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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 10, 2009 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 2009 CFO Report to the Board The attached report highlights the Corporation’s financial activities and results for the period ending June 30, 2009. Executive Summary • The Deposit Insurance Fund (DIF) balance decreased by 20 percent ($2.6 billion) to $10.4 billion during the second quarter of 2009. The second quarter 2009 decrease was primarily due to an $11.6 billion increase in provision for insurance losses which was partially offset by a $9.1 billion increase in assessment revenue. • During the second quarter of 2009, the FDIC was named receiver for 24 failed institutions. The combined assets at inception for these institutions totaled approximately $26.9 billion with an estimated loss totaling $9.0 billion. The corporate cash outlay during the second quarter for these failures was $9.3 billion. Twelve receiverships entered into loss-share agreements with the acquiring institutions and are expected to pay approximately $3.4 billion over the length of the agreements. • For the six months ending June 30, 2009, Corporate Operating and Investment Budget related expenditures ran below budget by 13 percent ($128.4 million) and 15 percent ($441.0 thousand), respectively. The variance with respect to the Corporate Operating Budget was primarily in the Receivership Funding budget component, where spending in several expense categories was well below budget through the second quarter. This year-to-date budget surplus is expected to be fully utilized in the second half of 2009 as expenses increase in future quarters in connection with recent and additional resolution activity. 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 • Since the beginning of the Temporary Liquidity Guarantee Program (TLGP) in October 2008 to June 30, 2009, the TLGP has $792.0 million in estimated losses upon the failure of 54 participating institutions in the Transaction Account Guarantee Program (TAGP) and has incurred no losses from payment default under the Debt Guarantee Program (DGP). A graph on page 13 shows the DIF receivership claims under the TAGP and the estimated losses by month. Of the $2.1 billion in total receivership TAGP claims and $792.2 million in total estimated TAGP losses, one institution comprises the majority of that amount with $1.5 billion in TAGP claims and $649.8 million in estimated losses. • As of June 30, 2009, TLGP has $7.4 billion in cash and cash equivalents. Note that the TLGP does not currently expect any new guarantees under the DGP after October 31, 2009 and the TAGP is currently scheduled to expire on December 31, 2009 (Note: There is a notice of proposed rulemaking that presents an alternative to extend the TAGP until June 30, 2010). 2 Financial Results II. Investments • • Trends and Outlook Comments The DIF investment portfolio’s amortized cost (book value) decreased by $5.8 billion during the first half of 2009, and totaled $20.8 billion on June 30, 2009. The decline was largely the result of funding 45 failed institution resolutions during the first half of 2009. However, it should be noted that 20 of these bank and thrift failures were resolved as lossshare transactions (in which the acquirers purchased substantially all of the failed institutions’ assets and the FDIC and the acquirers entered into loss-share agreements) requiring little or no initial resolution funding, thus helping to mitigate this quarter’s decline in the portfolio value. At quarter end, the DIF investment portfolio yield was 3.89 percent, down 70 basis points from its December 31, 2008, yield of 4.59 percent. The yield decline stemmed from several factors, notably the sale and maturity of generally higher yielding securities, as well as the DIF portfolio ending the quarter with a comparatively high overnight investment balance of $3.7 billion earning an ultra-low 0.10 percent yield. The high quarter-end overnight investment balance was attributable to the receipt of $2.6 billion in assessments and about $209.3 million in receivership dividends on June 30, 2009 (as well as other net cash inflows during June). Most conventional Treasury market yields increased substantially during the second quarter of 2009, with longer-maturity Treasury securities posting the largest yield increases. Although Treasury yields remain relatively low in light of the weak U.S. economy, the higher yields appeared to reflect a number of factors, including growing sentiment that the U.S. recession might soon be ending, a reversal of flight-to-quality trades, and concerns over the increasing supply of Treasury securities. During the third quarter of 2009, Treasury yields are expected to continue to trade within a range around current levels, and to gradually rise over the course of the rest of the year. 3 Financial Results III. Budget • • Trends and Outlook Comments Approximately $565.0 million was spent in the Ongoing Operations component of the 2009 Corporate Operating Budget, which was $12.4 million (2 percent) below the budget for the six months ending June 30, 2009. The Salaries and Compensation expense category was $10.8 million below the year-to-date budget. Spending in the Outside Services - Personnel expense category was $6.3 million greater than the year-to-date budget, but this amount was more than offset by the net under spending in all the remaining expense categories. Approximately $308.2 million was spent in the Receivership Funding component of the 2009 Corporate Operating Budget, which was $116.0 million (27 percent) below the budget for the six months ending June 30, 2009. The Outside Services - Personnel expense category was nearly $47.6 million below the year-to-date budget, and represented 41 percent of the total Receivership Funding variance. In addition, the Salaries and Compensation and Travel expense categories ran $26.4 million and $20.0 million under their year-to-date budgets, respectively. Collectively, these three expense categories represented 81 percent of the total year-to-date budget variance in the Receivership Funding component. I. Corporate Fund Financial Results (See pages 12 – 13 for detailed data and charts.) Deposit Insurance Fund (DIF) • For the six months ending June 30, 2009, DIF’s comprehensive loss totaled $6.9 billion compared with a comprehensive loss of $7.2 billion for the same period last year. This $288.0 million reduction in the year-over-year loss was primarily due to a $10.6 billion increase in assessment revenue partially offset by a $7.5 billion increase in the provision for insurance losses and a $3.0 billion decrease in the unrealized gain on available-for-sale securities (AFS). The continued sale of U.S. Treasury investments to fund resolution activity also contributed to the change in the comprehensive loss as the realized gain from investment sales rose by $657.5 million while the interest income earned from investments declined by $817.5 million. Other revenue also increased by $374.5 million, largely attributable to the collection of debt issuance surcharges under the TLGP. • Assessment revenue was $11.7 billion as of June 30, 2009 compared with $1.1 billion for the comparable period in 2008. A major reason for this $10.6 billion increase was the recognition of a $5.6 billion receivable for the special assessment to be collected on September 30, 2009. In regular assessment activity, DIF collected approximately $2.6 billion for first quarter 2009 insurance coverage on June 30, 2009 and recognized a $3.4 billion receivable for second quarter insurance coverage to be collected on September 30, 2009. Year-to-date regular assessment revenue totaled approximately $6.0 billion compared with approximately $1.1 billion for the same period in 2008. Major factors contributing to this increase in regular assessment revenue year-over-year include changes to the risk-based assessment regulations, 4 ratings downgrade of many institutions (which pushed them into higher assessment rate categories), the decline of the one-time credit available for use, and a larger assessment base. • The provision for insurance losses was $18.3 billion as of June 30, 2009 compared with $10.7 billion for the same period in 2008. The total provision consists mainly of the provision for future failures (approximately $8.0 billion) and the losses estimated at resolution for the 45 failures occurring in 2009 (approximately $10.3 billion). • The year-to-date unrealized losses on AFS securities were $1.3 billion as of June 30, 2009 compared with unrealized gains of $1.7 billion for the comparable period in 2008. Most of the year-to-date unrealized gain reported in June 2008 resulted from a one-time adjustment of $1.6 billion for the transfer of the held-to-maturity securities to the AFS category. For year-to-date 2009, the unrealized losses reflect a combination of: 1) increasing market yields (which lower the securities’ unrealized gains, thus resulting in an income statement unrealized loss for the period); and 2) the sale of a significant number of AFS securities (the latter of which were offset by the year-to-date 2009 realized gains of $657.5 million). • Liabilities due to resolutions were $11.1 billion at June 30, 2009 – an increase of $5.7 billion during the second quarter. This liability represents the amount due to the receiver for assets transferred to the acquirer or bridge bank for use in funding deposits. Two resolutions during the quarter resulted in most of this increase – Bank United, FSB ($3.1 billion) and Silverton Bank ($1.3 billion). II. Investments Investment Results (See pages 14 – 15 for detailed data and charts.) DIF Investment Portfolio • The amortized cost (book value) of the DIF investment portfolio decreased by $5.8 billion during the first half of 2009, or 21.8 percent, from $26.6 billion on December 31, 2008, to $20.8 billion on June 30, 2009. Similarly, the DIF portfolio’s market value dropped by $7.1 billion or 24.6 percent, from $28.8 billion on December 31, 2008, to $21.8 billion on June 30, 2009. Again, the declines were primarily the result of funding failed institution resolutions during the first half of 2009. • The DIF investment portfolio's total return for the first half of 2009 was -0.681 percent, approximately 175 basis points higher than its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which had a total return of -2.435 percent during the same period. The DIF portfolio’s Treasury Inflation-Protected Securities (TIPS) considerably outperformed the Index’s conventional Treasury securities. In addition, because the DIF conventional Treasury securities have a lower average duration than the securities held in the Index, and given the large increase in yields on longer duration securities, the DIF’s conventional Treasury securities outperformed those in the Index. Finally, the DIF portfolio’s high cash balances helped contribute to the positive relative return. • During the second quarter of 2008, to help fund resolution-related cash outlays, staff sold a total of twenty AFS conventional Treasury securities on four occasions; the securities had a 5 total book value of $4.2 billion, a total market value of $4.7 billion, a weighted average maturity (WAM) of 6.6 years, a weighted average modified duration of 5.3 years, and a weighted average yield at cost of 4.8 percent. These security sales resulted in a realized gain of $521.2 million. On June 30, 2009, the DIF portfolio’s overnight investment balance was $3.7 billion (about 17.0 percent of the portfolio by market value), to a large extent reflecting the receipt of approximately $2.6 billion in million regular deposit insurance assessments on June 30, 2009. Other Corporate Investment Portfolios • During the second quarter, the book value of the DGP investment portfolio increased from $6.2 billion on March 31, 2009, to $7.5 billion on June 30, 2009. The funds in this portfolio are from the guarantee fees related to the debt guarantee program under the TLGP. Consistent with the approved quarterly investment strategy, all Debt Guarantee Program portfolio funds were invested in overnight investments during the quarter. • During the second quarter, the Other Systemic Risk Reserves investment portfolio increased from $20.2 million on March 31, 2009 to $80.7 million on June 30, 2009, reflecting the May 15, 2009 receipt of $60.5 million in dividends on the Fixed Rate Cumulative Perpetual Preferred Stock, Series G issued by Citigroup Inc. (Citigroup Stock). Subsequently, the DIF should receive dividends of $60.5 million per quarter from the Citigroup Stock. These funds are segregated and invested separately from DIF’s other cash and investments. • On June 30, 2009, the FDIC collected about $178.7 million in fees related to the TAGP under the TLGP. However, these funds were then immediately transferred to the DIF and the DGP portfolios for reimbursement of claims and expenses paid on the TAGP’s behalf, so the TAGP investment portfolio had no balance at month end. The Treasury Market • During the second quarter of 2009, most conventional Treasury yields increased substantially, with longer-maturity Treasuries posting the largest yield increases. The three-month Treasury bill (T-Bill) and the six-month T-Bill yields declined, albeit just slightly by 2 basis points and 8 basis points, respectively. The yield on two-year Treasury note, which also is very sensitive to actual and anticipated changes in the federal funds rate, as well as to flight-to-quality concerns, increased by 31 basis points during the second quarter, reflecting some investors’ forecast for a higher federal funds target rate by late this year as well as some unwinding of flight-to-quality trades. Intermediate- to longer-maturity Treasury security yields increased substantially; the yield on the five-year Treasury note increased by 90 basis points, while the yield on the tenyear Treasury note increased by 87 basis points. Accordingly, the conventional Treasury yield curve steepened during the second quarter of 2009; on June 30, 2009, the two-year to ten-year yield curve had a 242-basis point positive spread (compared to a positive 186-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 83 basis points. 6 Prospective Strategies • The third quarter 2009 DIF investment strategy calls for placing all net proceeds from deposit insurance assessments, maturing securities, Temporary Liquidity Guarantee Program surcharges, coupon and other interest payments, and receivership dividends into overnight investment and/or short-term T-Bills in anticipation of using such funds for resolution activities. • For the DGP and Other Systemic Risk Reserves investment portfolios—which by contrast to the DIF portfolio are in investment mode—the third quarter 2009 investment strategy calls for strategically investing all available funds in overnight investments, and/or in conventional or callable Treasury securities with effective maturity dates not to exceed December 31, 2012. III. Budget Results (See pages 16 – 17 for detailed data.) Approved Budget Modifications The 2009 Budget Resolution delegated to the Chief Financial Officer (CFO) and selected other officials the authority to make certain modifications to the 2009 Corporate Operating Budget. The following budget reallocations were made during the second quarter in accordance with the authority delegated by the Board of Directors (they did not change the total 2009 Corporate Operating Budget approved by the Board): • In April 2009, the CFO approved the reallocation of budget authority within the Salaries and Compensation expense category of the Ongoing Operations component of the 2009 Corporate Operating Budget to reflect updated salary and benefit expense estimates for all divisions and offices, except for the Office of Inspector General. This reallocation followed a comprehensive analysis of the approved authority for salaries, bonuses, and fringe benefits as of March 31, 2009. Excess funds totaling $1,826,717 were identified and reallocated to the Corporate Unassigned budget and will be available to meet new budget requirements that emerge during the year.1 • In April 2009, the CFO approved the reallocation of budget authority within the Ongoing Operations component of the 2009 Corporate Operating Budget to provide funding for laptops and other equipment for new employees and contractor staff. The Equipment expense category of the Division of Information Technology (DIT) budget was increased by $2,576,085, and the Corporate Unassigned budget was decreased by the same amount. • In April 2009, the CFO approved the reallocation of $152,000 in budget authority within the Salaries and Compensation expense category of the Ongoing Operations component of the 2009 Corporate Operating Budget from the budget of the Chief Operating Officer (COO) to the budget of the CFO in connection with the addition of a position in the CFO’s office to assume work responsibilities transferred from the COO’s office. 1 The Corporate Unassigned budget within the Ongoing Operations component initially included only $2.5 million in unallocated funding approved by the Board in December 2008 for unanticipated expenses related to the implementation of TLGP, TARP, and other initiatives designed to address the credit and liquidity problems within the U. S. economy. As reported at the end of the first quarter, $1,749,368 was reallocated to this budget in February 2009, in connection with adjustments to the awards budgets of divisions/offices. 7 • In April 2009, the CFO approved the reallocation of $1,000,000 in budget authority within the Ongoing Operations component of the 2009 Corporate Operating Budget from the Corporate Unassigned budget to the Outside Services – Other budget of the Office of Public Affairs to continue the FDIC public service announcement campaign and outreach focusing on deposit insurance and encouraging the use of the enhanced Electronic Deposit Insurance Estimator (EDIE). • In May 2009, the CFO approved the reallocation of $34,595,471 in budget authority within the Receivership Funding component of the 2009 Corporate Operating Budget from the Corporate Unassigned budget to the budgets of the Division of Resolutions and Receiverships (DRR), DIT, Division of Administration (DOA), and Corporate University (CU) for the establishment of the temporary East Coast Satellite Office (ECSO)2. DRR received $20,386,767 (Salaries and Compensation $18,333,467 and Travel $2,053,300); DIT received $6,619,277 (Salaries and Compensation $403,632, Outside Services – Personnel $559,999, Equipment $5,417,970, and Outside Services–Other $237,676); DOA received $7,452,973 (Salaries and Compensation $1,049,425, Buildings $4,039,212, and Equipment $2,364,336); and CU received $136,454 (all in Salaries and Compensation) of the reallocated budget authority. • In May 2009, the CFO approved the reallocation of $8,533,213 in budget authority within the Receivership Funding component of the 2009 Corporate Operating Budget from the Corporate Unassigned budget to the Salaries and Compensation budget of DRR to fund 165 newly-authorized positions. • In May 2009, the CFO approved the reallocation of $787,782 in budget authority within the Receivership Funding component of the 2009 Corporate Operating Budget from the Corporate Unassigned budget to the Salaries and Compensation budget of the Office of the Ombudsman (OO) to fund 12 newly-authorized positions. The reallocation was implemented in June. Approved Staffing Modifications The 2009 Budget Resolution delegated to the CFO the authority to modify approved 2009 staffing authorizations for divisions and offices, as long as those modifications did not increase the total approved 2009 Corporate Operating Budget. The following changes were approved by the CFO in accordance with the authority delegated to him by the Board of Directors: • In April 2009, the CFO approved an increase of one authorized permanent position in the CFO’s office to provide support to the COO’s staff with its growing Board case review workload, and for work related to Temporary Liquidity Guarantee Program (TLGP), Legacy Loans Program (LLP), and other high priority initiatives. A budget adjustment was made in the Ongoing Operations budget component in conjunction with this approval. • In April 2009, the CFO approved an increase of 38 authorized positions (14 permanent, 24 non-permanent) in DOA. Most of these positions were approved to address increased 2 The Corporate Unassigned budget within the Receivership Funding component initially included $64.2 million in unallocated funding approved by the Board in December 2008 for budget requirements that emerge during the year in conjunction with receivership and resolution activities. 8 workload demands on DOA in Washington and Dallas that are attributable to factors other than the increase in receivership and resolution activity and will be funded through the Ongoing Operations budget component. The CFO determined that sufficient funding would be available for these positions for the balance of 2009 in that budget component through the reallocation of surplus budget authority during the mid-year budget review process. • In April 2009, the CFO approved an increase of one authorized non-permanent position in the Office of Legislative Affairs to assist with its rapidly growing workload and will be funded through the Ongoing Operations budget component. The CFO determined that sufficient funding would be available for these positions for the balance of 2009 in that budget component through the reallocation of surplus budget authority during the mid-year budget review process. • In May 2009, the CFO approved an increase of 12 authorized non-permanent positions in OO. These positions will be distributed equally among the Irvine, Jacksonville, and Dallas offices. A budget adjustment was implemented in June in the Receivership Funding budget component in conjunction with this approval. • In May 2009, the CFO approved an increase of 363 authorized non-permanent positions for the temporary ECSO. The newly authorized positions were in DRR (+343), DOA (+13), DIT (+5), and CU (+2). A budget adjustment was made in the Receivership Funding budget component in conjunction with this approval. • In May 2009, the CFO approved an increase of three authorized permanent positions in the Office of Enterprise Risk Management to support its rapidly growing risk assessment workload associated with the increase in the corporation’s business activities and workload. These positions will be funded through the Ongoing Operations budget component. The CFO determined that sufficient funding would be available for these positions for the balance of 2009 in that budget component through the reallocation of surplus budget authority during the mid-year budget review process. • In May 2009, the CFO approved an increase of 165 authorized non-permanent positions in DRR for its Dallas (+139), Washington (+21), and Irvine (+5) offices due to current and projected workload. A budget adjustment was made in the Receivership Funding budget component in conjunction with this approval. 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, 2009, are defined as those that either (1) exceed the YTD budget by $2 million and represent more than three percent for a major expense category or total division/office budget; or (2) are under the YTD budget for a major expense category or division/office by an amount that exceeds $3 million and represents more than five percent of the major expense category or total division/office budget. 9 Significant Spending Variances by Major Expense Category Ongoing Operations There were significant spending variances in two major expense categories through the second quarter in the Ongoing Operations component of the 2009 Corporate Operating Budget: • Outside Services-Personnel expenditures were $6.3 million, or 8 percent, more than budgeted. Approximately $2.6 million of this variance was attributable to expenses related to document management services provided to DRR, which were erroneously charged ton the Ongoing Operations budget component (this error will be corrected during the third quarter). In addition, approximately $1.9 million was spent on unbudgeted financial advisory services obtained in connection with preparatory work for the proposed Legacy Loan Program (LLP). The cost of contract services provided in support of IT systems maintenance and server operations also exceeded budgeted amounts during the quarter. • Buildings expenditures were $3.2 million, or 10 percent, less than budgeted. The variance was due to delays in the relocation and build-outs of the New York Regional Office, the Chicago Regional Office, and the Boston Area Office. Receivership Funding The Receivership Funding component of the 2009 Corporate Operating Budget includes funding for expenses that are incurred in conjunction with institution failures and the management and disposition of the assets and liabilities of the ensuing receiverships, except for salary and benefits expenses for permanent employees assigned to the receivership management function. There were significant spending variances in five major expense categories through the second quarter in the Receivership Funding component of the 2009 Corporate Operating Budget: • Salaries & Compensation ($26.4 million or 47 percent, less than budgeted). • Outside Services-Personnel ($47.6 million or 18 percent, less than budgeted). • Travel ($20.0 million or 68 percent, less than budgeted). • Outside Services-Other ($8.7 million or 63 percent, less than budgeted). • Other Expenses ($11.6 million or 46 percent, less than budgeted). These variances occurred primarily because bank closings have been less costly to administer than anticipated due to the prevalence of structured and whole bank transactions for the first six months of 2009; and budgeted positions have not been filled as quickly as projected in the original Board approved budget. These factors led to lower-than-budgeted costs for asset management and liquidation, outside counsel, travel, and other expenses. With the expected increase in bank failures and resolution activities during the second half of the year, Receivership Funding expenditures should increase each quarter as the number of bank closings increases and the cumulative inventory of assets under management grows. Based on 10 that assumption, we project that all or most of the surplus budget authority in the Receivership Funding budget component will be utilized by year-end. Significant Spending Variances by Division/Office3 Four organizations had significant spending variances through the end of the second quarter: • DRR spent $72.4 million, or 19 percent, less than budgeted. This reflected the net impact of under spending of approximately $80.4 million in its Receivership Funding budget for the reasons identified above and over spending of approximately $8.0 million in its Ongoing Operations budget due to the coding error referenced above, unbudgeted expenses for financial advisory services for LLP, and higher-than-budgeted expenses for travel in connection with recruiting and selection activities for the temporary West Coast Satellite Office, travel related to IT systems, and employee relocations. • The Legal Division spent $27.7 million, or 31 percent, less than budgeted. Approximately $23.6 million of this variance was due to under spending in its Receivership Funding budget because budgeted positions were not filled as projected and bank closings and resolution activities have required substantially less contractual legal services to date than anticipated. • DOA spent $14.9 million, or 14 percent, less than budgeted. This variance was largely attributable to delays in building out and relocating employees to new office space in the Boston Area Office, the Chicago Regional Office, and the New York Regional Office; temporary delays in purchasing Furniture, Fixtures and Equipment for those build outs; and lower-than-expected cost for leasehold improvements due to landlord concessions at the temporary West Coast Satellite Office. • 3 DIT spent nearly $4.5 million, or 4 percent, more than budgeted. This variance included approximately $1.0 million in unbudgeted systems development and maintenance expenses in support of TLGP. In addition, DIT accelerated its planned purchases of equipment, including $1.0 million for servers and $0.8 million for storage and network monitoring software. Contract expenses for operations and control of the mid-range IT platform also exceeded DIT’s year-to-date budget by $1.3 million. Some of these first half expenses may be offset by under spending during the second half of the year. Information on division/office variances reflects variances in both the Corporate Operating and Investment Budgets. 11 FDIC CFO REPORT TO THE BOARD – Second Quarter 2009 Fund Financial Results ($ in Millions) Balance Sheet Cash & cash equivalents - unrestricted Cash & cash equivalents - restricted - systemic risk Investment in U.S. Treasury obligations, net Preferred stock - systemic risk Assessments receivable, net Receivable, net - systemic risk 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 Liabilities due to resolutions ($763M-TLGP's liability) Guarantee obligations - systemic risk Postretirement benefit liability Contingent Liabilities: future failures Contingent Liabillties: systemic risk Contingent Liabilities: litigation losses & other Total Liabilities FYI: Unrealized gain on available-for-sale securities, net FYI: Unrealized postretirement benefit gain FUND BALANCE Jun-09 3,633 7,360 18,019 3,025 9,048 1,303 302 21,729 368 $ 64,787 121 11,091 10,032 114 31,968 893 200 $ 54,419 962 25 $ 10,368 $ Deposit Insurance Fund Quarterly Year-Over-Year Mar-09 Change Jun-08 Change (5,624) $ 1,636 $ 1,997 $ 9,257 $ 6,086 1,274 7,360 (6,890) 43,218 (25,199) 24,909 3,025 3,025 2,550 6,498 627 8,421 683 620 1,303 (40) 695 (393) 342 18,145 3,584 2,179 19,550 372 (4) 355 13 $ 57,748 $ 7,039 $ 56,331 $ 8,456 (632) 118 3 753 5,420 5,671 90 11,001 8,396 1,636 10,032 114 0 116 (2) 28,459 3,509 10,590 21,378 (506) 893 1,399 200 0 200 0 $ 44,741 9,678 11,114 43,305 1,919 (957) 2,045 (1,083) 25 19 6 $ 13,007 $ (2,639) $ 45,217 $ (34,849) DIF Fund Balance and Estimated Insured Deposits 1.21% 1.22% 0.36% 0.27% 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 $52 $49 $3,891 $50 $4,154 $4,831 $4,749 $4,292 $17 12/2005 12/2006 12/2007 Fund Balance $13 12/2008 3/2009 Estimated Insured Deposits Income Statement $ Assessments earned Systemic risk revenue Interest earned on investment securities Realized gain on sale of securities Other revenue Total Revenue $ Operating expenses (includes depreciation expense) Systemic risk expenses Provision for insurance losses Other expenses Total Expenses & Losses $ Net (Loss)/Income Unrealized gain/(loss) on available-for-sale securities, net Unrealized postretirement benefit gain/(loss) YTD Comprehensive (Loss)/Income $ Deposit Insurance Fund Quarterly Jun-09 Mar-09 Change 11,710 $ 2,615 $ 9,095 327 34 293 452 212 240 657 136 521 377 2 375 13,523 $ 2,999 $ 10,524 564 266 298 327 34 293 18,252 6,637 11,615 19,143 $ 6,937 $ 12,206 (5,620) (3,938) (1,682) (1,288) (331) (957) (6,908) $ (4,269) $ (2,639) Jun-08 $ 1,088 1,269 2 $ 2,359 494 10,746 1 $ 11,241 (8,882) 1,686 $ (7,196) Year-Over-Year Change $ 10,622 327 (817) 657 375 $ 11,164 70 327 7,506 (1) $ 7,902 3,262 (2,974) $ 288 Rate of Return FDIC Trailing 12-month Investment Portfolio Total Returns Compared to the Designated Performance Benchmark 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 11.33% 9.48% 9.73% 8.63% 8.86% 5.45% 8.55% 6.12% 5.27% 5.02% 4.06% 3.57% Dec-06 Jun-07 ($ in Billions) 60 55 50 45 40 35 30 25 20 15 10 1.25% Estimated Insured Deposits ($ in Biliions) Fund Balance Reserve ratio: Dec-07 DIF Jun-08 Merrill Lynch Index 12 Dec-08 Jun-09 Fund Financial Results - continued ($ in Millions ) Statements of Cash Flows Net (Loss)/Income Amortization of U.S. Treasury obligations (unrestricted) TIPS Inflation Adjustment Depreciation on property and equipment Provision for insurance losses Unrealized gain on postretirement benefits (Gain) on sale of UST obligations Systemic risk expenses Net change in operating assets and liabilities Net Cash Provided by (Used by) Operating Activities Investments matured and sold Investments purchased (includes purchase of property and equipment) Net Cash Provided by (Used by) Investing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at beginning of year Unrestricted Cash and Cash Equivalents - Ending Restricted Cash and Cash Equivalents - Ending Cash and Cash Equivalents - Ending Selected Financial Data Jun-09 (5,620) 145 38 33 18,252 (658) (13,610) $ (1,420) 9,027 $ $ $ (2) 9,025 $ 7,605 3,388 3,633 7,360 10,993 $ Jun-09 3,459 (123,955) 3,487 7 3 $ (7) Cash and cash equivalents Accumulated deficit, net Resolution equity Total revenue Operating expenses Goodwill/Guarini litigation expenses Net Income/(Loss) Deposit Insurance Fund Quarterly Year-Over-Year Mar-09 Change Jun-08 Change $ (3,938) $ (1,682) $ (8,882) $ 3,262 80 65 257 (112) 57 (19) (210) 248 15 18 27 6 6,637 11,615 10,746 7,506 (136) (522) (658) (999) (12,611) (1,934) (11,676) $ 1,716 $ (3,136) $ 4 $ (1,424) 2,619 6,408 5,009 4,018 $ (2) 2,617 $ 4,334 3,388 1,636 6,086 7,722 $ 6,408 $ 3,271 1,997 1,274 3,271 $ (1) 5,008 $ 5,012 4,245 9,257 9,257 $ (1) 4,017 2,593 (857) (5,624) 7,360 1,736 FSLIC Resolution Fund Year-Over-Year Quarterly Mar-09 Change Jun-08 Change (8) $ 3,444 $ 15 $ 3,467 $ (123,944) (11) (123,811) (144) 3,498 (11) 3,458 29 (36) 5 2 43 1 2 2 1 77 (77) $ 4 $ (11) $ (41) $ 34 Receivership Selected Statistics June 2009 vs. June 2008 Year-to-Date ($ in millions) Total Receiverships Assets in Liquidation Collections Dividends Paid - Cash DIF FRF ALL FUNDS Jun-09 Jun-08 Change Jun-09 Jun-08 Change Jun-09 Jun-08 Change 85 22 63 8 9 (1) 93 31 62 $ 26,467 $ 2,343 $ 24,124 $ 33 $ 34 $ (1) $ 26,500 $ 2,377 $ 24,123 $ 4,297 $ 221 $ 4,076 $ 5 $ 4 $ 1 $ 4,302 $ 225 $ 4,077 $ 3,078 $ 232 $ 2,846 $ - $ 4 $ (4) $ 3,078 $ 236 $ 2,842 DIF Receiverships with Transaction Account Guarantee Program Claims as of 6/30/2009 2,000 $ in Millions 1,800 1,600 $1,600 Total TAGP Claims = $2.1 billion 1,400 1,200 Total TAGP Estimated Losses = $792.2M 1,000 800 $682 600 400 200 0 $191 $0.4 $0.2 $67 10/2008 $21 11/2008 $3 $1 $67 $23 12/2008 1/2009 TAGP Claims $32 $65 $12 $37 $14 2/2009 3/2009 4/2009 TAGP Estimated Losses 13 $27 5/2009 $7 6/2009 Deposit Insurance Fund Portfolio Summary (Dollar Values in Millions) 6/30/09 12/31/08 Change Par Value Amortized Cost Market Value $20,595 $20,790 $21,751 $25,496 $26,580 $28,830 ($4,901) ($5,790) ($7,079) Primary Reserve 1 Primary Reserve % of Total Portfolio $22,043 100.0% $29,227 100.0% ($7,184) 0.0% 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) (0.681%) 8.550% not applicable (2.435%) 175.4 11.334% (278.4) not applicable not applicable 3.89% 4.59% (0.70%) 1.84 3.34 (1.50) 1.65 1.99 not applicable 2.85 2.94 not applicable (1.20) (0.95) 4 Effective Duration (in years) Total Portfolio Available-for-Sale Securities 5 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 1.1% annual increase in the CPI over the remaining life of each TIPS. 4 For each TIPS, an estimated 80 percent "yield beta" factor is applied to its real yield duration to arrive at an estimated effective duration. 5 In early August 2008, management reclassified all of the DIF portfolio's HTM securities as AFS securities effective as of June 30, 2008, because the FDIC could no longer assert it had the posititive intent and ability to hold its HTM securities until their maturity dates. Summary of Other Corporate Investment Portfolios (Dollar Values in Millions) 6/30/09 12/31/08 Change $7,536 0.10% overnight $2,425 0.11% overnight $5,111 (0.01%) no change $0 not applicable not applicable $0 not applicable not applicable $0 not applicable not applicable $81 0.10% overnight $0 not applicable not applicable $81 not applicable not applicable $3,317 0.10% overnight $3,325 0.11% overnight ($8) (0.01%) no change Debt Guarantee Program Book Value 6 Yield-to-Maturity Weighted Average Maturity Transaction Account Guarantee Program Book Value 6 Yield-to-Maturity Weighted Average Maturity Other Systemic Risk Reserves Book Value 6 Yield-to-Maturity Weighted Average Maturity FRF-FSLIC 6 Book Value Yield-to-Maturity Weighted Average Maturity 6 Due to the current short-term nature of these portfolios, each of their respective Par, Book, and Market Values are identical for reporting purposes. National Liquidation Fund (NLF) Investment Portfolio Summary (Dollar Values in Millions) 7 Book Value Yield-to-Maturity Weighted Average Maturity (in days) 7 6/30/09 12/31/08 Change $6,163 0.40% 30 $3,447 1.21% 23 $2,716 (0.81%) 7 Due to the short-term nature of the NLF, the portfolio's Book and Market Values are identical for reporting purposes. 14 Investment Strategies DEPOSIT INSURANCE FUND Strategy as of 2nd Quarter 2009 Invest all proceeds from deposit insurance assessments, Temporary Liquidity Guarantee Program surcharges, maturing securities, coupon and other interest payments, and receivership dividends in overnight investments and/or in short-term Treasury bills in anticipation of using such funds for resolution activities. Strategy Changes for 3rd Quarter 2009 No changes in strategy. DEBT GUARANTEE PROGRAM Strategy as of 2nd Quarter 2009 Strategically invest all available funds in overnight investments and/or in conventional or callable Treasury securities with effective maturity dates not to exceed December 31, 2012. Strategy Changes for 3rd Quarter 2009 No changes in strategy. NATIONAL LIQUIDATION FUND Strategy as of 2nd Quarter 2009 Maintain an overnight deposit balance within a target range of $15 million to $25 million. Strategically invest the remaining funds in the zero- to 12-month maturity sector. Strategy Changes for 3rd Quarter 2009 No changes in strategy. 15 Executive Summary of 2009 Budget and Expenditures by Major Expense Category Through June 30, 2009 (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 $387,371 78,332 36,982 31,216 25,899 10,990 6,680 $376,526 84,674 37,205 27,984 25,071 8,947 4,639 97% 108% 101% 90% 97% 81% 69% ($10,845) 6,342 223 (3,232) (828) (2,043) (2,041) Total Ongoing Operations Receivership Funding $577,470 $565,046 98% ($12,424) Salaries & Compensation Outside Services - Personnel Travel Buildings Equipment Outside Services - Other Other Expenses $55,763 258,290 29,500 26,156 15,235 13,940 25,321 $29,395 210,694 9,471 26,476 13,226 5,199 13,719 53% 82% 32% 101% 87% 37% 54% ($26,368) (47,596) (20,029) 320 (2,009) (8,741) (11,602) $424,205 $308,180 73% ($116,025) $1,001,675 $873,226 87% ($128,449) Investment Budget 1 $3,029 $2,588 85% ($441) Grand Total $1,004,704 $875,814 87% ($128,890) 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 2009 spending estimates for approved projects. 16 Executive Summary of 2009 Budget and Expenditures by Budget Component and Division/Office Through June 30, 2009 (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 Total, Corporate Operating Budget Investment Budget $240,376 109,220 106,770 374,296 88,082 17,741 15,581 13,578 18,637 12,987 4,407 $1,001,675 $228,213 114,089 91,855 301,945 60,382 16,840 13,939 11,882 19,513 11,056 3,512 $873,226 95% 104% 86% 81% 69% 95% 89% 88% 105% 85% 80% 87% ($12,163) 4,869 (14,915) (72,351) (27,700) (901) (1,642) (1,696) 876 (1,931) (895) ($128,449) $2,617 153 259 $3,029 $2,277 95 216 $2,588 87% 62% 83% 85% ($340) (58) (43) ($441) $240,376 111,837 106,770 374,449 88,082 18,000 15,581 13,578 18,637 12,987 4,407 $1,004,704 $228,213 116,366 91,855 302,040 60,382 17,056 13,939 11,882 19,513 11,056 3,512 $875,814 95% 104% 86% 81% 69% 95% 89% 88% 105% 85% 80% 87% ($12,163) 4,529 (14,915) (72,409) (27,700) (944) (1,642) (1,696) 876 (1,931) (895) ($128,890) 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 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, Deputy to the Chairman and Chief Financial Officer, and Deputy to the Chairman for External Affairs. 3) Budgets for investment projects are approved on a multi-year basis; the year-to-date budget amount reflects the 2009 spending estimates for approved projects. 17
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