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Federal Deposit Insurance Corporation 550 17th Street, N.W., Washington, D.C. 20429-9990 Deputy to the Chairman and CFO November 8, 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: Third Quarter 2007 CFO Report to the Board The attached report highlights the Corporation's financial activities and results for the period ending September 30, 2007. Executive Summary • The Deposit Insurance Fund (DIF) remained financially sound and exhibited healthy earnings during the first three quarters of 2007. The fund balance grew by one percent to $51.754 billion during the third quarter of 2007. DIF’s comprehensive income grew by $527 million during the third quarter of 2007, increasing the year-to-date (YTD) comprehensive income to $1.589 billion. Comprehensive income for the third quarter 2007 is primarily composed of interest earned on investment securities of $640 million, assessment revenue of $170 million, an increase in the unrealized gain on available-for-sale securities (AFS) of $68 million, which was offset by $243 million incurred in operating expenses and a $132 million change in the provision for insurance losses largely due to the failure of NetBank of Alpharetta, Georgia. • On September 28, 2007, the Office of Thrift Supervision closed NetBank of Alpharetta, Georgia and named the FDIC as receiver. In September, DIF recorded a liability for the estimated pending depositor claims and an offsetting receivable from the receivership for the estimated subrogated claim (reflecting the estimated insured deposits including brokered deposits) of $1.834 billion. In addition, an allowance for loss of $108 million was recorded against the resolution receivable. • For the nine months ending September 30, 2007, Corporate Operating and Investment Budget related expenditures ran below budget by 13 percent and 15 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 through the third quarter of 2007. Detailed quarterly reports are provided separately to the Board by the Capital Investment Review Committee for those information technology projects that are included in the Investment Budget. 1 The following is an assessment of each of the three major finance areas: financial statements, investments, and budget. Financial Results I. Financial Statements • Trends and Outlook Comments On September 28, 2007, NetBank was closed by the Office of Thrift Supervision and the FDIC was named receiver. As of September 30, the DIF estimated that the pending insured deposit claim liability would total $1.834 billion. Coupled with an initial loss estimate of $108 million, the projected net receivable from NetBank is $1.726 billion as of the end of the third quarter 2007. This net receivable estimate should decline as significant liquidation activity occurs during the fourth quarter of 2007. Of the $2.237 billion in total assets at inception, ING Bank purchased $464 million, while the FDIC retained $1.773 billion of assets, mainly comprising real estate loans, lease receivables, and a mortgage subsidiary. In October 2007, the receivership sold approximately $627 million in real estate loans and $439 million in lease receivables; this brings the remaining NetBank asset book value to $707 million. Of the $1.834 billion in estimated insured deposits, ING Bank assumed insured deposits of $1.374 billion and FDIC retained $460 million in brokered deposits. The DIF expects to complete the funding of the insured brokered deposits by November 2007. Given the significant proceeds received and anticipated asset sales, FDIC, as receiver for NetBank, declared a 50 percent dividend in September 2007. This will reduce the DIF’s net receivable from $1.726 billion to approximately $800 million during the fourth quarter. Further reductions will be made as liquidation proceeds are recovered and dividends paid to claimants over the next several months. II. Investments • DIF investment portfolio’s amortized cost (book value) increased by three percent during the first nine months of 2007, and totaled $50.562 billion on September 30, 2007. During the period, newly purchased securities had slightly higher average yields than those of maturing securities. Consequently, the DIF portfolio’s yield increased by three basis points during the first nine months of 2007, rising to 4.92 percent as of September 30, 2007, from 4.89 percent as of December 31, 2006. • Expectations are for Treasury market yields to initially trend lower, with the potential to rise from current levels over the course of the fourth quarter. Notwithstanding the recent lower trend in such Treasury yields, the growing DIF investment portfolio balance should lead to increased interest revenue over the long run. 2 Financial Results III. Budget • • Trends and Outlook Comments Approximately $717 million was spent in the Ongoing Operations component of the 2007 Corporate Operating Budget, which was $55 million (7 percent) below the budget for the nine months ending September 30, 2007. The Outside Services - Personnel expense category was $28 million below its year-to-date budget, and represented 51 percent of the total Ongoing Operations variance. Approximately $6 million was spent in the Receivership Funding component of the 2007 Corporate Operating Budget, which was $50 million (89 percent) below the budget for the nine months ending September 30, 2007. The Outside Services - Personnel expense category was $42 million below its year-to-date budget, and represented 84 percent of the total Receivership Funding variance. I. Corporate Fund Financial Statement Results (See pages 10 - 11 for detailed data and charts.) DIF • For the nine months ending September 30, 2007, DIF’s comprehensive income totaled $1.589 billion compared to $1.395 billion for the same period last year, an increase of 14 percent. Excluding the recognition of exit fees earned of $345 million (a one-time adjustment), comprehensive income rose by $539 million, or 51 percent, from a year ago. This year-overyear increase was primarily due to a $190 million increase in interest revenue, a $382 million increase in assessment revenue, a $139 million decrease in the unrealized loss on AFS securities, offset by a $27 million increase in operating expenses and a $157 million increase in the provision for insurance losses. • During the third quarter of 2007, DIF’s YTD provision for insurance losses increased by $132 million to $56 million primarily due to an $83 million increase in the estimated loss for the NetBank failure and a $64 million increase in the contingent loss reserve for anticipated failures. FSLIC Resolution Fund (FRF) • FRF reported net income of $39 million for the third quarter of 2007, decreasing the YTD net loss to $2 million. Net income for the quarter included: 1) interest on U.S. Treasury obligations of $39 million; 2) tax benefit recoveries of $4 million; and 3) an expense of $11 million to fund the fiscal year 2008 goodwill expenses of the Department of Justice (which was paid on October 1, 2007). • During the third quarter of 2007, FRF paid $46 million for two Goodwill cases (which were accrued for as of June 30, 2007), bringing the total year-to-date litigation expenses to $179 million. 3 • Subsequent to quarter-end, FRF paid $225 million to the Resolution Funding Corporation (REFCORP) on October 10, 2007, bringing total payments to REFCORP to $4.8 billion. The most recent prior payment to REFCORP was made on April 10, 2003 for $50 million. 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 12 – 13 for detailed data and charts.) • During the first nine months of 2007, the amortized cost (book value) of the DIF investment portfolio increased by $1.704 billion or by three percent—from $48.858 billion on December 31, 2006, to $50.562 billion on September 30, 2007. Moreover, during the period, the DIF portfolio’s market value increased by $2.322 billion or by five percent, from $49.038 billion on December 31, 2006, to $51.360 billion on September 30, 2007. • The DIF investment portfolio's total return for the first nine months of 2007 was 5.134 percent, approximately the same as its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which earned 5.139 percent during the same period. • During the third quarter of 2007, staff purchased just one conventional Treasury security. This newly purchased held-to-maturity (HTM) security had a par value of $400 million, a maturity of 12.00 years, a modified duration of 8.22 years, and a yield-to-maturity of 4.87 percent. The total cash outlay for this high coupon security was $517 million. On September 30, 2007, the DIF portfolio’s overnight investment balance was $2.850 billion, well above its $150 million target floor balance. Consistent with the approved third quarter Corporate investment strategy, staff deferred purchases of Treasury securities not only in light of comparatively low Treasury yields available during much of the quarter, but more importantly, to build up liquidity for the anticipated NetBank resolution. (This fairly large bank failure occurred on September 28, 2007, with significant resolution funding occurring in October 2007.) The Treasury Market • During the third quarter of 2007, conventional Treasury yields decreased substantially, particularly on the short end of the yield curve, reflecting the 50 basis point cut in the federal funds target rate that occurred on September 18, 2007, and reflecting market sentiment for additional cuts in the target rate during the last quarter of 2007 and the first quarter of 2008. During the quarter, yields on three-month and six-month T-Bills decreased by 100 basis points and 86 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 88 basis points, again, reflecting the aforementioned 50 basis point cut in the target rate and reflecting expectations for additional target rate cuts. Intermediate-maturity Treasury yields also decreased over the course of the quarter, although not surprisingly, the yield declines were more modest, as is often the case when an expected series of interest rate cuts is initiated. The yield on the fiveyear Treasury note decreased by 68 basis points. The yield on the ten-year Treasury note decreased by 43 basis points. It should be noted that most of the decrease in yields occurred 4 between mid-July and the early part of September; towards the latter half of September, yields on intermediate- to longer-maturity securities actually started to modestly increase as investors unwound some earlier so-called “flight to quality” trades. The conventional Treasury yield curve steepened during the third quarter of 2007; on September 30, 2007, the two-year to tenyear yield curve had a 61-basis point positive spread (compared to a modestly positive 16-basis point spread at the beginning of the quarter). Nevertheless, the Treasury yield curve still remains flatter from a recent historical perspective; over the past five years, this spread has averaged 106 basis points. • During the third quarter of 2007, most Treasury Inflation-Protected Securities’ (TIPS) real yields decreased, reflecting lower actual and anticipated interest rates and concerns over weak economic growth. However, the real yield on the DIF portfolio’s shortest-maturity TIPS (with a maturity of just over three months at the end of the quarter) increased by 50 basis points during the quarter.1 The real yield on the portfolio’s longest-maturity TIPS (with a maturity of a little over four years) decreased by 50 basis points. The real yield on the 10-year TIPS maturing on January 15, 2017, decreased by 36 basis points. Prospective Strategies • The current DIF investment strategy provides for purchasing AFS conventional Treasury securities 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 fourth quarter of 2007. • The DIF portfolio’s primary reserve balance is being increased, with a goal of reaching a $15 billion target floor balance over the near term. Any securities purchased during the fourth quarter will be designated AFS. (See attached Approved Investment Strategy.) Other Matters • Effective September 30, 2007, the FDIC and the U.S. Treasury’s Federal Financing Bank (FFB) entered into an agreement to extend the FDIC’s existing $40 billion line of credit with the FFB for an additional one-year period through September 30, 2008. III. Budget Results (See pages 14 - 15 for detailed data.) Approved Budget and Staffing Modifications All divisions and offices completed a mid-year review of their 2007 operating budgets in July, including assessments of YTD spending and projected funding requirements for the remainder of the year. Based on that review, the Chief Financial Officer (CFO) approved reallocations among the operating budgets of several divisions and offices, in accordance with the authority delegated by the Board of Directors in the 2007 Budget Resolution. In addition, funds were realigned internally within the operating budgets of several organizations. None of these realignments 1 Very short-maturity TIPS can have dramatic changes in real yields stemming from very near-term inflation expectations. Consequently, it is not unusual for very short-maturity TIPS’ real yields, which are quoted on an annual basis, to exhibit dramatic swings as they approach maturity. 5 changed the total 2007 Corporate Operating Budget, but they did result in changes in the amounts budgeted for most major expense categories: • At the corporate level, the budgets for the Travel and Other Expense categories were increased, the budget for the Buildings category was unchanged, and the budgets for the remaining expense categories were decreased. Funding for the approved budget increases was made available from excess funding in the Salary and Compensation budgets of the Legal Division, the Division of Information Technology (DIT), the Division of Insurance and Research (DIR), and the Division of Resolutions and Receiverships (DRR). • The Corporate University (CU) budget was increased by over $4.4 million to pay for salaries, travel, and other expenses for Corporate Employee Program (CEP) participants and detailees from other FDIC organizations. Funding for the salaries and benefits of detailees was originally budgeted in their home organizations. Funding had to be increased for the CEP because a decision was made in early 2007 to hire more employees than originally budgeted in order to fill examiner vacancies in the Division of Supervision and Consumer Protection (DSC) more quickly. The funding for this increase was also made available from excess funding in the Salary and Compensation budgets of the other organizations referenced above. • Most of the funds included in the DSC budget for the interagency Shared National Credit (SNC) Modernization Project were realigned from the Outside Services-Personnel category to the Travel category to cover higher-than-expected travel costs for the examination program. These funds were available for reallocation because the start of the SNC Modernization Project was postponed until 2008. • The budgets for the Outside Services-Personnel and Equipment categories within the internal operations portion of DIT’s budget were increased, while the budget for the Outside Services-Other category was reduced. Within the systems development, operations, and maintenance portion of the DIT budget, the budgets for the Outside Services-Personnel and Outside Services-Other categories were increased, while the budget for the Equipment category was reduced. The latter changes were made in accordance with recommendations from the CIO Council. The 2007 spending estimates for several multi-year Investment Budget projects were also updated during the third quarter. In addition, the DIT Director in September approved the reallocation of funds among several approved IT projects funded from DIT’s 2007 operating budget to reflect changes in estimated project costs and schedules, in accordance with recommendations of the CIO Council. These reallocations provided funding for the early start of three projects originally planned to begin in 2008, but did not change the total amount of the DIT budget. The CFO approved two changes in authorized staffing during the third quarter, in accordance with authority delegated by the Board: • DIT’s authorized year-end 2007 staffing target was increased by two positions to correct an error made in the Board case requesting approval of the 2007 budget in December 2006. As a result of the change, DIT’s year-end 2007 staffing target is now consistent with its authorized staffing throughout 2007. There was no impact on DIT’s 2007 operating budget. 6 • A request from the Office of the Inspector General to transfer one authorized 2007 position to CU was approved. There was no impact on CU’s 2007 operating budget. 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 for this purpose in 2006 on system changes, and $1.8 million was spent on printing and distribution costs. Through the third quarter of 2007, an additional $3.9 million (excluding internal salaries and compensation expenses) was spent as follows: • Approximately $3.4 million was spent for system development and enhancement activities. It is anticipated that an additional $1.2 million will be spent in 2007 to complete modifications to the Assessment Information Management System (AIMS) and the Risk Related Premium System (RRPS). A total of $4.8 million is budgeted in 2007 for systems work related to deposit insurance reform implementation. • Approximately $525,000 was spent for printing and distribution of updated deposit insurance brochures through the third quarter of 2007. It is anticipated that up to an additional $100,000 will be spent revising the English versions of Insuring Your Deposit and Your Insured Deposit during 2007. In addition, two new employees were hired in July by DIR to support deposit insurance pricing, as authorized by the Board. The additional cost for these employees through September 30, 2007, was about $85,000. Spending Variances Significant spending variances by major expense category and division/office are discussed below. Significant spending variances for the nine months ending September 30, 2007, are defined as those that either (1) exceed the YTD budget by $1 million and represent more than two percent of the major expense category or total division/office budget; or (2) are under the YTD budget by $2 million and represent more than four 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 a significant spending variance occurred through the third quarter in the Ongoing Operations component of the 2007 Corporate Operating Budget: • Outside Services-Personnel expenditures were $28 million, or 21 percent, less than budgeted. The variance was largely due to lower-than-budgeted payments to the Department of Justice for litigation services, delays in starting several IT projects, lower net costs for the Student Residence Center (because of increased proceeds derived from outside 7 use of the facility), and lower-than-budgeted spending on human resource contractual services. • Travel expenditures were $3 million, or 8 percent, less than budgeted. Overall corporate travel costs were lower because staff from DRR participated in fewer compliance examinations than projected and Dallas rotations for some CEP participants were rescheduled to later in the year. In addition, lower-than-projected travel costs were incurred for supervision, field oversight and litigation in the Legal Division. • Equipment expenditures were almost $3 million, or 9 percent, less than budgeted. A large portion of this variance was because furniture, fixtures, and equipment purchases and security equipment and software acquisitions originally budgeted in the first three quarters of 2007 were rescheduled to the fourth quarter. • Other Expenses were $3 million, or 35 percent, less than budgeted. This variance was largely due to the lack of spending by employees from their new Professional Learning Accounts and the charging of a portion of the expenses for off-site conferences to the Travel category rather than the Other Expenses category. Receivership Funding The Receivership Funding component of the Corporate Operating Budget includes budgeted funding for overtime and 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 were three major expense categories in which a significant spending variance occurred for the first nine months of the year in the Receivership Funding component of the Corporate Operating Budget. All of these variances were attributable to the limited receivership and resolution activity that occurred during the year. The major expense categories were: • Salary and Compensation2 ($2 million, or 86 percent, less than budgeted). • Outside Services-Personnel ($42 million, or 91 percent, less than budgeted). • Travel ($3 million, or 73 percent, less than budgeted). Significant Spending Variances by Division/Office3 There were six organizations that had a significant spending variance through the third quarter: • DRR spent $40 million, or 55 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 third quarter. 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. 3 Information on division/office variances reflects variances in both the Corporate Operating and Investment Budgets. 8 • The Legal Division spent nearly $14 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 third quarter. • DIT spent $12 million, or 8 percent, less than budgeted. Approximately one-half of the variance occurred in the Outside Services-Personnel category of the Ongoing Operations component of the Corporate Operating Budget and was caused by delays in systems development, operations, and maintenance efforts. In addition, DIT had a larger-thananticipated number of personnel vacancies and filled its vacancies more slowly than expected. Security equipment and software purchases were also rescheduled to the fourth quarter. • The Division of Administration spent nearly $7 million, or 6 percent, less than budgeted. This variance was largely attributable to (a) lower-than-anticipated net costs for the Student Residence Center as a result of higher-than-projected proceeds received in connection with use of the facility by outside parties, and (b) reduced spending for compensation and consulting services on human resource matters. • DIR spent nearly $3 million, or 10 percent, less than budgeted. This variance was attributable to the large number of budgeted positions that remain vacant 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. • CU spent $2 million, or 9 percent, less than budgeted. This variance was attributable to delays in both the IT training and DRR commission initiatives and the re-scheduling of Dallas rotations for some CEP participants to later in the year. 9 FDIC CFO REPORT TO THE BOARD – Third Quarter 2007 Fund Financial Results ($ in Millions) Deposit Insurance Fund (unaudited) (audited) Change Sep-06 % Change Dec-06 $ 2,954 $ (3%) $ 2,312 (100) 4% 46,554 46,142 1,791 0 0% 0 173 748 (6%) 707 (42) 539 1,518 282% 509 377 (20) (5%) 367 $ 50,760 $ 3,320 7% $ 50,449 154 1,788 1161% 253 130 (12%) 0 (16) 111 (37%) 4 (41) 200 0% 200 0 $ 595 $ 1,731 291% $ 457 234 (6%) 254 (13) 2 1000% 0 20 $ 50,165 $ 1,589 3% $ 49,992 Balance Sheet (unaudited) Sep-07 $ 2,854 Cash & cash equivalents 47,933 Investment in U.S. Treasury obligations, net Assessments receivable, net 173 Interest receivable on investments and other assets, net 706 Receivables from resolutions, net 2,057 357 Property, buildings and other capitalized assets, net Total Assets $ 54,080 1,942 Accounts payable and other liabilities 114 Postretirement benefit liability 70 Contingent Liabilities: future failures 200 Contingent Liabilities: litigation losses & other 2,326 Total Liabilities $ 221 FYI: Unrealized gain on available-for-sale securities, net 22 FYI: Unrealized postretirement benefit gain/(loss) FUND BALANCE $ 51,754 $1,200 $1,000 By the 4th quarter 2008 assessment period, assessment credits used are projected to decline by eighty percent resulting in an increase in quarterly net assessment revenue of approximately 400 percent. $936 $977 $965 $1,013 $1,001 $989 $ in Millions $857 $763 $800 $722 $717 $563 $600 $548 $441 $414 $400 $279 $248 $173 $200 $156 $0 3rd Qtr 2007 4th Qtr 2007 1st Qtr 2008 Gross Assessment Revenue 2nd Qtr 2008 Credits Used Income Statement (unaudited) Sep-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 $ $ $ $ 3rd Qtr 2008 4th Qtr 2008 Net Assessment Revenue Deposit Insurance Fund (unaudited) (audited) Sep-06 Dec-06 404 1,955 0 11 2,370 730 56 2 788 1,582 (13) 20 1,589 $ 32 2,241 345 27 2,645 951 (52) 6 905 1,740 (173) 2 1,569 $ $ $ $ $ $ $ $ $ 22 1,765 345 22 2,154 703 (101) 5 607 1,547 (152) 0 1,395 Year-OverYear Change $ $ $ $ $ 382 190 (345) (11) 216 27 157 (3) 181 35 139 20 194 Components of Provision for Insurance Losses $200 105 $ in Milions $100 $0 4 (28) 3 (4) (5) (52) -$100 -$200 56 94 (40) (153) (159) (154) (171) (160) -$300 (353) -$400 2004 Closed Banks 2005 Anticipated Failures 2006 Other 9/2007 Over the last seven years, the provision for insurance losses added to net income as estimated losses that had been previously booked for both existing receiverships and potential failures were reversed. By the end of the third quarter of 2007, this trend had begun to reverse. Total Provision for Losses page 10 Fund Financial Results - continued ($ in Millions ) DIF Coverage Ratio (Interest & Assessment Revenue /Operating Expenses) 5 4 3.23 2.49 3 2.31 2.35 2003 2004 The coverage ratio has increased substantially (35%) during 2007 as the growth of net assessment revenue accelerated. 2.39 2 1 0 2005 2006 9/2007 Deposit Insurance Fund Statements of Cash Flows (unaudited) (audited) (unaudited) Sep-07 Dec-06 Sep-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 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 $ 1,582 431 (286) 40 56 0 20 5 1,848 6,256 $ $ (8,204) (1,948) $ (100) 2,954 2,854 $ 1,740 $ 599 (109) 52 (52) (345) 0 100 1,985 $ 6,800 (9,062) (2,262) $ (277) 3,231 2,954 $ Year-OverYear Change 1,547 $ 35 454 (23) (178) (108) 39 1 (101) 157 (345) 345 0 20 104 (99) $20.8 1,520 $ 328 $18.9 $19.2 3,480 2,776 (5,919) (2,439) $ (919) 3,231 2,312 $ $18.6 (2,285) 491 819 (277) 542 FSLIC Resolution Fund Cash and cash equivalents Accumulated deficit, net Resolution equity Total revenue Operating expenses Goodwill/Guarini litigation expenses Net (loss/income) (unaudited) Dec-06 Sep-06 $285 $250 $179 $169 $100 $74 $49 $46 $28 $16 $9 $0 $0 $0 3Q 2005 4Q 2005 1Q 2006 2Q 2006 $6 $0 $0 3Q 2006 Goodwill Cases 4Q 2006 $23 1Q 2007 Guarini # of Cases Amount Paid/ Accrued # of Cases Amount Paid 43 N/A 0 N/A Settlements 18 $149 3 $121 Judgments 41 $1,221* 5 $153 Pending 20 N/A 0 N/A Totals 122 $1,370 8 $274 Dismissals/ Time $150 $50 Year-OverYear Change Goodwill $234 $200 $ in Millions (audited) Sep-07 $ 3,764 $ 3,616 $ 3,565 $ 199 (123,836) (123,834) (123,625) (211) 3,790 3,620 3,577 213 $ 150 $ 169 $ 124 $ 26 2 12 12 (10) 179 411 158 21 $ (2) $ (203) $ 6 $ (8) Summary of Goodwill & Guarini Litigation (Inception-to-Date) $ in Millions FRF Quarterly Payments for Goodwill & Guarini Case Settlements & Judgments $300 (unaudited) $0 $0 2Q 2007 3Q 2007 * 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 - $150 million). Guarini Cases page 11 Deposit Insurance Fund Portfolio Summary ($ 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) 9/30/07 12/31/06 Change $47,515 $50,562 $51,360 $46,483 $48,858 $49,038 $1,032 $1,704 $2,322 $12,770 $10,000 24.5% $13,911 $10,000 28.0% ($1,141) $0 (3.5%) 5.134% 5.139% (0.5%) 4.056% 3.571% 48.5 not applicable not applicable not applicable 4.92% 4.89% 0.03% 4.26 3.57 0.69 3.30 1.35 4.00 2.82 1.80 3.29 0.48 (0.45%) 0.71 4 Effective Duration (in years) Total Portfolio Available-for-Sale Securities Held-to-Maturity Securities 1 Primary Reserve is the total market value (including accrued interest) of overnight investments, available-for-sale securities, and held-to-maturity securities maturing within three months. 2 The benchmark is the total return of the Merrill Lynch 1-10 Year U.S. Treasury Index. 3 The Yield-to-Maturity includes the potential yield of Treasury Inflation-Protected Securities (TIPS), which assumes an average 2.2% annual increase in the CPI over the remaining life of each TIPS. 4 For each TIPS, an estimated 80% "yield beta" factor is applied to its real yield duration to arrive at an estimated effective duration. National Liquidation Fund (NLF) Investment Portfolio Summary ($ in Millions) 5 Book Value Yield-to-Maturity Weighted Average Maturity (in days) 12/31/06 Change $180 5.01% 25 $381 5.37% 13 ($201) (0.36%) 12 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% 9/30/07 4.25% 3.75% 3.25% TIPS 2.75% 12/31/06 2.25% 9/30/07 1.75% 10 Y ear 7 Ye ar 5 Ye ar 4 Ye ar 3 Ye ar 2 Ye ar 1 Ye ar 1.25% 3 Mo nth 6 Mo nth 5 9/30/07 page 12 Approved Investment Strategy DEPOSIT INSURANCE FUND Current Strategy as of 3rd 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 $9.5 billion (par value) by quarter end; and All newly purchased AFS conventional 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 4th Quarter 2007 Primary reserve balance is being increased, with a goal of reaching a $15 billion target floor balance over the near term. AFS securities target limit is eliminated; all securities purchased during the quarter will be designated AFS. TIPS target limit is eliminated. NATIONAL LIQUIDATION FUND Current Strategy as of 3rd 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 4th Quarter 2007 Maintain target overnight investment balance between $20 million and $25 million. page 13 Executive Summary of 2007 Budget and Expenditures by Major Expense Category Through September 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 $489,377 135,907 41,429 50,422 33,098 12,409 8,869 $474,363 107,692 38,048 49,435 30,162 11,347 5,777 97% 79% 92% 98% 91% 91% 65% ($15,014) (28,215) (3,381) (987) (2,936) (1,062) (3,092) Total Ongoing Operations Receivership Funding $771,511 $716,824 93% ($54,687) $2,565 46,010 4,234 1,725 170 407 1,139 $347 4,073 1,160 600 15 73 38 14% 9% 27% 35% 9% 18% 3% ($2,218) (41,937) (3,074) (1,125) (155) (334) (1,101) $56,250 $6,306 11% ($49,944) $827,761 $723,130 87% ($104,631) Investment Budget 1 $10,437 $8,911 85% ($1,526) Grand Total $838,198 $732,041 87% ($106,157) 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 14 Executive Summary of 2007 Budget and Expenditures by Budget Component and Division/Office Through September 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 $294,545 138,163 117,446 73,822 68,631 27,918 22,871 18,761 21,621 13,163 5,820 25,000 $827,761 $284,530 128,120 110,295 33,338 54,188 25,180 21,613 17,378 19,665 11,821 5,208 11,794 $723,130 97% 93% 94% 45% 79% 90% 94% 93% 91% 90% 89% 47% 87% ($10,015) (10,043) (7,151) (40,484) (14,443) (2,738) (1,258) (1,383) (1,956) (1,342) (612) (13,206) ($104,631) $9,994 180 203 60 $10,437 $8,427 273 211 0 $8,911 84% 152% 104% 0% 85% ($1,567) 93 8 (60) ($1,526) $294,545 148,157 117,446 74,002 68,631 28,121 22,871 18,761 21,681 13,163 5,820 25,000 $838,198 $284,530 136,547 110,295 33,611 54,188 25,391 21,613 17,378 19,665 11,821 5,208 11,794 $732,041 97% 92% 94% 45% 79% 90% 94% 93% 91% 90% 89% 47% 87% ($10,015) (11,610) (7,151) (40,391) (14,443) (2,730) (1,258) (1,383) (2,016) (1,342) (612) (13,206) ($106,157) 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 15
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