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Summary
Trends and Results -
Fourth Quarter 2007
| Financial Results |
Comments |
| I. Financial
Statements |
- During the 4th quarter of 2007,
DIF’s contingent liability
for anticipated failures increased by $54 million to $124 million
at year-end 2007 due to the deterioration in banking industry financial
conditions. Despite this increase, the contingent liability represents
less than one quarter of 1 percent of the fund balance.
Significant
challenges have confronted the banking industry in 2007
arising from a slowdown in the housing market and rising defaults
on subprime loans. Consequently, during 2007, the number
of institutions on the FDIC's "Problem List" increased by 26 to 77. These
institutions had $22.2 billion in assets as of December 31, 2007,
representing a 261 percent increase in problem assets from a year
earlier. However, these challenges did not cause a large number
of failures in 2007 – three FDIC-insured institutions
failed with total assets of $2.3 billion and estimated
losses of $120
million. These were the first failures since June 2004.
Current market volatility may continue to hurt the performance
of institutions with significant exposure to the residential
mortgage market – especially those mortgage lenders that relied heavily
on the “originate and sell” business model. However,
many financial institutions entered 2007 with strong profitability
and capital levels. As of September 30, 2007, risk-based capital
ratios in the industry averaged 10.2 percent.
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II. Investments |
- The DIF investment portfolio’s amortized cost (book value)
increased by three percent during 2007, and totaled $50.469 billion on December
31, 2007. At year end, the DIF’s portfolio yield was 4.72 percent,
appearing to have dropped 17 basis points from 4.89 percent as of December
31, 2006. However, this decline stems from the extremely low, anomalous
1.25 percent overnight investment bond equivalent yield earned on December
31, 2007. At quarter end, overnight investments totaled $4.240 billion,
or about 8.1 percent of the total portfolio as measured by market value.
The overall portfolio yield would have been in the neighborhood of 4.93
percent had the month-end overnight investment yield reflected the much
more representative 3.96 percent average overnight investment yield earned
between December 11, 2007 (the date of the then-most recent meeting of the
Federal Reserve’s Federal Open Market Committee (FOMC) when it lowered
the federal funds target rate) and December 30, 2007. This more representative
4.93 percent portfolio yield is four basis points higher than the portfolio’s
yield at year-end 2006, reflecting the fact that during 2007, newly
purchased securities had higher average yields than those of maturing
securities.
- Treasury market yields should continue to decline and trade
at comparatively low levels over the next several months, as many
investors are expecting further reductions in the federal funds target
rate and are
concerned with the prospect that the U.S. economy may be falling into
a recession. Expectations are for Treasury yields to gradually and modestly
rise during the latter half of 2008 and into early 2009. This, coupled
with a growing DIF portfolio balance, should lead to increased interest
revenue over the long run. Over the short run, any decrease in yields
would
add to the existing net unrealized gains on available-for-sale (AFS)
securities. Conversely, any subsequent increase in yields would accelerate
the decline
of the existing net unrealized gains on AFS securities. Moreover, 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).
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| III. Budget |
- Approximately $982 million was spent in the Ongoing Operations
component of the 2007 Corporate Operating Budget, which was $51 million
(5 percent) below the budget for the twelve months ending December
31, 2007. The Outside Services - Personnel expense category was $29
million (16 percent) below its year-to-date budget, and represented
58 percent of the total Ongoing Operations variance.
- Approximately $20
million was spent in the Receivership Funding component of the 2007
Corporate Operating Budget, which was
$55 million (74 percent) below the budget for the year. The Outside
Services - Personnel expense category was $49 million (79 percent)
below its budget, and represented 88 percent of the total Receivership
Funding variance.
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