of $730,000 in the Equipment budget of the CIO

Council for additional licensing costs. These increases were partially offset by reductions

elsewhere across the CIO organization budgets.

A decrease of $200,000 in the Division of Insurance and Research's Outside Services —

Personnel budget to reflect funds not expected to be used in 2019.

Realignments among expenses categories in the budgets of the Division of Administration,

Corporate University, and the Division of Depositor and Consumer Protection, with no net

change to the total budgets of each organization.

There were no changes to the Receivership Funding budgets for any organization

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

contingency reserves were $4,089,141 in the Ongoing Operations budget component and

$14,894,445 in the Receivership Funding budget component.

Approved Staffing Modifications

The 2019 Budget Resolution delegated to the CFO the authority to modify approved 2019 staffing

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

approved 2019 FDIC Operating Budget.

• In April, the CFO approved the realignment of 45 positions from DIT to OCMS in conjunction with

a reorganization creating OCMS.

• In April, the CFO approved a decrease of one authorized permanent RMS Supervisory Examiner

position (a revision to the staffing authorization approved in March 2019).

• In June, the CFO approved the transfer of one permanent authorized Senior Advisor position from

OCIO to OCMS.

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, 2019, 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

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

Onaoina Operations

There was a significant spending variance through the second quarter in one major expense category

of the Ongoing Operations budget component.

Spending in the Equipment expense category was under the YTD budget by $14.4 million, or 23

percent. This variance was attributable primarily to underspending by DIT of $15.9 million, or 39

percent, of its YTD budget for Equipment. This included $6 million of underspending for technology

refreshment purchases. In addition, equipment purchases were delayed for several projects including

the mainframe replacement, a virtual desktops pilot project, and redesign of the wide-area network.

4
The application segmentation project was cancelled, and budgeted funds for equipment purchases

related to that project will not be used.

Receivership Funding

The Receivership Funding component of the 2019 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 and other expenses

required to ensure readiness without regard to whether failures occur.

There was a significant spending variance through the second quarter in one major

expense category of the Receivership Funding budget component. Outside Services —Personnel

expenses through the second quarter were $35 million, or 50 percent, less than budgeted. This

variance primarily reflected underspending by the Division of Resolutions and Receiverships (DRR)

($20.9 million, or 52 percent of its YTD budget) and the Legal Division ($13.7 million, or 48% of its

YTD budget). DRR underspending was attributable to the absence of insured institution failures for

which funds had been budgeted. The variance for the Legal Division was attributable to lower-thanprojected spending for outside counsel because cases were settled before going to trial and more

work has been done by FDIC attorneys,

Office of Inspector General

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

category of the Office of Inspector General budget component.

Significant Spending Variances by Division/Office'

Three organizations had significant spending variances through the end of the second quarter.

• DRR spent $26.1 million, or 25 percent, less than budgeted, mostly in the Outside Services —

Personnel expense category of the Receivership Funding budget component, due to the absence

of expenses for insured institution failures.

• The Legal Division spent $17.6 million, or 18%, less than budgeted, mostly in the Outside

Services —Personnel expense category of the Receivership Funding budget component, due to

lower-than-budgeted outside counsel expenses.

• DIT spent $14.9 million, or 12%, less than budgeted due primarily to underspending of its

Equipment budget.

'Information on division/office variances reflects variances in the FDIC Operating Budget and do not include

variances related to approved multi-year investment projects.

5
Cash and cash equivalents _

Investrr~ent in U.S. Treasury securities

Assessments receivable

Interest receivable on investrr~ents and other assefs, net

Receivables from resolutions, net _ __

Prooeriv and eauiament, net

$ 8,795

94,524

1,060

694

Total Assets $

Accounts pale and other liabilities

Liabilities due to resolutions

Pos~etirement benefit liability

Contingent liability for anticipated failures

Contingent liability for guarantee payments and liti ation losses

Total Liabilities

FYI. Unrealized gain (loss)_ on U.S. Treasury securities, net_

FYI: Unrealized aos~retirement benefit (lossl pain

320

8,597

241

530

236

111

33

1,151

500

Fund Balance I $ 107

Small Bank Assessment Credit Usage Estimate

(as of June 30, 2019; dollars in millions)

$350

313.2

5300

$250 237.8

5zoo

$lso

Sioo

$50

$o

145.1

59.3

9.0

1st 2nd 3rd 4th Remaining

Quarter of credit use

$_ 7,062' $ 1,733 $ 3,535' $ 5,260

93,507 ''~ 1,017 88,300 6,224

1,372 ; (312)': 2,619 ~_ (1,619)

567 '' 121 558 136

3,187', 17 3,711 ~ (507)

324 ~~ (4) 321 ~ (1)

$ 106,019 $_ 2,578 j_$ 99,104 ` $ 9,493

2111 30 I 232 9

554' (24) 905 (375)

236 0 -.._259 (23)

115 (4) 85 26

33 j O i _ 35 (2)

$ 1,149 $ 2' $ 1,516 $ (365)

194) 694 X1,137) 1,637

14) (0) __~46)'E 32

$ 104,870 $ 2,516 ' $ 97,588 $ 9,858

Pursuant to FDIC rulemaking in response to

the Dodd-Frank Act increase of the minimum

reserve ratio to 1.35 percent, small banks

will receive credits for the portion of their

assessments that contributed to growth in

the reserve ratio from 1.15 percent to 1.35

percent. Per a proposed rule issued on

August 20, 2019, in each quarter that the

reserve ratio is at or above 1.35 percent

(rather than 1.38 percent, as required under

current regulation), the FDIC will

automatically apply a small bank's credits to

reduce its regular assessment up to the

entire amount of the assessment, until the

credits are exhausted. The total amount of

available credits is $764 million. The chart

presents the estimated credit usage by

quarter; 72% of the credits are expected to

be used in just two quarters of offset.

0
Assessments $ 2,556 $

$

$

$

$

1,369 ~ $

507

2

1,878 !. $

434'

396 ~

0

38 I $

1,840 ;

421 ;

0

2,261 $

907 $

124,582

908

5

0

0

5

1,187 ' $ 5,g4g ~ $

535 719 '

10 5

1,732 $ 6,172 ; $

459 878 !

(610) (206)

1 1

(150) $ 673 ! $

~~882 5,499 ~

694 (658) ~

~ 0 ~

2,576 $ 4,841 I $

~ ~ ~

~

.-

5 $ 892 $

~ 6 (124,597 _

5 893

6 7 ~

0 0 ~

0 0~

6 $ 7 $

(2,gg2)

323

7

(2,562)

15

(800)

0

(785)

(1,777)

1, 773

0

(4)

•

~-

20

21

20

4

0

0

4

_

Interest on U.S. Treasu securities 1,042

Olher revenue 12

Total Revenue $ 3,610

ratin e rises 893

Provision for insurance losses 1,006

Insurance and other e~enses 1

Total Ex enses and Losses $ 112

Net Income 3,722

Unrealized ain loss on U.S. Treasu securities, net 1,115

Unrealized ostretirement benefit ain loss 0

Com rehensive Income

•~ ~.

Cash and cash e uivalents

$ 4,837

$ 912

Accumulated deficit 124,576

Total resolution e ui 913

Total revenue 11

Operating e~enses 0

Losses related to thrift resolutions 0

Net Income Loss $ 11

in millions) Jun-19 Jun-18 Change Jun-19 Jun-18

Receiverships 263 302 (39) 0 0

is in Liquidation $ 1,039 $ 1,536 $ (497) $ 2 $ 2 $

Collections $ 555 $ 993 $ (438) $ 0 $ 0 $

Dividend/Other Pmts - $ 859 $ 2,448 $ (1,589) $ 0 $ 0 $

$120,000

$100,000

$80,000

$60, 000

$40,000

$20,000

$0

DIF Cash Flo«~s ($ in iiiillioiis~

2015 2016 2017 2018 6/2019

.Cash and Investments - Inflow Outflow

~ Jun-19 Jun-18 Change

0 263 302 (39)

0 $ 1,041 $ 1,538 $ (497)

0 $ 555 $ 993 $ (438)

0 $ 859 $ 2,448 $ (1,589)

$100,000

$90,000

$50,000

$70,000

$60,000

$50,000

$40, 000

$30,000

$20,000

$10,000

$0

Cash and Investments

increased by $39.9

billion from $63.4 billion

at year-end 2015 to

$103.3 billion at June

30, 2019. The increase

was primarily due to

assessment collections,

interest on U.S.

Treasury securities, and

recoveries from

resolutions, that far

exceeded resolutionrelated outlays and

operating expenses.

7
~.

6/30/19 12/31/18 Chan e

Par Value $103,079 $99,339 $3,740

Amortized Cost $102, 903 $99, 063 $3,840

Total Market Value (including accrued interest) $103,961 $98,954 $5,007

Primary Reserve' $103,961 $98,954 $5,007

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

Yield-to-Maturity ~ 2.12% 2.05% 0.07%

Weighted Average Maturity (in years) 1.34 1.75 -0.41

Effective Duration (in years)

Total PortFolio 1.30 1.69 -0.39

Available-for-Sale Securities 1.44 1.79 -0.35

Held-to-Maturity Securities' not applicable not applicable not applicable

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

held-to-maturity securities maturing within three months.

2 The Yeld-to-Maturity includes the potential yields of any Treasury Inflation-Protected Securities (TIPS), which assumes an average

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

3 In 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.

t• •

6/30/19 12/31/18 Chan e

FRF-FSLIC

Book Value 4 $868 $857 $11

Yield-to-Maturity 2.24% 2.42% -0.18%

Weighted Average Maturity overnight overnight 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.

t• •

6/30/19 12/31/18 Chan e

Book Value 5 $2,601 $2,988 ($387)

Effective Annual Yield 2.44% 2.46% -0.02%

Weighted Average Maturity (in days) 40 51 (11)

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

8
DEPOSIT INSURANCE FUND Strategy for the 2nd Quarter 2019

Purchase up to $15 billion (par value) of Treasury securities with maturity dates befinreen

September 30, 2019, and December 31, 2023, subject to the following additional

provisions: all newly purchased securities will be designated as AFS; no more than $2

billion (adjusted par value) of such securities shall consist of TIPS; and no "soft target"

minimum investment for newly purchased Treasury securities in the 3- to 5- year maturity

sectors.

Strategy Changes for the 3rd Quarter 2019

Purchase up to $22 billion (par value) of Treasury securities with maturity dates between

December 31, 2019, and December 31, 2023, subject to the following additional provisions:

all newly purchased securities will be designated as AFS; no more than $2 billion (adjusted

par value) of such securities shall consist of TIPS; and no "soft target" minimum

investment for newly purchased Treasury securities in the 3- to 5- year maturity sectors.

NATIONAL LIQUIDATION FUND Strategy for the 2nd Quarter 2019

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 maturity sector.

Strategy Changes for the 3rd Quarter 2019

No strategy changes for the third quarter of 2019.
~ .. - . - -

- ~ ~ •

~.. •

Annual YTD YTD % of YTD YTD

Major Expense Category Budget Budget E~enditures Budget Used Variance

FDIC Operating Budget

Ongoing Operations

Salaries &Compensation $1,234,521 $620,422 $596,680 96% ($23,742)

Outside Services -Personnel 256,119 123,485 116,545 94% (6,939)

Travel 85,236 41,952 38,356 91% (3,596)

Buildings 106,187 51,310 52,527 102% 1,217

Equipment 114,199 62,468 48,105 77% (14,363)

Outside Services -Other 16,091 8,461 9,428 111% 967

Other Expenses 13,111 6,848 6,121 89°/a (727)

Total Ongoing Operations $1,825,464 $914,946 $867,762 95% 47,184

Receivership Funding

Salaries &Compensation $3,804 $2,267 $1,555 69% ($712)

Outside Services -Personnel 156,634 70,654 35,619 50% (35,035)

Travel 3,272 1,632 590 36°/a (1,042)

Buildings 5,488 2,743 1,004 37% (1,739)

Equipment 1,160 579 267 46% (312)

Outside Services -Other 1,023 509 581 114% 72

Other Expenses 3,619 1,806 632 35% (1,174)

Total Receivership Funding $175,000 $80,190 $40,248 50% $39,942

Office of Inspector General

Salaries &Compensation $37,013 $18,506 $15,809 85% ($2,697)

Outside Services -Personnel 1,595 798 1,320 165% 522

Travel 1,218 609 688 113% 79

Buildings 0 0 0 0

Equipment 2,686 1,343 643 48% (700)

Outside Services -Other 0 0 0 0

Other Expenses 470 235 151 64% (84)

Total Office of Inspector General $42,982 $21,491 $18,611 87°/a $2,880

Total FDIC Operating Budget $2,043,446 $1,016,627 $926,621 91% $90,006

10
- • 1 • ••- ~

• t ~ •

• • - 1 1 •

t• • •

Annual YTD

Division/Office Budget Budget

•- ~

YTD

Expenditures

% ofYTD

Budget Used

YTD

Variance

FDIC Operating Budget

Risk Management Supervision $576,351 $292,157 $279,469 96% ($12,688)

Resolutions &Receiverships 209,661 105,213 79,032 75% (26,181)

Administration 268,303 134,412 132,476 99% (1,936)

Legal 194, 787 96,344 78, 744 82% (17, 600)

Information Technology 239,877 124,647 109,783 88% (14,864)

Depositor &Consumer Protection 179,951 90,934 87,007 96% (3,927)

Insurance &Research 55,816 27,727 26,799 97% (928)

CIO Council 51,890 25,304 25,293 100% (11)

Finance 42,166 21,339 19,540 92% (1,799)

Inspector General 42,982 21,491 18,611 87% (2,880)

Chief Information Security Officer 48,200 22,632 21,691 96% (941)

Executive Support ~ 35,582 16,034 12,171 76% (3,863)

Complex Financiallnstitutions 20,609 9,746 9,139 94% (607)

Corporate University -Corporate 25,375 16,864 16,378 97% (486)

Corporate University -CEP 19,364 4,548 3,934 86% (614)

Executive Offices 2 13,548 7,235 6,554 91% (681)

Corporate Unassigned 18,984 0 0 0

Total FDIC Operating Budget $2,043,446 $1,016,627 $926,621 91% ($90,006)

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

Financial Institution Adjudication, CIO Management Services, and FDiTech Lab.

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, Deputy to the Chairman for Policy, and Chief Information

O~cer.

11