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Federal Deposit Insurance Corporation
550 17th Street, N.W., Washington, D.C. 20429-9990

Deputy to the Chairman and CFO

April 30, 2007
MEMORANDUM TO:

The Board of Directors

FROM:

Steven O. App
Deputy to the Chairman and
Chief Financial Officer
Frederick S. Selby
Director, Division of Finance

SUBJECT:

First Quarter 2007 CFO Report to the Board

The attached report highlights the Corporation's financial activities and results for the three-month
period ending March 31, 2007.
Executive Summary
•

The Deposit Insurance Fund (DIF) fund balance grew by 1.2 percent to $50.7 million during
the first quarter of 2007, equaling the same percentage increase for the comparable period in
2006. DIF’s comprehensive income for the first quarter of 2007 was slightly lower compared
to a year ago ($580 million vs. $596 million). However, if the one-time adjustment for exit
fees earned of $346 million is excluded from the 2006 results, DIF’s first quarter 2007
comprehensive income rose by $330 million, or 132 percent. This increase resulted primarily
from higher assessment revenue ($89 million), an increase in interest revenue ($89 million),
and a higher contribution to the year-to-date comprehensive income from unrealized gain/(loss)
on available-for-sale (AFS) securities ($138 million).

•

In February 2007, the FDIC was appointed receiver of Metropolitan Savings Bank, Pittsburgh,
PA (total assets of $15.8 million), which was the first FDIC-insured bank failure in over two
and one-half years. The DIF disbursed $17.3 million to cover obligations to insured depositors
of the failed bank and recorded an allowance for loss of $2.5 million against this receivable.
This estimated loss is likely to substantially increase based on a further review of the
institution’s unrecorded assets and liabilities.

•

For the three months ending March 31, 2007, Corporate Operating and Investment Budget
related expenditures ran below budget by 12 percent and 31 percent, respectively. The variance
with respect to the Corporate Operating Budget expenditures was primarily the result of limited
resolutions and receivership activities in the Receivership Funding component of the budget
through the first quarter. Detailed quarterly reports are provided separately to the Board by the
Capital Investment Review Committee for those information technology projects that are
included in the Investment Budget.

1

The following is an assessment of each of the three major finance areas: financial statements,
investments, and budget.
Trends and Outlook
Comments
During the first quarter of 2007, DIF’s net receivables from resolutions
declined by $108 million, or 20 percent, to $431 million. This reduction is
primarily due to collections from receiverships totaling $112 million to
repay payments made by the DIF to cover the obligations to insured
depositors ($56 million from Superior Bank, $33 million from Hamilton
Bank, and $23 million from Southern Pacific Bank) that was partially offset
by the recordation of a $15 million net receivable from the failure of
Metropolitan Savings Bank. By year-end 2007, absent any new, substantial
failure activity, DIF’s net receivables from resolutions is expected to further
decline by approximately $142 million, or 33 percent, to $289 million,
assuming favorable resolution of various receivership asset dispositions,
litigation efforts, and payment of dividends.

Financial Results
I. Financial
Statements

•

II. Investments

•

The DIF portfolio’s par value increased by 1.22 percent during the first
quarter of 2007, and totaled $47.051 billion on March 31, 2007. Moreover,
while the securities that were purchased during this period had slightly
lower yields than maturing securities, this factor was more than offset by
higher yielding overnight investments. Consequently, the DIF portfolio’s
yield increased by three basis points during the first quarter of 2007, rising
to 4.92 percent as of March 31, 2007, from 4.89 percent as of December 31,
2006.

•

Expectations are for Treasury market yields to continue to trade generally
within the range exhibited during the first quarter of 2007, but with the
potential for a modest rise from quarter-end levels. This, coupled with a
growing DIF portfolio balance, should lead to increased interest revenue
over the long run. Over the short run, any increase in yields will accelerate
the erosion of existing net unrealized gains on available-for-sale (AFS)
securities. Moreover, regardless of changes in yields, existing net
unrealized gains will be reduced due to the passage of time (that is, any
unrealized gains or losses vanish as AFS securities approach their maturity
dates).

2

Financial Results
III. Budget

•

•

Trends and Outlook
Comments
Approximately $227 million was spent in the Ongoing Operations
component of the 2007 Corporate Operating Budget, which was $16
million (7 percent) below the budget for the three months ending March
31, 2007. The Outside Services - Personnel expense category was $7
million below its year-to-date budget, and represents 42 percent of the
total Ongoing Operations variance.
Approximately $2 million was spent in the Receivership Funding
component of the 2007 Corporate Operating Budget, which was $17
million (89 percent) below the budget for the three months ending March
31, 2007. The Outside Services - Personnel expense category was $14
million below its year-to-date budget, and represents 85 percent of the
total Receivership Funding variance.

I. Corporate Fund Financial Statement Results (See pages 9 - 10 for detailed data and charts.)
Deposit Insurance Fund (DIF)
•

For the three months ending March 31, 2007, DIF’s comprehensive income totaled $580
million compared to $596 million last year, a decrease of 2.7 percent. Excluding the
recognition of exit fees earned of $346 million (a one-time adjustment), comprehensive income
actually rose by $330 million from a year ago. This year-over-year increase is primarily due to
increases in the following line items: $89 million increase in assessments earned, $89 million
increase in interest earned on investment securities, and a $138 million higher contribution to
year-to-date comprehensive income from unrealized gain/(loss) on AFS securities, net.

•

DIF reported an 18.6 percent ($89 million) increase in interest income during the first quarter
of 2007 compared to a year ago, primarily stemming from higher inflation compensation
related to the DIF’s holdings of Treasury Inflation-Protected Securities (TIPS). In addition, the
DIF reported an unrealized gain on AFS securities of $81 million during the first quarter of
2007, compared to an unrealized loss of $57 million during the first quarter of 2006. The first
quarter 2007 unrealized gain stemmed from a decline in market yields, despite the lower
duration for the AFS securities held in the DIF’s investment portfolio.

•

DIF recorded a $94 million receivable for estimated net deposit insurance assessments due
from insured institutions for first quarter 2007 insurance coverage. Starting this quarter, the
FDIC must estimate assessment revenue, and establish a corresponding receivable, because
assessment premiums are now collected a quarter after the insurance coverage period (a change
from the previous 'payment in advance' requirement). The FDIC has developed an estimation
methodology based on institution assessment base and rate results, and available assessment
credits, for the prior quarter, adjusted for significant changes in the current quarter and a
modest deposit growth factor. The first quarter 2007 receivable of $94 million was the result of
netting $820 million in assessment credits estimated to be used by financial institutions against
estimated gross assessment revenue of $914 million. However, this estimate may differ from
3

the amount collected in June 2007 since the invoice amount will be based on actual first quarter
2007 assessment base, rate, and credit results.
FSLIC Resolution Fund (FRF)
•

FRF reported a net loss of $19 million for the first quarter of 2007 as a result of several
offsetting factors. The FRF incurred $107.3 million in Goodwill litigation expenses due to the
payment of a $32.8 million Goodwill judgment and the accrual of a $74.5 million estimated
loss for a second Goodwill case. These Goodwill litigation expenses were partially offset by 1)
$41 million in interest earned on U.S. Treasury overnight securities, 2) $20 million in criminal
restitution income, 3) $13 million in FSLIC assistance agreement tax benefits, and 4) the net
effect of a $22.5 million payment for a Guarini litigation settlement and the reversal of a $27.1
million loss reserve for this same case. This Guarini settlement concludes the last of the eight
Guarini cases originally filed against the government seeking damages.

II. DIF Investment Results (See pages 11 – 12 for detailed data and charts.)
DIF
•

During the first quarter of 2007, the par value of the DIF investment portfolio increased by
$568 million or by 1.22 percent—from $46.483 billion on December 31, 2006, to $47.051
billion on March 31, 2007. Moreover, during the quarter, the DIF portfolio’s market value
increased by $730 million or by 1.49 percent, from $49.038 billion on December 31, 2006, to
$49.768 billion on March 31, 2007.

•

The DIF investment portfolio's total return for the first quarter of 2007 was 1.655 percent,
approximately 10.3 basis points higher than the return of the benchmark, the Merrill Lynch 1 10 Year U.S. Treasury Index (Index), which earned 1.552 percent during the same period. The
outperformance relative to the benchmark can be attributed to the strong performance of the
DIF investment portfolio’s TIPS holdings, which outperformed the benchmark’s conventional
securities during the quarter.

•

During the first quarter of 2007, staff purchased Treasury securities on two occasions, both
purchases occurring in January. Staff purchased four securities with a total par value of $1.300
billion, a weighted average maturity of 6.34 years, a weighted average duration of 5.10 years,
and a weighted average yield-to-maturity of 4.835 percent. During February and March, staff
continued its recent practice of deferring purchases of longer-maturity securities and holding
excess funds in higher-yielding overnight investments. On March 31, 2007, the DIF portfolio’s
overnight investment balance was $3.709 billion, well above its $150 million target floor, and
higher than the $2.949 billion balance on December 31, 2006, meaning that staff purchased a
smaller amount of Treasury securities compared to the amount of net cash received during the
quarter.

•

In line with consensus expectations, yields should continue to trade generally within their
current range, but with the potential for a modest rise from quarter-end levels. Similar to the
strategy employed during the first quarter, during the second quarter, staff will take advantage
of instances when yields rise toward the upper end of this trading range and accordingly will
deploy funds into longer-maturity higher-yielding securities.
4

The Treasury Market
•

During the first quarter of 2007, conventional Treasury yields were little changed over the
short-end of the curve and decreased modestly across the remaining maturity sectors. This
non-parallel yield curve shift may be attributed to market expectations that the Federal Reserve
was unlikely to cut the federal funds target rate over the near term, although expectations for
rate cuts later this year have grown stronger. The yield on the three-month Treasury bill
increased by two basis points, while the yield on the six-month Treasury bill decreased by two
basis points. The two-year note yield, which is also sensitive to actual as well as anticipated
changes in the federal funds rate, decreased by 24 basis points, again, reflecting stronger
consensus expectations that the federal funds target rate will be cut later this year.
Intermediate-term Treasury yields also decreased, with the five-year Treasury note yield
declining 16 basis points and the ten-year note yield declining a more modest six basis points.
The Treasury yield curve ended the first quarter very flat and slightly positive; on March 31,
2007, the ten-year to two-year yield curve spread was a positive seven basis points (compared
to a negative 11-basis point spread at end of the fourth quarter of 2006). From a recent
historical perspective, the curve remains significantly flatter; over the past five years, this
spread has averaged 123 basis points.

•

During the first quarter of 2007, TIPS real yields decreased, reflecting concerns over weak
economic growth as well as lingering inflationary pressures. For example, the real yield on the
DIF portfolio’s longest-maturity TIPS (with a maturity of a little under five years) decreased by
41 basis points. The real yield on the ten-year TIPS maturing on January 15, 2016, decreased
by 23 basis points.

Prospective Strategies
•

The current DIF investment strategy provides the flexibility to purchase a wide range of
different Treasury securities with varying maturities, depending on Treasury market conditions
and developments during the second quarter of 2007. Similar to the first quarter 2007
investment strategy, if higher yields become available—either as a result of an upward shift in
the yield curve or because of potential yield volatility—the second quarter 2007 strategy
provides the flexibility to purchase comparatively higher-yielding, longer-maturity Treasury
securities. Given the flat Treasury yield curve, purchasing short- and intermediate-maturity
Treasuries may also make sense.

•

The DIF portfolio’s primary reserve target floor balance will remain at $10 billion for the
second quarter of 2007. The target limit for TIPS will also remain at its current $10 billion
target, while the AFS security target limit is being increased from $8.7 billion to $9.0 billion to
help ensure that the primary target floor balance can be maintained during 2007 (see attached
Approved Investment Strategy).

5

III. Budget Results (See pages 13 - 14 for detailed data.)
Approved Budget Modifications
During the first quarter of 2007, three modifications were made to the 2007 Corporate Operating
Budget and/or authorized staffing, in accordance with the authority delegated by the Board of
Directors in the 2007 Budget Resolution:
•

The Chief Financial Officer approved the reallocation of $2,208,024 within the Ongoing
Operations component of the approved 2007 Corporate Operating Budget from the Division of
Resolutions and Receiverships (DRR) to the Division of Finance (DOF). The reallocation was
made in conjunction with a reorganization that transferred the deposit insurance compliance
function, along with the 13 authorized positions, from DRR to DOF.

•

Two divisions, the Division of Information Technology (DIT) and the Division of Supervision
and Consumer Protection (DSC), made minor reallocations among the major expense
categories of their respective operating budgets. The total of these adjustments increased
Outside Services – Other by $642,868, Outside Services – Personnel by $398,881, and Other
Expenses by $196,846. This was offset by decreasing Equipment by $709,997 and Travel by
$528,598.

Status of Spending for the Implementation of Deposit Insurance Reform
The 2007 Corporate Operating Budget approved by the Board of Directors included funding for the
continued implementation of Deposit Insurance Reform. Excluding internal salaries and compensation
expenses, $4.9 million was spent on system changes and $1.8 million was spent on printing and
distribution costs in 2006. During the first quarter of 2007, an additional $1.8 million (excluding
internal salaries and compensation expenses) was spent as follows:
•

Approximately $1.4 million was spent for system development and enhancement activities. In
addition, about $0.6 million was approved by the Change Control Board for additional work
that will be undertaken later in the year. A total of $4.7 million is budgeted in 2007 for systems
work related to deposit insurance reform implementation.

•

Approximately $0.4 million was spent for printing and distribution of updated deposit
insurance brochures during the first quarter of 2007. Up to $0.8 million more will be spent
revising the Spanish, Korean, and Chinese versions of Insuring Your Deposit and Your Insured
Deposit later this year.

No funds have been spent in 2006 or 2007 for the additional staff in the Division of Insurance and
Research (DIR) that the Board authorized to support deposit insurance pricing. DIR continues to defer
hiring for those positions until final determinations are made about the new deposit insurance
assessment system.
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, 2007, are defined as those that
either (1) exceed the YTD budget by $3 million and represent more than five percent for a major
6

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 only one major expense category in which a significant spending variance occurred during
the first quarter in the Ongoing Operations component of the Corporate Operating Budget:
•

Outside Services-Personnel expenditures were $7 million, or 18 percent, less than budgeted.
Approximately half of this variance was due to information technology (IT) project schedule
changes and a decision by DIT management during its ongoing review of corporate IT
priorities to scale back selected DIT internal activities. This made approximately $1.6 million
available for reallocation to support continued expansion of the new Unix operating
environment for projects under development, bringing to $5.0 million the total funds now
planned to be spent for this purpose in 2007. The Chief Information Officer determined in
February 2006 that Unix would provide a more modern and cost effective technological
environment and designated it as the target architecture for the Corporation’s IT infrastructure;
initial purchases of equipment and software for the new environment were made during the
fourth quarter of 2006, as previously reported to the Board. As additional funds are available,
DIT plans to continue to expand the Unix environment to support new applications that can
efficiently and effectively use this technology.

•

In addition to the variance in IT contract spending, lower-than-budgeted first quarter spending
for government litigation being handled by the Department of Justice contributed $1 million to
the first quarter variance in the Outside Services-Personnel category. Another $0.8 million of
the variance was the result of a delay in the award of a contract for the Identity Theft Media
Campaign and the fact that DSC inadvertently neglected to accrue for IT support received from
the FFIEC to meet Home Mortgage Disclosure Act/Community Reinvestment Act reporting
requirements.

Receivership Funding
The Receivership Funding component of the Corporate Operating Budget includes funds budgeted for
non-personnel expenses that are incurred in conjunction with an institution failure and the management
and disposition of the assets and liabilities of the ensuing receivership. There was one major expense
category in the Receivership Funding component in which a significant spending variance occurred
during the first quarter:
•

Outside Services-Personnel expenditures were $14 million, or 93 percent, less than budgeted,
primarily due to the limited receivership and resolution activity that occurred during the
quarter.

7

Significant Spending Variances by Division/Office1
There were two organizations that had a significant spending variance during the first quarter:
•

DRR spent $13 million, or 53 percent, less than budgeted. This variance was fully attributable
to under spending in the Receivership Funding component of DRR’s operating budget
primarily due to the limited receivership and resolution activity that occurred during the
quarter.

•

DIT spent $6 million, or 12 percent, less than budgeted. This was due largely to IT project
schedule changes and a decision by DIT management to scale back selected DIT internal
activities in order to reallocate funds to continue expansion of the new Unix operating
environment, as described above. In addition, within the Corporation’s Investment Budget, a
major software purchase planned for the Claims Administration System investment project in
March was delayed.

Other Matters
In accordance with the requirements of the 2007 Budget Resolution, an analysis of 2007 funding
requirements for employee salaries and fringe benefits was completed after the close of the first
quarter. The analysis determined that those costs had been over-estimated by approximately $2.6
million during the preparation of the 2007 Corporate Operating Budget. This represents only about
four-tenths of one percent of the 2007 budget for Salaries and Compensation and could be affected by
other factors during the remainder of the year, such as timing of actions to fill authorized vacancies.
Accordingly, no action is being taken by the CFO to modify the 2007 budget for Salaries and
Compensation that was approved by the Board in December 2006.

1

Information on division/office variances reflects variances in both the Corporate Operating and Investment Budgets.

8

FDIC CFO REPORT TO THE BOARD – First Quarter 2007
Fund Financial Results

($ in millions)

Balance Sheet
(unaudited)
Mar-07
Cash & cash equivalents
$
3,712
45,942
Investment in U.S. Treasury obligations, net
Assessments receivable, net
94
Interest receivable on investments and other assets, net
682
Receivables from resolutions, net
431
Property, buildings and other capitalized assets, net
368
Total Assets $ 51,229
Accounts payable and other liabilities
119
Postretirement benefit liability
130
Contingent Liabilities: future failures
35
Contingent Liabilities: litigation losses & other
200
484
Total Liabilities $
FYI: Unrealized gain on available-for-sale securities
315
FYI: Unrealized postretirement benefit gain/(loss)
2
FUND BALANCE $ 50,745

Deposit Insurance Fund
(unaudited)
(audited)
Mar-06
Change
% Change
Dec-06
$
2,954 $
758
26% $
1,426
46,142
(0.4%)
46,647
(200)
0
100%
0
94
748
(9%)
722
(66)
539
(108)
(20%)
497
377
(9)
(2%)
377
$ 50,760 $
469
1% $
49,669
154
(35)
(23%)
266
130
0%
0
0
111
(68%)
9
(76)
200
0%
201
0
$
595 $
(111)
(19%) $
476
234
35%
350
81
2
0%
0
0
$ 50,165 $
580
1% $
49,193

Estimated net assessment revenue is projected to grow by 151 percent by the end of 2007.
1000

927

914
820

945

936
788

800

763
709

$ in millions

600

400
236

173

200

139

94
0
1st Qtr 2007

2nd Qtr 2007

Gross Assessment Revenue

3rd Qtr 2007

Credits Used

Net Assessment Revenue

Income Statement
(unaudited)

Deposit Insurance Fund
(unaudited)
(audited)

Mar-07
Assessments earned
Interest earned on investment securities
Exit fees earned
Other revenue

$

Total Revenue
Operating expenses (includes depreciation expense)
Provision for insurance losses
Other expenses
Total Expenses & Losses
Net Income
Unrealized gain/(loss) on available-for-sale securities, net
Unrealized postretirement benefit gain/(loss)
YTD Comprehensive Income

$

$

$

$

$
$

$

32
2,241
345
26
2,644
951
(52)
6
905
1,739
(173)
2
1,568

Year-OverYear Change

Mar-06

Dec-06

94
567
0
4
665
239
(73)
0
166
499
81
0
580

$
$

4th Qtr 2007

$

$

$
$

$

5
478
346
5
834
224
(45)
2
181
653
(57)
0
596

$

89
89
(346)
(1)
(169)
15
(28)
(2)
(15)
(154)
138
0
(16)

$

$
$

$

Five of the 24 active DIF receiverships account for the majority of DIF's net receivable from resolutions.
$400
$350

$344

$ in millions

$300

Superior
So Pacific
NextBank
Hamilton
Keystone
Others

$268
$232

$250

$213

$200
$150
$100
$50

$0
Total:
Year:

$132
$124

$124
$90

$94

$78

$110

$65

$35

$17

$25

$722 million
12/2004

$533 million
12/2005

$60
$27

$60

$40
$12 $27

$539 million
12/2006

$40
$7 $1

$431 million
3/2007

page 9

Fund Financial Results - continued

($ in millions )

Income Statement - (continued)
DIF Coverage Ratio
(Interest Revenue/Operating Expenses)
5
4
3

2.39

2.21

2.24

2.42

2.36

2.37

2003

2004

2005

2006

3/2007

2
1
0
2002

Deposit Insurance Fund

Statements of Cash Flows

Net Income
Amortization of U.S. Treasury obligations (unrestricted)
TIPS Inflation Adjustment
Depreciation on property and equipment
Provision for insurance losses
Exit fees earned
Net change in operating assets and liabilities
Net Cash Provided by Operating Activities
Investments matured and sold
Investments purchased (includes purchase of property and
equipment)
Net Cash (Used) by Investing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at beginning of year
Cash and Cash Equivalents - Ending

(unaudited)

(audited)

(unaudited)

Mar-07

Dec-06

Mar-06

$

499
136
(25)
13
(73)
0
37
587
1,515

$

$

$

$

1,739 $
599
(109)
53
(52)
(345)
100
1,985 $
6,800

$

(1,344)
171 $
758
2,954
3,712 $

(9,062)
(2,262) $
(277)
3,231
2,954 $

Year-OverYear Change

(154)
653 $
148
(12)
39
(64)
13
0
(45)
(28)
(346)
346
74
(37)
536 $
51 $18.9
$20.8
$19.2 490
1,025
(3,366)
(2341) $
(1,805)
3,231
1,426 $

$18.6

2,022
2512
2,563
(277)
2286

FSLIC Resolution Fund (FRF)

Cash and cash equivalents
Accumulated deficit, net
Resolution equity
Total revenue
Operating expenses
Expenses for Goodwill/Guarini litigation
Net (loss)

(unaudited)

(audited)

(unaudited)

Mar-07

Dec-06

Mar-06

$
3,676 $
3,616 $
3,636 $
40
(123,853)
(123,834)
(123,777)
(76)
3,708
3,620
3,409
299
$
64 $
169 $
37 $
27
0
12
3
(3)
103
411
(76)
179
$
(19) $
(203) $
(146) $
127
Summary of Goodwill & Guarini Litigation
(Inception-to-Date)

FRF Quarterly Payments for Goodwill & Guarini Case
Settlements & Judgments

Goodwill

450
400

$285

$ in Millions

300
$234

250
200

$179

$169

150
100
50
$0 $0 $0

$9 $28

$49
$0 $0

$16 $6 $0 $0

$23

1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2005 2005 2005 2005 2006 2006 2006 2006 2007
Goodwill Cases

Guarini

# of Cases

# of
Cases

Amount Paid

Dismissals/
Time

Amount Paid/
Accrued

43

N/A

0

N/A

Settlements

18

$149 million

3

$121 million

Judgments

38

$1,157 million*

5

$153 million

Pending

23

N/A

0

N/A

Totals

122

$1,306 million

8

$274 million

$382

350

0

Year-OverYear Change

* Four institutions account for 69% of the total Goodwill payments
(Glendale Federal Bank - $382 million, Westfed Holdings, Inc. $211 million, LaSalle Talman Bank - $155 million, and Home
Savings of America - $150 million).

Guarini Cases

page 10

Deposit Insurance Fund Portfolio Summary
(in millions)
Par Value
Amortized Cost
Market Value
1

Primary Reserve
Primary Reserve Target Floor
Primary Reserve % of Total Portfolio
Year-to-Date Total Return (Portfolio)
Year-to-Date Total Return (Benchmark)
Total Return Variance (in basis points)
Yield-to-Maturity

2

3

Weighted Average Maturity (in years)

3/31/07

12/31/06

Change

$47,051
$49,333
$49,768

$46,483
$48,858
$49,038

$568
$475
$730

$16,057
$10,000
31.8%

$13,911
$10,000
28.0%

$2,146
$0
3.8%

1.66%
1.55%
10

4.06%
3.57%
49

not applicable
not applicable
not applicable

4.92%

4.89%

0.03%

3.47

3.57

(0.10)

2.76
1.67
3.30

2.82
1.80
3.29

(0.06)
(0.13)
0.01

4

Effective Duration (in years)
Total Portfolio
Available-for-Sale Securities
Held-to-Maturity Securities
1

Primary Reserve is the total market value (including accrued interest) of overnight investments, available-for-sale securities,
and held-to-maturity securities maturing within three months.

2

The benchmark is the total return of the Merrill Lynch 1-10 Year U.S. Treasury Index.

3

The Yield-to-Maturity includes the potential yield of Treasury Inflation-Protected Securities (TIPS), which assumes an average
2.2% annual increase in the CPI over the remaining life of each TIPS.
4

For each TIPS, a 80% factor is applied to its real yield duration to arrive at an estimated effective duration (note: factor
updated in September 2006 to reflect recent past experience).

National Liquidation Fund (NLF) Investment Portfolio Summary
(Dollar Values in Millions)
5

Book Value
Yield-to-Maturity
Weighted Average Maturity (in days)

12/31/06

Change

$296
5.46%
8

$381
5.37%
13

($85)
0.09%
(5)

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

U.S. Treasury Security Yield Curves
5.75%
5.25%

Conventional

12/31/06

4.75%
4.25%

3/31/07

3.75%
3.25%

TIPS

2.75%

12/31/06

2.25%
1.75%

3/31/07
10 Y
ear

7 Ye
ar

5 Ye
ar

4 Ye
ar

3 Ye
ar

2 Ye
ar

1 Ye
ar

1.25%
3 Mo
nth
6 Mo
nth

5

3/31/07

page 11

Approved Investment Strategy
DEPOSIT INSURANCE FUND
Current Strategy as of 1st Quarter 2007
Maintain a $150 million target floor overnight investment balance.
Strategically invest all available funds in excess of the target overnight investment balance, which
may include purchasing conventional Treasury securities within the zero- to twelve-year maturity
sector, purchasing Treasury Inflation-Protected Securities (TIPS) within the two- to ten-year maturity
sector, and/or purchasing callable Treasury securities with final maturities not to exceed twelve years,
subject to the following limitations:
TIPS should not total more than $10.0 billion (adjusted par value) by quarter end;
Available-for-sale (AFS) securities should not total more than $8.7 billion (par value) by quarter end; and
All newly purchased AFS securities should have maturities of six years or less.
Moreover, staff will strive to maintain an $10 billion target floor primary reserve balance.

Strategy Changes for 2nd Quarter 2007
AFS securities target limit increased from $8.7 billion to $9.0 billion.

NATIONAL LIQUIDATION FUND
Current Strategy as of 1st Quarter 2007
Maintain a $30 million target floor overnight investment balance.
Strategically invest the remaining funds in the zero- to 12-month maturity sector.

Strategy Changes for 2nd Quarter 2007
None

page 12

Executive Summary of 2007 Budget and Expenditures
by Major Expense Category
Through March 31, 2007
(Dollars in Thousands)
Major Expense Category

YTD
Budget

YTD
Expenditures

% of
Budget Used

Variance

Corporate Operating Budget
Ongoing Operations
Salaries & Compensation
Outside Services - Personnel
Travel
Buildings
Equipment
Outside Services - Other
Other Expenses

$162,493
36,387
12,293
16,424
7,887
5,320
2,601

$158,141
29,763
10,335
16,665
7,887
2,878
1,810

97%
82%
84%
101%
100%
54%
70%

($4,352)
(6,624)
(1,958)
241
0
(2,442)
(791)

Total Ongoing Operations
Receivership Funding

$243,405

$227,479

93%

($15,926)

$855
15,337
1,411
575
56
136
380

$203
1,096
350
314
2
14
8

24%
7%
25%
55%
4%
10%
2%

($652)
(14,241)
(1,061)
(261)
(54)
(122)
(372)

$18,750

$1,987

11%

($16,763)

$262,155

$229,466

88%

($32,689)

Investment Budget 1

$5,602

$3,885

69%

($1,717)

Grand Total

$267,757

$233,351

87%

($34,406)

Salaries & Compensation
Outside Services - Personnel
Travel
Buildings
Equipment
Outside Services - Other
Other Expenses
Total Receivership Funding

Total Corporate Operating Budget

1) Budgets for investment projects are approved on a multi-year basis; the "Year-to-Date Budget" amount reflects the 2007 spending
estimates for approved projects. Detailed quarterly reports on the status of those projects are provided separately to the Board by the
Capital Investment Review Committee.

page 13

Executive Summary of 2007 Budget and Expenditures
by Budget Component and Division/Office
Through March 31, 2007
(Dollars in Thousands)
YTD
Budget

Division/Office

YTD
Expenditures

% of
Budget Used

Variance

Corporate Operating Budget
Supervision & Consumer Protection
Information Technology
Administration
Resolutions & Receiverships
Legal
Insurance & Research
Finance
Inspector General
Corporate University
Executive Support 1
Executive Offices 2
Government Litigation
Total, Corporate Operating Budget
Investment Budget

$96,237
42,921
39,742
24,743
23,101
9,161
7,436
6,281
6,307
4,150
1,076
1,000
$262,155

$92,772
38,669
36,296
11,448
18,452
8,378
6,971
5,788
6,047
3,501
1,144
0
$229,466

96%
90%
91%
46%
80%
91%
94%
92%
96%
84%
106%
0%
88%

($3,465)
(4,252)
(3,446)
(13,295)
(4,649)
(783)
(465)
(493)
(260)
(649)
68
(1,000)
($32,689)

$5,451
52
99
$5,602

$3,751
115
19
$3,885

69%
221%
19%
69%

($1,700)
63
(80)
($1,717)

$96,237
48,372
39,742
24,795
23,101
9,260
7,436
6,281
6,307
4,150
1,076
1,000
$267,757

$92,772
42,420
36,296
11,563
18,452
8,397
6,971
5,788
6,047
3,501
1,144
0
$233,351

96%
88%
91%
47%
80%
91%
94%
92%
96%
84%
106%
0%
87%

($3,465)
(5,952)
(3,446)
(13,232)
(4,649)
(863)
(465)
(493)
(260)
(649)
68
(1,000)
($34,406)

3

Information Technology
Resolutions & Receiverships
Insurance & Research
Total, Investment Budget 3
Combined Division/Office Budgets
Supervision & Consumer Protection
Information Technology
Administration
Resolutions & Receiverships
Legal
Insurance & Research
Finance
Inspector General
Corporate University
Executive Support 1
Executive Offices 2
Government Litigation
Grand Total

1) Executive Support includes the Offices of Diversity and Economic Opportunity, Public Affairs, Ombudsman, Legislative Affairs, Enterprise
Risk Management, and International Affairs.
2) Executive Offices include the offices of the Chairman, Vice Chairman, Independent Director, Deputy to the Chairman and Chief Operating
Officer, and Deputy to the Chairman and Chief Financial Officer.
3) Budgets for investment projects are approved on a multi-year basis; the "Year-to-Date Budget" amount reflects the 2007 spending
estimates for approved projects. Detailed quarterly reports on the status of those projects are provided separately to the Board by the
Capital Investment Review Committee.

page 14