Federal Deposit Insurance Corporation

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

May 15, 2015

MEMORANDUM TO: The Board of Directors

FROM: Steven O. App i~~~ „ Q ~.y

De P ut Y to the Chairman and C ~/U

Chief Financial Officer

Craig R. Jarvill ~~~

Director, Division of Finance

SUBJECT: First Quarter 2015 CFO Report to the Board

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

March 31, 2015.

Executive Summary

• During the first quarter of 2015, the Deposit Insurance Fund (DIF) balance increased by $2.5

billion, from $62.8 billion to $65.3 billion. This quarterly increase was primarily due to $2.2

billion of assessment revenue and a $426 million decrease in the provision for insurance

losses, partially offset by $396 million in operating expenses.

• During the first quarter of 2015, the FDIC was named receiver for 4 failed institutions. Doral

Bank, which failed on February 27, 2015 and had assets at time of failure of $4.9 billion, was

the largest bank failure since April 2010. The combined assets at inception for all four failed

institutions totaled $5.3 billion with a total estimated loss of $848 million. The corporate cash

outlay during the first quarter for these failures was approximately $1.7 billion.

• Through March 31, 2015, overall Corporate Operating Budget expenditures were below

budget by 12 percent ($64 million). This variance was primarily the result of vacancies in

budgeted positions, lower spending in the Equipment and Outside Services —Personnel

categories in the Ongoing Operations component of the budget, and lower-than-budgeted

spending for contractual services in the Receivership Funding component of the budget.
I. Corporate Fund Financial Results (See pages 6 — 7 for detailed data and charts.)

Deposit Insurance Fund

For the three months ending March 31, 2015, the DIF's comprehensive income totaled $2.5

billion compared to comprehensive income of $1.7 billion for the same period last year. This

$814 million increase was mostly due to a $774 million year-to-year decrease in provision for

insurance losses (negative $426 million for the first quarter 2015 vs. $348 million for the same

period in 2014) and a $206 million increase in the unrealized gain on U.S. Treasury

investments, partially offset by a $204 million decrease in assessment revenue.

• The provision for insurance losses was a negative $426 million for the first quarter of 2015.

The negative provision primarily resulted from a $640 million decrease in the estimated losses

for institutions that failed in current and prior years, partially offset by a $220 million increase in

the estimated losses for future failures.

Assessments

During March, the DIF recognized a total of $2.2 billion in assessment revenue. Of this

amount, the estimate for first quarter 2015 insurance coverage totaled $2.1 billion.

Additionally, the DIF recognized a net adjustment of $138 million that increased assessment

revenue. This adjustment consisted of a $9 million increase from prior period amendments and

a $129 million increase to the estimate for fourth quarter 2014 insurance coverage recorded at

December 31, 2014. The latter adjustment was primarily due to higher than estimated rates

and higher than estimated assessment base.

• On March 30, 2015, the FDIC collected $2.1 billion in DIF assessments for fourth quarter 2014

insurance coverage.

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

DIF Investment Portfolio

• On March 31, 2015, the total liquidity (also total market value) of the DIF investment portfolio

stood at $54.6 billion, up $2.3 billion from its December 31, 2014, balance of $52.3 billion.

During the first quarter, interest revenue, receivership dividends, and deposit insurance

assessment collections exceeded resolution-related outlays and operating expenses.

• On March 31, 2015, the DIF investment portfolio's yield was 0.72 percent, up 2 basis points

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

Treasury securities purchased during the quarter generally having considerably higher yields

than the maturing securities.

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

purchased a total of 16 short- to intermediate-maturity conventional Treasury securities, all

designated as available-for-sale. The 16 securities had a total par value of $7.5 billion, a

weighted average yield of 0.76 percent, and a weighted average maturity of 2.02 years.

2
III. Budget Results (See pages 10 — 11 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 approved during the first quarter in accordance with the authority

delegated by the Board of Directors.

In January 2015, the Division of Information Technology (DIT), the Office of Minority and

Women Inclusion, the Division of Insurance and Research, the Information Security and

Privacy Staff (ISPS), and the CIO Council reallocated budget authority among major expense

categories within their approved Ongoing Operations budgets, and the Division of Resolutions

and Receiverships (DRR) reallocated budget authority among major expense categories within

its approved Receivership Funding budget. None of the budget realignments increased or

decreased the total Board-approved budget, or the Ongoing Operations or Receivership

Funding components of their budgets.

In March 2015, the CFO approved the reallocation of $780,566 within the Ongoing Operations

budget component from the Legal Division to the newly established Office of Financial

Institution Adjudication (OFIA) for Salaries and Compensation ($737,967), Travel ($40,000),

and Other Expenses ($2,599). OFIA, although independent, was previously a part of the

Legal Division for administrative purposes. It is now a separate organizational entity within the

Executive Support Offices reporting directly to the Chief Operating Officer.

In March 2015, the CFO approved a $5,860,000 transfer of budget authority from the

Corporate Unassigned contingency reserve to the Outside Services —Personnel and

Equipment expense categories in the Ongoing Operations budget of DIT to fund an

independent assessment of the FDIC's IT program; an update of the IT strategic plan; the

purchase of new file storage capacity and related services for the extended retention of emails and other documents; and the purchase of software licenses to support new security

capabilities.

• In March 2015, the CIO approved the realignment of funds within the CIO Council budget

between the Outside Services —Personnel (-$24,000) and Travel (+$24,000) expense

categories to provide travel funds for the Receivership Oversight project.

Following these budget reallocations, the amounts remaining available within the Corporate

Unassigned budgets for the Ongoing Operations and the Receivership Funding budget components

were $19,140,000 and $22,710,143, respectively.

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 the transfer of three authorized positions (two permanent,

one non-permanent) from the Legal Division to OFIA in conjunction with the establishment of

OFIA as a separate office within the Executive Support Offices.

3
Spending Variances

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

Significant spending variances for the three months ending March 31, 2015, are defined as those that

either (1) exceed the YTD budget by $3 million and represent more than five 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 $5 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 was a significant spending variance during the first quarter in two major expense categories of

the Ongoing Operations component of the 2015 Corporate Operating Budget:

Outside Services-Personnel expenditures were $8 million, or 14 percent, less than budgeted.

The Division of Administration (DOA) spent $4 million less than budgeted largely due to (1) the

failure to fully accrue expenses for the new security guard services contract, (2) fewer

background investigations than anticipated, and (3) delays in completing the succession

planning project and related pay, performance, and competency modeling projects. DRR

spent $1 million less than budgeted, primarily due to delays in initiating projects in its Complex

Financial Institutions and Planning and Resource Management Branches. In addition,

Corporate University spent $1 million less than budgeted primarily due to lower-than-projected

expenditures for projects in the Dallas Learning Center and the Schools of Corporate

Operations, Leadership Development, and Supervision.

Equipment expenditures were $10 million, or 61 percent, less than budgeted. DIT spent $7

million less than budgeted for hardware and software maintenance due to a slow start in

purchasing equipment and processing hardware and software maintenance contracts. About

half of these planned first quarter expenses were actually incurred in April. In addition, DOA

spent $2 million less than budgeted due to lower spending for online information services and

under-spending for furniture, fixture and equipment.

Receivership Funding

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

the first quarter in the Receivership Funding component of the 2015 Corporate Operating Budget:

Outside Services-Personnel expenditures were $27 million, or 30 percent, less than budgeted.

DRR spent $16 million less than budgeted in the first quarter as resolutions, asset

management and marketing costs declined at a faster rate than projected. This included lower

expenses for contracts supporting Owned Real Estate, Loan Servicing, Environmental, Failed

Bank Data and Capital Markets related contracts. In addition, the Legal Division spent $11

million less than budgeted due primarily to an unexpected decrease in the professional liability

expenses during the first quarter that was attributable to pre-trial settlements, temporary stays

in some cases, and other factors. We will reassess the Outside Services —Personnel funding

levels for DRR and the Legal Division at mid-year.

4
Significant Spending Variances by Division/Office'

Only four organizations had significant spending variances through the end of the first quarter:

• DRR spent $21 million, or 19 percent, less than budgeted, mostly due to less than budgeted

spending for resolution and receivership workload for the reasons described above.

The Legal Division spent $13 million, or 18 percent, less than budgeted. Approximately $11

million of this variance was in the Receivership Funding budget component and was largely

attributable to lower-than-budgeted spending for legal services contracting due to an

unexpected decrease in the professional liability expenses during the first quarter that was

attributable to pre-trial settlements, temporary stays in some cases, and other factors.

Additionally, there was a $1 million variance in the Ongoing Operations budget component due

to slower-than-projected hiring.

• DIT spent $9 million, or 19 percent, less than budgeted. This variance was largely attributable

to delays in the timing of budgeted purchases and processing hardware and software

maintenance contracts in the equipment category.

• DOA spent $8 million, or 12 percent, less than budgeted. This variance was largely

attributable to lower-than-budgeted spending for contractor support ($4 million) and equipment

expenses ($2 million) in its Ongoing Operations Budget component.

1 Information on division/office variances reflects variances in the Corporate Operating Budget.

5
FDIC CFO REPORT TO THE BOARD —First Quarter 2015

wv~~ ~ni ~~w vw~vi~ vv~~n~.Y.~v~~~v T •7'•• 7_ •1_ _ _ _ --_

In~stment in U.S. Treasury obligations, net 50,591 49,806 785 44,215 6,376

Assessments receivable, net 2,051 2,003 48 2,266 (215)

Interest receivable on in~stments and other assets, net 373 652 (279) 424 (51)

Receivables from resolutions, net 17,258 18,181 (923) 15,580 1,678

Prope►ty and equipment, net 365 373 (8) 368 (3)

Total Assets $ 74,367 $ 72,929 $ 1,438 $ 63,364 $ 11,003

Accounts payable and other liabilities 243 291 (48) 257 (14)

Liabilities due to resolutions 7,868 7,799 69 12,438 (4,570)

Postretirement benefit liability 243 243 194 49

Contingent liability for anticipated failures 717 1,815 (1,098) 1,577 (860)

Contingent liability for litigation losses 1 (1) 5 (5)

Total Liabilities $ 9,071 $ 10,149 $ (1,078) $ 14,471 $ (5,400)

FYI: Unrealized gain (loss) on U.S. Treasury in~stments, net 282 51 231 45 237

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

Fund Balance $ 65,296 $ 62,780 $ 2,516 $ 48,893 $ 16,403

DIF Investment Portfolio Performance

1.8 _ - 1.00%

1.6 — - 0.90%

o - 0.80%

~ 1.2 - -:_-.~ - 0.70%

a~ - 0.60%

o ~

0.8 - (~4A°10--.. 0.41 %o 0 0.50 /o Q

0.36 /o __

T_- --

Z 0.6 — - 

.. --- 0.30%

0.4 ---- - -- _ ----- ------- -- 0.20°/a

0.2 ,16 0.10%

p — ~ 0.00%

2010 2011 2012 2013 2014 Mar-15

~ Weighted Avg. Maturity (in years) --tYield-to-Maturity

D
Interest on U.S. Treasury obligations 60 282 45 15

Other re~nue 6 27 9 (3)

Total Revenue $ 2,255 $ 8,965 $ 2,447 $ (192)

Operating expenses 396 1,664 422 (26)

Provision for insurance losses (426) (8,305) 348 (774)

Insurance and other expenses - 6

Total Expenses and Losses $ (30) $ (6,635) $ 770 $ (800)

Net Income 2,285 15,600 1,677 608

Unrealized gain (loss) on U.S. Treasury in~stments, net 231 31 25 206

Unrealized postretirement benefit gain (loss) - (42) -

Comprehensive Income

.. ._

Cash and cash equivalents

$

$

2,516

872

$ 15,589

.- - .-

$ 871 $ 1

$

$

1,702

872

$

$

814

.-

-

Accumulated deficit (124,460) (124,461) 1 (124,460) -

Total resolution equity 872 871 1 873 (1)

Total revenue 1 1 - 1

Operating expenses - 2 - -

Provision for losses - (1) (1) 1

Net Income (Loss) $

$ in millions ~

Mar-15 Mar-14 Change

1

Mar-15

$ (1)

~ ~

Mar-14 Change

$ 1

Mar-15

$

~

Mar-14

-

Change

Total Recei~rships 483 484 (1) - 1 (1) 483 485 (2)

Assets in Liquidation $; 7,289 $ 10,246 $ (2,957) $ 5 $ 5 $ - $ 7,294 $ 10,251 $ (2,957)

YTD Collections $ 1,365 $ 1,157 $ 208 $ - $ 1 $ (1) $ 1,365 $ 1,158 $ 207

YTD Dividend/Other Pymts -Cash $ 2,170 $ 1,078 $ 1, 092 $ - $ - $ - $ 2,170 $ 1,078 $ 1, 092

4th Quarter 2014 FDIC Premiums Invoiced March 2015

(Distributed by Assessment Base Size

54 76M

1].A9G

6,A35 institutions

$I,ISOM

$d98M 54.1%

23.5% 17 institutions

large Intilitutions (cTmr $1n06) Medium Institutions x$10 $100D) Snell Imtitulions (Under 510U)

7
~.

3/31/15 12/31/14 Change

Par Value $53,226 $50,739 $2,487

Amortized Cost $54,028 $51,655 $2,373

Total Market Value (including accrued interest) $54,626 $52,302 $2,324

Primary Reserve' $54,626 $52,302 $2,324

Primary Reser~ % of Total Portfolio 100.0% 100.0% 0.0%

Yield-to-Maturity z 0.72% 0.70% 0.02%

Weighted A~rage Maturity (in years) 1.65 1.66 -0.01

Effective Duration (in years)

Total Portfolio 1.62 1.63 -0.01

Available-for-Sale Securities 1.74 1.69 0.05

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

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

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

Z The Yeld-to-Maturityinciudes the potential yield of Treasury Inflation-Protected Securities (TIPS), which presently assumes

an a~nerage 2.0%annual increase in the CPI overthe remaining life of each TIPS.

31n early August 2008, msnagementreclassified all of the DIF portfolio's HTMsecurities as AFS securities effective as of

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

their maturitydates.

~•

3/31/15 12/31/14 Change

FRF-FSLIC

Book Value 4 $827 $827 $0

Yield-to-Maturity 0.02% 0.03% -0.01

Weighted Average Maturity overnight o~rnight no change

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

purposes.

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 1st Quarter 2015

Purchase up to $8 billion (par value) of Treasury securities with maturity dates

between June 30, 2015, and June 30, 2020, subjectto 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 2nd Quarter 2015

Purchase up to $10 billion (par value) of Treasurysecurities with maturitydates

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 Treasury Inflation-Protected Securities (TIPS).

NATIONAL LIQUIDATION FUND Strategy for the 1st Quarter 2015

Maintain an overnight deposit targetfloor 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 2nd Quarter 2015

No strategy changes forthe second quarter of 2015.
Annual YTD YTD of YTD YTD

Major Expense Category Budget Budget Expenditures Budget Used Variance

Corporate Operating Budget

Ongoing Operations

Salaries &Compensation $1,226,509 $298,903 $285,127 95% ($13,776)

Outside Services -Personnel 254,021 53,335 45,741 86% (7,594)

Travel 97,749 23,907 21,972 92% (1,935)

Buildings 93,895 21,011 20,907 100% (104)

Equipment 87,242 16,088 6,322 39% (9,766)

Outside Services -Other 17,420 4,595 3,170 69°/a (1,425)

Other Expenses 16,861 3,537 3,596 102°/a 59

Total Ongoing Operations $1,793,697 $421,375 $386,835 92°/ ($34,540)

Funding

Salaries &Compensation $89,088 $24,384 $23,552 97°/o ($832)

Outside Services -Personnel 380,797 89,532 63,032 70% (26,500)

Travel 6,806 1,706 2,359 138% 653

Buildings 17,328 4,312 3,771 87% (541)

Equipment 4,091 710 1,207 170% 497

Outside Services -Other 4,044 1,118 486 43% (632)

Other Expenses 22,847 5,695 3,361 59% (2,334)

Total Receivership Funding $525,000 $127,457 $97,768 77°/ ($29,689)

Total Corporate Operating Budget $2,318,697 $548,832 $484,603 88°/ ($64,229)

10
• • 1

t• • •

Annual YTD YTD % of YTD YTD

Division/Office Budget Budget Expenditures Budget Used Variance

Corporate Operating Budget

Risk Management Supervision $578,983 $140,916 $133,635 95% ($7,280)

Resolutions &Receiverships 438,154 110,815 89,765 81% (21,050)

Legal 280,497 69,603 56,834 82% (12,769)

Administration 268,883 64,172 56,201 88% (7,970)

Depositor &Consumer Protection 172,827 43,306 41,401 96% (1,905)

Information Technology 225,405 47,934 39,031 81% (8,903)

CIO Council 50,977 11,143 11,954 107% 812

Insurance &Research 51,293 12,091 11,116 92% (975)

Finance 40,329 9,950 9,124 92°/a (826)

Inspector General 33,715 8,411 7,325 87% (1,086)

Information Security &Privacy Staff 34,793 7,088 6,447 91% (641)

Executive Support ~ 26,185 6,128 5,604 91% (524)

Corporate University -Corporate 21,649 4,867 5,215 107°/a 348

Complex Financial Institutions 22,594 5,049 4,251 84°/a (798)

Corporate University- CEP 18,440 4,260 4,132 97% (128)

Executive Offices 2 12,124 3,100 2, 566 83% (534)

Corporate Unassigned 41,850 0 0 N/A 0

Total, Corporate Operating Budget $2,318,697 $548,832 $484,603 88% ($64,229)

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, Chief Information Officer.

11