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Chief Financial Officer's (CFO) Report to the Board

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Chief Financial Officer's (CFO) Report to the Board Home
Executive Summary
   •  Summary Trends and Results
I. Corporate Fund Financial Results

   •  DIF Balance Sheet
   •  DIF Income Statement
   •  DIF Statements of Cash Flows
   •  FRF Selected Financial Data
II. Investments Results & Prospective Strategies

   •  Deposit Insurance Fund Portfolio Summary
   •  Approved Investment Strategies
III. Budget Results

   •  Budget & Expenditures by Major Expense Categories
   •  Budget & Expenditures by Budget Component, Division & Office
Printable Version

Summary Trends and Results - Second Quarter 2008

Financial Results Comments
I. Financial Statements
  • The DIF decreased by 14% ($7.626 billion) to $45.217 billion during the second quarter. The primary reason for the decrease was a $10.0 billion increase in the contingent liability for anticipated failures. This increase was partially offset by an increase in the unrealized gains of $1.559 billion, an increase in assessment revenue of $640 million, and an increase in the interest earned on investment securities of $651 million. Note that subsequent to June 30, the FDIC experienced three bank failures during the month of July – IndyMac Bank, First National Bank of Nevada, and First Heritage Bank with total assets of $32.0 billion, $3.9 billion, and $161 million, respectively. In July, the DIF disbursed $14.5 billion to fund these failures - $11.5 billion to pay insured depositors and $3 billion to fund the operations of the IndyMac Federal Bank conservatorship. The initial loss estimate for these failures are: $8.9 billion for IndyMac Bank, $820 million for First National Bank of Nevada, and $42 million for First Heritage Bank.
II. Investments
  • DIF investment portfolio’s amortized cost (book value) decreased by $41 million or 0.08 percent during the first half of 2008, and totaled $50.428 billion on June 30, 2008. At quarter end, the DIF portfolio’s yield was 4.44 percent, down approximately 28 basis points from its December 31, 2007, yield of 4.72 percent. A large factor behind this decline was securities totaling just over $5 billion, with a high weighted average yield of 5.48 percent, matured during the first half of the year. During that period, staff deferred purchases of conventional Treasury securities in light of expected and potential resolution funding needs as well as depressed Treasury yields. All available funds were invested in overnight investments. At quarter end, overnight investments totaled $9.255 billion, or about 17.4 percent of the total portfolio as measured by market value. During the first half of the year, overnight investments averaged about 2.38 percent on a bond equivalent yield basis. However, on June 30, 2008, overnight investments had a bond equivalent yield of 1.74 percent. Thus, the DIF portfolio’s lower average yield at quarter end reflects a large amount of previously high yielding Treasury securities now being invested in lower yielding overnight investments.
  • Conventional Treasury market yields increased dramatically during the second quarter of 2008, with the two-year Treasury note posting the most significant increase. The yield increases appeared to reflect a number of factors, including concerns over potentially accelerating inflationary pressures and rising inflation expectations, an unwinding of so-called flight-to-quality trades as the recent financial market turmoil appeared to have mitigated, and a strong consensus opinion that the Federal Reserve is at or near the end of its easing cycle. During the third quarter of 2008, Treasuries are expected to be volatile as market participants gauge whether financial market turmoil is subsiding, inflation is a concern, and the Federal Reserve might begin raising interest rates, prompting Treasury prices to fall; or the market turmoil is not subsiding and has the potential to get worse, prompting further flight-to-quality Treasury price rallies.
  • At the end of the second quarter of 2008, the DIF portfolio’s AFS securities (including all securities that were previously classified as HTM) had unrealized gains of $2.045 billion. Market consensus expectations are for Treasury yields to gradually rise over the last half of 2008 and into 2009, which would likely reduce these unrealized gains. However, regardless of changes in yields, existing net unrealized gains will be reduced due to the passage of time (that is, any unrealized gains or losses vanish as AFS securities approach their maturity dates).
III. Budget
  • Approximately $492 million was spent in the Ongoing Operations component of the 2008 Corporate Operating Budget, which was $25 million (5 percent) below the budget for the six months ending June 30, 2008. The Outside Services - Personnel expense category was approximately $16 million below its year-to-date budget, and the Salaries and Compensation category was $7 million below its year-to-date budget. Together, these two categories represented 94 percent of the total Ongoing Operations variance.
  • Approximately $27.6 million was spent in the Receivership Funding component of the 2008 Corporate Operating Budget, which was $2.8 million (9 percent) below the budget for the six months ending June 30, 2008. Spending during the second quarter was significantly greater than in the first quarter as activities and equipment purchases were accelerated in preparation for expected increases in receivership and resolution activity.
  • Authorized staffing increases since the beginning of the year directly relate to the increased receivership and resolution activity and elevated examination workload. Most of the authorized staffing increase is for hiring non-permanent staff. This trend is likely to continue into the 2nd half of 2008.

Last Updated 09/15/2008

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