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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

   •  BIF & SAIF Balance Sheet
   •  BIF & SAIF Income Statement
   •  BIF & SAIF Statements of Cash Flows
   •  FRF Statements of Cash Flows
II. Investments Results & Prospective Strategies

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

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

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.

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).
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.

Last Updated 03/10/2008

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