Federal Housing Finance Board

Performance and Accountability Report 

Fiscal Year 2006 

November 15, 2006 

TABLE OF CONTENTS 

MESSAGE FROM THE CHAIRMAN 

Page

I. MANAGEMENT DISCUSSION AND ANALYSIS 

About the Finance Board ................................................................ 1

The Year in Review .................................................................... 6

Challenges ................................................................................. 8

Program Performance Overview ........................................................ 10

Financial Performance Overview ...................................................... 14

II. PROGRAM PERFORMANCE 

Measuring and Reporting Performance .............................................. 18

Annual Goals and Measures ............................................................ 18

Program Evaluation ..................................................................... 29

III. AUDITOR’S REPORT AND FINANCIAL STATEMENTS 

MESSAGE FROM THE CHAIRMAN 

I am pleased to present the Federal Housing Finance Board’s (Finance Board) 

Performance and Accountability Report (Report) for fiscal year 2006 (FY2006). This 

report summarizes the agency’s success in meeting its FY2006 goals and objectives as set 

forth in the FY2006 Annual Performance Budget and provides Finance Board financial 

and program performance information. 

The primary duty of the Finance Board is to ensure that the Federal Home Loan Banks 

(FHLBanks) and the Office of Finance (OF) operate safely and soundly. The Finance 

Board also assesses the FHLBanks’ administration of their affordable housing and 

community investment programs. 

FY2006 was a productive year at the Finance Board. The agency met the goals 

established in the FY2006 Annual Performance Budget. In addition, the Finance Board 

made substantial progress toward strengthening and positioning the agency to carry out 

its responsibilities more efficiently and effectively. 

The agency’s FY2006 financial statements, including an unqualified opinion, are 

provided in this report. The opinion states that the financial statements are fairly 

presented and demonstrate accountability in the execution of the agency’s 

responsibilities. This Report also includes a statement of reasonable assurance that the 

Finance Board’s management accountability and internal controls are adequate and 

effective. 

The Finance Board will continue to work to promote the safety and soundness of the 

Federal Home Loan Banks and build on the agency’s accomplishments. 

Ronald A. Rosenfeld 

Chairman
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 1 

MANAGEMENT DISCUSSION AND ANALYSIS 

ABOUT THE FINANCE BOARD

The Finance Board is an independent agency established by the Financial Institutions 

Reform, Recovery, and Enforcement Act of 1989. It is the successor agency to the 

former Federal Home Loan Bank Board, which was established by the Federal Home 

Loan Bank Act of 1932 (FHLBank Act). The Finance Board's statutory mandate is to 

ensure that the Federal Home Loan Banks operate in a financially safe and sound manner, 

carry out their housing finance mission, and remain adequately capitalized and able to 

raise funds in the capital markets. 

The FHLBanks are privately capitalized, government-sponsored enterprises that provide 

wholesale credit to members and certain nonmembers to be used for mortgage lending 

and related activities. In addition, the FHLBanks have a mandate to promote housing and 

community investment finance. The FHLBanks provide long-term, flexible financing to 

more than 8,100 member financial institutions around the country. In addition to its 

supervision of the FHLBanks, the Finance Board also has regulatory authority and 

supervisory oversight responsibility for the Office of Finance, a joint office of the 

FHLBanks, which issues FHLBank System debt. 

MISSION STATEMENT

The mission of the Federal Housing Finance Board is to ensure that the FHLBanks are safe 

and sound so they can serve as a reliable source of liquidity and funding for the nation’s 

housing finance and community investment needs. 

VISION

To continue to earn the public’s trust, the Finance Board is dedicated to the highest 

professional standards of accountability and independence to carry out its responsibilities 

for FHLBank supervision and housing finance mission oversight. 

VALUES

The core values underlying the mission and vision of the Finance Board, which guide its 

organizational decisions and actions, are: 

• Independence. The Finance Board is the arm’s-length regulator of the FHLBanks 

and the OF. 

• Accountability. The Finance Board is a steward of the public’s trust and will use its 

resources efficiently and in the public interest. 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 2 

• Responsiveness. The Finance Board aligns its actions with its mission and 

responds promptly, effectively, and creatively to emerging risks and discharges its 

responsibilities fairly and impartially and adheres to the highest standards of ethical 

conduct. 

• Excellence. The Finance Board strives for excellence in carrying out its 

responsibilities and recognizes the contributions of employees who demonstrate 

the highest professional standards in their work. 

ORGANIZATION

The Finance Board is governed by a five-member board of directors. Four of the 

directors are appointed by the President and confirmed by the Senate and must have 

extensive experience or training in housing finance or a commitment to providing 

specialized housing credit. The fifth member is the Secretary of the U.S. Department of 

Housing and Urban Development. No more than three directors may be members of the 

same political party. 

At least one appointed director must be from an organization with more than a two-year 

history of representing consumer or community interests in banking services, credit 

needs, housing, or financial consumer protections. The appointed members of the board 

of directors serve staggered seven-year terms. The President designates the chairperson 

of the board of directors from among these appointed members. 

 

The Finance Board is organized into five Offices: 

The Office of the Board of Directors is responsible for setting the agency’s strategic 

direction and approving policies and regulations. By delegation from the full Board of 

Directors, the chairperson supervises management and policy execution. The Board of 

Directors generally meets monthly in public sessions. The agency’s Chief Information 

Officer, who is responsible for the Finance Board’s technology and information systems, 

reports to the chairperson. 

The Office of Supervision (OS) is responsible for the supervision and examination of the 

FHLBanks and the OF. OS performs this function through annual on-site examinations, 

periodic visitations, and off-site monitoring. Other OS responsibilities include 

supervisory policy and program development, regulatory analysis and development, and 

economic research and analysis. 

The Office of General Counsel (OGC) provides legal support and guidance on 

interpretations of laws, regulations, and policies to Finance Board officials. OGC 

prepares legal documents on behalf of the Finance Board and represents the agency in 

judicial and administrative proceedings. OGC staff manages the Finance Board’s ethics 

and Freedom of Information Act programs, and acts as the Secretary to the Board. 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 3 

The Office of Management (OM) is responsible for the Finance Board’s administrative 

functions, such as accounting, budgeting, human resources, contracting and procurement, 

facilities and property management, and records management. 

The Office of Inspector General (OIG) operates pursuant to the Inspector General Act of 

1978, as amended. OIG conducts and supervises audits and investigations related to 

Finance Board programs and operations, and recommends policies to promote economy, 

efficiency, and effectiveness, and to prevent and detect fraud and abuse. 

FEDERAL HOUSING FINANCE BOARD

ORGANIZATION CHART

 

Board Director Board Director 

Chairperson 

 

Office of the 

Board of Directors

Board Director HUD Secretary 

or designee 

Office of General 

Counsel 

Office of 

Supervision 

Office of Inspector 

General 

Office of 

Management 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 4 

THE FEDERAL HOME LOAN BANK SYSTEM

In 1932, Congress authorized the establishment of the FHLBanks to stimulate mortgage 

finance and provide liquidity to credit markets. Until 1989, FHLBank members consisted 

primarily of savings and loan associations engaged in home financing. In 1989, Congress 

extended eligibility for FHLBank membership to commercial banks and federally insured credit 

unions (subject to a home financing requirement). In 1999, Congress made FHLBank 

membership voluntary for all types of eligible institutions. 

FEDERAL HOME LOAN BANK DISTRICTS

The FHLBanks are privately capitalized, government-sponsored enterprises that provide 

wholesale credit to members and certain nonmembers to be used for mortgage lending and 

related activities. In addition, the FHLBanks have a mandate to promote housing and 

community investment finance. The FHLBanks provide long-term, flexible financing to 

more than 8,100 member financial institutions around the country. As of September 30, 2006, 

the FHLBanks had combined assets exceeding one trillion dollars.
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 5 

The FHLBanks are funded principally by the issuance of consolidated obligations of the 

FHLBank System. These consolidated obligations consist of bonds (original maturity of one 

year or longer) and discount notes (original maturity of less than one year). Consolidated 

obligations are not guaranteed or insured by the U.S. government. However, their status as 

government sponsored enterprises enables the FHLBanks to raise funds at rates slightly higher 

than comparable obligations issued by the U.S. Treasury. Debt issued by the FHLBanks 

through the OF is the joint and several obligation of all 12 FHLBanks. 

Members use short and long-term advances (collateralized loans) to fund their lending activities 

and to maintain liquidity for their operations. Long-term advances may be used only to support 

residential housing finance and, in the case of a community financial institution, to support 

lending to small businesses, small farms, and small agricultural businesses. The 

preponderance of the collateral supporting advances consists of mortgage assets. 

In addition to advances, the FHLBanks purchase qualifying mortgage loans from members 

under various acquired member asset programs. Under these programs, the FHLBank 

manages the market risk associated with the loans while members bear most of the credit 

risk through the purchase of mortgage insurance for the loans sold to the FHLBank. 

Members have access to a broad array of funds to support affordable housing and 

community investment activities. The Bank Act requires each FHLBank to allocate 10 

percent of its annual net income to fund a subsidy program known as the Affordable 

KEY FEDERAL HOME LOAN BANK FINANCIAL STATISTICS

(in millions) 

 Sept 30 Dec 31 Dec 31 

 2006 2005 2004 

Advances to Members $644,164 $619,884 $581,235 

Mortgage Loans, Net 99,685 105,015 113,855 

Investments 155,557 152,892 152,992 

Other Assets 126,087 125,124 85,558

Total Assets $1,025,494 $1,002,915 $933,639

Consolidated Obligations $944,039 $921,475 $854,500 

Deposits and Borrowings 22,452 23,192 22,326 

Other Liabilities 13,445 13,859 14,879 

Capital 45,558 44,390 41,934 

Net income $1,924* $2,356 $2,008 

*Reflects income for first 9 months of 2006 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 6 

Housing Program (AHP). Under the AHP, a member may submit an application to its 

FHLBank for funds to be used to finance the purchase, construction, or rehabilitation of 

housing for very low, low, and moderate-income households. AHP funds also are 

awarded through the homeownership set-aside program in which members obtain AHP 

funds from the FHLBank to provide grants to eligible low and moderate-income 

households for down-payment or closing cost assistance and counseling costs in 

conjunction with a purchase or rehabilitation of owner-occupied units. Since the 

inception of the AHP in 1990, the FHLBanks have awarded nearly $2.7 billion in 

subsidies to assist more than 539,000 housing units. 

THE YEAR IN REVIEW

The Finance Board’s accomplishments in FY2006 were concentrated in five areas: 

1. Safety and Soundness Examination and Supervision. The Finance Board examination 

program continues to fulfill its statutory mandate by, among other things, monitoring 

risks at the FHLBanks. The Finance Board conducted examinations and periodic on-site 

visitations at all FHLBanks and the OF. 

At the conclusion of each examination, OS prepared a Report of Examination that 

summarized examiners’ findings and assigned a conclusion indicating the level of 

supervisory concern. OS met with each FHLBank’s board of directors to present the 

Report of Examination and discuss matters of concern. The Finance Board has written 

agreements with two FHLBanks that have been effective in achieving remedial action. 

2. Regulatory and Supervisory Policy Initiatives. In FY2006, the Finance Board issued 

three final rules, and published a proposed rule and the proposed examination rating 

system for public comment. The final rule addressing corporate governance improves the 

FHLBank director election process. Under this rule, at the beginning of the election 

process, each FHLBank may provide a brief statement describing the skills and 

experience the FHLBank believes will add strength to its board of directors. In addition, 

AHP Overview 

 Competitive 

 Application Set-Aside 

 Program Program

Time Period 1990-2006 1995-2005 

Units Receiving 

Assistance (in thousands) 492 48 

Total Funds Awarded 

($ in millions) $2,477 $198 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 7 

each ballot may briefly describe a nominee’s skills and experience. As a result, members 

should be better informed when casting their votes. This rule became effective on July 

18, 2006. 

The final rule addressing the Data Reporting Manual (DRM) consolidates data reporting 

requirements from individual regulations. The Finance Board finalized the first two 

chapters of the DRM, which address call report and membership data in FY2005. The 

agency completed the remaining chapters, which address acquired member asset and 

AHP data in 2006. This rule became effective on July 21, 2006. 

The final rule addressing the AHP removes certain prescriptive requirements, clarifies 

certain operational requirements, and otherwise streamlines and reorganizes the existing 

AHP regulation. The rule was published in the Federal Register on October 6, 2006, and 

will become effective on January 1, 2007. 

In FY2006, the Finance Board issued a proposed rule for public comment that would 

require each FHLBank to maintain a minimum level of retained earnings and would 

restrict an FHLBank’s reliance on excess stock. The Finance Board expects to consider a 

final rule during FY2007. 

In FY2006, the Office of Supervision deployed its revised safety and soundness 

examination manual. The manual, which serves as guidance for examiners during their 

annual examinations, emphasizes the quality of board governance, risk measurement and 

management, and financial condition and performance. The revised manual was used by 

examiners and other examination staff during examinations starting in January 2006. 

During FY2006, OS held a number of feedback sessions with examiners to solicit 

suggestions for ways to improve the effectiveness of the manual. A revised examination 

manual will be published on the Finance Board’s web site in FY2007. 

Finally, in FY2006, the Finance Board has issued for public comment a proposed 

examination rating system (Rating System) for the FHLBanks and the OF. Under the 

proposed Rating System, OS will assign a composite rating to each FHLBank that is 

based on an evaluation and rating of five key components: corporate governance, market 

risk, credit risk, operational risk, and financial condition and performance. The Rating 

System is expected to become effective in 2007. 

3. Risk Monitoring and Risk Modeling. In FY2006, the Finance Board developed a 

prototype modeling tool that is intended to facilitate the analysis and assessment of each 

FHLBank’s exposure to interest rate changes, the reliability of its internal reporting, the 

adequacy of its risk management decisions, the impact of new business strategies and 

policies, and its earnings capacity. At present, the Finance Board can use this tool to 

evaluate two FHLBanks. In FY2007, its use will expand to include at least three 

additional FHLBanks, and the model will be evaluated to determine whether it can be 

expanded to serve other purposes. 

 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 8 

4. Community Investment and AHP Examination and Supervision. The Finance Board 

conducts annual community investment and AHP examinations at each FHLBank. These 

examinations are designed to assess the overall effectiveness of each FHLBank’s AHP, to 

evaluate whether the FHLBank’s AHP databases accurately reflect program operations, 

to assess the adequacy of governance by the FHLBank’s board of directors, to assess the 

quality and effectiveness of the internal audit program and its coverage, and to assess 

compliance with the Bank Act and Finance Board regulations. At the conclusion of each 

examination, examiners summarize results in a Report of Examination presented to the 

FHLBank’s board of directors. 

In FY2006, the Finance Board initiated development of an AHP Examination Manual. 

Selected work programs were revised and used in FY2006. The manual will be 

completed in FY2007. When completed, the manual will serve as a baseline for 

examiners to use during their annual AHP examinations. 

5. Organizational Enhancements. The Finance Board took several actions to enhance 

the supervisory program in FY2006. New staff and/or positions were added, including 

senior level executives to oversee the supervision and examination function and 

supervisory and regulatory policy function, a chief accountant, four economists to 

conduct financial and housing research, four bank examiners, and two financial analysts. 

In light of the recent theft of sensitive personal information from the federal government 

and in response to Office of Management and Budget memoranda, the Finance Board 

completed a review of agency practices related to the collection, use, and protection of 

personally identifiable information. As a result of that review, the information 

technology staff enhanced the safeguards for sensitive information by adding two-factor 

authentication and data encryption to the agency’s network infrastructure. The agency 

also is implementing government-wide personal identity verification management 

standards that will result in issuance of new identification cards for employees and 

contractors. Finally, the Finance Board issued updates to its Privacy Act implementing 

rule and systems of records designed to strengthen the agency’s ability to protect 

personally identifiable information. 

In FY2006, the Finance Board installed dedicated broadband lines (T1) in all FHLBanks 

to connect Finance Board examiners to the agency’s network via a virtual private 

network (VPN). This allows examiners to complete work without competing for 

FHLBank resources, and provides additional security and reliability because the lines are 

dedicated to the Finance Board and secure. 

CHALLENGES

The environment in which the Finance Board and the FHLBanks operate influences the 

agency’s direction, goals, and priorities. The Finance Board is improving its resources 

and monitoring to provide for the timely assessment of emerging issues and risks. This 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 9 

effort will inform the agency on issues, and assist in identifying needed supervisory 

guidance for examiners and the FHLBanks. 

KEY EXTERNAL FACTORS

Performance of the Finance Board and the FHLBanks can be affected by conditions 

beyond their control. For example, macroeconomic developments affecting interest 

rates, national or regional activity can affect the economic performance of the 

FHLBanks. Other external factors with the potential to affect the FHLBanks 

include developments in capital and housing markets. Further, regulatory 

developments, including developments in accounting standards set by the Financial 

Accounting Standards Board and disclosure requirements set by the SEC, along with 

new legislation have the potential to significantly affect the environment in which 

the FHLBanks must operate. Regardless of the source of the influences on 

FHLBank performance, the Finance Board must respond promptly to ensure that the 

FHLBanks meet whatever challenges affect their performance. 

Significant events, influences, and risks that may affect the Finance Board are: 

Legislation. Congress has been considering legislation to establish a single agency as the 

regulator for the government sponsored enterprises (GSEs) that support the national 

housing market. This new agency would oversee the safety, soundness, and housing 

mission achievement of the FHLBanks, Fannie Mae, and Freddie Mac. 

Developments in Banking and Financial Markets. Financial markets continue to evolve 

with new products and services, particularly hedging activities and their associated 

accounting. These developments have the potential to influence the demand for 

FHLBank products and services and the FHLBanks’ financial performance. As the 

industry changes, the supervisory focus of the Finance Board also must change to ensure 

continuous effective supervision of the FHLBanks. Recent supervisory initiatives have 

included reviewing of the FHLBanks’ anti-predatory lending policies; increased 

accountability of FHLBank officers and directors as required by the Sarbanes-Oxley Act 

of 2002; monitoring housing prices and foreclosure activity, particularly in areas affected 

by natural disasters and economic downturns; monitoring consolidation of the financial 

services industry and its potential effects on the FHLBanks’ membership and business; and 

reviewing the composition of FHLBank capital and adequacy of retained earnings. 

In addition, the rapid pace of technological innovation, especially in telecommunications 

and electronic data processing, continues to have a substantial affect on U.S. financial 

services. Harnessing technological innovations will create opportunities to improve the 

Finance Board’s efficiency across organizational units and functions. 

Economic Variables. Adverse economic conditions such as high unemployment, 

softening real estate markets, and sharp or prolonged changes in interest rates have the 

potential to affect the financial condition of the FHLBanks. The Finance Board is 

responding by directing the FHLBanks to review and strengthen their risk management 

practices and business operations vulnerabilities. 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 10 

Staffing. In the competitive financial services environment, highly skilled personnel are 

in great demand. This makes recruiting and retaining a highly skilled workforce a 

continuing challenge. The Finance Board’s recruitment and retention efforts have 

included examiners, economists, accountants, analysts, and attorneys with the requisite 

financial, legal, and technological skills to model, monitor, and assess the risks 

undertaken by the FHLBanks and the OF.

Continuity of Operations. Financial institutions must maintain capacity to resume 

business after a crisis. Ensuring preparedness for a crisis continues to be a priority for the 

Finance Board both for its own operations and those of the FHLBanks and the OF. 

The Finance Board maintains an Emergency Operations Center that has connectivity to all 

agency systems and provides essential personnel with the necessary resources to continue 

agency operations. In addition, in case of a natural disaster, staff can access the agency’s 

systems from anywhere in the country. 

THE FINANCE BOARD’S MANAGEMENT CHALLENGE 

In accordance with Office of Management and Budget (OMB) Circular A-136, the Office 

of Inspector General has determined that the Finance Board’s most serious management 

and performance challenge is whether the examination and supervisory staff are 

adequate in number; possesses appropriate abilities, knowledge, and skills; has been 

provided with adequate guidance; and can adequately monitor the FHLBanks and the OF. 

Agency Progress: The OIG believes that the agency has taken appropriate steps to 

enhance the examination and supervision functions by adopting a risk-based supervisory 

approach in which staff: (1) identifies risks using common definitions (i.e., market, 

credit, and operational risks); (2) measures risks using common methods of evaluation; 

and (3) evaluates risk management to determine whether the FHLBanks’ systems and 

processes enable the board of directors and senior management to manage existing and 

prospective levels of risk. 

OS has committed to developing and issuing a formal strategic plan for fully staffing the 

examination and supervision functions. In FY2006, the Finance Board hired new staff 

members who have expertise in management, economics, financial analysis, bank 

examination, and accounting. In the next two years, the Finance Board plans to continue 

to hire additional staff with expertise in these areas. 

Finally, the Finance Board has revised the safety and soundness examination manual and 

has made substantial progress in drafting the AHP examination manual. 

PROGRAM PERFORMANCE OVERVIEW

The Finance Board evaluates its program performance within a structured planning, 

budgeting and performance management process. In its FY 2003-2008 Strategic Plan, 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 11 

the agency established three strategic goals that guide its operation. The strategic plan is 

available on the agency’s website (www.fhfb.gov). For each strategic goal, the agency 

established strategic objectives that describe how the strategic goal will be accomplished. 

While some of the objectives are easily measured, e.g., whether or not the FHLBanks 

meet or exceed their required capital ratios, others are more subjective. Accordingly, the 

Finance Board has adopted for each objective a number of annual performance goals and 

accompanying annual performance measures to determine the degree to which the 

strategic objectives, and ultimately the strategic goals are achieved. The Finance Board’s 

Annual Performance Budget for FY2006 lists the nested structure described above, which 

is reproduced in the table below. 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 12 

STRATEGIC GOAL STRATEGIC OBJECTIVES ANNUAL PERFORMANCE 

GOAL

ANNUAL PERFORMANCE 

MEASURE

1.1 The FHLBanks operate 

safely and soundly. 

1.1 Maintain an effective riskbased examination program. 1.1 Conduct all safety and 

soundness activities, including 

annual examinations, quarterly 

reviews, and off-site 

monitoring on a timely basis. 

1.2 The FHLBanks meet or 

exceed their minimum capital 

requirements. 

1.2 Each FHLBank satisfies 

its applicable capital 

requirements and prudently 

manages capital and earnings. 

1.2 Each FHLBank 

continuously meets or exceeds 

its minimum capital 

requirement. 

1.3a The FHLBanks maintain 

a triple A credit rating for their 

consolidated obligations. 

1.3a Conduct semi-annual 

assessment of FHLBank 

System cost of funds and 

maintain ratings for 

consolidated obligations and 

FHLBank credit ratings at 

regulatory requirements. 

1. Supervision program 

effectively fosters safe and 

sound operations at each 

FHLBank. 

1.3 The FHLBanks raise 

funds efficiently and are role 

models for transparency and 

accountability. 

1.3b Each FHLBank’s and the 

FHLBank System’s financial 

disclosures comply with 

applicable laws, rules, and 

regulations. 

1.3b Conduct on-site 

examination of the OF and 

review annual and quarterly 

financial reports issued by the 

FHLBank System and each 

FHLBank for compliance with 

disclosure requirements. EICs 

monitor annual and quarterly 

financial reports issued by 

each FHLBank. 

2.1 The FHLBanks facilitate 

the housing finance activities 

of their members. 

2.1 The FHLBanks adhere to 

public policy principles and 

safety and soundness 

requirements when making 

advances and acquiring 

mortgage assets. 

2.1 Review advance and 

mortgage portfolios of each 

FHLBank as part of the annual 

on-site examination for 

compliance with the Bank Act 

and Finance Board 

regulations. 

2. Ensure that the FHLBanks 

serve the nation’s housing 

finance and community 

investment needs. 

2.2 The FHLBanks support 

affordable housing and 

promote community 

investment. 

2.2 Supervision of the 

Affordable Housing and 

Community Investment 

Programs at each FHLBank. 

2.2 Conduct examinations of 

the Affordable Housing and 

Community Investment 

Programs at each FHLBank. 

3.1a Review, revise, and 

supplement Finance Board 

regulations to ensure 

relevance, transparency, and 

issue-oriented supervisory 

guidance. 

3.1a Review and revise 

Finance Board regulations, 

and supplement regulations 

with advisory bulletins, 

examiner guidance bulletins, 

and regulatory interpretations, 

where appropriate. 

3.1 The Finance Board takes 

appropriate and timely 

regulatory and advisory 

actions. 

3.1b Review and respond 

promptly to new business 

activity notices filed by the 

FHLBanks. 

3.1b Respond to new business 

activity notices filed by the 

FHLBanks within 60 days of 

receipt. 

3.2a Use fiscal, physical, and 

human resources efficiently 

and effectively to fulfill the 

Finance Board’s fiduciary 

responsibilities. 

3.2a Align budgeted resources 

with projected workloads and 

business priorities. Recruit, 

develop, and retain highachieving professional staff. 

3. Use supervisory, 

managerial, and legal 

resources to support effective, 

efficient, and responsive 

FHLBank supervision, 

regulation, and housing 

oversight. 

3.2 The Finance Board 

prudently allocates resources 

to fulfill its mission effectively 

and efficiently. 

3.2b Maintain and test 

business continuity and 

contingency plans. 

3.2b Review, update, and test 

the Finance Board’s 

Continuity of Operations Plan 

(COOP). 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 13 

The Finance Board achieved all of its performance goals in FY2006. The agency 

strengthened its supervisory program through the implementation of risk-based 

examinations and additional monitoring programs and tools. In addition, the agency 

issued a final rule to enhance the effectiveness of the AHP. The Finance Board also 

issued final rules to enhance board governance at the FHLBanks and to improve the 

quality and timeliness of data collected from the FHLBanks. The Finance Board also 

issued a notice of proposed rulemaking concerning the composition of FHLBank capital, 

which would establish a minimum retained earnings requirement and a limit on the use of 

excess stock at each FHLBank. The following table summarizes a number of the key 

Finance Board achievements during FY2006. 

REPRESENTATIVE ACCOMPLISHMENTS DURING FY2006 

STRATEGIC GOAL 1: SUPERVISION PROGRAM EFFECTIVELY FOSTERS SAFE AND SOUND OPERATIONS AT 

EACH FHLBANK. 

Strategic Objectives Accomplishments 

1.1 The FHLBanks operate safely and soundly. • Completed annual examinations and 

periodic visitations. 

• Implemented a program to assign an 

overall examination conclusion that 

summarizes level of supervisory concern. 

• Amended written agreement with an 

FHLBank. 

1.2. The FHLBanks meet or exceed their minimum 

capital requirements. 

• Each FHLBank exceeded its minimum 

regulatory capital requirements. 

• Approved capital plan amendments 

submitted by two FHLBanks. 

1.3. The FHLBanks raise funds efficiently and are 

role models for corporate transparency and 

accountability. 

• Every FHLBank registered a class of 

equity securities with the U.S. Securities 

and Exchange Commission (SEC) and are 

now subject to the reporting requirements 

of the Securities Exchange Act of 1934 

(1934 Act). 

STRATEGIC GOAL 2: ENSURE THAT THE FHLBANKS SERVE THE NATION’S HOUSING FINANCE AND 

COMMUNITY INVESTMENT NEEDS. 

Strategic Objectives Accomplishments 

2.1 The FHLBanks facilitate the housing finance 

activities of their members. 

• Reviewed advance and mortgage portfolios 

at each FHLBank for compliance with the 

Bank Act and Finance Board regulations 

2.2 The FHLBanks support affordable housing and 

promote community investment. 

• Completed annual examinations of the 

Affordable Housing Program at each 

FHLBank. 

• To date in 2006, the FHLBanks have 

awarded more than $135 million in 

subsidies to assist 20,087 housing units. 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 14 

STRATEGIC GOAL 3: USE SUPERVISORY, MANAGERIAL, AND LEGAL RESOURCES TO SUPPORT EFFECTIVE,

EFFICIENT, AND RESPONSIVE FHLBANK SUPERVISION, REGULATION, AND 

HOUSING OVERSIGHT. 

Strategic Objectives Accomplishments 

3.1 The Finance Board takes appropriate and timely 

regulatory and advisory actions. 

• Adopted corporate governance, AHP, and 

data quality and timeliness regulations. 

• Issued for comment a proposed rule to 

strengthen the capital structure of the 

FHLBanks. 

• Requested comments on a proposed 

FHLBank rating system. 

• Issued Advisory Bulletins on AHP and 

Resolution Funding Corporation 

contributions, model documentation and 

validation, and disclosure of SEC filings. 

3.2 The Finance Board prudently allocates 

resources to fulfill its mission effectively and 

efficiently. 

• Received and responded to all (5) new 

business activity notices within 60 days of 

receipt of a complete submission. 

• Hired 15 additional full-time staff, 

including a senior executive and chief 

accountant. 

• Provided high-speed Internet access to 

Finance Board staff at the FHLBanks. 

• Improved security for all agency 

computers. 

• Redesigned the Call Report System. 

• Converted acquired member assets 

database to a relational database. 

• Completed testing of Continuity of 

Operations Plan (COOP). 

FINANCIAL PERFORMANCE OVERVIEW

As of September 30, 2006, the financial condition of the Finance Board was sound. 

There are sufficient funds to meet program needs and adequate controls in place to ensure 

that obligations do not exceed budget authority. 

FINANCIAL HIGHLIGHTS

The Finance Board draws its financial resources from assessments of the twelve 

FHLBanks. It receives no appropriations, and its funds are not subject to apportionment. 

The Finance Board’s budget for FY2006 was approximately $35.9 million with 153.5 

full-time equivalent staff. The FY2006 budget reflected a decrease in budget authority of 

$576,000 or 2 percent less then the FY2005 budget. 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 15 

 

BUDGET vs. ACTUAL EXPENSES

0

10

20

30

40

2004 2005 2006

FISCAL YEAR

(In Millions)

Budget

Actual

Actual expenditures in FY2006 were $32.2 million with 132.5 full-time equivalent staff. 

As in the past, the Finance Board allocated approximately 80 percent of its budget in 

FY2006 to supervision of the FHLBanks. 

 

ACTUAL EXPENSES BY STRATEGIC GOAL

0

5

10

15

20

25

Goal 1 Goal 2 Goal 3

(In Millions

2004

2005

2006

FINANCIAL STATEMENT ANALYSIS

A major change in the Net Cost of Operations occurred due to one-time costs associated 

with the agency’s build-out of new office space in FY2005. FY2006 reflects a significant 

decrease as a result of the tenant improvement allowance that was applied to rent. In 

addition, Total Budgetary Resources changed primarily due to an increase in salaries, 

benefits, and rent. 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 16 

The Finance Board has prepared the principal financial statements to report its financial 

position and results of operations pursuant to the requirements of 31 U.S.C. § 3515(b). 

The Finance Board prepared the statements from its books and records in accordance 

with generally accepted accounting principles for Federal entities and the formats 

prescribed by OMB. The agency’s financial statements and reports are prepared from the 

same books and records, and both are used to monitor and control budgetary resources. 

The statements should be read with an understanding that they are for a component of the 

U.S. Government, a sovereign entity. 

MANAGEMENT ASSURANCES

The Finance Board provides reasonable assurance that its systems of internal accounting 

and administrative control fully comply with applicable requirements of the Federal 

Managers' Financial Integrity Act of 1982 and OMB Circular A-123 (revised December 

21, 2004). The Finance Board also provides reasonable assurance that the agency’s 

management accountability and internal controls are adequate and effective, and there are 

no material weaknesses to report. The objectives of the system of internal control are to 

provide reasonable assurance that: 

• Programs achieve their intended results; 

• Resources are used consistent with agency mission; 

• Programs and resources are protected from waste, fraud, and mismanagement; 

• Laws and regulations are followed; and 

• Reliable and timely information is obtained, maintained, reported, and used for 

decision making. 

COMPARISON OF FY2006 TO FY2005

(in Millions) 

 2006 2005

Total Assets $10.47 $10.03 

Total Liabilities 3.47 3.41 

Total Net Position 7.00 6.63 

Net Cost of Operations 0.62 3.23 

Total Budgetary Resources $36.19 $33.32 
MANAGEMENT DISCUSSION AND ANALYSIS

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 17 

The concept of reasonable assurance recognizes that the cost of management control 

should not exceed the benefits expected to be gained, and that the benefits consist of 

reductions in the risks of failing to achieve the stated objectives. Estimates and judgments 

are required to assess the expected benefits and related costs of control procedures. 

Furthermore, errors or irregularities may occur and not be detected because of inherent 

limitations in any system of management accountability and control, including limitations 

resulting from resource constraints and other factors. The statement of assurance and 

determination is based on the following: 

• An independent outside audit of the Finance Board’s financial statements, which 

provided an unqualified opinion and found no weaknesses involving the Finance 

Board’s internal control structure determined to be material. 

• An internal evaluation that included input from senior program and management 

officials and the OIG, covering the period from October 1, 2005, through September 

30, 2006, which found no material weaknesses and concluded that the Finance 

Board’s internal controls are achieving their intended objectives. 

The Finance Board is committed to a strong internal control program. The agency 

employs sound financial management techniques, has developed oversight procedures, 

and emphasizes the importance of a strong risk management and internal control program 

to meet its statutory, regulatory, and fiduciary responsibilities. 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 18 

PROGRAM PERFORMANCE 

MEASURING AND REPORTING PERFORMANCE

This section presents information on the program-specific performance of the Finance Board 

during FY2006. This discussion of performance includes an overview of the agency’s key 

initiatives and some of our major accomplishments. Program-specific performance results 

for Finance Board goals and measures, along with the results of all program evaluations or 

studies completed during FY2006, are also presented. 

PERFORMANCE MEASUREMENT SYSTEM

The Finance Board’s performance measurement system centers around three strategic goals 

for the agency, as outlined in its FY2003-2008 Strategic Plan. The strategic goals represent 

the agency’s mission and reflect the overall outcomes to be achieved. The Finance Board 

has adopted a number of annual performance goals and accompanying annual 

performance measures that can be used to determine the degree to which the strategic 

objectives, and ultimately the strategic goals are achieved. The performance measures, 

performance goals, and strategic objectives constitute the agency’s performance 

management system. 

The Finance Board completed a triennial update of its Strategic Plan and review of its 

performance measures in 2006. The Finance Board continually seeks additional effective 

means to measure, report, and ultimately improve its performance. The update of the 

Strategic Plan for FY2007-2012 was an opportunity to develop and implement effective 

practices in performance measurement, reporting, and management. 

ALIGNING RESOURCES TO GOALS

Collectively, the outcome-based performance goals are the key indicators for successful 

progress in achieving the agency’s strategic goals. The performance goals and their 

associated measures reflect the agency’s move toward more outcome-based performance. 

The Finance Board plans, manages, and monitors programs and activities based on 

contributions to the achievement of these performance goals, with the safety and soundness 

of the FHLBank System as the primary consideration. On-going program evaluations will 

identify whether existing programs are successfully achieving goals and whether revised or 

new initiatives are appropriate. 

GOALS, OBJECTIVES, AND MEASURES

STRATEGIC GOAL 1: SUPERVISION PROGRAM EFFECTIVELY FOSTERS SAFE AND 

SOUND OPERATIONS AT EACH FHLBANK. 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 19 

The Finance Board has identified three strategic objectives to assist in determining whether 

the agency has met its safety and soundness strategic goal. These objectives define the 

effectiveness of the Finance Board’s oversight of the FHLBanks. The goal of the Finance 

Board’s regulatory efforts is to encourage the events described in the objectives below. 

STRATEGIC OBJECTIVES 2002 2003 2004 2005 2006 

1.1 The FHLBanks operate safely and soundly. Achieved Achieved Achieved Achieved Achieved

1.2 The FHLBanks meet or exceed their 

minimum capital requirements. 

Achieved Achieved Achieved Achieved Achieved

1.3 The FHLBanks raise funds efficiently, 

and are role models for transparency and 

accountability. 

Achieved Achieved Achieved Achieved Achieved

STRATEGIC OBJECTIVE 1.1: THE FHLBANKS OPERATE SAFELY AND SOUNDLY.

The Finance Board’s supervisory program focuses on programs, activities, and operations 

that present the highest risk to the safety and soundness to the FHLBanks. The following 

processes are central to the agency’s application of a risk-based supervisory approach: (1) 

identification of market, credit, and operational risks; (2) use of common methods of 

evaluation to measure these risks; and (3) assessment of governance, e.g., the policies, 

systems, and processes employed by each FHLBank and the OF in managing existing and 

prospective levels of risk. 

STRATEGIC OBJECTIVE 1.2: EACH FHLBANK MEETS OR EXCEEDS ITS MINIMUM CAPITAL 

REQUIREMENT. 

In December 2000, the Finance Board adopted a regulation requiring the FHLBanks to 

establish a new risk based capital structure that addresses minimum capital standards and 

establishes the amount of FHLBank stock members must hold. 

In 2002, the Finance Board required each FHLBank to submit for approval a plan to 

establish a new capital structure for the Bank. The Finance Board has approved all of the 

capital structure plans, and to date, 11 of the 12 FHLBanks have implemented their new 

capital structure. 

STRATEGIC OBJECTIVE 1.3: THE FHLBANKS RAISE FUNDS EFFICIENTLY AND ARE ROLE MODELS 

FOR TRANSPARENCY AND ACCOUNTABILITY. 

As government-sponsored enterprises, FHLBanks can raise funds at interest rates that are 

slightly higher than the rates on obligations of comparable type and similar maturity issued by 

the U.S. Treasury. 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 20 

In 2005, the Finance Board required each FHLBank to file a registration statement 

covering a class of equity securities with the SEC and ensure its effectiveness under 

section 12(g) of the 1934 Act. In FY2006, the FHLBanks completed registration with the 

SEC. 

Each FHLBank now is subject to the 1934 Act’s periodic disclosure requirements, which 

include the periodic preparation and filing of public disclosures relating to their financial 

condition, results of operations, trends, or uncertainties affecting its business, and 

management’s assessment of its business and financial condition, including supporting 

financial information and certifications. 

ANNUAL PERFORMANCE GOALS: To support its strategic objectives in meeting strategic goal 

1, the Finance Board has four annual performance goals, each with accompanying 

performance measures to indicate the achievement of those goals. 

ANNUAL PERFORMANCE GOAL 1.1: MAINTAIN AN EFFECTIVE RISK-BASED EXAMINATION 

PROGRAM.

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

1.1 Conduct all safety and soundness 

activities, including annual 

examinations, quarterly reviews and 

off-site monitoring on a timely basis. 

Achieved Achieved Achieved Achieved Achieved 

DESCRIPTION: To fulfill their housing finance mission, the FHLBanks offer advances, 

mortgage purchase programs, and other services. As a result of these activities, the 

FHLBanks assume market, credit, and operational risks. The FHLBanks must evaluate 

and manage these varied and complex risks in accordance with their condition and 

earnings. The Finance Board’s supervisory program evaluates and monitors whether the 

risk management processes at each FHLBank effectively reflect and control the level of 

risk undertaken by it. 

RESULTS: The Finance Board conducted on-site safety and soundness examinations at all 

12 FHLBanks. At the end of each examination, staff reached a conclusion of the overall 

condition of each FHLBank based upon the level of credit, market, and operational risk 

undertaken, the adequacy of the FHLBank’s risk management practices, its financial 

condition and operating performance, the adequacy of its capitalization, the quality of its 

corporate governance, and administration of its affordable housing and community 

investment programs. 

In 2004, the Finance Board entered into written agreements with the boards of directors 

of two FHLBanks. These agreements address certain deficiencies with the FHLBanks’ 

risk management, corporate governance, and financial condition that the Finance Board 

identified through its supervisory program. The agreement with one FHLBank was 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 21 

amended in October 2005. In the past two years, both of these FHLBanks have made 

progress toward addressing the Finance Board’s supervisory concerns, but remain subject 

to the provisions of the written agreements.

ANNUAL PERFORMANCE GOAL 1.2: EACH FHLBANK SATISFIES ITS APPLICABLE CAPITAL 

REQUIREMENTS AND PRUDENTLY MANAGES CAPITAL 

AND EARNINGS.

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

1.2 Each FHLBank continuously meets 

or exceeds its minimum capital 

requirement. 

Achieved Achieved Achieved Achieved Achieved 

DESCRIPTION: The FHLBanks must report their risk-based capital, total capital, and 

permanent capital, at least monthly to the Finance Board. Risk-based capital 

requirements are imposed upon each FHLBank on the basis of the credit, market, and 

operations risks it undertakes. If the FHLBank has not implemented a new capital plan, it 

must adhere to the alternative leverage requirement in 12 C.F.R. § 966.3(a). 

RESULTS: In FY2006, all of the FHLBanks exceeded their minimum capital 

requirements. 

In FY2006, the FHLBank of Chicago made significant progress towards implementing its 

new capital plan. 

The Finance Board approved capital plan amendments submitted by two FHLBanks. 

One FHLBank amended its plan to clarify existing provisions and delete certain 

transaction-related provisions. The other FHLBank amended its capital plan to authorize 

the establishment of an excess stock pool and to issue Class A stock. 

ANNUAL PERFORMANCE GOAL 1.3A: THE FHLBANKS MAINTAIN A TRIPLE A CREDIT 

RATING FOR THEIR CONSOLIDATED OBLIGATIONS.

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

1.3a Conduct semi-annual assessment 

of FHLBank System cost of funds and 

maintain ratings for consolidated 

obligations and FHLBank credit 

ratings at regulatory requirements. 

Achieved Achieved Achieved Achieved Achieved 

DESCRIPTION: The FHLBanks raise funds in the capital markets through the issuance of 

consolidated obligations for which they are jointly and severally liable. The FHLBanks 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 22 

ability to issue consolidated obligations at rates slightly above the rates on comparable 

U.S. Treasury obligations is important to their ability to efficiently fund their operations. 

RESULTS: In FY2006, to measure the efficiency of the FHLBanks in raising funds, the 

agency conducted two reviews of the FHLBanks’ funding costs relative to those of the 

U.S. Treasury and other GSEs engaged in housing-related activities. The Finance Board 

also monitored FHLBank System funding costs relative to interest rate indices such as the 

London Interbank Offered Rate (LIBOR). 

Collectively, the FHLBanks are required to obtain from a nationally recognized statistical 

rating organization (NRSRO), and at all times maintain, a current credit rating on their 

consolidated obligations. S&P and Moody’s have rated long-term FHLBank 

consolidated obligations “AAA” and “Aaa,” respectively, and short-term consolidated 

obligations “P-1” and “A-1+,” respectively, their highest ratings. Consolidated 

obligations of the FHLBank System maintained a triple-A rating in FY2006. 

ANNUAL PERFORMANCE GOAL 1.3B: EACH FHLBANK’S AND THE FHLBANK SYSTEM’S 

FINANCIAL DISCLOSURES COMPLY WITH 

APPLICABLE LAWS, RULES, AND REGULATIONS.

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

1.3a Conduct on-site examination of 

the OF, and review annual and periodic 

financial reports issued by the 

FHLBank System and each FHLBank.. 

Achieved Achieved Achieved Achieved Achieved

DESCRIPTION: The Finance Board conducts an annual on-site examination of the OF. 

While on site, examiners: (1) follow up on issues identified through pre-examination 

analysis and planning; (2) test systems, controls, and reports for adequacy and accuracy, 

including the internal audit function; (3) assess the risk profile and operational soundness; 

(4) identify issues that may affect the risk or operating profile; (5) evaluate the quality of 

corporate governance; and (6) test for compliance with laws, regulations, and policies, 

including sales suitability practices by participating underwriters and broker-dealers. 

RESULTS: The OF prepares the combined financial statements for the entire FHLBank 

System in accordance with 12 C.F.R. § 985.6(b). The OF currently is preparing the 

combined FHLBank System financial statements for 2005 and 2004. The Finance Board 

anticipates that the combined FHLBank System financial statements for 2005 and 2004 

will be available by year end 2006, and that the OF will complete the combined 

FHLBank System financial statements for 2006 on schedule. In addition, by June 30, 

2007, the OF plans to provide a single report that presents restated financial information 

on a combined basis for 2001, 2002, and 2003. Once issued, the Finance Board will 

assess whether the combined financial statements comply with the agency’s regulations 

and policies. 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 23 

All of the FHLBanks have completed registration of a class of equity securities with the 

SEC and are now subject to the reporting requirements of the 1934 Act. 

STRATEGIC GOAL 2: ENSURE THAT THE FHLBANKS SERVE THE NATION’S 

HOUSING FINANCE AND COMMUNITY INVESTMENT 

NEEDS.

The Finance Board has identified two strategic objectives that support strategic goal 2, and 

define the Finance Board’s responsibilities in overseeing the housing finance mission of the 

FHLBanks. The goal of the Finance Board’s regulatory efforts is to encourage the events 

described in the objectives below: 

STRATEGIC OBJECTIVES 2002 2003 2004 2005 2006 

2.1 The FHLBanks facilitate the housing 

finance activities of their members. 

Achieved Achieved Achieved Achieved Achieved

2.2 The FHLBanks support 

affordable housing and promote 

community investment. 

Achieved Achieved Achieved Achieved Achieved

STRATEGIC OBJECTIVE 2.1: THE FHLBANKS FACILITATE THE HOUSING FINANCE ACTIVITIES OF 

THEIR MEMBERS. 

Congress established the FHLBank System in 1932 to restore confidence in the nation’s 

financial institutions and to improve the supply of funds to local lenders to finance loans 

for home purchases. In 1989, Congress established the AHP and a Community 

Investment Program (CIP) through which the FHLBanks provide funding to support the 

community and economic development activities of their members. 

STRATEGIC OBJECTIVE 2.2: THE FHLBANKS SUPPORT AFFORDABLE HOUSING AND PROMOTE 

COMMUNITY INVESTMENT. 

 

The AHP subsidizes the cost of affordable owner-occupied and rental housing. The 

subsidy may be in the form of a grant or a below-cost or subsidized interest rate on an 

FHLBank advance to a member. The Bank Act requires each FHLBank to contribute at 

least 10 percent of its net earnings from the previous year to the AHP, subject to a 

minimum annual combined contribution by all 12 FHLBanks of $100 million. 

ANNUAL PERFORMANCE GOALS: To support its strategic objectives in meeting strategic goal 

2, the Finance Board has two annual performance goals, each with accompanying 

performance measures to indicate the achievement of those goals. 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 24 

ANNUAL PERFORMANCE GOAL 2.1: THE FHLBANKS ADHERE TO PUBLIC PURPOSE PRINCIPLES 

AND SAFETY AND SOUNDNESS REQUIREMENTS WHEN 

MAKING ADVANCES AND ACQUIRING MORTGAGE 

ASSETS. 

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

2.1 Review advances and mortgage 

portfolios of each FHLBank as part of 

the annual on-site examination for 

compliance with the FHLBank Act and 

Finance Board regulations. 

Achieved Achieved Achieved Achieved Achieved 

DESCRIPTION: FHLBanks make fully collateralized advances to their members to provide 

funds for residential housing finance and to community financial institutions for small 

businesses, small farms, and small agricultural businesses. The Bank Act and Finance 

Board regulations describe authorized purposes for advances, limitations upon access to 

advances based upon member capitalization and condition, collateral eligible to secure 

advances, documentation requirements, required disclosures in the case of convertible 

advances, transaction fees, lien priority of advances, member borrowing limits, and other 

matters. 

Acquired Member Assets (AMA) is the comprehensive term for programs through which 

the FHLBanks acquire whole, single-family, residential mortgage loans or loan pools 

either by purchasing closed loans or funding loans at time of closing. Members originate 

these loans in transactions that functionally are equivalent to making an advance in 

purpose and economic substance in that the member or housing associate can access 

liquidity for additional mission-related lending, and all or a material portion of the credit 

risk is borne by the member or housing associate. 

RESULTS: The Finance Board reviewed the advance portfolio of each FHLBank as part 

of its 2006 annual on-site examination, and monitored the size and composition of the 

portfolios on a quarterly basis. The Finance Board completed the annual survey of 

collateral securing FHLBank advances in the third quarter of 2006. 

In 2006, mortgage analysts and examiners evaluated AMA programs and program loans 

as part of the annual on-site examination of each FHLBank. The examinations focused 

on: (1) risk exposures to the FHLBanks; (2) operations of the FHLBanks, including 

governance of the programs and quality control programs; (3) credit enhancement 

determinations; and (4) data collection coding. 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 25 

ANNUAL PERFORMANCE GOAL 2.2: SUPERVISION OF THE AFFORDABLE HOUSING AND 

COMMUNITY INVESTMENT PROGRAMS AT EACH 

FHLBANK. 

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

2.2a Conduct examinations of the 

Affordable Housing and Community 

Investment Programs at each FHLBank. 

Achieved Achieved Achieved Achieved Achieved 

DESCRIPTION: The Finance Board supports the Bank Act’s affordable housing and 

community investment objectives by maintaining an effective program of annual on-site 

examinations for the AHP, CIP, and, as applicable, other Community Investment Cash 

Advance (CICA) programs. 

The AHP subsidizes the cost of owner-occupied housing for individuals and families with 

incomes at or below 80 percent of the area median income, and rental housing in which at 

least 20 percent of the units are reserved for households with incomes at or below 50 

percent of area median income. The subsidy may be in the form of a grant or subsidized 

interest rate for an advance. 

RESULTS: In FY2006, the Finance Board completed on-site reviews of the AHP at all 12 

FHLBanks. The purpose of the AHP examination is to assess the overall effectiveness of 

each FHLBank’s AHP, evaluate the accuracy of the AHP databases, and assess 

compliance with the Bank Act and AHP regulations. Staff assigned an examination 

conclusion to each FHLBank based on the effectiveness of its AHP activities. 

In FY2006, the Finance Board began to develop the AHP Examination Manual, which it 

expects to complete in FY2007. 

STRATEGIC GOAL 3: USE SUPERVISORY, MANAGERIAL, AND LEGAL 

RESOURCES TO SUPPORT EFFECTIVE, EFFICIENT,

AND RESPONSIVE FHLBANK SUPERVISION,

REGULATION, AND HOUSING OVERSIGHT. 

The Finance Board has identified two strategic objectives in support of this goal. These are 

top-level objectives that define the Finance Board’s success in managing its resources to 

carry out its mission. 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 26 

STRATEGIC OBJECTIVES 2002 2003 2004 2005 2006 

3.1 The Finance Board takes appropriate 

and timely regulatory and advisory actions. 

Achieved Achieved Achieved Achieved Achieved 

3.2 The Finance Board prudently 

allocates resources to fulfill its mission 

effectively and efficiently. 

Achieved Achieved Achieved Achieved Achieved 

STRATEGIC OBJECTIVE 3.1: THE FINANCE BOARD TAKES APPROPRIATE AND TIMELY 

REGULATORY AND ADVISORY ACTIONS. 

The Finance Board’s highest regulatory priorities are to ensure the safety and soundness 

of the FHLBank System and to ensure that the FHLBanks fulfill their housing finance 

mission. In FY2006, the agency continued to reassess and revise its regulatory structure. 

STRATEGIC OBJECTIVE 3.2: THE FINANCE BOARD PRUDENTLY ALLOCATES RESOURCES TO 

FULFILL ITS MISSION EFFECTIVELY AND EFFICIENTLY.

The Finance Board recognizes that it must effectively manage its resources to 

successfully carry out its mission and achieve its annual performance goals. Two areas 

that are crucial to the accomplishment of the agency’s mission are human capital and 

information and systems technology. The Finance Board’s employees are its most 

important resource. In addition, the Finance Board uses information technology 

resources to improve the efficiency and effectiveness of its operational processes. 

ANNUAL PERFORMANCE GOALS: To support its strategic objectives in meeting strategic goal 

3, the Finance Board has four annual performance goals, each with accompanying 

performance measures to indicate the achievement of those goals. 

ANNUAL PERFORMANCE GOAL 3.1A: REVIEW, REVISE, AND SUPPLEMENT FINANCE BOARD 

REGULATIONS TO ENSURE RELEVANCE,

TRANSPARENCY, AND ISSUE-ORIENTED SUPERVISORY 

GUIDANCE. 

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

3.1a Review, revise and supplement 

Finance Board regulations, and 

supplement regulations with advisory 

bulletins, examiner guidance bulletins, 

and regulatory interpretations, where 

appropriate. 

Achieved Achieved Achieved Achieved Achieved 

DESCRIPTION: In FY2006, the Finance Board continued to develop and issue supervisory 

guidance to the FHLBanks through regulations, advisory bulletins, and regulatory 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 27 

interpretations. The Finance Board’s guidance incorporates effective practices in 

response to emerging risks, the evolving activities and operations of the FHLBanks, 

developments in the financial markets, and new supervisory issues. 

RESULTS: In FY2006, the Finance Board adopted rules to: (1) enhance the FHLBanks 

corporate governance by establishing qualifications for elected members of the FHLBank 

boards of directors; (2) streamline and reorganize the existing AHP regulation; and (3) 

consolidate data reporting requirements from individual regulations into a Data Reporting 

Manual. In FY2006, the Finance Board also issued for comment a proposed rule to 

strengthen each FHLBank’s capital structure by maintaining a minimum level of retained 

earnings and restricting the amount of excess stock an FHLBank can have outstanding. 

In addition, the Finance Board issued the proposed Rating System for public comment. 

Under the proposed Rating System, each FHLBank would be assigned a composite rating 

that is based on an evaluation and rating of five key components: corporate governance, 

market risk, credit risk, operational risk, and financial condition and performance. 

The Finance Board also issued advisory bulletins that: (1) clarify how restatement of the 

FHLBank System’s financial statements will affect contributions to the AHP and 

Resolution Funding Corporation; (2) require the FHLBanks and the OF to establish 

policies and procedures to ensure that financial models are documented and validated; 

and (3) authorize each FHLBank to use or disclose unpublished information that is 

material to the FHLBank’s financial condition or business operations in its SEC filings.

ANNUAL PERFORMANCE GOAL 3.1B: REVIEW AND RESPOND PROMPTLY TO NEW BUSINESS 

ACTIVITY NOTICES FILED BY THE FHLBANKS. 

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

3.1b Respond to new business 

activity notices filed by the 

FHLBanks within 60 days of 

receipt. 

Achieved Achieved Achieved Achieved Achieved 

DESCRIPTION: A “new business activity” is any business activity an FHLBank 

undertakes, transacts, conducts, or engages in that it has not previously undertaken, 

transacted, conducted, or engaged in, or that it previously undertook, transacted, 

conducted, or engaged in under materially different terms and conditions. Finance Board 

regulations require an FHLBank that intends to engage in a new business activity to file a 

notice with the Finance Board. In its review of a new business activity notice, the 

Finance Board will assess whether the proposed activity is legally objectionable, the risks 

of the proposal, and the ability of the FHLBank to manage those risks. After the Finance 

Board deems a notice to be complete, it must respond to the FHLBank within 60 days. 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 28 

RESULTS: In FY2006, the Finance Board considered and responded to all 5 new business 

activity notifications from the FHLBanks within 60 days of receipt of a full and complete 

FHLBank submission. 

ANNUAL PERFORMANCE GOAL 3.2A: USE FISCAL, PHYSICAL, AND HUMAN RESOURCES 

EFFICIENTLY AND EFFECTIVELY TO FULFILL THE 

FINANCE BOARD’S FIDUCIARY RESPONSIBILITIES.

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

3.2a Align budgeted resources with 

projected workloads and business 

priorities. Recruit, develop, and 

retain high-achieving professional 

staff. 

Achieved Achieved Achieved Achieved Achieved

DESCRIPTION: Due to the increasing size and complexity of the FHLBanks, the Finance 

Board continues to augment and support its workforce with high-achieving professionals 

in various disciplines. 

RESULTS: In FY2006, the Finance Board hired 15 full-time staff, including a senior 

executive, four economists, four bank examiners, two financial analysts, and two 

administrative or support staff. The Finance Board also hired a chief accountant. 

The Finance Board continues to enhance its data management and information systems. 

In FY2006, the agency adopted its Data Reporting Manual (DRM), which reorganizes 

data reporting requirements that previously were in the Finance Board’s regulations or 

otherwise required by the agency. 

In FY2006, the Finance Board redesigned the Call Report System (CRS.net) to provide 

an integrated framework through which the Finance Board gathers financial and other 

information from and about the FHLBanks. In addition, the agency converted the AMA 

database, which captures summary reports on a quarterly basis and loan specific acquired 

member assets data on a semi-annual basis, to a relational database. 

ANNUAL PERFORMANCE GOAL 3.2B: MAINTAIN AND TEST BUSINESS CONTINUITY AND 

CONTINGENCY PLANS.

ANNUAL PERFORMANCE MEASURE 2002 2003 2004 2005 2006 

3.2b Review, update, and test the 

Finance Board’s Continuity of 

Operations Plan (COOP). 

Achieved Achieved Achieved Achieved Achieved

DESCRIPTION: The Finance Board designed its Continuity of Operations Plan (COOP) to 

ensure continuity of essential agency functions under all emergency circumstances. The 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 29 

COOP identifies the essential functions that must continue under any circumstances, and 

the policy and procedures for activating the program. The major components of the 

COOP include identification of essential functions; delegations of authority; orders of 

succession; communications processes; vital records, files and databases required and 

available during an emergency; and a testing, training, and exercise program that includes 

monthly, quarterly, and annual testing of the COOP’s different components. 

RESULTS: The Finance Board tested the COOP in FY2006 through an exercise using 

established activation procedures, requiring all emergency personnel to report to the 

Emergency Operations Center, and testing of programs to ensure that essential functions 

could be performed. In response to testing in both FY2005 and FY2006, the COOP was 

updated. In addition, the COOP has been updated to reflect the agency’s preparedness 

for pandemic flu. 

PROGRAM EVALUATION

The Finance Board uses program evaluations to improve and enhance its mission 

performance and support strategic and performance planning efforts. These evaluations 

take many forms, and are performed by organizations both inside and outside the agency. 

Staff evaluates and implements recommendations, as appropriate. The principal 

evaluations include: 

SUPERVISORY PROGRAM

Government Accountability Office (GAO) Evaluations: The GAO conducts program- and 

program-support related evaluations of the agency’s supervisory program. 

OIG Evaluations: The OIG evaluates the agency’s supervisory program and program 

support operations.

FHLBank Strategic Planning Interview Project: The Finance Board held discussions 

with senior executives of each FHLBank to gather information about FHLBank practices 

and experiences in three major areas: (1) risk management and modeling; (2) financial 

reporting and data collection; and (3) information systems. 

Quality Assurance: OS is developing a Quality Assurance (QA) Program that will 

provide recommendations to facilitate efficient and effective operations. QA also will 

conduct reviews of all OS programs. These reviews may include ongoing evaluation of 

work processes, policy development, and decision-making processes. 

FINANCIAL MANAGEMENT

Financial Audits: Annually, the OIG contracts with a public accounting firm to audit the 

Finance Board’s financial statements. This audit is conducted in accordance with 
PROGRAM PERFORMANCE

FY2006 PERFORMANCE AND ACCOUNTABILITY REPORT 30 

generally accepted auditing standards and the standards applicable to financial audits 

contained in Government Auditing Standards. 

INFORMATION TECHNOLOGY

Federal Information Security Management Act (FISMA): The OIG annually reviews and 

evaluates the agency’s information technology systems for FISMA compliance. This 

includes evaluating information technology controls for financial management systems.

Network Penetration: Annually, the Finance Board contracts with an outside company of 

security experts to perform network penetration testing of our information technology 

systems. 

Customer Satisfaction Survey: Annually, the Finance Board conducts a survey of all endusers to obtain their opinions on the quality of the agency’s products and services. This 

allows a better understanding of user needs and results in improved service. 

HUMAN CAPITAL MANAGEMENT

Human Capital Management Survey: Annually, the Finance Board participates in the 

Office of Personnel Management’s Human Capital Management Survey. 

Recommendations are evaluated and implemented, as appropriate.

Training and Development Program: The Finance Board is committed to training and 

development of its staff to build, maintain, and improve individual and team 

competencies to meet current and future demands and challenges in the financial and 

regulatory arenas. OS has begun a more formalized training and development program to 

address a variety of training and development opportunities through various activities and 

forums. Consideration of a particular training or development activity is based on the 

need to acquire new skills or enhance performance. 

Workplace Improvement Committee: Representatives from all offices within the Finance 

Board meet to identify and pursue improvements to the work environment. 

Equal Employment Opportunity (EEO): The Finance Board is committed to equal 

employment opportunity and the implementation of a strong EEO program to promote 

employment and advancement opportunities without regard to race, sex, sexual 

orientation, religion, color, national origin, age, or disability. The Minority and Disabled 

Recruitment Task Force, comprised of staff from a cross-section of Offices and 

disciplines within the Finance Board, meets periodically and discusses strategies for 

enhancing recruitment initiatives to attract a diverse applicant pool. In addition, the 

Finance Board is committed to continuing to take advantage of employment programs 

that integrate veterans, disabled, and other populations into the public-sector workforce. 

FINANCIAL STATEMENTS 

AND 

INDEPENDENT AUDITOR’S REPORT 

FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005 

TABLE OF CONTENTS

 PAGE

INDEPENDENT AUDITOR’S REPORT ON THE FINANCIAL STATEMENTS ........................ 1 

INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER 

FINANCIAL REPORTING............................................................................................................... 3 

INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE WITH LAWS 

AND REGULATIONS...................................................................................................................... 5 

BALANCE SHEET ........................................................................................................................... 6 

STATEMENT OF NET COST.......................................................................................................... 7 

STATEMENT OF CHANGES IN NET POSITION......................................................................... 8 

STATEMENT OF BUDGETARY RESOURCES ............................................................................ 9 

STATEMENT OF FINANCING....................................................................................................... 10

NOTES TO FINANCIAL STATEMENTS....................................................................................... 11 

 

 
 
 
 
The accompanying notes are an integral part of these financial statements. 

6

 

FEDERAL HOUSING FINANCE BOARD 

BALANCE SHEET 

As of September 30, 2006 and 2005 

(In Dollars) 

 

 2006 2005

Assets: 

Intragovernmental: 

Fund Balance with Treasury (Note 2) $ 8,942,840 $ 7,991,460 

Total Intragovernmental 8,942,840 7,991,460 

Accounts Receivable (Note 1) 3,358 1,739 

General Property, Plant and Equipment, Net (Note 3) 1,498,423 1,994,269 

Other 29,030 46,770 

Total Assets $ 10,473,651 $ 10,034,238 

 

Liabilities: 

Intragovernmental: 

Accounts Payable (Note 5) $ 65,298 $ 7,505 

Other (Note 5) 128,794 123,260 

Total Intragovernmental 194,092 130,765 

Accounts Payable (Note 5) 778,832 997,879 

Other (Note 5) 2,498,611 2,277,419 

Total Liabilities $ 3,471,535 $ 3,406,063 

 

Commitments and Contingencies (Note 1) 

Net Position: 

Cumulative Results of Operations - Other Funds $ 7,002,116 $ 6,628,175 

Total Net Position $ 7,002,116 $ 6,628,175 

 

Total Liabilities and Net Position $ 10,473,651 $ 10,034,238 

 
The accompanying notes are an integral part of these financial statements. 

7

 

FEDERAL HOUSING FINANCE BOARD 

STATEMENT OF NET COST 

For the Years Ended September 30, 2006 and 2005 

(In Dollars) 

 

Unaudited 

(Note 1) 

 2006 2005

Program Costs: 

Program A: Review of Federal Home Loan Banks 

Gross Costs (Note 8) $ 32,200,748 $ 32,720,678 

Less: Earned Revenue 31,582,813 29,492,449 

Net Program Costs 617,935 3,228,229 

 

Net Cost of Operations $ 617,935 $ 3,228,229 

 
The accompanying notes are an integral part of these financial statements. 

8

 

FEDERAL HOUSING FINANCE BOARD 

STATEMENT OF CHANGES IN NET POSITION 

As of September 30, 2006 and 2005 

(In Dollars) 

 

Unaudited 

(Note 1) 

 2006 2005

 Total Total 

 

Cumulative Results of Operations: 

Beginning Balances $ 6,628,175 $ 8,964,846 

Beginning Balances, as Adjusted $ 6,628,175 $ 8,964,846 

 

Other Financing Sources (Non-Exchange): 

Imputed Financing Sources $ 991,876 $ 891,558 

Total Financing Sources 991,876 891,558 

Net Cost of Operations 617,935 3,228,229 

Net Changes $ 373,941 $ (2,336,671) 

 

Cumulative Results of Operations $ 7,002,116 $ 6,628,175 

 

Net Position $ 7,002,116 $ 6,628,175 
The accompanying notes are an integral part of these financial statements. 

9

 

FEDERAL HOUSING FINANCE BOARD 

STATEMENT OF BUDGETARY RESOURCES 

For the Years Ended September 30, 2006 and 2005 

(In Dollars) 

 

Unaudited 

(Note 1) 

 2006 2005

Budgetary Resources: 

Unobligated Balance Brought Forward, October 1: $ 4,307,516 $ 3,844,154 

Recoveries of Prior Year Unpaid Obligations 299,492 929 

Budget Authority 

Collected 31,583,288 29,477,431 

 

Total Budgetary Resources $ 36,190,296 $ 33,322,514 

 

Status of Budgetary Resources: 

Obligations Incurred 

Reimbursable $ 31,447,727 $ 29,014,998 

Unobligated Balance 

Exempt from Apportionment 4,742,569 4,307,516 

 

Total Status of Budgetary Resources $ 36,190,296 $ 33,322,514 

 

Change in Obligated Balance: 

Obligated Balance, Net 

Unpaid Obligations, Brought Forward, October 1 $ 3,683,944 $ 6,286,065 

Total Unpaid Obligated Balance, Net 3,683,944 6,286,065 

Obligations Incurred Net 31,447,727 29,014,998 

Less: Gross Outlays 30,631,908 31,616,190 

Less: Recoveries of Prior Year Unpaid 

Obligations, Actual 299,492 929 

Obligated Balance, Net, End of Period 

Unpaid Obligations 4,200,271 3,683,944 

Total, Unpaid Obligated Balance, Net, End of Period $ 4,200,271 $ 3,683,944 

 

Net Outlays: 

Net Outlays: 

Gross Outlays $ 30,631,908 $ 31,616,190 

Less: Offsetting Collections 31,583,288 29,477,431 

Net Outlays $ (951,380) $ 2,138,759 
The accompanying notes are an integral part of these financial statements. 

10

 

FEDERAL HOUSING FINANCE BOARD 

STATEMENT OF FINANCING 

For the Years Ended September 30, 2006 and 2005 

(In Dollars) 

 

Unaudited 

(Note 1) 

2006 2005

Resources Used to Finance Activities: 

Budgetary Resources Obligated 

Obligations Incurred $ 31,447,727 $ 29,014,998 

Less: Spending Authority from Offsetting Collections and Recoveries 31,882,780 29,478,360 

Obligations Net of Offsetting Collections and Recoveries (435,053) (463,362) 

Net Obligations (435,053) (463,362) 

Other Resources 

Imputed Financing from Costs Absorbed by Others 991,876 891,558 

Net Other Resources Used to Finance Activities 991,876 891,558 

Total Resources Used to Finance Activities $ 556,823 $ 428,196 

Resources Used to Finance Items Not Part of the Net Cost of Operations 

Change in Budgetary Resources Obligated for Goods, 

Services and Benefits Ordered But Not Yet Provided $ 433,114 $ (1,576,248) 

Resources That Fund Expenses Recognized in Prior Periods - 1,118,014 

Resources That Finance the Acquisition of Assets (388) 1,176,076 

Total Resources Used to Finance Items Not Part of the Net Cost of 

Operations 432,726 717,842 

Total Resources Used to Finance the Net Cost of Operations $ 124,097 $ (289,646) 

Components of the Net Cost of Operations That Will Not Require or 

Generate Resources in the Current Period 

Components Not Requiring or Generating Resources: 

Depreciation and Amortization $ 823,585 $ 1,154,584 

Revaluation of Assets or Liabilities 33,619 85,566 

Other (363,366) 2,277,725 

Total Components of Net Cost of Operations That Will Not Require or 

Generate Resources 493,838 3,517,875 

Total Components of Net Cost of Operations That Will Not Require or 

Generate Resources in the Current Period 493,838 3,517,875 

Net Cost of Operations $ 617,935 $ 3,228,229 
11 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

A. Basis of Presentation 

The financial statements have been prepared to report the financial position, net cost of 

operations, changes in net position, status and availability of budgetary resources, and the 

reconciliation between proprietary and budgetary accounts of the Federal Housing Finance 

Board (Finance Board). The statements are a requirement of the Chief Financial Officers Act of 

1990, the Government Management Reform Act of 1994, the Accountability of Tax Dollars Act 

of 2002, and the Office of Management and Budget (OMB) Bulletin Number 06-03, Audit 

Requirements for Federal Financial Statements. They have been prepared from, and are fully 

supported by, the books and records of the Finance Board in accordance with the hierarchy of 

accounting principles generally accepted in the United States of America, standards approved by 

the principals of the Federal Accounting Standards Advisory Board (FASAB), OMB Circular 

No. A-136, Financial Reporting Requirements and the Finance Board accounting policies, which 

are summarized in this note. These statements, with the exception of the Statement of Budgetary 

Resources, are different from financial management reports, which are also prepared pursuant to 

OMB directives that are used to monitor and control the Finance Board’s use of budgetary 

resources. 

The statements consist of the Balance Sheet, Statement of Net Cost, Statement of Changes in Net 

Position, Statement of Budgetary Resources, and the Statement of Financing. In accordance with 

OMB Circular No. A-136, the financial statements and associated notes are presented on a 

comparative basis. Unless specified otherwise, all dollar amounts are presented in dollars. 

B. Reporting Entity 

The Finance Board is an independent non-appropriated funded Agency in the Executive Branch. 

The Finance Board ensures that Federal Home Loan Banks, which are privately capitalized, 

government-sponsored enterprises, operate in a safe and sound manner, carry out the housing 

and community development finance mission, and remain adequately capitalized and able to 

raise funds in the capital markets. The Federal Home Loan Bank System raises its money 

through the Office of Finance that acts as the central debt issuance facility for all 12 Federal 

Home Loan Banks. 

The Federal Home Loan Bank System was created in 1932 to promote home ownership and a 

strong home-finance industry. It is a network of 12 district banks that provide lending, deposit, 

and other services to mortgage-lending institutions. The members of the Federal Home Loan 

Bank System originate and hold a significant portion of the nation's home mortgages. 

Membership includes the thrift institutions, commercial banks, credit unions, and a small number 

of insurance companies. 
12 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

Each Federal Home Loan Bank and the Office of Finance operates with its own staff and 

funding. Accordingly, the accompanying financial statements summarize only the financial 

activities of the Finance Board. 

The Finance Board is located in Washington, DC, where it operates with a staff of approximately 

130 employees under the direction of a five member Board of Directors, four of whom are 

appointed from the private sector by the President. The fifth is the Secretary of Housing and 

Urban Development or designee. Operation of the Finance Board is funded by the collection of 

assessments from each of the Federal Home Loan Banks. These assessments are used to fund 

the salaries and expenses of staff engaged in supervision and compliance activities, policy 

development, strategic planning, and administration. These funds are neither appropriated nor 

subject to apportionment. 

C. Basis of Accounting 

Transactions are recorded on both an accrual accounting basis, consistent with accounting 

principles generally accepted in the United States of America, and a budgetary basis. Under the 

accrual method, revenues are recognized when earned, and expenses are recognized when a 

liability is incurred, without regard to receipt or disbursement of cash. Budgetary accounting 

facilitates compliance with legal requirements on the use of federal funds. 

D. Revenues & Other Financing Sources 

Operating revenues of the Finance Board are obtained through assessments of the 12 Federal 

Home Loan Banks. The banks are collectively assessed based on amounts needed to fund the 

Finance Board's annual budget. The agency’s Board of Directors, prior to the start of a new 

fiscal year, approves the budget. Each Federal Home Loan Bank’s share is based upon the dollar 

value of its capital stock relative to the combined dollar value of all Federal Home Loan Banks’ 

capital stock. The Finance Board's expenses are met through assessments paid by the Federal 

Home Loan Banks, which totaled $31,224,539 and $29,474,862 for the fiscal years ended 

September 30, 2006 and 2005, respectively.

The Finance Board recognizes as an imputed financing source the amount of accrued pension 

and post-retirement benefit expenses for current employees paid on the Finance Board’s behalf 

by the Office of Personnel Management (OPM). 
13 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

E. Taxes 

The Finance Board, as a federal entity, is not subject to federal, state, or local income taxes, and, 

accordingly, no provision for income taxes has been recorded in the accompanying financial 

statements. 

F. Fund Balance with Treasury 

The U.S. Treasury processes cash receipts and disbursements. Funds held at the Treasury are 

available to pay agency liabilities. The Finance Board does not maintain cash in commercial 

bank accounts or foreign currency balances. 

Significant receipts are transmitted to this account monthly by the 12 Federal Home Loan Banks 

which are assessed amounts necessary to cover the Finance Board’s expected operating needs for 

the fiscal year. 

Disbursements are made as necessary to fund the biweekly payroll and administrative costs of 

the organization. Due to of the nature of the Finance Board’s program, disbursements do not 

vary significantly from month to month. 

Effective July 1, 2005, the Bureau of Public Debt Administrative Resource Center commenced 

processing operating expenses for the Finance Board. The Finance Board continues to utilize the 

services of the Department of Agriculture’s National Finance Center for payroll related 

activities. 

G. Accounts Receivable 

Accounts receivable consists of amounts owed to the Finance Board by other federal agencies 

and the public. Amounts due from federal agencies are considered fully collectible. Accounts 

receivable from the public include reimbursements from employees. An allowance for 

uncollectible accounts receivable from the public is established when either (1) based upon a 

review of outstanding accounts and the failure of all collection efforts, management determines 

that collection is unlikely to occur considering the debtor’s ability to pay, or (2) an account for 

which no allowance has been established is submitted to the Department of the Treasury for 

collection, which takes place when it becomes 180 days delinquent. As of September 30, 2006 

and 2005 the balance in accounts receivable from the public was $3,358 and $1,739, 

respectively. 
14 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. Property and Equipment, Net 

The fixed asset capitalization threshold for the asset acquisitions changed from $5,000 to 

$25,000, effective for fiscal year 2006. Effective fiscal year 2006, equipment acquisitions 

greater than or equal to $25,000 are capitalized and depreciated using the straight-line method 

over the estimated useful life of the asset. Additionally, for bulk purchases of similar items, 

which individually do not meet the test for capitalization, the acquisition is capitalized and 

depreciated if the depreciated basis of the bulk purchase is $100,000 or more. Applicable 

standard governmental guidelines regulate the disposal and convertibility of agency property, 

plant and equipment. 

 The useful life classifications for capitalized assets are as follows: 

 

Description Useful Life (years)

 

Furniture, Fixtures, and Equipment 6 

Electronic Data Processing Systems 3 

Data Handling Equipment (Excluding computers) 6 

Software and Computer Programs 3 

Real Property Improvements 30 

Leasehold Improvement’s useful life is equal to the remaining lease term or the estimated useful 

life of the improvement, whichever is shorter. 

I. Advances and Prepaid Charges 

Advance payments are generally prohibited by law. There are some exceptions, such as 

reimbursable agreements, subscriptions, and payments to contractors and employees. Payments 

made in advance of the receipt of goods and services are recorded as advances or prepaid charges 

at the time of prepayment and recognized as expenses when the related goods and services are 

received. As of September 30, 2006 and 2005 prepaid expenses were $29,030 and $46,770, 

respectively. 

J. Liabilities

Liabilities covered by budgetary or other resources are those liabilities for which funding is 

available to pay amounts due. 
15 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intragovernmental liabilities are claims against the Finance Board by other federal agencies. 

Additionally, the Government, acting in its sovereign capacity, can abrogate liabilities. 

K. Accounts Payable 

Accounts payable consists of amounts owed to other federal agencies and the public. 

L. Employee Leave and Benefits 

Accrued Leave: Finance Board employees are entitled to accrue annual leave and sick leave at a 

rate based on years of federal service. For most employees, annual leave may be accrued up to 

240 hours each year. Senior employees may accrue annual leave consistent with the rules for 

SES level employees. Any unused annual leave balance is paid to the employee upon leaving 

federal service, based on the employee's earnings per hour. There is no maximum limit on the 

amount of sick leave that may be accrued. Upon separation, any unused sick leave of CSRS plan 

employees is creditable as additional time in service for the purpose of calculating an employee's 

retirement annuity. For FERS plan employees, unused sick leave is held indefinitely and may be 

used if rehired. 

Health Benefits and Life Insurance: The Finance Board, through programs established for all 

agencies by the federal government, offers its employees health and life insurance coverage. The 

cost of each is shared by the Finance Board and its employees. The Finance Board’s fiscal year 

2006 contribution to health and life insurance coverage was $967,172. The fiscal year 2005 

contribution was $847,090. In addition, all employees have 1.45% of gross earnings withheld to 

pay for future Medicare coverage. 

M. Accrued Workers’ Compensation 

A liability is recorded for actual and estimated future payments to be made for workers’ 

compensation pursuant to the Federal Employees’ Compensation Act (FECA). The actual costs 

incurred are reflected as a liability because the Finance Board will reimburse the Department of 

Labor (DOL) two years after the actual payment of expenses. The liability consists of (1) the net 

present value of estimated future payments calculated by the DOL, and (2) the unreimbursed cost 

paid by DOL for compensation to recipients under the FECA. 

N. Retirement Plans 

 

Finance Board employees participate in either the Civil Service Retirement System (CSRS) or 

the Federal Employees’ Retirement System (FERS). 
16 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The employees who participate in CSRS are beneficiaries of Finance Board’s matching 

contribution, equal to 7% of pay, distributed to the employee’s annuity account in the Civil 

Service Retirement and Disability Fund. 

FERS went into effect on January 1, 1987. FERS and Social Security automatically cover most 

employees hired after December 31, 1983. Employees hired prior to January 1, 1984 elected to 

join either FERS and Social Security, or remain in CSRS. FERS offers a savings plan to which 

the Finance Board automatically contributes 1% of pay and matches any employee contribution 

up to an additional 4% of pay. For FERS participants, the Finance Board also contributes the 

employer’s matching share of Social Security. 

FERS employees and certain CSRS reinstatement employees are eligible to participate in the 

Social Security program after retirement. In these instances, the Finance Board remits the 

employer’s share of the required contribution. 

The Finance Board recognizes the imputed cost of pension and other retirement benefits during 

the employees’ active years of service. OPM actuaries determine pension cost factors by 

calculating the value of pension benefits expected to be paid in the future and communicate these 

factors to the Finance Board for current period expense reporting. OPM also provides 

information regarding the full cost of health and life insurance benefits. The Finance Board 

recognized the offsetting revenue as imputed financing sources to the extent these expenses will 

be paid by OPM. 

The Finance board does not report on its financial statements information pertaining to the 

retirement plans covering its employees. Reporting amounts such as plan assets, accumulated 

plan benefits, and related unfunded liabilities, if any, is the responsibility of the OPM. 

The Finance Board’s 401(k) is administered by T. Rowe Price. Eligible employees may 

contribute up to 10% of salary on a pre-tax basis while the Finance Board will match 

contributions up to 3% of the employee’s salary. Qualified employees may participate in both 

the Federal Thrift Savings Plan and/or the Finance Board’s 401(k) Savings Plan, up to the 

Internal Revenue Code limitations established for salary deferral and annual additions. 

O. Use of Estimates 

Management has made certain estimates and assumptions when reporting assets, liabilities, 

revenue, and expenses, and in the note disclosures. Actual results could differ from these 

estimates. 
17 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

P. Imputed Costs/Financing Sources 

Federal government entities often receive goods and services from other federal government 

entities without reimbursing the providing entity for all the related costs. In addition, federal 

government entities also incur costs that are paid in total or in part by other entities. An imputed 

financing source is recognized by the receiving entity for costs that are paid by other entities. 

The Finance Board recognized imputed costs and financing sources in fiscal years 2006 and 

2005 to the extent directed by OMB. 

Q. Contingencies 

Liabilities are deemed contingent when the existence or amount of the liability cannot be 

determined with certainty pending the outcome of future events. The Finance Board recognizes 

contingent liabilities, in the accompanying balance sheet and statement of net cost, when it is 

both probable and can be reasonably estimated. The Finance Board discloses contingent 

liabilities in the notes to the financial statements when the conditions for liability recognition are 

not met or when a loss from the outcome of future events is more than remote. 

Equal Employment Opportunity Complaints: 

At the Agency: As of the end of the period beginning on October 1, 2005 and ending on 

September 26, 2006, there were no cases pending before the Finance Board. Agency Case 

Number 2006-01 was filed on October 13, 2005, and remanded to the Finance Board for 

processing by a decision of the Office of Federal Operations of the Equal Employment 

Opportunity Commission (EEOC) dated June 5, 2006. On August 17, 2006, the Finance Board’s 

EEO Director dismissed Case Number 2006-01. The Complainant appealed the dismissal to the 

EEOC by a form dated August 26, 2006. On September, 25, 2006, the Finance Board filed its 

opposition to the Complainant’s appeal of the dismissal. This case has a potential loss ranging 

from $0 to $300,000. An unfavorable outcome is considered unlikely. 

 

At the Equal Employment Opportunity Commission (EEOC): As of the end of the beginning on 

October 1, 2005 and ending on September 26, 2006, there were two cases pending before the 

EEOC. In Agency Case Number 2005-01, the Finance Board filed a motion to dismiss the case, 

or in the alternative, for summary judgment, on January 11, 2006, which has not yet been 

decided. This case has a potential loss ranging from $0 to $300,000. An unfavorable outcome is 

considered unlikely. In Agency Case Number 2006-01, the Finance Board filed its opposition to 

the Complainant’s appeal of the dismissal of the case on September 25, 2006. This case has a 

potential loss ranging from $0 to $300,000. An unfavorable outcome is considered unlikely. 
18 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

At the United States District Court: As of the end of the nine-month period beginning on October 1, 2005 

and ending on September 30, 2006, there was one civil action pending in the U.S. District Court for the 

District of Columbia. On September 26, 2005, the court granted in part and denied in part the Finance 

Board’s motion to dismiss the case. The Finance Board is awaiting a scheduling order from the court and 

anticipates filing a motion for summary judgment with regard to the claims that have not already been 

dismissed. This case has a potential loss ranging from $0 to $300,000. An unfavorable outcome is 

considered unlikely. 

Other Cases at the United States District Court: On September 22, 2005, the U.S. District Court for the 

District of Kansas dismissed the Finance Board as a party in a case filed by a former employee of a 

Federal Home Loan Bank alleging wrongful discharge based on multiple theories of recovery. On March 

13, 2006, the district court judge denied the plaintiff’s motion to amend the September 22nd decision, and 

the 60-day period for appeal has elapsed. The Finance Board no longer is a party to the case. 

R. Reclassification 

Certain fiscal year 2005 balances have been reclassified, retitled, or combined with other financial 

statement line items for consistency with current year presentation. The 2005 financial statements where 

audited and an unqualified opinion was issued based on an industry type format. For comparative 

purposes, the 2005 financial information has been restated to be in compliance with OMB A-136. 

NOTE 2. FUND BALANCE WITH TREASURY

Fund balance with Treasury account balances as of September 30, 2006 and 2005 were: 

Fund Balances: 

2006 2005 

 

Total Other Fund Types $8,942,840 $7,991,460 

Status of Fund Balance with Treasury: 

 2006 2005 

Total Unobligated Non-Budgetary FBWT $ 8,942,840 $ 7,991,460 
19 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005

NOTE 3. GENERAL PROPERTY AND EQUIPMENT 

Property and equipment account balances as of September 30, 2006 and 2005 were as follows: 

Schedule of Property and Equipment as of September 30, 2006

 Acquisition Accumulated Net 

 Cost Depreciation Book Value

Description 

Software $ 3,325,582 $ 3,107,491 $ 218,091

Furniture & Equipment 2,734,985 1,816,400 918,585 

Internal-Use Software In Development 361,747 361,747

Total $ 6,422,314 $ 4,923,891 $ 1,498,423 

Schedule of Property and Equipment as of September 30, 2005

 Acquisition Accumulated Net 

 Cost Depreciation Book Value

Description 

Software $ 3,325,582 $ 2,509,278 $ 816,304 

Furniture & Equipment 4,007,539 2,829,574 1,177,965

Total $ 7,333,121 $ 5,338,852 $ 1,994,269 

NOTE 4. LEASES 

Capital Leases

The Finance Board leases a copier under lease-to-own agreements. The lease terms range from 54 to 60 

months. The minimum future lease payments and the present value of the net minimum lease payments 

are as follows: 

Fiscal Year Amount 

 

2007 $ 5,951 

2008 5,493 

2009 458 

Total Future Minimum Lease Payments 11,902 

Less: Imputed Interest 1,016 

Present Value of the Net Minimum Lease Payments 10,886 

Less: Current Portion 5,206 

Lease Obligation – Long Term $ 5,680 
20 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005

NOTE 4. LEASES (CONTINUED) 

Operating Leases

The Finance Board leases office space at 1625 Eye Street, Washington D.C., under a non-cancelable 

long-term lease that expires on June 30, 2015, and requires monthly payments of $270,073. Total rental 

payments for the fiscal years ended September 30, 2006 and 2005 were $1,601,508 and $4,168,960, 

respectively. Fiscal year 2005 disbursements consisted of FHFB’s previous office location at F Street 

regular monthly rents of $1,447,760, F Street lease buyout of $1,919,867, and Eye Street monthly rent 

payments of $801,333. The rental payments for the fiscal year ending September 30, 2006 were reduced 

by a tenant improvement allowance in the amount of $1,613,355. The minimum future payments at 1625 

Eye Street, as required by the lease, are as follows: 

Fiscal Year

 

Amount

2007 $ 3,257,103

2008 3,322,310

2009 3,388,799

2010 3,475,652

2011 3,602,273

Thereafter 14,155,278

Total $ 35,188,922

NOTE 5. LIABILITIES

The accrued liabilities for the Finance Board are comprised of program expense accruals, payroll 

accruals, and funded annual leave earned by employees. Program expense accruals represent expenses 

that were incurred prior to month-end but were not paid. Similarly, payroll accruals represent payroll 

expenses that were incurred prior to month-end but were not paid. 

 2006 2005 

Intragovernmental 

 Accounts Payable $ 65,298 $ 7,505

 Payroll Taxes Payable 128,794 123,260

Total Intragovernmental 194,092 130,765

Accounts Payable 778,832 997,879

Accrued Payroll and Benefits 863,074 728,001 

Capital Lease Obligations 10,886 15,306

Funded Annual Leave 1,624,651 1,534,112 

Total Liabilities $ 3,471,535 $ 3,406,063 

All liabilities are current liabilities. 
21 

FEDERAL HOUSING FINANCE BOARD 

NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2006 and 2005

NOTE 6. IMPUTED FINANCING SOURCES 

The Finance Board recognizes as imputed financing the amount of accrued pension and post-retirement 

benefit expenses for current employees. The assets and liabilities associated with such benefits are the 

responsibility of the administering agency, OPM. 

For the fiscal years ended September 30, 2006 and 2005, respectively, imputed financing was $991,876 

and $891,558. 

NOTE 7. BUDGETARY RESOURCE COMPARISONS TO THE BUDGET OF THE UNITED 

STATES GOVERNMENT 

The 2008 Budget of the United States Government, with the Actual Column completed for fiscal year 

2006, has not yet been published as of the date of these financial statements. The Budget is expected to 

be published and delivered to Congress in early February 2007. The 2007 Budget of the United States 

Government, with the Actual Column completed for 2005, has been reconciled. 

NOTE 8. OPERATING/PROGRAM COSTS 

Costs by major budgetary object classification as of September 30, 2006 and 2005 are as follows: 

Budgetary Object Classifications 2006 2005 

Personnel Compensation $16,197,400 $14,814,525

Personnel Benefits 5,844,193 5,036,183

Benefits to Former Employees 49,565

Travel 1,586,637 1,075,393

Transportation 16,521 20,283

Rents, Communication & Utilities 2,415,394 5,316,441

Printing and Reproduction 64,415 58,256

Other Services 4,897,619 4,803,871

Supplies and Materials 313,086 247,782

Land & Structures 95,309

Equipment 865,483 1,203,070

Total $32,200,748 $32,720,678