III. Budget Results - Third Quarter 2009

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 third quarter in accordance with the authority delegated by the Board of Directors (none of these modifications changed the total 2009 Corporate Operating Budget approved by the Board in December 2008):

• In early September 2009, the CFO approved the reallocation of existing 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 nearly all divisions and offices. This reallocation was based upon an analysis of actual spending for salaries, bonuses, and fringe benefits through June 30, 2009, and on-board staffing as of that date. This reallocation was made effective in August 2009.

• In early October 2009, the CFO approved the reallocation of $40,625 in budget authority within the Ongoing Operations component of the 2009 Corporate Operating Budget from the Outside Services – Personnel expense category of the Government Litigation budget to the Division of Supervision and Consumer Protection to provide additional budget authority in the Travel (+$37,500) and Other Expenses (+$3,125 for Professional Learning Accounts (PLA)) categories to support estimated expenses for up to 86 newly-authorized positions. This reallocation was made effective in September 2009.

• In early October 2009, the CFO approved the reallocation of existing 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 several divisions and offices. This reallocation was based upon an analysis of current staffing levels, spending for salaries, bonuses, and fringe benefits through August 31, 2009, and projected staffing levels for the final four months of the year. This reallocation was made effective in September 2009.

• In early October 2009, the CFO approved the reallocation of existing budget authority within the Receivership Funding component of the 2009 Corporate Operating Budget from the Legal Division (-$43,500,000) and the Corporate Unassigned (-$10,146,457) budgets to the budgets of the Division of Resolutions and Receiverships (+$35,021,126), Division of Information Technology (+$11,342,366), Division of Administration (+$6,753,580), Office of the Ombudsman (+$290,000), Corporate University (+$185,885), Office of Diversity and Economic Opportunity (+$37,000), and Office of Enterprise Risk Management (+$16,500). Budget authority was realigned among all expense categories as follows: Salaries and Compensation (-$37,064,173); Outside Services–Personnel (+$20,404,220); Travel
  (-$2,656,328); Buildings (+$23,884,738); Equipment (+$13,932,261); Outside Services – Other (-$7,030,378); and Other Expenses (-$11,470,340). This reallocation was the result of the mid-year reassessment of actual and projected spending by all divisions and offices for the Receivership Funding budget component. This reallocation was made effective in September 2009.

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. In accordance with that authority, the CFO approved the following staffing modifications during the third quarter after determining that there were sufficient unspent funds available for reallocation elsewhere within the approved budget to cover the increased 2009 salary and benefits costs associated with any newly-authorized positions:

• In July 2009, the CFO approved an increase of six authorized non-permanent positions in Corporate University (CU) to address increased course administration workload, the need for a team leader for the Instructional Systems Designers working on the Division of Resolutions and Receiverships (DRR) Commission and Corporate Employee Program (CEP) Certificate Programs in Dallas, and additional performance management and oversight workload attributable to the decision to hire more first-year Financial Institution Specialists (FISs) in the CEP.

• In August 2009, the CFO approved a reduction of one authorized position in the Office of Enterprise Risk Management (OERM) based on a determination that the position was no longer essential to OERM operations.

• In August 2009, the CFO approved an increase of one authorized position in DRR to support the Franchise and Asset Marketing area by maintaining resolution files and a database of resolutions, asset valuations, loss sharing, and other asset information for reference and reporting; participating in closings; coordinating the schedule of investor meetings; and compiling and providing investor information.

• In September 2009, the CFO approved an increase of 32 non-permanent positions in the Legal Division. The approved increase included 17 new positions in the Supervision Branch to address increased enforcement and related open bank supervision workload, 3 new positions in the Corporate Operations Branch to address increased employee and contractor ethics and Board support workload, and 12 new positions in the Litigation and Resolutions Branch to address the increasing workload associated with the resolution of failed institutions.

• In September 2009, the CFO approved an increase of up to 86 authorized positions (47 permanent, 39 non-permanent) in the Division of Supervision and Consumer Protection (DSC). This included 41 new supervisory examiner (SE) positions to reduce current supervisory spans of control for SEs; 35 new positions in Washington and Regional Offices to address increased enforcement and failing bank workload; and up to 10 new capital markets experts and large/complex bank specialist positions (the latter were approved contingent upon acceptance of employment offers by specific individuals on pending rosters; if those offers are not accepted, the DSC staffing authorization will be adjusted downward accordingly).

• In September 2009, the CFO approved an increase of six authorized non-permanent positions in the Division of Information Technology. These positions were authorized to address increased client support workload for the Dallas and Chicago Regional Offices and the growth in security workload associated with the rising number of new employees and contractors.

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, 2009, are defined as those that either (1) exceed the YTD budget by $1 million and represent more than 2 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 $2 million and represents more than 4 percent of the major expense category or total division/office budget.

Significant Spending Variances by Major Expense Category

Ongoing Operations

There were significant spending variances in four major expense categories through the third quarter in the Ongoing Operations component of the 2009 Corporate Operating Budget:

• Outside Services – Personnel expenditures were $9.1 million, or 7 percent, more than budgeted. Approximately $3.8 million of this variance was attributable to expenses related to document management services provided to DRR in connection with resolution and receivership activities. These costs are properly classified as Receivership Funding expenses.² In addition, about $2.4 million was spent on unbudgeted financial advisory services related to the Legacy Loans Program that was being developed to address disruptions in the banking system; expenses for systems maintenance and help desk operations costs exceeded budgeted funds by $3.7 million; and expenses for security services (guard services, background investigations on employees and contractors, and security systems) were greater than anticipated. Partially offsetting these items were expenses for the Deposit Insurance Call Center, open bank litigation, and other smaller miscellaneous contracts that were lower than year-to-date budgeted amounts.

• Buildings expenditures were $4.3 million, or 9 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.

• Outside Services – Other expenditures were $2.9 million, or 17 percent, less than budgeted. The variance was largely due to the unpredictable nature and timing of spending for public services media.

• Other Expenses expenditures were $2.6 million, or 25 percent, less than budgeted. The variance was mostly due to significant underutilization of PLA budgets by employees due to an increasing workload.

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 six major expense categories through the third quarter in the Receivership Funding component of the 2009 Corporate Operating Budget:

• Salaries & Compensation ($26.5 million, or 32 percent, less than budgeted).
• Travel ($26.5 million, or 61 percent, less than budgeted).
• Buildings ($7.5 million, or 12 percent, more than budgeted).
• Equipment ($6.1 million, or 19 percent, less than budgeted).
• Outside Services - Other ($8.8 million, or 46 percent, less than budgeted).
• Other Expenses ($6.5 million, or 19 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 nine months of 2009 and because budgeted positions have not been filled as quickly as originally projected. These factors led to lower-than-budgeted expenses for salaries and compensation, asset management and liquidation contracts, outside legal counsel, travel, and other expenses. In light of the expected acceleration in the rate of bank failures for the remainder of the year, Receivership Funding expenditures are expected to increase as the number of active receiverships and the cumulative inventory of assets under management grows.

Significant Spending Variances by Division/Office³

Five organizations had significant spending variances through the end of the third quarter:

• DRR spent $42.5 million, or 6 percent, less than budgeted, mostly due to less-than-budgeted spending for resolution and receivership workload activities for the reasons identified above. This was slightly offset by unbudgeted contract spending for financial advisory services and greater-than-budgeted expenses for travel in connection with employee relocations.

• The Legal Division spent $15.9 million, or 13 percent, less than budgeted. Approximately $11.7 million of this variance was due to under spending of its Receivership Funding budget because resolution activities have to-date required substantially less outside legal services than anticipated. In addition, the termination of temporary contract support for the Deposit Insurance Call Center and lower-than-anticipated expenses for open bank litigation contributed to the Division’s variance in the Ongoing Operations budget component.

• The Division of Administration spent $15.8 million, or 10 percent, less than budgeted. This variance was largely attributable to delays in building out and relocating employees to new offices; temporary delays in purchasing Furniture, Fixtures and Equipment for those build-outs; and lower-than-expected costs for leasehold improvements at the Dallas Regional Office and the temporary West Coast Satellite Office.

• CU spent $2.2 million, or 7 percent, less than budgeted. This variance included approximately $1.4 million less than budgeted for travel due to lower-than-anticipated travel expenses for Financial Institution Specialists (FISs) in the Corporate Employee Program.

• The Office of Inspector General (OIG) spent $2.2 million, or 11 percent, less than budgeted. This variance was mostly attributable to vacancies in budgeted positions.

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²Appropriate accounting adjustments will be made to both the Ongoing Operations and Receivership Funding budget components to address these coding errors.
³Information on division/office variances reflects variances in both the Corporate Operating and Investment Budgets.