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Federal Deposit Insurance Corporation 550 17th Street, N.W., Washington, D.C. 20429-9990 Deputy to the Chairman and CFO August 2, 2007 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: Second Quarter 2007 CFO Report to the Board The attached report highlights the Corporation's financial activities and results for the period ending June 30, 2007. Executive Summary • The Deposit Insurance Fund (DIF) fund balance grew by 0.95 percent to $51.2 billion during the second quarter of 2007, a decrease of 21 basis points from the growth experienced in the first quarter of 2007. DIF’s comprehensive income for the second quarter of 2007 was 17 percent lower compared to the prior quarter ($482 million vs. $580 million). This decrease of $98 million is primarily attributable to the volatility in the market value of DIF’s portfolio of available-for-sale securities (AFS) securities. Although the DIF reported higher interest revenue ($181 million) and an increase in assessment revenue ($46 million) in the second quarter, this was fully offset by a lower contribution to the year-to-date comprehensive income from unrealized (loss)/gain on AFS securities (second quarter unrealized loss of $162 million vs. first quarter unrealized gain of $81 million) and a smaller reduction in the estimated losses for anticipated failures ($70 million). • For the six months ending June 30, 2007, Corporate Operating Budget and Investment Budget related expenditures ran below budget by 10 percent and 53 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 second quarter. Detailed quarterly reports are provided separately to the Board by the Capital Investment Review Committee for those 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 Assessment revenue in the second quarter was 49 percent higher than first quarter revenue ($140 million vs. $94 million). This increase primarily resulted from a reduction in the amount of assessment credits estimated to be used by financial institutions to offset gross assessments. The trend in higher assessment income is expected to continue as institutions deplete their available credits; through the first two quarters of 2007, institutions are expected to use approximately $1.6 billion, or 34 percent, of the initial $4.7 billion one-time assessment credit (second quarter assessments will be collected on September 28, 2007). Financial Results I. Financial Statements • II. Investments • The DIF portfolio amortized cost (book value) increased by 2.22 percent during the first half of 2007, and totaled $49.942 billion on June 30, 2007. During the period, newly purchased securities had higher average yields than those of maturing securities. Consequently, the DIF portfolio’s yield increased by eight basis points during the first half of 2007, rising to 4.97 percent as of June 30, 2007, from 4.89 percent as of December 31, 2006. • Treasury market yields are expected to continue to trade generally within the range exhibited during the latter half of the second quarter of 2007, with the potential for a modest rise from quarter-end levels. This, coupled with a growing DIF investment portfolio balance, should lead to increased interest revenue over the long run. • Approximately $467 million was spent in the Ongoing Operations component of the 2007 Corporate Operating Budget, which was $21 million (4 percent) below the budget for the six months ending June 30, 2007. The Outside Services - Personnel expense category was $10 million below its year-to-date budget, and represents 47 percent of the total Ongoing Operations variance. • Approximately $4 million was spent in the Receivership Funding component of the 2007 Corporate Operating Budget, which was $33 million (88 percent) below the budget for the six months ending June 30, 2007. The Outside Services - Personnel expense category was $28 million below its year-to-date budget, and represents 84 percent of the total Receivership Funding variance. III. Budget 2 I. Corporate Fund Financial Statement Results (See pages 8 - 9 for detailed data and charts.) Deposit Insurance Fund (DIF) • For the six months ending June 30, 2007, DIF’s comprehensive income totaled $1.1 billion compared to $967 million for the same period last year, an increase of 10 percent. Excluding the recognition of exit fees earned of $346 million (a one-time adjustment), comprehensive income rose by $441 million, or 71 percent, from a year ago. This year-over-year increase was primarily due to a $222 million increase in assessment revenue, a $172 million increase in interest revenue, a $53 million decrease in the unrealized loss on AFS securities, and a $24 million increase in the negative provision for insurance loss. • During the second quarter of 2007, DIF recorded a $139 million receivable for estimated net assessments due from insured institutions for second quarter 2007 insurance coverage. The receivable was the result of netting $789 million in credits estimated to be used by financial institutions against $928 million in estimated gross assessment revenue. In June, DIF also collected $94 million in cash assessment payments for first quarter insurance coverage. • During the second quarter of 2007, DIF’s net receivables from resolutions declined by $124 million, or 29 percent, to $307 million compared to the prior quarter. This reduction was primarily due to dividends from receiverships totaling approximately $122 million ($108 million from Southern Pacific and $14.5 million from Nextbank). FSLIC Resolution Fund (FRF) • FRF’s net loss was $22 million for the second quarter of 2007 compared to a $19 million loss incurred during the first quarter of 2007. The additional loss is primarily due to an increase in interest on U.S. Treasury obligations of $40 million offset by Goodwill/Guarini expenses of $64 million. • During the second quarter of 2007, FRF paid $74.5 million for a Goodwill case. In addition, FRF accrued expenses for three Goodwill cases which totaled $64.3 million. All of the Guarini cases have been concluded. However, there are still issues pertaining to attorney fees pending in several of those cases. II. DIF Investment Results (See pages 10 – 11 for detailed data and charts.) DIF • During the first half of 2007, the amortized cost (book value) of the DIF investment portfolio increased by $1.084 billion or by 2.22 percent—from $48.858 billion on December 31, 2006, to $49.942 billion on June 30, 2007. Moreover, during the period, the DIF portfolio’s market value increased by $698 million or by 1.42 percent, from $49.038 billion on December 31, 2006, to $49.736 billion on June 30, 2007. • The DIF investment portfolio's total return for the first half of 2007 was 1.866 percent, approximately 31.2 basis points higher than the return of the benchmark, the Merrill Lynch 1 10 Year U.S. Treasury Index (Index), which earned 1.554 percent during the same period. The 3 outperformance relative to the benchmark can be attributed to two factors: The strong performance of the DIF investment portfolio’s Treasury Inflation-Protected Securities (TIPS) holdings, which outperformed the benchmark’s conventional securities during the six-month period; and relatively high yields being earned on overnight investments, whose return also exceeded the benchmark return. • During the second quarter of 2007, staff purchased Treasury securities on seven occasions, purchasing a total of 15 conventional Treasury securities. The purchased securities had a total par value of $5.400 billion, a weighted average maturity of 9.70 years, a weighted average duration of 6.96 years, and a weighted average yield-to-maturity of 4.95 percent. Consistent with the approved second quarter 2007 investment strategy, one short-term Treasury note, with a maturity of 1.87 years, was designated as AFS. The other 14 securities, with maturities ranging from 7.94 years to 11.84 years, were designated as held-to-maturity (HTM). The total cash outlay for the securities was $6.407 billion. On June 30, 2007, the DIF portfolio’s overnight investment balance was $978.2 million, which is above the fund’s $150 million target floor balance. Staff continued its recent practice of holding excess funds in higher yielding overnight investments as a reasonable short term investment strategy. That said, the June 30, 2007, overnight investment balance was substantially lower than the March 31, 2007, overnight balance of $3.709 billion, meaning that staff purchased a larger amount of Treasury securities compared to the amount of net cash received during the quarter, taking advantage of the comparatively high Treasury market yields that became available during much of the latter half of 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 second quarter, during the third quarter of 2007 staff will take advantage of instances when yields rise toward the upper end of this trading range and accordingly would deploy funds into longer-maturity higher-yielding securities. The Treasury Market • During the second quarter of 2007, most conventional Treasury yields increased. The yield changes appeared to primarily stem from investors’ concerns that stronger global economic growth may increase inflationary pressures, thus leading to higher global interest rates. During the quarter, yields on three-month and six-month T-Bills decreased; the T-Bill yield declines were the one exception to the general observation noted above. (The yield decline on T-Bill apparently stemmed from technical factors, such as supply and demand factors, rather than fundamental factors). The two-year note yield, which is sensitive to actual as well as anticipated changes in the federal funds rate, increased by 29 basis points during the second quarter, reflecting reduced expectations by most market participants for any federal funds rate cuts later this year. Intermediate-maturity Treasury yields also increased, with the five-year Treasury note yield increasing 39 basis points and the ten-year note yield increasing 38 basis points. The Treasury yield curve ended the second quarter still relatively flat; on June 30, 2007, the ten-year to two-year yield curve spread was a positive 16 basis points (compared to a positive seven-basis point spread at end of the first quarter of 2007). From a recent historical perspective, the curve remains significantly flatter; over the past five years, this spread has averaged 114 basis points. 4 • During the second quarter of 2007, TIPS real yields increased, reflecting concerns over stronger global economic growth and correspondingly higher global interest rates. For example, the real yield on the DIF portfolio’s shortest-maturity TIPS (with a maturity of under one year) increased by 182 basis points during the quarter, while the real yield on the DIF portfolio’s longest-maturity TIPS (with a maturity of a little under five years) increased by 58 basis points. The real yield on the ten-year TIPS maturing on January 15, 2017, increased by 45 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 third quarter of 2007. From a longer-term investment perspective, purchasing primarily longer-maturity securities could make sense in light of current and expected near-term market conditions. Thus, similar to the strategy implementation during the second quarter, if higher yields become available—either as a result of a modest upward shift in the yield curve or because of potential yield volatility—the third quarter 2007 strategy allows for purchasing comparatively higher-yielding, longer-maturity Treasury securities. • The DIF portfolio’s primary reserve target floor balance will remain at $10 billion for the third quarter of 2007. The TIPS target limit will also remain at $10 billion, while the AFS security target limit is being increased from $9.0 billion to $9.5 billion, to ensure that the primary reserve target floor balance can be maintained during the remainder of the year (see attached Approved Investment Strategy). III. Budget Results (See pages 12 - 13 for detailed data.) Approved Budget Modifications During the second quarter of 2007, two 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 Division of Information Technology (DIT) made numerous reallocations of its existing operating budget among the major expense categories in accordance with Boarddelegated authority. However, the net budget change was less than $1 million to any major expense category. The budget reallocation involved multiple Information Technology (IT) projects in accordance with CIO Council recommendations or internal DIT operations requirements. The budget for midrange software computer support was increased by $2.2 million (including $972,800 for the JAVA Unix environment). These reallocations resulted in no net change to the total approved DIT budget. • A reallocation was made to the operating budgets of all divisions and most offices to properly classify the funds projected to be needed for tuition, fees, and travel associated with the new Professional Learning Accounts (PLA) program. This reallocation will allow us to monitor PLA program utilization and it did not increase or decrease the budgeted 5 amounts for the program or the overall ongoing operations budget for any division or office. 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. Through the second quarter of 2007, an additional $3.0 million (excluding internal salaries and compensation expenses) was spent as follows: • Approximately $2.5 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 $525 thousand was spent for printing and distribution of updated deposit insurance brochures during the first half of 2007. It is anticipated that up to an additional $675 thousand will be spent revising the Spanish, Korean, and Chinese versions of Insuring Your Deposits and Your Insured Deposits brochures during 2007. No funds have yet been spent in 2006 or through June 30, 2007 for the additional staff in the Division of Insurance and Research (DIR) that the Board authorized to support deposit insurance pricing. DIR has selected two new employees for these positions who will start in July. Spending Variances Significant spending variances by major expense category and division/office are discussed below. Significant spending variances for the six months ending June 30, 2007, are defined as those that either (1) exceed the YTD budget by $2 million and represent more than three percent of the major expense category or total division/office budget; or (2) are under the YTD budget by $3 million and represent more than five 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 through the second quarter in the Ongoing Operations component of the Corporate Operating Budget: • Outside Services-Personnel expenditures were $10 million, or 14 percent, less than budgeted. A large portion of this variance was due to lower-than-anticipated spending by DIT on system operations, development, and maintenance through the first half of the year. However, current plans to expedite development activities and increase contractual services, along with a 7 percent Information Technology Applications Services (ITAS) labor rate increase that became effective in May, are expected to absorb the DIT variance by year-end. Other factors that contributed to the variance included lower-than-budgeted spending for 6 government litigation being handled by the Department of Justice, delays in initiating the Identity Theft consumer education campaign, and postponement of the Shared National Credit Modernization initiative until 2008. Receivership Funding The Receivership Funding component of the Corporate Operating Budget includes budgeted funding 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 which a significant spending variance occurred through the second quarter in the Receivership Funding component of the Corporate Operating Budget: • Outside Services-Personnel expenditures were $28 million, or 91 percent, less than budgeted, primarily due to the limited receivership and resolution activity that occurred through the second quarter. Significant Spending Variances by Division/Office 1 There were three divisions that had a significant spending variance through the second quarter of 2007: • The Division of Resolutions and Receiverships (DRR) spent $27 million, or 54 percent, less than budgeted. This variance was fully attributable to under spending in the Receivership Funding component of DRR’s operating budget due to the limited receivership and resolution activity that occurred through the second quarter. • The DIT spent $11 million, or 11 percent, less than budgeted. Approximately $4.4 million of the variance occurred in the Ongoing Operations component of the Corporate Operating Budget and reflected lower-than-budgeted expenses during the first six months of the year for contractor services related to systems operations, development, and maintenance as well as the inability to fill personnel vacancies as planned. These budget variances were partially offset by Microsoft maintenance costs realized in June but budgeted in July. DIT’s spending from the Investment Budget was $6.5 million less than anticipated, largely because a major software purchase planned for the Claims Administration System (CAS) investment project was delayed. • 1 The Legal Division spent nearly $10 million, or 21 percent, less than budgeted. This variance was largely attributable to under spending in the Receivership Funding component of its operating budget, primarily due to the limited receivership and resolution activity that occurred through the second quarter. Information on division/office variances reflects variances in both the Corporate Operating and Investment Budgets. 7 FDIC CFO REPORT TO THE BOARD – Second Quarter 2007 Fund Financial Results ($ in millions) Balance Sheet (unaudited) Jun-07 Cash & cash equivalents $ 983 Investment in U.S. Treasury obligations, net 49,116 Assessments receivable, net 139 Interest receivable on investments and other assets, net 805 Receivables from resolutions, net 307 360 Property, buildings and other capitalized assets, net Total Assets $ 51,710 Accounts payable and other liabilities 122 Postretirement benefit liability 130 Contingent Liabilities: future failures 31 Contingent Liabilities: litigation losses & other 200 483 Total Liabilities $ FYI: Unrealized gain on available-for-sale securities 153 FYI: Unrealized postretirement benefit gain/(loss) 2 FUND BALANCE $ 51,227 Deposit Insurance Fund (unaudited) (audited) Change Jun-06 % Change Dec-06 $ 2,954 $ (67%) $ 749 (1,971) 46,142 6% 47,690 2,974 0 0% 0 139 748 8% 768 57 539 (232) (43%) 466 377 (17) (5%) 370 $ 50,760 $ 950 2% $ 50,043 154 (32) (21%) 269 130 0% 0 0 111 (72%) 10 (80) 200 0% 200 0 (112) (19%) $ 479 $ 595 $ 234 (35%) 273 (81) 2 0% 0 0 $ 50,165 $ 1,062 2% $ 49,564 Over the past nine quarters the AFS portion of the DIF's investment portfolio's cumulative unrealized gain gradually declined, whereas the market value of the HTM portion of the investment portfolio experienced greater volitality, and at quarter end, the DIF investment portfolio's total market value was $206 million less than its amortized cost. $1,000 $ in Millions Mark-to-Market Adjustment $800 $688 $826 $642 $600 $407 $330 $400 $200 $315 $349 $273 $165 $254 $234 $120 $153 $32 $0 ($54) -$200 -$400 ($359) ($320) -$600 ($598) -$800 -$1,000 2nd Qtr 05 3rd Qtr 05 4th Qtr 05 1st Qtr 06 2nd Qtr 06 Available-for-sale (AFS) Income Statement (unaudited) Jun-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 $ $ $ $ 234 1,315 0 6 1,555 487 (76) 1 412 1,143 (81) 0 1,062 Remaining 8,620, $490.3, 53% Top 11 thru 25, $110.9, 12% 4th Qtr 06 1st Qtr 07 2nd Qtr 07 Deposit Insurance Fund (unaudited) (audited) Jun-06 Dec-06 $ $ $ $ $ 32 2,241 345 27 2,645 951 (52) 6 905 1,740 (173) 2 1,569 $ $ $ $ $ 12 1,143 346 19 1,520 466 (52) 5 419 1,101 (134) 0 967 Year-OverYear Change $ $ $ $ $ 222 172 (346) (13) 35 21 (24) (4) (7) 42 53 0 95 Total 1st Quarter 2007 Assessments Paid (net of credits used) $ in millions Total Net Assessments = $94.1 Total 1st Quarter 2007 Gross Assessments (before credits used) $ in millions Total Gross Assessments = $918.7 Top 10, $317.5, 35% 3rd Qtr 06 Held-to-maturity (HTM) Institutions with the largest gross assessments and cash outlays (net of credit used) Remaining 1,956, $44.4, 47% Top 10, $37.5, 40% Top 11 thru 25, $12.2, 13% page 8 Fund Financial Results - continued ($ in millions ) Income Statement - (continued) DIF Coverage Ratio (Interest & Assessments Revenue/Operating Expenses) 5 4 3.18 3 2.32 2.49 2.35 2.39 2 1 0 2003 2004 2005 2006 6/2007 Deposit Insurance Fund Statements of Cash Flows (unaudited) (audited) (unaudited) Jun-07 Dec-06 Jun-06 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 $ 1,143 280 (213) 26 (76) 0 (9) 1,151 4,565 $ 1,740 $ 599 (109) 52 (52) (345) 100 1,985 $ 6,800 $ (7,687) (3,122) $ (1,971) 2,954 983 $ (9,062) (2,262) $ (277) 3,231 2,954 $ Year-OverYear Change 1,101 $ 42 302 (22) (94) (119) 26 0 (52) (24) (346) 346 70 (79) $20.8 1,007 $ 144 $18.9 $19.2 2,430 2,135 (5,919) (3,489) $ (2,482) 3,231 749 $ $18.6 (1,768) 367 511 (277) 234 FSLIC Resolution Fund (FRF) Cash and cash equivalents Accumulated deficit, net Resolution equity Total revenue Operating expenses Goodwill/Guarini litigation expenses Net (loss) $ in Millions $250 Jun-06 $169 $100 $74 $49 $28 $0$0 $9 $0 $0 $16 $6 $0 $0 $23 $0 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2005 2005 2005 2006 2006 2006 2006 2007 2007 Goodwill Cases Guarini Amount Paid/ Accrued # of Cases Amount Paid 43 N/A 0 N/A Settlements 18 $149 million 3 $121 million Judgments 41 $1,221 million* 5 $153 million Pending 20 N/A 0 N/A Totals 122 $1,370 million 8 $274 million Dismissals/ Time $179 Year-OverYear Change # of Cases $285 $150 $0 (unaudited) Dec-06 Goodwill $234 $200 $50 (audited) Jun-07 $ 3,716 $ 3,616 $ 3,506 $ 210 (123,875) (123,834) (123,684) (191) 3,751 3,620 249 3,502 $ 106 $ 169 $ 80 $ 26 2 12 (6) 8 167 411 124 43 $ (41) $ (203) $ (53) $ 12 Summary of Goodwill & Guarini Litigation (Inception-to-Date) FRF Quarterly Payments for Goodwill & Guarini Case Settlements & Judgments $300 (unaudited) * Four institutions account for 66% 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 9 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) 6/30/07 12/31/06 Change $46,861 $49,942 $49,736 $46,483 $48,858 $49,038 $378 $1,084 $698 $11,974 $10,000 23.7% $13,911 $10,000 28.0% ($1,937) $0 (4.3%) 1.866% 1.554% 31.2 4.056% 3.571% 48.5 not applicable not applicable not applicable 4.97% 4.89% 0.08% 4.39 3.57 0.82 3.39 1.52 3.91 2.82 1.80 3.29 0.57 (0.28%) 0.62 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, 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) 5 Book Value Yield-to-Maturity Weighted Average Maturity (in days) 5 6/30/07 12/31/06 Change $168 5.39% 15 $381 5.37% 13 ($213) 0.02% 2 6 Due to the short-term nature of the NLF, the portfolio's Book and Market Values are identical for reporting purposes. 6 Much of the significant decline occurred at the end of the second quarter of 2007 as a result of a large receivership dividend payment. U.S. Treasury Security Yield Curves 5.75% Conventional 5.25% 6/30/07 4.75% 12/31/06 4.25% 3.75% TIPS 3.25% 6/30/07 2.75% 2.25% 12/31/06 1.75% 10 Y ear 7 Ye ar 5 Ye ar 4 Ye ar 3 Ye ar 2 Ye ar 1 Ye ar 3 Mo nth 6 Mo nth 1.25% page 10 Approved Investment Strategy DEPOSIT INSURANCE FUND Current Strategy as of 2nd 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 $9.0 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 3rd Quarter 2007 AFS securities target limit increased from $9.0 billion to $9.5 billion. NATIONAL LIQUIDATION FUND Current Strategy as of 2nd 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 3rd Quarter 2007 None page 11 Executive Summary of 2007 Budget and Expenditures by Major Expense Category Through June 30, 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 $326,113 73,232 25,738 33,345 15,189 8,967 5,426 $317,102 63,071 24,915 32,868 17,022 7,826 3,728 97% 86% 97% 99% 112% 87% 69% ($9,011) (10,161) (823) (477) 1,833 (1,141) (1,698) Total Ongoing Operations Receivership Funding $488,010 $466,532 96% ($21,478) $1,710 30,673 2,823 1,150 113 272 759 $294 2,782 714 469 13 58 18 17% 9% 25% 41% 12% 21% 2% ($1,416) (27,891) (2,109) (681) (100) (214) (741) $37,500 $4,348 12% ($33,152) $525,510 $470,880 90% ($54,630) Investment Budget 1 $12,371 $5,857 47% ($6,514) Grand Total $537,881 $476,737 89% ($61,144) 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 12 Executive Summary of 2007 Budget and Expenditures by Budget Component and Division/Office Through June 30, 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 $194,339 86,073 78,600 49,390 46,289 18,583 15,132 12,525 12,988 8,410 2,181 1,000 $525,510 $190,301 81,673 74,552 22,546 36,538 16,591 14,331 11,586 12,739 7,718 2,305 0 $470,880 98% 95% 95% 46% 79% 89% 95% 93% 98% 92% 106% 0% 90% ($4,038) (4,400) (4,048) (26,844) (9,751) (1,992) (801) (939) (249) (692) 124 (1,000) ($54,630) $12,096 71 204 $5,561 209 87 46% 294% 43% ($6,535) 138 (117) $12,371 $5,857 47% ($6,514) $194,339 98,169 78,600 49,461 46,289 18,787 15,132 12,525 12,988 8,410 2,181 1,000 $537,881 $190,301 87,234 74,552 22,755 36,538 16,678 14,331 11,586 12,739 7,718 2,305 0 $476,737 98% 89% 95% 46% 79% 89% 95% 93% 98% 92% 106% 0% 89% ($4,038) (10,935) (4,048) (26,706) (9,751) (2,109) (801) (939) (249) (692) 124 (1,000) ($61,144) 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 13
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