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
2

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

investments, and budget. 

Trends and Outlook

Financial Results Comments 

I. Financial 

Statements 

• 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). 

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. 

III. Budget • 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. 
3

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 
4

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. 
5

• 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 
6

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 
7

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/Office1

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. 

• 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. 

 

1 Information on division/office variances reflects variances in both the Corporate Operating and Investment Budgets. 
FDIC CFO REPORT TO THE BOARD – Second Quarter 2007

Fund Financial Results ($ in millions)

page 8

Balance Sheet

(unaudited) (audited) 

Jun-07 Dec-06

Cash & cash equivalents $ 983 $ 2,954 $ (1,971) (67%) $ 749 

Investment in U.S. Treasury obligations, net 49,116 46,142 2,974 6% 47,690 

Assessments receivable, net 139 0 139 0% 0

Interest receivable on investments and other assets, net 805 748 57 8% 768 

Receivables from resolutions, net 307 539 (232) (43%) 466 

Property, buildings and other capitalized assets, net 360 377 (17) (5%) 370 

Total Assets $ 51,710 $ 50,760 $ 950 2% $ 50,043 

Accounts payable and other liabilities 122 154 (32) (21%) 269 

Postretirement benefit liability 130 130 0 0% 0 

Contingent Liabilities: future failures 31 111 (80) (72%) 10 

Contingent Liabilities: litigation losses & other 200 200 0 0% 200 

Total Liabilities $ 483 $ 595 $ (112) (19%) $ 479 

FYI: Unrealized gain on available-for-sale securities 153 234 (81) (35%) 273 

FYI: Unrealized postretirement benefit gain/(loss) 2 2 0 0% 0 

FUND BALANCE $ 51,227 $ 50,165 $ 1,062 2% $ 49,564 

Income Statement 

(unaudited) (audited)

Jun-07 Dec-06

Assessments earned $ 234 $ 32 $ 12 $ 222 

Interest earned on investment securities 1,315 2,241 1,143 172 

Exit fees earned 0 345 346 (346)

Other revenue 6 27 19 (13)

Total Revenue $ 1,555 $ 2,645 $ 1,520 $ 35 

Operating expenses (includes depreciation expense) 487 951 466 21 

Provision for insurance losses (76) (52) (52) (24)

Other expenses 1 6 5 (4)

Total Expenses & Losses $ 412 $ 905 $ 419 $ (7)

Net Income $ 1,143 $ 1,740 $ 1,101 $ 42 

Unrealized gain/(loss) on available-for-sale securities, net (81) (173) (134) 53 

Unrealized postretirement benefit gain/(loss) 0 2 0 0 

YTD Comprehensive Income $ 1,062 $ 1,569 $ 967 $ 95 

Deposit Insurance Fund

Deposit Insurance Fund

(unaudited)

Change Jun-06

Jun-06

(unaudited)

% Change

Year-OverYear Change

$688

$407 $349

$273 $254 $234

$315

$153

$642

($359)

$120

$826

$330

$165

($320)

($598)

$32

($54)

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

$600

$800

$1,000

2nd Qtr 05 3rd Qtr 05 4th Qtr 05 1st Qtr 06 2nd Qtr 06 3rd Qtr 06 4th Qtr 06 1st Qtr 07 2nd Qtr 07

$ in Millions

Mark-to-Market Adjustment

Available-for-sale (AFS) Held-to-maturity (HTM)

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.

Total 1st Quarter 2007 Gross Assessments 

(before credits used) 

$ in millions

Total Gross Assessments = $918.7

Top 11 thru 25, 

$110.9, 12%

Remaining 

8,620, $490.3, 

53%

Top 10, $317.5, 

35%

Total 1st Quarter 2007 Assessments Paid 

(net of credits used) 

$ in millions

Total Net Assessments = $94.1

Top 11 thru 25, 

$12.2, 13%

Remaining 

1,956, $44.4, 

47%

Top 10, $37.5, 

40%

Institutions with the 

largest gross 

assessments and 

cash outlays (net of 

credit used)
page 9

Fund Financial Results - continued ($ in millions )

$20.8 $19.2

$18.9 $18.6

Income Statement - (continued) 

Statements of Cash Flows 

(unaudited) (audited)

Jun-07 Dec-06

Net Income $ 1,143 $ 1,740 $ 1,101 $ 42

Amortization of U.S. Treasury obligations (unrestricted) 280 599 302 (22)

TIPS Inflation Adjustment (213) (109) (94) (119)

Depreciation on property and equipment 26 52 26 0 

Provision for insurance losses (76) (52) (52) (24)

Exit fees earned 0 (345) (346) 346 

Net change in operating assets and liabilities (9) 100 70 (79)

Net Cash Provided by Operating Activities $ 1,151 $ 1,985 $ 1,007 $ 144

Investments matured and sold 4,565 6,800 2,430 2,135 

Investments purchased (includes purchase of property and 

equipment) (7,687) (9,062) (5,919) (1,768)

Net Cash (Used) by Investing Activities $ (3,122) $ (2,262) $ (3,489) $ 367

Net Increase (Decrease) in Cash and Cash Equivalents (1,971) (277) (2,482) 511 

Cash and Cash Equivalents at beginning of year 2,954 3,231 3,231 (277)

Cash and Cash Equivalents - Ending $ 983 $ 2,954 $ 749 $ 234

(unaudited) (audited)

Jun-07 Dec-06

Cash and cash equivalents $ 3,716 $ 3,616 $ 3,506 $ 210

Accumulated deficit, net (123,875) (123,834) (123,684) (191)

Resolution equity 3,751 3,620 3,502 249 

Total revenue $ 106 $ 169 $ 80 $ 26

Operating expenses 2 12 8 (6)

Goodwill/Guarini litigation expenses 167 411 124 43 

Net (loss) $ (41) $ (203) $ (53) $ 12

# of Cases # of 

Cases

Dismissals/

Time 43 0

Settlements 18 3

Judgments 41 5

Pending 20 0

Totals 122 8

N/A

Guarini

Summary of Goodwill & Guarini Litigation 

(Inception-to-Date)

FSLIC Resolution Fund (FRF)

Jun-06

(unaudited)

Amount Paid

N/A

* 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).

Goodwill

Deposit Insurance Fund

Jun-06

(unaudited)

Amount Paid/ 

Accrued

Year-OverYear Change

Year-OverYear Change

$121 million

$153 million

N/A

$274 million

$149 million

$1,221 million*

N/A

$1,370 million

DIF Coverage Ratio

(Interest & Assessments Revenue/Operating Expenses)

2.32 2.35 2.49 2.39

3.18

0

1

2

3

4

5

2003 2004 2005 2006 6/2007

FRF Quarterly Payments for Goodwill & Guarini 

Case Settlements & Judgments

$0 $0

$234

$0 $9 $16

$74

$179

$285

$6 $0

$49

$0

$169

$28 $23

$0 $0

$0

$50

$100

$150

$200

$250

$300

2Q

2005

3Q

2005

4Q

2005

1Q

2006

2Q

2006

3Q

2006

4Q

2006

1Q

2007

2Q

2007

$ in Millions

Goodwill Cases Guarini Cases
6/30/07 12/31/06 Change

Par Value $46,861 $46,483 $378

Amortized Cost $49,942 $48,858 $1,084

Market Value $49,736 $49,038 $698

Primary Reserve 1 $11,974 $13,911 ($1,937)

Primary Reserve Target Floor $10,000 $10,000 $0

Primary Reserve % of Total Portfolio 23.7% 28.0% (4.3%)

Year-to-Date Total Return (Portfolio) 1.866% 4.056% not applicable

Year-to-Date Total Return (Benchmark) 2 1.554% 3.571% not applicable

Total Return Variance (in basis points) 31.2 48.5 not applicable

Yield-to-Maturity 3 4.97% 4.89% 0.08%

Weighted Average Maturity (in years) 4.39 3.57 0.82

Effective Duration (in years) 4

 Total Portfolio 3.39 2.82 0.57

 Available-for-Sale Securities 1.52 1.80 (0.28%)

 Held-to-Maturity Securities 3.91 3.29 0.62

6/30/07 12/31/06 Change

Book Value 5 $168 $381 ($213) 6

Yield-to-Maturity 5.39% 5.37% 0.02%

Weighted Average Maturity (in days) 15 13 2

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.

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.

5

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

Deposit Insurance Fund Portfolio Summary

(in millions)

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.

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)

U.S. Treasury Security Yield Curves

1.25%

1.75%

2.25%

2.75%

3.25%

3.75%

4.25%

4.75%

5.25%

5.75%

3

Month

6

Month

1Year

2

Year

3

Year

4

Year

5

Year

7

Year

10

Year page 10

Conventional

TIPS

12/31/06

6/30/07

12/31/06

6/30/07
page 11

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.

Maintain a $30 million target floor overnight investment balance.

Strategically invest the remaining funds in the zero- to 12-month maturity sector.

 None

Approved Investment Strategy

Current Strategy as of 2nd Quarter 2007

Strategy Changes for 3rd Quarter 2007

Current Strategy as of 2nd Quarter 2007

Strategy Changes for 3rd Quarter 2007

AFS securities target limit increased from $9.0 billion to $9.5 billion. 

DEPOSIT INSURANCE FUND

NATIONAL LIQUIDATION FUND
page 12

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. 

YTD YTD % of 

Major Expense Category Budget Expenditures Budget Used Variance

Corporate Operating Budget 

Ongoing Operations

Salaries & Compensation $326,113 $317,102 97% ($9,011)

Outside Services - Personnel 73,232 63,071 86% (10,161)

Travel 25,738 24,915 97% (823)

Buildings 33,345 32,868 99% (477)

Equipment 15,189 17,022 112% 1,833

Outside Services - Other 8,967 7,826 87% (1,141)

Other Expenses 5,426 3,728 69% (1,698)

Total Ongoing Operations $488,010 $466,532 96% ($21,478)

Receivership Funding

Salaries & Compensation $1,710 $294 17% ($1,416)

Outside Services - Personnel 30,673 2,782 9% (27,891)

Travel 2,823 714 25% (2,109)

Buildings 1,150 469 41% (681)

Equipment 113 13 12% (100)

Outside Services - Other 272 58 21% (214)

Other Expenses 759 18 2% (741)

Total Receivership Funding $37,500 $4,348 12% ($33,152)

Total Corporate Operating Budget $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)

(Dollars in Thousands)

Executive Summary of 2007 Budget and Expenditures

by Major Expense Category

Through June 30, 2007
page 13

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. 

YTD YTD % of 

Division/Office Budget Expenditures Budget Used Variance

 Corporate Operating Budget 

 Supervision & Consumer Protection $194,339 $190,301 98% ($4,038)

 Information Technology 86,073 81,673 95% (4,400)

 Administration 78,600 74,552 95% (4,048)

 Resolutions & Receiverships 49,390 22,546 46% (26,844)

 Legal 46,289 36,538 79% (9,751)

 Insurance & Research 18,583 16,591 89% (1,992)

 Finance 15,132 14,331 95% (801)

 Inspector General 12,525 11,586 93% (939)

 Corporate University 12,988 12,739 98% (249)

 Executive Support 1 8,410 7,718 92% (692)

 Executive Offices 2 2,181 2,305 106% 124

 Government Litigation 1,000 0 0% (1,000)

 Total, Corporate Operating Budget $525,510 $470,880 90% ($54,630)

 Investment Budget 3

 Information Technology $12,096 $5,561 46% ($6,535)

 Resolutions & Receiverships 71 209 294% 138

 Insurance & Research 204 87 43% (117)

 Total, Investment Budget 3 $12,371 $5,857 47% ($6,514)

 Combined Division/Office Budgets

 Supervision & Consumer Protection $194,339 $190,301 98% ($4,038)

 Information Technology 98,169 87,234 89% (10,935)

 Administration 78,600 74,552 95% (4,048)

 Resolutions & Receiverships 49,461 22,755 46% (26,706)

 Legal 46,289 36,538 79% (9,751)

 Insurance & Research 18,787 16,678 89% (2,109)

 Finance 15,132 14,331 95% (801)

 Inspector General 12,525 11,586 93% (939)

 Corporate University 12,988 12,739 98% (249)

 Executive Support 1 8,410 7,718 92% (692)

 Executive Offices 2 2,181 2,305 106% 124

 Government Litigation 1,000 0 0% (1,000)

 Grand Total $537,881 $476,737 89% ($61,144)

Executive Summary of 2007 Budget and Expenditures

by Budget Component and Division/Office

Through June 30, 2007

(Dollars in Thousands)