UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20152016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-51401
Federal Home Loan Bank of Chicago
(Exact name of registrant as specified in its charter)
|
| | | | |
| Federally chartered corporation | | 36-6001019 | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
| 200 East Randolph Drive Chicago, IL | | 60601 | |
| (Address of principal executive offices) | | (Zip Code) | |
Registrant's telephone number, including area code: (312) 565-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
|
| | | | | |
| Large accelerated filer o | | Accelerated filer o |
| Non-accelerated filer x (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 31, 2015,September 30, 2016, including mandatorily redeemable capital stock, registrant had 18,956,34819,376,924 total outstanding shares of Class B Capital Stock.
Federal Home Loan Bank of Chicago
TABLE OF CONTENTS
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Item 4. | | |
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Federal Home Loan Bank of Chicago
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Statements of Condition (unaudited)
(Dollars in millions, except capital stock par value)
| | | September 30, 2015 | | December 31, 2014 | September 30, 2016 | | December 31, 2015 |
Assets | | | | | | |
Cash and due from banks | $ | 606 |
| | $ | 342 |
| $ | 31 |
| | $ | 499 |
|
Interest bearing deposits | 560 |
| | 560 |
| 650 |
| | 650 |
|
Federal Funds sold | 720 |
| | 1,525 |
| 3,807 |
| | 1,702 |
|
Securities purchased under agreements to resell | 3,400 |
| | 3,400 |
| 1,000 |
| | 1,375 |
|
Investment securities - | | | | | | |
Trading, $58 and $71 pledged | 155 |
| | 167 |
| |
Trading, $90 and $62 pledged | | 1,047 |
| | 1,160 |
|
Available-for-sale | 18,308 |
| | 19,975 |
| 15,561 |
| | 17,470 |
|
Held-to-maturity, $6,375 and $7,824 fair value | 5,740 |
| | 7,118 |
| |
Total investment securities | 24,203 |
| | 27,260 |
| |
Advances, $95 and $83 carried at fair value | 35,044 |
| | 32,485 |
| |
MPF Loans held in portfolio, net of allowance for credit losses of $(3) and $(15) | 5,079 |
| | 6,057 |
| |
Held-to-maturity, $5,308 and $6,513 fair value | | 4,788 |
| | 5,967 |
|
Investment securities | | 21,396 |
| | 24,597 |
|
Advances, $703 and $511 carried at fair value | | 43,117 |
| | 36,778 |
|
MPF Loans held in portfolio, net of allowance for credit losses of $(3) and $(3) | | 4,720 |
| | 4,828 |
|
Derivative assets | 2 |
| | 29 |
| 21 |
| | 2 |
|
Other assets | 210 |
| | 183 |
| |
Total assets | $ | 69,824 |
| | $ | 71,841 |
| |
Other assets, $58 and $54 carried at fair value | | 241 |
| | 240 |
|
Assets | | $ | 74,983 |
| | $ | 70,671 |
|
| | | | | | |
Liabilities | | | | | | |
Deposits - | | | | | | |
Noninterest bearing | $ | 41 |
| | $ | 49 |
| $ | 59 |
| | $ | 41 |
|
Interest bearing, $15 and $13 from other FHLBs | 469 |
| | 617 |
| |
Total Deposits | 510 |
| | 666 |
| |
Interest bearing, $15 and $12 from other FHLBs | | 453 |
| | 497 |
|
Deposits | | 512 |
| | 538 |
|
Consolidated obligations, net - | | | | | | |
Discount notes, $6,472 and $1,799 carried at fair value | 37,290 |
| | 31,054 |
| |
Bonds, $980 and $2,785 carried at fair value | 26,062 |
| | 34,251 |
| |
Total consolidated obligations, net | 63,352 |
| | 65,305 |
| |
Discount notes, $12,537 and $9,006 carried at fair value | | 39,144 |
| | 41,564 |
|
Bonds, $7,058 and $952 carried at fair value | | 30,139 |
| | 22,582 |
|
Consolidated obligations, net | | 69,283 |
| | 64,146 |
|
Derivative liabilities | 44 |
| | 55 |
| 48 |
| | 55 |
|
Affordable Housing Program assessment payable | 92 |
| | 90 |
| 90 |
| | 89 |
|
Mandatorily redeemable capital stock | | 302 |
| | 8 |
|
Other liabilities | 309 |
| | 256 |
| 233 |
| | 239 |
|
Subordinated notes | 944 |
| | 944 |
| — |
| | 944 |
|
Total liabilities | 65,251 |
| | 67,316 |
| |
Liabilities | | 70,468 |
| | 66,019 |
|
Commitments and contingencies - see notes to the financial statements |
|
| |
|
|
|
| |
|
|
Capital | | | | | | |
Class B1 activity stock - putable $100 par value - 10 million and 8 million shares issued and outstanding | 966 |
| | 827 |
| |
Class B2 membership stock - putable $100 par value - 9 million and 11 million shares issued and outstanding | 926 |
| | 1,075 |
| |
Total capital stock | 1,892 |
| | 1,902 |
| |
Class B1 activity stock - putable $100 par value - 11 million and 13 million shares issued and outstanding | | 1,063 |
| | 1,313 |
|
Class B2 membership stock - putable $100 par value - 6 million and 6 million shares issued and outstanding | | 573 |
| | 637 |
|
Capital stock | | 1,636 |
| | 1,950 |
|
Retained earnings - unrestricted | 2,336 |
| | 2,152 |
| 2,577 |
| | 2,407 |
|
Retained earnings - restricted | 304 |
| | 254 |
| 374 |
| | 323 |
|
Total retained earnings | 2,640 |
| | 2,406 |
| |
Retained earnings | | 2,951 |
| | 2,730 |
|
Accumulated other comprehensive income (loss) (AOCI) | 41 |
| | 217 |
| (72 | ) | | (28 | ) |
Total capital | 4,573 |
| | 4,525 |
| |
Total liabilities and capital | $ | 69,824 |
| | $ | 71,841 |
| |
Capital | | 4,515 |
| | 4,652 |
|
Liabilities and capital | | $ | 74,983 |
| | $ | 70,671 |
|
The accompanying notes are an integral part of these financial statements (unaudited).
Federal Home Loan Bank of Chicago
Statements of Income (unaudited)
(Dollars in millions)
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Interest income | | $ | 304 |
| | $ | 333 |
| | $ | 934 |
| | $ | 1,033 |
| | $ | 309 |
| | $ | 304 |
| | $ | 944 |
| | $ | 934 |
|
Interest expense | | 182 |
| | 195 |
| | 561 |
| | 649 |
| | 196 |
| | 182 |
| | 600 |
| | 561 |
|
Net interest income before provision for (reversal of) credit losses | | 122 |
| | 138 |
| | 373 |
| | 384 |
| |
Net interest income | | | 113 |
| | 122 |
| | 344 |
| | 373 |
|
Provision for (reversal of) credit losses | | 1 |
| | (2 | ) | | 5 |
| | (8 | ) | | — |
| | 1 |
| | — |
| | 5 |
|
Net interest income | | 121 |
| | 140 |
| | 368 |
| | 392 |
| |
Net interest income after provision for (reversal of) credit losses | | | 113 |
| | 121 |
| | 344 |
| | 368 |
|
| | | | | | | | | | | | | | | | |
Noninterest gain (loss) on - | | | | | | | | | | | | | | | | |
Trading securities | | (1 | ) | | (6 | ) | | (2 | ) | | (18 | ) | | — |
| | (1 | ) | | — |
| | (2 | ) |
Derivatives and hedging activities | | (15 | ) | | 1 |
| | (17 | ) | | (11 | ) | | 7 |
| | (15 | ) | | (7 | ) | | (17 | ) |
Instruments held under fair value option | | 1 |
| | 10 |
| | 4 |
| | 11 |
| | — |
| | 1 |
| | 6 |
| | 4 |
|
Litigation settlement awards | | 2 |
| | 1 |
| | 13 |
| | 18 |
| | — |
| | 2 |
| | 38 |
| | 13 |
|
Other, net | | 7 |
| | 5 |
| | 15 |
| | 14 |
| |
Other gain (loss), net | | �� | 7 |
| | 7 |
| | 24 |
| | 15 |
|
Noninterest gain (loss) | | (6 | ) | | 11 |
| | 13 |
| | 14 |
| | 14 |
| | (6 | ) | | 61 |
| | 13 |
|
| | | | | | | | | | | | | | | | |
Noninterest expense - | | | | | | | | | | | | | | | | |
Compensation and benefits | | 20 |
| | 17 |
| | 57 |
| | 49 |
| | 26 |
| | 20 |
| | 71 |
| | 57 |
|
Other operating expenses | | 13 |
| | 12 |
| | 38 |
| | 34 |
| |
Operating expenses | | | 15 |
| | 13 |
| | 44 |
| | 38 |
|
Other | | 2 |
| | (1 | ) | | 6 |
| | 6 |
| | 1 |
| | 2 |
| | 13 |
| | 6 |
|
Noninterest expense | | 35 |
| | 28 |
| | 101 |
| | 89 |
| | 42 |
| | 35 |
| | 128 |
| | 101 |
|
| | | | | | | | | | | | | | | | |
Income before assessments | | 80 |
| | 123 |
| | 280 |
| | 317 |
| | 85 |
| | 80 |
| | 277 |
| | 280 |
|
| | | | | | | | | | | | | | | | |
Affordable Housing Program assessment | | 8 |
| | 13 |
| | 28 |
| | 32 |
| | 9 |
| | 8 |
| | 28 |
| | 28 |
|
| | | | | | | | | | | | | | | | |
Net income | | $ | 72 |
| | $ | 110 |
| | $ | 252 |
| | $ | 285 |
| | $ | 76 |
| | $ | 72 |
| | $ | 249 |
| | $ | 252 |
|
The accompanying notes are an integral part of these financial statements (unaudited).
Federal Home Loan Bank of Chicago
Statements of Comprehensive Income (unaudited)
(Dollars in millions)
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Net income | | $ | 72 |
| | $ | 110 |
| | $ | 252 |
| | $ | 285 |
| | $ | 76 |
| | $ | 72 |
| | $ | 249 |
| | $ | 252 |
|
| |
| | | | | | | |
| | | | | | |
Other comprehensive income (loss) - | |
| | | | | | | |
| | | | | | |
Net unrealized gain (loss) on available-for-sale securities | | (79 | ) | | (99 | ) | | (214 | ) | | 37 |
| |
Non-credit OTTI on held-to-maturity securities | | 11 |
| | 15 |
| | 37 |
| | 43 |
| |
Net unrealized gain (loss) on cash flow hedges | | (31 | ) | | 85 |
| | 8 |
| | 91 |
| |
Net unrealized gain (loss) available-for-sale securities | | | (13 | ) | | (79 | ) | | (113 | ) | | (214 | ) |
Non-credit OTTI held-to-maturity securities | | | 9 |
| | 11 |
| | 30 |
| | 37 |
|
Net unrealized gain (loss) cash flow hedges | | | 83 |
| | (31 | ) | | 38 |
| | 8 |
|
Post-retirement plans | | 1 |
| | (2 | ) | | (7 | ) | | 1 |
| | — |
| | 1 |
| | 1 |
| | (7 | ) |
Other comprehensive income (loss) | | (98 | ) | | (1 | ) | | (176 | ) | | 172 |
| | 79 |
| | (98 | ) | | (44 | ) | | (176 | ) |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income | | $ | (26 | ) | | $ | 109 |
| | $ | 76 |
| | $ | 457 |
| | $ | 155 |
| | $ | (26 | ) | | $ | 205 |
| | $ | 76 |
|
The accompanying notes are an integral part of these financial statements (unaudited).
Federal Home Loan Bank of Chicago
Statements of Capital (unaudited)
(Dollars and shares in millions)
| | | Capital Stock - Putable - B1 Activity | | Capital Stock - Putable - B2 Membership | | Total Capital Stock | | Retained Earnings | | | | | Capital Stock - Putable - B1 Activity | | Capital Stock - Putable - B2 Membership | | Capital Stock | | Retained Earnings | | | | Total Capital |
| | Shares | | Value | | Shares | | Value | | Shares | | Value | | Unrestricted | | Restricted | | Total | | AOCI | |
December 31, 2015 | | 13 |
| | $ | 1,313 |
| | 6 |
| | $ | 637 |
| | 19 |
| | $ | 1,950 |
| | $ | 2,407 |
| | $ | 323 |
| | $ | 2,730 |
| | $ | (28 | ) | | $ | 4,652 |
|
Comprehensive income | | | | | | | | | | | | | | 198 |
| | 51 |
| | 249 |
| | (44 | ) | | 205 |
|
Proceeds from issuance of capital stock | | 10 |
| | 952 |
| | — |
| | 12 |
| | 10 |
| | 964 |
| | | | | | | | | | 964 |
|
Repurchases of capital stock | | (6 | ) | | (586 | ) | | (3 | ) | | (392 | ) | | (9 | ) | | (978 | ) | | | | | | | | | | (978 | ) |
Capital stock reclassified to mandatorily redeemable capital stock (other liabilities) | | (3 | ) | | (295 | ) | | — |
| | (5 | ) | | (3 | ) | | (300 | ) | | | | | | | | | | (300 | ) |
Transfers between classes of capital stock | | (3 | ) | | (321 | ) | | 3 |
| | 321 |
| | | | | | | | | | | | | | |
Cash dividends - class B1 | | | | | | | | | | | | | | (25 | ) | |
|
| | (25 | ) | | | | (25 | ) |
Class B1 annualized rate | | | | | | | | | | | | | | | | | | | | | | 2.73 | % |
Cash dividends - class B2 | | | | | | | | | | | | | | (3 | ) | | | | (3 | ) | | | | (3 | ) |
Class B2 annualized rate | | | | | | | | | | | | | | | | | | | | | | 0.60 | % |
Total change in period | | (2 | ) | | (250 | ) | | — |
| | (64 | ) | | (2 | ) | | (314 | ) | | 170 |
| | 51 |
| | 221 |
| | (44 | ) | | (137 | ) |
September 30, 2016 | | 11 |
| | $ | 1,063 |
| | 6 |
| | $ | 573 |
| | 17 |
| | $ | 1,636 |
| | $ | 2,577 |
| | $ | 374 |
| | $ | 2,951 |
| | $ | (72 | ) | | $ | 4,515 |
|
| Shares | | Value | | Shares | | Value | | Shares | | Value | | Unrestricted | | Restricted | | Total | | AOCI | | Total | | | | | | | | | | | | | | | | | | | | | |
December 31, 2014 | 8 |
| | $ | 827 |
| | 11 |
| | $ | 1,075 |
| | 19 |
| | $ | 1,902 |
| | $ | 2,152 |
| | $ | 254 |
| | $ | 2,406 |
| | $ | 217 |
| | $ | 4,525 |
| 8 |
| | $ | 827 |
| | 11 |
| | $ | 1,075 |
| | 19 |
| | $ | 1,902 |
| | $ | 2,152 |
| | $ | 254 |
| | $ | 2,406 |
| | $ | 217 |
| | $ | 4,525 |
|
Comprehensive income | | | | | | | | | | | | | 202 |
| | 50 |
| | 252 |
| | (176 | ) | | 76 |
| | | | | | | | | | | | | 202 |
| | 50 |
| | 252 |
| | (176 | ) | | 76 |
|
Proceeds from issuance of capital stock | 3 |
| | 228 |
| | — |
| | 15 |
| | 3 |
| | 243 |
| | | | | | | | | | 243 |
| 3 |
| | 228 |
| | — |
| | 15 |
| | 3 |
| | 243 |
| | | | | | | | | | 243 |
|
Repurchases of capital stock | — |
| | (29 | ) | | (3 | ) | | (223 | ) | | (3 | ) | | (252 | ) | | | | | | | | | | (252 | ) | — |
| | (29 | ) | | (3 | ) | | (223 | ) | | (3 | ) | | (252 | ) | | | | | | | | | | (252 | ) |
Capital stock reclassified to mandatorily redeemable capital stock | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | | | | | | | | | (1 | ) | |
Capital stock reclassified to mandatorily redeemable capital stock (other liabilities) | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | | | | | | | | | (1 | ) |
Transfers between classes of capital stock | (1 | ) | | (60 | ) | | 1 |
| | 60 |
| | | | | | | | | | | | | | | (1 | ) | | (60 | ) | | 1 |
| | 60 |
| | | | | | | | | | | | | |
|
|
Cash dividends - class B1(2.25% annualized rate) | | | | | | | | | | | | | (14 | ) | |
|
| | (14 | ) | | | | (14 | ) | |
Cash dividends - class B2(0.50% annualized rate) | | | | | | | | | | | | | (4 | ) | | | | (4 | ) | | | | (4 | ) | |
Cash dividends - class B1 | | | | | | | | | | | | | | (14 | ) | | | | (14 | ) | | | | (14 | ) |
Class B1 annualized rate | | | | | | | | | | | | | | | | | | | | | | 2.25 | % |
Cash dividends - class B2 | | | | | | | | | | | | | | (4 | ) | | | | (4 | ) | | | | (4 | ) |
Class B2 annualized rate | | | | | | | | | | | | | | | | | | | | | | 0.50 | % |
Total change in period | | 2 |
| | 139 |
| | (2 | ) | | (149 | ) | | — |
| | (10 | ) | | 184 |
| | 50 |
| | 234 |
| | (176 | ) | | 48 |
|
September 30, 2015 | 10 |
| | $ | 966 |
| | 9 |
| | $ | 926 |
| | 19 |
| | $ | 1,892 |
| | $ | 2,336 |
| | $ | 304 |
| | $ | 2,640 |
| | $ | 41 |
| | $ | 4,573 |
| 10 |
|
| $ | 966 |
|
| 9 |
|
| $ | 926 |
|
| 19 |
|
| $ | 1,892 |
|
| $ | 2,336 |
|
| $ | 304 |
|
| $ | 2,640 |
|
| $ | 41 |
|
| $ | 4,573 |
|
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | 7 |
| | $ | 629 |
| | 10 |
| | $ | 1,041 |
| | 17 |
| | $ | 1,670 |
| | $ | 1,853 |
| | $ | 175 |
| | $ | 2,028 |
| | $ | 67 |
| | $ | 3,765 |
| |
Comprehensive income | | | | | | | | | | | | | 228 |
| | 57 |
| | 285 |
| | 172 |
| | 457 |
| |
Proceeds from issuance of capital stock | 2 |
| | 234 |
| | 1 |
| | 43 |
| | 3 |
| | 277 |
| | | | | | | | | | 277 |
| |
Repurchases of capital stock | (1 | ) | | (45 | ) | | (1 | ) | | (101 | ) | | (2 | ) | | (146 | ) | | | | | | | | | | (146 | ) | |
Transfers between classes of capital stock | (1 | ) | | (115 | ) | | 1 |
| | 115 |
| | | | | | | | | | | | | |
|
| |
Cash dividends - class B1(1.43% annualized rate) | | | | | | | | | | | | | (5 | ) | | | | (5 | ) | | | | (5 | ) | |
Cash dividends - class B2(0.43% annualized rate) | | | | | | | | | | | | | (4 | ) | | | | (4 | ) | | | | (4 | ) | |
September 30, 2014 | 7 |
|
| $ | 703 |
|
| 11 |
|
| $ | 1,098 |
|
| 18 |
|
| $ | 1,801 |
|
| $ | 2,072 |
|
| $ | 232 |
|
| $ | 2,304 |
|
| $ | 239 |
|
| $ | 4,344 |
| |
The accompanying notes are an integral part of these financial statements (unaudited).
Federal Home Loan Bank of Chicago
Condensed Statements of Cash Flows (unaudited)
(Dollars in millions)
| | | Nine months ended September 30, | | 2015 | | 2014 | | Nine months ended September 30, | | 2016 | | 2015 | |
Operating | Net cash provided by (used in) operating activities | | $ | 375 |
| | $ | 592 |
| | Net cash provided by (used in) operating activities | | $ | 184 |
| | $ | 375 |
| |
Investing | Net change interest bearing deposits | | — |
| | (560 | ) | | Net change Federal Funds sold | | (2,105 | ) | | 805 |
| |
| Net change Federal Funds sold | | 805 |
| | (1,283 | ) | | |
| Net change securities purchased under agreements to resell | | — |
| | 4,550 |
| | |
| Advances - | | | | | | Net change securities purchased under agreements to resell | | 375 |
| | — |
| |
| Principal collected | | 251,066 |
| | 188,332 |
| | Trading securities - | | | | | |
| Issued | | (253,574 | ) | | (191,556 | ) | | Sales | | 2,158 |
| | — |
| |
| MPF Loans held in portfolio - | | | | | | Proceeds from maturities and paydowns | | 108 |
| | 109 |
| |
| Principal collected | | 1,085 |
| | 1,353 |
| | Purchases | | (2,156 | ) | | (101 | ) | |
| Purchases | | (117 | ) | | (64 | ) | | Available-for-sale securities - | | | | | |
| Trading securities - | | | | | | Proceeds from maturities and paydowns | | 1,777 |
| | 1,452 |
| |
| Sales | | — |
| | 2,002 |
| | Purchases | | (2 | ) | | (12 | ) | |
| Proceeds from maturities and paydowns | | 109 |
| | 867 |
| | Held-to-maturity securities - | | | | | |
| Purchases | | (101 | ) | | (1,812 | ) | | Short-term held-to-maturity securities, net | | 543 |
| a | 675 |
| a |
| Held-to-maturity securities - | | | | | | Proceeds from maturities and paydowns | | 740 |
| | 793 |
| |
| Short-term held-to-maturity securities, net | | 675 |
| a | 503 |
| a | Purchases | | (30 | ) | | (16 | ) | |
| Proceeds from maturities and paydowns | | 793 |
| | 833 |
| | Advances - | | | | | |
| Purchases | | (16 | ) | | (22 | ) | | Principal collected | | 548,381 |
| | 251,066 |
| |
| Available-for-sale securities - | | | | | | Issued | | (554,570 | ) | | (253,574 | ) | |
| Proceeds from maturities and paydowns | | 1,452 |
| | 1,157 |
| | MPF Loans held in portfolio - | | | | | |
| Purchases | | (12 | ) | | — |
| | Principal collected | | 867 |
| | 1,085 |
| |
| Proceeds from sale of foreclosed assets | | 47 |
| | 76 |
| | Purchases | | (759 | ) | | (117 | ) | |
| Capital expenditures for software and equipment | | (8 | ) | | (8 | ) | | Other investing activities | | 27 |
| | 39 |
| |
| Net cash provided by (used in) investing activities | | 2,204 |
| | 4,368 |
| | Net cash provided by (used in) investing activities | | (4,646 | ) | | 2,204 |
| |
Financing | Net change deposits | | (156 | ) | | (14 | ) | | Net change deposits | | (26 | ) | | (156 | ) | |
| Net proceeds from issuance of consolidated obligations - | | | | | | Discount notes - | | | | | |
| Discount notes | | 210,023 |
| | 924,591 |
| | Net proceeds from issuance | | 438,057 |
| | 210,023 |
| |
| Bonds | | 8,503 |
| | 16,891 |
| | Payments for maturing and retiring | | (440,500 | ) | | (203,798 | ) | |
| Payments for maturing and retiring consolidated obligations - | | | | | | Consolidated obligation bonds - | | | | | |
| Discount notes | | (203,798 | ) | | (925,174 | ) | | Net proceeds from issuance | | 24,439 |
| | 8,503 |
| |
| Bonds | | (16,777 | ) | | (13,888 | ) | | Payments for maturing and retiring | | (16,943 | ) | | (16,777 | ) | |
| Net proceeds (payments) on derivative contracts with financing element | | (47 | ) | | (46 | ) | | Net proceeds (payments) on derivative contracts with financing element | | (38 | ) | | (47 | ) | |
| Net proceeds (payments) on bond transfers to other FHLBs | | (35 | ) | | — |
| | Net proceeds (payments) on bond transfers with other FHLBs | | — |
| | (35 | ) | |
| Proceeds from issuance of capital stock | | 243 |
| | 277 |
| | Payments for retiring of subordinated debt | | (944 | ) | | — |
| |
| Repurchase or redemption of capital stock | | (252 | ) | | (146 | ) | | Capital stock - | | | | | |
| Redemptions of mandatorily redeemable capital stock | | (1 | ) | | — |
| | Proceeds from issuance of capital stock | | 964 |
| | 243 |
| |
| Cash dividends paid | | (18 | ) | | (9 | ) | | Repurchase of capital stock | | (978 | ) | | (252 | ) | |
| Net cash provided by (used in) financing activities | | (2,315 | ) | | 2,482 |
| | Cash dividends paid | | (28 | ) | | (18 | ) | |
| Net increase (decrease) in cash and due from banks | | 264 |
| | 7,442 |
| | Other financing activities | | (9 | ) | | (1 | ) | |
| Cash and due from banks at beginning of period | | 342 |
| | 971 |
| | Net cash provided by (used in) financing activities | | 3,994 |
| | (2,315 | ) | |
| Cash and due from banks at end of period | | $ | 606 |
| | $ | 8,413 |
| | Net increase (decrease) in cash and due from banks | | (468 | ) | | 264 |
| |
| | Cash and due from banks at beginning of period | | 499 |
| | 342 |
| |
| | Cash and due from banks at end of period | | $ | 31 |
| | $ | 606 |
| |
Noncash | | Capital stock reclassified to mandatorily redeemable capital stock (other liabilities) | | $ | 300 |
| | $ | 1 |
| |
| |
a | Short-term held-to-maturity securities, net, consists of investment securities with a maturity of less than 90 days when purchased. |
The accompanying notes are an integral part of these financial statements (unaudited).
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 1 – Background and Basis of Presentation
The Federal Home Loan Bank of Chicago a is a federally chartered corporation and one of 11 Federal Home Loan Banks (the FHLBs) that, with the Office of Finance, comprise the Federal Home Loan Bank System (the System). The FHLBs are government-sponsored enterprises (GSE) of the United States of America and were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLB Act), in order to improve the availability of funds to support home ownership. The FHLBsWe are supervised and regulated by the Federal Housing Finance Agency (FHFA), an independent federal agency. Weagency in the executive branch of the United States (U.S.) government.
Each FHLB is a member-owned cooperative with members from a specifically defined geographic district. Our defined geographic district is Illinois and Wisconsin. All federally-insured depository institutions, insurance companies engaged in residential housing finance, credit unions and community development financial institutions located in our district are eligible to apply for membership with us. All our members are required to purchase our capital stock as a condition of membership. Our capital stock is not publicly traded, and is issued, repurchased or redeemed at par value, $100 per share, subject to certain statutory and regulatory limits. As a cooperative, we do business with our members, and former members (under limited circumstances). Specifically, we provide credit to members principally in the form of secured loans called advances. We also provide liquidity for home mortgage loans to members approved as Participating Financial Institutions (PFIs) through the Mortgage Partnership Finance® (MPF®) Program b.Program.
Our accounting and financial reporting policies conform to generally accepted accounting principles in the United States of America (GAAP). Amounts in prior periods may be reclassified to conform to the current presentation and if material are disclosed in the following notes.
In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements and the following footnotes should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 2014,2015, included in our Annual Report on Form 10-K (2014(2015 Form 10-K) starting on page F-1, as filed with the SEC.Securities and Exchange Commission (SEC).
Unless otherwise specified, references to we, us, our, and the Bank are to the Federal Home Loan Bank of Chicago.
“Mortgage Partnership Finance”, “MPF”, “MPF Xtra”, and "Community First" are registered trademarks of the Federal Home Loan Bank of Chicago.
Refer to the Glossary of Terms starting on page 63 for the definitions of certain terms used herein.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant of these assumptions and estimates applies to fair value measurements and allowance for credit losses. Actual results could differ from these assumptions and estimates.
Consolidation of Variable Interest Entities
We dowould consolidate a variable interest entity if we determine that we are its primary beneficiary, which occurs when both conditions shown below are met.
We have the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance.
We have the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.
We did not consolidate any of our investments in variable interest entities since we are not the primary beneficiary. We classify variable interest entities as investment securities in our statements of condition. Such investment securities include, but are not limited to, senior interests in private labelprivate-label mortgage backed securities (MBS) and Federal Family Education Loan Program asset backed securities (FFELP ABS). Our maximum loss exposure for these investment securities is limited to their carrying amounts. We have no liabilities related to these investments in variable interest entities. We have not provided financial or other support (explicitly or implicitly) to these investment securities that we were not previously contractually required to provide, nor do we intend to provide such support in the future.
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Gross versus Net Presentation of Financial Instruments
We present our derivative assets and liabilities on a net basis in our statements of condition. GAAP requires disclosurecondition on the basis that our right to net amounts due to our clearing agents and/or our counterparties is enforceable at law upon early termination. We include accrued interest receivable/payable and cash collateral, including initial and variation margin, in the carrying amount of both gross informationa derivative. Derivatives are netted by contract (e.g., master netting agreement), to discharge all or a portion of the amounts that would be owed to our counterparty by applying them against the amounts that our counterparty owes to us. Additionally, we clear certain derivatives transactions with clearinghouses classified as a Derivatives Clearing Organization (DCO), through Futures Commission Merchants (FCM). If these netted amounts are positive, they are classified as a derivative asset and if negative, they are classified as a derivative liability.
The net information relatedexposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to derivatives,be returned. For derivative instruments that meet the netting requirements, any excess cash collateral received or pledged is recognized as a derivative liability or asset.
Refer to Note 9 - Derivatives and Hedging Activities for further details.
Our policy is to report securities purchased under agreements to resell and securities sold under agreements to repurchase, agreements and reverse repurchase agreements,if any, and securities borrowing or lending transactions, regardless of whether we offset these transactions in our statements of condition. For the periods presented to date, these rights of offset only apply to our derivatives.if any, on a gross basis.
| |
a
| Unless otherwise specified, references to we, us, our, and the Bank are to the Federal Home Loan Bank of Chicago. |
| |
b
| “Mortgage Partnership Finance”, “MPF”, “MPF Xtra”, and "Community First" are registered trademarks of the Federal Home Loan Bank of Chicago. |
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)
Note 2 – Summary of Significant Accounting Policies
Our Summary of Significant Accounting Policies through December 31, 2014,2015, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our 20142015 Form 10-K starting on page F-10.10-K. We adopted the following policies in 2015:2016:
Asset Classification and Charge-off ProvisionsSimplifying the Presentation of Debt Issuance Cost (i.e., Concession Fees)
OnIn April 9, 2012,of 2015, the FHFAFASB issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans,new guidance requiring any concession fee to be presented as a direct deduction from the debt it relates to rather than separately presented as a deferred cost in Other Real Estate Owned, andAssets. We retrospectively adopted the new guidance January 1, 2016 by reclassifying deferred concession fees from Other Assets to its related debt, which at the time of adoption included our Consolidated obligation discount notes, Consolidated obligation bonds and Listing Assets for Special Mention (AB 2012-02). The guidance in AB 2012-02 is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. AB 2012-02 establishes a standard and uniform methodology for classifying assets, prescribes the timing of asset charge-offs (excluding investment securities), and provides measurement guidance with respect to determining our allowance for credit losses, and fair value measurement guidance for conventional MPF Loans that are classified as Substandard, Doubtful, or Loss, and Real Estate Owned (REO) related to conventional MPF Loans. Subsequent to the issuance of AB 2012-02, the FHFA issued interpretative guidance clarifying that implementation of the asset classification framework may occur in two phases. We implemented the asset classification provisions effective January 1, 2014. We prospectively adopted the remaining provisions of AB 2012-02 on January 1, 2015. The effect of implementing the remaining provisions was as follows:
The AB 2012-02 allowance for credit losses measurement guidanceSubordinated notes. This reclassification did not have a material effect on our financial condition, results of operations, cash flows, or percentage net interest yield on our consolidated obligations at the time of adoption.
Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
In March of 2016, the FASB issued new guidance clarifying that a change in counterparty (novation) to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or be considered a change in the critical term of the hedging relationship. We early adopted this new guidance on a prospective basis effective January 1, 2016. The new guidance had no effect on our financial condition, results of operations, or cash flows at the time of adoption.
We recorded a $10 million charge-off in the first quarter of 2015 to our allowance for credit losses on MPF Loans to conform our charge-off policies to AB 2012-02. In particular, we now write-down a conventional MPF Loan to its fair value less estimated selling costs when such a loan is classified as "Loss" and when a conventional MPF Loan is transferred to REO. Our prior practice was to record a charge-off when a conventional MPF Loan was transferred to REO. Exposures classified "Loss"are considered uncollectible and of such little value that the exposures continuance as a balance sheet asset is not warranted. This classification does not mean that the exposure has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer charging off this asset, even though partial recovery may occur in the future. Examples of confirming events indicating that a "Loss" exists include, but are not limited to, the following:
| |
▪ | A current assessment of value is made before a single family residential loan is more than 180 days past due. Any outstanding loan balance in excess of the fair value of the property, less cost to sell, is classified as "Loss" when the loan is no more than 180 days delinquent. |
When a borrower is in bankruptcy, loans are written down to the fair value of the collateral, less costs to sell, within 60 days of receipt of the notification of filing from the bankruptcy court or within the delinquency time frames specified in the guidance, whichever is shorter. A loan is not written down if the loan is performing, the borrower continues making payments on the loan, and repayment in full is expected.
Fraudulent loans, not covered by any existing representations and warranties in the loan purchase agreement, are charged off within 90 days of discovery of the fraud, or within the delinquency time frames specified in the adverse classification guidance, whichever is shorter.
We began using an Automated Valuation Methodology (AVM) to determine the fair value of our impaired conventional MPF Loans held in portfolio and REO. Our prior practice was to determine fair value using broker price opinions, if available, to measure impaired conventional MPF Loans held in portfolio and REO. If a current broker price opinion was not available, we estimated fair value based on our current actual loss severity rates we experienced on sales, excluding any estimated selling costs. The use of AVM's to determine fair value may result in increased volatility with respect to our provision for credit losses.
We now place a conventional MPF Loan held in portfolio on nonaccrual when it is adversely classified as either "Substandard," "Doubtful", or "Loss". An adverse classification means that such a loan is not considered well secured and in the process of collection. Exposures classified "Substandard" are inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Exposure so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the exposure. These weaknesses are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Exposures classified "Doubtful"have all the weaknesses inherent in those exposures classified "Substandard"with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Our prior practice was to place conventional MPF Loans held in portfolio on nonaccrual when the loan was 90 or more days past due (or 60 days past due in the case of a bankruptcy) and the loan was not well-secured and in the process of collection. This change in nonaccrual practice did not have a material effect on our nonaccrual loans outstanding at the time of adoption.
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)
Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure
In August of 2014, the FASB issued new guidance that requires certain government-guaranteed mortgage loans to be derecognized upon foreclosure and established as a separate receivable. Our foreclosed government MPF Loans meet the conditions specified by the new guidance and will be classified as a receivable rather than REO. Our foreclosed government MPF Loans were previously classified in REO in Other Assets. We prospectively adopted this new guidance on January 1, 2015, for our government MPF Loans. The new guidance did not have a material effect on our operating activities or our financial statements since our credit risk on government MPF Loans is limited to whether or not the servicing PFI fails to pay for losses not covered by Federal Housing Administration (FHA) insurance, or Department of Veteran Affairs (VA), Department of Housing and Urban Development (HUD) or Department of Agriculture Rural Housing Service (RHS) guarantees.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In January of 2014, the FASB issued new accounting guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to REO. The new guidance became effective on January 1, 2015. The new guidance is consistent with our previous accounting and did not have an effect on our operating activities or our financial statements.
Held for Sale Mortgage Loans
We classify MPF Xtra, MPF Direct, and government mortgage loans obtained for a Ginnie Mae securitization transaction as mortgage loans held for sale (HFS), as we sell such loans in an outright sale or in a securitization transaction. If material, HFS mortgage loans are classified as a separate line item in our statements of condition; otherwise, we classify HFS mortgage loans in Other Assets. We have elected the fair value option for HFS mortgage loans. Since these HFS mortgage loans are carried at fair value, the loans do not require an allowance for credit losses. We measure the fair value of HFS mortgage loans based on to-be-announced (TBA) securities, which represent quoted market prices for new mortgage-backed securities issued by U.S. government sponsored enterprises. Any initial premium or discount is recognized as part of the fair value measurement process rather than amortized as a yield adjustment. Any transaction fees, such as extension fees, or costs are immediately recognized into other noninterest income. HFS mortgage loans are classified as an operating activity within our statements of cash flows.
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)
Note 3 – Recently Issued but Not Yet Adopted Accounting Standards
Classification of Certain Cash Receipts and Cash Payments in the Statement of Cash Flows
SimplifyingIn August of 2016, the PresentationFASB issued statement of Debt Issuance Cost (i.e., Concession Fees)cash flows classification guidance governing certain cash receipts and cash payments. The new guidance becomes effective January 1, 2018, with earlier adoption permitted. The new guidance must be applied retrospectively to each period our statements of cash flows are presented at the time of adoption. Key provisions relevant to us are outlined below. Our existing practice is consistent with the provisions of the guidance outlined below pertaining to debt prepayment or extinguishment costs and the classification of accreted interest expense. We are in the process of reviewing the expected effect of the remaining provisions of the guidance on our financial condition, results of operations, and cash flows.
Cash payments for debt prepayment or extinguishment costs are classified as cash outflows for financing activities.
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
At settlement, the portion of the cash payment attributable to accreted interest expense is classified as cash outflows for operating activities, and the portion of the cash payment attributable to the principal would be classified as cash outflows for financing activities. The cash paid attributable to accreted interest expense also needs to be included in the supplemental disclosure of the amount of interest expense paid.
A transferor’s beneficial interest obtained in a securitization of financial assets is disclosed as a noncash activity.
Additional guidance is provided to clarify when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows and when an entity should classify the aggregate of those cash receipts and payments into one class of cash flows on the basis of predominance.
Measurement of Credit Losses on Financial Instruments
In AprilJune of 2015,2016, the FASB amended existing GAAP guidance applicable to measuring credit losses on financial instruments. The amendments are expected to result in recognizing credit losses in the financial statements on a timelier basis by utilizing forward looking information. Key provisions of the amendments relevant to us are outlined below.
Replaces the “incurred loss” impairment methodology applied under current GAAP with an “expected credit losses” methodology.
The expected credit losses methodology requires us to estimate all credit losses on financial instruments carried on an amortized cost basis and off-balance-sheet credit exposures over their contractual term. On balance sheet financial instruments include, but are not limited to, advances, MPF Loans held in portfolio, and Held-to-maturity (HTM) securities. Off-balance-sheet credit exposure refers to unfunded credit exposures, such as standby letters of credit.
The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial instrument’s reported amount.
Aligns the income statement recognition of credit losses for securities with the reporting period in which changes in collectability occur by recording credit losses (and subsequent reversals) through an allowance rather than a write-down as currently required under GAAP.
Requires recognition of a credit loss on available-for-sale (AFS) securities into the income statement if the present value of cash flows expected to be collected on the security is less than its amortized cost basis. Additionally, the allowance on AFS debt securities will be limited to the amount by which fair value is less than the amortized cost.
Expands upon the current credit quality disclosures by requiring further disaggregation of financial instruments by their year of origination. This disclosure is expected to help financial statement users better understand credit quality trends of asset portfolios.
The amendments become effective January 1, 2020, with early adoption permitted effective January 1, 2019. We plan to implement the expected credit loss methodology through a cumulative-effect adjustment to our beginning retained earnings as of the first reporting period in which the new guidance becomes effective for us. The cumulative effect adjustment will equal the amount required to adjust our existing allowance for credit losses for our on balance-sheet financial instruments and other liabilities for our off-balance sheet financial instruments to the amounts determined under the expected credit losses methodology. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before our effective date. This means write-downs recognized prior to our effective date on securities may not be reversed at the time of our adoption. Instead, improvements in expected cash flows that exist at the time we adopt will continue to be accreted into income over the remaining life of the security. Additionally, recoveries of amounts previously written off prior to the date of adoption will be recorded in earnings when received. We are in the process of reviewing the expected effect of this guidance on our financial condition, results of operations, and cash flows.
Contingent Put and Call Options in Debt Instruments
In March of 2016, the FASB issued new guidance requiring concession feesclarifying the requirements for assessing whether a contingent call (put) option embedded in a debt instrument is clearly and closely related to that debt instrument, which is referred to as the "host contract". Specifically, entities no longer will be presented asrequired to assess whether the event triggering the acceleration of an embedded contingent call (put) option within a direct deduction from the debt it relatesinstrument is clearly and closely related to rather than separately presented as a deferred cost in Other Assets. As required, we expectits host contract. We plan to adopt the new guidance using the modified retrospective approach on January 1, 2016 on a retrospective basis for all periods presented in our financial statements.2017. The new guidance is not expected to have a material effect on our financial statements.condition, results of operations, or cash flows at the time of adoption.
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Amendments to Consolidation AnalysisLeases
In February of 2015,2016, the FASB issued amendednew guidance concerning consolidation analysis. pertaining to lease accounting. Key lessee accounting provisions relevant to us are outlined below. Our existing practice is to record our operating leases off-balance sheet.
Recognize operating leases and right-to-use assets in our statements of condition; however, we would be permitted to elect off-balance sheet recognition of such leases having a term of 12 months or less.
Recognize a single lease cost over the lease term on a straight-line basis.
Classify all cash payments within operating activities in our statement of cash flows.
The new guidance becomes effective January 1, 2019. A modified retrospective transition approach is intendedrequired to enhance consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The new guidance will be effective for periodsapplied to leases existing at, or entered into after, the beginning after December 15, 2015. Early adoption is permitted, including adoptionof the earliest comparative period presented in an interim period.the financial statements. We do not expect the new guidance to affecthave a significant effect on our financial condition, results of operations, and cash flows since our existing off-balance sheet operating leases are not material.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January of 2016, the FASB issued new guidance governing recognition and measurement of financial assets and financial liabilities. The key provisions applicable to us include, but are not limited to, the following:
The ability to elect the fair value option will continue to be permitted.
Requires recognizing the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk in other comprehensive income when we elect to carry that liability at fair value under the fair value option.
Requires separate presentation of financial assets and financial liabilities by measurement category, such as amortized cost, and form, such as securities or cash flows.loans, on our statements of condition or the accompanying notes to the financial statements.
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
In August of 2014, the FASB issued guidance that requires an entity's management to assess the entity's ability to continue as a going concern. Specifically, for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise “substantial doubt” about the entity’s ability to continue as a going concern. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity is unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The new guidance becomes effective forJanuary 1, 2018. We are in the interim and annual periods ending after December 15, 2016, and early application is permitted. This guidance is notprocess of reviewing its expected to have any effect on our financial condition, or results of operations, at the time of adoption.
and cash flows.
Revenue from Contracts with Customers
In May of 2014, the FASB issued new guidance governing revenue recognition from contracts with customers. In August of 2015, the FASB deferred the effective date of this new guidance until January 1, 2018. Subsequently, the FASB has issued several pronouncements that provide additional guidance and clarifications to the revenue recognition guidance issued in May of 2014. The new guidance focuses on the timing and amount of revenue recognition that best depictsguidance is not expected to have a material effect on our financial condition, results of operations, or cash flows at the transfer by an entitytime of promised goods or services to its customers. Financialadoption because the majority of our financial instruments and other contractual rights are within the scope of other GAAP guidanceguidance; and accordingly, are excluded from the scope of this new revenue recognition guidance. As a result, we anticipate that a majority of our contracts with members would be excluded from the scope of this new guidance. In August of 2015, the FASB deferred the effective date for the new revenue recognition guidance until January 1, 2018. We are in the process of reviewing our contracts with members to determine the effect, if any, on our operating activities and financial statements.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 4 – Interest Income and Interest Expense
The following table presents interest income and interest expense for the periods indicated:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
Interest income - | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Interest bearing deposits, Federal Funds sold and securities purchased under agreements to resell | $ | 2 |
| | $ | 2 |
| | $ | 6 |
| | $ | 6 |
| |
|
| | | | | | | |
Investment securities - |
| | | | | | | |
Trading | — |
| | 6 |
| | 2 |
| | 21 |
| $ | 2 |
| | $ | — |
| | $ | 7 |
| | $ | 2 |
|
Available-for-sale | 132 |
| | 136 |
| | 396 |
| | 415 |
| 116 |
| | 132 |
| | 367 |
| | 396 |
|
Held-to-maturity | 63 |
| | 72 |
| | 201 |
| | 223 |
| 56 |
| | 63 |
| | 171 |
| | 201 |
|
Total investment securities | 195 |
| | 214 |
| | 599 |
| | 659 |
| |
Investment securities | | 174 |
| | 195 |
| | 545 |
| | 599 |
|
|
| | | | | | |
| | | | | | |
Advances - | | | | | | | | |
Advance interest income | 44 |
| | 35 |
| | 125 |
| | 108 |
| 73 |
| | 44 |
| | 203 |
| | 125 |
|
Advance prepayment fees, including related hedge adjustment gains (losses) of $0, $0, $1, and $0 | 1 |
| | 4 |
| | 7 |
| | 8 |
| |
Total Advances | 45 |
| | 39 |
| | 132 |
| | 116 |
| |
Advance prepayment fees | | 1 |
| | 1 |
| | 8 |
| | 7 |
|
Advances | | 74 |
| | 45 |
| | 211 |
| | 132 |
|
|
|
| | | | | | |
|
| | | | | | |
MPF Loans held in portfolio | 62 |
| | 78 |
| | 197 |
| | 252 |
| 53 |
| | 62 |
| | 165 |
| | 197 |
|
Other interest bearing assets | | 8 |
| | 2 |
| | 23 |
| | 6 |
|
|
|
| | | | | | | | | | | | | |
Total interest income | 304 |
| | 333 |
| | 934 |
| | 1,033 |
| |
|
| | | | | | | |
Interest income | | 309 |
| | 304 |
| | 944 |
| | 934 |
|
| | | | | | | |
| | | | | | |
Interest expense - |
| | | | | | |
| | | | | | |
|
| | | | | | |
| | | | | | |
Consolidated obligations - |
| | | | | | | |
Discount notes | 72 |
| | 68 |
| | 216 |
| | 201 |
| 95 |
| | 72 |
| | 272 |
| | 216 |
|
Bonds | 96 |
| | 114 |
| | 304 |
| | 408 |
| 99 |
| | 96 |
| | 299 |
| | 304 |
|
Total consolidated obligations | 168 |
| | 182 |
| | 520 |
| | 609 |
| |
Consolidated obligations | | 194 |
| | 168 |
| | 571 |
| | 520 |
|
|
| | | | | | |
| | | | | | |
Subordinated notes | 14 |
| | 13 |
| | 41 |
| | 40 |
| — |
| | 14 |
| | 24 |
| | 41 |
|
Other interest bearing liabilities | | 2 |
| | — |
| | 5 |
| | — |
|
| | | | | | | | | | | | | | |
Total interest expense | 182 |
| | 195 |
| | 561 |
| | 649 |
| |
Interest expense | | 196 |
| | 182 |
| | 600 |
| | 561 |
|
|
| | | | | | |
| | | | | | |
Net interest income before provision for (reversal of) credit losses | 122 |
| | 138 |
| | 373 |
| | 384 |
| |
Net interest income | | 113 |
| | 122 |
| | 344 |
| | 373 |
|
| | | | | | | | |
Provision for (reversal of) credit losses | 1 |
| | (2 | ) | | 5 |
| | (8 | ) | — |
| | 1 |
| | — |
| | 5 |
|
Net interest income | $ | 121 |
| | $ | 140 |
| | $ | 368 |
| | $ | 392 |
| |
| | | | | | | | |
Net interest income after provision for (reversal of) credit losses | | $ | 113 |
| | $ | 121 |
| | $ | 344 |
| | $ | 368 |
|
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 5 – Investment Securities
We classify securities as either trading, held-to-maturity (HTM), or available-for-sale (AFS). Our security disclosures within these classifications are disaggregated by major security types as shown below. Our major security types presented inare based on the tables below are defined as follows:nature and risks of the security.
U.S. Government & other government related may consist of the sovereign debt of the United States; debt issued by Fannie Mae, Freddie Mac, and the Federal Farm Credit Banks Funding Corporation;government sponsored enterprises (GSE); and non-mortgage-backed securities of the Small Business Administration and Tennessee Valley Authority.
Federal Family Education Loan Program - asset backed securities (FFELP ABS).
Government Sponsored Enterprises (GSE)GSE residential mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac.
Government-guaranteed residential, multifamily, and reverse mortgage MBS.
Private-label residential MBS.
State or local housing agency obligations.
Pledged Collateral
We transact mostdisclose the amount of investment securities pledged as collateral pertaining to our derivatives with large banks and major broker-dealers. Derivative transactions may be entered into either through an over-the-counter bilateral agreement with an individual counterparty or through a Futures Commission Merchant (FCM or clearing member) with a derivatives clearing organization (clearinghouse). We may pledge investment securities as collateral under these agreements, and in such cases, the amounts pledged are parenthetically disclosedactivity on our statements of condition. Also see Note 9 - Derivatives and Hedging Activities for further details.
Trading Securities
The following table presents the fair value of our trading securities. We did not hold a material amount of securities we issued through our MPF Government MBS product as of the dates presented. We had no material unrealized gains or losses realized from the sales ofon trading securities.
| | As of | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
U.S. Government & other government related | | $ | 101 |
| | $ | 102 |
| | $ | 1,003 |
| | $ | 1,108 |
|
Residential MBS: | | | | | | | | |
GSE | | 52 |
| | 63 |
| | 42 |
| | 50 |
|
Government-guaranteed | | 2 |
| | 2 |
| | 2 |
| | 2 |
|
Total Residential MBS | | 54 |
| | 65 |
| |
Residential MBS | | | 44 |
| | 52 |
|
Trading securities | | $ | 155 |
| | $ | 167 |
| | $ | 1,047 |
| | $ | 1,160 |
|
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Amortized Cost Basis and Fair Value – Available-for-Sale Securities (AFS)
| | | Amortized Cost Basis | | Gross Unrealized Gains in AOCI | | Gross Unrealized (Losses) in AOCI | | Carrying Amount and Fair Value | Amortized Cost Basis | | Gross Unrealized Gains in AOCI | | Gross Unrealized (Losses) in AOCI | | Carrying Amount and Fair Value |
As of September 30, 2015 | | | | | | | | |
As of September 30, 2016 | | | | | | | | |
U.S. Government & other government related | $ | 416 |
| | $ | 26 |
| | $ | (3 | ) | | $ | 439 |
| $ | 350 |
| | $ | 20 |
| | $ | (3 | ) | | $ | 367 |
|
State or local housing agency | 15 |
| | — |
| | — |
| | 15 |
| 19 |
| | 1 |
| | — |
| | 20 |
|
FFELP ABS | 5,269 |
| | 274 |
| | (23 | ) | | 5,520 |
| 4,561 |
| | 158 |
| | (25 | ) | | 4,694 |
|
| | | | | | | | | | | | | | |
Residential MBS: | | | | | | | | | | | | | | |
GSE | 9,769 |
| | 501 |
| | (13 | ) | | 10,257 |
| 8,578 |
| | 353 |
| | (9 | ) | | 8,922 |
|
Government-guaranteed | 1,931 |
| | 79 |
| | — |
| | 2,010 |
| 1,457 |
| | 43 |
| | — |
| | 1,500 |
|
Private-label | 62 |
| | 5 |
| | — |
| | 67 |
| 51 |
| | 7 |
| | — |
| | 58 |
|
Total Residential MBS | 11,762 |
| | 585 |
| | (13 | ) | | 12,334 |
| |
Total | $ | 17,462 |
| | $ | 885 |
| | $ | (39 | ) | | $ | 18,308 |
| |
Residential MBS | | 10,086 |
| | 403 |
| | (9 | ) | | 10,480 |
|
Available-for-sale securities | | $ | 15,016 |
| | $ | 582 |
| | $ | (37 | ) | | $ | 15,561 |
|
| | | | | | | | | | | | | | |
As of December 31, 2014 | | | | | | | | |
As of December 31, 2015 | | | | | | | | |
U.S. Government & other government related | $ | 479 |
| | $ | 29 |
| | $ | — |
| | $ | 508 |
| $ | 405 |
| | $ | 21 |
| | $ | (4 | ) | | $ | 422 |
|
State or local housing agency | 3 |
| | — |
| | — |
| | 3 |
| 18 |
| | — |
| | — |
| | 18 |
|
FFELP ABS | 5,824 |
| | 408 |
| | (11 | ) | | 6,221 |
| 5,090 |
| | 233 |
| | (24 | ) | | 5,299 |
|
| | | | | | | | | | | | | |
|
Residential MBS: | | | | | | | | | | | | | |
|
GSE | 10,285 |
| | 550 |
| | (8 | ) | | 10,827 |
| 9,427 |
| | 383 |
| | (12 | ) | | 9,798 |
|
Government-guaranteed | 2,258 |
| | 87 |
| | — |
| | 2,345 |
| 1,811 |
| | 57 |
| | — |
| | 1,868 |
|
Private-label | 66 |
| | 5 |
| | — |
| | 71 |
| 61 |
| | 4 |
| | — |
| | 65 |
|
Total Residential MBS | 12,609 |
| | 642 |
| | (8 | ) | | 13,243 |
| |
Total | $ | 18,915 |
| | $ | 1,079 |
| | $ | (19 | ) | | $ | 19,975 |
| |
Residential MBS | | 11,299 |
|
| 444 |
|
| (12 | ) |
| 11,731 |
|
Available-for-sale securities | | $ | 16,812 |
|
| $ | 698 |
|
| $ | (40 | ) |
| $ | 17,470 |
|
We had no sales of AFS securities for the periods presented.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Amortized Cost Basis, Carrying Amount, and Fair Value - Held-to-Maturity Securities (HTM)
| | | Amortized Cost Basis | | Non-credit OTTI Recognized in AOCI (Loss) | | Carrying Amount | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding (Losses) | | Fair Value | Amortized Cost Basis | | Non-credit OTTI Recognized in AOCI (Loss) | | Carrying Amount | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding (Losses) | | Fair Value |
As of September 30, 2015 | | | | | | | | | | | | |
As of September 30, 2016 | | | | | | | | | | | | |
U.S. Government & other government related | $ | 1,414 |
| | $ | — |
| | $ | 1,414 |
| | $ | 78 |
| | $ | — |
| | $ | 1,492 |
| $ | 1,271 |
| | $ | — |
| | $ | 1,271 |
| | $ | 74 |
| | $ | — |
| | $ | 1,345 |
|
State or local housing agency | 16 |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
| 13 |
| | — |
| | 13 |
| | — |
| | — |
| | 13 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Residential MBS: | | | | | | | | | | | | | | | | | | | | | | |
GSE | 2,373 |
| | — |
| | 2,373 |
| | 173 |
| | — |
| | 2,546 |
| 1,928 |
| | — |
| | 1,928 |
| | 133 |
| | — |
| | 2,061 |
|
Government-guaranteed | 1,009 |
| | — |
| | 1,009 |
| | 26 |
| | — |
| | 1,035 |
| 834 |
| | — |
| | 834 |
| | 13 |
| | — |
| | 847 |
|
Private-label | 1,155 |
| | (227 | ) | | 928 |
| | 359 |
| | (1 | ) | | 1,286 |
| 929 |
| | (187 | ) | | 742 |
| | 301 |
| | (1 | ) | | 1,042 |
|
Total Residential MBS | 4,537 |
| | (227 | ) | | 4,310 |
| | 558 |
| | (1 | ) | | 4,867 |
| |
Total | $ | 5,967 |
| | $ | (227 | ) | | $ | 5,740 |
| | $ | 636 |
| | $ | (1 | ) | | $ | 6,375 |
| |
Residential MBS | | 3,691 |
| | (187 | ) | | 3,504 |
| | 447 |
| | (1 | ) | | 3,950 |
|
Held-to-maturity securities | | $ | 4,975 |
| | $ | (187 | ) | | $ | 4,788 |
| | $ | 521 |
| | $ | (1 | ) | | $ | 5,308 |
|
| | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2014 | | | | | | | | | | | | |
As of December 31, 2015 | | | | | | | | | | | | |
U.S. Government & other government related | $ | 2,222 |
| | $ | — |
| | $ | 2,222 |
| | $ | 76 |
| | $ | (1 | ) | | $ | 2,297 |
| $ | 1,932 |
| | $ | — |
| | $ | 1,932 |
| | $ | 64 |
| | $ | (1 | ) | | $ | 1,995 |
|
State or local housing agency | 18 |
| | — |
| | 18 |
| | — |
| | — |
| | 18 |
| 16 |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
| | | | | | | | | | | | | | | |
| | | | | |
|
Residential MBS: | | | | | | | | | | | | | | | |
| | | | | |
|
GSE | 2,695 |
| | — |
| | 2,695 |
| | 189 |
| | — |
| | 2,884 |
| 2,163 |
| | — |
| | 2,163 |
| | 134 |
| | — |
| | 2,297 |
|
Government-guaranteed | 1,129 |
| | — |
| | 1,129 |
| | 28 |
| | — |
| | 1,157 |
| 969 |
| | — |
| | 969 |
| | 16 |
| | — |
| | 985 |
|
Private-label | 1,318 |
| | (264 | ) | | 1,054 |
| | 415 |
| | (1 | ) | | 1,468 |
| 1,104 |
| | (217 | ) | | 887 |
| | 334 |
| | (1 | ) | | 1,220 |
|
Total Residential MBS | 5,142 |
| | (264 | ) | | 4,878 |
| | 632 |
| | (1 | ) | | 5,509 |
| |
Total | $ | 7,382 |
| | $ | (264 | ) | | $ | 7,118 |
| | $ | 708 |
| | $ | (2 | ) | | $ | 7,824 |
| |
Residential MBS | | 4,236 |
|
| (217 | ) |
| 4,019 |
|
| 484 |
|
| (1 | ) |
| 4,502 |
|
Held-to-maturity securities | | $ | 6,184 |
|
| $ | (217 | ) |
| $ | 5,967 |
|
| $ | 548 |
|
| $ | (2 | ) |
| $ | 6,513 |
|
We had no sales of HTM securities for the periods presented.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Aging of Unrealized Temporary Losses
The following tables present unrealized temporary losses on our AFS and HTM portfolio for periods less than 12 months and for 12 months or more. We recognized no OTTI charges on these unrealized loss positions because we expect to recover the entire amortized cost basis, we do not intend to sell these securities, and we believe it is more likely than not that we will not be required to sell them prior to recovering their amortized cost basis. In the tables below, in cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
Available-for-Sale Securities
| | | Less than 12 Months | | 12 Months or More | | Total | Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) |
As of September 30, 2015 | | | | | | | | | | | | |
As of September 30, 2016 | | | | | | | | | | | | |
U.S. Government & other government related | $ | 77 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 77 |
| | $ | (3 | ) | $ | — |
| | $ | — |
| | $ | 86 |
| | $ | (3 | ) | | $ | 86 |
| | $ | (3 | ) |
State or local housing agency | 2 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
FFELP ABS | 90 |
| | — |
| | 799 |
| | (23 | ) | | 889 |
| | (23 | ) | — |
| | — |
| | 774 |
| | (25 | ) | | 774 |
| | (25 | ) |
| | | | |
| | | | | | | | | | |
| | | | | | |
Residential MBS: | | | | |
| | | | | | | | | | |
| | | | | | |
GSE | 759 |
| | (1 | ) | | 1,796 |
| | (12 | ) | | 2,555 |
| | (13 | ) | 658 |
| | — |
| | 1,217 |
| | (9 | ) | | 1,875 |
| | (9 | ) |
Government-guaranteed | | 24 |
| | — |
| | — |
| | — |
| | 24 |
| | — |
|
Private-label | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
|
Total Residential MBS | 759 |
| | (1 | ) | | 1,797 |
| | (12 | ) | | 2,556 |
| | (13 | ) | |
Total | $ | 928 |
| | $ | (4 | ) | | $ | 2,596 |
| | $ | (35 | ) | | $ | 3,524 |
| | $ | (39 | ) | |
Residential MBS | | 682 |
| | — |
| | 1,218 |
| | (9 | ) | | 1,900 |
| | (9 | ) |
Available-for-sale securities | | $ | 683 |
|
| $ | — |
|
| $ | 2,078 |
|
| $ | (37 | ) |
| $ | 2,761 |
|
| $ | (37 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2014 | | | | | | | | | | | | |
As of December 31, 2015 | | | | | | | | | | | | |
U.S. Government & other government related | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
| | $ | — |
| $ | 30 |
| | $ | (1 | ) | | $ | 45 |
| | $ | (3 | ) | | $ | 75 |
|
| $ | (4 | ) |
State or local housing agency | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| — |
|
FFELP ABS | 14 |
| | — |
| | 877 |
| | (11 | ) | | 891 |
| | (11 | ) | 64 |
| | (1 | ) | | 787 |
| | (23 | ) | | 851 |
|
| (24 | ) |
| | | | | | | | | | | | | | | | | | | |
|
|
|
Residential MBS: | | | | | | | | | | | | | | | | | | | |
|
|
|
GSE | — |
| | — |
| | 1,996 |
| | (8 | ) | | 1,996 |
| | (8 | ) | 1,081 |
| | (3 | ) | | 1,006 |
| | (9 | ) | | 2,087 |
|
| (12 | ) |
Government-guaranteed | | 90 |
| | — |
| | — |
| | — |
| | 90 |
|
| — |
|
Private-label | — |
| | — |
| | 16 |
| | — |
| | 16 |
| | — |
| — |
| | — |
| | 8 |
| | — |
| | 8 |
|
| — |
|
Total Residential MBS | — |
| | — |
| | 2,012 |
| | (8 | ) | | 2,012 |
| | (8 | ) | |
Total | $ | 65 |
| | $ | — |
| | $ | 2,889 |
| | $ | (19 | ) | | $ | 2,954 |
| | $ | (19 | ) | |
Residential MBS | | 1,171 |
|
| (3 | ) |
| 1,014 |
|
| (9 | ) |
| 2,185 |
|
| (12 | ) |
Available-for-sale securities | | $ | 1,269 |
|
| $ | (5 | ) |
| $ | 1,846 |
|
| $ | (35 | ) |
| $ | 3,115 |
|
| $ | (40 | ) |
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Held-to-Maturity Securities
| | | Less than 12 Months | | 12 Months or More | | Total | Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) |
As of September 30, 2015 | | | | | | | | | | | | |
U.S. Government & other government related | $ | — |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
| | $ | — |
| |
State or local housing agency | 1 |
| | — |
| | 10 |
| | — |
| | 11 |
| | — |
| |
| | | | | | | | | | | | |
Residential MBS: | | | | | | | | | | | | |
Private-label | 2 |
| | — |
| | 1,228 |
| | (228 | ) | | 1,230 |
| | (228 | ) | |
Total Residential MBS | 2 |
| | — |
| | 1,228 |
| | (228 | ) | | 1,230 |
| | (228 | ) | |
Total | $ | 3 |
| | $ | — |
| | $ | 1,254 |
| | $ | (228 | ) | | $ | 1,257 |
| | $ | (228 | ) | |
| | | | | | | | | | | | |
As of December 31, 2014 | | | | | | | | | | | | |
As of September 30, 2016 | | | | | | | | | | | | |
U.S. Government & other government related | $ | 13 |
| | $ | — |
| | $ | 5 |
| | $ | (1 | ) | | $ | 18 |
| | $ | (1 | ) | $ | — |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
| | $ | — |
|
State or local housing agency | 10 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| 9 |
| | — |
| | 1 |
| | — |
| | 10 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | |
Residential MBS: | | | | | | | | | | | | | | | | | | | | | | |
GSE | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | — |
| 4 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
|
Private-label | 12 |
| | — |
| | 1,384 |
| | (265 | ) | | 1,396 |
| | (265 | ) | — |
| | — |
| | 1,000 |
| | (188 | ) | | 1,000 |
| | (188 | ) |
Total Residential MBS | 12 |
| | — |
| | 1,389 |
| | (265 | ) | | 1,401 |
| | (265 | ) | |
Total | $ | 35 |
| | $ | — |
| | $ | 1,394 |
| | $ | (266 | ) | | $ | 1,429 |
| | $ | (266 | ) | |
Residential MBS | | 4 |
| | — |
| | 1,000 |
| | (188 | ) | | 1,004 |
| | (188 | ) |
Held-to-maturity securities | | $ | 13 |
|
| $ | — |
|
| $ | 1,017 |
|
| $ | (188 | ) |
| $ | 1,030 |
|
| $ | (188 | ) |
| | | | | | | | | | | | |
As of December 31, 2015 | | | | | | | | | | | | |
U.S. Government & other government related | | $ | 606 |
| | $ | — |
| | $ | 16 |
| | $ | (1 | ) | | $ | 622 |
|
| $ | (1 | ) |
State or local housing agency | | 1 |
| | — |
| | 10 |
| | — |
| | 11 |
|
| — |
|
| | | | | | | | | |
|
|
|
|
|
Residential MBS: | | | | | | | | | |
|
|
|
|
|
GSE | | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| — |
|
Private-label | | — |
| | — |
| | 1,167 |
| | (218 | ) | | 1,167 |
|
| (218 | ) |
Residential MBS | | 4 |
|
| — |
|
| 1,167 |
|
| (218 | ) |
| 1,171 |
|
| (218 | ) |
Held-to-maturity securities | | $ | 611 |
|
| $ | — |
|
| $ | 1,193 |
|
| $ | (219 | ) |
| $ | 1,804 |
|
| $ | (219 | ) |
Contractual Maturity Terms
The following table belowprimarily presents the amortized cost basis and fair value of U.S. Government & other government related AFS and HTM securities by contractual maturity, excludingmaturity. ABS and MBS securities. These securities are excluded becausesince their expected maturities may differ from their contractual maturities if borrowers of the underlying loans elect to prepay their loans.
| | | | Available-for-Sale | | Held-to-Maturity | | Available-for-Sale | | Held-to-Maturity |
As of September 30, 2015 | | Amortized Cost Basis | | Carrying Amount and Fair Value | | Carrying Amount | | Fair Value | |
As of September 30, 2016 | | | Amortized Cost Basis | | Carrying Amount and Fair Value | | Carrying Amount | | Fair Value |
Year of Maturity - | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | — |
| | $ | — |
| | $ | 139 |
| | $ | 139 |
| | $ | 17 |
| | $ | 17 |
| | $ | 176 |
| | $ | 177 |
|
Due after one year through five years | | 75 |
| | 78 |
| | 199 |
| | 205 |
| | 44 |
| | 46 |
| | 285 |
| | 298 |
|
Due after five years through ten years | | 28 |
| | 29 |
| | 203 |
| | 214 |
| | 30 |
| | 32 |
| | 86 |
| | 88 |
|
Due after ten years | | 328 |
| | 347 |
| | 889 |
| | 950 |
| | 278 |
| | 292 |
| | 737 |
| | 795 |
|
ABS and MBS without a single maturity date | | 17,031 |
| | 17,854 |
| | 4,310 |
| | 4,867 |
| | 14,647 |
| | 15,174 |
| | 3,504 |
| | 3,950 |
|
Total securities | | $ | 17,462 |
| | $ | 18,308 |
| | $ | 5,740 |
| | $ | 6,375 |
| | $ | 15,016 |
| | $ | 15,561 |
| | $ | 4,788 |
| | $ | 5,308 |
|
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Other-Than-Temporary Impairment Analysis
Significant Inputs Used to Determine OTTI
Our analysisWe had no OTTI for OTTIthe periods presented based on our private-label MBS includesthe significant inputs, key modeling assumptions, and methodologies outlined below.
We assess an HTM or AFS private-label MBS security for OTTI whenever its fair value is less than its amortized cost basis as of the reporting date. Specifically, we determine OTTI, if any, by performing a cash flow analysis for substantially all of these private-label MBS securities utilizing two independent third party models, which are described further below. Our analysis generates cash flow projections utilizing significant inputs, key modeling assumptions, and methodologies provided by anthe FHLB System OTTI Committee. We use the information providedCommittee, which was established to generate cash flow projections used in analyzing credit losses and determiningachieve consistent OTTI analyses for private-label MBS. The OTTI Committee was formed by the FHLBs to achieve consistencyMBS among the FHLBs in their analyses of the OTTI of private-label MBS.FHLBs. We are still responsible, however, for making our own OTTI determination, of impairment, which includesinvolves determining the reasonableness of these significant inputs, assumptions, inputs, and methodologies, used, andas well as performing the required present value calculations using appropriate historical cost bases and yields. We then utilize these cash flow projections to determine if OTTI exists on our private-label MBS.
First model. This model considers borrower characteristics and the particular attributes of the loans underlying the securities, in conjunction with assumptions about future changes in home prices and interest rates, prepayment rates, default rates, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. Outputs from this first model are then used as inputs by the second model as follows.
Second model. This model uses the month-by-month projections of future loan performance derived from the first model and allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules.
As of September 30, 2015,2016, we had a short-term housing price forecast over all markets with projected changes ranging from -3.0%-1.0% to +8.0%+10.0% over the twelve month period beginning July 1, 2015, for all markets.2016. For the vast majority of markets, the short-term forecast has changes ranging from +2.0%+3.0% to +5.0%+6.0%. For periods beginning after June 30, 2016, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.
Based on these inputs and assumptions, we had no OTTI charges for the three or nine months ended September 30, 2015, and 2014.
The following table presents the changes in the cumulative amount of previously recorded OTTI credit losses (recognized into earnings) on OTTI investment securities for the reporting periods stated.indicated.
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Beginning Balance | | $ | 591 |
| | $ | 649 |
| | $ | 620 |
| | $ | 677 |
| | $ | 542 |
| | $ | 591 |
| | $ | 568 |
| | $ | 620 |
|
Reductions: | |
| | | | | | | |
| | | | | | |
Increases in expected future cash flows recorded as credit-related accretion into interest income | | (12 | ) | | (15 | ) | | (41 | ) | | (43 | ) | |
Increases in expected future cash flows recorded as accretion into interest income | | | (11 | ) | | (12 | ) | | (37 | ) | | (41 | ) |
Ending Balance | | $ | 579 |
| | $ | 634 |
| | $ | 579 |
| | $ | 634 |
| | $ | 531 |
| | $ | 579 |
| | $ | 531 |
| | $ | 579 |
|
Ongoing Litigation
On October 15, 2010, we instituted litigation relating to 64 private-label MBS bonds we purchased in an aggregate original principal amount of $4.29 billion. In April 2016, we received a payment of $37.5 million (partially offset by $5.0 million of related legal fees and other expenses) resulting from a settlement with some of the defendants. As of September 30, 2016, the remaining litigation covers four private-label MBS bonds in the aggregate original principal amount of $77.5 million.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 6 – Advances
We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. The following table presents our advances by callable/putable features:
|
| | | | | | | | |
As of | | September 30, 2015 | | December 31, 2014 |
Noncallable/nonputable | | $ | 32,165 |
| | $ | 29,666 |
|
Callable | | 961 |
| | 964 |
|
Putable | | 1,685 |
| | 1,673 |
|
Par value advances | | 34,811 |
| | 32,303 |
|
Hedging adjustments | | 214 |
| | 166 |
|
Other adjustments | | 19 |
| | 16 |
|
Total advances | | $ | 35,044 |
| | $ | 32,485 |
|
The following table presents our advances by redemption terms:terms of maturity. Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay advances with or without penalties.
| | As of September 30, 2015 | | Amount | | Weighted Average Interest Rate | | Next Maturity or Call Date | | Next Maturity or Put Date | |
As of September 30, 2016 | | | Weighted Average Contractual Interest Rate | | Amount |
Due in one year or less | | $ | 8,908 |
| | 0.65 | % | | $ | 9,819 |
| | $ | 9,826 |
| | 0.60 | % | | $ | 12,719 |
|
One to two years | | 3,750 |
| | 1.15 | % | | 3,693 |
| | 3,375 |
| | 0.77 | % | | 8,966 |
|
Two to three years | | 4,641 |
| | 1.05 | % | | 4,164 |
| | 4,133 |
| | 0.56 | % | a | 7,283 |
|
Three to four years | | 6,988 |
| | 0.37 | % | a | 6,816 |
| | 6,983 |
| | 0.58 | % | a | 8,120 |
|
Four to five years | | 7,985 |
| | 0.35 | % | a | 7,785 |
| | 8,042 |
| | 1.34 | % | | 1,536 |
|
More than five years | | 2,539 |
| | 2.13 | % | | 2,534 |
| | 2,452 |
| | 1.67 | % | | 4,168 |
|
Total par value | | $ | 34,811 |
| | 0.74 | % | | $ | 34,811 |
| | $ | 34,811 |
| |
Par value | | | 0.76 | % | | $ | 42,792 |
|
| |
a | The weighted average interest rate is relatively lower when compared to other categories due to a majority of advances in this category consisting of variable rate advances which reset periodically at current interest rates. |
See Note 8 - Allowance for Credit Losses for information related to our credit risk on advances and allowance methodology for credit losses.
The following table reconciles the par value of our advances to the carrying amount on our statements of condition as of the dates indicated.
|
| | | | | | | | |
As of | | September 30, 2016 | | December 31, 2015 |
Par value | | $ | 42,792 |
| | $ | 36,605 |
|
Fair value hedging adjustments | | 300 |
| | 159 |
|
Other adjustments | | 25 |
| | 14 |
|
Advances | | $ | 43,117 |
| | $ | 36,778 |
|
The following advance borrowers exceeded 10% of our total advances outstanding:
|
| | | | | | | |
As of September 30, 2015 | | Par Value Outstanding | | % of Total Outstanding |
One Mortgage Partners Corp | | $ | 11,000 |
| a | 32 | % |
The Northern Trust Company | | 4,000 |
| | 12 | % |
|
| | | | | | | |
As of September 30, 2016 | | Par Value | | % of Total Outstanding |
One Mortgage Partners Corp. | | $ | 11,000 |
| a | 26 | % |
BMO Harris Bank, N.A. | | 4,875 |
| | 11 | % |
| |
a | One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA. |
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 7 – MPF Loans Held in Portfolio
We acquire MPF Loans from PFIs to hold in our portfolio, and in some cases we purchased participations in pools of eligible mortgage loans from other FHLBs (MPF Banks). MPF Loans that are held in portfolio are fixed-rate conventional and government mortgage loans secured by one-to-four family residential properties with maturities ranging from 5 years to 30 years or participations in pools of similar eligible mortgage loans from other MPF Banks.
The following table presents information on MPF Loans held in our portfolio by contractual maturity at the time of purchase. All are fixed-rate. Government is comprised of loans insured by the FHA and loans guaranteed by the VA, HUD or RHS.
| | As of | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
Medium term (15 years or less) | | $ | 752 |
| | $ | 1,094 |
| | $ | 448 |
| | $ | 662 |
|
Long term (greater than 15 years) | | 4,270 |
| | 4,905 |
| | 4,209 |
| | 4,112 |
|
Total unpaid principal balance | | 5,022 |
| | 5,999 |
| |
Unpaid principal balance | | | 4,657 |
| | 4,774 |
|
Net premiums, credit enhancement and deferred loan fees | | 20 |
| | 23 |
| | 36 |
| | 20 |
|
Hedging adjustments | | 40 |
| | 50 |
| |
Total before allowance for credit losses | | 5,082 |
| | 6,072 |
| |
Fair value hedging adjustments | | | 30 |
| | 37 |
|
MPF Loans held in portfolio, before allowance for credit losses | | | 4,723 |
| | 4,831 |
|
Allowance for credit losses on MPF Loans | | (3 | ) | | (15 | ) | | (3 | ) | | (3 | ) |
Total MPF Loans held in portfolio, net | | $ | 5,079 |
| | $ | 6,057 |
| |
MPF Loans held in portfolio, net | | | $ | 4,720 |
| | $ | 4,828 |
|
| | | | | | | | |
Conventional mortgage loans | | $ | 3,759 |
| | $ | 4,619 |
| | $ | 3,543 |
| | $ | 3,568 |
|
Government insured mortgage loans | | 1,263 |
| | 1,380 |
| |
Total unpaid principal balance | | $ | 5,022 |
| | $ | 5,999 |
| |
Government Loans | | | 1,114 |
| | 1,206 |
|
Unpaid principal balance | | | $ | 4,657 |
| | $ | 4,774 |
|
See Note 8 - Allowance for Credit Losses to the financial statements for information related to our credit risklosses on MPF Loans and allowance for credit losses methodology.held in portfolio.
In addition to our portfolio MPF products,Products, PFIs sell eligible MPF Loans to us through the MPF Program infrastructure and we concurrently sell them to Fannie Mae under the MPF Xtra product and to third party investors under theor hold MPF Direct product. Under our MPF Government MBS product, PFIs sell us Government Loans that we intend to hold in our held for sale portfolio in other assets for a short period of timeuntil such loans are pooled into Ginnie Mae MBS. Other MPF Banks that offer these products allow their PFIs to sell MPF Loans directly to us. As of September 30, 2015, we held an immaterial amount of MPF Loans held for sale, recorded in Other Assets in our statements of condition. See Note 2 - Summary of Significant Accounting Policies for information related to our accounting for MPF Loans that are held for sale.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 8 – Allowance for Credit Losses
See Note 2 - Summary of Significant Accounting Policies to the financial statements in our 2015 Form 10-K for further details pertaining to the methodologies and factors we consider when determining the amount to recognize as an allowance for credit losses, if any, for each portfolio segment identified below.
We have established an allowance methodology for each ofidentified our portfolio segments:segments as shown below:
•memberMember credit products (advances, letters of credit and other extensions of credit to borrowers);
•conventionalConventional MPF Loans held forin portfolio;
•government MPFGovernment Loans held forin portfolio; and
•term Federal Funds soldSold and term securities purchased under agreementsSecurities Purchased Under Agreements to resell.
For detailed information on these methodologies and our accounting policies please see Note 8 - Allowance for Credit Losses to the financial statements in our 2014 Form 10-K. Any updates to these accounting policies are noted below.Resell.
Member Credit Products
We lend to members within our district according to federal statutes, including the FHLB Act, and FHFA regulations. The FHLB Act requires us to obtain sufficient collateral to fully secure our credit products, and we do not expect to incur any credit losses on advances. We perfect our security interest in pledged collateral and enter into control agreements for securities collateral. We take a risk-based approach in requiring delivery of pledged collateral. We have policies and procedures in place that are designed to manage our credit risk, including requirements for restrictions on borrowing, verifications of collateral and monitoring of borrowings and the borrower's financial condition. Based upon the collateral we held as security, our credit extension and collateral policies, our credit analysis and the repayment history on credit products, we do not believe that any credit losses have been incurred on our credit products. Accordingly, we have not recorded any allowance for credit losses for our on-balance sheetmember credit products nor have we recorded a liability forportfolio segment based upon our credit products with off-balance sheet credit exposure. Further, we expect to collect all amounts due according to contractual terms of ouranalysis and the repayment history on member credit products. Accordingly, for the periods presented, weWe had no member credit products that were past due, on nonaccrual status, considered impaired, or consideredinvolved in a troubled debt restructuring.restructuring or otherwise considered impaired. We have not recorded a separate liability to reflect credit losses on our member credit products with off-balance sheet credit exposure.
Conventional MPF Loans
MPF Risk Sharing Structure Held in Portfolio
We share the risk of credit losses on conventional MPF Loan products held in portfolio with our PFIs by structuring potential losses on conventional MPF Loans into layers with respect to each master commitment (MC). The credit risk analysis determines the degree to which layers of the MPF Risk Sharing Structure are available to recover losses on MPF Loans. PFIs deliver MPF Loans into pools designated by product specific MCs. The credit risk analysis is performed at an individual MC level as loss recovery is MC-specific and no risk layer can be applied across a PFI's MCs. With respect to participation interests in MPF Loans, losses are allocated amongst the participating MPF Banks pro-ratably based upon their respective percentage participation interest in the related MC. For further detail of our MPF Risk Sharing Structure see page F-31F-14 in our 20142015 Form 10-K.
There has been no material activity in our allowance for credit losses since December 31, 2015. The following table presents the changes inrecorded investment and the allowance for credit losses onin conventional MPF Loans.Loans by impairment methodology. Recorded investment in a conventional MPF Loan is its amortized cost basis plus related accrued interest receivable, if any. Recorded investment is not net of its allowance for credit losses but is net of any direct charge-off on the conventional MPF Loan.
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2015 | | 2014 | | 2015 | | 2014 | |
Balance, beginning of period | | $ | 3 |
| | $ | 19 |
| | $ | 15 |
| | $ | 29 |
| |
Losses charged to the allowance | | (1 | ) | | (1 | ) | | (17 | ) | | (5 | ) | |
Provision for (reversal of) credit losses | | 1 |
| | (2 | ) | | 5 |
| | (8 | ) | |
Balance, end of period | | $ | 3 |
| | $ | 16 |
| | $ | 3 |
| | $ | 16 |
| |
|
| | | | | | | | |
As of | | September 30, 2016 | | December 31, 2015 |
Recorded investment in conventional MPF Loans - | | | | |
Individually evaluated for impairment | | $ | 78 |
| | $ | 107 |
|
Collectively evaluated for impairment | | 3,533 |
| | 3,519 |
|
Recorded investment | | $ | 3,611 |
| | $ | 3,626 |
|
| | | | |
Allowance for credit losses on conventional MPF Loans - | | | | |
Homogeneous pools of loans collectively evaluated for impairment | | $ | 3 |
| | $ | 3 |
|
Government Loans Held in Portfolio
Servicing PFIs are responsible for absorbing any losses incurred on Government Loans held in portfolio that are not recovered from the government insurer or guarantor. We did not establish an allowance for credit losses on our Government Loans held in portfolio for the reporting periods presented based on our assessment that our servicing PFIs have the ability to absorb such losses. Further, Government Loans were not placed on nonaccrual status or disclosed as troubled debt restructurings for the same reason.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The table below presents the recorded investment by impairment methodology on conventional MPF Loans. There is no allowance for credit losses attributable to MPF Loans that are specifically identified and individually evaluated for impairment as of September 30, 2015, since such credit losses have been charged off in accordance to AB 2012-02. Refer to Note 2 – Summary of Significant Accounting Policies for further details.
|
| | | | | | | | |
As of | | September 30, 2015 | | December 31, 2014 |
Specifically identified and individually evaluated for impairment | | $ | — |
| | $ | 12 |
|
Homogeneous pools of loans collectively evaluated for impairment | | 3 |
| | 3 |
|
Allowance for credit losses on conventional MPF Loans | | $ | 3 |
| | $ | 15 |
|
| | | | |
Individually evaluated for impairment | | $ | 114 |
| | $ | 160 |
|
Collectively evaluated for impairment | | 3,707 |
| | 4,538 |
|
Total recorded investment | | $ | 3,821 |
| | $ | 4,698 |
|
GovernmentCredit Quality Indicators - MPF Loans Held in Portfolio
The PFI provides and maintains insurance or a guaranty from governmental agencies, which includes ensuring compliance with all of their requirements, and obtaining the benefit of the applicable insurance or guaranty with respect to defaulted government MPF Loans. Any losses incurred on government MPF Loans that are not recovered from the government insurer or guarantor are absorbed by the servicing PFI. Accordingly, our credit risk on government MPF Loans is limited to whether or not the servicing PFI fails to pay for losses not covered by FHA insurance, or VA, HUD or RHS guarantees. In this regard, based on our assessment of the servicing PFIs, we did not establish an allowance for credit losses for our government MPF Loan portfolio as of the periods presented. Further, due to the government guarantee or insurance and the servicing PFIs ability to absorb losses, government MPF Loans are not placed on nonaccrual status or disclosed as troubled debt restructurings.
Credit Quality Indicators - MPF Loans
Thefollowing table below summarizes our recorded investment in MPF Loans by our key credit quality indicators. indicators, which include:
"Serious delinquency rate is defined asrate" consists of MPF Loans that are 90 days or more past due or in the process of foreclosure, as a percentage of the total recorded investment. MPF Loans that are both 90 days or more past due and in the process of foreclosure are only included once in our serious delinquency rate calculation.
"Past due 90 days or more still accruing interest is defined asinterest" consists of MPF Loans that are either insured or guaranteed by the government guaranteed or conventional mortgage loans that are well secured (by collateral that have a realizable value sufficient to discharge the debt or by the guarantee or insurance, such as PMI,Primary Mortgage Insurance, of a financially responsible party) and in the process of collection.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 | |
As of | | Conventional | | Government | | Total | | Conventional | | Government | | Total | |
Past due 30-59 days | | $ | 100 |
| | $ | 62 |
| | $ | 162 |
| | $ | 138 |
| | $ | 92 |
| | $ | 230 |
| |
Past due 60-89 days | | 33 |
| | 21 |
| | 54 |
| | 43 |
| | 23 |
| | 66 |
| |
Past due 90 days or more | | 104 |
| | 36 |
| | 140 |
| | 153 |
| | 44 |
| | 197 |
| |
Total past due | | 237 |
| | 119 |
| | 356 |
| | 334 |
| | 159 |
| | 493 |
| |
Total current | | 3,584 |
| | 1,169 |
| | 4,753 |
| | 4,364 |
| | 1,246 |
| | 5,610 |
| |
Total recorded investment | | $ | 3,821 |
| | $ | 1,288 |
| | $ | 5,109 |
| | $ | 4,698 |
| | $ | 1,405 |
| | $ | 6,103 |
| |
Also in process of foreclosure | | $ | 53 |
| | $ | 12 |
| | $ | 65 |
| | $ | 77 |
| | $ | 11 |
| | $ | 88 |
| |
Serious delinquency rate | | 2.75 | % | | 2.82 | % | | 2.77 | % | | 3.28 | % | | 3.15 | % | | 3.25 | % | |
Past due 90 days or more still accruing interest | | $ | 9 |
| | $ | 36 |
| | $ | 45 |
| | $ | 25 |
| | $ | 44 |
| | $ | 69 |
| |
On nonaccrual status | | $ | 114 |
| | $ | — |
| | $ | 114 |
| | $ | 163 |
| | $ | — |
| | $ | 163 |
| |
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)
Troubled Debt Restructurings
As of September 30, 2015, and December 31, 2014, our recorded investment balances of mortgage loans classified as troubled debt restructurings were $69 million and $73 million, respectively. The financial amounts related to troubled debt restructurings are not material to our financial condition, results of operations, or cash flows. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2016 | | December 31, 2015 | |
As of | | Conventional | | Government | | Total | | Conventional | | Government | | Total | |
Past due 30-59 days | | $ | 81 |
| | $ | 53 |
| | $ | 134 |
| | $ | 99 |
| | $ | 63 |
| | $ | 162 |
| |
Past due 60-89 days | | 26 |
| | 17 |
| | 43 |
| | 32 |
| | 21 |
| | 53 |
| |
Past due 90 days or more | | 71 |
| | 21 |
| | 92 |
| | 100 |
| | 15 |
| | 115 |
| |
Past due | | 178 |
| | 91 |
| | 269 |
| | 231 |
|
| 99 |
| | 330 |
| |
Current | | 3,433 |
| | 1,044 |
| | 4,477 |
| | 3,395 |
| | 1,130 |
| | 4,525 |
| |
Recorded investment | | $ | 3,611 |
| | $ | 1,135 |
| | $ | 4,746 |
| | $ | 3,626 |
|
| $ | 1,229 |
| | $ | 4,855 |
| |
In process of foreclosure | | $ | 36 |
| | $ | 5 |
| | $ | 41 |
| | $ | 51 |
| | $ | 3 |
| | $ | 54 |
| |
Serious delinquency rate | | 2.02 | % | | 1.87 | % | | 1.98 | % | | 2.77 | % | | 1.23 | % | | 2.38 | % | |
Past due 90 days or more still accruing interest | | $ | 7 |
| | $ | 21 |
| | $ | 28 |
| | $ | 10 |
| | $ | 15 |
| | $ | 25 |
| |
On nonaccrual status | | $ | 78 |
| | $ | — |
| | $ | 78 |
| | $ | 107 |
| | $ | — |
| | $ | 107 |
| |
Individually Evaluated Impaired MPF Loans
The following table summarizes the recorded investment, unpaid principal balance, and related allowance for credit losses attributable to individually evaluated impaired conventional MPF Loans. Such impairedConventional MPF Loans include MPF Loans that are considered collateral dependent and MPF Loans involved in a troubled debt restructuring.individually evaluated for impairment when they are adversely classified. There is no allowance for credit losses attributable to conventional MPF Loans that are individually evaluated for impairment, as of September 30, 2015, since suchthe related allowance for credit losses have been charged off in accordance to AB 2012-02. For further details see Note 2 - Summary of Significant Accounting Policies to the financial statements.off.
| | As of | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
Recorded investment with an allowance for credit losses | | $ | — |
| | $ | 160 |
| |
Recorded investment without an allowance for credit losses | | 114 |
| | — |
| | $ | 78 |
| | $ | 107 |
|
Unpaid principal balance with an allowance for credit losses | | — |
| | 158 |
| |
Unpaid principal balance without an allowance for credit losses | | 125 |
| | — |
| | 84 |
| | 117 |
|
Related allowance for credit losses | | — |
| | 12 |
| |
The following table summarizes the average recorded investment of impaired conventional MPF Loans. We do not recognize interest income on impaired loans.
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 |
Average recorded investment with an allowance for credit losses | | $ | — |
| | $ | 176 |
| | $ | — |
| | $ | 190 |
|
Average recorded investment without an allowance for credit losses | | 118 |
| | — |
| | 132 |
| | — |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Average recorded investment without allowance for credit losses | $ | 81 |
| | $ | 118 |
| | $ | 89 |
| | $ | 132 |
|
Term Federal Funds Sold and Term Securities Purchased Under Agreements to Resell
We only had credit risk exposure to overnight Federal Funds sold are only evaluated for purposesand Securities Purchased Under Agreements to Resell as of September 30, 2016, and December 31, 2015. We did not have any term Federal Funds sold and Securities Purchased Under Agreements to Resell arrangements. We did not establish an allowance for credit losses if payment is not made when due. In this regard,for our overnight Federal Funds sold since all Federal Funds sold were repaid according to their contractual terms. We also did not establish an allowance for credit losses for overnight Securities Purchased Under Agreements to Resell since all payments due under the contractual terms have been received and because we hold sufficient underlying collateral.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 9 – Derivatives and Hedging Activities
Refer toNote 2 - Summary of Significant Accounting PolicesPolicies to the financial statements in our 20142015 Form 10-K for our accounting policies for derivatives.
We transact most of our derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Derivative transactions may be entered into through an over-the-counter bilateral agreement with an individual counterparty. Additionally, we clear some derivatives transactions with clearinghouses classified as a Derivatives Clearing Organization (DCO) through an FCM with a derivativesFutures Commission Merchant (FCM), a clearing organization (clearinghouse).member of the DCO. We are not a derivatives dealer and do not trade derivatives for speculative purposes.
Managing Credit Risk on Derivative Agreements
We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative agreements. For bilateral derivative agreements, the degree of counterparty risk depends on the extent to which master netting arrangements, collateral requirements and other credit enhancements are included in such contracts to mitigate the risk. We manage counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in our policies and FHFA regulations. We require collateral agreements on all derivatives that establish collateral delivery thresholds. Additionally, collateral related to derivatives with member institutions includes collateral assigned to us, as evidenced by a written security agreement, and held by the member institution for our benefit. Based on credit analyses and collateral requirements, we do not anticipate any credit losses on our derivative agreements. See Note 16 - Fair Value Accounting to the financial statements in our 20142015 Form 10-K for discussion regarding our fair value methodology for derivative assets and liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.
Our over-the-counter bilateral derivative agreements may contain provisions that require us to post additional collateral with our counterparties if there is deterioration in our credit rating, except for those derivative agreements with a zero unsecured collateral threshold for both parties, in which case positions are required to be fully collateralized regardless of credit rating. If our credit rating is lowered by a major credit rating agency, such as Standard and Poor's or Moody’s, we would be required to deliver additional collateral on derivatives in net liability positions. If our credit rating had been lowered from its current rating to the next lower rating, we would have been required to deliver up to an additional $39$43 million of collateral at fair value to our derivatives counterparties at September 30, 2015.2016.
Cleared swaps are subject to initialvariation and variationinitial margin requirements established by the clearinghouseDCO and its clearing members. We post initialvariation and variationinitial margin through the clearing member,FCM, on behalf of the clearinghouse,DCO, which could expose us to institutional credit risk in the event that a clearing memberan FCM or the clearinghouseDCO fail to meet their obligations. Clearing derivatives through a clearinghouseDCO mitigates counterparty credit risk exposure because a central clearinghouse counterpartythe DCO is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through an FCM. The clearinghouseDCO determines initial margin requirements for cleared derivatives. In this regard, clearing agentsan FCM may require additional initial margin to be posted based on credit considerations, including but not limited to, credit rating downgrades. We were not requiredhad no requirement to post additional initial margin by our clearing agentsFCMs at September 30, 2015.2016.
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)
We present our derivative assets and liabilities on a net basis in our statements of condition. Refer to Note 1 - Background and Basis of Presentation and Note 2 - Summary of Significant Accounting Policies to the financial statements in our 2014 Form 10-K for further discussion. In addition to the cash collateral as noted in the following table, we also pledgepledged $90 million of investment securities (as parenthetically disclosed on our statements of condition)that can be sold or repledged, as part of our initial margin related to cleared derivative transactions.transactions at September 30, 2016.
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The following table presents our gross and net derivative assets and liabilities by contract type and amount for our derivative agreements.
| | | | September 30, 2015 | | December 31, 2014 | | | September 30, 2016 | | December 31, 2015 | |
As of | | Notional Amount | | Derivative Assets | | Derivative Liabilities | | Notional Amount | | Derivative Assets | | Derivative Liabilities | | | Notional Amount | | Derivative Assets | | Derivative Liabilities | | Notional Amount | | Derivative Assets | | Derivative Liabilities | |
Derivatives in hedge accounting relationships- | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | 27,240 |
| | $ | 94 |
| | $ | 1,305 |
| | $ | 30,940 |
| | $ | 53 |
| | $ | 1,348 |
| | | $ | 24,256 |
| | $ | 40 |
| | $ | 1,156 |
| | $ | 25,140 |
| | $ | 30 |
| | $ | 1,082 |
| |
Derivatives not in hedge accounting relationships- | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | 22,767 |
| | 565 |
| | 442 |
| | 19,159 |
| | 487 |
| | 329 |
| | | 36,692 |
| | 514 |
| | 414 |
| | 28,866 |
| | 456 |
| | 341 |
| |
Interest rate swaptions | | 1,270 |
| | 43 |
| | — |
| | 1,850 |
| | 56 |
| | — |
| | | 550 |
| | 56 |
| | — |
| | 1,270 |
| | 40 |
| | — |
| |
Interest rate caps or floors | | 1,131 |
| | 93 |
| | — |
| | 1,164 |
| | 105 |
| | — |
| | | 1,129 |
| | 51 |
| | — |
| | 1,131 |
| | 76 |
| | — |
| |
Interest rate futures | | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | |
Mortgage delivery commitments | | 651 |
| | 1 |
| | — |
| | 284 |
| | 3 |
| | 3 |
| | | 1,178 |
| | 1 |
| | 1 |
| | 479 |
| | 1 |
| | 1 |
| |
Other | | 118 |
|
| — |
|
| 1 |
| | — |
| | — |
| | — |
| | | 127 |
|
| 1 |
|
| — |
| | 121 |
| | — |
| | — |
| |
Derivatives not in hedge accounting relationships | | 25,940 |
| | 702 |
| | 443 |
| | 22,460 |
| | 651 |
| | 332 |
| | | 39,676 |
| | 623 |
| | 415 |
| | 31,867 |
|
| 573 |
|
| 342 |
| |
Gross derivative amount before adjustments | | $ | 53,180 |
| | 796 |
| | 1,748 |
| | $ | 53,400 |
| | 704 |
| | 1,680 |
| | | $ | 63,932 |
| | 663 |
| | 1,571 |
| | $ | 57,007 |
|
| 603 |
|
| 1,424 |
| |
Netting adjustments and cash collateral | | | | (794 | ) | a | (1,704 | ) | a | | | (675 | ) | a | (1,625 | ) | a | | | | (642 | ) | a | (1,523 | ) | a | | | (601 | ) | a | (1,369 | ) | a |
Derivatives on statements of condition | | | | $ | 2 |
| | $ | 44 |
| | | | $ | 29 |
| | $ | 55 |
| | | | | $ | 21 |
| | $ | 48 |
| | | | $ | 2 |
| | $ | 55 |
| |
| |
a | Amounts represent the application of the netting requirements that allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed by us with the same clearing agentFCM and/or counterparty. Cash collateral posted was $946$910 million and $793 million at JuneSeptember 30, 2016, and December 31, 2015, and $978 million at December 31, 2014. Cashcash collateral received was $36 million at June 30, 2015, and $29 million at December 31, 2014.and $25 million. |
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)
The following table presents our gross recognized amount of offsetting derivative assets and liabilities for derivatives with legal right of offset as well as derivatives without the legal right of offset. Any over-collateralization received by or paid from us to an individual clearing member and/or at a counterparty arrangement level is not included in the determination of the net amount. Specifically, any such over-collateralization amount received by us is not offset against another derivative asset counterparty exposure for which there is no legal right of offset, while any over-collateralization delivered by us is not offset against another derivative liability counterparty exposure for which there is no legal right of offset.
| | | | Derivative Assets | | Derivative Liabilities | | | Derivative Assets | | Derivative Liabilities | |
As of September 30, 2015 | | Bilateral | | Cleared | | Total | | Bilateral | | Cleared | | Total | | |
As of September 30, 2016 | | | Bilateral | | Cleared | | Total | | Bilateral | | Cleared | | Total | |
Derivatives with legal right of offset - | | | | | | | | | | | | | | |
Gross recognized amount | | | $ | 485 |
| | $ | 177 |
| | $ | 662 |
| | $ | 998 |
| | $ | 572 |
| | $ | 1,570 |
| |
Netting adjustments and cash collateral | | | (483 | ) | | (159 | ) | | (642 | ) | | (951 | ) | | (572 | ) | | (1,523 | ) | |
Derivatives with legal right of offset - net | | | 2 |
| | 18 |
| | 20 |
| | 47 |
| | — |
| | 47 |
| |
Derivatives without legal right of offset | | | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
| |
Derivatives on statements of condition | | | 3 |
| | 18 |
| | 21 |
| | 48 |
| | — |
| | 48 |
| |
Cash collateral for initial margin | | |
| | (1 | ) | | (1 | ) | |
| | | |
|
| |
Noncash collateral received (pledged) and cannot be sold or repledged | | | 1 |
| | (71 | ) | a | (70 | ) | | — |
| | — |
| | — |
| |
Net amount | | | $ | 2 |
| | $ | 90 |
| | $ | 92 |
| | $ | 48 |
| | $ | — |
| | $ | 48 |
| |
| | | | | | | | | | | | | | |
As of December 31, 2015 | | | | | | | | | | | | | | |
Derivatives with legal right of offset - | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross recognized amount | | $ | 652 |
| | $ | 143 |
| | $ | 795 |
| | $ | 1,420 |
| | $ | 328 |
| | $ | 1,748 |
| | | $ | 509 |
| | $ | 93 |
| | $ | 602 |
| | $ | 1,182 |
| | $ | 241 |
| | $ | 1,423 |
| |
Netting adjustments and cash collateral | | (651 | ) | | (143 | ) | | (794 | ) | | (1,378 | ) | | (326 | ) | | (1,704 | ) | | | (508 | ) | | (93 | ) | | (601 | ) | | (1,140 | ) | | (229 | ) | | (1,369 | ) | |
Derivatives with legal right of offset - net | | 1 |
| | — |
| | 1 |
| | 42 |
| | 2 |
| | 44 |
| | | 1 |
|
| — |
|
| 1 |
|
| 42 |
|
| 12 |
|
| 54 |
| |
Derivatives without legal right of offset | | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
| |
Derivatives on statements of condition | | 2 |
| | — |
| | 2 |
| | 42 |
| | 2 |
| | 44 |
| | | 2 |
|
| — |
|
| 2 |
|
| 43 |
|
| 12 |
|
| 55 |
| |
Noncash collateral received (pledged) and cannot be sold or repledged | | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | | — |
| | — |
| | — |
| | — |
| | 12 |
| | 12 |
| |
Net amount | | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 42 |
| | $ | 1 |
| | $ | 43 |
| | | $ | 2 |
|
| $ | — |
|
| $ | 2 |
|
| $ | 43 |
|
| $ | — |
|
| $ | 43 |
| |
| | | | | | | | | | | | | | |
As of December 31, 2014 | | | | | | | | | | | | | | |
Derivatives with legal right of offset - | | | | | | | | | | | | | | |
Gross recognized amount | | $ | 656 |
| | $ | 45 |
| | $ | 701 |
| | $ | 1,466 |
| | $ | 211 |
| | $ | 1,677 |
| | |
Netting adjustments and cash collateral | | (632 | ) | | (43 | ) | | (675 | ) | | (1,414 | ) | | (211 | ) | | (1,625 | ) | | |
Derivatives with legal right of offset - net | | 24 |
|
| 2 |
|
| 26 |
|
| 52 |
|
| — |
|
| 52 |
| | |
Derivatives without legal right of offset | | 3 |
| | — |
| | 3 |
| | 3 |
| | — |
| | 3 |
| | |
Derivatives on statements of condition | | 27 |
|
| 2 |
|
| 29 |
|
| 55 |
|
| — |
|
| 55 |
| | |
Noncash collateral received (pledged) and cannot be sold or repledged | | 23 |
| | — |
| | 23 |
| | — |
| | — |
| | — |
| | |
Net amount | | $ | 4 |
|
| $ | 2 |
|
| $ | 6 |
|
| $ | 55 |
|
| $ | — |
|
| $ | 55 |
| | |
| |
a | Represents noncash collateral pledged for initial margin for cleared derivatives. |
At September 30, 2015,2016, we had $56$19 million of additional net credit exposure on cleared derivatives due to our pledging of non-cash collateral to a clearinghouseDCO for initial margin, which exceeded our net derivative liability position. We had $4$50 million comparable exposure at December 31, 2014.2015.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The following table below presents the gains (losses) of derivatives and hedging activities as presented in the statements of income.
| | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended September 30, | | Nine months ended September 30, |
For the periods ending | | 2015 | | 2014 | | 2015 | | 2014 | | | 2016 | | 2015 | | 2016 | | 2015 |
Fair value hedges - | | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | (17 | ) | | $ | (3 | ) | | $ | (30 | ) | | $ | (15 | ) | | | $ | 5 |
| | $ | (17 | ) | | $ | (7 | ) | | $ | (30 | ) |
| | | | | | | | | | |
Fair value hedges | | | 5 |
| | (17 | ) | | (7 | ) | | (30 | ) |
Cash flow hedges | | 1 |
| | — |
| | 2 |
| | 1 |
| | | — |
| | 1 |
| | 4 |
| | 2 |
|
| | | | | | | | | | |
Economic hedges - | |
| | | | | | | | |
| | | | | | |
Interest rate swaps | | (14 | ) | | 1 |
| | (43 | ) | | (2 | ) | | | (1 | ) | | (14 | ) | | (40 | ) | | (43 | ) |
Interest rate swaptions | | 4 |
| | (4 | ) | | 7 |
| | (20 | ) | | | (2 | ) | | 4 |
| | 16 |
| | 7 |
|
Interest rate caps or floors | | (4 | ) | | (17 | ) | | (12 | ) | | (32 | ) | | | (14 | ) | | (4 | ) | | (25 | ) | | (12 | ) |
Net interest settlements | | 16 |
| | 23 |
| | 60 |
| | 55 |
| | | 16 |
| | 16 |
| | 44 |
| | 60 |
|
Mortgage delivery commitments | | 1 |
| | 1 |
| | 1 |
| | 2 |
| | |
Other | | (2 | ) | | — |
| | (2 | ) | | — |
| | | 3 |
| | (1 | ) | | 1 |
| | (1 | ) |
Economic hedges | | 1 |
| | 4 |
| | 11 |
| | 3 |
| | | 2 |
| | 1 |
| | (4 | ) | | 11 |
|
| | | | | | | | | | |
Gains (losses) on derivatives and hedging activities | | $ | (15 | ) | | $ | 1 |
| | $ | (17 | ) | | $ | (11 | ) | | | $ | 7 |
| | $ | (15 | ) | | $ | (7 | ) | | $ | (17 | ) |
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Fair Value Hedges
The following table presents our fair value hedging results by the type of hedged item,item. We had no gain (loss) for hedges that no longer qualified as a fair value hedge. Additionally, the gains (losses) on derivatives and the related hedged items intable indicates where fair value hedging relationships andresults are classified in our statements of income. In this regard, the effect of those derivatives on our net interest income. Net Interest Settlements Amount Recorded in Net Interest Income representscolumn includes the effectfollowing:
The amortization of net interest settlements attributable to open derivativeclosed fair value hedging instruments on net interest income. The effect of derivatives on net interest income isadjustments, which are included in the interest income/expense line item of the respective hedged item type.Closed Hedge Adjustments Amortized into Net Interest Income represents the amortization
The effect of hedge adjustments included innet interest settlements attributable to open derivative hedging instruments, which are recorded directly to the interest income/expense line item of the respective hedged item type.We had no gain (loss) for hedged firm commitments on forward-starting advances that no longer qualified as a fair value hedge.
| | | | Gain (loss) | | Net Interest Settlements Recorded in Net Interest Income | | Closed Hedge Adjustments Amortized into Net Interest Income | | | On Derivative | | On Hedged Item | | Total Ineffectiveness Recognized in Derivatives and Hedging Activities | | Amount Recorded in Net Interest Income |
Three months ended September 30, 2016 | | | | | | | | | |
Available-for-sale securities | | | $ | 51 |
| | $ | (50 | ) | | $ | 1 |
| | $ | (31 | ) |
Advances | | | 35 |
| | (34 | ) | | 1 |
| | (17 | ) |
MPF Loans held for portfolio | | | — |
| | — |
| | — |
| | (2 | ) |
Consolidated obligation bonds | | | (34 | ) | | 37 |
| | 3 |
| | 12 |
|
Total | | | $ | 52 |
| | $ | (47 | ) | | $ | 5 |
| | $ | (38 | ) |
| | On Derivative | | On Hedged Item | | Total Ineffectiveness Recognized in Derivatives and Hedging Activities | | Net Interest Settlements Recorded in Net Interest Income | | Closed Hedge Adjustments Amortized into Net Interest Income | | | | | | | | | |
Three months ended September 30, 2015 | | | | | | | | | | | | | | |
|
Available-for-sale securities | | $ | (40 | ) | | $ | 29 |
| | $ | (11 | ) | | $ | (33 | ) | | $ | — |
| | | $ | (40 | ) | | $ | 29 |
| | $ | (11 | ) | | $ | (33 | ) |
Advances | | (77 | ) | | 78 |
| | 1 |
| | (21 | ) | | (1 | ) | | | (77 | ) | | 78 |
| | 1 |
| | (22 | ) |
MPF Loans held for portfolio | | — |
| | — |
| | — |
| | — |
| | (4 | ) | | | — |
| | — |
| | — |
| | (4 | ) |
Consolidated obligation bonds | | 87 |
| | (94 | ) | | (7 | ) | | 54 |
| | — |
| | | 87 |
| | (94 | ) | | (7 | ) | | 54 |
|
Total | | $ | (30 | ) | | $ | 13 |
| | $ | (17 | ) | | $ | — |
| | $ | (5 | ) | | | $ | (30 | ) |
| $ | 13 |
|
| $ | (17 | ) |
| $ | (5 | ) |
Three months ended September 30, 2014 | | | | | | | | | | | | |
| | | | | | | | | |
Nine months ended September 30, 2016 | | | | | | | | |
|
Available-for-sale securities | | $ | 50 |
| | $ | (50 | ) | | $ | — |
| | $ | (35 | ) | | $ | — |
| | | $ | (4 | ) | | $ | — |
| | $ | (4 | ) | | $ | (93 | ) |
Advances | | 7 |
| | (5 | ) | | 2 |
| | (20 | ) | | (1 | ) | | | (143 | ) | | 143 |
| | — |
| | (57 | ) |
MPF Loans held for portfolio | | — |
| | — |
| | — |
| | — |
| | (4 | ) | | | — |
| | — |
| | — |
| | (7 | ) |
Consolidated obligation bonds | | (57 | ) | | 52 |
| | (5 | ) | | 63 |
| | (1 | ) | | | 42 |
| | (45 | ) | | (3 | ) | | 51 |
|
Total | | $ | — |
|
| $ | (3 | ) |
| $ | (3 | ) |
| $ | 8 |
|
| $ | (6 | ) | | | $ | (105 | ) | | $ | 98 |
| | $ | (7 | ) | | $ | (106 | ) |
| | | | | | | | | |
Nine months ended September 30, 2015 | | | | | | | | | | | | | | | | | | |
|
Available-for-sale securities | | $ | (28 | ) | | $ | 15 |
| | $ | (13 | ) | | $ | (101 | ) | | $ | (10 | ) | | | $ | (28 | ) | | $ | 15 |
| | $ | (13 | ) | | $ | (111 | ) |
Advances | | (49 | ) | | 49 |
| | — |
| | (62 | ) | | (1 | ) | | | (49 | ) | | 49 |
| | — |
| | (63 | ) |
MPF Loans held for portfolio | | — |
| | — |
| | — |
| | — |
| | (11 | ) | | | — |
| | — |
| | — |
| | (11 | ) |
Consolidated obligation bonds | | 117 |
| | (134 | ) | | (17 | ) | | 172 |
| | (3 | ) | | | 117 |
| | (134 | ) | | (17 | ) | | 169 |
|
Total | | $ | 40 |
| | $ | (70 | ) | | $ | (30 | ) | | $ | 9 |
| | $ | (25 | ) | | | $ | 40 |
| | $ | (70 | ) | | $ | (30 | ) | | $ | (16 | ) |
Nine months ended September 30, 2014 | | | | | | | | | | | | |
Available-for-sale securities | | $ | 20 |
| | $ | (23 | ) | | $ | (3 | ) | | $ | (105 | ) | | $ | — |
| | |
Advances | | (56 | ) | | 62 |
| | 6 |
| | (60 | ) | | (3 | ) | | |
MPF Loans held for portfolio | | — |
| | — |
| | — |
| | — |
| | (13 | ) | | |
Consolidated obligation bonds | | 225 |
| | (243 | ) | | (18 | ) | | 189 |
| | (11 | ) | | |
Total | | $ | 189 |
| | $ | (204 | ) | | $ | (15 | ) | | $ | 24 |
| | $ | (27 | ) | | |
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Cash Flow Hedges
The following table presentsWe reclassify amounts in AOCI into our gains (losses) on our cash-flow hedging relationships recorded instatements of income and other comprehensive income (loss). In cases where amounts are insignificant in the aggregate, we do not report a balance. Net Interest Settlements Recorded in Net Interest Income representssame periods during which the effect of net interest settlements attributable to open derivative hedging instruments on net interest income. The effect of derivatives on net interest income is included in the interest income/expense line item of the respective hedged item type.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of Effective Portion Reclassified From AOCI to Interest | | Ineffective Portion Reclassified From AOCI to Derivatives and Hedging Activities | | Total Reclassified From AOCI to Statements of Income | | Net Change in Other Comprehensive Income | | Effective Portion Recorded in AOCI | | Net Interest Settlements Recorded in Net Interest Income | |
Three months ended September 30, 2015 | | | | | | | | | | | | |
Advances - interest rate floors | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| |
Discount notes - interest rate swaps | (1 | ) | | 1 |
| | — |
| | (29 | ) | | (29 | ) | | (61 | ) | |
Total | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | (31 | ) | | $ | (29 | ) | | $ | (61 | ) | |
Three months ended September 30, 2014 | | | | | | | | | | | | |
Advances - interest rate floors | $ | 4 |
| | $ | — |
| | $ | 4 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| |
Discount notes - interest rate swaps | (1 | ) | | — |
| | (1 | ) | | 88 |
| | 87 |
| | (62 | ) | |
Bonds - interest rate swaps | (1 | ) | | — |
| | (1 | ) | | 1 |
| | — |
| | — |
| |
Total | $ | 2 |
|
| $ | — |
|
| $ | 2 |
|
| $ | 85 |
|
| $ | 87 |
|
| $ | (62 | ) | |
Nine months ended September 30, 2015 | | | | | | | | | | | | |
Advances - interest rate floors | $ | 8 |
| | $ | — |
|
| $ | 8 |
| | $ | (8 | ) | | $ | — |
| | $ | — |
| |
Discount notes - interest rate swaps | (2 | ) | | 2 |
| | — |
| | 14 |
| | 14 |
| | (185 | ) | |
Bonds - interest rate swaps | (2 | ) | | — |
| | (2 | ) | | 2 |
| | — |
| | — |
| |
Total | $ | 4 |
| | $ | 2 |
| | $ | 6 |
| | $ | 8 |
| | $ | 14 |
| | $ | (185 | ) | |
Nine months ended September 30, 2014 | | | | | | | | | | | | |
Advances - interest rate floors | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | (9 | ) | | $ | — |
| | $ | — |
| |
Discount notes - interest rate swaps | (2 | ) | | 1 |
| | (1 | ) | | 98 |
| | 97 |
| | (184 | ) | |
Bonds - interest rate swaps | (2 | ) | | — |
| | (2 | ) | | 2 |
| | — |
| | — |
| |
Total | $ | 5 |
| | $ | 1 |
| | $ | 6 |
| | $ | 91 |
| | $ | 97 |
| | $ | (184 | ) | |
There wereforecasted transaction affects our earnings. We had no amounts reclassified from AOCI into earnings for the periods presented as a result of the discontinuance of cash-flow hedges because the original forecasted transactions failed to occur by the end of the originally specified time period or within a two-month period thereafter.discontinued hedges. The deferred net gains (losses) on derivative instruments in AOCI that are expected to be reclassified to earnings during the next twelve months were $(2)$(8) million as of September 30, 2015.2016. The maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is 54 years.
The following table presents our cash flow hedging results by type of hedged item. Additionally, the table indicates where cash flow hedging results are classified in our statements of income. In this regard, the Amount Recorded in Net Interest Income column includes the following:
The amortization of closed cash flow hedging adjustments, which are reclassified from AOCI into the interest income/expense line item of the respective hedged item type.
The effect of net interest settlements attributable to open derivative hedging instruments, which are recorded directly to the interest income/expense line item of the respective hedged item type.
|
| | | | | | | | | | | | | |
| | | Ineffective Portion Recorded in Derivatives and Hedging Activities | | Effective Portion Recorded in AOCI | | Amount Recorded in Net Interest Income |
Three months ended September 30, 2016 | | | | | | |
Advances | Interest rate floors | | $ | — |
| | $ | — |
| | $ | 1 |
|
Discount notes | Interest rate swaps | | — |
| | 84 |
| | (49 | ) |
Total | | | $ | — |
| | $ | 84 |
| | $ | (48 | ) |
| | | | | | | |
Three months ended September 30, 2015 | | | | | |
|
Advances | Interest rate floors | | $ | — |
| | $ | — |
| | $ | 2 |
|
Discount notes | Interest rate swaps | | 1 |
| | (29 | ) | | (62 | ) |
Total | | | $ | 1 |
|
| $ | (29 | ) |
| $ | (60 | ) |
| | | | | | | |
Nine months ended September 30, 2016 | | | | | |
|
Advances | Interest rate floors | | $ | — |
|
| $ | — |
| | $ | 7 |
|
Discount notes | Interest rate swaps | | 4 |
| | 46 |
| | (147 | ) |
Bonds | Interest rate swaps | | — |
| | — |
| | (2 | ) |
Total | | | $ | 4 |
| | $ | 46 |
| | $ | (142 | ) |
| | | | | | | |
Nine months ended September 30, 2015 | | | | | |
|
Advances | Interest rate floors | | $ | — |
| | $ | — |
| | $ | 8 |
|
Discount notes | Interest rate swaps | | 2 |
| | 14 |
| | (187 | ) |
Bonds | Interest rate swaps | | — |
| | — |
| | (2 | ) |
Total | | | $ | 2 |
| | $ | 14 |
| | $ | (181 | ) |
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 10 – Consolidated Obligations
The FHLBs issue consolidated obligations through the Office of Finance as their agent. Consolidated obligations consist of discount notes and consolidated obligation bonds. Consolidated discount notes are issued primarily to raise short-term funds. Discount notesfunds, are issued at less than their face amount and redeemed at par value when they mature. The maturity of consolidated bonds may range from less than one year to over 20 years, but they are not subject to any statutory or regulatory limits on maturity.
The following table presents our consolidated obligation bonds, for which we are the primary obligor, including callable bonds that are redeemable in whole, or in part, at our discretion on predetermined call dates.
| | As of September 30, 2015 | | Contractual Maturity | | Weighted Average Interest Rate | | By Next Maturity or Call Date | |
As of September 30, 2016 | | | Contractual Maturity | | Weighted Average Interest Rate | | By Maturity or Next Call Date |
Due in one year or less | | $ | 3,095 |
| | 3.53 | % | | $ | 17,714 |
| | $ | 9,756 |
| | 1.16 | % | | $ | 20,922 |
|
One to two years | | 4,111 |
| | 2.18 | % | | 2,991 |
| | 7,686 |
| | 1.31 | % | | 4,460 |
|
Two to three years | | 5,309 |
| | 1.61 | % | | 2,177 |
| | 4,591 |
| | 1.26 | % | | 3,105 |
|
Three to four years | | 3,627 |
| | 1.41 | % | | 1,853 |
| | 979 |
| | 1.28 | % | | 474 |
|
Four to five years | | 3,343 |
| | 1.51 | % | | 141 |
| | 2,808 |
| | 1.99 | % | | 363 |
|
Thereafter | | 6,603 |
| | 2.75 | % | | 1,212 |
| | 4,354 |
| | 2.85 | % | | 850 |
|
Total par value | | $ | 26,088 |
| | 2.17 | % | | $ | 26,088 |
| |
Par value | | | $ | 30,174 |
| | 1.54 | % | | $ | 30,174 |
|
The following table presents our consolidated obligation discount notes for which we are the primary obligor. All are due in one year or less.
| | As of | | September 30, 2015 | | December 31, 2014 |
| | September 30, 2016 | | December 31, 2015 |
|
Carrying Amount | | $ | 37,290 |
| | $ | 31,054 |
| | $ | 39,144 |
| | $ | 41,564 |
|
Par Value | | 37,301 |
| | 31,060 |
| | 39,164 |
| | 41,584 |
|
Weighted Average Interest Rate | | 0.17 | % | | 0.09 | % | | 0.39 | % | | 0.22 | % |
The following table presents consolidated obligation bonds outstanding by call feature:
| | As of | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
Noncallable | | $ | 10,845 |
| | $ | 11,046 |
| | $ | 18,288 |
| | $ | 10,148 |
|
Callable | | 15,243 |
| | 23,355 |
| | 11,886 |
| | 12,536 |
|
Par value | | 26,088 |
| | 34,401 |
| | 30,174 |
| | 22,684 |
|
Bond premiums (discounts), net | | 7 |
| | 17 |
| |
Hedging adjustments | | (39 | ) | | (177 | ) | |
Fair value option adjustments | | 6 |
| | 10 |
| |
Total consolidated obligation bonds | | $ | 26,062 |
| | $ | 34,251 |
| |
Fair value hedging adjustments | | | (49 | ) | | (101 | ) |
Other adjustments | | | 14 |
| | (1 | ) |
Consolidated obligation bonds | | | $ | 30,139 |
| | $ | 22,582 |
|
JointThe following table summarizes the consolidated obligations of the FHLBs and Several Liability
those for which we are the primary obligor. We do not expect to pay any additional amounts on behalf of other FHLBs under our joint and several liability as of September 30, 2015. As a result, we did not accrue a liability for our joint and several liability related to the other FHLBs’ share of the consolidated obligations as of September 30, 2015,2016, and December 31, 2014.2015. Refer to Note 17 - Commitments and Contingencies to the financial statements in our 2015 Form 10-K for further details.
The following table summarizes the consolidated obligations of the FHLBs and those for which we are the primary obligor:
| | | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
Par values as of | | Bonds | | Discount Notes | | Total | | Bonds | | Discount Notes | | Total | | Bonds | | Discount Notes | | Total | | Bonds | | Discount Notes | | Total |
FHLB System total consolidated obligations | | $ | 447,000 |
| | $ | 409,511 |
| | $ | 856,511 |
| | $ | 484,812 |
| | $ | 362,363 |
| | $ | 847,175 |
| | $ | 532,920 |
| | $ | 434,808 |
| | $ | 967,728 |
| | $ | 410,859 |
| | $ | 494,343 |
| | $ | 905,202 |
|
FHLB Chicago as primary obligor | | 26,088 |
| | 37,301 |
| | 63,389 |
| | 34,401 |
| | 31,060 |
| | 65,461 |
| | 30,174 |
| | 39,164 |
| | 69,338 |
| | 22,684 |
| | 41,584 |
| | 64,268 |
|
As a percent of the FHLB System | | 6 | % | | 9 | % | | 7 | % | | 7 | % | | 9 | % | | 8 | % | | 6 | % | | 9 | % | | 7 | % | | 6 | % | | 8 | % | | 7 | % |
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 11 – Capital
and Mandatorily Redeemable Capital Stock (MRCS)
Under our Capital Plan our stock consists of two sub-classes of stock, Class B1 activity stock and Class B2 membership stock (together, Class B stock), both with a par value of $100 and redeemable on five years' written notice, subject to certain conditions. Under the Capital Plan, each member is required to own capital stock in an amount equal to the greater of a membership stock requirement or an activity stock requirement. Class B1 activity stock is available for purchase only to support a member's activity stock requirement. Class B2 membership stock is available to be purchased to support a member's membership stock requirement and any activity stock requirement.
Minimum Capital Requirements
For details on our minimum capital requirements, including how the ratios below were calculated, see Minimum Capital Requirementson page F-44F-42 of our 20142015 Form 10-K. We complied with our minimum regulatory capital requirements as shown below:below.
| | | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
| | Requirement | | Actual | | Requirement | | Actual | | Requirement | | Actual | | Requirement | | Actual |
Risk-based capital | | $ | 1,040 |
| | $ | 4,541 |
| | $ | 1,127 |
| | $ | 4,317 |
| | $ | 971 |
| | $ | 4,889 |
| | $ | 1,027 |
| | $ | 4,688 |
|
Total regulatory capital | | $ | 2,793 |
| | $ | 4,541 |
| | $ | 2,874 |
| | $ | 4,317 |
| | $ | 2,999 |
| | $ | 4,889 |
| | $ | 2,827 |
| | $ | 4,688 |
|
Total regulatory capital ratio | | 4.00 | % | | 6.50 | % | | 4.00 | % | | 6.01 | % | | 4.00 | % | | 6.52 | % | | 4.00 | % | | 6.63 | % |
Leverage capital | | $ | 3,491 |
| | $ | 6,813 |
| | $ | 3,592 |
| | $ | 6,475 |
| | $ | 3,749 |
| | $ | 7,332 |
| | $ | 3,534 |
| | $ | 7,032 |
|
Leverage capital ratio | | 5.00 | % | | 9.76 | % | | 5.00 | % | | 9.01 | % | | 5.00 | % | | 9.78 | % | | 5.00 | % | | 9.95 | % |
Total regulatory capital and leverage capital doincludes mandatorily redeemable capital stock (MRCS) but does not include accumulated other comprehensive income (loss).AOCI. Under the FHFA regulation on capital classifications and critical capital levels for the FHLBs, we are adequately capitalized.
The following members' regulatory capital stock exceeded 10% of our total regulatory capital stock outstanding:
|
| | | | | | | |
As of September 30, 2015 | | Capital Stock Outstanding | | % of Total Outstanding |
One Mortgage Partners Corp | | $ | 250 |
| a | 13 | % |
Northern Trust Company | | 200 |
| | 11 | % |
|
| | | | | | | |
As of September 30, 2016 | | Regulatory Capital Stock Outstanding | | % of Total Outstanding |
One Mortgage Partners Corp. | | $ | 245 |
| a | 13 | % |
BMO Harris Bank, N.A. | | $ | 219 |
| | 11 | % |
| |
a | One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA. |
Transfer of Capital Stock to Mandatorily Redeemable Capital Stock (MRCS)
During the first quarter of 2016, we transferred $294 million of our captive insurance company members' capital stock from equity to MRCS in liabilities on our statement of condition. The transfer was triggered by the issuance of the final FHFA rule on FHLB membership making captive insurance companies ineligible for FHLB membership, which was issued on January 20, 2016 and became effective February 19, 2016. Under this rule, our three captive insurance company members will have their memberships terminated by February 2021. The transfer from equity to MRCS in liabilities was required because the new rule creates an unconditional obligation requiring us to redeem our capital stock from our captive insurance company members after their membership terminates. We reclassify our capital stock from equity to MRCS in liabilities at fair value, which is its par value plus any dividends related to the capital stock. Par value represents fair value since our capital stock can only be acquired and redeemed or repurchased at par value. Further, our capital stock is not traded and no market mechanism exists for the exchange of stock outside our cooperative structure. Upon reclassification to MRCS, subsequent dividends are accrued at the expected dividend rate and reported as a component of interest expense in our statements of income.
Excess Capital Stock
In February 2016, we announced significant reductions in our membership stock and activity stock requirements, which went into effect on April 1, 2016. As a result of these changes, we held $593 million of excess capital stock on April 1, 2016. As of September 30, 2016, we held excess capital stock of $419 million. The reduction was a result of members requesting repurchase of their excess stock and members utilizing excess stock to support new advance borrowing activities.
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 12 - Accumulated Other Comprehensive Income (Loss)
The following table summarizes the income (loss)gains (losses) in AOCI for the reporting periods indicated:indicated.
| | | | Net Unrealized Gain (Loss) | |
Non-credit OTTI | | Net Unrealized on Cash Flow Hedges | | | | | | Net Unrealized - | | Non-credit OTTI - | | Net Unrealized - Cash Flow Hedges | | | | |
| | | Available-for-sale Securities | | Held-to-maturity Securities | | Post-Retirement Plans | | AOCI |
Three months ended September 30, 2016 | | | | | | | | | | | |
Beginning balance | | | $ | 558 |
| | $ | (196 | ) | | $ | (508 | ) | | $ | (5 | ) |
| $ | (151 | ) |
Change in the period recorded to the statements of condition, before reclassifications to statements of income | | | (13 | ) | | 9 |
| | 84 |
| | — |
|
| 80 |
|
Amounts reclassified in period to statements of income: | | |
|
| |
|
| |
|
| |
|
| |
|
|
Net interest income | | | — |
| | — |
| | (1 | ) | | | | (1 | ) |
Other comprehensive income in the period | | | (13 | ) | | 9 |
| | 83 |
| | — |
| | 79 |
|
Ending balance | | | $ | 545 |
| | $ | (187 | ) | | $ | (425 | ) | | $ | (5 | ) | | $ | (72 | ) |
| | Available-for-sale Securities | | Held-to-maturity Securities | | Net Unrealized on Cash Flow Hedges | | Post-Retirement Plans | | Total AOCI | | | | | | | | | | |
Three months ended September 30, 2015 | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 925 |
| | $ | (238 | ) | | $ | (541 | ) | | $ | (7 | ) |
| $ | 139 |
| | $ | 925 |
| | $ | (238 | ) | | $ | (541 | ) | | $ | (7 | ) | | $ | 139 |
|
Change in the period recorded to the statements of condition, before reclassifications to statements of income | | (79 | ) | | 11 |
| | (29 | ) | | 1 |
|
| (96 | ) | | (79 | ) | | 11 |
| | (29 | ) | | 1 |
| | (96 | ) |
Amounts reclassified in period to statements of income: | |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | |
|
|
Net interest income | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) | | | | (1 | ) |
Non-interest gain (loss) | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) | | | | (1 | ) |
Total other comprehensive income in the period | | (79 | ) | | 11 |
| | (31 | ) | | 1 |
| | (98 | ) | |
Other comprehensive income in the period | | | (79 | ) |
| 11 |
|
| (31 | ) |
| 1 |
|
| (98 | ) |
Ending balance | | $ | 846 |
| | $ | (227 | ) | | $ | (572 | ) | | $ | (6 | ) | | $ | 41 |
| | $ | 846 |
|
| $ | (227 | ) |
| $ | (572 | ) |
| $ | (6 | ) |
| $ | 41 |
|
| | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2014 | | | | | | | | | | | |
Nine months ended September 30, 2016 | | | | | | | | | | | |
Beginning balance | | $ | 1,188 |
| | $ | (293 | ) | | $ | (659 | ) | | $ | 4 |
| | $ | 240 |
| | $ | 658 |
| | $ | (217 | ) | | $ | (463 | ) | | $ | (6 | ) | | $ | (28 | ) |
Change in the period recorded to the statements of condition, before reclassifications to statements of income | | (99 | ) | | 15 |
| | 87 |
| | (2 | ) | | 1 |
| | (113 | ) | | 30 |
| | 46 |
| | 1 |
| | (36 | ) |
Amounts reclassified in period to statements of income: | | | | | | | | | |
|
| | | | | | | | | |
|
|
Net interest income | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | — |
| | — |
| | (4 | ) | | | | (4 | ) |
Total other comprehensive income in the period | | (99 | ) |
| 15 |
|
| 85 |
|
| (2 | ) |
| (1 | ) | |
Non-interest gain (loss) | | | — |
| | — |
| | (4 | ) | | | | (4 | ) |
Other comprehensive income in the period | | | (113 | ) | | 30 |
| | 38 |
| | 1 |
| | (44 | ) |
Ending balance | | $ | 1,089 |
|
| $ | (278 | ) |
| $ | (574 | ) |
| $ | 2 |
|
| $ | 239 |
| | $ | 545 |
| | $ | (187 | ) | | $ | (425 | ) | | $ | (5 | ) | | $ | (72 | ) |
| | | | | | | | | | | | | | | | | | | |
|
Nine months ended September 30, 2015 | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 1,060 |
| | $ | (264 | ) | | $ | (580 | ) | | $ | 1 |
| | $ | 217 |
| | $ | 1,060 |
| | $ | (264 | ) | | $ | (580 | ) | | $ | 1 |
| | $ | 217 |
|
Change in the period recorded to the statements of condition, before reclassifications to statements of income | | (214 | ) | | 37 |
| | 14 |
| | (7 | ) | | (170 | ) | | (214 | ) | | 37 |
| | 14 |
| | (7 | ) | | (170 | ) |
Amounts reclassified in period to statements of income: | | | | | | | | | |
|
| | | | | | | | | | |
Net interest income | | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) | | | | (4 | ) |
Non-interest gain (loss) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | | | | (2 | ) |
Total other comprehensive income in the period | | (214 | ) | | 37 |
| | 8 |
| | (7 | ) | | (176 | ) | |
Other comprehensive income in the period | | | (214 | ) | | 37 |
| | 8 |
| | (7 | ) | | (176 | ) |
Ending balance | | $ | 846 |
| | $ | (227 | ) | | $ | (572 | ) | | $ | (6 | ) | | $ | 41 |
| | $ | 846 |
| | $ | (227 | ) | | $ | (572 | ) | | $ | (6 | ) | | $ | 41 |
|
| | | | | | | | | |
| |
Nine months ended September 30, 2014 | | | | | | | | | | | |
Beginning balance | | $ | 1,052 |
| | $ | (321 | ) | | $ | (665 | ) | | $ | 1 |
| | $ | 67 |
| |
Change in the period recorded to the statements of condition, before reclassifications to statements of income | | 37 |
| | 43 |
| | 97 |
| | — |
| | 177 |
| |
Amounts reclassified in period to statements of income: | | | | | | | | | | | |
Net interest income | | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | |
Non-interest gain (loss) | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
Non-interest expense | | — |
| | — |
| | — |
| | 1 |
| | 1 |
| |
Total other comprehensive income in the period | | 37 |
| | 43 |
| | 91 |
| | 1 |
| | 172 |
| |
Ending balance | | $ | 1,089 |
| | $ | (278 | ) | | $ | (574 | ) | | $ | 2 |
| | $ | 239 |
| |
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 13 - Fair Value Accounting
For accounting policies regarding fair values seeFair value represents the exit price that we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. Refer to Note 2 - Summary of Significant Accounting Policies to the financial statements in our 20142015 Form 10-K.10-K for our fair value measurement policies. For a description of the valuation techniques and significant inputs see Note 16 - Fair Value Accountingto the financial statements in our 20142015 Form 10-K. There has been one change in our valuation inputs for interest rate derivative agreements since then as discussed below.
The fair values of all interest rate derivative agreements are netted by clearing member and/or by counterparty, including cash collateral received from or delivered to the counterparty. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. We use a midmarket pricing convention based on the bid-ask spread for fair-value measurements. Because these estimates are made at a specific point in time, they are susceptible to material near-term changes. We evaluated the potential for the fair value of the instruments to be affected by changes in our counterparty credit risk and our own credit risk, and we made no adjustments as they were insignificant to the overall fair-value measurements. When midmarket pricing inputs are unavailable, we use a discounted cash-flow model which uses market-observable inputs (inputs that are actively quoted and can be validated to external sources), including the following:
Discount rate assumption. At September 30, 2015, we used the overnight-index swap (OIS) curve and at December 31, 2014, we used the LIBOR swap curve.
We implemented using the OIS curve to determine the fair value of derivative contracts in the first quarter of 2015. The initial effect of using the OIS curve did not have a material effect on our operating activities or financial statements.
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)
Thefollowing tables below are a summary of the fair value estimates and related levels in the fair value hierarchy. The carrying amounts are as recorded in the statements of condition. These tables do not represent an estimate of our overall market value as a going concern; as they do not take into account future business opportunities and future net profitability of assets and liabilities. The tables below are presentedWe had no transfers between levels in the following order:fair value hierarchy for the periods shown.
FairThe following table shows the fair values of financial instruments.instruments that are measured at amortized cost on our statements of condition, unless we elect the fair value option for such instruments, in which case, such instruments are measured at fair value on our statements of condition. Financial instruments for which we elected the fair value option are measured at fair value on a recurring basis and are shown on our statements of condition and are also included in the table on the following page, which details instruments carried at fair value on a recurring basis.
|
| | | | | | | | | | | | | | | | | | | | |
| Carrying Amount | | | | Fair Value Hierarchy | |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 | |
September 30, 2016 | | | | | | | | | | |
Financial Assets - | | | | | | | | | | |
Cash and due from banks | $ | 31 |
| | $ | 31 |
| | $ | 31 |
| | $ | — |
| | $ | — |
| |
Interest bearing deposits | 650 |
| | 650 |
| | 650 |
| | — |
| | — |
| |
Federal Funds sold | 3,807 |
| | 3,807 |
| | — |
| | 3,807 |
| | — |
| |
Securities purchased under agreements to resell | 1,000 |
| | 1,000 |
| | — |
| | 1,000 |
| | — |
| |
Held-to-maturity securities | 4,788 |
| | 5,308 |
| | — |
| | 4,266 |
| | 1,042 |
| |
Advances | 43,117 |
| | 43,149 |
| | — |
| | 43,149 |
| | — |
| |
MPF Loans held in portfolio, net | 4,720 |
| | 5,032 |
| | — |
| | 5,007 |
| | 25 |
| |
Financial Liabilities - | | | | | | |
| | | |
Deposits | (512 | ) | | (512 | ) | | — |
| | (512 | ) | | — |
| |
Consolidated obligation discount notes | (39,144 | ) | | (39,146 | ) | | — |
| | (39,146 | ) | | — |
| |
Consolidated obligation bonds | (30,139 | ) | | (30,594 | ) | | — |
| | (30,594 | ) | | — |
| |
Mandatorily redeemable capital stock | (302 | ) | | (302 | ) | | (302 | ) | | — |
| | — |
| |
| | | | | | | | | | |
December 31, 2015 | | | | | | | | | | |
Financial Assets - | | | | | | | | | | |
Cash and due from banks | $ | 499 |
| | $ | 499 |
| | $ | 499 |
| | $ | — |
| | $ | — |
| |
Interest bearing deposits | 650 |
| | 650 |
| | 650 |
| | — |
| | — |
| |
Federal Funds sold | 1,702 |
| | 1,702 |
| | — |
| | 1,702 |
| | — |
| |
Securities purchased under agreements to resell | 1,375 |
| | 1,375 |
| | — |
| | 1,375 |
| | — |
| |
Held-to-maturity securities | 5,967 |
| | 6,513 |
| | — |
| | 5,293 |
| | 1,220 |
| |
Advances | 36,778 |
| | 36,736 |
| | — |
| | 36,736 |
| | — |
| |
MPF Loans held in portfolio, net | 4,828 |
| | 5,190 |
| | — |
| | 5,155 |
| | 35 |
| |
Financial Liabilities - | | |
| | | | | | | |
Deposits | (538 | ) | | (538 | ) | | — |
| | (538 | ) | | — |
| |
Consolidated obligation discount notes | (41,564 | ) | | (41,563 | ) | | — |
| | (41,563 | ) | | — |
| |
Consolidated obligation bonds | (22,582 | ) | | (22,986 | ) | | — |
| | (22,931 | ) | | (55 | ) | a |
Mandatorily redeemable capital stock | (8 | ) | | (8 | ) | | (8 | ) | | — |
| | — |
| |
Subordinated notes | (944 | ) | | (966 | ) | | — |
| | (966 | ) | | — |
| |
| |
a | Amount represents debt carried at fair value under a full fair value hedge strategy, not at fair value under the fair value option. |
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The following table presents financial instruments measured at fair value on a recurring basis on our statements of condition.
Assets measured at fair value The Netting adjustment shown in the table reflects our policy of presenting derivative assets and liabilities on a nonrecurringnet basis onin our statements of condition.
We had no transfers between Levels See Note 1 2, and/or 3 - Background and Basis of Presentation and Note 9 - Derivatives and Hedging Activities for further details. Advances, consolidated obligation discount notes and bonds, and mortgage loans held for sale resulted from our electing the periods presented.
Fair values of financial instruments
fair value option.
|
| | | | | | | | | | | | | | | | | | | | |
| Carrying Amount | | | | Fair Value Hierarchy | |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 | |
September 30, 2015 | | | | | | | | | | |
Financial Assets - | | | | | | | | | | |
Cash and due from banks | $ | 606 |
| | $ | 606 |
| | $ | 606 |
| | $ | — |
| | $ | — |
| |
Interest bearing deposits | 560 |
| | 560 |
| | 560 |
| | — |
| | — |
| |
Federal Funds sold | 720 |
| | 720 |
| | — |
| | 720 |
| | — |
| |
Securities purchased under agreements to resell | 3,400 |
| | 3,400 |
| | — |
| | 3,400 |
| | — |
| |
Held-to-maturity securities | 5,740 |
| | 6,375 |
| | — |
| | 5,089 |
| | 1,286 |
| |
Advances | 35,044 |
| | 35,020 |
| | — |
| | 35,020 |
| | — |
| |
MPF Loans held in portfolio, net | 5,079 |
| | 5,442 |
| |
|
| | 5,406 |
| | 36 |
| |
Financial Liabilities - | | | | | | |
| | | |
Deposits | (510 | ) | | (510 | ) | | — |
| | (510 | ) | | — |
| |
Consolidated obligation discount notes | (37,290 | ) | | (37,292 | ) | | — |
| | (37,292 | ) | | — |
| |
Consolidated obligation bonds | (26,062 | ) | | (26,586 | ) | | — |
| | (26,532 | ) | | (54 | ) | a |
Subordinated notes | (944 | ) | | (980 | ) | | — |
| | (980 | ) | | — |
| |
December 31, 2014 | | | | | | | | | | |
Financial Assets - | | | | | | | | | | |
Cash and due from banks | $ | 342 |
| | $ | 342 |
| | $ | 342 |
| | $ | — |
| | $ | — |
| |
Interest bearing deposits | 560 |
| | 560 |
| | 560 |
| | — |
| | — |
| |
Federal Funds sold | 1,525 |
| | 1,525 |
| | — |
| | 1,525 |
| | — |
| |
Securities purchased under agreements to resell | 3,400 |
| | 3,400 |
| | — |
| | 3,400 |
| | — |
| |
Held-to-maturity securities | 7,118 |
| | 7,824 |
| | — |
| | 6,356 |
| | 1,468 |
| |
Advances | 32,485 |
| | 32,546 |
| | — |
| | 32,546 |
| | — |
| |
MPF Loans held in portfolio, net | 6,057 |
| | 6,585 |
| | — |
| | 6,435 |
| | 150 |
| |
Financial Liabilities - | | | | | | | | | | |
Deposits | (666 | ) | | (666 | ) | | — |
| | (666 | ) | | — |
| |
Consolidated obligation discount notes | (31,054 | ) | | (31,055 | ) | | — |
| | (31,055 | ) | | — |
| |
Consolidated obligation bonds | (34,251 | ) | | (34,831 | ) | | — |
| | (34,768 | ) | | (63 | ) | a |
Subordinated notes | (944 | ) | | (1,013 | ) | | — |
| | (1,013 | ) | | — |
| |
|
| | | | | | | | | | | | | | | | |
September 30, 2016 | | Level 2 | | Level 3 | | Netting | | Fair Value |
Financial assets - | | | | | | | | |
U.S. Government & other government related non-MBS | | $ | 1,003 |
| | $ | — |
| | | | $ | 1,003 |
|
GSE residential MBS | | 42 |
| | — |
| | | | 42 |
|
U.S. Governmental-guaranteed residential MBS | | 2 |
| | — |
| | | | 2 |
|
Trading securities | | 1,047 |
| | — |
| | | | 1,047 |
|
U.S. Government & other government related non-MBS | | 367 |
| | — |
| | | | 367 |
|
State or local housing agency non-MBS | | 20 |
| | — |
| | | | 20 |
|
FFELP ABS | | 4,694 |
| | — |
| | | | 4,694 |
|
GSE residential MBS | | 8,922 |
| | — |
| | | | 8,922 |
|
U.S. Government-guaranteed residential MBS | | 1,500 |
| | — |
| | | | 1,500 |
|
Private-label residential MBS | | — |
| | 58 |
| | | | 58 |
|
Available-for-sale securities | | 15,503 |
| | 58 |
| | | | 15,561 |
|
Advances | | 703 |
| | — |
| | | | 703 |
|
Derivative assets | | 663 |
| | — |
| | $ | (642 | ) | | 21 |
|
Other assets - Mortgage loans held for sale | | 58 |
| | — |
| | | | 58 |
|
Financial assets at fair value | | $ | 17,974 |
| | $ | 58 |
| | $ | (642 | ) | | $ | 17,390 |
|
Financial liabilities - | | | | | | | | |
Consolidated obligation discount notes | | $ | (12,537 | ) | | $ | — |
| | | | $ | (12,537 | ) |
Consolidated obligation bonds | | (7,058 | ) | | — |
| | | | (7,058 | ) |
Derivative liabilities | | (1,571 | ) | | — |
| | $ | 1,523 |
| | (48 | ) |
Financial liabilities at fair value | | $ | (21,166 | ) | | $ | — |
| | $ | 1,523 |
| | $ | (19,643 | ) |
December 31, 2015 | | | | | | | | |
Financial assets - | | | | | | | | |
U.S. Government & other government related non-MBS | | $ | 1,108 |
| | $ | — |
| | | | $ | 1,108 |
|
GSE residential MBS | | 50 |
| | — |
| | | | 50 |
|
U.S. Governmental-guaranteed residential MBS | | 2 |
| | — |
| | | | 2 |
|
Trading securities | | 1,160 |
|
| — |
| | | | 1,160 |
|
U.S. Government & other government related non-MBS | | 422 |
| | — |
| | | | 422 |
|
State or local housing agency non-MBS | | 18 |
| | — |
| | | | 18 |
|
FFELP ABS | | 5,299 |
| | — |
| | | | 5,299 |
|
GSE residential MBS | | 9,798 |
| | — |
| | | | 9,798 |
|
U.S. Government-guaranteed residential MBS | | 1,868 |
| | — |
| | | | 1,868 |
|
Private-label residential MBS | | — |
| | 65 |
| | | | 65 |
|
Available-for-sale securities | | 17,405 |
|
| 65 |
| | | | 17,470 |
|
Advances | | 511 |
| | — |
| | | | 511 |
|
Derivative assets | | 598 |
| | 5 |
| | $ | (601 | ) | | 2 |
|
Other assets - Mortgage loans held for sale | | 54 |
| | — |
| | | | 54 |
|
Financial assets at fair value | | $ | 19,728 |
|
| $ | 70 |
|
| $ | (601 | ) | | $ | 19,197 |
|
Financial liabilities - | | | | | | | |
|
Consolidated obligation discount notes | | $ | (9,006 | ) | | $ | — |
| | | | $ | (9,006 | ) |
Consolidated obligation bonds | | (952 | ) | | (55 | ) | a | | | (1,007 | ) |
Derivative liabilities | | (1,424 | ) | | — |
| | $ | 1,369 |
| | (55 | ) |
Financial liabilities at fair value | | $ | (11,382 | ) |
| $ | (55 | ) |
| $ | 1,369 |
| | $ | (10,068 | ) |
| |
a | Amount represents debt carried at fair value under a full fair value hedge strategy, not at fair value under the fair value option. |
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)
Financial instruments measured at fair value on a recurring basis on our statements of condition
|
| | | | | | | | | | | | | | | | |
As of September 30, 2015 | | Level 2 | | Level 3 | | Netting | | Fair Value |
Financial assets - | | | | | | | | |
U.S. Government & other government related non-MBS | | $ | 101 |
| | $ | — |
| | | | $ | 101 |
|
GSE residential MBS | | 52 |
| | — |
| | | | 52 |
|
U.S. Governmental-guaranteed residential MBS | | 2 |
| | — |
| | | | 2 |
|
Trading securities | | 155 |
| | — |
| | | | 155 |
|
U.S. Government & other government related non-MBS | | 439 |
| | — |
| | | | 439 |
|
State or local housing agency non-MBS | | 15 |
| | — |
| | | | 15 |
|
FFELP ABS | | 5,520 |
| | — |
| | | | 5,520 |
|
GSE residential MBS | | 10,257 |
| | — |
| | | | 10,257 |
|
U.S. Government-guaranteed residential MBS | | 2,010 |
| | — |
| | | | 2,010 |
|
Private-label residential MBS | | — |
| | 67 |
| | | | 67 |
|
Available-for-sale securities | | 18,241 |
| | 67 |
| | | | 18,308 |
|
Advances | | 95 |
| | — |
| | | | 95 |
|
Derivative assets | | 791 |
| | 5 |
| | $ | (794 | ) | a | 2 |
|
Other assets - Mortgage loans held for sale | | 21 |
| | — |
| | | | 21 |
|
Total financial assets at fair value | | $ | 19,303 |
| | $ | 72 |
| | $ | (794 | ) | a | $ | 18,581 |
|
Level 3 as a percent of total assets at fair value | | | | 0.4 | % | | | | |
Financial liabilities - | | | | | | | | |
Consolidated obligation discount notes | | $ | (6,472 | ) | | $ | — |
| | | | $ | (6,472 | ) |
Consolidated obligation bonds | | (980 | ) | | (54 | ) | b | | | (1,034 | ) |
Derivative liabilities | | (1,748 | ) | | — |
| | $ | 1,704 |
| a | (44 | ) |
Total financial liabilities at fair value | | $ | (9,200 | ) | | $ | (54 | ) | | $ | 1,704 |
| a | $ | (7,550 | ) |
Level 3 as a percent of total liabilities at fair value | | | | 0.7 | % | | | | |
As of December 31, 2014 | | | | | | | | |
Financial assets - | | | | | | | | |
U.S. Government & other government related non-MBS | | $ | 102 |
| | $ | — |
| | | | $ | 102 |
|
GSE residential MBS | | 63 |
| | — |
| | | | 63 |
|
U.S. Governmental-guaranteed residential MBS | | 2 |
| | — |
| | | | 2 |
|
Trading securities | | 167 |
| | — |
| | | | 167 |
|
U.S. Government & other government related non-MBS | | 508 |
| | — |
| | | | 508 |
|
State or local housing agency non-MBS | | 3 |
| | — |
| | | | 3 |
|
FFELP ABS | | 6,221 |
| | — |
| | | | 6,221 |
|
GSE residential MBS | | 10,827 |
| | — |
| | | | 10,827 |
|
U.S. Government-guaranteed residential MBS | | 2,345 |
| | — |
| | | | 2,345 |
|
Private-label residential MBS | | — |
| | 71 |
| | | | 71 |
|
Available-for-sale securities | | 19,904 |
| | 71 |
| | | | 19,975 |
|
Advances | | 83 |
| | — |
| | | | 83 |
|
Derivative assets | | 691 |
| | 13 |
| | $ | (675 | ) | a | 29 |
|
Total financial assets at fair value | | $ | 20,845 |
| | $ | 84 |
| | $ | (675 | ) | a | $ | 20,254 |
|
Level 3 as a percent of total assets at fair value | | | | 0.4 | % | | | | |
Financial liabilities - | | | | | | | | |
Consolidated obligation discount notes | | $ | (1,799 | ) | | $ | — |
| | | | $ | (1,799 | ) |
Consolidated obligation bonds | | (2,785 | ) | | (63 | ) | b | | | (2,848 | ) |
Derivative liabilities | | (1,680 | ) | | — |
| | $ | 1,625 |
| a | (55 | ) |
Total financial liabilities at fair value | | $ | (6,264 | ) | | $ | (63 | ) | | $ | 1,625 |
| a | $ | (4,702 | ) |
Level 3 as a percent of total liabilities at fair value | | | | 1.3 | % | | | | |
| |
a
| The netting adjustment amount includes cash collateral (either received or paid by us) and related accrued interest in cases where we have a legal right of setoff, by contract (e.g., master netting agreement) or otherwise, to discharge all or a portion of the debt owed to our counterparty by applying against the debt an amount that our counterparty owes to us. See Note 9 - Derivatives and Hedging Activities.
|
| |
b
| Amount represents debt carried at fair value under a full fair value hedge strategy, not at fair value under the fair value option. |
Financial instruments carried at fair value on a recurring basis using Level 3 inputs were immaterial and there were no significant changes in balances in unobservable inputs (Level 3) in the nine months ended September 30, 2015, or 2014.
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollarstables in millions except per share amounts unless otherwise indicated)
Assets measured at fair value on a nonrecurring basis on our statements of condition
Assets that are not carried at fair value in our statements of condition may be required to be measured at fair value under certain circumstances. Examples include, but are not limited to, conventional MPF Loans held in portfolio that become impaired or REO that have declined in fair value during the reporting period. We measure such assets at fair value on a nonrecurring basis. Effective January 1, 2015, we began using an Automated Valuation Methodology (AVM) to determine the fair value of our impaired conventional MPF Loans and REO pursuant to the guidance provided by AB 2012-02. Refer to Note 2 - Summary of Significant Accounting Policies for further details.
The table below presents assets that typically are not carried at fair value that were measured at fair value in our statements of condition as of the dates shown. The fair value information presented is not as of the period-end, rather it was as of the date the fair value adjustment was recorded during the nine months ended September 30, 2015, and excludes nonrecurring fair value measurements of assets no longer on the balance sheet.
|
| | | | | | | | |
| | Level 3 |
As of | | September��30, 2015 | | December 31, 2014 |
Impaired conventional MPF Loans held in portfolio | | $ | 36 |
| | $ | 150 |
|
REO (recorded in Other Assets) | | 12 |
| | 9 |
|
Fair Value Option
We electedelect the fair value option for financial instruments, such as advances, MPF Loans held for sale, discount notes, and consolidated obligation bonds, for whichin cases where hedge accounting treatment may not be achieved. Specifically, hedge accounting may not be achieved in cases where it may be difficult to pass prospective or retrospective effectiveness testing under derivative hedge accounting guidance even though the interest rate swapsderivatives used to hedge these financial instruments have matching terms. Accordingly, electing the fair value option allows us to better match the change in fair value of the advance, MPF Loans held for sale, discount note, and short-term consolidated obligation bondsthese financial instruments with the interest rate swapderivative economically hedging it. We made no adjustments to the fair values of our instruments under the fair value option for credit risk as of the dates presented.
The table below summarizes the net gain (loss) related to financial assets and liabilities for which we elected the fair value option, except for MPF Loans held for sale which are not material.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Advances | $ | 1 |
| | $ | 3 |
| | $ | 2 |
| | $ | 3 |
|
Bonds | — |
| | 7 |
| | 4 |
| | 8 |
|
Discount Notes | — |
| | — |
| | (2 | ) | | — |
|
Total | $ | 1 |
| | $ | 10 |
| | $ | 4 |
| | $ | 11 |
|
them.
The following table reflects the difference between the aggregate unpaid principal balance (UPB) outstanding and the aggregate fair value for advances and consolidated obligation bondsour long term financial instruments for which the fair value option has been elected. None of the advances were 90 days or more past due and none were on nonaccrual status.
|
| | | | | | | | | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 |
As of | | Advances | | Consolidated Obligation Bonds | | Advances | | Consolidated Obligation Bonds |
Unpaid Principal Balance | | $ | 90 |
|
| $ | 974 |
|
| $ | 80 |
|
| $ | 2,775 |
|
Fair Value Over (Under) UPB | | 5 |
| | 6 |
| | 3 |
| | 10 |
|
Fair Value | | $ | 95 |
| | $ | 980 |
| | $ | 83 |
| | $ | 2,785 |
|
|
| | | | | | | | | | | | | | | | |
| | September 30, 2016 | | December 31, 2015 |
As of | | Advances | | Consolidated Obligation Bonds | | Advances | | Consolidated Obligation Bonds |
Unpaid principal balance | | $ | 689 |
| | $ | 7,047 |
|
| $ | 509 |
| | $ | 953 |
|
Fair value over (under) UPB | | 14 |
| | 11 |
| | 2 |
| | (1 | ) |
Fair value | | $ | 703 |
| | $ | 7,058 |
| | $ | 511 |
| | $ | 952 |
|
Federal Home Loan Bank of Chicago![logoa11.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa11.jpg)
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 14 – Commitments and Contingencies
The following table below shows our commitments outstanding, which represent off-balance sheet obligations, for the periods presented.obligations.
| | | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
As of | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total |
Unsettled consolidated obligation bonds | | $ | 93 |
| | $ | — |
| | $ | 93 |
| | $ | 91 |
| | $ | — |
| | $ | 91 |
| | $ | 748 |
| | $ | — |
| | $ | 748 |
| | $ | 105 |
| | $ | — |
| | $ | 105 |
|
Unsettled consolidated obligation discount notes | | | 500 |
| | — |
| | 500 |
| | — |
| | — |
| | — |
|
Member standby letters of credit | | 4,754 |
| | 1,597 |
| a | 6,351 |
| | 2,410 |
| | 1,207 |
| a | 3,617 |
| | 8,283 |
| | 2,140 |
| a | 10,423 |
| | 5,063 |
| | 1,615 |
| a | 6,678 |
|
Housing authority standby bond purchase agreements | | — |
| | 433 |
| | 433 |
| | 155 |
| | 262 |
| | 417 |
| | 46 |
| | 262 |
| | 308 |
| | 49 |
| | 362 |
| | 411 |
|
Committed unused member lines of credit | | — |
| | — |
| | — |
| | 4,000 |
| | — |
| | 4,000 |
| |
Advance commitments | | 185 |
| | 20 |
| | 205 |
| | 158 |
| | 104 |
| | 262 |
| | 45 |
| | 1 |
| | 46 |
| | 163 |
| | 5 |
| | 168 |
|
MPF Program mortgage purchase commitments | | 383 |
| | — |
| | 383 |
| | 143 |
| | — |
| | 143 |
| |
MPF delivery commitments | | | 632 |
| | — |
| | 632 |
| | 279 |
| | — |
| | 279 |
|
Other commitments | | 52 |
| | — |
| | 52 |
| | 68 |
| | — |
| | 68 |
| | 28 |
| | — |
| | 28 |
| | 48 |
| | 3 |
| | 51 |
|
Commitments | | $ | 5,467 |
| | $ | 2,050 |
| | $ | 7,517 |
| | $ | 7,025 |
| | $ | 1,573 |
| | $ | 8,598 |
| | $ | 10,282 |
| | $ | 2,403 |
| | $ | 12,685 |
| | $ | 5,707 |
| | $ | 1,985 |
| | $ | 7,692 |
|
| |
a | Contains $1,032$372 million and $974$637 million of member standby letters of credit at September 30, 2015,2016, and December 31, 2014,2015, which were renewable annually. |
For a description of previously defined terms see Note 17 - Commitments and Contingencies to the financial statements in our 20142015 Form 10-K.
Note 15 – Transactions with Related Parties and Other FHLBs
We define related parties as members that own 10% or more of our capital stock or members whose officers or directors also serve on our Board of Directors. Capital stock ownership is a prerequisite to transacting any member business with us. Members and former members own all of our capital stock.
In the normal course of business, we extend credit to or enter into other transactions with these related parties. All transactions are done at market terms that are no more favorable than the terms of comparable transactions with other members who are not considered related parties.
Members
The following table below summarizes balances we had with our members who are related parties as defined above as related parties (including their affiliates). Members represented in these tables may change between periods presented, to the extent that our related parties change, based on changes in the composition of our Board membership.membership or percentage of capital stock ownership over 10% as noted in Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS).
| | As of | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
Assets - Interest bearing deposits | | $ | 560 |
| | $ | 560 |
| | $ | 650 |
| | $ | 650 |
|
Assets - Advances | | 15,156 |
| | 11,159 |
| | 16,016 |
| | 15,168 |
|
Assets - Advance Interest Receivable | | 4 |
| | 2 |
| |
Liabilities - Deposits | | 18 |
| | 26 |
| | 33 |
| | 20 |
|
Equity - Capital Stock | | 466 |
| | 267 |
| | 483 |
| | 467 |
|
Other FHLBs
From time to time, we may loan to, or borrow from, other FHLBs. All transactions are done at market terms that are no more favorable than the terms of comparable transactions with other counterparties. These transactions are overnight, maturing the following business day. These and other material transactions with other FHLBs, if any, are identified on the face of our Financial Statements.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
| | As of or for the three months ended | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 | | December 31, 2014 | | September 30, 2014 | | September 30, 2016 | | June 30, 2016 | | March 31, 2016 | | December 31, 2015 | | September 30, 2015 |
Selected statements of condition data | | | | | | | | | | | | | | | | | | | | |
Total investments a | | $ | 28,883 |
| | $ | 28,080 |
| | $ | 30,816 |
| | $ | 32,745 |
| | $ | 30,229 |
| | $ | 26,853 |
| | $ | 28,964 |
| | $ | 27,597 |
| | $ | 28,324 |
| | $ | 28,883 |
|
Advances | | 35,044 |
| | 34,553 |
| | 31,941 |
| | 32,485 |
| | 26,766 |
| | 43,117 |
| | 46,424 |
| | 38,353 |
| | 36,778 |
| | 35,044 |
|
MPF Loans held in portfolio, gross | | 5,082 |
| | 5,377 |
| | 5,732 |
| | 6,072 |
| | 6,438 |
| | 4,723 |
| | 4,670 |
| | 4,681 |
| | 4,831 |
| | 5,082 |
|
Less: allowance for credit losses | | (3 | ) | | (3 | ) | | (4 | ) | | (15 | ) | | (16 | ) | | (3 | ) | | (3 | ) | | (2 | ) | | (3 | ) | | (3 | ) |
Total assets | | 69,824 |
| | 69,760 |
| | 70,147 |
| | 71,841 |
| | 72,031 |
| | 74,983 |
| | 80,662 |
| | 70,913 |
| | 70,671 |
| | 69,824 |
|
Consolidated obligations, net - | | | | | | | | | | | |
Discount notes | | 37,290 |
| | 34,552 |
| | 30,474 |
| | 31,054 |
| | 30,507 |
| |
Bonds | | 26,062 |
| | 28,672 |
| | 33,043 |
| | 34,251 |
| | 35,239 |
| |
Consolidated obligation discount notes, net | | | 39,144 |
| | 45,876 |
| | 40,293 |
| | 41,564 |
| | 37,290 |
|
Consolidated obligation bonds, net | | | 30,139 |
| | 29,091 |
| | 24,021 |
| | 22,582 |
| | 26,062 |
|
Total capital stock | | 1,892 |
| | 1,835 |
| | 1,923 |
| | 1,902 |
| | 1,801 |
| | 1,636 |
| | 1,774 |
| | 1,733 |
| | 1,950 |
| | 1,892 |
|
Total retained earnings | | 2,640 |
| | 2,575 |
| | 2,484 |
| | 2,406 |
| | 2,304 |
| | 2,951 |
| | 2,884 |
| | 2,790 |
| | 2,730 |
| | 2,640 |
|
Mandatorily redeemable capital stock (MRCS) | | | 302 |
| | 302 |
| | 302 |
| | 8 |
| | 9 |
|
Total capital | | 4,573 |
| | 4,549 |
| | 4,579 |
| | 4,525 |
| | 4,344 |
| | 4,515 |
| | 4,507 |
| | 4,413 |
| | 4,652 |
| | 4,573 |
|
Other selected data at period end | | | | | | | | | | | | | | | | | | | | |
MPF off-balance sheet loans outstanding b | | $ | 15,083 |
| | 14,840 |
| | $ | 14,662 |
| | $ | 14,474 |
| | $ | 14,298 |
| |
MPF off-balance sheet loans outstanding FHLB System b | | | $ | 16,594 |
| | $ | 16,061 |
| | $ | 15,664 |
| | $ | 15,399 |
| | $ | 15,083 |
|
MPF off-balance sheet loans outstanding FHLB Chicago PFIs b | | | 8,100 |
| | 7,892 |
| | 7,827 |
| | 7,785 |
| | 7,765 |
|
FHLB systemwide consolidated obligations (par) | | 856,511 |
| | 852,783 |
| | 812,196 |
| | 847,175 |
| | 816,950 |
| | 967,728 |
| | 963,810 |
| | 896,828 |
| | 905,202 |
| | 856,511 |
|
Number of members | | 742 |
| | 748 |
| | 745 |
| | 751 |
| | 757 |
| | 730 |
| | 732 |
| | 737 |
| | 740 |
| | 742 |
|
Total employees (full and part time) | | 410 |
| | 413 |
| | 408 |
| | 405 |
| | 391 |
| | 443 |
| | 432 |
| | 425 |
| | 422 |
| | 410 |
|
Selected statements of income data | | | | | | | | | | | | | | | | | | | | |
Net interest income after provision for credit losses | | $ | 121 |
|
| $ | 117 |
|
| $ | 130 |
|
| $ | 136 |
|
| $ | 140 |
| | $ | 113 |
|
| $ | 111 |
|
| $ | 120 |
|
| $ | 135 |
|
| $ | 121 |
|
Non-interest gain (loss) | | (6 | ) | | 24 |
| | (5 | ) | | 18 |
| | 11 |
| | 14 |
| | 50 |
| | (3 | ) | | 10 |
| | (6 | ) |
Non-interest expense | | 35 |
| | 33 |
| | 33 |
| | 35 |
| | 28 |
| | 42 |
| | 46 |
| | 40 |
| | 37 |
| | 35 |
|
Net income | | 72 |
| | 97 |
| | 83 |
| | 107 |
| | 110 |
| | 76 |
| | 104 |
| | 69 |
| | 97 |
| | 72 |
|
Other selected data during the periods | | | | | | | | | | | | | | | | | | | | |
MPF off-balance sheet loan volume funded system b | | $ | 807 |
| | $ | 800 |
| | $ | 698 |
| | $ | 604 |
| | $ | 591 |
| |
MPF off-balance sheet loan volume funded FHLBC b | | 363 |
| | 388 |
| | 357 |
| | 315 |
| | 281 |
| |
MPF off-balance sheet loan volume funded FHLB System b | | | $ | 1,298 |
| | $ | 960 |
| | $ | 703 |
| | $ | 849 |
| | $ | 807 |
|
MPF off-balance sheet loan volume funded FHLB Chicago PFIs b | | | 609 |
| | 395 |
| | 277 |
| | 329 |
| | 363 |
|
Selected ratios (rates annualized) | | | | | | | | | | | | | | | | | | | | |
Total regulatory capital to assets ratio | | 6.50 | % | | 6.33 | % | | 6.29 | % | | 6.01 | % | | 5.71 | % | | 6.52 | % | | 6.15 | % | | 6.81 | % | | 6.63 | % | | 6.50 | % |
Market value of equity to book value of equity | | 108 | % | | 110 | % | | 112 | % | | 114 | % | | 116 | % | | 108 | % | | 107 | % | | 107 | % | | 108 | % | | 108 | % |
Total investments - % of total assets | | 41 | % |
| 40 | % | | 44 | % | | 46 | % | | 42 | % | | 36 | % |
| 36 | % | | 39 | % | | 40 | % | | 41 | % |
Advances - % of total assets | | 50 | % |
| 50 | % | | 46 | % | | 45 | % | | 37 | % | | 58 | % |
| 58 | % | | 54 | % | | 52 | % | | 50 | % |
MPF Loans held in portfolio, net - % of total assets | | 7 | % |
| 8 | % | | 8 | % | | 8 | % | | 9 | % | | 6 | % |
| 6 | % | | 7 | % | | 7 | % | | 7 | % |
Dividend rate class B1 activity stock-period paid | | 2.25 | % | | 2.25 | % | | 2.25 | % | | 2.00 | % | | 1.50 | % | | 2.80 | % | | 2.80 | % | | 2.60 | % | | 2.50 | % | | 2.25 | % |
Dividend rate class B2 membership stock-period paid | | 0.50 | % | | 0.50 | % | | 0.50 | % | | 0.50 | % | | 0.50 | % | | 0.60 | % | | 0.60 | % | | 0.60 | % | | 0.50 | % | | 0.50 | % |
Return on average assets | | 0.42 | % | | 0.56 | % | | 0.44 | % | | 0.58 | % | | 0.62 | % | | 0.38 | % | | 0.53 | % | | 0.38 | % | | 0.53 | % | | 0.42 | % |
Return on average equity | | 6.31 | % | | 8.51 | % | | 7.34 | % | | 9.60 | % | | 10.16 | % | | 6.70 | % | | 9.38 | % | | 5.87 | % | | 8.44 | % | | 6.31 | % |
Average equity to average assets | | 6.66 | % | | 6.58 | % | | 5.99 | % | | 6.03 | % | | 6.07 | % | | 5.67 | % | | 5.65 | % | | 6.47 | % | | 6.28 | % | | 6.66 | % |
Net yield on average interest-earning assets | | 0.72 | % | | 0.71 | % | | 0.70 | % | | 0.75 | % | | 0.79 | % | | 0.57 | % | | 0.57 | % | | 0.66 | % | | 0.75 | % | | 0.72 | % |
Return on average Regulatory Capital spread to three month LIBOR index | | 6.15 | % | | 8.59 | % | | 7.51 | % | | 9.84 | % | | 10.53 | % | | 5.34 | % | | 7.97 | % | | 5.17 | % | | 7.94 | % | | 6.15 | % |
Cash dividends | | $ | 7 |
| | $ | 6 |
| | $ | 5 |
| | $ | 5 |
| | $ | 4 |
| | $ | 9 |
| | $ | 10 |
| | $ | 9 |
| | $ | 7 |
| | $ | 7 |
|
Dividend payout ratio | | 10 | % |
| 6 | % |
| 6 | % |
| 5 | % |
| 4 | % | | 12 | % |
| 10 | % |
| 13 | % |
| 7 | % |
| 10 | % |
| |
a | Total investments includes investment securities, interest bearing deposits, Federal Funds sold, and securities purchased under agreements to resell. |
| |
b | MPF off-balance sheet outstanding loans are MPF Program loansLoans purchased from our PFIs or the PFIs of systemwide FHLBs and are concurrently resold to Fannie Mae or other third party investors under the MPF Xtra and MPF Direct products or pooled and securitized in Ginnie Mae MBS under the MPF Government MBS product. See Mortgage Partnership Finance Program beginning on page 7 in our 20142015 Form 10-K. |
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Forward-Looking Information
Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions of management, may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “expects,” “could,” “estimates,” “may,” “should,” “will,” their negatives, or other variations of these terms. We caution that, by their nature, forward-looking statements involve risks and uncertainties related to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in these forward-looking statements and could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, undue reliance should not be placed on such statements.
These forward-looking statements involve risks and uncertainties including, but not limited to, the following:
changes in the demand by our members for advances, including the impact of the availability of other sources of funding for our members, such as deposits;
limits on our investments in long-term assets;
the impact of new business strategies, including our ability to develop and implement business strategies focused on maintaining net interest income; the impact of our efforts to simplify our balance sheet on our market risk profile and future hedging costs; our ability to successfully transition to a newexecute our business model, implement business process improvements and scale our size to our members' borrowing needs; the extent to which our members use our advances as part of their core financing rather than just as a back-up source of liquidity; and our ability to implement product enhancements and new products and generate enough volume in new products to cover our costs related to developing such products;
the extent to which amendments to our Capital Plan, including our ability to reduce capital stock requirements for certain future advance borrowings, and our ability to continue to pay enhanced dividends on our activity-basedactivity stock, impact borrowing by our members;
our ability to meet required conditions to repurchase and redeem capital stock from our members (including maintaining compliance with our minimum regulatory capital requirements and determining that our financial condition is sound enough to support such repurchases), and the amount and timing of such repurchases or redemptions;
general economic and market conditions, including the timing and volume of market activity, inflation/deflation, unemployment rates, housing prices, the condition of the mortgage and housing markets, increased delinquencies and/or loss rates on mortgages, prolonged or delayed foreclosure processes, and the effects on, among other things, mortgage-backed securities; volatility resulting from the effects of, and changes in, various monetary or fiscal policies and regulations, such as those determined by the Federal Reserve Board and Federal Deposit Insurance Corporation; impacts from various measures to stimulate the economy and help borrowers refinance home mortgages and student loans; disruptions in the credit and debt markets and the effect on future funding costs, sources, and availability;
volatility of market prices, rates, and indices, or other factors, such as natural disasters, that could affect the value of our investments or collateral; changes in the value or liquidity of collateral securing advances to our members;
changes in the value of and risks associated with our investments in mortgage loans, mortgage-backed securities, and FFELP ABS and the related credit enhancement protections;
changes in our ability or intent to hold mortgage-backed securities to maturity;
changes in mortgage interest rates and prepayment speeds on mortgage assets;
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
membership changes, including the withdrawal of members due to restrictions on our dividends or the loss of members through mergers and consolidations;consolidations or through regulatory requirements; changes in the financial health of our members, including the resolution of some members; risks related to expanding our membership to include more institutions with regulators and resolution processes with which we have less experience;
increased reliance on short-term funding and changes in investor demand and capacity for consolidated obligations and/or the terms of interest rate derivatives and similar agreements, including changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities; changes in our cost of funds due to concerns over U.S. fiscal policy, and any related rating agency actions impacting FHLB consolidated obligations;
political events, including legislative, regulatory, judicial, or other developments that affect us, our members, our counterparties and/or investors in consolidated obligations, including, among other things, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related regulations and proposals and legislation related to housing finance and GSE reform; changes by our regulator and changes in the FHLB Act or applicable regulations as a result of the Housing and Economic Recovery Act of 2008 (Housing Act) or as may otherwise be issued by our regulator, including regulatory changes to FHLB membership requirements proposed by the FHFA; the potential designation of us as a nonbank financial company for supervision by the Federal Reserve;
the ability of each of the other FHLBs to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which we have joint and several liability;
the pace of technological change and our ability to develop and support technology and information systems, including our ability to protect the security of our information systems and manage any failures, interruptions or breaches in our information systems or technology services provided to us through third-party vendors;
our ability to attract and retain skilled employees;
the impact of new accounting standards and the application of accounting rules, including the impact of regulatory guidance on our application of such standards and rules;
the impact of the application of auditor independence rules to our independent auditor;
the volatility of reported results due to changes in the fair value of certain assets and liabilities; and
our ability to identify, manage, mitigate, and/or remedy internal control weaknesses and other operational risks.
For a more detailed discussion of the risk factors applicable to us, see Risk Factors in our 20142015 Form 10-K on page 19.
These forward-looking statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement as a result of new information, future events, changed circumstances, or any other reason.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Executive Summary
Third Quarter 20152016 Financial Highlights
We recorded net incomeof $72$76 million for the third quarter of 2015, down2016, up from $110$72 million in the third quarter of 2014.
2015.Net interest incomefor the third quarter of 20152016 was $121$113 million, downwhich included $9 million of income from $140 million forinvestment security prepayments during the period. For the third quarter of 2014 as2015, net interest income was $122 million, which included $11 million of income from investment security prepayments during the period. While our legacy investment and MPF Loan portfolios continuedportfolio continues to pay down.
down, investments that were indexed to three-month LIBOR benefited from the increase in three-month LIBOR rates. Separately, debt hedged with three-month LIBOR swaps was negatively impacted by higher three-month LIBOR rates. In addition, we have issued more long term debt at higher rates.Noninterest gain (loss) for the third quarter of 20152016 was ($6 million), down$14 million, up from a gainloss of $11$6 million for the third quarter of 20142015 as we experienced increased gains on our balance sheet hedging costs returnedactivities.
Noninterest expense increased to more historically normalized levels.$42 million for the third quarter of 2016, compared to $35 million for the third quarter of 2015, with the increase driven mainly by an increase in compensation and benefits.
Total investment securitiesdeclined $3.1 decreased $3.2 billion to $21.4 billion at September 30, 2016, down 13% from $27.3$24.6 billion at December 31, 2014,2015, as our investment portfolio continued to $24.2pay down during the period.
Advances outstanding increased $6.3 billion to $43.1 billion at September 30, 2015, as the investments portfolio continued to pay down.
Advancesoutstanding increased $2.5 billion to $35.0 billion at September 30, 2015,2016, up 17% from $32.5$36.8 billion at December 31, 2014.
2015, as members continue to support investment activities and high loan growth in their communities.MPF Loans held in portfolio remained relatively flat from December 31, 2015, to September 30, 2016, as new MPF Loan volume helped offset paydown and maturity activity during the period.
Total assetsdecreased $2.0 increased $4.3 billion to $69.8$75.0 billion as of September 30, 2016, up 6% compared to $70.7 billion as of December 31, 2015.
We reached $2.95 billion in retained earnings at September 30, 2015, down from $71.8 billion at December 31, 2014.
We reached over $2.6 billion in retained earningsat September 30, 2015.
2016.We remained in compliance with all of our regulatory capital requirements as of September 30, 2015.2016.
Summary and Outlook
Third Quarter 20152016 Dividend
For
On October 27, 2016, the second time this year, the Bank’sBank's Board of Directors has increasedmaintained the dividend declared per share onlevels for the third quarter of 2016. The Board again recognized our members that borrow from the Bank by declaring a dividend of 2.80% (annualized) for Class B1 activity capital stock, by 25 basis points to an annualized rate of 2.50% based on the Bank’s preliminary financial results for the third quarter of 2015. With this action, the Board continues and enhances the practice of rewarding members that use the Bank’s advances and support the financial health of the entire cooperative.2016. The Board has also implemented changes, as described below, that provide access to the higherdeclared a 0.60% dividend to most borrowing members. The Board maintained the dividend level declared in previous quarters this year(annualized) for Class B2 membership stock at an annualized rate of 0.50%.capital stock.
Enhancing Members’ Return on MembershipMember Owned and Member Focused
AlsoAt September 30, 2016, advances were $43.1 billion, up 17% from December 31, 2015, and letters of credit were $10.4 billion, up 56% from December 31, 2015. As the Bank’s members seek ways to increase their non-interest income, the volume in the third quarter, the Board implemented the Second Amended and Restated Capital Plan, which increases members’ returntraditional MPF products has continued to grow as well.
The Bank continues to focus on activity with the Bank. This Capital Plan became effective October 1, 2015. It significantly reduced the threshold for the automatic conversion of membership stockits members by striving to activity stock. Instead of $5 million, the threshold is now $10,000. Using this lower threshold, a member that borrows more than $200,000 at a 5% activity stock requirement has a lower net cost of borrowing due to the higher dividend paid on activity stock. As a result of this change, more than 99% of the Bank’s borrowingunderstand what members held more activity stock on October 1. Members are expected to see the benefit whenneed from the Bank pays the fourth quarter 2015 dividend, which is planned to be in February 2016. See Capital Rules on page 52 for further details.
More Mortgage Partnership Finance Solutions
Providing members with access to the secondary mortgage market remains one of our top prioritiesbeyond serving as well. We are working on a servicing released enhancement to the new MPF Government MBS product, which is designed to provide members with additional flexibility to enhance their competitiveness and support homeownership in their communities. Whether members choose servicing released or servicing retained, the MPF Government MBS offers attractive pricing, which members can pass on to their borrowers.
This summer we rolled out MPF Direct, which has a single-family loan limit of $1.5 million. We also reintroduced three MPF products-MPF Original, MPF 125, and MPF 35-that allow members to earn higher fee income for sharing the credit risk of conventional, conforming loans while we manage the liquidity, interest rate, and prepayment risks. With all of these products, we are striving to help members meet the different mortgage needs of the borrowers in their communities.
Providing a Reliable Source of Liquidity
We continue to monitor the political uncertainty in Washington, D.C. At the beginning of the fourth quarter we started building our liquidity position and extending the terms of our borrowings so that we are better able to meet members’ funding requests during all political and economic scenarios. For more than 82 years, we have been a reliable source of liquidityliquidity. The Bank continues to ourevaluate its performance by measuring how well it is enhancing the value of membership in the Bank.
The Bank’s Community First® Disaster Relief Program is one way in which the Bank is supporting its members and we remain committedtheir needs. In late September, the Bank funded the program with $500,000 to help northern Wisconsin communities hit by the severe storms and flooding that standard.occurred on July 11-12, 2016.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Results of Operations
Our financial condition and results of operations are influenced by the interest rate environment, global and national economies, local economies within our districts of Illinois and Wisconsin, and the conditions in the financial, housing and credit markets. In particular, our net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. We manage our interest rate risk by entering into fair value hedge relationships utilizing derivative agreements in which 1-month, 3-month or 6-month LIBOR is received or paid to hedge a portion of our advances, available for sale securities and debt. We also enter into cash flow hedge relationships utilizing derivative agreements to hedge the cash flow risk attributable to the rolling nature of our short-term consolidated discount notes. Additionally, we enter into economic hedges using derivative agreements to hedge our mortgage-related assets, which are sensitive to changes in mortgage rates.
Our profitability is significantly affected by the interest rate environment. We earn relatively narrow spreads between yields on assets and the rates paid on corresponding liabilities. We also expect our ability to generate significant earnings on capital and short-term investments will be affected in light of the Federal Reserve’s policy of setting the short-term Federal Funds rate. Short-term interest rates also directly affect our earnings on invested capital.
Our operating results are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. A flattening of the yield curve tends to compress our net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. The performance of our MPF Loans held for investment portfolio is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products. In addition, our higher yielding private label MBS portfolio continues its expected runoff. As higher coupon MPF Loans mature along with higher yielding private label MBS, the return of principal cannot be invested in assets with a comparable yield, resulting in a decline in the aggregate yield on the remaining MPF Loans held for investment portfolio and investment securities and a possible decrease in our net interest margin.
Lastly, the volume related to our MPF Xtra and MPF Direct programs as well as our Ginnie Mae MBS issuances also are influenced by the interest rate environment, global and national economies, local economies within our districts of Illinois and Wisconsin, and the conditions in the financial, housing and credit markets.
Net Interest Income
Net interest income beforeis the provision for (reversal of) credit losses includesdifference between the followingamount we recognize into interest income on our interest earning assets and the amount we recognize into interest expense on our interest bearing liabilities. These amounts were determined in accordance with GAAP:GAAP and were based on the underlying contractual interest rate terms of our interest earning assets and interest bearing liabilities as well as the following items:
Net interest paid or received on interest rate swaps that are accounted for as fair value or cash flow hedges;
Amortization of premiums;
Accretion of discounts;discounts and OTTI reversals;
Amortization of hedge adjustments;
Advance and investment prepayment fees; and
MPF credit enhancement fees.
Federal Home Loan Bank of Chicago
(Dollars in millions except per share amounts unless otherwise indicated)
The tables belowon the following page present the increase or decrease in interest income and expense before the provision for (reversal of) credit losses due to volume or rate variances. The calculation of these components includes the following considerations:
Average
Amortized cost basis is used to compute average daily balances are computed using historical amortized costfor most of our financial instruments, including available for sale securities. Fair value is used to compute average daily balances except for itemsour trading securities and financial instruments carried at fair value under the fair value option which include changes in fair value.option.
MPF Loans held in portfolio that are on nonaccrual status are included in average daily balances used to determine the effective yield/rate. Amounts included in interest income on MPF Loans held in portfolio are presented as detailed in MPF Loans Held in Portfolio, Net of Allowance for Credit Losses on page 46.
Interest and effective yield/rate includes all components of net interest income as discussed above. Yields/rates are calculated on an annualized basis.
Any changechanges due to the combined volume/rate variance hashave been allocated ratably to volume and rate.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2015 | | September 30, 2014 | | Increase (decrease) due to |
For the three months ended | Average Balance | | Total Interest | | Yield/ Rate | | Average Balance | | Total Interest | | Yield/ Rate | | Volume | | Rate | | Net Change |
Federal Funds sold, securities purchased under agreements to resell, and interest bearing deposits | $ | 5,506 |
| | $ | 2 |
| | 0.15 | % | | $ | 10,538 |
| | $ | 2 |
| | 0.08 | % | | $ | (1 | ) | | $ | 1 |
| | $ | — |
|
Investment securities | 24,188 |
| | 195 |
| | 3.22 | % | | 28,210 |
| | 214 |
| | 3.03 | % | | (30 | ) | | 11 |
| | (19 | ) |
Advances | 33,318 |
| | 45 |
| | 0.54 | % | | 24,934 |
| | 39 |
| | 0.63 | % | | 13 |
| | (7 | ) | | 6 |
|
MPF Loans held in portfolio | 5,140 |
| | 62 |
| | 4.82 | % | | 6,537 |
| | 78 |
| | 4.77 | % | | (17 | ) | | 1 |
| | (16 | ) |
Total Interest Income on Assets | 68,152 |
| | 304 |
| | 1.78 | % | | 70,219 |
| | 333 |
| | 1.90 | % | | (35 | ) | | 6 |
| | (29 | ) |
Consolidated obligation discount notes | 34,080 |
| | 72 |
| | 0.85 | % | | 28,971 |
| | 68 |
| | 0.94 | % | | 12 |
| | (8 | ) | | 4 |
|
Consolidated obligation bonds | 28,565 |
| | 96 |
| | 1.34 | % | | 36,279 |
| | 114 |
| | 1.26 | % | | (24 | ) | | 6 |
| | (18 | ) |
Subordinated notes | 944 |
| | 14 |
| | 5.93 | % | | 944 |
| | 13 |
| | 5.51 | % | | — |
| | 1 |
| | 1 |
|
Total Interest Expense on Liabilities | 63,589 |
| | 182 |
| | 1.14 | % | | 66,194 |
| | 195 |
| | 1.18 | % | | (12 | ) | | (1 | ) | | (13 | ) |
Net yield on interest-earning assets | $ | 68,152 |
| | $ | 122 |
| | 0.72 | % | | $ | 70,219 |
| | $ | 138 |
| | 0.79 | % | | $ | (23 | ) | | $ | 7 |
| | $ | (16 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2015 | | September 30, 2014 | | Increase (decrease) due to |
For the nine months ended | Average Balance | | Total Interest | | Yield/ Rate | | Average Balance | | Total Interest | | Yield/ Rate | | Volume | | Rate | | Net Change |
Federal Funds sold, securities purchased under agreements to resell, and interest bearing deposits | $ | 7,297 |
| | $ | 6 |
| | 0.11 | % | | $ | 10,294 |
| | $ | 6 |
| | 0.08 | % | | $ | (2 | ) | | $ | 2 |
| | $ | — |
|
Investment securities | 24,754 |
| | 599 |
| | 3.23 | % | | 29,363 |
| | 659 |
| | 2.99 | % | | (103 | ) | | 43 |
| | (60 | ) |
Advances | 32,633 |
| | 132 |
| | 0.54 | % | | 23,611 |
| | 116 |
| | 0.66 | % | | 45 |
| | (29 | ) | | 16 |
|
MPF Loans held in portfolio | 5,455 |
| | 197 |
| | 4.82 | % | | 6,973 |
| | 252 |
| | 4.82 | % | | (55 | ) | | — |
| | (55 | ) |
Total Interest Income on Assets | 70,139 |
| | 934 |
| | 1.78 | % | | 70,241 |
| | 1,033 |
| | 1.96 | % | | (115 | ) | | 16 |
| | (99 | ) |
Consolidated obligation discount notes | 33,890 |
| | 216 |
| | 0.85 | % | | 27,773 |
| | 201 |
| | 0.96 | % | | 44 |
| | (29 | ) | | 15 |
|
Consolidated obligation bonds | 30,769 |
| | 304 |
| | 1.32 | % | | 37,626 |
| | 408 |
| | 1.45 | % | | (75 | ) | | (29 | ) | | (104 | ) |
Subordinated notes | 944 |
| | 41 |
| | 5.79 | % | | 944 |
| | 40 |
| | 5.65 | % | | — |
| | 1 |
| | 1 |
|
Total Interest Expense on Liabilities | 65,603 |
| | 561 |
| | 1.14 | % | | 66,343 |
| | 649 |
| | 1.30 | % | | (31 | ) | | (57 | ) | | (88 | ) |
Net yield on interest-earning assets | $ | 70,139 |
| | $ | 373 |
| | 0.71 | % | | $ | 70,241 |
| | $ | 384 |
| | 0.73 | % | | $ | (84 | ) | | $ | 73 |
| | $ | (11 | ) |
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2016 | | September 30, 2015 | | Increase (decrease) due to |
For the three months ended | Average Balance | | Total Interest | | Yield/ Rate | | Average Balance | | Total Interest | | Yield/ Rate | | Volume | | Rate | | Net Change |
Investment securities | $ | 21,547 |
| | $ | 174 |
| | 3.23 | % | | $ | 24,188 |
| | $ | 195 |
| | 3.22 | % | | $ | (22 | ) | | $ | 1 |
| | $ | (21 | ) |
Advances | 44,300 |
| | 74 |
| | 0.67 | % | | 33,318 |
| | 45 |
| | 0.54 | % | | 18 |
| | 11 |
| | 29 |
|
MPF Loans held in portfolio | 4,657 |
| | 53 |
| | 4.55 | % | | 5,140 |
| | 62 |
| | 4.82 | % | | (6 | ) | | (3 | ) | | (9 | ) |
Other interest bearing assets | 8,443 |
| | 8 |
| | 0.38 | % | | 5,506 |
| | 2 |
| | 0.15 | % | | 3 |
| | 3 |
| | 6 |
|
Interest income on assets | 78,947 |
| | 309 |
| | 1.57 | % | | 68,152 |
| | 304 |
| | 1.78 | % | | 41 |
| | (36 | ) | | 5 |
|
Consolidated obligation discount notes | 44,417 |
| | 95 |
| | 0.86 | % | | 34,080 |
| | 72 |
| | 0.85 | % | | 22 |
| | 1 |
| | 23 |
|
Consolidated obligation bonds | 29,461 |
| | 99 |
| | 1.34 | % | | 28,565 |
| | 96 |
| | 1.34 | % | | 3 |
| | — |
| | 3 |
|
Subordinated notes | — |
| | — |
| | — | % | | 944 |
| | 14 |
| | 5.93 | % | | (14 | ) | | — |
| | (14 | ) |
Other interest bearing liabilities | 845 |
| | 2 |
| | 0.95 | % | | | | | |
|
| | 2 |
| | — |
| | 2 |
|
Interest expense on liabilities | 74,723 |
| | 196 |
| | 1.05 | % | | 63,589 |
| | 182 |
| | 1.14 | % | | 28 |
| | (14 | ) | | 14 |
|
Net yield on interest-earning assets | $ | 78,947 |
| | $ | 113 |
| | 0.57 | % | | $ | 68,152 |
| | $ | 122 |
| | 0.72 | % | | $ | 17 |
| | $ | (26 | ) | | $ | (9 | ) |
| | | | | | | | | | | | | | | | | |
For the nine months ended | | | | | | | | | | | | | | | | | |
Investment securities | $ | 22,342 |
| | $ | 545 |
| | 3.25 | % | | $ | 24,754 |
| | $ | 599 |
| | 3.23 | % | | $ | (58 | ) | | $ | 4 |
| | $ | (54 | ) |
Advances | 42,141 |
| | 211 |
| | 0.67 | % | | 32,633 |
| | 132 |
| | 0.54 | % | | 47 |
| | 32 |
| | 79 |
|
MPF Loans held in portfolio | 4,684 |
| | 165 |
| | 4.70 | % | | 5,455 |
| | 197 |
| | 4.82 | % | | (27 | ) | | (5 | ) | | (32 | ) |
Other interest bearing assets | 7,346 |
| | 23 |
| | 0.42 | % | | 7,297 |
| | 6 |
| | 0.11 | % | | — |
| | 17 |
| | 17 |
|
Interest income on assets | 76,513 |
| | 944 |
| | 1.65 | % | | 70,139 |
| | 934 |
| | 1.78 | % | | 78 |
| | (68 | ) | | 10 |
|
Consolidated obligation discount notes | 44,647 |
| | 272 |
| | 0.81 | % | | 33,890 |
| | 216 |
| | 0.85 | % | | 66 |
| | (10 | ) | | 56 |
|
Consolidated obligation bonds | 26,184 |
| | 299 |
| | 1.52 | % | | 30,769 |
| | 304 |
| | 1.32 | % | | (51 | ) | | 46 |
| | (5 | ) |
Subordinated notes | 565 |
| | 24 |
| | 5.66 | % | | 944 |
| | 41 |
| | 5.79 | % | | (16 | ) | | (1 | ) | | (17 | ) |
Other interest bearing liabilities | 825 |
| | 5 |
| | 0.81 | % | | | | | |
| | 5 |
| | — |
| | 5 |
|
Interest expense on liabilities | 72,221 |
| | 600 |
| | 1.11 | % | | 65,603 |
| | 561 |
| | 1.14 | % | | 54 |
| | (15 | ) | | 39 |
|
Net yield on interest-earning assets | $ | 76,513 |
| | $ | 344 |
| | 0.60 | % | | $ | 70,139 |
| | $ | 373 |
| | 0.71 | % | | $ | 29 |
| | $ | (58 | ) | | $ | (29 | ) |
Net interest income changed mainly due to the following:
Investment interestInterest income from investment securities declined primarily due to the decline in average investment balances as securities matured or paid down during the periods. Although we continue to reduce our MBS portfolio to less than three times our total regulatory capital. This ratio is one of the conditions that needs to be met to remove the restriction on usare no longer required to obtain FHFA approval for any new investments that have a term to maturity in excess of 270 days. For further information, seedays, we are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in Investment Securities Investmentson page 49.12 in our 2015 Form 10-K. This decline in interest income was partially offsetalso negatively impacted by declines in accretion into interest income of expected improvements in the present value offuture cash flows on securities that were previously charged with credit related OTTI. For the three and nine monthsquarter ended September 30, 2015,2016, we recorded credit-related accretion of $11 million compared to interest income of $12 million for the same period in 2015; and $37 million and $41 million. Formillion for the comparable period in 2014, accretion was $15 million and $43 million. Future accretionyear to date periods ended September 30. Accretion is dependent upon how estimated market conditions may impact the projectedfuture cash flows, and may vary from past experience.
Interest income from advances increased primarily due to increases in volume. Memberhigher member demand for advances has continued to increase modestlyalong with increases in 2015 afterinterest rates, primarily as a significant increase of $9.0 billion during 2014. We are finding that our members in Illinois and Wisconsin have increased funding needs as the economic activity in our district continues to improve. In addition, members are taking advantageresult of the benefitsFederal Reserve Bank's actions at year end 2015. The key factor resulting in the increased demand for advances was the result of our continuing the Reduced Capitalization Advance Program (RCAP) to lower their cost of borrowing and our dividend policies are, which is designed to make the net cost of borrowing through advances more attractive to our active members. While ourmembers by allowing members to borrow new advances increased so far in 2015, it is possible that our advances may decrease to the extent our members elect to utilize alternative funding resources.using less activity based capital stock.
Interest income from MPF Loans continued to decline as expectedheld in portfolio declined due to the net decrease in balance ofour outstanding MPF Loans outstanding.held in portfolio. Though we have experienced a net decline in MPF Loans outstanding, werecently resumed purchasing MPF Loans, that we held in portfolio during 2015, though the amount has been nominal to date. We doour purchases were not expect these new MPF Loans to be materiallarge enough to offset olderour loan paydowns in the near-term, but may become sopaydown activity year over a longer-term period of time.
year.
Interest expense decreased both as a result of a reduction in the average interest rates of our debt portfolio, as well as due to reduced overall debt outstanding. As higher rate debt has matured or been called, the debt was replaced with lower-rate funding. Market rates on our short term discount notes also declined on average and we benefited from these lower rates by increasing the mix of discount notes as compared to bonds.
Net interest income is also impacted by fair value and cash flow hedging activity. For details see Trading Securities, Derivatives and Hedging Activities, and Instruments Held at Fair Value Option on pages 45 and 46.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Interest income from other interest bearing assets comes primarily from interest bearing deposits, Federal Funds sold and securities sold under agreements to repurchase. The increase is primarily due to increases in rates as a result of the Federal Reserve Bank's actions at year end 2015 to raise short term interest rates by 25 bps.
Interest expense increased, primarily due to higher volume outstanding on our consolidated obligations used to fund the growth in our assets. Rates overall on our consolidated obligations did not change materially during the periods presented.
Our hedging activities also contributed a net reduction to net interest income. The low interest rate environment resulted in negative net interest settlements on derivative contracts in active hedge accounting relationships. For further details see Trading Securities, Derivatives and Hedging Activities, and Instruments Held at Fair Value Option in the following table.
Non-Interest Gain (Loss)
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Trading securities | | $ | (1 | ) | | $ | (6 | ) | | $ | (2 | ) | | $ | (18 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | (2 | ) |
Derivatives and hedging activities | | (15 | ) | | 1 |
| | (17 | ) | | (11 | ) | | 7 |
| | (15 | ) | | (7 | ) | | (17 | ) |
Instruments held under fair value option | | 1 |
| | 10 |
| | 4 |
| | 11 |
| | — |
| | 1 |
| | 6 |
| | 4 |
|
Subtotal - Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option | | (15 | ) | | 5 |
| | (15 | ) | | (18 | ) | |
Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option | | | 7 |
| | (15 | ) | | (1 | ) | | (15 | ) |
Litigation settlement awards | | 2 |
| | 1 |
| | 13 |
| | 18 |
| | — |
| | 2 |
| | 38 |
| | 13 |
|
Other, net | | 7 |
| | 5 |
| | 15 |
| | 14 |
| |
Other gain (loss), net | | | 7 |
| | 7 |
| | 24 |
| | 15 |
|
Noninterest gain (loss) | | $ | (6 | ) | | $ | 11 |
| | $ | 13 |
| | $ | 14 |
| | $ | 14 |
| | $ | (6 | ) | | $ | 61 |
| | $ | 13 |
|
Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option
Gains or (losses) on these activities have generally stabilized in recent quartersyears primarily as a result of less volatile hedging costs, which is consistent with the hedging strategies offor our more simplified balance sheet, along with a more stable economy. Our loss in the third quarter of 2015 (as compared to the gain in the third quarter of 2014), was primarily due to volatility and uncertainty related to the September Federal Reserve meeting to discuss, among other things, a potential rise in short term rates. The Federal Reserve decided to defer any rate increases at that time.
MostHowever, most of our total net effect from hedging activities was recorded as a component of net interest income. This was primarily due toincome, not in the above non-interest gain (loss) line items. The low interest rate environment resultingresulted in significant negative net interest settlements on derivative contracts in active hedge accounting relationships. Net interest income was also reduced by the amortization of negative hedge adjustments from previously active hedges that were closed (de-designated) but where the previously hedged instrument is still outstanding.
contracts. Details of the impact on all of these hedging related items are in the table on the following page.
Litigation settlement awards
On October 15, 2010, we instituted litigation relating to 64 private labelprivate-label MBS bonds we purchased in an aggregate original principal amount of $4.29 billion. In both 2015 and 2014,April 2016, we received payments for settlementsa payment of $37.5 million (partially offset by $5.0 million of related legal fees and expenses recorded in Noninterest expense) resulting from a settlement with some of the defendants. We continue to pursue litigation related to these matters. As of September 30, 2016, the remaining litigation covers four private-label MBS bonds in the aggregate original principal amount of $77.5 million. We cannot predict to what extent we will be successful in this remaining litigation. See Item 1. Legal Proceedings on page 6560 for further details.
Other gain (loss), net
Other gain (loss), net, consists primarily of income from the sale of MPF Loans to third party investors and fees other FHLBs pay us to support their participation in the MPF Program, which offsets a portion of the expenses we incur.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The following table shows the impact of Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option on our results of operations. The largest contributor to the total net effect gain (loss) of hedging activities is net interest settlements. Net interest settlements are attributable to open derivative hedging instruments and are included in the interest income/expense line item of the respective fair value or cash flow hedged item type.The amortization/accretion amount pertains to both closed fair value and cash flow hedging adjustments, which are included in the interest income/expense line item of the respective hedged item type. For further details please see Note 9 - Derivatives and Hedging Activities to the Financial Statements in this Form 10-Q.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Advances | | Investments | | MPF Loans | | Discount Notes | | Bonds | | Total |
Three months ended September 30, 2015 | | | | | | | | | | | |
Amortization/accretion | $ | 1 |
|
| $ | — |
|
| $ | (4 | ) |
| $ | (1 | ) |
| $ | — |
|
| $ | (4 | ) |
Net interest settlements | (21 | ) | | (33 | ) | | — |
| | (61 | ) | | 54 |
| | (61 | ) |
Total recorded in net interest income | (20 | ) |
| (33 | ) |
| (4 | ) |
| (62 | ) |
| 54 |
|
| (65 | ) |
Fair value hedges - ineffectiveness net gain (loss) | 1 |
| | (11 | ) | | — |
| | — |
| | (7 | ) | | (17 | ) |
Cash flow hedges - ineffectiveness net gain (loss) | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Economic hedges - net gain (loss) | (2 | ) |
| — |
|
| (2 | ) |
| 2 |
|
| 3 |
| | 1 |
|
Total recorded derivatives & hedging activities | (1 | ) | | (11 | ) | | (2 | ) | | 3 |
| | (4 | ) | | (15 | ) |
Instruments held under fair value option | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Total net effect gain (loss) of hedging activities | $ | (20 | ) | | $ | (44 | ) | | $ | (6 | ) | | $ | (59 | ) | | $ | 50 |
| | $ | (79 | ) |
| | | | | | | | | | | |
Three months ended September 30, 2014 | | | | | | | | | | | |
Amortization/accretion | $ | 3 |
| | $ | — |
| | $ | (4 | ) | | $ | (1 | ) | | $ | (2 | ) | | $ | (4 | ) |
Net interest settlements | (20 | ) | | (35 | ) | | — |
| | (62 | ) | | 63 |
| | (54 | ) |
Total recorded in net interest income | (17 | ) | | (35 | ) | | (4 | ) | | (63 | ) | | 61 |
| | (58 | ) |
Fair value hedges - ineffectiveness net gain (loss) | 2 |
| | — |
| | — |
| | — |
| | (5 | ) | | (3 | ) |
Economic hedges - net gain (loss) | — |
| | — |
| | (4 | ) | | — |
| | 8 |
| | 4 |
|
Total recorded derivatives & hedging activities | 2 |
| | — |
| | (4 | ) | | — |
| | 3 |
| | 1 |
|
Instruments held under fair value option | 3 |
| | — |
| | — |
| | — |
| | 7 |
| | 10 |
|
Total net effect gain (loss) of hedging activities | $ | (12 | ) | | $ | (35 | ) | | $ | (8 | ) | | $ | (63 | ) | | $ | 71 |
| | $ | (47 | ) |
| | | | | | | | | | | |
Nine months ended September 30, 2015 | | | | | | | | | | | |
Amortization/accretion | $ | 7 |
|
| $ | (10 | ) |
| $ | (11 | ) |
| $ | (2 | ) |
| $ | (5 | ) |
| $ | (21 | ) |
Net interest settlements | (62 | ) |
| (101 | ) |
| — |
|
| (185 | ) |
| 172 |
|
| (176 | ) |
Total recorded in net interest income | (55 | ) |
| (111 | ) |
| (11 | ) |
| (187 | ) |
| 167 |
|
| (197 | ) |
Fair value hedges - ineffectiveness net gain (loss) | — |
| | (13 | ) | | — |
| | — |
| | (17 | ) | | (30 | ) |
Cash flow hedges - ineffectiveness net gain (loss) | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Economic hedges - net gain (loss) | (4 | ) | | — |
| | (3 | ) | | 7 |
| | 11 |
| | 11 |
|
Total recorded derivatives & hedging activities | (4 | ) |
| (13 | ) |
| (3 | ) |
| 9 |
|
| (6 | ) |
| (17 | ) |
Instruments held under fair value option | 2 |
| | — |
| | — |
| | (2 | ) | | 4 |
| | 4 |
|
Total net effect gain (loss) of hedging activities | $ | (57 | ) |
| $ | (124 | ) |
| $ | (14 | ) |
| $ | (180 | ) |
| $ | 165 |
|
| $ | (210 | ) |
| | | | | | | | | | | |
Nine months ended September 30, 2014 | | | | | | | | | | | |
Amortization/accretion | $ | 6 |
| | $ | — |
| | $ | (13 | ) | | $ | (2 | ) | | $ | (13 | ) | | $ | (22 | ) |
Net interest settlements | (60 | ) | | (105 | ) | | — |
| | (184 | ) | | 189 |
| | (160 | ) |
Total recorded in net interest income | (54 | ) |
| (105 | ) |
| (13 | ) |
| (186 | ) |
| 176 |
|
| (182 | ) |
Fair value hedges - ineffectiveness net gain (loss) | 6 |
| | (3 | ) | | — |
| | — |
| | (18 | ) | | (15 | ) |
Cash flow hedges - ineffectiveness net gain (loss) | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Economic hedges - net gain (loss) | — |
| | — |
| | (5 | ) | | — |
| | 8 |
| | 3 |
|
Total recorded derivatives & hedging activities | 6 |
|
| (3 | ) |
| (5 | ) |
| 1 |
|
| (10 | ) |
| (11 | ) |
Instruments held under fair value option | 3 |
| | — |
| | — |
| | — |
| | 8 |
| | 11 |
|
Total net effect gain (loss) of hedging activities | $ | (45 | ) |
| $ | (108 | ) |
| $ | (18 | ) |
| $ | (185 | ) |
| $ | 174 |
|
| $ | (182 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Advances | | Investments | | MPF Loans | | Discount Notes | | Bonds | | Total |
Three months ended September 30, 2016 | | | | | | | | | | | |
Recorded in net interest income | $ | (16 | ) |
| $ | (31 | ) |
| $ | (2 | ) |
| $ | (49 | ) |
| $ | 12 |
|
| $ | (86 | ) |
Recorded in derivatives & hedging activities | 6 |
| | 1 |
| | 6 |
| | (3 | ) | | (3 | ) | | 7 |
|
Recorded on instruments held under fair value option | (4 | ) |
| — |
|
| (1 | ) |
| (2 | ) |
| 7 |
| | — |
|
Total net effect gain (loss) of hedging activities | $ | (14 | ) | | $ | (30 | ) | | $ | 3 |
| | $ | (54 | ) | | $ | 16 |
| | $ | (79 | ) |
| | | | | | | | | | | |
Three months ended September 30, 2015 | | | | | | | | | | | |
Recorded in net interest income | $ | (20 | ) | | $ | (33 | ) | | $ | (4 | ) | | $ | (62 | ) | | $ | 54 |
| | $ | (65 | ) |
Recorded in derivatives & hedging activities | (1 | ) | | (11 | ) | | (2 | ) | | 3 |
| | (4 | ) | | (15 | ) |
Recorded on instruments held under fair value option | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Total net effect gain (loss) of hedging activities | $ | (20 | ) | | $ | (44 | ) | | $ | (6 | ) | | $ | (59 | ) | | $ | 50 |
| | $ | (79 | ) |
| | | | | | | | | | | |
Nine months ended September 30, 2016 | | | | | | | | | | | |
Recorded in net interest income | $ | (50 | ) |
| $ | (93 | ) |
| $ | (7 | ) |
| $ | (147 | ) |
| $ | 49 |
|
| $ | (248 | ) |
Recorded in derivatives & hedging activities | (14 | ) |
| (5 | ) |
| 13 |
|
| 2 |
|
| (3 | ) |
| (7 | ) |
Recorded in trading securities - hedged only | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
Recorded on instruments held under fair value option | 12 |
| | — |
| | (1 | ) | | (7 | ) | | 2 |
| | 6 |
|
Total net effect gain (loss) of hedging activities | $ | (52 | ) |
| $ | (99 | ) |
| $ | 5 |
|
| $ | (152 | ) |
| $ | 48 |
|
| $ | (250 | ) |
| | | | | | | | | | | |
Nine months ended September 30, 2015 | | | | | | | | | | | |
Recorded in net interest income | $ | (55 | ) |
| $ | (111 | ) |
| $ | (11 | ) |
| $ | (187 | ) |
| $ | 167 |
|
| $ | (197 | ) |
Recorded in derivatives & hedging activities | (4 | ) |
| (13 | ) |
| (3 | ) |
| 9 |
|
| (6 | ) |
| (17 | ) |
Recorded on instruments held under fair value option | 2 |
| | — |
| | — |
| | (2 | ) | | 4 |
| | 4 |
|
Total net effect gain (loss) of hedging activities | $ | (57 | ) |
| $ | (124 | ) |
| $ | (14 | ) |
| $ | (180 | ) |
| $ | 165 |
|
| $ | (210 | ) |
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Noninterest Expense
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Compensation and benefits | | $ | 20 |
| | $ | 17 |
| | $ | 57 |
| | $ | 49 |
| | $ | 26 |
| | $ | 20 |
| | $ | 71 |
| | $ | 57 |
|
Other operating expenses | | 13 |
| | 12 |
| | 38 |
| | 34 |
| |
Operating expenses | | | 15 |
| | 13 |
| | 44 |
| | 38 |
|
Other | | 2 |
| | (1 | ) | | 6 |
| | 6 |
| | 1 |
| | 2 |
| | 13 |
| | 6 |
|
Noninterest expense | | $ | 35 |
| | $ | 28 |
| | $ | 101 |
| | $ | 89 |
| | $ | 42 |
| | $ | 35 |
| | $ | 128 |
| | $ | 101 |
|
Compensation and benefits increased primarily due to higher salariesdefined benefit pension costs and wages as well asother post retirement benefit related expenses (driven in part by the continued low interest rate environment and a change in the mortality tables used to calculate the estimated pension liability), and increased headcount and incentive compensation expense. In addition, we added employees in order to continue to enhance our member-focused bank capabilities and to continue to build out the MPF Program platform to support new products such as MPF Direct and MPF Government MBS.expenses. We had 410443 employees as of September 30, 2015,2016, compared to 391410 as of September 30, 2014.2015.
Other consists of legal fees and expenses related to litigation settlements and costs related to our share of funding the Office of Finance and the Federal Housing Finance Agency.
Other operating expenses increased mostly due to information technology, primarily because of general infrastructure maintenance, information technology security, and the investment in systems related to the MPF Program.Assessments
We fund the Affordable Housing Program (AHP) program at a calculated rate of 10% of income before assessments.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Other Comprehensive Income (Loss)
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 |
Net unrealized gain (loss) on available-for-sale securities | | $ | (79 | ) | | $ | (99 | ) | | $ | (214 | ) | | $ | 37 |
|
Non-credit OTTI on held-to-maturity securities | | 11 |
| | 15 |
| | 37 |
| | 43 |
|
Net unrealized gain (loss) on cash flow hedges | | (31 | ) | | 85 |
| | 8 |
| | 91 |
|
Post-retirement plans | | 1 |
| | (2 | ) | | (7 | ) | | 1 |
|
Other comprehensive income (loss) | | $ | (98 | ) | | $ | (1 | ) | | $ | (176 | ) | | $ | 172 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Net unrealized gain (loss) available-for-sale securities | | $ | (13 | ) | | $ | (79 | ) | | $ | (113 | ) | | $ | (214 | ) |
Non-credit OTTI held-to-maturity securities | | 9 |
| | 11 |
| | 30 |
| | 37 |
|
Net unrealized gain (loss) cash flow hedges | | 83 |
| | (31 | ) | | 38 |
| | 8 |
|
Post-retirement plans | | — |
| | 1 |
| | 1 |
| | (7 | ) |
Other comprehensive income (loss) | | $ | 79 |
| | $ | (98 | ) | | $ | (44 | ) | | $ | (176 | ) |
Net unrealized gain (loss) on available-for-sale securities
WeOur available-for-sale portfolio securities are in a net unrealized gain position (net of any offsetting related fair value hedge losses) as market interest rates have a substantialdeclined since we acquired these securities. As these securities mature, the net unrealized gain position gradually reverses to zero as we will only collect the face value at their maturity. Such reversals result in periodic net unrealized losses as individual securities mature. Our unrealized net gain position related to our AFSavailable-for-sale securities portfolio remaining in our AOCI. These unrealized gains decreased during the first nine monthsAOCI was $545 million as of 2015, primarily in our student loan FFELP ABS, due to market-related declines. If we do not sell these securities, the remaining unrealized gain position will eventually reverse to zero within AOCI as they pay down and mature.September 30, 2016.
Non-credit OTTI on held-to-maturity securities
OverWe accrete the past several years, we have accreted back intonon-credit related OTTI amount in AOCI to the carrying amount of each related held-to-maturity security over its remaining life. The decrease in the periods presented resulted from a decline in our HTM securities portfolio a portion of the previously incurredoutstanding non-credit OTTI recorded duringbalance, which drove a reduction in the financial crisis. As theseaccretion amounts. Our remaining non-credit OTTI amount on held-to-maturity securities approach maturity, wein AOCI was $(187) million as of September 30, 2016. We expect these unrealized non-credit lossesthis remaining amount to continue to reverse as principal and interest from the securities are received over time unless there is any further impairment. We also expect the rate of accretion to decline as theseour OTTI held-to-maturity securities approach maturity.
Net unrealized gain (loss) on cash flow hedges
We had net unrealized gains on cash flow hedges in 2014. During 2015, longer-term market interest rates declined in the first quarter before increasing in excess of the first quarter decline during the second quarter of 2015. The market then turned again in the third quarter of 2015 with a decrease in long term interest rates, creating the unrealized loss for the third quarter. Shorter-term market interest rates remained stable throughout 2014 and 2015. Our cash flow hedges are more sensitive to changes in longer-term market interest rates than to changes in shorter-term market interest rates. We haveThe net unrealized gains during 2016 resulted from an increase in interest rates compared to the beginning of the year, especially in the third quarter of 2016, offsetting losses recorded in earlier quarters when rates declined. As of September 30, 2016, we had a substantialnet unrealized loss position(loss) of $(425) million in AOCI related to theseour cash flow hedges.
Post-retirement plans
TheIn the first quarter of 2015, we recorded an unrealized loss in the post-retirement plans for 2015 isOCI of $(8) million due to a revision to the mortality tables we useused for our post-retirement healthcare and supplemental defined benefit equalization plan. We do not expect this to be a recurring event and, as this effectThis loss is being amortized into earningscompensation and benefits expense over the average employment periodnumber of several years of employment remaining before retirement, we expect its impact to our resultsretirement. The annual amount of operationsamortization is expected to be immaterial.no more than $1 million.
For further information on the activity in Other Comprehensive Income (Loss) see Note 12 - Accumulated Other Comprehensive Income (Loss) to the financial statements.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Statements of Condition
| | | September 30, 2015 | | December 31, 2014 | September 30, 2016 | | December 31, 2015 |
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreement to resell | $ | 5,286 |
| | $ | 5,827 |
| $ | 5,488 |
| | $ | 4,226 |
|
Investment securities | 24,203 |
| | 27,260 |
| 21,396 |
| | 24,597 |
|
Advances | 35,044 |
| | 32,485 |
| 43,117 |
| | 36,778 |
|
MPF Loans held in portfolio, net | 5,079 |
| | 6,057 |
| |
MPF Loans held in portfolio, net of allowance for credit losses | | 4,720 |
| | 4,828 |
|
Other | 212 |
| | 212 |
| 262 |
| | 242 |
|
Total assets | $ | 69,824 |
| | $ | 71,841 |
| |
Assets | | $ | 74,983 |
| | $ | 70,671 |
|
| | | | |
Consolidated obligation discount notes | $ | 37,290 |
| | $ | 31,054 |
| $ | 39,144 |
| | $ | 41,564 |
|
Consolidated obligation bonds | 26,062 |
| | 34,251 |
| 30,139 |
| | 22,582 |
|
Subordinated notes | 944 |
| | 944 |
| — |
| | 944 |
|
Other | 955 |
| | 1,067 |
| 1,185 |
| | 929 |
|
Total liabilities | 65,251 |
| | 67,316 |
| |
Liabilities | | 70,468 |
| | 66,019 |
|
| | | | |
Capital stock | 1,892 |
| | 1,902 |
| 1,636 |
| | 1,950 |
|
Total retained earnings | 2,640 |
| | 2,406 |
| |
Retained earnings | | 2,951 |
| | 2,730 |
|
Accumulated other comprehensive income (loss) | 41 |
| | 217 |
| (72 | ) | | (28 | ) |
Total capital | 4,573 |
| | 4,525 |
| |
Capital | | 4,515 |
| | 4,652 |
|
Total liabilities and capital | $ | 69,824 |
| | $ | 71,841 |
| $ | 74,983 |
| | $ | 70,671 |
|
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreements to resell
Amounts held in these accounts will vary each day based on the following:
Interest rate spreads between Federal Funds sold and securities purchased under agreements to resell and our debt;
Liquidity requirements;
Counterparties available; and
Collateral availability on securities purchased under agreements to resell.
Our liquidity position was relatively unchanged, as we continue to take advantage of the very low interest rates in the market by issuing debt in the form of short term discount notes and investing it in short term liquid assets.
Investment Securities
WeAlthough we are no longer required to obtain FHFA approval for any new investmentsthat have a term to maturity in excess of 270 days, until such timewe are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in Investments on page 12 in our MBS portfolio is less than three times our total regulatory capital and our advances represent more than 50% of our total assets. At September 30, 2015 our MBS portfolio was 3.55 times our total regulatory capital and our advances represented 50% of our total assets, thus we expect our portfolios to continue to decline over time as a result of this limitation.Form 10-K.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Advances
Member demand for advances has continuedAdvances increased in 2016 primarily due to increase modestlyour members' interest in 2015 after a significant increase of $9.0 billion during 2014. We are finding thatthe benefits we offer our members in Illinois and Wisconsin have experienced increased funding needs as the economic activity inthrough our district continues to improve. In addition, members are taking advantage of the benefits of ourcontinuing Reduced Capitalization Advance Program (RCAP) to lower their cost of borrowing and our dividend policies are, which is designed to make the net cost of borrowing through advances more attractive to our active members. members and allows members to borrow new advances using less activity stock.
While our advances increased, so far in 2015, it is possible that member demand for our advances may decreasecould decline in future periods should their funding needs change, or to the extent our membersthey elect to utilize alternative funding resources. In addition, as our advances with captive insurance companies mature, our total advance levels could decrease as further discussed in Legislative and Regulatory Developments on page 54 in our Form 10-Q for the quarter ended March 31, 2016.
MPF Loans Held in Portfolio, Net of Allowance for Credit Losses
We had a small net decrease in our outstanding MPF Loans continuedfrom year end, as we resumed purchasing a higher volume of new loans during 2016 to pay down as expected, a result of our past business strategy to limit the concentration ofhelp offset maturities and paydowns experienced in our MPF Loans. However, we have begun adding new MPF Loans toLoan portfolio. In the third quarter of 2016, our portfolio but we do not expect these new MPF Loans to be material enough to offset olderpurchases were slightly greater than our current loan paydowns in the near-term, butquarter. A portion of our new loans were refinancings, and this activity is dependent upon interest rates. If rates were to rise significantly, our refinancings may become so over a longer-term period of time.decline. For the nine monthsyear to date period ended September 30, 2015,2016, we have added $117acquired $759 million in new MPF Loans to our portfolio.portfolio, compared to $117 million in the same period in 2015.
In addition to our MPF Loans held in portfolio, we have MPF off-balance sheet products, where we buy and concurrently resell MPF Loans to Fannie Mae or other third party investors or pool and securitize them into Ginnie Mae MBS.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Liquidity, Funding, & Capital Resources
Liquidity
For the period ending September 30, 2015,2016, we have maintained a liquidity position in accordance with FHFA regulations and guidance, and policies established by our Board of Directors. Based upon our excess liquidity position described below, we anticipate remaining in compliance with our liquidity requirements. See Liquidity, Funding, & Capital Resources on page 4948 in our 20142015 Form 10-K for a detailed description of our liquidity requirements. We use different measures of liquidity as follows:
Overnight Liquidity – Our policy requires us to maintain overnight liquid assets at least equal to 3.5% of total assets. As of September 30, 2015,2016, our overnight liquidity was $7.2$9.0 billion or 10%12% of total assets, giving us an excess overnight liquidity of $4.7$6.3 billion.
Deposit Coverage – To support our member deposits, FHFA regulations require us to have an amount equal to the current deposits invested in obligations of the U.S. Government, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. As of September 30, 2015,2016, we had excess liquidity of $37.1$43.7 billion to support member deposits.
Contingency Liquidity – The cumulative five business day liquidity measurement assumes there is a localized credit crisis for all FHLBs where the FHLBs do not have the ability to issue new consolidated obligations or borrow unsecured funds from other sources (e.g., purchasing Federal Funds or customer deposits). Our net liquidity in excess of our total uses and reserves over a cumulative five-business-day period was $17.6$16.4 billion as of September 30, 2015.2016.
In addition to the liquidity measures discussed above, FHFA guidance requires us to maintain daily liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. We mayOne scenario assumes that we cannot access the capital markets for 15 days and that during that time members do not renew any maturing, prepaid, and called advances. The second scenario assumes that we cannot access the capital markets for 5 days and that during that period we will automatically renew maturing and called advances for all members except for very large, highly rated members. These additional requirements are more stringent than the Contingency Liquidity requirement discussed above and are designed to enhance our protection against temporary disruptions in access to the FHLB debt markets in response to a rise in capital markets volatility. As a result of this guidance, we maintain increased balances in short-term investments. In addition, we fund certain overnight or shorter termshorter-term investments and advances with discount notesdebt that have maturitieshas a maturity that extendextends beyond the maturities of the related investments or advances. For a discussion of how this may impact our earnings, see page 2322 in the Risk Factors section of our 20142015 Form 10-K.
We are sensitive to maintaining an appropriate liquidity and funding balance between our financial assets and liabilities, and we measure and monitor the risk of refunding such assets as liabilities mature (refunding risk). In measuring the level of assets requiring refunding, we take into account their contractual maturities, as further described in the notes to the financial statements. In addition, we make certain assumptions about their expected cash flows. These assumptions include: calls for assets with such features, projected prepayments and scheduled amortizations for our MPF Loans held in portfolio, MBS and ABS investments. The following table presents the unpaid principal balances of (1) MPF Loans held in portfolio, (2) AFS securities, and (3) HTM securities (including ABS and MBS investments), by expected principal cash flows. The table is illustrative of our assumptions about the expected cash flow of our assets, including prepayments made in advance of maturity.
|
| | | | | | | | | | | | |
| | MPF Loans Held in Portfolio | | Investment Securities |
As of September 30, 2016 | | | Available-for Sale | | Held-to-Maturity |
Year of Expected Principal Cash Flows | | | | | | |
One year or less | | $ | 1,329 |
| | $ | 1,347 |
| | $ | 1,707 |
|
After one year through five years | | 2,280 |
| | 10,783 |
| | 2,812 |
|
After five years through ten years | | 740 |
| | 1,742 |
| | 588 |
|
After ten years | | 308 |
| | 795 |
| | 162 |
|
Total | | $ | 4,657 |
| | $ | 14,667 |
| | $ | 5,269 |
|
We consider our liabilities available to fund assets until their contractual maturity. For further discussion of the liquidity risks related to our access to funding, see page 24 of the Risk Factors section in our 2015 Form 10-K.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Funding
Conditions in Financial Markets
During the third quarter of 2015, much of2016, the focus in the financial markets was on a potential rate increase at the September Federal Open Market Committee (FOMC) meeting.delayed further interest rate hikes due to fragile economic growth and tepid inflation. Market indicators suggest a 25 basis point interest rate hike in December 2016 by the FOMC, one year after its last rate increase. The FOMC did not raise rates, and the 10-year10 year Treasury fell nearly 40Note rose 13 basis points over the course of the quarter ending at 2.04%. Many analysts are currently forecasting that the FOMC will not raise rates until 2016 due to lower GDP growth assumptions. 1.60 percent.
We maintained ready access to funding during the third quarter.
In October, the U.S. Treasury projected that the statutory “debt ceiling” limit would be reached in the first half of November. We continue to monitor the political uncertainty in Washington, D.C. At the beginning of the fourth quarter we started building our liquidity position and extending the terms of our borrowings so that we are better able to meet members’ funding requests during all political and economic scenarios.
Cash flows from operating activities with significant changes
|
| | | | | | | | | | | | |
Nine months ended September 30, | | 2016 | | 2015 | | Change |
Net cash provided by (used in) operating activities - | | | | | | |
Net income | | $ | 249 |
| | $ | 252 |
| | $ | (3 | ) |
Non cash (gain) loss on derivatives and hedging activities | | (44 | ) | | 133 |
| | (177 | ) |
Other | | (21 | ) | | (10 | ) | | (11 | ) |
Net cash provided by (used in) operating activities | | $ | 184 |
| | $ | 375 |
| | $ | (191 | ) |
Our operating assets and liabilities support our mission to provide our member shareholders competitively priced funding, a reasonable return on their investment in our capital stock, and support for community investment activities. Operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by member-driven activities and market conditions. We believe cash flows from operations, available cash balances and our ability to generate cash through short- and long-term borrowings are sufficient to fund our operating liquidity needs. NetThe $(191) million change in net cash provided by (used in) operating activities was $375 million for the nine months ended September 30, 2015. Thisprimarily resulted from net income adjusted forthe following:
The non-cash adjustments, which primarily isadjustment attributable to a positivethe unrealized net changechanges in the fair value of derivatives and hedging activities.our derivative instruments.
Cash flows from investing activities with significant changes
|
| | | | | | | | | | | | |
Nine months ended September 30, | | 2016 | | 2015 | | Change |
Net cash provided by (used in) investing activities - | | | | | | |
Net change in Federal Funds sold, and securities purchased under agreements to resell | | $ | (1,730 | ) |
| $ | 805 |
|
| $ | (2,535 | ) |
Net change in available-for-sale securities | | 1,775 |
| | 1,440 |
| | 335 |
|
Net change in held-to-maturity securities | | 1,253 |
| | 1,452 |
| | (199 | ) |
Net change in advances | | (6,189 | ) |
| (2,508 | ) |
| (3,681 | ) |
Net change in MPF Loans held in portfolio | | 108 |
|
| 968 |
|
| (860 | ) |
Other | | 137 |
| | 47 |
| | 90 |
|
Net cash provided by (used in) investing activities | | $ | (4,646 | ) | | $ | 2,204 |
| | $ | (6,850 | ) |
Our investing activities predominantly include advances, MPF Loans held for investment,in portfolio, investment securities, and other
short-term interest-earning assets. NetThe $(6.9) billion change in net cash provided by (used in) investing activities was $2.2 billion forprimarily resulted from the nine months ended September 30, 2015. This resulted primarily from afollowing:
The increase in net decrease in federal funds sold, maturities relatedcash (used in) funding advances reflects our objective to held-to-maturity andmake advances to our members our
primary business;
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
available-for-sale investment securities, and principal collected on MPF Loans held in portfolio, partially offset by a netThe increase in advances funded during the period. The net increase in advancescash (used in) acquiring Federal Funds sold and the shift away from investment securities is consistent withpurchased under agreements to resell reflects our objective to make advancesinvest in liquid assets to meet the needs of our membersmembers; and
The decrease in net cash (used in) purchasing MPF Loans Held in Portfolio reflects our primary business.decision in mid 2015
to resume these purchases.
Cash flows from financing activities with significant changes
|
| | | | | | | | | | | | |
Nine months ended September 30, | | 2016 | | 2015 | | Change |
Net cash provided by (used in) financing activities - | | | | | | |
Net change in discount notes | | (2,443 | ) | | 6,225 |
| | (8,668 | ) |
Net change in consolidated obligation bonds | | 7,496 |
| | (8,274 | ) | | 15,770 |
|
Payments for retiring of subordinated debt | | (944 | ) | | — |
| | (944 | ) |
Other | | (115 | ) | | (266 | ) | | 151 |
|
Net cash provided by (used in) financing activities | | $ | 3,994 |
| | $ | (2,315 | ) | | $ | 6,309 |
|
Our financing activities primarily reflect cash flows related to issuing and repaying consolidated obligations. NetThe proceeds from the net increases in our consolidated obligation discount notes and consolidated obligations bonds were primarily utilized to fund the net increases in our investing activities as noted above. The $6.3 billion change in net cash provided by (used in) financing activities was $(2.3) billion forprimarily resulted from the nine months ended September 30, 2015. This was primarily driven by paydowns in excess of issuances related to our consolidated obligation bonds partially offset by afollowing:
A net increase in our consolidated obligation discount notes. Thedebt outstanding, with a shift to discount notein funding was driven by increased demand from our members for short term advances as well as taking advantage of very low short-term interest rates in the market.
Consolidated Obligation Bonds and Discount Notes
We fund our assets principally with consolidated obligations (bonds and discount notes) issued through the Office of Finance, and capital stock. Consolidated obligations have GSE status although they are not obligations of the United States and the United States does not guarantee them.
During the first nine months of 2015, we relied more on shorter termobligation discount notes to fund our assets as longer term bonds matured. The shift to discount note funding was driven by increased demand from our members for short term advances as well as taking advantage of funding opportunities in discount notes (versus bonds). For the comparable period in 2014, shorter term discount notes declined significantly as we issued more attractively-priced, longer-termed consolidated obligation bonds.bonds; and
The following showsretirement of our net cash flow issuances (redemptions) by type of consolidated obligation:
|
| | | | | | | | |
Nine months ended September 30, | | 2015 | | 2014 |
Discount notes | | $ | 6,225 |
| | $ | (583 | ) |
Bonds | | (8,274 | ) | | 3,003 |
|
Total consolidated obligations | | $ | (2,049 | ) | | $ | 2,420 |
|
subordinated notes.
Capital Resources
Capital Rules
For capital rules in effect through the third quarter of 2015, see Capital Rules on page 53 in our 2014 Form 10-K.
During the third quarter, we announced the approval ofUnder our Second Amended and Restated Capital Plan of the Federal Home Loan Bank of Chicago, which was implemented by our Board in August and effective as of October 1, 2015 (Capital Plan).
Under our Capital Plan,, our stock consists of two sub-classes of stock, Class B1 activity stock and Class B2 membership stock (together, Class B stock), both with a par value of $100 and redeemable on five years' written notice, subject to certain conditions. Each member is required to own capital stock in an amount equal to the greater of a membership stock requirement or an activity stock requirement. Class B1 activity stock is available for purchase only to support a member's activity stock requirement. Class B2 membership stock is available to be purchased to support a member's membership stock requirement and any activity stock requirement.
OurUnder our Capital Plan, allows our Board of Directors tomay set a threshold of between $10,000 and $75 million on the amount of Class B2 membership stock that would otherwise be held for membership if a member has advances outstanding that have an activity stock requirement in excess of the threshold amount. In that case, the amount of Class B2 membership stock that exceeds such threshold and is necessary to support advance activity is automatically converted into Class B1 activity stock. Effective
October 1, 2015, thisThat threshold was significantly reduced from $5 million tois currently set at $10,000, which means that we will convert to Class B1 activity capital stock any capital stock supporting advances that exceeds the lesser of the member's membership requirement or $10,000. As a result of this change, more than 99% of our borrowing members held more Class B1 activity stock on
October 1, 2015, than they did on September 30, 2015.
The Board of Directors may periodically adjust members' activity stock requirement for certain new advances within a range of 2% and 6% of a member's outstanding advances. Our Board implemented this provision through RCAP as further discussed below. EachIn addition, our Board reduced each member's activity stock requirement remains atfrom 5% to 4.5% for non-RCAP advances.
Federal Home Loan Bank of Chicago
(Dollars in millions except per share amounts unless otherwise indicated)advances, effective April 1, 2016.
In addition, ourOur Capital Plan now allows for an activity stock requirement for MPF Loans acquired for our portfolio within a range of 0% and 6%, which our Board has set at 0%. Should the Board decide to introduce this capital requirement, we intend to notify members sufficiently in advance of the change and apply that change only to future acquisitions.
Our Capital Plan
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The Board may periodically adjust members’ membership stock requirement iswithin a range of 0.20% to 2% of a member’s mortgage assets. In February 2016, our Board reduced the membership stock requirement to the greater of either $10,000 or 0.85% of a member's mortgage assets, subject to adjustment by the Board within a range of 0.2% to 2%0.40% of a member's mortgage assets. A member’s investment in membership stock is subject to a cap equal to the lesser of (1) a dollar cap set by the Board within a range of $10,000 and $75 million, and (2) 9.9% of our total capital stock outstanding as of the prior December 31. Effective October 1, 2015,Also in February 2016 , the Board reduced the dollar cap on membership stock from $75$25 million to $25$5 million, which is less than 9.9% of the Bank’s total capital stock at December 31, 2014,2015, and thus the operative cap during the remainder of 20152016 unless the Board sets a new cap.
Membership stock requirements will continue to be recalculated annually, whereas the activity stock requirement and any automatic conversion of Class B2 membership stock to Class B1 activity stock related to the threshold will apply on a daily basis. The revised membership stock and activity stock requirements discussed above went into effect on April 1, 2016. As a result of these changes, we held $593 million of excess capital stock on April 1, 2016. As of September 30, 2016, we held excess capital stock of $419 million. The reduction was a result of members requesting repurchase of their excess stock and members utilizing excess stock to support new advance borrowing activities.
We may only redeem or repurchase capital stock from a member if, following the redemption or repurchase, the member continues to meet its minimum investment requirement and we remain in compliance with our regulatory capital requirements discussed below.
Members that withdraw from membership must wait at least five years after their membership was terminated and all of their capital stock was redeemed or repurchased before being readmitted to membership in any FHLB.
Under the terms of our Capital Plan, our Board of Directors is authorized to amend the Capital Plan, and the FHFA must approve all such amendments before they become effective.
Reduced Capitalization Advance Program
Since June 2015, we have offered RCAP on a monthly basis. RCAP allows members to borrow one or more advances with an activity stock requirement of only 2% for the life of the advance instead of the 5%4.5% requirement under our capital plan’sCapital Plan’s general provisions, if the new advances represent an incremental increase in a member’s overall level of advances and have maturity dates of at least one year.
Minimum Capital Requirements
For details on our minimum capital requirements, see Note 11 - Capital to the financial statements. As of the date of this filing,provisions. Since June 1, 2016, we have managed ouroffered a more flexible version of RCAP, under which members can borrow both short- and long-term funding, including overnight advances, with the reduced activity stock capital base and assets to remain in compliance with our minimum capital requirements.requirement.
Capital Amounts
The following table reconciles our capital reported in our statements of condition to the amount of capital stock reported for regulatory purposes. MRCS is included in the calculation of the regulatory capital and leverage ratios but is recorded in Other liabilities in our statements of condition.
| | | | September 30, 2015 | | December 31, 2014 | | Change | | September 30, 2016 | | December 31, 2015 | | Change |
Capital stock | | $ | 1,892 |
| | $ | 1,902 |
| | $ | (10 | ) | | $ | 1,636 |
| | $ | 1,950 |
| | $ | (314 | ) |
Total retained earnings | | 2,640 |
| | 2,406 |
| | 234 |
| | 2,951 |
| | 2,730 |
| | 221 |
|
Total permanent capital | | 4,532 |
| | 4,308 |
| | 224 |
| |
Accumulated other comprehensive income (loss) | | 41 |
| | 217 |
| | (176 | ) | | (72 | ) | | (28 | ) | | (44 | ) |
Total GAAP capital | | $ | 4,573 |
| | $ | 4,525 |
| | $ | 48 |
| | $ | 4,515 |
| | $ | 4,652 |
| | $ | (137 | ) |
| | | | | |
|
| | | | | |
|
|
Capital Stock | | $ | 1,892 |
| | $ | 1,902 |
| | $ | (10 | ) | | $ | 1,636 |
| | $ | 1,950 |
| | $ | (314 | ) |
MRCS | | 9 |
| | 9 |
| | — |
| | 302 |
| | 8 |
| | 294 |
|
Total retained earnings | | 2,640 |
| | 2,406 |
| | 234 |
| | 2,951 |
| | 2,730 |
| | 221 |
|
Regulatory capital | | $ | 4,541 |
| | $ | 4,317 |
| | $ | 224 |
| | $ | 4,889 |
| | $ | 4,688 |
| | $ | 201 |
|
Federal Home Loan Bank of Chicago
(Dollars in millions except per share amounts unless otherwise indicated)
Although we have had no OTTI in 2015,2016, credit deterioration may negatively impact our remaining private-label MBS portfolio. We believe that future impairments of this portfolio are possible if unemployment rates, default, delinquency, or loss rates on mortgages were to increase, or there is a further decline in residential real estate value. We cannot predict if or when such impairments will occur, or the impact such impairments may have on our retained earnings and capital position. See page 28 of the Risk Factors section of our 20142015 Form 10-K.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
We may not pay dividends if we fail to satisfy our minimum capital and liquidity requirements under the FHLB Act and FHFA regulations.
For the second time this year,On October 27, 2016, our Board of Directors increasedapproved maintaining the dividend declared per share on Class B1 activity stock by 25 basis points. On October 27, 2015, our Boardlevels for the third quarter of Directors2016 and declared a cash2.80% dividend at an annualized rate of 2.50% per share of(annualized) for Class B1 activity stock and 0.50% per share ofa 0.60% dividend (annualized) for Class B2 membership stock based on our preliminary financial results for the third quarter of 2015.2016. This dividend, including dividends on mandatorily redeemable capital stock, totals $7totaled $11 million and will be paid on November 12, 2015.14, 2016. With this action, the Board continues and enhances the practice of rewarding members that use the Bank’s advances and support the financial health of the entire cooperative. Although we continue to work to maintain our financial strength to support a reasonable dividend, any future dividend determination by our Board will be at our Board's sole discretion and will depend on future operating results, our Retained Earnings and Dividend Policy and any other factors the Board determines to be relevant. For further information about our Retained Earnings and Dividend Policy, see Retained Earnings and Dividend Policy on page 57 in our 20142015 Form 10-K.10-K.
We continue to allocate 20% of our net income each quarter to a restricted retained earnings account in accordance with the Joint Capital Enhancement Agreement that we entered into with the other FHLBs, as further discussed in Joint Capital Enhancement Agreement on page F-45F-43 in our 20142015 Form 10-K.
Federal Home Loan Bank2016 of Chicago
(Dollars$294 million of our captive insurance company members' capital stock from equity to MRCS in millions except per share amounts unless otherwise indicated)liabilities on our statement of condition. For further details see Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements.
Critical Accounting Policies
The table below identifies our critical accounting policies and estimates and the page number where a detailed description of each can be found in our 20142015 Form 10-K.
|
| |
Overnight Indexed Swaps (OIS)Estimating Credit Losses | Page 60 |
Estimating Fair Value | Page 60 |
Joint and Several Liability | Page 61Pages 60-61 |
Significant changes in our critical accounting policies from our 2014 Form 10-K are outlined below. Also see
SeeNote 2 - Summary of Significant Accounting Policies and Note 3 - Recently Issued but Not Yet Adopted Accounting Standards to the financial statements in this Form 10-Q for the impact of changes in accounting policies and recently issued accounting standards on our financial results.
Overnight Indexed Swaps (OIS)
We started using the OIS curve to determine the fair value of our derivative contracts in the first quarter of 2015. The initial effect of using the OIS curve did not have a material effect on our operating activities or financial statements.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Risk Management - Credit Risk
Managing Our Credit Risk Exposure Related to Member Credit Products
Our credit risk rating system focuses primarily on our member's overall financial health and takes into account the member's asset quality, earnings, and capital position. For further information please see Member Credit Risk Ratings on page 63 in our 2015 Form 10-K.
The following table presents the number of members and related credit outstanding to them by credit risk rating. Credit outstanding consists primarily of outstanding advances and letters of credit. MPF credit enhancement obligations, member derivative exposures, and other obligations make up the rest. Of the total credit outstanding, $42.8 billion were advances (par value) and $10.4 billion were letters of credit at September 30, 2016, compared to $36.6 billion and $6.7 billion at December 31, 2015.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2016 | | December 31, 2015 |
Rating | | Borrowing Members | | % of Total | | Credit Outstanding | | % of Total | | Collateral Loan Value | | Borrowing Members | | % of Total | | Credit Outstanding | | % of Total | | Collateral Loan Value |
1-3 | | 492 |
| | 97 | % | | $ | 53,218 |
| | 100 | % | | $ | 99,480 |
| | 482 |
| | 94 | % | | $ | 43,090 |
| | 100 | % | | $ | 90,366 |
|
4 | | 6 |
| | 1 | % | | 47 |
| | — | % | | 129 |
| | 12 |
| | 2 | % | | 158 |
| | — | % | | 318 |
|
5 | | 12 |
| | 2 | % | | 100 |
| | — | % | | 242 |
| | 20 |
| | 4 | % | | 145 |
| | — | % | | 353 |
|
Total | | 510 |
| | 100 | % | | $ | 53,365 |
| | 100 | % | | $ | 99,851 |
| | 514 |
| | 100 | % | | $ | 43,393 |
| | 100 | % | | $ | 91,037 |
|
MPF Loans and Related Exposures
For details on our allowance for credit losses on MPF Loans, please see Note 8 - Allowance for Credit Losses to the financial statements.
Mortgage Repurchase Risk
We are exposed to mortgage repurchase risk in connection with our sale of MPF Loans to third party investors and MPF Loans securitized into MBS when a loan eligibility requirement or other warranty is breached. We may require the PFI from which we purchased the ineligible MPF Loan to repurchase that loan from us or indemnify us for related losses.
For the three and nine months ended September 30, 2016, we have repurchased $2 million and $8 million of unpaid principal balances related to MPF Loans. Due to recoveries from PFIs, we incurred no material losses on these loans. As of September 30, 2016, we have $21 million of unpaid principal with respect to mortgage loans that represent unresolved claims with investors in which a repurchase demand may occur, compared to $38 million at December 31, 2015.
For further details, see Mortgage Repurchase Risk on page 66 in our 2015 Form 10-K.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Investment Securities
We hold a variety of investment securities, mostly government backed or insured securities such as GSE debt and FFELP ABS, and we believe these investments are low risk. There was no material change in the credit ratings of these AA or better rated securities since December 31, 2015, and except for private-label MBS as noted below, we have never taken an impairment charge on these securities. For further details see page 69 in our 2015 Form 10-K.
Our private-label MBS are predominantly variable rate securities rated below investment grade (BBB). There was no material change in overall credit quality since December 31, 2015, nor have we acquired any new private-label MBS. We last had an other-than-temporary impairment (OTTI) loss on private-label MBS in 2012. We currently have unrealized gains on these securities as their market values have improved from the impaired values and subsequent to 2012 we have begun recording accretion gains on these securities back into income. For further details see Note 5 - Investments Securities to the financial statements in this Form 10-Q as well as pages F-27 and F-28 in our 2015 Form 10-K.
Unsecured Short-Term Investments Credit Exposure
We face credit riskFor further details on our unsecured short-term investment portfolio that we maintaininvestments as well as policies and procedures to provide funds to meet the credit needs oflimit and monitor our members and to maintain liquidity. See Liquidity on page 51for a discussion of our liquidity management. Our policy permits unsecured credit investments that can have maturities up to nine months and can consist of commercial paper, certificates of deposit, and Federal Funds sold.
We actively monitorrisk exposure, see page 72 in our credit exposure and the credit quality of each counterparty (which can include our members), including an assessment of each counterparty's financial performance, capital adequacy, sovereign support and the current market perceptions of the counterparty. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result of this monitoring activity, we may limit or suspend existing unsecured credit limits.
We do not invest in unsecured financial instruments issued by non-U.S. entities (other than those issued by U.S. branches and agency offices of foreign commercial banks) as we are prohibited from doing so by FHFA regulations. Our unsecured credit exposures to U.S. branches or agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties.2015 Form 10-K.
The following table presents the credit ratings of our unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks. This table does not reflect the foreign sovereign government's credit rating. The unsecured investment credit exposure presented in the table may not reflect the average or maximum exposure during the period as the table reflects only the balances at period end.
|
| | | | | | | | | | | | | | | | |
As of September 30, 2015 | | AA | | A | | Unrated | | Total |
Domestic U.S. - Interest-Bearing Deposits | | $ | — |
| | $ | 560 |
| | $ | — |
| | $ | 560 |
|
Domestic U.S. - Fed Funds Sold | | — |
| | — |
| | 20 |
| | 20 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | | |
Netherlands - Fed Funds Sold | | — |
| | 400 |
| | — |
| | 400 |
|
Finland - Fed Funds Sold | | 300 |
| | — |
| | — |
| | 300 |
|
Total unsecured credit exposure | | $ | 300 |
| | $ | 960 |
| | $ | 20 |
| | $ | 1,280 |
|
|
| | | | | | | | | | | | | | | | | | | | |
As of September 30, 2016 | | AA | | A | | BBB | | Unrated | | Total |
Domestic U.S. | | | | | | | | | | |
Interest-Bearing Deposits | | $ | — |
| | $ | 650 |
| | $ | — |
| | $ | — |
| | $ | 650 |
|
Fed Funds Sold | | — |
| | — |
| | 188 |
| | 19 |
| | 207 |
|
U.S. branches and agency offices of foreign commercial banks - Federal Funds sold: | | | | | | | | | | |
Australia | | 500 |
| | — |
| | — |
| | — |
| | 500 |
|
Canada | | — |
| | 1,100 |
| | — |
| | — |
| | 1,100 |
|
Finland | | 500 |
| | — |
| | — |
| | — |
| | 500 |
|
Netherlands | | — |
| | 500 |
| | — |
| | — |
| | 500 |
|
Norway | | — |
| | 500 |
| | — |
| | — |
| | 500 |
|
Sweden | | — |
| | 500 |
| | — |
| | — |
| | 500 |
|
Total unsecured credit exposure | | $ | 1,000 |
| | $ | 3,250 |
| | $ | 188 |
| | $ | 19 |
| | $ | 4,457 |
|
In
All $4.5 billion of the unsecured credit exposure shown in the above table no investments were longer than of overnight duration.investments.
Investment Securities
We hold a variety of investment securities we believe are low risk and mostly government backed or insured such as GSE debt, and FFELP ABS. There was no material change in the credit ratings of these AA or better rated securities since December 31, 2014, and except for private-label MBS as noted below, we have never taken an impairment charge on these securities. For further details see page 66 in our 2014 Form 10-K.
Our private label MBS are predominantly variable rate securities rated below investment grade BBB. There was no material change in overall credit quality since December 31, 2014, nor have we acquired any new private label MBS. We last had an other-than-temporary impairment (OTTI) loss in 2012. For further details see page F-26 and F-27 in our 2014 Form 10-K.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The following table presents the components of amortized cost of our private label MBS (whether or not impaired), and where applicable, the life-to-date OTTI credit impairment taken over time on some of these securities. For further details, see Note 5 - Investment Securities - Other-Than-Temporary Impairment Analysis to the financial statements.
|
| | | | | | | | | | | | | | | | |
As of September 30, 2015 | | Unpaid Principal Balance | | Life-To-Date OTTI Credit Impairment a | | Other Adjustments b | | Amortized Cost |
Private label MBS | | $ | 1,642 |
| | $ | (742 | ) | | $ | 317 |
| | $ | 1,217 |
|
| |
a
| Life-to-date OTTI credit impairment excludes certain adjustments, such as increases in cash flows expected to be collected that have been recognized into net income. |
| |
b
| Other Adjustments primarily consists of principal shortfalls and life-to-date accretion of interest related to the discounted present value of previously recognized credit-related impairment losses. |
MemberManaging Our Credit OutstandingRisk Exposure Related to Derivative Agreements
The following table presents the number of borrowers and secured credit outstandingRefer to our borrowers by rating. Our internal rating reflects our assessment of the default risk associated with a member rather than the risk of loss on the credit outstanding. We manage our credit risk through collateral controls and, based on our risk rating, increase over-collateralization requirements as a member deteriorates. As a result, we have never suffered a credit loss from a member default. Credit outstanding consists primarily of outstanding advances and letters of credit. MPF credit enhancement obligations, member derivative exposures, and other obligations make up the rest. Collateral loan value describes the borrowing capacity assigned to the types of collateral we accept for advances. Collateral loan value does not imply fair value. Of the total credit outstanding, $34.8 billion were advances (par value) and $6.4 billion were letters of credit at September 30, 2015, compared to $32.3 billion and $3.6 billion at December 31, 2014.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 |
Rating | | Number of Borrowers | | % of Total | | Credit Outstanding | | % of Total | | Collateral Loan Value | | Number of Borrowers | | % of Total | | Credit Outstanding | | % of Total | | Collateral Loan Value |
1-3 | | 483 |
| | 95 | % | | $ | 41,002 |
| | 100 | % | | $ | 113,752 |
| | 481 |
| | 92 | % | | $ | 35,651 |
| | 98 | % | | $ | 76,797 |
|
4 | | 7 |
| | 1 | % | | 90 |
| | — | % | | 151 |
| | 15 |
| | 3 | % | | 183 |
| | 1 | % | | 331 |
|
5 | | 21 |
| | 4 | % | | 194 |
| | — | % | | 326 |
| | 25 |
| | 5 | % | | 240 |
| | 1 | % | | 388 |
|
Total | | 511 |
| | 100 | % | | $ | 41,286 |
| | 100 | % | | $ | 114,229 |
| | 521 |
| | 100 | % | | $ | 36,074 |
| | 100 | % | | $ | 77,516 |
|
The significant increases in collateral loan values are due to the updated loan margins we made available to members effective June 25, 2015, large collateral pledges from two of our biggest borrowers and also a change in the qualified collateral report process that made pledging easier to conduct. The majority of borrowers assigned a 4 rating in the above table were required to submit specific collateral listings and the majority of borrowers assigned a 5 rating were required to deliver collateral to us or a third-party custodian on our behalf.
As a result of the collateral and other credit risk mitigation efforts, we believe our credit outstanding is sufficiently well collateralized and we have not recorded an allowance for credit losses on our advances or other credit products in the periods presented.
MPF Loans
Our allowance declined in 2015 compared to 2014 primarily as a result of change in regulation by AB 2012-02, for further details see Note 29 - Summary of Significant Accounting PoliciesDerivatives and Hedging Activities to the financial statements. For details onstatements for a discussion of how we manage our allowance for credit losses, please see Note 8 - Allowance for Credit Losses to the financial statements.
Mortgage Repurchase Risk
We are exposed to mortgage repurchase risk in connection with our sale of MPF Loans to Fannie Mae under the MPF Xtra product, to third party investors under the MPF Direct product, and to Ginnie Mae for MPF Loans securitized in Ginnie Mae MBS. If a loan eligibility requirement or other warranty is breached, these third parties could require us to repurchase the ineligible MPF Loan or provide an indemnity. We may require the PFI from which we purchased the ineligible MPF Loan to repurchase that loan from us or indemnify us for related losses. Under the MPF Direct product, if a PFI is insolvent, our repurchase liability is limited to a PFI's failure to deliver the required loan documentation and excludes repurchases for breaches of loan level
Federal Home Loan Bank of Chicago
(Dollars in millions except per share amounts unless otherwise indicated)
representations and warranties. In addition, if we purchased the ineligible MPF Loan from a PFI of another MPF Bank, the MPF Bank will indemnify us for any losses we may incur.
For the three and nine months ended September 30, 2015, we have repurchased $4 million and $17 million of unpaid principal balances related to MPF Xtra loans sold to Fannie Mae. These repurchases represent repurchase requests that have been resolved during the reporting period. Due to recoveries from PFIs, we incurred no material losses on these loans. As of September 30, 2015, we have $43 million of unpaid principal with respect to mortgage loans that represent unresolved claims with Fannie Mae, in which a repurchase demand may occur compared to $62 million at December 31, 2014; see Note 14 -Commitments and Contingencies to the financial statements. We did not estimate any mortgage repurchase liability with respect to MPF Direct loans due to the pre-purchase due diligence performed by the investor of all MPF Loans purchased under the MPF Direct product. We did not estimate any mortgage repurchase liability with respect to MPF Government MBS loans due to the minimal volume of MPF Loans securitized in Ginnie Mae MBS as of September 30, 2015.
For further details, see Mortgage Repurchase Risk on page 74 in our 2014 Form 10-K.
Derivative counterparties
We transact most of our derivatives with large banks and major broker-dealers. Derivative transactions may be either over-the-counter with a counterparty (bilateral derivatives) or over-the-counter cleared through an FCM with a derivatives clearing organization (clearinghouse).
We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative agreements. The amount of credit risk on derivatives depends on the extent to which netting procedures, collateral requirements and other credit enhancements are used and are effective in mitigating the risk. We manage credit risk through credit analysis, collateral management and other credit enhancements. We are also required to follow the requirements set forth by applicable regulation.
Bilateral Derivatives. We are subject to credit risk due to nonperformance by counterpartiesexposure related to derivative agreements. We require collateral on bilateral derivative agreements. The amount of net unsecuredhave credit exposure that is permissible with respecton net asset positions where we have not received adequate collateral from our counterparties. We also have credit exposure on net liability positions where we have pledged collateral in excess of our liability to a counterparty depends on the credit rating of that counterparty. The counterparty must deliver collateral to us if the total market value of our exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our bilateral derivative agreements with counterparties as of September 30, 2015.
Cleared Derivatives. We are subject to credit risk due to nonperformance by the clearinghouse. The requirement that we post initial and variation margin through the FCM, on behalf of the clearinghouse, exposes us to institutional credit risk in the event that the FCM or the clearinghouse fails to meet their obligations. Clearing derivatives through a clearinghouse mitigates counterparty credit risk exposure because individual counterparties are replaced by the central clearinghouse counterparty and collateral is posted daily for changes in the value of cleared derivatives. We do not anticipate any credit losses on our cleared derivatives as of September 30, 2015.
The contractual or notional amount of derivative agreements reflects our involvement in the various classes of financial instruments. Our maximum credit risk with respect to derivative agreements is the estimated cost of replacing interest-rate swaps, forward agreements and purchased caps and floors if the counterparty defaults, minus the value of any related collateral. In determining maximum credit risk, we consider, with respect to each counterparty, accrued interest receivables and payables as well as the legal right to net assets and liabilities.
Federal Home Loan Bank of Chicago
(Dollars in millions except per share amounts unless otherwise indicated)
The following table presents only our derivative positions with netwhere we have such credit exposure. Ratingexposures. The rating used was the lowest rating among the three largest NRSROs.Nationally Recognized Statistical Rating Organizations. Non-cash collateral pledged consists of initial margin we posted through our FCMs, on behalf of the clearinghousesDCOs for cleared derivatives. Non-cash collateral pledgedderivatives and is included in our derivative positions with credit exposure.
| | | | Net Derivatives Fair Value Before Collateral | | Cash Collateral Pledged | | Non-cash Collateral Pledged | | Net Credit Exposure to Counterparties | | Net Fair Value Before Collateral | | Cash Collateral Pledged | | Non-cash Collateral Pledged | | Net Credit Exposure to Counterparties | |
As of September 30, 2015 | | | | | | | | | |
Asset positions with credit exposure - | | | | | | | | | |
As of September 30, 2016 | | | | | | | | | | |
Non-member counterparties - | | | | | | | | | | |
Undercollateralized asset positions - | | | | | | | | | | |
Bilateral derivatives - | | | | | | | | | | | | | | | | | |
Cleared derivatives | | | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| |
Overcollateralized liability positions - | | | | | | | | | | |
Bilateral derivatives - | | | | | | | | | | |
AA rated | | | (17 | ) | | 17 |
| | — |
| | — |
| |
A rated | | $ | 4 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | (29 | ) | | 29 |
| | — |
| | — |
| |
Liability positions with credit exposure - | | | | | | | | | |
Cleared derivatives | | (185 | ) | | 184 |
| | 58 |
| | 57 |
| | (395 | ) | | 413 |
| | 90 |
| | 108 |
| |
Net with non-member counterparties | | (181 | ) | | 180 |
| | 58 |
| | 57 |
| |
Non-member counterparties | | | (441 | ) | | 460 |
| | 90 |
| | 109 |
| |
Member institutions | | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 1 |
| |
Total | | $ | (180 | ) | | $ | 180 |
| | $ | 58 |
| | $ | 58 |
| | $ | (440 | ) | | $ | 460 |
| | $ | 90 |
| | $ | 110 |
| |
| | | | | | | | | | | | | | | | | |
As of December 31, 2014 | | | | | | | | | |
Asset positions with credit exposure - | | | | | | | | | |
As of December 31, 2015 | | | | | | | | | | |
Non-member counterparties - | | | | | | | | | | |
Overcollateralized liability positions - | | | | | | | | | | |
Bilateral derivatives - | | | | | | | | | | | | | | | | | |
A rated | | $ | 7 |
| | $ | (6 | ) | | $ | — |
| | $ | 1 |
| |
Liability positions with credit exposure - | | | | | | | | | |
Bilateral derivatives - | | | | | | | | | |
AA rated | | | $ | (14 | ) | | $ | 14 |
| | $ | — |
| | $ | — |
| a |
A rated | | (16 | ) | | 16 |
| | — |
| | — |
| | (4 | ) | | 4 |
| | — |
| | — |
| a |
Cleared derivatives | | (166 | ) | | 168 |
| | 71 |
| | 73 |
| | (147 | ) | | 136 |
| | 62 |
| | 51 |
| |
Net with non-member counterparties | | (175 | ) | | 178 |
| | 71 |
| | 74 |
| |
Non-member counterparties | | | (165 | ) | | 154 |
| | 62 |
| | 51 |
| |
Member institutions | | 3 |
| | — |
| | — |
| | 3 |
| | 1 |
| | — |
| | — |
| | 1 |
| |
Total | | $ | (172 | ) | | $ | 178 |
| | $ | 71 |
| | $ | 77 |
| | $ | (164 | ) | | $ | 154 |
| | $ | 62 |
| | $ | 52 |
| |
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Legislative and Regulatory Developments
Significant regulatory actions and developments for the period covered by this report are summarized below.
Joint Final RuleMinority and Women Inclusion
On October 27, 2016, the FHFA proposed amendments to its Minority and Women Inclusion regulations that, if adopted, would clarify the scope of the FHLBs’ obligation to promote diversity and ensure inclusion. These proposed amendments update existing FHFA regulations aimed at promoting diversity and the inclusion and utilization of minorities, women, and individuals with disabilities in all Bank business and activities, including management, employment and contracting.
The proposed amendments would:
require the FHLBs to develop standalone diversity and inclusion strategic plans or incorporate diversity and inclusion into their existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;
encourage the FHLBs to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements;
require the FHLBs to amend their policies on Marginequal opportunity in employment and Capital Requirementscontracting by adding sexual orientation, gender identity, and status as a parent to the list of protected classifications; and
require the FHLBs to provide information in their annual reports to the FHFA about their efforts to advance diversity and inclusion through capital market transactions, affordable housing and community investment programs, initiatives to improve access to mortgage credit, and strategies for Covered Swap Entitiespromoting the diversity of supervisors and managers.
In October 2015,Comments on the proposed amendments are due by December 27, 2016. We are currently assessing the effect the proposed amendments would have on us if adopted.
FHLB Membership for Non-Federally-Insured Credit Unions
On September 28, 2016, the FHFA proposed amendments to regulations governing FHLB membership that would implement statutory amendments to the FHLB Act authorizing FHLBs to accept applications for membership from state-chartered credit unions without Federal share insurance, provided that certain prerequisites have been met. The new rule, if adopted, would generally treat these credit unions the same as other depository institutions with an additional requirement that they obtain an affirmative statement from their state regulator that they meet the requirements for Federal insurance as of the date of their application for FHLB membership; a written statement from the state regulator that it cannot or will not make any determination regarding eligibility for Federal insurance; or if the regulator fails or refuses to respond to the credit union’s request within six months, confirmation of the failure to receive a response.
Comments are due on the proposed rule by November 28, 2016. We are currently assessing the effect of the proposed rule but do not anticipate that, if adopted, it would materially impact us.
Indemnification Payments
On September 20, 2016, the FHFA issued a re-proposed rule that, if adopted, would establish standards for identifying whether an indemnification payment by a FHLB or the Office of Finance to an officer, director, employee, or other entity-affiliated party in connection with an administrative proceeding or civil action instituted by the ComptrollerFHFA is prohibited or permissible. Under the proposed rule, those payments with respect to an administrative proceeding or civil action initiated by the FHFA are only permitted if they relate to:
premiums for professional liability insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the Currency, the BoardFHFA or a civil money penalty;
expenses of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the FHFA (eachdefending an Agency and, collectively, the Agencies) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (Swap Entities) that areaction, subject to the jurisdiction of one of the Agencies (such entities, Covered Swap Entities,an agreement to repay those expenses in certain instances; and the joint final rules, the Final Margin Rules).
When they take effect, the Final Margin Rules will subject non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and financial end users that have material swaps exposure (i.e.,amounts due under an average daily aggregate notional of $8 billionindemnification agreement entered into on or more in non-cleared swaps calculated in accordance with the Final Margin Rules),prior to a mandatory two-way minimum initial margin requirement. The minimum amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity.September 20, 2016.
The Final Margin Rules specifyproposed rule also outlines the typesprocess a board of collateral that may be posted or collected as initial margindirectors must undertake prior to making any permitted indemnification payment for non-cleared swaps and non-cleared security-based swaps with financial end-users (generally cash, certain government and GSE securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold), and set forth haircuts for certain collateral asset classes. Initial margin must be segregated withexpenses of defending an independent, third-party custodian and, generally, may not be rehypothecated, except that, cash funds may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances.action instituted by the FHFA.
The Final Margin Rules will require minimum variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and all financial end-users (without regard toComments are due on the swaps exposure ofproposed rule by December 21, 2016. We are currently assessing the particular financial end-user). The minimum variation margin amount iseffect the daily mark-to-market change in the value of the swap to the Covered Swap Entity, taking into account variation margin previously posted or collected. For non-cleared swaps and security-based swaps between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party custodian, and may,proposed rule would have on us if permitted by contract, be rehypothecated.adopted.
The variation margin requirement under the Final Margin Rules will become effective for the Bank on March 1, 2017, and the initial margin requirement under the Final Margin Rules is expected to become effective for the Bank on September 1, 2020.
The Bank is not a Covered Swap Entity under the Final Margin Rules. But, the Bank is a financial end-user under the Final Margin Rules, and would likely have material swaps exposure when the initial margin requirements under the Final Margin Rules become effective.
Because we are currently posting and collecting variation margin on non-cleared swaps, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a material impact on our costs. However, when the initial margin requirements under the Final Margin Rules become effective, we anticipate that our cost of engaging in non-cleared swaps may increase.
The Commodity Futures Trading Commission (CFTC) and the SEC are expected to adopt their own versions of the Final Margin Rules that will be comparable to the Final Margin Rules. The CFTC’s and SEC’s rules will only apply to a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that are not subject to the jurisdiction of one of the Agencies.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
FHFA Core Mission Achievement Advisory Bulletin 2015-05FRB Framework for Implementing the U.S. Basel III Countercyclical Capital Buffer
On July 14, 2015,September 8, 2016, the FRB adopted a final policy statement (“Policy Statement”) describing the framework that the FRB will follow in setting the countercyclical capital buffer (“CCyB”) for banking organizations that are subject to the advanced approaches capital rules, generally those with more than $250 billion in assets or $10 billion in on-balance-sheet foreign exposures, and to any depository institution subsidiary of such banking organizations. The CCyB supplements the minimum capital requirements and other capital buffers included in existing regulations, which were designed to provide resilience to unexpected losses created by normal fluctuations in economic and financial conditions.
Although the Policy Statement does not directly impact us, the potential impact on borrowings by our few larger members is uncertain.
FHLB New Business Activities
On August 23, 2016, the FHFA issued an advisory bulletinproposed a rule that, provides guidance relating toif adopted, would reduce the scope of new business activities (“NBAs”) for which a core mission asset ratio by whichFHLB must seek approval from the FHFA will assess each FHLB’s core mission achievement.and would establish more certain timelines for FHFA review and approval of NBA notices. The proposed rule also would clarify the protocol for FHFA plansreview of NBAs. Under the proposed rule, acceptance of new types of legally permissible collateral by the FHLBs would not constitute a new business activity or require approval from the FHFA prior to assess core mission achievement by using a ratio of primary mission assets, which includes advances and mortgage loans acquired from members (also referred to as acquired member assets), to consolidated obligations. The core mission asset ratio will be calculated at year-end 2015, and annually thereafteracceptance. Instead, the FHFA would review new collateral types as part of the FHFA's examination process, using annual average par values.
The advisory bulletin provides the FHFA’s expectations for each FHLB’s strategic plan based on its ratio, which are:exam process.
whenOn October 24, 2016, the ratio is at least 70% or higher,FHLBs provided comments to the strategic plan should include an assessmentproposed rule, which primarily relate to certain procedures under the proposed rule. We do not anticipate that the proposed rule, if adopted, would materially impact us.
Mandatory Contractual Stay Requirements for Qualified Financial Contracts (“QFCs”)
On August 19, 2016, the Office of the FHLB’s prospects for maintaining this level;Comptroller of the Currency (“OCC”) issued a proposed rule, which, if adopted, would require certain systemically important financial institutions (“SIFI”) regulated by the OCC to amend their covered qualified financial contracts (“QFCs”) to limit a counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the SIFI or an affiliate of the SIFI. Covered QFCs include derivatives, repurchase agreements (known as “repos”) and reverse repos, and securities lending and borrowing agreements. On May 3, 2016, the Federal Reserve Board (“FRB”) issued a substantively identical proposed rule with respect to QFCs entered into with globally systemically important banking organizations (“GSIBs”) and their affiliates that are subject to regulation in the U.S. Further, on October 26, 2016, the Federal Deposit Insurance Corporation ("FDIC") issued a substantively identical proposed rule with respect to QFCs entered into with certain FDIC-supervised institutions.
whenThe FHLBs provided comments on the ratio is between 55% but less than 70%,FRB proposed rule on August 5, 2016 and to the strategic plan should explainOCC proposed rule on October 18, 2016, which primarily seek clarification of an exemption and the FHLB’s planrecognition of a safe harbor. The FHLBs are considering whether to increase its mission focus; andcomment on the FDIC's proposed rule. We do not anticipate that the proposed rules, if adopted, would materially impact us.
whenEuropean Union (“EU”) Market Abuse Regulation
The EU issued updated Market Abuse Regulations (“MAR”) that became effective July 3, 2016 which contain rules on insider dealing, unlawful disclosure of inside information and market manipulation for debt and equity securities on European securities exchanges, which differ in certain respects from U.S. regulations. MAR applies to issuers with securities admitted to trading on the ratio is below 55%,EU exchanges, including EU exchanges on which FHLB consolidated obligations are listed. MAR contains an exemption to its requirements for certain public bodies and central banks of third countries. The OF and the strategic plan should include an explanationFHLBs are examining whether this exemption applies. If the exemption does not apply, we anticipate that the most significant impact of the circumstances that caused the ratio toMAR on us will be at that levelmore stringent and detailed plansrecordkeeping, creation of detailed lists on parties who have access to increase the ratio. The advisory bulletin provides that if an FHLB maintains a ratio below 55% over the course of several consecutive reviews, then the FHLB’s board of directors should consider possible strategic alternatives.inside information, and notification requirements.
Our core mission activities primarily includeFinancial Industry Regulatory Authority (“FINRA”) Rule 4210 establishing margin requirements for the issuanceTBA Market
On June 15, 2016, the SEC approved a proposed rule by FINRA to require the margining of advances. In addition,certain “to-be-announced” (“TBA”) transactions. Specifically, the approved FINRA Rule 4210 will require FINRA members to collect from, but not post to, their customers maintenance margin (i.e. initial margin) and variation margin on transactions that are "Covered Transactions" (as defined in FINRA rules), subject to certain exemptions. Under the rule, we acquire member assets throughare exempt from posting initial margin but would be required to post variation margin to our FINRA-member counterparty in connection with covered transactions, provided we have more than $10 million in gross open positions with the MPF Program. We expect our core mission achievement ratio at year-endcounterparty.
FINRA members will be between 55%required to comply with the new margin requirements beginning in December 2017. We are currently assessing the financial and 70%.operational impacts of this rule.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Measurement of Market Risk Exposure
To measure our exposure, we discount the cash flows generated from modeling the terms and conditions of all interest rate-sensitive securities using current interest rates to determine their fair values or spreads to the swap curve for securities where third party prices are used. This includes considering explicit and embedded options using a lattice model or Monte Carlo simulation. We estimate yield curve, option, and basis risk exposures by calculating the fair value change in relation to various parallel changes in interest rates, implied volatility, prepayment speeds, spreads to the swap curve and mortgage rates.
The table below summarizes our sensitivity to various interest rate risk exposures in terms of changes in market value.
| | | | | Option Risk | | Basis Risk | | | Option Risk | | Basis Risk |
| Yield Curve Risk | | Implied Volatility | | Prepayment Speeds | | Spread to Swap Curve | | Mortgage Spread | Yield Curve Risk | | Implied Volatility | | Prepayment Speeds | | Spread to Swap Curve | | Mortgage Spread |
As of September 30, 2015 | | | | | | | | | | |
As of September 30, 2016 | | | | | | | | | | |
Advances | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | (9 | ) | | $ | — |
| $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | (10 | ) | | $ | — |
|
MPF Loans | (1 | ) |
| (2 | ) |
| (3 | ) |
| (2 | ) |
| 1 |
| (1 | ) |
| (1 | ) |
| (3 | ) |
| (2 | ) |
| 1 |
|
Mortgage Backed Securities | (5 | ) | | (1 | ) | | (1 | ) | | (6 | ) | | — |
| (3 | ) | | — |
| | (1 | ) | | (4 | ) | | — |
|
Other interest earning assets | (1 | ) | | — |
| | — |
| | (3 | ) | | — |
| (1 | ) | | — |
| | — |
| | (3 | ) | | — |
|
Interest-bearing liabilities | 6 |
| | 5 |
| | — |
| | 6 |
| | — |
| 5 |
| | 3 |
| | — |
| | 5 |
| | — |
|
Derivatives | 4 |
| | (3 | ) | | — |
| | — |
| | — |
| 3 |
| | (2 | ) | | — |
| | — |
| | — |
|
Total | $ | — |
| | $ | (1 | ) | | $ | (4 | ) | | n/m |
| | $ | 1 |
| $ | (1 | ) | | $ | — |
| | $ | (4 | ) | | n/m |
| | $ | 1 |
|
| | | | | | | | | | | | | | | | | | |
As of December 31, 2014 | | | | | | | | | | |
As of December 31, 2015 | | | | | | | | | | |
Advances | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | (11 | ) | | $ | — |
| $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | (10 | ) | | $ | — |
|
MPF Loans | (1 | ) | | (3 | ) | | (3 | ) | | (2 | ) | | 1 |
| (1 | ) | | (2 | ) | | (2 | ) | | (2 | ) | | 1 |
|
Mortgage Backed Securities | (6 | ) | | (1 | ) | | (1 | ) | | (7 | ) | | — |
| (4 | ) | | (1 | ) | | (1 | ) | | (5 | ) | | — |
|
Other interest earning assets | (1 | ) | | — |
| | — |
| | (4 | ) | | — |
| (1 | ) | | — |
| | — |
| | (3 | ) | | — |
|
Interest-bearing liabilities | 10 |
| | 12 |
| | — |
| | 9 |
| | — |
| 6 |
| | 5 |
| | — |
| | 6 |
| | — |
|
Derivatives | 2 |
| | (9 | ) | | — |
| | — |
| | — |
| 3 |
| | (3 | ) | | — |
| | — |
| | — |
|
Total | $ | 1 |
| | $ | (1 | ) | | $ | (4 | ) | | n/m |
| | $ | 1 |
| $ | — |
| | $ | (1 | ) | | $ | (3 | ) | | n/m |
| | $ | 1 |
|
| |
n/m | Spread movements to the swap curve within each category are independent of the other categories and therefore a total is not meaningful. |
Yield curve risk – Change in market value for a one basis point parallel increase in the swap curve.
Option risk (implied volatility) – Change in market value for a one percent parallel increase in the swaption volatility.
Option risk (prepayment speeds) – Change in market value for a one percent increase in prepayment speeds.
Basis risk (spread to swap curve) – Change in market value for a one basis point parallel increase in the spread to the swap curve.
Basis risk (mortgage spread) – Change in market value for a one basis point increase in mortgage rates.
As of September 30, 2015,2016, our sensitivity to changes in implied volatility was $(1) million.zero. At December 31, 2014,2015, our sensitivity to changes in implied volatility was $(1) million. These sensitivities are limited in that they do not incorporate other risks, including but not limited to, non-parallel changes in yield curves, prepayment speeds, and basis risk related to differences between the swap and the other curves. Option positions embedded in our mortgage assets and callable debt impact our yield curve risk profile, such that swap curve changes significantly greater than one basis point cannot be linearly interpolated from the table above.
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Duration of equity is another measure to express interest rate sensitivity. We report the results of our duration of equity calculations to the FHFA each quarter. We measure duration of equity in a base case using the actual yield curve as of a specified date and then shock it with an instantaneous shift of the entire curve. The following table presents the duration of equity reported by us to the FHFA in accordance with the FHFA's guidance, which prescribes that down and up interest-rate shocks equal 200 basis points. The results are shown in years of duration equity.
|
| | | | | | | | | | |
September 30, 2015 | | December 31, 2014 |
Down 200 bps | | Base | | Up 200 bps | | Down 200 bps | | Base | | Up 200 bps |
3.2 | | 1.3 | | 0.8 | | 3.2 | | -0.3 | | 0.2 |
|
| | | | | | | | | | |
September 30, 2016 | | December 31, 2015 |
Down 200 bps | | Base | | Up 200 bps | | Down 200 bps | | Base | | Up 200 bps |
2.5 | | 1.0 | | 1.0 | | 2.8 | | 0.6 | | 0.7 |
Duration gap is another measure of interest rate sensitivity. Duration gap is calculated by dividing the dollar duration of equity by the fair value of assets. A positive duration gap indicates an exposure to rising interest rates. As of September 30, 2015,2016, our duration gap was 1.00.9 months, compared to -0.20.5 months as of December 31, 2014.2015.
As of September 30, 2015,2016, on a U.S. GAAP basis, our fair value surplus (relative to book value) was $351$399 million, and our market value of equity to book value of equity ratio was 108%. At, compared to $351 million and 108% at December 31, 2014, our fair value surplus was $618 million and our market value of equity to book value of equity ratio was 114%. The reduction in market value to book value was partly driven by the increase in our capital and the gradual pay down of assets at a fair value premium to book value that are replaced by assets at par. This is a trend that is expected to continue.2015. Our market to book value of total capital for regulatory risk-based capital purposes differs from this GAAP calculation, as discussed in Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) .to the financial statements.
Our Asset/Liability Management Committee provides oversight of market risk management practices and policies. This includes routine reporting to senior management and the Board of Directors, as well as maintaining the Income and Market Value Risk Policy, which defines our interest rate risk limits. The table below reflects the change in market risk limits under the Income and Market Value Risk Policy.
| | | | September 30, 2015 | | December 31, 2014 | | September 30, 2016 | | December 31, 2015 |
Scenario as of | | Change in Market Value of Equity | | Loss Limit | | Change in Market Value of Equity | | Loss Limit | | Change in Market Value of Equity | | Loss Limit | | Change in Market Value of Equity | | Loss Limit |
-200 bp | | $ | 119.6 |
| | $ | (185.0 | ) | | $ | 118.6 |
| | $ | (185.0 | ) | | $ | 60.1 |
| | $ | (370.0 | ) | | $ | 123.0 |
| | $ | (370.0 | ) |
-100 bp | | 95.5 |
| | (77.5 | ) | | 28.5 |
| | (77.5 | ) | | 125.7 |
| | (155.0 | ) | | 65.2 |
| | (155.0 | ) |
-50 bp | | 48.9 |
| | (30.0 | ) | | (0.6 | ) | | (30.0 | ) | | 42.4 |
| | (60.0 | ) | | 21.8 |
| | (60.0 | ) |
-25 bp | | 22.6 |
| | (15.0 | ) | | (2.4 | ) | | (15.0 | ) | | 16.9 |
| | (30.0 | ) | | 7.5 |
| | (30.0 | ) |
+25 bp | | (12.7 | ) | | (30.0 | ) | | 4.1 |
| | (30.0 | ) | | (11.4 | ) | | (30.0 | ) | | (6.4 | ) | | (30.0 | ) |
+50 bp | | (23.0 | ) | | (60.0 | ) | | 9.2 |
| | (60.0 | ) | | (20.2 | ) | | (60.0 | ) | | (13.9 | ) | | (60.0 | ) |
+100 bp | | (42.7 | ) | | (155.0 | ) | | 12.9 |
| | (155.0 | ) | | (35.9 | ) | | (155.0 | ) | | (31.3 | ) | | (155.0 | ) |
+200 bp | | (78.3 | ) | | (370.0 | ) | | 7.0 |
| | (370.0 | ) | | (80.3 | ) | | (370.0 | ) | | (62.8 | ) | | (370.0 | ) |
Federal Home Loan Bank of Chicago![logoa12.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa12.jpg)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the Evaluation Date). Based on this evaluation, the principal executive officer and principal financial officer concluded as of the Evaluation Date that the disclosure controls and procedures were effective such that information relating to us that is required to be disclosed in reports filed with the SEC (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
For the current yearmost recent quarter presented in this Form 10-Q, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Consolidated Obligations
Our disclosure controls and procedures include controls and procedures for accumulating and communicating information relating to our joint and several liability for the consolidated obligations of other FHLBs. For further information, see Item 9A. Controls and Procedures on page 8582 of our 20142015 Form 10-K.
Federal Home Loan Bank of Chicago![logoa10.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa10.jpg)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On October 15, 2010, the Bank instituted litigation relating to 64 private labelprivate-label MBS bonds purchased by the Bank in an aggregate original principal amount of $4.29 billion. The litigation was brought in state courtOf the three cases that were filed by the Bank, only the action filed in the statesCircuit Court of Washington, California and Illinois. The Washington action has been resolved and was dismissed with prejudice on December 5, 2013. The California action has been resolved and was dismissed with prejudice on January 27, 2014. TheCook County, Illinois action, which currently relates to nine private labelremains active. As of September 30, 2016, this litigation covers four private-label MBS bonds with anin the aggregate original principal amount of $494 million, is proceeding in discovery.$77.5 million.
In the Illinoisthis action, the Bank asserts claims for untrue or misleading statements in the sale of securities, signing or circulating securities documents that contained material misrepresentations, and negligent misrepresentation. The Bank seeks the remedies of rescission, recovery of damages, and recovery of reasonable attorneys' fees and costs of suit. As of October 31, 2015,September 30, 2016, Morgan Stanley & Co., Incorporated, and certain of its affiliates, remain as the sole defendants in the Illinois litigation include the following entities and affiliates thereof: Goldman Sachs & Co. and Morgan Stanley & Co., Incorporated.action.
The Bank may also be subject to various other legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any other proceedings that might have a material effect on the Bank's financial condition or results of operations.
Item 1A. Risk Factors.
In addition to the information presented in this report, readers should carefully consider the factors set forth in the Risk Factors section on page 19 in our 20142015 Form 10-K, which could materially affect our business, financial condition, or future results. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also severely affect us.
Federal Home Loan Bank of Chicago
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
PricewaterhouseCoopers LLP (PwC) serves as the independent registered public accounting firm for us and the other FHLBs. Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with their audit clients and affiliated entities. Specifically, the Loan Rule provides, in the relevant part, that an accounting firm generally would not be independent if it receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.”
PwC has advised the Bank that as of September 30, 2016 it has borrowing relationships with one Bank member (referred to below as the “Lender”) who owns more than ten percent of the Bank’s capital stock, which could call into question PwC’s independence with respect to the Bank. The Bank is providing this disclosure to explain the facts and circumstances as well as PwC’s and the Audit Committee’s conclusions concerning PwC’s objectivity and impartiality with respect to the audit of the Bank.
PwC advised the Audit Committee of the Bank that it believes that, in light of the facts of the borrowing relationship, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement have not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:
the borrowings are in good standing and the Lender does not have the right to take action against PwC, as borrower, in connection with the financings;
the debt balances outstanding are immaterial to PwC and to the Lender;
PwC has borrowing relationships with a diverse group of lenders, therefore PwC is not dependent on any single lender or group of lenders; and
the PwC audit engagement team has no involvement in PwC’s treasury function and PwC’s treasury function has no oversight or ability to influence the PwC audit engagement team.
Additionally, the Audit Committee of the Bank assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership and governance structure of the Bank, the limited voting rights of the Bank’s members and the composition of the board of directors. In addition to the above listed considerations, the Audit Committee considered the following:
although the Lender owned more than ten percent of the Bank’s capital stock, the voting power of the Lender's capital stock is less than ten percent;
no individual officer or director of a member or independent director that serves on the board of directors has the ability to significantly influence the Bank based on the composition of the board of directors; and
as of September 30, 2016, no officer or director of the Lender serves on the board of directors of the Bank.
Based on the Audit Committee’s evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.
If in the future, however, PwC is ultimately determined under the Loan Rule not to be independent with respect to the Bank, or permanent relief regarding this matter is not granted by the SEC, the Bank may need to take other actions and incur other costs in order for the Bank’s previously filed Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q to be deemed compliant with applicable securities laws. Such actions may include, among other things, obtaining a new audit of our historical financial statements by another independent registered public accounting firm. Any of the foregoing could have an adverse impact on the Bank.
For further discussion of Bank members owning more than ten percent of the Bank’s capital stock at September 30, 2016, please see Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements in this Form 10-Q. For a discussion of the voting rights of our members, please see Item 10 - Directors, Executive Officers, and Corporate Governance - 2015 Director Election on page 84 in our 2015 Form 10-K.
Item 6. Exhibits.
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4.1 | Second Amended and Restated Capital Plan
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10.1 | MPF Consolidated Interbank Agreement, dated as of the Federal Home Loan Bank of Chicago, effective October 1, 20151July 22, 2016 |
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31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer |
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31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer |
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32.1 | Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer |
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32.2 | Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer |
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101.INS | XBRL Instance Document |
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101.SCH | XBRL Taxonomy Extension Schema Document |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
1 Filed with our 8-K Current Report on August 31, 2015
Federal Home Loan Bank of Chicago![logoa10.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa10.jpg)
Glossary of Terms
Advances: Secured loans to members.
ABS: Asset-backed-securities.
AFS: Available-for-sale securities.
AOCI: Accumulated Other Comprehensive Income.
Capital Plan: The Second Amended and Restated Capital Plan of the Federal Home Loan Bank of Chicago, effective as of October 1, 2015.
CDFI:CBSA: Community development financial institution.Core Based Statistical Areas (CBSAs), which are based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people.
Consolidated Obligations (CO): FHLB debt instruments (bonds and discount notes) which are the joint and several liability of all FHLBs; issued by the Office of Finance.
Consolidated obligation bonds: Consolidated obligations that make periodic interest payments with a term generally over one year, although we have issued for terms of less than one year.
DCO: Derivatives Clearing Organization. A clearinghouse, clearing association, clearing corporation, or similar entity that enables each party to an agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties; arranges or provides, on a multilateral basis, for the settlement or netting of obligations; or otherwise provides clearing services or arrangements that mutualize or transfer credit risk among participants.
Discount notes: Consolidated obligations with a term of one year or less, which sell at less than their face amount and are redeemed at par value when they mature.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted July 21, 2010.
Excess capital stock: Capital stock held by members in excess of their minimum investment requirement.
Fannie Mae: Federal National Mortgage Association.
FASB: Financial Accounting Standards Board.
FCM: Futures Commission Merchant.
FDIC: Federal Deposit Insurance Corporation.
FFELP: Federal Family Education Loan Program.
FHA: Federal Housing Administration.
FHFA: Federal Housing Finance Agency - The Housing and Economic Recovery Act of 2008 enacted on July 30, 2008 created the Federal Housing Finance Agency which became the regulator of the FHLBs.
FHLB Act: The Federal Home Loan Bank Act of 1932, as amended.
FHLBs: The 11 Federal Home Loan Banks or subset thereof.
FHLB System: The 11 FHLBs and the Office of Finance.
FHLBC:FHLB Chicago: The Federal Home Loan Bank of ChicagoChicago.
Freddie Mac: Federal Home Loan Mortgage Corporation.
GAAP: Generally accepted accounting principles in the United States of America.
Ginnie Mae: Government National Mortgage Association.
Ginnie Mae MBS: Mortgage-backed securities guaranteed by Ginnie Mae.
Federal Home Loan Bank of Chicago![logoa10.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa10.jpg)
Government Loans: Mortgage loans insured or guaranteed by the Federal Housing Administration, (FHA), the Department of Housing and Urban Development, (HUD), the Department of VeteranVeterans Affairs (VA) or Department of Agriculture Rural Housing Service (RHS).Service.
GSE: Government sponsored enterprise.
Housing Act: HFS:Housing and Economic Recovery Act of 2008, enacted July 30, 2008. Held for sale.
HUD: Department of Housing and Urban Development.
HTM: Held-to-maturity securities.
LIBOR: London Interbank Offered Rate.
Master Commitment (MC): Pool of MPF Loans purchased or funded by an MPF Bank.
MBS: Mortgage-backed securities.
Moody's: Moody's Investors Service.
MPF®: Mortgage Partnership Finance.
MPF Banks: FHLBs that participate in the MPF program.
MPF Direct product: The MPF Program product under which we acquire jumbo MPF Loans from PFIs and concurrently resell them to a third party investor.
MPF Government MBS product: The MPF Program product under which we aggregate Government Loans acquired from PFIs in order to issue securities guaranteed by the Ginnie Mae that are backed by such Government Loans.
MPF Loans: Conforming conventionalConventional and government fixed-rate mortgage loans secured by one-to-four family residential properties with maturities from five to 30 years or participations in such mortgage loans that are acquired under the MPF Program.
MPF Program: A secondary mortgage market structure that provides liquidity to FHLB members that are PFIs through the purchase or funding by an FHLB of MPF Loans.
MPF Xtra® product: The MPF Program product under which we acquire MPF Loans from PFIs and concurrently resell them to Fannie Mae.
MRCS: mandatorily redeemable capital stock.
NRSRO:Nonaccrual MPF Loans: Nationally Recognized Statistical Rating Organization.Nonperforming mortgage loans in which the collection of principal and interest is determined to be doubtful or when interest or principal is past due for 90 days or more, except when the MPF Loan is well secured and in the process of collection.
Office of Finance: A joint office of the FHLBs established to facilitate issuing and servicing of consolidated obligations.
OIS: Fed Funds Effective Swap Rate (or Overnight Index Swap Rate).
OTTI: Other-than-temporary impairment.
PFI: Participating Financial Institution. A PFI is a member (or eligible housing associate) of an MPF Bank that has applied to and been accepted to do business with its MPF Bank under the MPF Program.
PMI:PwC: Primary Mortgage Insurance.PricewaterhouseCoopers LLP.
RCAP: Reduced Capitalization Advance Program.
Recorded Investment: Recorded investment in a loan is its amortized cost basis plus related accrued interest receivable, if any. Recorded investment is not net of an allowance for credit losses but is net of any direct charge-off on a loan. Amortized cost basis is defined as either the amount funded or the cost to purchase MPF Loans held in portfolio. Specifically, the amortized cost basis includes the initial fair value amount of the delivery commitment as of the purchase or settlement date, agent fees (i.e., market risk premiums or discounts paid to or received from PFIs), if any, subsequently adjusted, if applicable, for accretion, amortization, collection of cash, charge-offs, and cumulative basis adjustments related to fair value hedges.
Regulatory capital: Regulatory capital stock plus retained earnings.
Regulatory capital stock: The sum of the paid-in value of capital stock and mandatorily redeemable capital stock.
Federal Home Loan Bank of Chicago
REO:SEC: Real estate owned.Securities and Exchange Commission.
RHS: Department of Agriculture Rural Housing Service.
System or FHLB System: The Federal Home Loan Bank System consisting of the 11 Federal Home Loan Banks and the Office of Finance.
VA: TBA:Department of Veteran's Affairs. A forward contract on a mortgage-backed security (MBS), typically issued by a U.S. government sponsored entity, whereby a seller agrees to deliver an MBS for an agreed upon price on an agreed upon date.
UPB: Unpaid Principal Balance.
U.S.: United States
Federal Home Loan Bank of Chicago![logoa10.jpg](https://files.docoh.com/10-Q/0001331451-16-000402/logoa10.jpg)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | FEDERAL HOME LOAN BANK OF CHICAGO |
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| | /s/ Matthew R. Feldman |
| | By:Name: | | Matthew R. Feldman |
| | Title: | | President and Chief Executive Officer |
Date: | November 6, 20153, 2016 | (Principal Executive Officer) |
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| | /s/ Roger D. Lundstrom |
| | By:Name: | | Roger D. Lundstrom |
| | Title: | | Executive Vice President and Chief Financial Officer |
Date: | November 6, 20153, 2016 | (Principal Financial Officer and Principal Accounting Officer) |