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

Deputy to the Chairman and CFO

February 6, 2008
MEMORANDUM TO:

The Board of Directors

FROM:

Steven O. App
Deputy to the Chairman and
Chief Financial Officer
Bret D. Edwards
Director, Division of Finance

SUBJECT:

Fourth Quarter 2007 CFO Report to the Board

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

The Deposit Insurance Fund (DIF) balance grew by one percent to $52.413 billion during the
fourth quarter of 2007. DIF’s comprehensive income grew by $659 million during the fourth
quarter of 2007, increasing the year-to-date (YTD) comprehensive income to $2.248 billion.
Comprehensive income for the fourth quarter 2007 is primarily composed of interest earned on
investment securities of $585 million, assessment revenue of $239 million, and an unrealized
gain on available-for-sale (AFS) securities of $138 million, less operating expenses of $263
million and a provision for insurance losses of $39 million.

•

On October 4, 2007, the Ohio Superintendent of Financial Institutions closed Miami Valley
Bank of Lakeview, Ohio, and named the FDIC as receiver. DIF recorded a $56 million
receivable from the receivership for the payments made by DIF to cover obligations to insured
depositors. In addition, an allowance for loss of $3 million was recorded against the resolution
receivable. The Miami Valley receivership retained assets of approximately $83 million.

•

For the twelve months ending December 31, 2007, total Corporate Operating and Investment
Budget related expenditures ran below budget by 10 percent and 18 percent, respectively. The
variance with respect to the Corporate Operating Budget expenditures was primarily the result
of limited resolutions and receivership activity in the Receivership Funding component of the
budget during the year. Detailed quarterly reports are provided separately to the Board by the
Capital Investment Review Committee (CIRC) for those information technology projects that
are included in the Investment Budget.

The following is an assessment of each of the three major finance areas: financial statements,
investments, and budget.

Financial Results
I. Financial
Statements

•

Trends and Outlook
Comments
During the 4th quarter of 2007, DIF’s contingent liability for anticipated
failures increased by $54 million to $124 million at year-end 2007 due
to the deterioration in banking industry financial conditions. Despite
this increase, the contingent liability represents less than one quarter of
1 percent of the fund balance.
Significant challenges have confronted the banking industry in 2007
arising from a slowdown in the housing market and rising defaults on
subprime loans. Consequently, during 2007, the number of institutions
on the FDIC's "Problem List" increased by 26 to 77. These institutions
had $22.2 billion in assets as of December 31, 2007, representing a 261
percent increase in problem assets from a year earlier. However, these
challenges did not cause a large number of failures in 2007 – three
FDIC-insured institutions failed with total assets of $2.3 billion and
estimated losses of $120 million. These were the first failures since
June 2004.
Current market volatility may continue to hurt the performance of
institutions with significant exposure to the residential mortgage market
– especially those mortgage lenders that relied heavily on the “originate
and sell” business model. However, many financial institutions entered
2007 with strong profitability and capital levels. As of September 30,
2007, risk-based capital ratios in the industry averaged 10.2 percent.

II. Investments

•

The DIF investment portfolio’s amortized cost (book value) increased
by three percent during 2007, and totaled $50.469 billion on December
31, 2007. At year end, the DIF’s portfolio yield was 4.72 percent,
appearing to have dropped 17 basis points from 4.89 percent as of
December 31, 2006. However, this decline stems from the extremely
low, anomalous 1.25 percent overnight investment bond equivalent
yield earned on December 31, 2007. At quarter end, overnight
investments totaled $4.240 billion, or about 8.1 percent of the total
portfolio as measured by market value. The overall portfolio yield
would have been in the neighborhood of 4.93 percent had the monthend overnight investment yield reflected the much more representative
3.96 percent average overnight investment yield earned between
December 11, 2007 (the date of the then-most recent meeting of the
Federal Reserve’s Federal Open Market Committee (FOMC) when it
lowered the federal funds target rate) and December 30, 2007. This
more representative 4.93 percent portfolio yield is four basis points
higher than the portfolio’s yield at year-end 2006, reflecting the fact that
during 2007, newly purchased securities had higher average yields than
those of maturing securities.
2

Financial Results
•

III. Budget

•

•

Trends and Outlook
Comments
Treasury market yields should continue to decline and trade at
comparatively low levels over the next several months, as many
investors are expecting further reductions in the federal funds target rate
and are concerned with the prospect that the U.S. economy may be
falling into a recession. Expectations are for Treasury yields to
gradually and modestly rise during the latter half of 2008 and into early
2009. This, coupled with a growing DIF portfolio balance, should lead
to increased interest revenue over the long run. Over the short run, any
decrease in yields would add to the existing net unrealized gains on
available-for-sale (AFS) securities. Conversely, any subsequent
increase in yields would accelerate the decline of the existing net
unrealized gains on 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).
Approximately $982 million was spent in the Ongoing Operations
component of the 2007 Corporate Operating Budget, which was $51
million (5 percent) below the budget for the twelve months ending
December 31, 2007. The Outside Services - Personnel expense
category was $29 million (16 percent) below its year-to-date budget,
and represented 58 percent of the total Ongoing Operations variance.
Approximately $20 million was spent in the Receivership Funding
component of the 2007 Corporate Operating Budget, which was $55
million (74 percent) below the budget for the year. The Outside
Services - Personnel expense category was $49 million (79 percent)
below its budget, and represented 88 percent of the total Receivership
Funding variance.

I. Corporate Fund Financial Statement Results (See pages 11 - 12 for detailed data and charts.)
DIF
•

For 2007, DIF’s comprehensive income totaled $2.248 billion compared to $1.568 billion for
last year. Excluding the recognition of exit fees earned of $345 million (a one-time adjustment)
from the 2006 results, comprehensive income rose by $1.025 billion, or 84 percent, from a year
ago. This year-over-year increase was primarily due to a $611 million increase in assessment
revenue, a $299 million increase in interest revenue, a higher contribution from unrealized
gain/loss on AFS securities of $298 million, offset by a $42 million increase in operating
expenses and a $147 million increase in the provision for insurance losses.

•

During the fourth quarter of 2007, DIF’s receivables from resolutions, net, decreased by $1.249
billion to $808 million primarily due to $1.289 billion in dividends from the NetBank
receivership. This decrease was in part offset by a $53 million increase in the net receivable
resulting from the Miami Valley Bank closing on October 4, 2007.
3

•

The DIF portfolio's interest revenue was $2.540 billion in 2007, or $299 million higher than the
$2.241 billion of interest revenue earned in 2006. The largest contributor to the overall
increase in 2007 interest revenue was TIPS inflation compensation of $314 million, which was
$205 million more than the amount earned in 2006. This increased inflation compensation
reflected the comparatively large increases in the CPI during 2007 stemming from rising
energy and food prices. The remaining $94 million year-over-year increase in interest revenue
resulted from: 1) slightly higher average portfolio yields in 2007 as newly purchased securities
continued to have somewhat higher yields than those of maturing securities; and 2) a growing
investment portfolio balance. The DIF’s AFS portfolio reported a $125 million unrealized gain
in 2007 compared with a $173 million unrealized loss in 2006. During 2007, conventional
Treasury yields and TIPS real yields decreased, resulting in higher market prices. In contrast,
these yields increased during 2006, resulting in market price declines.

FSLIC Resolution Fund (FRF)
•

FRF’s net income for 2007 was $64 million compared to a $203 million loss for 2006. This
change is primarily due to an increase in criminal restitution income of $19 million, an increase
in the recovery of tax benefits of $33 million, and a decrease in Goodwill/Guarini litigation
expenses of $215 million.

•

During the fourth quarter of 2007, FRF accrued a $35 million contingent liability and offsetting
receivable from the U.S. Treasury for judgments for two Goodwill cases that were fully
adjudicated as of year-end. These funds were paid in January 2008. For the year ending
December 31, 2007, FRF paid or accrued a total of $440 million in Goodwill litigation
expenses to resolve eight cases, compared with a total of $447 million on six Goodwill cases
during 2006.

•

FRF paid $225 million to the Resolution Funding Corporation (REFCORP) on October 10,
2007, bringing total payments to REFCORP to $4.797 billion. Subsequent to year-end 2007,
FRF paid an additional $225 million to REFCORP on January 10, 2008. The FDIC must
transfer to the REFCORP the net proceeds from the sale of FRF-RTC assets (once all liabilities
of the FRF-RTC have been provided for) to pay the interest on REFCORP bonds, which were
issued to fund early Resolution Trust Corporation resolutions. Any such payments benefit the
U.S. Treasury, which would otherwise be obligated to pay the interest on the bonds.

II. DIF Investment Results (See pages 13 – 14 for detailed data and charts.)
•

During 2007, the amortized cost (book value) of the DIF investment portfolio increased by
$1.611 billion or by three percent—from $48.858 billion on December 31, 2006, to $50.469
billion on December 31, 2007. Moreover, during the period, the DIF portfolio’s market value
increased by $3.340 billion or by seven percent, from $49.038 billion on December 31, 2006, to
$52.378 billion on December 31, 2007.

•

The DIF investment portfolio's total return for 2007 was 8.63 percent, approximately 23 basis
points less than its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index),
which had a total return of 8.86 percent during the same period. Given the significant rise in
4

Treasury security prices during the year reflecting lower market yields, the DIF portfolio’s
large cash balance acted as a drag on relative total return performance.
•

During the fourth quarter of 2007, consistent with the approved quarterly Corporate investment
strategy, staff deferred purchases of Treasury securities in light of the comparatively low
Treasury yields available during the quarter. On December 31, 2007, the DIF portfolio’s
overnight investment balance was $4.240 billion, well above its $150 million target floor
balance.

The Treasury Market
•

During the fourth quarter of 2007, conventional Treasury yields decreased substantially,
reflecting two 25-basis point cuts in federal funds target rate during the quarter, and reflecting
market sentiment for additional cuts in the target rate during the first quarter and second
quarters of 2008. In addition, Treasuries also rallied in response to “flight to quality” trades by
investors seeking the relative safety of Treasury securities. In the fourth quarter, yields on
three-month and six-month T-Bills decreased by 56 basis points and 69 basis points,
respectively. The two-year note yield, which is also sensitive to actual as well as anticipated
changes in the federal funds rate, decreased by 93 basis points, again, reflecting the
aforementioned 50-basis point cut in the federal funds rate and reflecting expectations for
additional rate cuts. Intermediate-maturity Treasury yields also decreased over the course of
the quarter. The yield on the five-year Treasury note decreased by 80 basis points; the yield on
the ten-year Treasury note decreased by 57 basis points. The conventional Treasury yield
curve steepened during the fourth quarter of 2007; on December 31, 2007, the two-year to tenyear yield curve had a 97-basis point positive spread (compared to positive 61-basis point
spread at the beginning of the quarter). Over the past five years, this spread has averaged 99
basis points.

•

During the fourth quarter of 2007, Treasury Inflation-Protected Securities’ (TIPS) real yields
decreased dramatically, reflecting lower actual and anticipated interest rates and concerns over
weak economic growth. In addition, as the magnitude of the declines in many cases were
larger than those of comparable maturity conventional Treasury yields, such real yield declines
reflect some modest concerns over growing inflationary pressures. The real yield of the DIF
portfolio’s short-maturity TIPS (with a maturity of a little over one-year at the end of the
quarter) decreased by 130 basis points during the quarter. The real yield on the portfolio’s
longest-maturity TIPS (with a maturity of just over four years) decreased by 107 basis points.
The real yield on the 10-year TIPS maturing on January 15, 2017, decreased by 57 basis points.

Prospective Strategies
•

The current DIF investment strategy provides for purchasing AFS conventional with maturities
of six years or less, for purchasing AFS TIPS, and for holding excess overnight investments,
depending on Treasury market conditions and developments during the first quarter of 2008.
During the quarter, if appropriate, staff will take advantage of any instances when yields rise
toward the upper end of the recent trading range by purchasing short- to intermediate-maturity
conventional Treasury securities and TIPS. Any securities purchased during the quarter will be
designated AFS. As with recent quarterly investment strategies, conventional AFS securities
will be limited to maturities of six years or less, as a means to help control fund balance
volatility. (See attached Approved Investment Strategy.)
5

•

As part of the DIF portfolio’s approved fourth quarter investment strategy, an objective was
established to reach a $15 billion primary reserve target floor balance over the near term, with
the understanding that this goal would not be reached until at least the first quarter of 2008. At
the end of the fourth quarter of 2007, the primary reserve stood at $14.317 billion. The DIF
portfolio’s first quarter 2008 investment strategy continues to include this primary reserve
target objective.

III. Budget Results (See pages 15 - 16 for detailed data.)
Approved Budget and Staffing Modifications
During the fourth quarter of 2007, three modifications were made to the 2007 Corporate Operating
Budget, in accordance with the authority delegated by the Board of Directors in the 2007 Budget
Resolution:
•

In October 2007, the Chief Financial Officer approved a reallocation of $3.7 million and
$0.5 million, respectively, from the Salaries and Compensation expense category in the
ongoing operations components of the budgets of the Division of Supervision and
Consumer Protection (DSC) and the Division of Information Technology (DIT) to the
Equipment expense category in DIT’s budget. The additional $4.2 million in equipment
funding was required to support the procurement of application software and equipment
for the new Java/Unix platform and to upgrade or replace obsolete equipment. This
funding reallocation reduced DIT’s projected 2008 budget requirements. Funds were
available for reallocation in the DSC and DIT Salary and Compensation budgets because a
large number of vacancies in those organizations were not filled as quickly as projected.

•

In October 2007, funding was reallocated within the individual budgets for the Executive
Offices to better align those budgets with projected personnel, travel, and other expenses
for each office. There was no net change to the total budget for any major expense
category in the combined Executive Offices budget.

•

In December 2007, DIT reallocated $343,000 within the ongoing operations component of
its budget from the Equipment expense category to the Buildings expense category in
order to properly account for expenses related to the installation of a wireless antenna at
the Seidman Center. These expenses were initially budgeted in and charged to the
Equipment category, but it was subsequently determined that they should have been
charged to the Buildings category and treated as a capital improvement to the complex.
This reallocation resulted in no net change to the total approved DIT budget.

A 2007 Investment Budget spending projection for the Legal Information Management System
(LIMS) project was also revised during the quarter. The 2007 spending estimate for LIMS was
reduced by $206,380, to be consistent with a revised project plan for the project. That amount
will remain available for use by the LIMS project in 2008, in accordance with approved
Investment Budget procedures.

6

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

Approximately $4.3 million was spent for system development and enhancement
activities. All of the targeted systems have now been upgraded and are fully functional for
the deposit insurance reform implementation.

•

Approximately $0.6 million was spent for additional printing and distribution of updated
deposit insurance brochures. All updates of printed materials that were required to support
the implementation of deposit insurance reform were completed and distributed by yearend 2007.

In addition, DIR hired in mid-2007 two new employees to support deposit insurance pricing on an
ongoing basis, as authorized by the Board in March 2006. Estimated 2007 Salary and
Compensation expenses for these employees were approximately $170 thousand.
All requirements for the initial implementation of Deposit Insurance Reform, as outlined in the
case presented to the Board in March 2006, have now been completed. Accordingly, this will be
the final quarterly report on expenses incurred in connection with those requirements. As of
December 31, 2007, the Corporation had spent a total of approximately $9.8 million over two
years to support the initial implementation of Deposit Insurance Reform (excluding Salary and
Compensation expenses for the two new DIR employees).1
Spending Variances
Significant spending variances by major expense category and division/office for the year ending
December 31, 2007, are discussed below. Significant spending variances are defined as those that
either (1) exceed the annual budget; or (2) are under the total annual budget by $1 million or more
and represent more than three percent of the major expense category or total division/office
budget.
Significant Spending Variances by Major Expense Category
Ongoing Operations
There were four major expense categories in which there were significant spending variances for
the year in the Ongoing Operations component of the 2007 Corporate Operating Budget:

1

Additional systems development work will be required after the Board completes rulemaking on the payment of dividends
from the new Deposit Insurance Fund (currently projected to occur no sooner than the first half of 2009). At such time as
those requirements are defined, they will be funded through DIT’s annual ongoing operating budget for information
technology projects and will be accounted for as a separate project.

7

•

Outside Services-Personnel expenditures were $29 million, or 16 percent, less than
budgeted. The variance was largely due to lower-than-budgeted payments to the
Department of Justice for litigation services; less-than-anticipated spending for IT-systems
development, operations, and maintenance support; lower net costs for the Student
Residence Center (because of increased proceeds derived from outside use of the facility);
and lower-than-budgeted spending on human resources contractual services.

•

Travel expenditures were $3 million, or 5 percent, less than budgeted. Overall corporate
travel costs were lower because DRR staff participated in fewer compliance examinations
than initially projected and CEP rotation schedules were adjusted, resulting in less travel for
CEP participants. In addition, lower-than-projected travel costs were incurred for
supervision, field oversight and litigation activities in the Legal Division.

•

Outside Services-Other expenditures were almost $2 million, or 10 percent, less than
budgeted. This variance reflected successful negotiations to lower insurance rates, lowerthan-anticipated outside printing costs, and a reduction in the number of local telephone lines
needed for examinations as a result of the deployment of wireless data cards to examiners.

• Other Expenses were $3 million, or 28 percent, less than budgeted. This variance was
largely due to (a) lower-than-projected spending by employees under the first year of the
new Professional Learning Accounts program; and (b) charges of expenses for some off-site
conferences to the Travel expense category rather than the Other Expenses expense
category.
Receivership Funding
The Receivership Funding component of the Corporate Operating Budget includes budgeted
funding for non-personnel expenses that are incurred in conjunction with institution failures and
the management and disposition of the assets and liabilities of the ensuing receiverships. There
were four major expense categories in which significant spending variances occurred during the
year in the Receivership Funding component of the 2007 Corporate Operating Budget:
•

Salary and Compensation2 ($2 million, or 71 percent, less than budgeted).

•

Outside Services-Personnel ($49 million, or 79 percent, less than budgeted).

•

Travel ($4 million, or 64 percent, less than budgeted).

•

Buildings ($0.2 million, or 7 percent, more than budgeted).

Variances in the first three expense categories were attributable to the limited receivership and
resolution activity that occurred during the year. The overspending variance in the Buildings
category was due to incorrect coding of charges totaling $1.7 million (the expenses should have
been charged to the Outside Services-Personnel category).
2

Overtime is the only account budgeted in the Salary and Compensation expense category of the Receivership Funding
component of the Corporate Operating Budget in 2007. All staff salaries are budgeted and expensed in the Ongoing
Operations budget component.

8

Significant Spending Variances by Division/Office3
There were significant spending variances from total approved 2007 budgets for nine
organizations during the year:

3

•

DRR spent $43 million, or 43 percent, less than budgeted. This variance was mostly
attributable to under spending in the Receivership Funding component of its operating
budget due to the limited receivership and resolution activity that occurred during the year.

•

The Legal Division spent $18 million, or 20 percent, less than budgeted. This variance
was largely attributable to under spending in the Receivership Funding component of its
operating budget due to the limited receivership and resolution activity that occurred
during the year.

•

DIT spent $11 million, or 5 percent, less than budgeted for 2007. DIT spent $8.6 million
less than budgeted in the ongoing operations component of its budget, primarily due to
lower-than-projected spending for application development, operations, and maintenance
activities. It also spent $2.6 million less than estimated in 2007 from the approved
Investment Budget projects that are monitored and reported to the Board separately by the
CIRC. These latter variances were attributable primarily to delays in project schedules.

•

The Division of Administration spent $7 million, or 5 percent, less than budgeted. This
variance was largely attributable to (a) lower-than-anticipated net costs for the Student
Residence Center (due to higher-than-projected proceeds received in connection with use
of the facility by outside parties), and (b) less use of compensation and consulting services
on human resource matters than originally projected for 2007.

•

DIR spent $3 million, or 9 percent, less than budgeted. This variance was attributable to
the large number of budgeted positions that were vacant during the year and a significant
reduction in the FDIC’s share of the costs for enhancements to the Central Deposit
Repository under the cost sharing agreement with the other bank regulatory agencies.

•

The Inspector General spent $2 million, or 8 percent, less than budgeted. This variance
was primarily attributable to the fact that the OIG’s on-board staffing was below its
authorized staffing level throughout the year.

•

DOF spent $2 million, or 6 percent, less than budgeted. This variance was largely
attributable to a larger-than-projected number of vacancies due to unanticipated
management and staff departures during the year.

•

Executive Support Offices spent nearly $2 million, or 10 percent, less than budgeted. This
variance was largely attributable to budgeted positions that were vacant during the year in
the Office of Diversity and Economic Opportunity and the Office of the Ombudsman.

•

CU spent $1 million, or 4 percent, less than budgeted. This variance was attributable to (a)
lower-than-budgeted spending for travel as a result of adjustments to the travel
requirements for CEP participants; and (b) reduced spending for contractor services as a

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

9

result of performance issues with a contractor related to the development of the DRR
training and commissioning program, which have since been resolved.

10

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

($ in Millions)

Balance Sheet

Cash & cash equivalents
Investment in U.S. Treasury obligations, net
Assessments receivable, net
Interest receivable on investments and other assets, net
Receivables from resolutions, net
Property, buildings and other capitalized assets, net
Total Assets
Accounts payable and other liabilities
Postretirement benefit liability
Contingent Liabilities: future failures
Contingent Liabilities: litigation losses & other
Total Liabilities
FYI: Unrealized gain on available-for-sale securities, net
FYI: Unrealized postretirement benefit gain
FUND BALANCE

Deposit Insurance Fund
(audited) (unaudited) Quarterly
(audited)
Dec-06
Change
Dec-07
Sep-07
$
4,245 $
2,854 $
2,954
1,391 $
46,588
47,933
46,142
(1,345)
245
173
0
72
768
706
748
62
808
2,057
539
(1,249)
351
357
377
(6)
$ 53,005 $ 54,080 $
50,760
(1,075) $
152
1,942
154
(1,790)
116
114
130
2
124
70
111
54
200
200
200
0
$
592 $
2,326 $
595
(1,734) $
359
221
234
138
19
22
2
(3)
$ 52,413 $ 51,754 $
659 $
50,165

Year-Over-Year
Change
$
1,291
446
245
20
269
(26)
$
2,245
(2)
(14)
13
0
$
(3)
125
17
$
2,248

Unrealized Gains/Losses on AFS Securities Effect on Quarterly Comprehensive Income

$800

Unrealized Gains/Losses AFS

$700

Net Income

$600

$ in Millions

$500
$400
$300
$200
$100
$0
($100)
($200)

Quarterly Comprehensive Income Totals
$596

$371

$428

$173

Q2-06

Q3-06

Q4-06

$580

$482

$527

$659

($300)
Q1-06

Income Statement

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

Q1-07

Q2-07

Q3-07

Q4-07

Deposit Insurance Fund
Year-Over-Year
(audited) (unaudited) Quarterly
(audited)
Dec-06
Change
Change
Dec-07
Sep-07
$
643 $
404 $
239 $
32 $
611
2,540
1,955
585
2,241
299
0
0
0
(345)
345
14
11
3
(12)
26
$
3,197 $
2,370 $
827 $
2,644 $
553
993
730
263
951
42
95
56
39
(52)
147
3
2
1
6
(3)
$
1,091 $
788 $
303 $
905 $
186
$
2,106 $
1,582 $
524 $
1,739 $
367
125
(13)
138
(173)
298
17
20
(3)
2
15
680
$
2,248 $
1,589 $
659 $
1,568 $

Components of Provision for Insurance Losses
$200
105

$ in Milions

$100
$0

4

(28)

14

0

(4)

(5)

-$100
-$200

95

81

(52)
(154) (171)

(160)

(159)

(153)

-$300
(353)

-$400
2004

Closed Banks

2005

Anticipated Failures

2006

Other

Over the last three years, the
provision for insurance losses
added to net income as
estimated losses that had been
previously booked for both
existing receiverships and
potential failures were
reversed. During 2007, this
trend had reversed.

2007

Total Provision for Losses

page 11

Fund Financial Results - continued

($ in Millions )

Interest Earned on Investment Securities
3,000

$ in Millions

2,000

$2,540

$2,342

2,500

$2,241

$2,131

$1,996

$2,226

1,500
1,000
500

$314

$345
$109

0
2005

Interest Income

2006

2007

TIPS Inflation Compensation

Statements of Cash Flows

Total Interest Earned

Deposit Insurance Fund
Year-Over-Year
(audited) (unaudited) Quarterly
(audited)
Change
Dec-06
Change
Dec-07
Sep-07
$
2,106 $
1,582 $
1,739 $
524 $
367
571
431
140
599
(28)
(314)
(286)
(28)
(109)
(205)
63
40
23
53
10
95
56
39
(52)
147
0
0
0
(345)
345
17
20
(3)
0
17
(668)
5
(673)
101
(769)
$
1,870 $
1,848 $
22 $
1,986 $ $18.9
$18.6
(116)
$20.8
$19.2
7,626
6,256
1,370
6,800
826

Net Income
Amortization of U.S. Treasury obligations (unrestricted)
TIPS Inflation Adjustment
Depreciation on property and equipment
Provision for insurance losses
Exit fees earned
Unrealized gain on postretirement benefits
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 $

(8,205)
(579) $
1,291
2,954
4,245 $

(8,204)
(1,948) $
(100)
2,954
2,854 $

(1)
1,369 $
1,391
0
1,391 $

(9,062)
(2,262) $
(276)
3,230
2,954 $

857
1,683
1,567
(276)
1,291

FSLIC Resolution Fund

Cash and cash equivalents
Accumulated deficit, net
Resolution equity
Total revenue
Operating expenses
Goodwill/Guarini litigation expenses
Net (loss/income)
DIF Active Receiverships - Remaining Assets-in-Liquidation
by Year of Receivership Failure
($ in Thousands)
1990-1999,
11 Rcvrs,
$7,189, 0.8%

2007, 3 Rcvrs,
$591,974,
68%

Year-Over-Year
(audited) (unaudited) Quarterly
(audited)
Change
Dec-06
Change
Dec-07
Sep-07
(147) $
3,616 $
1
$
3,617 $
3,764 $
(123,770)
(123,836)
66
(123,834)
64
3,648
3,790
(142)
3,620
28
$
188 $
150 $
38 $
169 $
19
3
2
1
12
(9)
196
178
(215)
18
411
66 $
(203) $
267
$
64 $
(2) $
Summary of Goodwill & Guarini Litigation
(Inception-to-Date)
$ in Millions
Goodwill

2001, 1 Rcvr,
$218,893,
25%

2002, 4 Rcvrs,
$32,319, 4%
2003, 2 Rcvrs,
$14,772, 2%
2004, 1 Rcvr,
$1,524, 0.2%

# of Cases

Guarini
Amount Paid/
# of Cases
Accrued

Amount Paid

Dismissals/
Time

43

N/A

0

N/A

Settlements

18

$149

3

$121

Judgments

42

$1,238*

5

$153

Pending

19

N/A

0

N/A

Totals

122

$1,387

8

$274

* Four institutions account for 65% 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).

Active Receiverships = 22
Total Assets-in-Liquidation = $866,671

page 12

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

Primary Reserve
2
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

3

4

Weighted Average Maturity (in years)

12/31/07

12/31/06

Change

$47,562
$50,469
$52,378

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

$1,079
$1,611
$3,340

$14,317
$15,000
26.9%

$13,911
$10,000
28.0%

$406
$5,000
(1.1%)

8.629%

4.056%

not applicable

8.861%
(23.2)

3.571%
48.5

not applicable
not applicable

4.72%

4.89%

(0.17%)

4.06

3.57

0.49

3.19
1.29
3.94

2.82
1.80
3.29

0.37
(0.51)
0.65

5

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

This primary reserve target floor was increased from the third quarter's $10 billion target, although when adopted it was
understood that the target floor would not be reached until at least the first quarter of 2008.

3

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

4

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.

5

For each TIPS, an estimated 80% "yield beta" factor is applied to its real yield duration to arrive at an estimated effective
duration.

National Liquidation Fund (NLF) Investment Portfolio Summary
(Dollar Values in Millions)
6

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

12/31/06

Change

$393
4.22%
19

$381
5.37%
13

($12)
(1.15%)
6

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%
3.75%

12/ 31/07

3.25%

TIPS

2.75%

12/31/06

2.25%
12/31/07

1.75%
1.25%

10 Y
ear

7 Ye
ar

5 Ye
ar

4 Ye
ar

3 Ye
ar

2 Ye
ar

1 Ye
ar

0.75%
3 Mo
nth
6 Mo
nth

6

12/31/07

page 13

Approved Investment Strategy
DEPOSIT INSURANCE FUND
Current Strategy as of 4th 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 six-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 exeed eight years, subject to the following limitations:
All newly purchased Treasury securities shall be designated available-for-sale (AFS).
Newly purchased AFS conventional Treasury securities should have maturities of six years or less.
Increase the portfolio's primary reserve balance, with a goal of reaching a $15 billion target floor balance
over the near term.

Strategy Changes for 1st Quarter 2008
No changes in strategy

NATIONAL LIQUIDATION FUND
Current Strategy as of 4th Quarter 2007
Maintain a target overnight investment balance between $20 million and $25 million.
Strategically invest the remaining funds in the zero- to 12-month maturity sector.

Strategy Changes for 1st Quarter 2008
No changes in strategy

page 14

Executive Summary of 2007 Budget and Expenditures
by Major Expense Category
Through December 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

$650,116
179,424
56,719
68,290
49,563
15,723
12,655

$638,428
150,034
53,738
67,076
49,201
14,158
9,172

98%
84%
95%
98%
99%
90%
72%

($11,688)
(29,390)
(2,981)
(1,214)
(362)
(1,565)
(3,483)

$1,032,490

$981,807

95%

($50,683)

$3,420
61,347
5,646
2,300
226
543
1,518

$990
12,827
2,046
2,471
31
185
1,156

29%
21%
36%
107%
14%
34%
76%

($2,430)
(48,520)
(3,600)
171
(195)
(358)
(362)

$75,000

$19,706

26%

($55,294)

$1,107,490

$1,001,513

90%

($105,977)

Investment Budget 1

$14,496

$11,946

82%

($2,550)

Grand Total

$1,121,986

$1,013,459

90%

($108,527)

Total Ongoing Operations
Receivership Funding
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 15

Executive Summary of 2007 Budget and Expenditures
by Budget Component and Division/Office
Through December 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

$390,408
194,687
159,340
98,377
90,619
37,088
30,891
24,938
30,899
17,797
7,446
25,000
$1,107,490

$385,455
186,054
152,143
55,688
72,314
33,780
28,895
22,867
29,898
16,100
6,514
11,805
$1,001,513

99%
96%
95%
57%
80%
91%
94%
92%
97%
90%
87%
47%
90%

($4,953)
(8,633)
(7,197)
(42,689)
(18,305)
(3,308)
(1,996)
(2,071)
(1,001)
(1,697)
(932)
(13,195)
($105,977)

$13,871
227
278
120

$11,283
358
305
0

81%
158%
110%
0%

($2,588)
131
27
(120)

$14,496

$11,946

82%

($2,550)

$390,408
208,558
159,340
98,604
90,619
37,366
30,891
24,938
31,019
17,797
7,446
25,000
$1,121,986

$385,455
197,337
152,143
56,046
72,314
34,085
28,895
22,867
29,898
16,100
6,514
11,805
$1,013,459

99%
95%
95%
57%
80%
91%
94%
92%
96%
90%
87%
47%
90%

($4,953)
(11,221)
(7,197)
(42,558)
(18,305)
(3,281)
(1,996)
(2,071)
(1,121)
(1,697)
(932)
(13,195)
($108,527)

3

Information Technology
Resolutions & Receiverships
Insurance & Research
Corporate University
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 16