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, 20162017
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
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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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth 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
Emerging growth company   o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 September 30, 2016,2017, including mandatorily redeemable capital stock, registrant had 19,376,92418,648,304 total outstanding shares of Class B Capital Stock.


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TABLE OF CONTENTS





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PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
Statements of Condition (unaudited)
(Dollars in millions, except capital stock par value)
 September 30, 2017 December 31, 2016
Assets   
Cash and due from banks$32
 $351
Interest bearing deposits750
 650
Federal Funds sold9,849
 4,075
Securities purchased under agreements to resell3,750
 2,300
Investment securities -   
Trading,71and97pledged236
 1,045
Available-for-sale13,532
 14,918
Held-to-maturity,4,184and5,516fair value3,768
 5,072
Investment securities17,536
 21,035
Advances,785 and672 carried at fair value50,153
 45,067
MPF Loans held in portfolio, net of,(2)and(3)allowance for credit losses5,024
 4,967
Derivative assets3
 6
Other assets,171and44carried at fair value391
 241
Assets$87,488
 $78,692
    
Liabilities   
Deposits -   
Noninterest bearing$52
 $53
Interest bearing,15and16from other FHLBs548
 443
Deposits600
 496
Consolidated obligations, net -   
Discount notes,872and6,368carried at fair value45,460
 35,949
Bonds,5,206and5,443carried at fair value35,890
 36,903
Consolidated obligations, net81,350
 72,852
Derivative liabilities28
 43
Affordable Housing Program assessment payable87
 86
Mandatorily redeemable capital stock308
 301
Other liabilities243
 219
Liabilities82,616
 73,997
Commitments and contingencies - see notes to the financial statements


 


Capital   
Class B1 activity stock,14and12million shares issued and outstanding1,351
 1,160
Class B2 membership stock,2and6million shares issued and outstanding206
 551
Capital stock - putable,$100and$100par value1,557
 1,711
Retained earnings - unrestricted2,784
 2,631
Retained earnings - restricted435
 389
Retained earnings3,219
 3,020
Accumulated other comprehensive income (loss) (AOCI)96
 (36)
Capital4,872
 4,695
Liabilities and capital$87,488
 $78,692

 September 30, 2016 December 31, 2015
Assets   
Cash and due from banks$31
 $499
Interest bearing deposits650
 650
Federal Funds sold3,807
 1,702
Securities purchased under agreements to resell1,000
 1,375
Investment securities -   
Trading, $90 and $62 pledged1,047
 1,160
Available-for-sale15,561
 17,470
Held-to-maturity, $5,308 and $6,513 fair value4,788
 5,967
Investment securities21,396
 24,597
Advances, $703 and $511 carried at fair value43,117
 36,778
MPF Loans held in portfolio, net of allowance for credit losses of $(3) and $(3)4,720
 4,828
Derivative assets21
 2
Other assets, $58 and $54 carried at fair value241
 240
Assets$74,983
 $70,671
    
Liabilities   
Deposits -   
Noninterest bearing$59
 $41
Interest bearing, $15 and $12 from other FHLBs453
 497
Deposits512
 538
Consolidated obligations, net -   
Discount notes, $12,537 and $9,006 carried at fair value39,144
 41,564
Bonds, $7,058 and $952 carried at fair value30,139
 22,582
Consolidated obligations, net69,283
 64,146
Derivative liabilities48
 55
Affordable Housing Program assessment payable90
 89
Mandatorily redeemable capital stock302
 8
Other liabilities233
 239
Subordinated notes
 944
Liabilities70,468
 66,019
Commitments and contingencies - see notes to the financial statements

 

Capital   
Class B1 activity stock - putable $100 par value - 11 million and 13 million shares issued and outstanding1,063
 1,313
Class B2 membership stock - putable $100 par value - 6 million and 6 million shares issued and outstanding573
 637
Capital stock1,636
 1,950
Retained earnings - unrestricted2,577
 2,407
Retained earnings - restricted374
 323
Retained earnings2,951
 2,730
Accumulated other comprehensive income (loss) (AOCI)(72) (28)
Capital4,515
 4,652
Liabilities and capital$74,983
 $70,671



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


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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,
 2016 2015 2016 2015 2017 2016 2017 2016
Interest income $309
 $304
 $944
 $934
 $411
 $309
 $1,121
 $944
Interest expense 196
 182
 600
 561
 288
 196
 768
 600
Net interest income 113
 122
 344
 373
 123
 113
 353
 344
Provision for (reversal of) credit losses 
 1
 
 5
 (1) 
 
 
Net interest income after provision for (reversal of) credit losses 113
 121
 344
 368
 124
 113
 353
 344
                
Noninterest gain (loss) on -        
Trading securities 
 (1) 
 (2)
Noninterest income -        
Derivatives and hedging activities 7
 (15) (7) (17) 
 7
 6
 (7)
Instruments held under fair value option 
 1
 6
 4
 (5) 
 (3) 6
Litigation settlement awards 
 2
 38
 13
 
 
 1
 38
Other gain (loss), net��7
 7
 24
 15
Noninterest gain (loss) 14
 (6) 61
 13
MPF fees from other FHLBs 5
 4
 15
 12
Other, net 5
 3
 12
 12
Noninterest income 5
 14
 31
 61
                
Noninterest expense -                
Compensation and benefits 26
 20
 71
 57
 26
 26
 77
 71
Operating expenses 15
 13
 44
 38
 15
 15
 45
 44
Other 1
 2
 13
 6
 2
 1
 7
 13
Noninterest expense 42
 35
 128
 101
 43
 42
 129
 128
                
Income before assessments 85
 80
 277
 280
 86
 85
 255
 277
                
Affordable Housing Program assessment 9
 8
 28
 28
Affordable Housing Program 9
 9
 26
 28
                
Net income $76
 $72
 $249
 $252
 $77
 $76
 $229
 $249




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






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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,
 2016 2015 2016 2015 2017 2016 2017 2016
Net income $76
 $72
 $249
 $252
 $77
 $76
 $229
 $249
 
       
      
Other comprehensive income (loss) - 
       
      
Net unrealized gain (loss) available-for-sale securities (13) (79) (113) (214) (24) (13) (5) (113)
Non-credit OTTI held-to-maturity securities 9
 11
 30
 37
Noncredit OTTI held-to-maturity securities 8
 9
 25
 30
Net unrealized gain (loss) cash flow hedges 83
 (31) 38
 8
 42
 83
 111
 38
Post-retirement plans 
 1
 1
 (7)
Postretirement plans 3
 
 1
 1
Other comprehensive income (loss) 79
 (98) (44) (176) 29
 79
 132
 (44)
 
   
   
   
  
Comprehensive income $155
 $(26) $205
 $76
 $106
 $155
 $361
 $205




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






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Statements of Capital (unaudited)
(Dollars and shares in millions)


 Capital Stock - Putable - B1 Activity Capital Stock - Putable - B2 Membership Capital Stock Retained Earnings   Total
 Shares Value Shares Value Shares Value Unrestricted Restricted Total AOCI 
December 31, 201612
 $1,160
 6
 $551
 18
 $1,711
 $2,631
 $389
 $3,020
 $(36) $4,695
Comprehensive income            183
 46
 229
 132
 361
Proceeds from issuance of capital stock21
 2,162
 
 10
 21
 2,172
         2,172
Repurchases of capital stock
 (35) (23) (2,285) (23) (2,320)         (2,320)
Capital stock reclassified to mandatorily redeemable capital stock (liabilities)
 (3) 
 (3) 
 (6)         (6)
Transfers between classes of capital stock(19) (1,933) 19
 1,933
              
Cash dividends - class B1            (28) 

 (28)   (28)
Class B1 annualized rate                    3.15%
Cash dividends - class B2            (2)   (2)   (2)
Class B2 annualized rate                    1.05%
Total change in period2
 191
 (4) (345) (2) (154) 153
 46
 199
 132
 177
September 30, 201714
 $1,351
 2
 $206
 16
 $1,557
 $2,784
 $435
 $3,219
 $96
 $4,872
                      
December 31, 201513
 $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 stock10
 952
 
 12
 10
 964
         964
Repurchases of capital stock(6) (586) (3) (392) (9) (978)         (978)
Capital stock reclassified to mandatorily redeemable capital stock (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, 201611

$1,063

6

$573

17

$1,636

$2,577

$374

$2,951

$(72)
$4,515

 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, 201513
 $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 stock10
 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, 201611
 $1,063
 6
 $573
 17
 $1,636
 $2,577
 $374
 $2,951
 $(72) $4,515
                      
December 31, 20148
 $827
 11
 $1,075
 19
 $1,902
 $2,152
 $254
 $2,406
 $217
 $4,525
Comprehensive income            202
 50
 252
 (176) 76
Proceeds from issuance of capital stock3
 228
 
 15
 3
 243
         243
Repurchases of capital stock
 (29) (3) (223) (3) (252)         (252)
Capital stock reclassified to mandatorily redeemable capital stock (other liabilities)
 
 
 (1) 
 (1)         (1)
Transfers between classes of capital stock(1) (60) 1
 60
             

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 period2
 139
 (2) (149) 
 (10) 184
 50
 234
 (176) 48
September 30, 201510

$966

9

$926

19

$1,892

$2,336

$304

$2,640

$41

$4,573


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


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Condensed Statements of Cash Flows (unaudited)
(Dollars in millions)


Nine months ended September 30, 2016 2015 Nine months ended September 30, 2017 2016 
OperatingNet cash provided by (used in) operating activities $184
 $375
 Net cash provided by (used in) operating activities $337
 $184
 
InvestingNet change Federal Funds sold (2,105) 805
 Net change interest bearing deposits (100) 
 
Net change Federal Funds sold (5,774) (2,105) 
Net change securities purchased under agreements to resell 375
 
 Net change securities purchased under agreements to resell (1,450) 375
 
Trading securities -     Trading securities -     
Sales 2,158
 
 Sales 801
 2,158
 
Proceeds from maturities and paydowns 108
 109
 Proceeds from maturities and paydowns 205
 108
 
Purchases (2,156) (101) Purchases (200) (2,156) 
Available-for-sale securities -     Available-for-sale securities -     
Proceeds from maturities and paydowns 1,777
 1,452
 Proceeds from maturities and paydowns 1,307
 1,777
 
Purchases (2) (12) Purchases (5) (2) 
Held-to-maturity securities -     Held-to-maturity securities -     
Short-term held-to-maturity securities, net 543
a 
675
a 
Short-term held-to-maturity securities, net 570
a 
543
a 
Proceeds from maturities and paydowns 740
 793
 Proceeds from maturities and paydowns 816
 740
 
Purchases (30) (16) Purchases (27) (30) 
Advances -     Advances -     
Principal collected 548,381
 251,066
 Principal collected 543,511
 548,381
 
Issued (554,570) (253,574) Issued (548,590) (554,570) 
MPF Loans held in portfolio -     MPF Loans held in portfolio -     
Principal collected 867
 1,085
 Principal collected 761
 867
 
Purchases (759) (117) Purchases (821) (759) 
Other investing activities 27
 39
 Other investing activities 20
 27
 
Net cash provided by (used in) investing activities (4,646) 2,204
 Net cash provided by (used in) investing activities (8,976) (4,646) 
FinancingNet change deposits (26) (156) Net change deposits 104
 (26) 
Discount notes -     Discount notes -     
Net proceeds from issuance 438,057
 210,023
 Net proceeds from issuance 1,080,879
 438,057
 
Payments for maturing and retiring (440,500) (203,798) Payments for maturing and retiring (1,071,386) (440,500) 
Consolidated obligation bonds -     Consolidated obligation bonds -     
Net proceeds from issuance 24,439
 8,503
 Net proceeds from issuance 13,947
 24,439
 
Payments for maturing and retiring (16,943) (16,777) Payments for maturing and retiring (15,024) (16,943) 
Net proceeds (payments) on derivative contracts with financing element (38) (47) Payments for retirement of subordinated notes 
 (944) 
Net proceeds (payments) on bond transfers with other FHLBs 
 (35) Capital stock -     
Payments for retiring of subordinated debt (944) 
 Proceeds from issuance 2,172
 964
 
Capital stock -     Repurchases (2,320) (978) 
Proceeds from issuance of capital stock 964
 243
 Cash dividends paid (30) (28) 
Repurchase of capital stock (978) (252) Other financing activities (22) (47) 
Cash dividends paid (28) (18) Net cash provided by (used in) financing activities 8,320
 3,994
 
Other financing activities (9) (1) Net increase (decrease) in cash and due from banks (319) (468) 
Net cash provided by (used in) financing activities 3,994
 (2,315) Cash and due from banks at beginning of period 351
 499
 
Net increase (decrease) in cash and due from banks (468) 264
 Cash and due from banks at end of period $32
 $31
 
Cash and due from banks at beginning of period 499
 342
 
Cash and due from banks at end of period $31
 $606
 
NoncashCapital stock reclassified to mandatorily redeemable capital stock (other liabilities) $300
 $1
 
a 
Short-term held-to-maturity securities,assets and liabilities may be presented on a net consists of investment securities with abasis provided that the original maturity of the asset or liability is three months or less than 90 days when purchased.from the date of origination or the date of purchase.


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


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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 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.  We are supervised and regulated by the Federal Housing Finance Agency (FHFA), an independent federal agency 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 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.


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, 2015,2016, included in our Annual Report on Form 10-K (2015(2016 Form 10-K) starting on page F-1, as filed with the 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 toSee the Glossary of Terms starting on page 63 for the definitions of certain terms used herein.


Use of Estimates and Assumptions


The preparation ofWe are required to make estimates and assumptions when preparing our 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.GAAP. The most significant of these assumptionsestimates and estimatesassumptions applies to fair value measurements and allowance for credit losses. ActualOur actual results couldmay differ from these assumptionsthe results reported in our financial statements due to such estimates and estimates.assumptions. This includes the reported amounts of assets and liabilities, the reported amounts of income and expense, and the disclosure of contingent assets and liabilities.


ConsolidationBasis of Variable Interest EntitiesPresentation


We would 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 activitiesThe basis 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 significantpresentation pertaining 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 anyconsolidation of our investments in variable interest entities has not significantly changed since we arefiled our 2016 Form 10-K.  The basis of presentation pertaining to our gross versus net presentation of financial instruments also has not significantly changed since we filed our 2016 Form 10-K with one exception. Specifically, there was a change in our basis of presentation for our cleared derivative transactions with clearinghouses classified as a Derivatives Clearing Organization (DCO) through a Futures Commission Merchant (FCM), a clearing member of the primary beneficiary. We classifyDCO. Prior to 2017, our accounting presented derivative assets and liabilities of our cleared derivative transactions on a net basis, inclusive of initial and variation margin, and accrued interest receivable/payable and cash collateral. Due to rule changes adopted by our DCOs that characterize the treatment of variation margin payments as settlement of a derivative’s mark-to-market exposure and not as collateral against the derivative’s mark-to-market exposure, we now account for our variation margin payments as settlements to our derivative assets and derivative liabilities. The amendments to the DCOs’ rules have no effect on how we present initial margin, which we include in the carrying amount of our derivative assets or derivative liabilities.

Refer to Note 1- Background and Basis of Presentation to the financial statements in our 2016 Form 10-K with respect to our basis of presentation for consolidation of variable interest entities as investment securities inand our statementsgross versus net presentation of condition. Such investment securities include, but are not limited to, senior interests in private-label mortgage backed securities (MBS) and Federal Family Education Loan Program asset backed securities (FFELP ABS). Our maximum loss exposurefinancial instruments 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.further details.


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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 derivative assets and liabilities on a net basis in our statements of condition 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 a 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 exposure 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 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, if any, and securities borrowing transactions, if any, on a gross basis.



Note 2 – Summary of Significant Accounting Policies



Our Summary of Significant Accounting Policies through December 31, 2015,2016, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our 20152016 Form 10-K. We adopted the following policies year to date in 2016:2017:


SimplifyingAccounting for Variation Margin Payments

Effective in January of 2017 we began accounting for variation margin payments made to or received by the Presentation of Debt Issuance Cost (i.e., Concession Fees)

In April of 2015, the FASB issued new guidance requiring any concession feeDCOs through our FCMs as settlements to be presented as a direct deduction from the debt it relates to rather than separately presented as a deferred costour cleared derivative assets and derivative liabilities. See Note 1 - Background and Basis for Presentation for further details. This change in Other Assets. 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 Subordinated notes. This reclassificationaccounting did not have a materialany effect on the accounting of our financial condition, resultsexisting hedge relationships. Specifically, the change in accounting would not require us to discontinue existing hedge relationships or preclude us from using the short-cut method of operations, cash flows, or percentage net interest yield on our consolidated obligations athedge accounting provided no additional changes are made by the timeDCOs that would preclude the use of adoption.the short-cut method of hedge accounting. The International Swaps and Derivatives Association (ISDA) issued a confirmation letter confirming the SEC staff’s non-objection to the conclusions reached by ISDA related to the accounting implications of the DCO rule changes regarding the characterization of the variation margin payments as daily settlements and the continued application of existing hedge accounting relationships, including the use of the short-cut method of hedge accounting.


Effect of Derivative Contract Novations on Existing Hedge Accounting RelationshipsContingent Put and Call Options in Debt Instruments


In March of 2016, the FASB issued new guidance clarifying the requirements for assessing whether a contingent call (put) option embedded in a debt instrument is clearly and closely related to that a change in counterparty (novation)debt instrument, which is referred to a derivative instrument that has been designated as the hedging instrument in"host contract" for purposes of this assessment. Specifically, we are no longer required to consider the event triggering the acceleration of an existing hedging relationship would not, inembedded contingent call (put) option when assessing whether it is clearly and of itself, be considered a termination ofclosely related to the derivativedebt instrument or be considered a change inhost contract. We adopted the critical term of the hedging relationship. We early adopted this new guidance on a prospective basis effective January 1, 2016.2017. The new guidance had nodid not have any effect on our financial condition, results of operations, or cash flows at the time of adoption.




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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 3 – Recently Issued but Not Yet Adopted Accounting Standards


Targeted Improvements to Accounting for Hedging Activities

In August of 2017, the FASB amended existing derivatives and hedging guidance. The amended guidance may be adopted immediately in any interim period or January 1, 2019 as required. We are in the process of assessing the anticipated effect of the new guidance on the Bank. Outlined below are the significant changes to existing guidance that are relevant to the Bank.

Enables the Bank to enter into cash flow hedges of a variable-rate instrument indexed to a non-benchmark rate.

Enables the Bank to measure the change in fair value of the hedged item in a fair value hedge on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception, rather than on the full contractual coupon cash flows as required under existing GAAP.

Requires both the effective and ineffective portion of a hedging relationship to be presented in either interest income or interest expense, whichever is appropriate. This means that the ineffective portion of a hedging relationships will no longer be presented in derivatives and hedging activities.

Requires the entire rather than the effective portion of the change in fair value of the hedging instrument in a cash flow hedge to be recorded in Accumulated Other Comprehensive Income (AOCI). Upon recognition, the amounts in AOCI are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item.

Enables hedge effectiveness to be qualitatively assessed subsequent to hedge inception in cases where initial quantitative testing is required.

Permits the application of the long-haul method of assessing hedge effectiveness in cases where the shortcut method was initially applied but was not or no longer is appropriate, provided that the Bank documented at hedge inception which long-haul methodology it will use.

Requires recognizing a cumulative-effect adjustment at the date of adoption for cash flow hedges related to eliminating the separate measurement of ineffectiveness. Specifically, a cumulative-effect adjustment would be made with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts these amendments. The amended presentation and disclosure guidance is required only prospectively.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March of 2017, the FASB amended existing GAAP to require the service cost component of our net periodic pension and postretirement benefit costs to be classified as compensation costs. The other components of our net periodic pension and postretirement benefit costs are required to be classified as Noninterest expense - Other operating expenses on a retrospective basis effective January 1, 2018. Currently, our total net periodic pension and postretirement costs are classified as compensation costs. We do not expect the classification guidance of this GAAP amendment will have a significant effect on our financial condition, results of operations, and cash flows.

Classification of Certain Cash Receipts and Cash Payments in the Statement of Cash Flows


InIn August of 2016, the FASB issued statement of 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 mustand will be applied retrospectively tofor each period our statements of cash flows are presented at the time of adoption. Key provisions relevantThe new guidance is not expected 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 expectedhave any effect of the remaining provisions of the guidance on our financial condition, results of operations, and cash flows.flows since our existing practice is consistent with the provisions that are applicable to us. The provisions applicable to us are outlined below.


CashWe classify cash payments for debt prepaymentrelated to prepaying or extinguishment costs are classifiedextinguishing our consolidated obligations as financing activities in our statements of cash outflows for financing activities.flows.



We classify the cash payments attributable to interest expense paid at the maturity of our discount notes, which have a zero coupon rate, as operating activities in our statements of cash flows and in our supplemental disclosure of interest expense paid.


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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 June of 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.cost basis.


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 forin which an other-than-temporaryother-than-temporary-impairment (OTTI) impairment had been recognized before our effective date. This means write-downsThe accounting implications of such an approach are outlined below:

Write-downs recognized prior to our effective date on securities may not be reversed at the time of our adoption. Instead, improvements

Improvements in expected cash flows that exist at the time we adoptsubsequent to adoption for such securities will continue to be accreted into incomeaccounted for as yield adjustments over thetheir remaining life of the security. Additionally, recoverieslife.

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 clarifying 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 required to assess whether the event triggering the acceleration of an embedded contingent call (put) option within a debt instrument is clearly and closely related to its host contract. We plan to adopt the new guidance using the modified retrospective approach on January 1, 2017. The new guidance is not expected to have a material effect on our financial condition, results of operations, or cash flows at the time of adoption.

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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)



Leases


In February of 2016, the FASB issued new guidance pertaining to lease accounting. Key lessee accounting provisions relevantThe new guidance requires us to us are outlined below. Our existing practice is to recordrecognize operating leases and right-to-use assets, if any, in our statements of condition if their term exceeds 12 months. Currently, we recognize 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 required to be applied to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.January 1, 2018. We do not expect the new guidance to have a significant effect on our financial condition, results of operations, and cash flows since our existing off-balance sheet operating leases are not material.



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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

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 new guidance becomes effective January 1, 2018. We do not expect the new guidance to have a significant effect on our financial condition, results of operations, and cash flows. The key provisions applicable to us include, but are not limited to, the following:as follows:


The ability to elect the fair value option will continue to be permitted.


Requires recognizing theThe portion of instrument-specific credit risk attributable to 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 carryour consolidated obligations that liabilityare carried at fair value under the fair value option.option should be recognized in other comprehensive income. We will measure such instrument-specific credit risk based on our nonperformance risk. Specifically, our nonperformance risk includes our own credit risk and the credit risk associated with the joint and several liability of other FHLBs. We do not expect this requirement will have a material effect on our financial condition, results of operations, and cash flows.


Requires separate presentation ofThe requirement to separately present financial assets and financial liabilities by measurement category, such as amortized cost, and form, such as securities or loans, on our statements of condition or the accompanying notes to the financial statements.


The new guidance becomes effective January 1, 2018. We are in the process of reviewing its expected effect on our financial condition, results of operations, 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 other related pronouncements that provide additional revenue recognition guidance and clarifications to the revenue recognitionoriginal guidance issued in May of 2014. The new guidance becomes effective January 1, 2018. We do not expect the new revenue recognition guidance is not expected towill have a materialany effect on our financial condition, results of operations, or cash flows at the time of adoptionadoption. This is because the majority of our financial instruments and other contractual rights that generate revenue are within the scope ofcovered by other GAAP, guidance; and accordingly,therefore, are excluded from the scopescoped out of this new guidance. Further, we believe that our current method of recognition of our service fee revenue, recognitionwhich is insignificant, is already consistent with this new guidance. In the event of an adjustment, if any, we would apply the modified retrospective method.



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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,
 2017 2016 2017 2016
Interest income -       
 

      
Trading$1
 $2
 $3
 $7
Available-for-sale interest income106
 109
 321
 334
Available-for-sale prepayment fees9
 7
 20
 33
Available-for-sale115
 116
 341
 367
Held-to-maturity47
 56
 148
 171
Investment securities163
 174
 492
 545
 
      
Advances157
 74
 386
 211
MPF Loans held in portfolio53
 53
 160
 165
Federal funds sold and securities purchased under agreements to resell34
 7
 74
 16
Other4
 1
 9
 7
        
Interest income411
 309
 1,121
 944
 
      
Interest expense -
      
        
Consolidated obligations -
      
Discount notes148
 95
 363
 272
Bonds136
 99
 394
 299
 
      
Subordinated notes
 
 
 24
Other4
 2
 11
 5
        
Interest expense288
 196
 768
 600
 
      
Net interest income123
 113
 353
 344
Provision for (reversal of) credit losses(1) 
 
 
Net interest income after provision for (reversal of) credit losses$124
 $113
 $353
 $344

 Three months ended September 30, Nine months ended September 30,
 2016 2015 2016 2015
Interest income -       
        
Trading$2
 $
 $7
 $2
Available-for-sale116
 132
 367
 396
Held-to-maturity56
 63
 171
 201
Investment securities174
 195
 545
 599
 
      
Advance interest income73
 44
 203
 125
Advance prepayment fees1
 1
 8
 7
Advances74
 45
 211
 132
 

      
MPF Loans held in portfolio53
 62
 165
 197
Other interest bearing assets8
 2
 23
 6
        
Interest income309
 304
 944
 934
 
      
Interest expense -
      
 
      
Discount notes95
 72
 272
 216
Bonds99
 96
 299
 304
Consolidated obligations194
 168
 571
 520
 
      
Subordinated notes
 14
 24
 41
Other interest bearing liabilities2
 
 5
 
        
Interest expense196
 182
 600
 561
 
      
Net interest income113
 122
 344
 373
        
Provision for (reversal of) credit losses
 1
 
 5
        
Net interest income after provision for (reversal of) credit losses$113
 $121
 $344
 $368



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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 are based on the 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 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).
GSE residential mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac.
Government-guaranteedGovernment guaranteed MBS.
Private-labelPrivate label residential MBS.
State or local housing agency obligations.




Pledged Collateral


We disclose the amount of investment securities pledged as collateral pertaining to our derivatives activity 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 materialOur unrealized gains or losses on trading securities.securities still held on our statement of condition as of the end of the reporting period were not material.


As of September 30, 2017 December 31, 2016
U.S. Government & other government related $201
 $1,005
Residential MBS:    
GSE 34
 39
Government guaranteed 1
 1
Trading securities $236
 $1,045

As of September 30, 2016 December 31, 2015
U.S. Government & other government related $1,003
 $1,108
Residential MBS:    
GSE 42
 50
Government-guaranteed 2
 2
Residential MBS 44
 52
Trading securities $1,047
 $1,160




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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
As of September 30, 2017       
U.S. Government & other government related$266
 $13
 $
 $279
State or local housing agency20
 
 
 20
FFELP ABS4,087
 235
 (7) 4,315
Residential MBS:       
GSE7,615
 178
 (3) 7,790
Government guaranteed1,048
 28
 
 1,076
Private label42
 10
 
 52
Available-for-sale securities$13,078
 $464
 $(10) $13,532
        
As of December 31, 2016       
U.S. Government & other government related$322
 $15
 $(1) $336
State or local housing agency19
 
 
 19
FFELP ABS4,431
 165
 (24) 4,572
Residential MBS:      
GSE8,291
 266
 (2) 8,555
Government guaranteed1,346
 34
 
 1,380
Private label50
 6
 
 56
Available-for-sale securities$14,459

$486

$(27)
$14,918

 Amortized Cost Basis Gross Unrealized Gains in AOCI Gross Unrealized (Losses) in AOCI Carrying Amount and Fair Value
As of September 30, 2016       
U.S. Government & other government related$350
 $20
 $(3) $367
State or local housing agency19
 1
 
 20
FFELP ABS4,561
 158
 (25) 4,694
        
Residential MBS:       
GSE8,578
 353
 (9) 8,922
Government-guaranteed1,457
 43
 
 1,500
Private-label51
 7
 
 58
Residential MBS10,086
 403
 (9) 10,480
Available-for-sale securities$15,016
 $582
 $(37) $15,561
        
As of December 31, 2015       
U.S. Government & other government related$405
 $21
 $(4) $422
State or local housing agency18
 
 
 18
FFELP ABS5,090
 233
 (24) 5,299
       
Residential MBS:      
GSE9,427
 383
 (12) 9,798
Government-guaranteed1,811
 57
 
 1,868
Private-label61
 4
 
 65
Residential MBS11,299

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.





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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
As of September 30, 2017           
U.S. Government & other government related$976
 $
 $976
 $33
 $(1) $1,008
State or local housing agency10
 
 10
 
 
 10
Residential MBS:           
GSE1,590
 
 1,590
 79
 
 1,669
Government guaranteed633
 
 633
 8
 
 641
Private label711
 (152) 559
 297
 
 856
Held-to-maturity securities$3,920
 $(152) $3,768
 $417
 $(1) $4,184
            
As of December 31, 2016           
U.S. Government & other government related$1,733
 $
 $1,733
 $42
 $(1) $1,774
State or local housing agency13
 
 13
 
 
 13
Residential MBS:    
     
GSE1,856
 
 1,856
 100
 
 1,956
Government guaranteed791
 
 791
 10
 
 801
Private label856
 (177) 679
 294
 (1) 972
Held-to-maturity securities$5,249

$(177)
$5,072

$446

$(2)
$5,516

 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, 2016           
U.S. Government & other government related$1,271
 $
 $1,271
 $74
 $
 $1,345
State or local housing agency13
 
 13
 
 
 13
            
Residential MBS:           
GSE1,928
 
 1,928
 133
 
 2,061
Government-guaranteed834
 
 834
 13
 
 847
Private-label929
 (187) 742
 301
 (1) 1,042
Residential MBS3,691
 (187) 3,504
 447
 (1) 3,950
Held-to-maturity securities$4,975
 $(187) $4,788
 $521
 $(1) $5,308
            
As of December 31, 2015           
U.S. Government & other government related$1,932
 $
 $1,932
 $64
 $(1) $1,995
State or local housing agency16
 
 16
 
 
 16
     
     
Residential MBS:    
     
GSE2,163
 
 2,163
 134
 
 2,297
Government-guaranteed969
 
 969
 16
 
 985
Private-label1,104
 (217) 887
 334
 (1) 1,220
Residential MBS4,236

(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.





Contractual Maturity Terms

The maturity of our non-MBS AFS and HTM investments is detailed in the following table.

15
  Available-for-Sale Held-to-Maturity
As of September 30, 2017 Amortized Cost Basis Carrying Amount and Fair Value Carrying Amount Fair Value
Year of Maturity -        
Due in one year or less $2
 $2
 $87
 $87
Due after one year through five years 30
 31
 178
 183
Due after five years through ten years 39
 41
 117
 117
Due after ten years 215
 225
 604
 631
ABS and MBS without a single maturity date 12,792
 13,233
 2,782
 3,166
Total securities $13,078
 $13,532
 $3,768
 $4,184



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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 presenttable presents 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 expectpositions. Refer 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.Other-Than-Temporary Impairment Analysis section below for further discussion. 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
 Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)
Available-for-Sale Securities           
As of September 30, 2017           
State or local housing agency$5
 $
 $
 $
 $5
 $
FFELP ABS
 
 661
 (7) 661
 (7)
Residential MBS:    
      
GSE89
 
 809
 (3) 898
 (3)
Government guaranteed1
 
 
 
 1
 
Private label
 
 7
 
 7
 
Available-for-sale securities$95

$

$1,477

$(10)
$1,572

$(10)
As of December 31, 2016           
U.S. Government & other government related$
 $
 $47
 $(1) $47

$(1)
State or local housing agency7
 
 
 
 7


FFELP ABS
 
 753
 (24) 753

(24)
Residential MBS:        


GSE
 
 991
 (2) 991

(2)
Government guaranteed
 
 23
 
 23


Private label
 
 8
 
 8


Available-for-sale securities$7

$

$1,822

$(27)
$1,829

$(27)
            
Held-to-Maturity Securities           
As of September 30, 2017           
U.S. Government & other government related$7
 $
 $16

$(1) $23
 $(1)
Residential MBS:    
 
    
GSE
 
 2
 
 2
 
Private label
 
 824
 (152) 824
 (152)
Held-to-maturity securities$7

$

$842

$(153)
$849

$(153)
As of December 31, 2016           
U.S. Government & other government related$26
 $
 $17
 $(1) $43

$(1)
State or local housing agency
 
 1
 
 1


Residential MBS:        




GSE
 
 4
 
 4


Government guaranteed117
 
 
 
 117
 
Private label
 
 934
 (178) 934

(178)
Held-to-maturity securities$143

$

$956

$(179)
$1,099

$(179)

 Less than 12 Months 12 Months or More Total
 Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)
As of September 30, 2016           
U.S. Government & other government related$
 $
 $86
 $(3) $86
 $(3)
State or local housing agency1
 
 
 
 1
 
FFELP ABS
 
 774
 (25) 774
 (25)
     
      
Residential MBS:    
      
GSE658
 
 1,217
 (9) 1,875
 (9)
Government-guaranteed24
 
 
 
 24
 
Private-label
 
 1
 
 1
 
Residential MBS682
 
 1,218
 (9) 1,900
 (9)
Available-for-sale securities$683

$

$2,078

$(37)
$2,761

$(37)
            
As of December 31, 2015           
U.S. Government & other government related$30
 $(1) $45
 $(3) $75

$(4)
State or local housing agency4
 
 
 
 4


FFELP ABS64
 (1) 787
 (23) 851

(24)
         


Residential MBS:        


GSE1,081
 (3) 1,006
 (9) 2,087

(12)
Government-guaranteed90
 
 
 
 90


Private-label
 
 8
 
 8


Residential MBS1,171

(3)
1,014

(9)
2,185

(12)
Available-for-sale securities$1,269

$(5)
$1,846

$(35)
$3,115

$(40)




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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Held-to-Maturity SecuritiesOther-Than-Temporary Impairment Analysis


We recognized no OTTI charges on HTM or AFS securities for the periods presented. This is because we do not intend to sell these securities, we believe it is more likely than not that we will not be required to sell them prior to recovering their amortized cost basis, and we expect to recover the entire amortized cost basis. For further detail on our accounting policy regarding OTTI please see Note 2 - Summary of Significant Accounting Policies to the financial statements in our 2016 Form 10-K.
 Less than 12 Months 12 Months or More Total
 Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)
As of September 30, 2016           
U.S. Government & other government related$
 $
 $16
 $
 $16
 $
State or local housing agency9
 
 1
 
 10
 
            
Residential MBS:           
GSE4
 
 
 
 4
 
Private-label
 
 1,000
 (188) 1,000
 (188)
Residential MBS4
 
 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 agency1
 
 10
 
 11


         




Residential MBS:        




GSE4
 
 
 
 4


Private-label
 
 1,167
 (218) 1,167

(218)
Residential MBS4



1,167

(218)
1,171

(218)
Held-to-maturity securities$611

$

$1,193

$(219)
$1,804

$(219)


As of September 30, 2017, we had a base case short-term housing price forecast for all markets with projected changes ranging from -6.0% to +13.0% over the twelve month period beginning July 1, 2017. For the vast majority of markets, the short-term forecast has changes ranging from +1.0% to +6.0%. 

Contractual Maturity Terms


The following table primarily presents the amortized cost basis and fair valuechanges in the cumulative amount of U.S. Government & other government related AFS and HTMpreviously recorded OTTI credit losses on investment securities by contractual maturity. ABS and MBS securities are excluded since their expected maturities may differ from their contractual maturities if borrowers ofrecognized into earnings for the underlying loans elect to prepay their loans.reporting periods indicated.


  Available-for-Sale Held-to-Maturity
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 $17
 $17
 $176
 $177
Due after one year through five years 44
 46
 285
 298
Due after five years through ten years 30
 32
 86
 88
Due after ten years 278
 292
 737
 795
ABS and MBS without a single maturity date 14,647
 15,174
 3,504
 3,950
Total securities $15,016
 $15,561
 $4,788
 $5,308
  Three months ended September 30, Nine months ended September 30,
  2017 2016 2017 2016
Beginning Balance $499
 $542
 $520
 $568
Reductions: 
      
Increases in expected future cash flows recorded as accretion into interest income (10) (11) (31) (37)
Ending Balance $489
 $531
 $489
 $531



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. As of September 30, 2017, the remaining litigation covers three private label MBS bonds in the aggregate original principal amount of $65 million.

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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

Other-Than-Temporary Impairment Analysis


We had no OTTI for the periods presented based on the 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 the FHLB System OTTI Committee, which was established to achieve consistent OTTI analyses for private-label MBS among FHLBs. We are still responsible, however, for making our own OTTI determination, which involves determining the reasonableness of these significant inputs, assumptions, and methodologies, as 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, 2016, we had a short-term housing price forecast over all markets with projected changes ranging from -1.0% to +10.0% over the twelve month period beginning July 1, 2016. For the vast majority of markets, the short-term forecast has changes ranging from +3.0% to +6.0%. 

The following table presents the changes in the cumulative amount of previously recorded OTTI credit losses (recognized into earnings) on investment securities for the reporting periods indicated.

  Three months ended September 30, Nine months ended September 30,
  2016 2015 2016 2015
Beginning Balance $542
 $591
 $568
 $620
Reductions: 
      
Increases in expected future cash flows recorded as accretion into interest income (11) (12) (37) (41)
Ending Balance $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.

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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 terms of contractual 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, 2017 Amount   Weighted Average Contractual Interest Rate 
Due in one year or less $24,820
 1.18% 
One to two years 3,969
 1.29% 
Two to three years 1,646
 1.71% 
Three to four years 1,905
 1.60% 
Four to five years 1,716
 1.80% 
More than five years 15,988
 1.42%
a 
Par value $50,044
 1.32% 
As of September 30, 2016 Weighted Average Contractual Interest Rate Amount  
Due in one year or less 0.60% $12,719
One to two years 0.77% 8,966
Two to three years 0.56%
a 
7,283
Three to four years 0.58%
a 
8,120
Four to five years 1.34% 1,536
More than five years 1.67% 4,168
Par value 0.76% $42,792

a 
The weighted average interest rate is relatively lowerlow when compared to other categories due to a majority of advances in this category consisting of variable rate advances which reset periodically at currentmarket prevailing interest rates.




We have no allowance for credit losses on our advances. See Note 8 - Allowance for Credit Losses to the financial statements for further information related to our credit risk on advances and allowance methodology for credit losses.advances.


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, 2017 December 31, 2016
Par value $50,044
 $44,965
Fair value hedging adjustments 105
 98
Other adjustments 4
 4
Advances $50,153
 $45,067

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, 2016 Par Value % of Total Outstanding
One Mortgage Partners Corp. $11,000
a 
26%
BMO Harris Bank, N.A. 4,875
 11%
As of September 30, 2017 Par Value % of Total Outstanding
One Mortgage Partners Corp. $11,000
a 
22.0%
BMO Harris Bank, National Association 7,375
 14.7%
The Northern Trust Company 6,000
 12.0%
a 
One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA.



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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 wehistorically 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 loansGovernment 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 portfolio by contractual maturity at the time of purchase.


As of September 30, 2016 December 31, 2015 September 30, 2017 December 31, 2016
Medium term (15 years or less) $448
 $662
 $292
 $417
Long term (greater than 15 years) 4,209
 4,112
 4,662
 4,489
Unpaid principal balance 4,657
 4,774
 4,954
 4,906
Net premiums, credit enhancement and deferred loan fees 36
 20
 49
 38
Fair value hedging adjustments 30
 37
 23
 26
MPF Loans held in portfolio, before allowance for credit losses 4,723
 4,831
 5,026
 4,970
Allowance for credit losses on MPF Loans (3) (3) (2) (3)
MPF Loans held in portfolio, net $4,720
 $4,828
 $5,024
 $4,967
        
Conventional mortgage loans $3,543
 $3,568
 $3,946
 $3,818
Government Loans 1,114
 1,206
 1,008
 1,088
Unpaid principal balance $4,657
 $4,774
 $4,954
 $4,906



The above table excludes MPF Loans acquired under the MPF Xtra, MPF Direct, and MPF Government MBS products. We concurrently sell MPF Xtra and MPF Direct loans to third party investors. MPF Government MBS loans are held for a short time period, during which they are reflected as Other Assets held at fair value in our Statements of Condition, until such loans are securitized.


See Note 8 - Allowance for Credit Lossesto the financial statements for information related to our credit losses on MPF Loans held in portfolio.


In addition to our portfolio MPF Products, PFIs sell eligible MPF Loans to us through the MPF Program infrastructure and we concurrently sell them to third party investors or hold MPF Loans in our held for sale portfolio in other assets for a short period of time until such loans are pooled into MBS.



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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 20152016 Form 10-K for further details pertaining to the methodologies and factors we consider when determining the amount to recognize as anregarding our allowance for credit losses if any,methodology for each of the portfolio segment identifiedsegments discussed below.


We have identified our portfolio segments as shown below:


Member credit products (advances, letters of credit and other extensions of credit to borrowers);
Conventional MPF Loans held in portfolio;
Government Loans held in portfolio; and
Federal Funds Sold and Securities Purchased Under Agreements to Resell.



Member Credit Products


We have not recorded any allowance for credit losses for our member credit products portfolio segment based upon our credit analysis and the repayment history on member credit products. We had no member credit products that were past due, on nonaccrual status, involved in a troubled debt 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 Held in Portfolio


For further detail of our MPF Risk Sharing Structure see page F-14F-15 in our 20152016 Form 10-K. There has been no material activity in our allowance for credit losses since December 31, 2015.2016. The following table presents the recorded investment and the allowance for credit losses in conventional MPF 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.


As of September 30, 2017 December 31, 2016
Recorded investment in conventional MPF Loans -    
Individually evaluated for impairment $53
 $74
Collectively evaluated for impairment 3,971
 3,812
Recorded investment $4,024
 $3,886
     
Allowance for credit losses on conventional MPF Loans -    
Homogeneous pools of loans collectively evaluated for impairment $2
 $3

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 PFIsServicers 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 PFIsservicers 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.




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(Dollars in tables in millions except per share amounts unless otherwise indicated)


Credit Quality Indicators - MPF Loans Held in Portfolio


The following table summarizes our recorded investment in MPF Loans by our key credit quality indicators, which include:


"Serious delinquency rate" 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" consists of MPF Loans that are either insured or guaranteed by the government 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 Primary Mortgage Insurance,primary mortgage insurance, of a financially responsible party) and in the process of collection.


  September 30, 2017 December 31, 2016 
As of Conventional Government Total Conventional Government Total 
Past due 30-59 days $71
 $49
 $120
 $83
 $57
 $140
 
Past due 60-89 days 19
 14
 33
 26
 17
 43
 
Past due 90 days or more 50
 21
 71
 69
 23
 92
 
Past due 140
 84
 224
 178

97
 275
 
Current 3,884
 944
 4,828
 3,708
 1,013
 4,721
 
Recorded investment $4,024
 $1,028
 $5,052
 $3,886

$1,110
 $4,996
 
In process of foreclosure $25
 $7
 $32
 $35
 $7
 $42
 
Serious delinquency rate 1.27% 2.00% 1.41% 1.82% 2.07% 1.88% 
Past due 90 days or more and still accruing interest $6
 $20
 $26
 $8
 $23
 $31
 
On nonaccrual status $53
 $
 $53
 $74
 $
 $74
 

  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. Conventional MPF Loans are 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, since the related allowance for credit losses have been charged off.


As of September 30, 2017 December 31, 2016
Recorded investment without an allowance for credit losses $53
 $74
Unpaid principal balance without an allowance for credit losses 57
 80

As of September 30, 2016 December 31, 2015
Recorded investment without an allowance for credit losses $78
 $107
Unpaid principal balance without an allowance for credit losses 84
 117


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,
 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 toheld overnight Federal Funds sold and Securities Purchased Under Agreements to Resell as of September 30, 2016,2017, and December 31, 2015.2016. We did not have any longer term Federal Funds sold and Securities Purchased Under Agreements to Resell arrangements. We did not establish an allowance for credit losses 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 Agreementssecurities purchased under agreements to Resellresell since all payments due under the contractual terms have been received and we hold sufficient underlying collateral.


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(Dollars in tables in millions except per share amounts unless otherwise indicated)


Note 9 – Derivatives and Hedging Activities


Refer toSee Note 2 - Summary of Significant Accounting Policies in our 20152016 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 a Futures Commission Merchant (FCM), a clearing member of the DCO. We are not a derivatives dealer and do not trade derivatives for speculative purposes. We enter into derivative transactions through either of the following:



A bilateral agreement with an individual counterparty for over-the-counter derivative transactions.

Clearinghouses classified as DCOs through FCMs, which are clearing members of the DCOs, for cleared derivative transactions.

Managing Interest Rate Risk

We use fair value hedges to offset changes in the fair value or a benchmark interest rate (e.g., LIBOR) related to (1) a recognized asset or liability or (2) an unrecognized firm commitment. We use cash flow hedges to offset an exposure to variability in expected future cash flows associated with an existing recognized asset or liability or a forecasted transaction. We use economic hedges in cases where hedge accounting treatment is not permitted or achievable; for example, hedges of portfolio interest rate risk or financial instruments carried at fair value under the fair value option.

Managing Credit Risk on Derivative Agreements


Over-the-counter Derivative Transactions: 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.over-the-counter derivatives. Additionally, collateral related to over-the-counter derivatives with member institutions includes collateral assigned to us, as evidenced by a written security agreement, and which may be held by the member institution for our benefit. Based on credit analyses and collateral requirements, we do not anticipate any credit losses on our over-the-counter derivative agreements. SeeNote 1613 - Fair Value to the financial statements in this Form 10-Q and Note 16 - Fair Value in our 20152016 Form 10-K for discussion regarding our fair value methodology for over-the-counter 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-counterFor most of our bilateral derivative transactions executed prior to March 1, 2017, and for all transactions entered into after March 1, 2017, our bilateral derivative agreements are fully collateralized with a zero unsecured threshold in accordance with variation margin requirements issued by the U.S. federal bank regulatory agencies and the CFTC, as discussed in the Legislative and Regulatory Developments in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2015. Certain of our bilateral derivative agreements may contain provisions that require us to post net additional collateral with our counterparties for transactions executed prior to March 1, 2017, 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 by a major credit rating agency, such as Standard and Poor's or Moody’s, the amount of collateral we would have been required to deliver up to an additional $43 million of collateral at fair value to our derivatives counterpartieswould not have been material at September 30, 2016.2017.


Cleared swapsDerivative Transactions: Cleared derivative transactions are subject to variation and initial margin requirements established by the DCO and its clearing members. As a result of rule changes adopted by our DCOs, variation margin payments are characterized as settlement of a derivative’s mark-to-market exposure and not as collateral against the derivative’s mark-to-market exposure. See Note 1 - Background and Basis of Presentation and Note 2 - Summary of Significant Accounting Policies for further discussion. We post variation andour initial margin collateral payments and make variation margin settlement payments through the FCM,our FCMs, on behalf of the DCO, which could expose us to institutional credit risk in the event that an FCMthe FCMs or the DCO fail to meet their obligations. Clearing derivatives through a DCO mitigates counterparty credit risk exposure because the DCO is substituted for individual counterparties and collateral is postedvariation margin settlement payments are made daily through the FCMs for changes in the value of cleared derivatives through an FCM.derivatives. The DCO determines initial margin requirements for cleared derivatives. In this regard, an FCM may require additional initial margin to be posted based on credit considerations, including but not limited to, credit rating downgrades.  We had no requirement to post additional initial margin by our FCMs at September 30, 2016.

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 for further discussion. In addition to the cash collateral as noted in the following table, we also pledged $90$71 million of investment securities that can be sold or repledged, as part of our initial margin related to cleared derivative transactions at September 30, 2016.2017. Additionally, an FCM may require additional initial margin to be posted based on credit considerations, including but not limited to, if our credit rating downgrades.  We had no requirement to post additional initial margin by our FCMs at September 30, 2017.




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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)


The following table presents our grossdetails on the notional amounts, and net derivative assets and liabilities by contract type and amount foron our derivative agreements.statements of condition. Effective in January of 2017, we began treating daily variation margin on our cleared derivatives as cash settlements instead of as cash collateral.

  September 30, 2017 December 31, 2016 
As of Notional Amount Derivative Assets Derivative Liabilities Notional Amount Derivative Assets Derivative Liabilities 
Derivatives in hedge accounting relationships-             
Interest rate contracts $26,057
 $39
 $664
 $25,999
 $40
 $898
 
Derivatives not in hedge accounting relationships-             
Interest rate contracts 22,276

327

194
 29,313
 432
 260
 
Other 1,113

1

2
 892
 2
 3
 
Derivatives not in hedge accounting relationships 23,389
 328
 196
 30,205

434

263
 
Variation margin daily settlements on cleared derivatives   (10) (200)       
Gross derivative amount before netting adjustments and cash collateral $49,446
 357
 660
 $56,204

474

1,161
 
Netting adjustments and cash collateral   (354)
a 
(632)
a 
  (468)
a 
(1,118)
a 
Derivatives on statements of condition   $3
 $28
   $6
 $43
 
  September 30, 2016 December 31, 2015 
As of Notional Amount Derivative Assets Derivative Liabilities Notional Amount Derivative Assets Derivative Liabilities 
Derivatives in hedge accounting relationships-             
Interest rate swaps $24,256
 $40
 $1,156
 $25,140
 $30
 $1,082
 
Derivatives not in hedge accounting relationships-             
Interest rate swaps 36,692
 514
 414
 28,866
 456
 341
 
Interest rate swaptions 550
 56
 
 1,270
 40
 
 
Interest rate caps or floors 1,129
 51
 
 1,131
 76
 
 
Mortgage delivery commitments 1,178
 1
 1
 479
 1
 1
 
Other 127

1


 121
 
 
 
Derivatives not in hedge accounting relationships 39,676
 623
 415
 31,867

573

342
 
Gross derivative amount before adjustments $63,932
 663
 1,571
 $57,007

603

1,424
 
Netting adjustments and cash collateral   (642)
a 
(1,523)
a 
  (601)
a 
(1,369)
a 
Derivatives on statements of condition   $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 FCM and/or counterparty. Cash collateral posted was $910$313 million and $793$689 million at September 30, 2016,2017, and December 31, 2015,2016, and cash collateral received was $29$35 million and $25$40 million.



The following table presents our gross recognized amountthe noninterest income on derivatives and hedging activities as presented in the statements of offsetting derivative assetsincome. The amounts attributable to fair value and liabilities for derivatives with legal right of offset as well as derivatives without the legal right of offset.cash flow hedges represent hedge ineffectiveness.

  Derivative Assets Derivative Liabilities 
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 $509
 $93
 $602
 $1,182
 $241
 $1,423
 
Netting adjustments and cash collateral (508) (93) (601) (1,140) (229) (1,369) 
Derivatives with legal right of offset - net 1



1

42

12

54
 
Derivatives without legal right of offset 1
 
 1
 1
 
 1
 
Derivatives on statements of condition 2



2

43

12

55
 
Noncash collateral received (pledged) and cannot be sold or repledged 
 
 
 
 12
 12
 
Net amount $2

$

$2

$43

$

$43
 
a
Represents noncash collateral pledged for initial margin for cleared derivatives.

  Three months ended September 30, Nine months ended September 30,
For the periods ending 2017 2016 2017 2016
Fair value hedges - interest rate contracts $(3) $5
 $(3) $(7)
Cash flow hedges - interest rate contracts 1
 
 2
 4
Economic hedges -        
Interest rate contracts 2
 (1) 3
 (5)
Other 
 3
 3
 1
Economic hedges 2
 2
 6
 (4)
Variation margin on daily settled cleared derivatives 
 
 1
 
Noninterest income on derivatives and hedging activities $
 $7
 $6
 $(7)
At September 30, 2016, we had $19 million of additional net credit exposure on cleared derivatives due to our pledging of non-cash collateral to a DCO for initial margin, which exceeded our net derivative liability position. We had $50 million comparable exposure at December 31, 2015.



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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)



The following table presents details regarding the gains (losses)offsetting of derivativesour derivative assets and hedging activities as presented in theliabilities on our statements of income.condition. Effective in January of 2017, we began treating daily variation margin on our cleared derivatives as cash settlements instead of as cash collateral.

  Derivative Assets Derivative Liabilities 
  Bilateral Cleared Total Bilateral Cleared Total 
As of September 30, 2017             
Derivatives with legal right of offset -             
Gross recognized amount $272
 $84
 $356
 $568
 $90
 $658
 
Netting adjustments and cash collateral (270) (84) (354) (548) (84) (632) 
Derivatives with legal right of offset - net 2
 
 2
 20
 6
 26
 
Derivatives without legal right of offset 1
 
 1
 2
 
 2
 
Derivatives on statements of condition 3
 
 3
 22
 6
 28
 
Less:             
Noncash collateral received and cannot be sold or repledged 
   
 
 6
 6
 
Noncash collateral pledged and cannot be sold or repledged   (1) (1)       
Net amount $3
 $1
 $4
 $22
 $
 $22
 
              
As of December 31, 2016             
Derivatives with legal right of offset -             
Gross recognized amount $339
 $133
 $472
 $820
 $339
 $1,159
 
Netting adjustments and cash collateral (335) (133) (468) (788) (330) (1,118) 
Derivatives with legal right of offset - net 4



4

32

9

41
 
Derivatives without legal right of offset 2
 
 2
 2
 
 2
 
Derivatives on statements of condition 6



6

34

9

43
 
Less:             
Noncash collateral received and cannot be sold or repledged 
   
 
 9
 9
 
Cash collateral for initial margin   (1) (1)       
Noncash collateral pledged and cannot be sold or repledged   (2) (2)       
Net amount $6
 $3
 $9
 $34
 $
 $34
 

  Three months ended September 30, Nine months ended September 30,
For the periods ending 2016 2015 2016 2015
Fair value hedges -        
Interest rate swaps $5
 $(17) $(7) $(30)
Fair value hedges 5
 (17) (7) (30)
Cash flow hedges 
 1
 4
 2
Economic hedges - 
      
Interest rate swaps (1) (14) (40) (43)
Interest rate swaptions (2) 4
 16
 7
Interest rate caps or floors (14) (4) (25) (12)
Net interest settlements 16
 16
 44
 60
Other 3
 (1) 1
 (1)
Economic hedges 2
 1
 (4) 11
Gains (losses) on derivatives and hedging activities $7
 $(15) $(7) $(17)



At September 30, 2017, we had $64 million of additional credit exposure on cleared derivatives due to pledging of noncash collateral to our DCOs for initial margin, which exceeded our derivative liability position. We had $86 million of comparable exposure at December 31, 2016.






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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. We had no gain (loss) for hedges that no longer qualified as a fair value hedge. Additionally, the table indicates where fair value 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 fair value hedging adjustments, which are included in 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.



  On Derivative On Hedged Item Total Ineffectiveness-Noninterest Income-Derivatives and Hedging Activities Amount Recorded in Net Interest Income
Three months ended September 30, 2017        
Available-for-sale securities $23
 $(26) $(3) $(21)
Advances 9
 (9) 
 (8)
MPF Loans held for portfolio 
 
 
 (2)
Consolidated obligation bonds (4) 4
 
 7
Total $28
 $(31) $(3) $(24)
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)
Nine months ended September 30, 2017       
Available-for-sale securities $58
 $(64) $(6) $(70)
Advances (6) 9
 3
 (27)
MPF Loans held for portfolio 
 
 
 (5)
Consolidated obligation bonds 55
 (55) 
 29
Total $107
 $(110) $(3) $(73)
Nine months ended September 30, 2016       
Available-for-sale securities $(4) $
 $(4) $(93)
Advances (143) 143
 
 (57)
MPF Loans held for portfolio 
 
 
 (7)
Consolidated obligation bonds 42
 (45) (3) 51
Total $(105) $98
 $(7) $(106)

  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)
         
Three months ended September 30, 2015       
Available-for-sale securities $(40) $29
 $(11) $(33)
Advances (77) 78
 1
 (22)
MPF Loans held for portfolio 
 
 
 (4)
Consolidated obligation bonds 87
 (94) (7) 54
Total $(30)
$13

$(17)
$(5)
         
Nine months ended September 30, 2016       
Available-for-sale securities $(4) $
 $(4) $(93)
Advances (143) 143
 
 (57)
MPF Loans held for portfolio 
 
 
 (7)
Consolidated obligation bonds 42
 (45) (3) 51
Total $(105) $98
 $(7) $(106)
         
Nine months ended September 30, 2015       
Available-for-sale securities $(28) $15
 $(13) $(111)
Advances (49) 49
 
 (63)
MPF Loans held for portfolio 
 
 
 (11)
Consolidated obligation bonds 117
 (134) (17) 169
Total $40
 $(70) $(30) $(16)



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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Cash Flow Hedges


We reclassify amounts in AOCI into our statements of income in the same periods during which the hedged forecasted transaction affects our earnings. We had no 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 $(8)$(2) million as of September 30, 2016.2017. The maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is 43 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-Noninterest Income-Derivatives and Hedging Activities Effective Portion Recorded in AOCI Amount Recorded in Net Interest Income
Three months ended September 30, 2017      
Advances $
 $
 $1
Discount notes 1
 44
 (40)
Total $1
 $44
 $(39)
       
Three months ended September 30, 2016     
Advances $
 $
 $1
Discount notes 
 84
 (49)
Total
$

$84
 $(48)
       
Nine months ended September 30, 2017     
Advances $

$
 $7
Discount notes 2
 117
 (128)
Bonds 
 
 (2)
Total $2
 $117
 $(123)
       
Nine months ended September 30, 2016     
Advances $
 $
 $7
Discount notes 4
 46
 (147)
Bonds 
 
 (2)
Total $4
 $46
 $(142)



   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      
AdvancesInterest rate floors $
 $
 $1
Discount notesInterest rate swaps 
 84
 (49)
Total  $
 $84
 $(48)
        
Three months ended September 30, 2015     
AdvancesInterest rate floors $
 $
 $2
Discount notesInterest rate swaps 1
 (29) (62)
Total  $1

$(29)
$(60)
        
Nine months ended September 30, 2016     
AdvancesInterest rate floors $

$
 $7
Discount notesInterest rate swaps 4
 46
 (147)
BondsInterest rate swaps 
 
 (2)
Total  $4
 $46
 $(142)
        
Nine months ended September 30, 2015     
AdvancesInterest rate floors $
 $
 $8
Discount notesInterest rate swaps 2
 14
 (187)
BondsInterest rate swaps 
 
 (2)
Total  $2
 $14
 $(181)

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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 to raise short-term funds, are issued at less than their face amount and redeemed at par value when they mature. The maturity of consolidated obligation 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 discount notes for which we are the primary obligor. All are due in one year or less.
As of September 30, 2017 December 31, 2016
Carrying Amount $45,460
 $35,949
Weighted Average Interest Rate 0.94% 0.46%


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, 2017 Contractual Maturity Weighted Average Interest Rate By Maturity or Next Call Date
Due in one year or less $15,886
 1.19% $26,692
One to two years 7,581
 1.23% 6,420
Two to three years 2,543
 1.27% 1,642
Three to four years 2,995
 1.97% 450
Four to five years 3,178
 2.04% 286
Thereafter 3,876
 2.96% 569
Total par value $36,059
 1.53% $36,059

As of September 30, 2016 Contractual Maturity Weighted Average Interest Rate By Maturity or Next Call Date
Due in one year or less $9,756
 1.16% $20,922
One to two years 7,686
 1.31% 4,460
Two to three years 4,591
 1.26% 3,105
Three to four years 979
 1.28% 474
Four to five years 2,808
 1.99% 363
Thereafter 4,354
 2.85% 850
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, 2016 December 31, 2015
Carrying Amount $39,144
 $41,564
Par Value 39,164
 41,584
Weighted Average Interest Rate 0.39% 0.22%


The following table presents consolidated obligation bonds outstanding by call feature:

As of September 30, 2016 December 31, 2015 September 30, 2017 December 31, 2016
Noncallable $18,288
 $10,148
 $22,327
 $22,356
Callable 11,886
 12,536
 13,732
 14,778
Par value 30,174
 22,684
 36,059
 37,134
Fair value hedging adjustments (49) (101) (165) (229)
Other adjustments 14
 (1) (4) (2)
Consolidated obligation bonds $30,139
 $22,582
 $35,890
 $36,903



The following table summarizes the consolidated obligations of the FHLBs and those for which we are the primary obligor. 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, 2016,2017, and December 31, 2015. Refer to 2016. See Note 17 - Commitments and Contingencies to the financial statements in our 20152016 Form 10-K for further details.

  September 30, 2017 December 31, 2016
Par values as of Bonds 
Discount
Notes
 Total Bonds 
Discount
Notes
 Total
FHLB System total consolidated obligations $620,807
 $407,903
 $1,028,710
 $579,189
 $410,122
 $989,311
FHLB Chicago as primary obligor 36,059
 45,499
 81,558
 37,134
 35,969
 73,103
As a percent of the FHLB System 6% 11% 8% 6% 9% 7%

  September 30, 2016 December 31, 2015
Par values as of Bonds 
Discount
Notes
 Total Bonds 
Discount
Notes
 Total
FHLB System total consolidated obligations $532,920
 $434,808
 $967,728
 $410,859
 $494,343
 $905,202
FHLB Chicago as primary obligor 30,174
 39,164
 69,338
 22,684
 41,584
 64,268
As a percent of the FHLB System 6% 9% 7% 6% 8% 7%


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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$100 and redeemable on five years'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'smember's activity stock requirement. Class B2 membership stock is available to be purchased to support a member'smember'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 Requirements on page F-42F-43 of our 20152016 Form 10-K. We complied with our minimum regulatory capital requirements as shown below.
 September 30, 2016 December 31, 2015 September 30, 2017 December 31, 2016
 Requirement Actual Requirement Actual Requirement Actual Requirement Actual
Risk-based capital $971
 $4,889
 $1,027
 $4,688
 $1,055
 $5,084
 $1,088
 $5,032
Total regulatory capital $2,999
 $4,889
 $2,827
 $4,688
 $3,500
 $5,084
 $3,148
 $5,032
Total regulatory capital ratio 4.00% 6.52% 4.00% 6.63% 4.00% 5.81% 4.00% 6.40%
Leverage capital $3,749
 $7,332
 $3,534
 $7,032
 $4,374
 $7,626
 $3,935
 $7,549
Leverage capital ratio 5.00% 9.78% 5.00% 9.95% 5.00% 8.72% 5.00% 9.59%


Total regulatory capital and leverage capital includes mandatorily redeemable capital stock (MRCS) but does not include AOCI. Under the FHFA regulation on capital classifications and critical capital levels for the FHLBs, we are adequately capitalized.


The following members' regulatory capital stockmembers exceeded 10% of our total regulatory capital stock outstanding:outstanding (which includes MRCS):


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%
As of September 30, 2017 Regulatory Capital Stock Outstanding % of Total Outstanding Amount of Which is Classified as a Liability (MRCS)
BMO Harris Bank, National Association $307
 16.5% $
One Mortgage Partners Corp. 245
a 
13.1% 245
The Northern Trust Company 195
 10.5% 
a 
One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA.




TransferRepurchase 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,On January 26, 2017, we began repurchasing all excess Class B2 stock on a weekly basis at par value, i.e., $100 per share. Members may continue to request repurchase of excess stock on any business day in addition to the weekly repurchase. All repurchases of excess stock, including automatic weekly repurchases, will continue until otherwise announced, significant reductions inbut remain subject to our membership stockregulatory requirements, certain financial and activity stock requirements, which went into effect on April 1, 2016. As a result of these changes, we held $593 millioncapital thresholds, and prudent business practices. Repurchase of excess capital stock held by members is subject to compliance with financial and capital thresholds, as detailed on April 1, 2016. page 57 of our 2016 Form 10-K.

As of September 30, 2016, we held excess2017, our regulatory capital stock outstanding was $1.9 billion, a net decrease of $419 million. The reduction was$147 million from December 31, 2016, due in part to the automatic weekly repurchases.

Dividends

On October 24, 2017, our Board of Directors declared a result of members requesting repurchase of their excess3.30% dividend (annualized) for Class B1 activity stock and members utilizing excessa 1.25% dividend (annualized) for Class B2 membership stock to support new advance borrowing activities.based on our preliminary financial results for the third quarter of 2017. This dividend, including dividends on mandatorily redeemable capital stock, totaled $11 million and is scheduled for payment on November 15, 2017.


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(Dollars in tables in millions except per share amounts unless otherwise indicated)


Note 12 - Accumulated Other Comprehensive Income (Loss)


The following table summarizes the gains (losses) in AOCI for the reporting periods indicated.
  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, 2017          
Beginning balance $478
 $(160) $(243) $(8)
$67
Change in the period recorded to the statements of condition, before reclassifications to statements of income (24) 8
 44
 3

31
Amounts reclassified in period to statements of income: 

 

 

 

 

Net interest income 
 
 (1)   (1)
Non-interest gain (loss) 
 
 (1)   (1)
Ending balance $454
 $(152) $(201) $(5) $96
           
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)
Ending balance $545

$(187)
$(425)
$(5)
$(72)
           
Nine months ended September 30, 2017          
Beginning balance $459
 $(177) $(312) $(6) $(36)
Change in the period recorded to the statements of condition, before reclassifications to statements of income (5) 25
 117
 1
 138
Amounts reclassified in period to statements of income:         

Net interest income 
 
 (4)   (4)
Non-interest gain (loss) 
 
 (2)   (2)
Ending balance $454
 $(152) $(201) $(5) $96
           
Nine months ended September 30, 2016          
Beginning balance $658
 $(217) $(463) $(6) $(28)
Change in the period recorded to the statements of condition, before reclassifications to statements of income (113) 30
 46
 1
 (36)
Amounts reclassified in period to statements of income:          
Net interest income 
 
 (4)   (4)
Non-interest gain (loss) 
 
 (4)   (4)
Ending balance $545
 $(187) $(425) $(5) $(72)

  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)
           
Three months ended September 30, 2015          
Beginning balance $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)
Amounts reclassified in period to statements of income:         

Net interest income 
 
 (1)   (1)
Non-interest gain (loss) 
 
 (1)   (1)
Other comprehensive income in the period (79)
11

(31)
1

(98)
Ending balance $846

$(227)
$(572)
$(6)
$41
           
Nine months ended September 30, 2016          
Beginning balance $658
 $(217) $(463) $(6) $(28)
Change in the period recorded to the statements of condition, before reclassifications to statements of income (113) 30
 46
 1
 (36)
Amounts reclassified in period to statements of income:         

Net interest income 
 
 (4)   (4)
Non-interest gain (loss) 
 
 (4)   (4)
Other comprehensive income in the period (113) 30
 38
 1
 (44)
Ending balance $545
 $(187) $(425) $(5) $(72)
          
Nine months ended September 30, 2015          
Beginning balance $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)
Amounts reclassified in period to statements of income:          
Net interest income 
 
 (4)   (4)
Non-interest gain (loss) 
 
 (2)   (2)
Other comprehensive income in the period (214) 37
 8
 (7) (176)
Ending balance $846
 $(227) $(572) $(6) $41


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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Note 13 - Fair Value


Fair 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 See Note 2 - Summary of Significant Accounting Policies to the financial statements in our 20152016 Form 10-K for our fair value measurement policies. For a description of the valuation techniques and significant inputs see Note 16 - Fair Value to the financial statements in our 20152016 Form 10-K.


The following tables 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;concern as they do not take into account future business opportunities and future net profitability of assets and liabilities. We had no transfers between levels in the fair value hierarchy for the periods shown.


The following table shows the fair values of financial 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.


     Fair Value Hierarchy 
 Carrying Amount Fair Value Level 1 Level 2 Level 3 
September 30, 2017          
Financial Assets -          
Cash and due from banks$32
 $32
 $32
 $
 $
 
Interest bearing deposits750
 750
 750
 
 
 
Federal Funds sold9,849
 9,849
 
 9,849
 
 
Securities purchased under agreements to resell3,750
 3,750
 
 3,750
 
 
Held-to-maturity securities3,768
 4,184
 
 3,328
 856
 
Advances50,153
 50,181
 
 50,181
 
 
MPF Loans held in portfolio, net5,024
 5,191
 
 5,171
 20
 
Financial Liabilities -      
   
Deposits(600) (600) 
 (600) 
 
Consolidated obligation discount notes(45,460) (45,459) 
 (45,459) 
 
Consolidated obligation bonds(35,890) (36,110) 
 (36,110) 
 
Mandatorily redeemable capital stock(308) (308) (308) 
 
 
           
December 31, 2016          
Financial Assets -          
Cash and due from banks$351
 $351
 $351
 $
 $
 
Interest bearing deposits650
 650
 650
 
 
 
Federal Funds sold4,075
 4,075
 
 4,075
 
 
Securities purchased under agreements to resell2,300
 2,300
 
 2,300
 
 
Held-to-maturity securities5,072
 5,516
 
 4,544
 972
 
Advances45,067
 45,065
 
 45,065
 
 
MPF Loans held in portfolio, net4,967
 5,162
 
 5,136
 26
 
Financial Liabilities -  
       
Deposits(496) (496) 
 (496) 
 
Consolidated obligation discount notes(35,949) (35,949) 
 (35,949) 
 
Consolidated obligation bonds(36,903) (37,149) 
 (37,149) 
 
Mandatorily redeemable capital stock(301) (301) (301) 
 
 

 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 deposits650
 650
 650
 
 
 
Federal Funds sold3,807
 3,807
 
 3,807
 
 
Securities purchased under agreements to resell1,000
 1,000
 
 1,000
 
 
Held-to-maturity securities4,788
 5,308
 
 4,266
 1,042
 
Advances43,117
 43,149
 
 43,149
 
 
MPF Loans held in portfolio, net4,720
 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 deposits650
 650
 650
 
 
 
Federal Funds sold1,702
 1,702
 
 1,702
 
 
Securities purchased under agreements to resell1,375
 1,375
 
 1,375
 
 
Held-to-maturity securities5,967
 6,513
 
 5,293
 1,220
 
Advances36,778
 36,736
 
 36,736
 
 
MPF Loans held in portfolio, net4,828
 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.


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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. The Netting adjustment shown in the table reflects our policy of presenting derivative assets and liabilities on a net basis in our statements of condition. See Note 1 - Background and Basis of Presentation and Note 9 - Derivatives and Hedging Activities for further details. Advances,This includes advances, consolidated obligation discount notes and bonds, and mortgage loans held for sale resulted from our electingfor which we elected the fair value option. The Netting and Cash Collateral adjustment is attributable to our derivative transactions that are presented on a net basis in our statements of condition. See Note 1 - Background and Basis of Presentation,Note 2 - Summary of Significant Accounting Policies and Note 9 - Derivatives and Hedging Activities for further details.
  Level 2 Level 3 Netting and Cash Collateral Fair Value
September 30, 2017        
U.S. Government & other government related non-MBS $201
 $
   $201
GSE residential MBS 34
 
   34
U.S. Governmental-guaranteed residential MBS 1
 
   1
Trading securities 236
 
   236
U.S. Government & other government related non-MBS 279
 
   279
State or local housing agency non-MBS 20
 
   20
FFELP ABS 4,315
 
   4,315
GSE residential MBS 7,790
 
   7,790
U.S. Government guaranteed residential MBS 1,076
 
   1,076
Private label residential MBS 
 52
   52
Available-for-sale securities 13,480
 52
   13,532
Advances held at fair value 785
 
   785
Derivative assets 357
 
 $(354) 3
Other assets held at fair value 171
 
   171
Financial assets at fair value $15,029
 $52
 $(354) $14,727
Consolidated obligation discount notes held at fair value $(872) $
   $(872)
Consolidated obligation bonds held at fair value (5,206) 
   (5,206)
Derivative liabilities (660) 
 $632
 (28)
Financial liabilities at fair value $(6,738) $
 $632
 $(6,106)
         
December 31, 2016        
U.S. Government & other government related non-MBS $1,005
 $
   $1,005
GSE residential MBS 39
 
   39
U.S. Governmental-guaranteed residential MBS 1
 
   1
Trading securities 1,045


   1,045
U.S. Government & other government related non-MBS 336
 
   336
State or local housing agency non-MBS 19
 
   19
FFELP ABS 4,572
 
   4,572
GSE residential MBS 8,555
 
   8,555
U.S. Government guaranteed residential MBS 1,380
 
   1,380
Private label residential MBS 
 56
   56
Available-for-sale securities 14,862

56
   14,918
Advances held at fair value 672
 
   672
Derivative assets 474
 
 $(468) 6
Other assets held at fair value 44
 
   44
Financial assets at fair value $17,097

$56

$(468) $16,685
Consolidated obligation discount notes held at fair value $(6,368) $
   $(6,368)
Consolidated obligation bonds held at fair value (5,443) 
   (5,443)
Derivative liabilities (1,161) 
 $1,118
 (43)
Financial liabilities at fair value $(12,972)
$

$1,118
 $(11,854)



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.


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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Fair Value Option


We elect the fair value option for financial instruments, such as advances, MPF Loans held for sale, and consolidated obligation discount notes and consolidated obligation bonds in cases where hedge accounting treatment may not be achieved. Specifically,achieved due to the inability to meet the 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 derivatives used to hedge these financialcriterion. Financial instruments have matching terms. Accordingly, electingfor which we elected the fair value option allows us to better match the change inalong with their related fair value are shown on our Statements of theseCondition. Refer to our Note 2 – Summary of Significant Accounting Policies to the financial instruments with the derivative economically hedging them.statements in our 2016 Form 10-K for further details.



The following table reflects the difference between the aggregate unpaid principal balance (UPB) outstanding and the aggregate fair value for our 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, 2017 December 31, 2016
As of Advances Consolidated Obligation Bonds Advances Consolidated Obligation Bonds
Unpaid principal balance $788
 $5,210

$677
 $5,447
Fair value over (under) UPB (3) (4) (5) (4)
Fair value   $785
 $5,206
 $672
 $5,443

  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



33

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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 shows our commitments outstanding, which represent off-balance sheet obligations.


  September 30, 2017 December 31, 2016
As of Expire within one year Expire after one year Total Expire within one year Expire after one year Total
Unsettled consolidated obligation bonds $300
 $
 $300
 $10
 $
 $10
Member standby letters of credit 12,497
 2,914
a 
15,411
 8,459
 2,369
a 
10,828
Housing authority standby bond purchase agreements 
 323
 323
 25
 281
 306
Advance commitments 1
 
 1
 15
 1
 16
MPF delivery commitments 514
 
 514
 417
 
 417
Other 10
 
 10
 24
 
 24
Commitments $13,322
 $3,237
 $16,559
 $8,950
 $2,651
 $11,601
  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
Unsettled consolidated obligation bonds $748
 $
 $748
 $105
 $
 $105
Unsettled consolidated obligation discount notes 500
 
 500
 
 
 
Member standby letters of credit 8,283
 2,140
a 
10,423
 5,063
 1,615
a 
6,678
Housing authority standby bond purchase agreements 46
 262
 308
 49
 362
 411
Advance commitments 45
 1
 46
 163
 5
 168
MPF delivery commitments 632
 
 632
 279
 
 279
Other commitments 28
 
 28
 48
 3
 51
Commitments $10,282
 $2,403
 $12,685
 $5,707
 $1,985
 $7,692

a 
Contains $372$720 million and $637$486 million of member standby letters of credit at September 30, 2016,2017, and December 31, 2015,2016, which were renewable annually.


For a description of previously defined terms see Note 17 - Commitments and Contingencies to the financial statements in our 20152016 Form 10-K.



34


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Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 15 – Transactions with Related Parties and Other FHLBs



We define related parties as members that own 10% or more of our capital stock oreither 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 formerDirectors, or members own allthat control more than 10% of our capital stock.total voting interests. We did not have any members that controlled more than 10% of our total voting interests for the periods presented in these financial statements.


In the normal course of business, we may extend credit to or enter into other transactions with thesea related parties.party. 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 summarizes balances we had with our members who are related parties as defined above (including their affiliates). Members represented in these tables may change between as of the periods presented, to the extent that our related parties change, based on changes in the composition of our Board membership or percentage of capital stock ownership over 10% as noted in Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS).presented.


As of September 30, 2017 December 31, 2016
Assets - Advances $141
 $107
Liabilities - Deposits 13
 8
Equity - Capital Stock 8
 18

As of September 30, 2016 December 31, 2015
Assets - Interest bearing deposits $650
 $650
Assets - Advances 16,016
 15,168
Liabilities - Deposits 33
 20
Equity - Capital Stock 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 transactions with other FHLBs, if any, are identified on the face of our Financial Statements.



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(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.
Selected Financial Data
As of or for the three months ended September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015 September 30, 2015 September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 
Selected statements of condition data                     
Total investments a
 $26,853
 $28,964
 $27,597
 $28,324
 $28,883
Investments a
 $31,885
 $29,461
 $28,547
 $28,060
 $26,853
 
Advances 43,117
 46,424
 38,353
 36,778
 35,044
 50,153
 46,844
 42,328
 45,067
 43,117
 
MPF Loans held in portfolio, gross 4,723
 4,670
 4,681
 4,831
 5,082
 5,026
 4,968
 4,943
 4,970
 4,723
 
Less: allowance for credit losses (3) (3) (2) (3) (3) (2) (3) (3) (3) (3) 
Total assets 74,983
 80,662
 70,913
 70,671
 69,824
 87,488
 81,779
 76,109
 78,692
 74,983
 
Consolidated obligation discount notes, net 39,144
 45,876
 40,293
 41,564
 37,290
 45,460
 37,944
 32,806
 35,949
 39,144
 
Consolidated obligation bonds, net 30,139
 29,091
 24,021
 22,582
 26,062
 35,890
 37,878
 37,662
 36,903
 30,139
 
Total capital stock 1,636
 1,774
 1,733
 1,950
 1,892
Total retained earnings 2,951
 2,884
 2,790
 2,730
 2,640
Capital stock 1,557
 1,526
 1,282
 1,711
 1,636
 
Retained earnings 3,219
 3,153
 3,083
 3,020
 2,951
 
Mandatorily redeemable capital stock (MRCS) 302
 302
 302
 8
 9
 308
 303
 301
 301
 302
 
Total capital 4,515
 4,507
 4,413
 4,652
 4,573
 4,872
 4,746
 4,418
 4,695
 4,515
 
Other selected data at period end                     
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
MPF off-balance sheet loans outstanding - FHLB System b
 $18,091
 $17,537
 $17,180
 $16,972
 $16,594
 
MPF off-balance sheet loans outstanding - FHLBC PFIs b
 8,395
 8,305
 8,214
 8,196
 8,100
 
FHLB systemwide consolidated obligations (par) 967,728
 963,810
 896,828
 905,202
 856,511
 1,028,710
 1,011,526
 959,280
 989,311
 967,728
 
Number of members 730
 732
 737
 740
 742
 717
 721
 726
 728
 730
 
Total employees (full and part time) 443
 432
 425
 422
 410
 457
 457
 452
 440
 443
 
Selected statements of income data                     
Net interest income after provision for credit losses $113

$111

$120

$135

$121
 $124

$116

$113

$111

$113
 
Non-interest gain (loss) 14
 50
 (3) 10
 (6) 5
 16
 10
 15
 14
 
Non-interest expense 42
 46
 40
 37
 35
 43
 44
 42
 39
 42
 
Net income 76
 104
 69
 97
 72
 77
 79
 73
 78
 76
 
Other selected data during the periods                     
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
MPF off-balance sheet loan volume funded - FHLB System b
 $1,022
 $935
 $726
 $1,215
 $1,354
 
MPF off-balance sheet loan volume funded - FHLBC PFIs b
 354
 355
 278
 527
 636
 
Selected ratios (rates annualized)                     
Total regulatory capital to assets ratio 6.52% 6.15% 6.81% 6.63% 6.50%
Regulatory capital to assets ratio 5.81% 6.09% 6.13% 6.40% 6.52% 
Market value of equity to book value of equity 108% 107% 107% 108% 108% 107% 108% 108% 108% 108% 
Total investments - % of total assets 36%
36% 39% 40% 41%
Investments - % of total assets 36%
36% 38% 36% 36% 
Advances - % of total assets 58%
58% 54% 52% 50% 57%
57% 56% 57% 58% 
MPF Loans held in portfolio, net - % of total assets 6%
6% 7% 7% 7% 6%
6% 6% 6% 6% 
Dividend rate class B1 activity stock-period paid 2.80% 2.80% 2.60% 2.50% 2.25% 3.30% 3.15% 3.00% 2.80% 2.80% 
Dividend rate class B2 membership stock-period paid 0.60% 0.60% 0.60% 0.50% 0.50% 1.25% 1.05% 0.85% 0.60% 0.60% 
Return on average assets 0.38% 0.53% 0.38% 0.53% 0.42% 0.36% 0.39% 0.36% 0.40% 0.38% 
Return on average equity 6.70% 9.38% 5.87% 8.44% 6.31% 6.54% 6.99% 6.46% 6.84% 6.70% 
Average equity to average assets 5.67% 5.65% 6.47% 6.28% 6.66% 5.50% 5.58% 5.57% 5.85% 5.67% 
Net yield on average interest-earning assets 0.57% 0.57% 0.66% 0.75% 0.72% 0.59% 0.58% 0.57% 0.57% 0.57% 
Return on average Regulatory Capital spread to three month LIBOR index 5.34% 7.97% 5.17% 7.94% 6.15% 4.89% 5.47% 5.09% 5.37% 5.34% 
Cash dividends $9
 $10
 $9
 $7
 $7
 $11
 $9
 $10
 $9
 $9
 
Dividend payout ratio 12%
10%
13%
7%
10% 14%
11%
14%
12%
12% 
a 
Total investmentsInvestments includes investment securities, interest bearing deposits, Federal Funds sold, and securities purchased under agreements to resell.
b 
MPF off-balance sheet loans areinclude MPF Loans purchased from PFIs and 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.products. See Mortgage Partnership Finance Program beginning on page 7 in our 20152016 Form 10-K.



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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;investments;


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 execute 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 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;






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membership changes, including the withdrawal of members due to restrictions on our dividends or the loss of members through mergers and 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 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;


recent regulatory changes to FHLB membership requirements by the FHFA;

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 20152016 Form 10-K on page 19.18.


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.




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Executive Summary



Third Quarter 20162017 Financial Highlights


We recorded net income of $76 million for the third quarter of 2016, up from $72$77 million in the third quarter of 2015.2017, up from $76 million in the third quarter of 2016.

Net interest income for the third quarter of 20162017 was $113 million, which included $9 million of income from investment security prepayments during the period. For the third quarter of 2015, net interest income was $122 million, which included $11 million of income from investment security prepayments during the period. While our legacy investment portfolio continues to pay 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 2016 was $14$123 million, up 9% from a loss of $6 million for the third quarter of 2015 as we experienced increased gains on our balance sheet hedging activities.
Noninterest expense increased to $42$113 million for the third quarter of 2016 compared to $35 million foras we benefited both from the third quarterrising rate environment and higher levels of 2015, with the increase driven mainly by an increase in compensation and benefits.interest earning assets.

Total investment securities decreased $3.2 billion17% to $21.4$17.5 billion at September 30, 2016,2017, down 13% from $24.6$21.0 billion at December 31, 2015,2016, as our investment portfolio continued to pay down during the period.down.

Advances outstanding increased $6.3 billion11% to $43.1$50.2 billion at September 30, 2016,2017, up 17% from $36.8$45.1 billion at December 31, 2015, as members continue to support investment activities and high loan growth in their communities.2016.

MPF Loans held in portfolio, remained relatively flat from December 31, 2015,net of allowance for credit losses, increased $57 million or 1% to $5.0 billion at September 30, 2016, as new MPF Loan volume helped offset paydown and maturity activity during the period.2017.

Total assets increased $4.3 billion11% to $75.0$87.5 billion as of September 30, 2016, up 6%2017, compared to $70.7$78.7 billion as of December 31, 2015.2016.
We reached $2.95 billion in retained earnings at September 30, 2016.
We remained in compliance with all of our regulatory capital requirements as of September 30, 2016.2017.



Summary and Outlook


Third Quarter 20162017 Dividend


On October 27, 2016,24, 2017, the Bank's Board of Directors maintained the dividend levels for the third quarter of 2016. The Board again recognized our members that borrow from the Bank by declaringdeclared a dividend of 2.80%3.30% (annualized) for Class B1 activity capital stock based onfor members that borrow from the Bank’s preliminary financial results for the third quarterBank and a dividend of 2016. The Board also declared a 0.60% dividend1.25% (annualized) for Class B2 membership capital stock.stock . The Bank offers a higher dividend on the Class B1 activity stock as a means to provide additional value to those members that support the cooperative by using our advances products. The higher dividend on Class B1 activity stock, in effect, lowers members’ all-in cost of borrowing from the Bank.

Member OwnedOwned. Member Focused.

As a member-focused cooperative, we strive to offer products and Member Focused

services that meet our members’ business needs. At September 30, 2016,2017, advances were $43.1$50.2 billion, up 17%11% from December 31, 2015,2016, and letters of credit were $10.4$15.4 billion, up 56%43% from December 31, 2015. As2016. In addition, the Bank’s members seek waysvolume of our MPF Traditional products also increased.
Investments in Our Members’ Communities

We continue to invest in members’ communities across the United States. Through our new Community First® Capacity-Building Grant Program, we granted $250,000 to six nonprofit lending institutions in Illinois and Wisconsin this August to help them expand their capacity, and, in turn, increase their non-interest income,impact on community development and affordable housing in their neighborhoods.

Also this fall, we joined the volumeten other Federal Home Loan Banks to donate to hurricane relief efforts in Texas and the traditional MPF products has continuedGulf Coast, Florida and the Southeast, Puerto Rico, and the U.S. Virgin Islands. Together we are committed to growsupporting members as well.they help to rebuild their communities.


The Bank continues to focus on its members by striving to understand what members need from the Bank beyond serving as a reliable source of liquidity. The Bank continues to evaluate 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 their 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 occurred on July 11-12, 2016.



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Results of Operations




Net Interest Income


Net interest income is the difference between the amount 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 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 and OTTI reversals;
Amortization of hedge adjustments;
Advance and investment prepayment fees; and
MPF credit enhancement fees.




The tablestable on the following page presentpresents the increase or decrease in interest income and expense due to volume or rate variances. The calculation of these components includes the following considerations:

Average Balance: Average balances are calculated using daily balances. Historical cost balances are used to compute the average balances for most of our financial instruments, including available for sale securities and MPF Loans held in portfolio that are on nonaccrual status. Fair value is used to compute average balances for our trading securities and financial instruments carried at fair value under the fair value option.

Total Interest: Total interest includes all components of net interest income, if applicable, as discussed above.
Amortized cost basis is used to compute average daily balances for most of our financial instruments, including available for sale securities. Fair value is used to compute average daily balances for our trading securities and financial instruments carried at fair value under the fair value option.
Yield/Rate: Effective yields/rates are based on average daily balances and include all components of net interest income as discussed above. Yields/rates are calculated on an annualized basis.

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 changes due to the combined volume/rate variance have been allocated ratably to volume and rate.


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Increase or decrease in interest income and expense due to volume or rate variances

September 30, 2017 September 30, 2016 Increase (decrease) due to
September 30, 2016 September 30, 2015 Increase (decrease) due toAverage Balance Total Interest   Yield/ Rate Average Balance Total Interest   Yield/ Rate Volume Rate Net Change
For the three months endedAverage 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)$17,949
 $163
 3.63% $21,547
 $174
 3.23% $(33) $22
 $(11)
Advances44,300
 74
 0.67% 33,318
 45
 0.54% 18
 11
 29
47,135
 157
 1.33% 44,300
 74
 0.67% 10
 73
 83
MPF Loans held in portfolio4,657
 53
 4.55% 5,140
 62
 4.82% (6) (3) (9)4,927
 53
 4.30% 4,657
 53
 4.55% 3
 (3) 
Other interest bearing assets8,443
 8
 0.38% 5,506
 2
 0.15% 3
 3
 6
Federal funds sold and securities purchased under agreements to resell11,467
 34
 1.19% 6,857
 7
 0.41% 14
 13
 27
Other1,247
 4
 1.28% 1,586
 1
 0.25% (1) 4
 3
Interest income on assets78,947
 309
 1.57% 68,152
 304
 1.78% 41
 (36) 5
82,725
 411
 1.99% 78,947
 309
 1.57% 19
 83
 102
Consolidated obligation discount notes44,417
 95
 0.86% 34,080
 72
 0.85% 22
 1
 23
41,241
 148
 1.44% 44,417
 95
 0.86% (11) 64
 53
Consolidated obligation bonds29,461
 99
 1.34% 28,565
 96
 1.34% 3
 
 3
36,437
 136
 1.49% 29,461
 99
 1.34% 26
 11
 37
Subordinated notes
 
 % 944
 14
 5.93% (14) 
 (14)
 
 % 
 
 % 
 
 
Other interest bearing liabilities845
 2
 0.95%     

 2
 
 2
Other918
 4
 1.74% 845
 2
 0.95% 
 2
 2
Interest expense on liabilities74,723
 196
 1.05% 63,589
 182
 1.14% 28
 (14) 14
78,596
 288
 1.47% 74,723
 196
 1.05% 14
 78
 92
Net yield on interest-earning assets$78,947
 $113
 0.57% $68,152
 $122
 0.72% $17
 $(26) $(9)
Net yield on interest earning assets$82,725
 $123
 0.59% $78,947
 $113
 0.57% $6
 $4
 $10
                                  
For the nine months ended                                  
Investment securities$22,342
 $545
 3.25% $24,754
 $599
 3.23% $(58) $4
 $(54)$18,639
 $492
 3.52% $22,342
 $545
 3.25% $(98) $45
 $(53)
Advances42,141
 211
 0.67% 32,633
 132
 0.54% 47
 32
 79
46,191
 386
 1.11% 42,141
 211
 0.67% 36
 139
 175
MPF Loans held in portfolio4,684
 165
 4.70% 5,455
 197
 4.82% (27) (5) (32)4,906
 160
 4.35% 4,684
 165
 4.70% 7
 (12) (5)
Other interest bearing assets7,346
 23
 0.42% 7,297
 6
 0.11% 
 17
 17
Federal funds sold and securities purchased under agreements to resell10,211
 74
 0.97% 5,779
 16
 0.37% 32
 26
 58
Other1,273
 9
 0.94% 1,567
 7
 0.60% (2) 4
 2
Interest income on assets76,513
 944
 1.65% 70,139
 934
 1.78% 78
 (68) 10
81,220
 1,121
 1.84% 76,513
 944
 1.65% 68
 109
 177
Consolidated obligation discount notes44,647
 272
 0.81% 33,890
 216
 0.85% 66
 (10) 56
38,940
 363
 1.24% 44,647
 272
 0.81% (53) 144
 91
Consolidated obligation bonds26,184
 299
 1.52% 30,769
 304
 1.32% (51) 46
 (5)37,278
 394
 1.41% 26,184
 299
 1.52% 117
 (22) 95
Subordinated notes565
 24
 5.66% 944
 41
 5.79% (16) (1) (17)
 
 % 565
 24
 5.66% (24) 
 (24)
Other interest bearing liabilities825
 5
 0.81%     
 5
 
 5
Other888
 11
 1.65% 825
 5
 0.81% 1
 5
 6
Interest expense on liabilities72,221
 600
 1.11% 65,603
 561
 1.14% 54
 (15) 39
77,106
 768
 1.33% 72,221
 600
 1.11% 49
 119
 168
Net yield on interest-earning assets$76,513
 $344
 0.60% $70,139
 $373
 0.71% $29
 $(58) $(29)
Net yield on interest earning assets$81,220
 $353
 0.58% $76,513
 $344
 0.60% $20
 $(11) $9




Net interest income changed mainly dueThe following is an analysis of the preceding table and unless otherwise indicated, comparisons apply to both the following:three and nine month periods ending September 30, 2017 compared to September 30, 2016.
 
Interest income from investment securities declined as securities matured or paid down and were not replaced. We are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in Investments on page 12 in our 2016 Form 10-K. One of the limits is that our investment in MBS and ABS cannot exceed three times our total regulatory capital. As of September 30, 2017, our MBS and ABS portfolio was 3.23 times our total regulatory capital, compared to 3.46 at December 31, 2016. We expect the decline to continue until we are below that limit.
Interest 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 are no longer required to obtain FHFA approval for any new investments that have a term to maturity in excess of 270 days, we are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in Investments on page 12 in our 2015 Form 10-K. This decline in interest income was also negatively impacted by declines in accretion into interest income of expected improvements in future cash flows on securities that were previously charged with credit related OTTI. For the quarter ended September 30, 2016, we recorded accretion of $11 million compared to $12 million for the same period in 2015; and $37 million and $41 million for the comparable year to date periods ended September 30. Accretion is dependent upon how estimated market conditions impact future cash flows, and may vary from past experience.


Interest income from advances increased primarily due to a rise in interest rates and, to a lesser extent, higher member demand for advances along with increases inadvances. Higher interest rates resulted primarily as a result offrom rate hikes by the Federal 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), which is designed to make the net cost of borrowing through advances more attractive to members by allowing members to borrow new advances using less activity based capital stock.Bank.


Interest income from MPF Loans held in portfolio declined due to the decrease in our outstanding MPF Loans held in portfolio. Though we have recently resumed purchasing MPF Loans, our purchases were not large enough to offset our loan paydown activity year over year.



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Interest income from otherMPF Loans held in portfolio declined slightly due to lower average interest bearing assets comes primarilyrates (as our more seasoned and higher interest rate MPF Loans matured and were replaced with lower current interest rate MPF Loans), offset by slightly higher volumes of MPF Loans outstanding.

Interest income from interest bearing deposits, Federal Funds sold and securities soldpurchased under agreements to repurchase. The increase is primarilyresell increased both due to higher volumes outstanding and increases in interest rates as a result ofby the Federal Reserve Bank's actions at year end 2015Bank.

Interest expense on our shorter termed consolidated obligation discount notes increased due to raiserising short term interest rates by 25 bps.despite declines in average balances outstanding as we shifted a portion of our funding to longer termed bonds.


Interest expense on our longer termed consolidated obligation bonds increased primarilyas we shifted a portion of our funding to longer termed bonds. Rates declined in the first and second quarters of 2017 compared to 2016, 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 Optionmoney market reforms which increased demand for FHLB debt in the following table.
market, but this effect reversed in the third quarter of 2017 as rates rose.



Our subordinated notes were paid off on June 13, 2016.
Non-Interest Gain (Loss)
For details of the effect our fair value and cash flow hedge activities had on our net interest income see Total Net Effect Gain (Loss) of Hedging Activities on the following page.



Noninterest Income

  Three months ended September 30, Nine months ended September 30,
  2016 2015 2016 2015
Trading securities $
 $(1) $
 $(2)
Derivatives and hedging activities 7
 (15) (7) (17)
Instruments held under fair value option 
 1
 6
 4
Trading Securities, Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option 7
 (15) (1) (15)
Litigation settlement awards 
 2
 38
 13
Other gain (loss), net 7
 7
 24
 15
Noninterest gain (loss) $14
 $(6) $61
 $13
  Three months ended September 30, Nine months ended September 30,
  2017 2016 2017 2016
Derivatives and hedging activities $
 $7
 $6
 $(7)
Instruments held under fair value option (5) 
 (3) 6
Litigation settlement awards 
 
 1
 38
MPF fees from other FHLBs 5
 4
 15
 12
Other, net 5
 3
 12
 12
Noninterest income $5
 $14
 $31
 $61




Trading Securities, The following is an analysis of the above table and unless otherwise indicated, comparisons apply to both the three and nine month periods ending September 30, 2017 compared to September 30, 2016.


Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option


Gains or (losses) on theseDerivatives and hedging activities, have generally stabilized in recent years primarily as a resultand instruments held under the fair value option were not significantto our statements of less volatile hedging costs, which is consistent withincome over the hedging strategies for our more simplified balance sheet, along with a more stable economy. However, mostlast year. Instead, the majority of our total netthe effect from our derivatives and hedging activities wasis recorded as a component ofin net interest income, not in the above non-interest gain (loss) line items. income.

The low interest rate environment resulted in significant negative net interest settlements on derivative contracts. Details are in the table on the following page.


Litigation settlement awards

On October 15, 2010,page details the effect of all of these transactions on our results of operations. Note that 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 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 Legal Proceedings on page 60 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 offsetseconomically hedge only a portion of the expenses we incur.our trading securities.





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(Dollars in tables in millions except per share amounts unless otherwise indicated)




The following table shows the impactTotal Net Effect Gain (Loss) 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 Other Total
Three months ended September 30, 2017             
Recorded in net interest income$(7)
$(21)
$(2)
$(40)
$7

$
 $(63)
Recorded in derivatives & hedging activities1

(2)
2



(2)
1
 
Recorded on instruments held under fair value option(1)


(1)
(1)
(2) 
 (5)
Total net effect gain (loss) of hedging activities$(7)
$(23)
$(1)
$(41)
$3

$1

$(68)
Advances Investments MPF Loans Discount Notes Bonds Total             
Three months ended September 30, 2016                        
Recorded in net interest income$(16)
$(31)
$(2)
$(49)
$12

$(86)$(16) $(31) $(2) $(49) $12
 $
 $(86)
Recorded in derivatives & hedging activities6
 1
 6
 (3) (3) 7
6
 1
 6
 (3) (3) 
 7
Recorded on instruments held under fair value option(4)


(1)
(2)
7
 
(4) 
 (1) (2) 7
 
 
Total net effect gain (loss) of hedging activities$(14) $(30) $3
 $(54) $16
 $(79)$(14) $(30) $3
 $(54) $16
 $
 $(79)
                        
Three months ended September 30, 2015           
Nine months ended September 30, 2017             
Recorded in net interest income$(20) $(33) $(4) $(62) $54
 $(65)$(20)
$(70)
$(5)
$(128)
$27

$
 $(196)
Recorded in derivatives & hedging activities(1) (11) (2) 3
 (4) (15)(2)
(5)
5

2

5

1
 6
Recorded in trading securities - hedged only
 1
 
 
 
 
 1
Recorded on instruments held under fair value option1
 
 
 
 
 1
2
 
 (2) (1) (2) 
 (3)
Total net effect gain (loss) of hedging activities$(20) $(44) $(6) $(59) $50
 $(79)$(20)
$(74)
$(2)
$(127)
$30

$1
 $(192)
                        
Nine months ended September 30, 2016                        
Recorded in net interest income$(50)
$(93)
$(7)
$(147)
$49

$(248)$(50)
$(93)
$(7)
$(147)
$49

$
 $(248)
Recorded in derivatives & hedging activities(14)
(5)
13

2

(3)
(7)(14)
(5)
13

2

(3)

 (7)
Recorded in trading securities - hedged only
 (1) 
 
 
 (1)
 (1) 
 
 
 
 (1)
Recorded on instruments held under fair value option12
 
 (1) (7) 2
 6
Recorded in instruments held under fair value option12
 
 (1) (7) 2
 
 6
Total net effect gain (loss) of hedging activities$(52)
$(99)
$5

$(152)
$48

$(250)$(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 option2
 
 
 (2) 4
 4
Total net effect gain (loss) of hedging activities$(57)
$(124)
$(14)
$(180)
$165

$(210)



Litigation settlement awards

Litigation settlement awards have not been material during the first nine months of 2017. During the second quarter of 2016 we received $38 million in settlement awards on our ongoing litigation related to our investment in private label mortgage backed securities as further discussed in Note 5 - Investment Securities - Ongoing Litigation to the financial statements on page F-30 in our 2016 Form 10-K.

MPF fees from other FHLBs

Other FHLBs pay us a membership fee to participate in the MPF Program and a fee for us to provide services related to their on balance sheet MPF Loans. These fees offset a portion of the expenses we incur to administer the program.

Other, net

Other, net consists primarily of fee income we earn from our off balance sheet MPF Loan products.



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Noninterest Expense


 Three months ended September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30,
 2016 2015 2016 2015 2017 2016 2017 2016
Compensation and benefits $26
 $20
 $71
 $57
 $26
 $26
 $77
 $71
Operating expenses 15
 13
 44
 38
 15
 15
 45
 44
Other 1
 2
 13
 6
 2
 1
 7
 13
Noninterest expense $42
 $35
 $128
 $101
 $43
 $42
 $129
 $128




The following is an analysis of the preceding table and unless otherwise indicated, comparisons apply to both the three and nine month periods ending September 30, 2017 compared to September 30, 2016.

Compensation and benefits increased primarily due to defined benefit pension costs and other 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 employee headcount and incentive compensation expenses.increases in salaries and wages. We had 443457 employees as of September 30, 2016,2017, compared to 410443 as of September 30, 2015.2016.


Other consists ofdecreased in the nine months ended September 30, 2017, due to $5 million in legal fees and expenses related towe incurred during the second quarter of 2016 on our $38 million in legal settlement income as noted in Litigation settlement awards on page 42. Our ongoing litigation settlements and costs related to our shareinvestment in private label mortgage backed securities is further discussed in Note 5 - Investment Securities - Ongoing Litigation to the financial statements on page F-30 in our 2016 Form 10-K. Litigation settlement fees have not been material during the first nine months of funding the Office of Finance and the Federal Housing Finance Agency.2017.




Assessments


We fund the Affordable Housing Program (AHP) program at a calculated rate of 10% of income before assessments.assessments, excluding interest expense on MRCS.




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Other Comprehensive Income (Loss)


 Three months ended September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30, Balance remaining in AOCI as of
 2016 2015 2016 2015 2017 2016 2017 2016 September 30, 2017
Net unrealized gain (loss) available-for-sale securities $(13) $(79) $(113) $(214) $(24) $(13) $(5) $(113) $454
Non-credit OTTI held-to-maturity securities 9
 11
 30
 37
Noncredit OTTI held-to-maturity securities 8
 9
 25
 30
 (152)
Net unrealized gain (loss) cash flow hedges 83
 (31) 38
 8
 42
 83
 111
 38
 (201)
Post-retirement plans 
 1
 1
 (7)
Postretirement plans 3
 
 1
 1
 (5)
Other comprehensive income (loss) $79
 $(98) $(44) $(176) $29
 $79
 $132
 $(44) $96




The following is an analysis of the above table and unless otherwise indicated, comparisons apply to both the three and nine month periods ending September 30, 2017 compared to September 30, 2016.

Net unrealized gain (loss) on available-for-sale securities


Our available-for-saleavailable for sale (AFS) portfolio securities are inhas experienced a small net unrealized gain position (net of any offsetting related fair value hedge losses) asloss during 2017, which was due to a slight increase in longer term market interest rates have declined since we acquired these securities. Asand reversion of market values to par value as the securities approach maturity. Any unrealized gain (or loss) position in AFS securities reverse to zero by maturity as these securities mature, theare expected to pay at par value on maturity. During 2016, our AFS portfolio had a large net unrealized gain position gradually reversesloss primarily due to zero as we will only collect the face value at their maturity. Such reversals resultan increase in periodic net unrealized losses as individual securities mature. Our unrealized net gain position related to our available-for-sale securities portfolio in AOCI was $545 million as of September 30, 2016.longer term market interest rates.


Non-creditNoncredit OTTI on held-to-maturity securities


We accreteThe gains in noncredit OTTI held-to-maturity (HTM) securities are the non-credit relatedamounts accreted to their carrying amounts as these securities are performing better than expected when we took the original noncredit OTTI amountcharge in past years. The remaining accumulated losses in AOCI on these securities will be further accreted over their remaining lives provided the gains are expected to be collected. However, to the carrying amount of each related held-to-maturity security over its remaining life. The decrease in the periods presented resulted from a declineextent that further losses are expected to be incurred, we would immediately recognize those amounts as additional OTTI in our outstanding non-credit OTTI balance, which drove a reduction in the accretion amounts. Our remaining non-credit OTTI amount on held-to-maturity securities in AOCI was $(187) million asstatements of September 30, 2016. We expect this remaining amount to continue to decline as our OTTI held-to-maturity securities approach maturity.income.


Net unrealized gain (loss) on cash flow hedges


OurThe net unrealized gain on cash flow hedges are more sensitive to changes in longer-term market interest rates than to changes in shorter-term market interest rates. The net unrealized gains during both 2017 and 2016 resulted from an increase in shorter term interest rates compared toas a result of actions by 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 net unrealized (loss) of $(425) million in AOCI related to our cash flow hedges.Federal Reserve Bank.


Post-retirement plans

In the first quarter of 2015, we recorded an unrealized loss in OCI of $(8) million due to a revision to the mortality tables used for our post-retirement healthcare and supplemental defined benefit equalization plan. This loss is being amortized into compensation and benefits expense over the average number of years of employment remaining before retirement. The annual amount of amortization is expected to be no more than $1 million.

For further informationdetails on the activity in our Other Comprehensive Income (Loss) see Note 12 - Accumulated Other Comprehensive Income (Loss)to the financial statements.


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Statements of Condition


September 30, 2016 December 31, 2015September 30, 2017 December 31, 2016
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreement to resell$5,488
 $4,226
$14,381
 $7,376
Investment securities21,396
 24,597
17,536
 21,035
Advances43,117
 36,778
50,153
 45,067
MPF Loans held in portfolio, net of allowance for credit losses4,720
 4,828
5,024
 4,967
Other262
 242
394
 247
Assets$74,983
 $70,671
87,488
 78,692
   
Consolidated obligation discount notes$39,144
 $41,564
45,460
 35,949
Consolidated obligation bonds30,139
 22,582
35,890
 36,903
Subordinated notes
 944
Other1,185
 929
1,266
 1,145
Liabilities70,468
 66,019
82,616
 73,997
   
Capital stock1,636
 1,950
1,557
 1,711
Retained earnings2,951
 2,730
3,219
 3,020
Accumulated other comprehensive income (loss)(72) (28)96
 (36)
Capital4,515
 4,652
4,872
 4,695
Total liabilities and capital$74,983
 $70,671
$87,488
 $78,692




The following is an analysis of the above table and comparisons apply to September 30, 2017 compared to December 31, 2016.

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.




Investment Securities


Although we are no longer required to obtain FHFA approval for any new investments that have a term to maturityInvestment securities declined as securities matured or paid down and were not replaced, as noted in excessResults of 270 days, we are currently unable to make additional investments in MBS/ABS under FHFA regulatory limits as discussed in InvestmentsOperations on page 1240.


Advances

Advances increased to the highest outstanding quarter-end balance in our 2015 Form 10-K.history at September 30, 2017. See Note 6 - Advances to the financial statements.




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Advances

Advances increased in 2016 primarily due to our members' interest in the benefits we offer our members through our continuing Reduced Capitalization Advance Program (RCAP), whichWhile advance demand is designed to make the net cost of borrowing through advances more attractive to members and allows members to borrow new advances using less activity stock.

While our advances increased,strong, it is possible that member demand for our advances could decline in future periods should their funding needs change, or to the extent they elect 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.decrease.




MPF Loans Held in Portfolio, Net of Allowance for Credit Losses


We had a small net decreaseincrease in our outstanding MPF Loans from year end, as we resumed purchasing a higher volumeour purchases of new loans during 2016 to help2017 offset maturities and paydowns experienced in our MPF Loan portfolio. In the third quarter


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Table of 2016, our purchases were slightly greater than our current loan paydownsContents
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(Dollars in the quarter. 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 decline. For the year to date period ended September 30, 2016, we acquired $759 milliontables in new MPF Loans to our portfolio, compared to $117 million in the same period in 2015.millions except per share amounts unless otherwise indicated)



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.




Hurricanes and California Wildfires

During the third quarter of 2017, three significant hurricanes impacted the southeastern coasts of the United States and Puerto Rico.

We have analyzed the potential impact that damage related to these hurricanes might have on our advances, letters of credit, MPF Loans held for portfolio, community investment programs, and non-agency MBS securities. These hurricanes did not have a material impact on our financial condition or results of operation during the third quarter of 2017. Based on the information currently available, we do not expect that the potential losses resulting from these hurricanes will have a material effect on our financial condition or results of operations in future periods.

We continue to evaluate the impact of the hurricanes on our advances, letters of credit, MPF Loans held for portfolio, community investment programs, and non-agency MBS investments. We are also monitoring the significant wildfires in California that occurred in October 2017 for any potential impact. If additional information becomes available indicating that any of our assets have been impaired and the amount of the loss can be reasonably estimated, we will record appropriate reserves at that time.

Additionally, in response to the hurricanes and California wildfires, we communicated to our mortgage loan servicers of our conventional MPF Loans held in portfolio that special relief would be available for certain borrowers, including forbearance or temporary suspension of mortgage payments for up to 90 days for borrowers whose income is affected by the disaster or for borrowers whose property is located in a FEMA disaster designated area. To assist individuals and households displaced by the hurricanes, we have announced that vacant AHP-assisted rental units may be temporarily leased to displaced individuals/households, regardless of income.

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Liquidity, Funding, & Capital Resources


Liquidity
For the period ending September 30, 2016,2017, 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 48 in our 20152016 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% or $3.1 billion of total assets. As of September 30, 2016,2017, our overnight liquidity was $9.0$20.7 billion or 12%24% of total assets, giving us an excess overnight liquidity of $6.3$17.6 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, 2016,2017, we had excess liquidity of $43.7$40.0 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 $16.4$17.7 billion as of September 30, 2016.2017.


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. One 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 Liquiditycontingency 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 maintainare maintaining increased balances in short-term investments. In addition, we fund certain overnight or shorter-term investments and advances with debt that has a maturity that extends beyond the maturities of the related investments or advances. For a discussion of how this may impact our earnings, see page 2221 in the Risk Factors section of our 20152016 Form 10-K. On July 3, 2017, the FHFA proposed to rescind certain minimum regulatory liquidity requirements for the FHLBs as further discussed in Legislative and Regulatory Developments starting on page 56.


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 MPF Loans Held in Portfolio Investment Securities
As of September 30, 2016 Available-for Sale Held-to-Maturity
As of September 30, 2017 MPF Loans Held in Portfolio Available-for Sale Held-to-Maturity
Year of Expected Principal Cash Flows          
One year or less $1,329
 $1,347
 $1,707
 $888
 $1,182
 $1,367
After one year through five years 2,280
 10,783
 2,812
 1,979
 9,630
 2,166
After five years through ten years 740
 1,742
 588
 1,155
 1,465
 349
After ten years 308
 795
 162
 932
 620
 132
Total $4,657
 $14,667
 $5,269
 $4,954
 $12,897
 $4,014




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 20152016 Form 10-K.



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Funding


Conditions in Financial Markets


During the third quarter of 2016, theThe Federal Open Market Committee (FOMC) delayed further interest rate hikes duemaintained the target range from 1.00 to fragile economic growth1.25 percent during the third quarter of 2017.  In September 2017, the FOMC initiated its balance sheet normalization program to shrink its balance sheet by reducing reinvestment purchases of US Treasuries and tepid inflation. Market indicators suggest aagency mortgage backed securities.  The markets predict another 25 basis point interest rate hikeincrease in December 2016 by the FOMC, one year after its last rate increase. The 10 year Treasury Note rose 13 basis points overtarget range in the fourth quarter ending at 1.60 percent.of 2017.


We maintained ready access to funding during the third quarter.  However, the U.S. Treasury has projected that the statutory “debt ceiling” limit could be reached in the first quarter of 2018. In preparation for the possibility of disorderly markets caused by potential debt defaults of the U.S. Government, we will be monitoring our liquidity position.  


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)
Nine months ended September 30, 2017 2016 Change
Net cash provided by (used in) operating activities $337
 $184
 $153



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. The $(191) million change in netNet cash provided by (used in) operating activities primarily resultedresult from the following:


The non-cashNet income; plus
A noncash adjustment attributablerelated to derivatives and hedging activities; minus
Net cash outflows related to the unrealized net changes in the fair valuepurchase of our derivative instruments.

MPF Loans held for sale offset by proceeds from securitized mortgage loans.
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)
Nine months ended September 30, 2017 2016 Change
Net cash provided by (used in) investing activities -      
Liquid assets (Federal Funds sold, securities purchased under agreements to resell, interest bearing deposits, and trading securities) $(6,518)
$(1,620)
$(4,898)
Securities held for investment (available-for-sale and held-to-maturity) 2,661
 3,028
 (367)
Advances (5,079)
(6,189)
1,110
Other (40) 135
 (175)
Net cash provided by (used in) investing activities $(8,976) $(4,646) $(4,330)



Our investing activities consist predominantly include advances, MPF Loansof liquid assets, securities held in portfolio,for investment, securities, and other
short-term interest-earning assets.advances. The $(6.9)$(4.3) billion change in net cash provided by (used in) investing activities primarily resulted from the following:


TheLiquid assets reflect a desire for increased liquidity to meet the needs of our members.

Securities held for investment reflects the continued paydown in our investments portfolio.

Advances reflect the further increase in net cash (used in) funding advances reflects our objective to make advances to our members ouroutstanding during 2017, but at a slower rate than 2016.
primary business;




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The increase in net cash (used in) acquiring Federal Funds sold and securities purchased under agreements to resell reflects our objective to invest in liquid assets to meet the needs of our members; and

The decrease in net cash (used in) purchasing MPF Loans Held in Portfolio reflects our decision in mid 2015
to resume these purchases.



Cash flows from financing activities with significant changes


Nine months ended September 30, 2016 2015 Change 2017 2016 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)
Consolidated obligation discount notes $9,493
 $(2,443) $11,936
Consolidated obligation bonds (1,077) 7,496
 (8,573)
Payments for retirement of subordinated notes 
 (944) 944
Other (115) (266) 151
 (96) (115) 19
Net cash provided by (used in) financing activities $3,994
 $(2,315) $6,309
 $8,320
 $3,994
 $4,326



Our financing activities primarily reflect cash flows related to issuing and repaying consolidated obligations. The 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$4.3 billion change in net cash provided by (used in) financing activities primarily resulted from the following:


A netAn increase in the amount of our consolidated obligation debt outstanding, with a shiftobligations used to fund the growth in funding from our consolidated obligationbalance sheet. We relied on shorter term discount notes for our funding in 2017 compared to consolidated obligation bonds; andlonger term bonds in 2016.


The payment for the retirement of our subordinated notes.notes in 2016.


Capital Resources


Capital Rules


Under our Second Amended and Restated Capital Plan of the Federal Home Loan Bank of Chicago, effective October 1, 2015 (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.


Under our Capital Plan, our Board of Directors may 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. That threshold is 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.


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. In addition, our Board reduced each member'sEach member’s activity stock requirement from 5% toremained at 4.5% for non-RCAP advances, effective April 1, 2016.advances.


Our Capital Plan 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.


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The Board may periodically adjust members’ membership stock requirement within a range of 0.20% to 2% of a member’s mortgage assets. In February 2016, our Board reduced theEach member’s membership stock requirement tois the greater of either $10,000 or 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. Also in February 2016 , the Board reduced the dollarThe cap on each member’s membership stock from $25 million torequirement is now $5 million, which is less than 9.9% of the Bank’s total capital stock outstanding at December 31, 2015,2016, and is thus the operative cap during the remainder of 20162017 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

For details on April 1, 2016. As a result of these changes, we held $593 million of excessour capital stock requirement changes in 2016, see Capital Resourceon April 1, 2016. Aspage 54 of September 30,our 2016 we held excess capital stockForm 10-K.

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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 as discussed below.in Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements in this Form 10-Q.


On July 3, 2017, the FHFA proposed to amend certain regulatory capital requirements for the FHLBs as further discussed in Legislative and Regulatory Developments on page 56.

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


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 4.5% requirement under our Capital Plan’s general provisions. Since June 1,provisions as further discussed in Capital Resources on page 54 of our 2016 Form 10-K. As of September 30, 2017, and December 31, 2016, RCAP advances outstanding total $24.1 billion to 164 members and $22.7 billion to 147 members, respectively.

Repurchase of Excess Capital Stock

On January 26, 2017, we have offeredbegan repurchasing all excess Class B2 membership stock on a more flexible versionweekly basis at par value, i.e., $100 per shareMembers may continue to request repurchase of RCAP, under whichexcess stock on any business day in addition to the weekly repurchase. All repurchases of excess stock, including automatic weekly repurchases, will continue until otherwise announced, but remain subject to our regulatory requirements, certain financial and capital thresholds, and prudent business practices.

Repurchase of excess capital stock held by members can borrow both short-is subject to compliance with financial and long-term funding, including overnight advances, with the reduced activity stock capital requirement.thresholds, as detailed on page 57 of our 2016 Form 10-K.
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 Otherother liabilities in our statements of condition.


 September 30, 2016 December 31, 2015 Change September 30, 2017 December 31, 2016 Change
Capital stock $1,636
 $1,950
 $(314)
Total retained earnings 2,951
 2,730
 221
Accumulated other comprehensive income (loss) (72) (28) (44)
Total GAAP capital $4,515
 $4,652
 $(137)
     

Capital Stock $1,636
 $1,950
 $(314) $1,557
 $1,711
 $(154)
MRCS 302
 8
 294
 308
 301
 7
Total retained earnings 2,951
 2,730
 221
Regulatory capital stock 1,865
 2,012
 (147)
Retained earnings 3,219
 3,020
 199
Regulatory capital $4,889
 $4,688
 $201
 $5,084
 $5,032
 $52
      
Capital stock $1,557
 $1,711
 $(154)
Retained earnings 3,219
 3,020
 199
Accumulated other comprehensive income (loss) 96
 (36) 132
GAAP capital $4,872
 $4,695
 $177




Although we have had no OTTIAccumulated other comprehensive income (loss) in 2016, credit deterioration may negatively impact our remaining private-label MBS portfolio.  We believe that future impairmentsthe above table consists of this portfoliochanges in market value of various balance sheet accounts where the change is not recorded in earnings but are possible if unemployment rates, default, delinquency, or loss ratesinstead recorded in equity capital as the income (loss) is not yet realized. For details on mortgages werethese changes please see Note 12 - Accumulated Other Comprehensive Income (Loss) 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 2015 Form 10-K.financial statements.




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Although we have had no OTTI year to date in 2017, credit deterioration may negatively impact our remaining private label MBS portfolio.  We cannot predict if or when impairments will occur, or the impact these impairments may have on our retained earnings and capital position. See page 28 of the Risk Factors section of our 2016 Form 10-K.

We may not pay dividends if we fail to satisfy our minimum capital and liquidity requirements under the FHLB Act and FHFA regulations.


On October 27, 2016,24, 2017, our Board of Directors approved maintaining the dividend levels for the third quarter of 2016 and declared a 2.80%3.30% dividend (annualized) for Class B1 activity stock and a 0.60%1.25% dividend (annualized) for Class B2 membership stock based on our preliminary financial results for the third quarter of 2016.2017. This dividend, including dividends on mandatorily redeemable capital stock, totaled $11 million and will be paidis scheduled for payment on November 14, 2016.  With this action,15, 2017.  The Class B2 capital stock dividend is intended to enhance the Board continuesvalue of membership; the practiceClass B1 capital stock dividend reduces the effective cost of rewardingborrowing from the Bank and rewards our members that use the Bank’s advances andwho support the financial health of the entire cooperative. cooperative by using our advance products.

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 aboutOn October 24, 2017, our Board of Directors amended our Retained Earnings and Dividend Policy to include consideration of settlement risks relating to unsettled consolidated obligations and investment securities. For further information see Retained Earnings and Dividend Policy & Dividends on page 57 in our 20152016 Form 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-43F-44 in our 20152016 Form 10-K.
The increase in MRCS and decrease in Capital Stock in the above table is mostly due to the transfer in the first quarter of 2016 of $294 million of our captive insurance company members' capital stock from equity to MRCS in 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 whereFor a detailed description of each can be foundour Critical Accounting Policies and Estimates see page 61 in our 20152016 Form 10-K.

Estimating Credit LossesPage 60
Estimating Fair ValuePages 60-61


SeeAlso see Note 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.results subsequent to December 31, 2016.


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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 6364 in our 20152016 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$50.0 billion were advances (par value) and $10.4$15.4 billion were letters of credit at September 30, 2016,2017, compared to $36.6$45.0 billion and $6.7$10.8 billion at December 31, 2015.2016.


 September 30, 2016 December 31, 2015 September 30, 2017 December 31, 2016
Rating Borrowing Members % of Total Credit Outstanding % of Total Collateral Loan Value Borrowing Members % of Total Credit Outstanding % of Total Collateral Loan Value 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
 499
 97% $65,443
 100% $116,386
 483
 97% $55,750
 100% $106,814
4 6
 1% 47
 % 129
 12
 2% 158
 % 318
 7
 1% 59
 % 102
 7
 1% 47
 % 103
5 12
 2% 100
 % 242
 20
 4% 145
 % 353
 10
 2% 113
 % 199
 11
 2% 140
 % 390
Total 510
 100% $53,365
 100% $99,851
 514
 100% $43,393
 100% $91,037
 516
 100% $65,615
 100% $116,687
 501

100%
$55,937

100%
$107,307




The majority of members assigned a 4 rating in the above table were required to submit specific collateral listings and the majority of members assigned a 5 rating were required to deliver collateral to us or a third-party custodian on our behalf.


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.


Credit Risk Exposure - Our credit risk exposure on conventional MPF Loans held in portfolio is the potential for financial loss due to borrower default and depreciation in the value of the real estate collateral securing the MPF Loan, offset by our ability to recover losses from PMI, Recoverable CE Fees, and the CE Amount which may include SMI. The PFI is required to pledge collateral to secure any portion of its CE Amount that is a direct obligation of the PFI.

Setting Credit Enhancement Levels - Credit losses in a Master Commitment are first absorbed by the Bank’s FLA but, if applicable to the MPF product, we will withhold a PFI’s scheduled performance credit enhancement fee in order to reimburse ourselves for any losses allocated to the FLA. If the FLA is exhausted, the credit losses are then absorbed by the PFI’s CE Amount that is calculated by utilizing a third party’s credit model. For further details on the FLA and PFI’s CE Amount, refer to Item 1- PFI Responsibilities on page 9 and Note 2 - MPF Risk Sharing Structure on page F-15 of the 2016 10-K.
Pursuant to the revised AMA regulation, effective January 18, 2017, we adjusted our methodology to set the PFI’s CE Amount. The PFI’s CE Amount is determined by the Bank with respect to an asset or a pool, based on documented analysis, that the Bank has a high degree of confidence that it will not bear material losses beyond the losses absorbed by the FLA, even under reasonably likely adverse changes to expected economic conditions.
The CE Amounts and the FLA for certain conventional MPF products held in our portfolio may be periodically reset lower for each Master Commitment after a required period of seasoning because the amount of credit enhancement necessary to maintain our risk of credit losses within our risk tolerance is usually reduced over time.

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Under the MPF Plus product, the PFI is required to provide an SMI policy covering MPF Loans in the Master Commitment and having a deductible initially equal to the FLA. Certain SMI providers fell below the requirements in the MPF Guides and instead of replacing the SMI provider or indemnifying us for any losses, most PFIs elected to forfeit future performance CE Fees. Credit losses associated with Master Commitments where the SMI coverage has been discontinued are incorporated into the allowance for credit losses calculation. Such credit losses are immaterial.
The following table shows the status of our credit enhancement structure on conventional MPF Loans held in portfolio. Unpaid principal balances in this table include REO, as losses in REO impact, and are impacted by, the credit enhancement structure of a Master Commitment. As defined, the CE Amount includes SMI on the MPF Plus product. Government Loans are excluded from the table as they are not directly credit enhanced by the PFI.
  As of September 30, 2017
MPF Product Type Unpaid Principal Balance 90+ Days Delinquent 
FLA a
 
PFI's CE Amount b
100 $236
 1.66% 4.91% 4.22%
125 1,216
 0.22% 1.33% 1.42%
Plus 1,378
 3.88% 5.95% 1.66%
35 32
 —% 0.35% 2.89%
Original 1,104
 0.71% 0.90% 7.07%
a
For each product above, except MPF Original, a portion of losses experienced at the FLA level may be recovered through the withholding of performance-based CE Fees from PFIs.
b
Credit losses on a loan may only be absorbed by the CE Amount in the Master Commitment related to the loan. For further detail refer to Note 2 - MPF Risk Sharing Structure on page F-15 of the 2016 10-K.


Mortgage Repurchase Risk


We are exposed toFor details on our 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,breached, see Mortgage Repurchase Risk on page 6667 in our 20152016 Form 10-K.






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Investment Securities


We hold a variety of AA or better rated investment securities, mostly government backed or insured securities such as GSE debt and FFELP ABS, and we believe these investments are low risk. There waswere no material changechanges in the credit ratings of these AA or better rated securities since December 31, 2015, and except2016. For further details see page 70 in our 2016 Form 10-K. Except for private-labelprivate label MBS, as noted below, we have never taken an impairment charge on theseour investment securities. For further details see page 69 in our 2015 Form 10-K.


Our private-labelprivate label MBS are predominantly variable rate securities rated below investment grade (BBB). There waswere no material changechanges in overall credit quality since December 31, 2015,2016, nor have we acquired any new private-labelprivate label MBS. We last had an other-than-temporary impairment (OTTI) loss on private-labelprivate 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 - InvestmentsInvestment 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.statements.




Unsecured Short-Term Investments Credit Exposure


For further details on our unsecured short-term investments as well as policies and procedures to limit and monitor our unsecured credit risk exposure, see page 72 in our 20152016 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, 2016 AA A BBB Unrated Total
As of September 30, 2017 AA A BBB Unrated Total
Domestic U.S.                    
Interest-Bearing Deposits $
 $650
 $
 $
 $650
 $
 $750
 $
 $
 $750
Fed Funds Sold 
 
 188
 19
 207
 
 
 147
 27
 174
U.S. branches and agency offices of foreign commercial banks - Federal Funds sold:                    
Australia 500
 
 
 
 500
 1,750
 
 
 
 1,750
Canada 
 1,100
 
 
 1,100
 500
 2,225
 
 
 2,725
Finland 500
 
 
 
 500
France 
 600
 
 
 600
Japan 
 700
 
 
 700
Netherlands 
 500
 
 
 500
 
 600
 
 
 600
Norway 
 500
 
 
 500
 
 600
 
 
 600
Sweden 
 500
 
 
 500
 2,000
 700
 
 
 2,700
Total unsecured credit exposure $1,000
 $3,250
 $188
 $19
 $4,457
 $4,250
 $6,175
 $147
 $27
 $10,599




All $4.5$10.6 billion of the unsecured credit exposure shown in the above table were overnight investments.


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Managing Our Credit Risk Exposure Related to Derivative Agreements


Refer to See Note 9 - Derivatives and Hedging Activities to the financial statements for a discussion of how we manage our credit risk exposure related to derivative agreements. We have credit exposure on 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.


The following table presents our derivative positions where we have such credit exposures. The rating used was the lowest rating among the three largest Nationally Recognized Statistical Rating Organizations. Non-cash collateral pledged consists of initial margin we posted through our FCMs, on behalf of the DCOs for cleared derivatives and is included in our derivative positions with credit exposure.


 Net Fair Value Before Collateral Cash Collateral Pledged Non-cash Collateral Pledged Net Credit Exposure to Counterparties  Net Derivative Fair Value Before Collateral Cash Collateral Pledged Non-cash Collateral Pledged Net Credit Exposure to Counterparties 
As of September 30, 2016         
As of September 30, 2017         
Non-member counterparties -                  
Undercollateralized asset positions -                  
Bilateral derivatives -                  
Cleared derivatives $
 $1
 $
 $1
 
BBB $2
 $(2) $
 $
 
Overcollateralized liability positions -                  
Bilateral derivatives -                  
AA rated (17) 17
 
 
 
A rated (29) 29
 
 
  (71) 72
 
 1
a 
Cleared derivatives (395) 413
 90
 108
  (6) 
b 
71
 65
 
Non-member counterparties (441) 460
 90
 109
  (75) 70
 71
 66
 
Member institutions 1
 
 
 1
  1
 
 
 1
 
Total $(440) $460
 $90
 $110
  $(74) $70
 $71
 $67
 
                  
As of December 31, 2015         
As of December 31, 2016         
Non-member counterparties -                  
Overcollateralized liability positions -                  
Bilateral derivatives -                  
AA rated $(14) $14
 $
 $
a 
 $(60) $60
 $
 $
a 
A rated (4) 4
 
 
a 
 (57) 60
 
 3
 
Cleared derivatives (147) 136
 62
 51
  (206) 198
b 
97
 89
 
Non-member counterparties (165) 154
 62
 51
  (323)
318

97

92
 
Member institutions 1
 
 
 1
  2
 
 
 2
 
Total $(164) $154
 $62
 $52
  $(321)
$318

$97

$94
 
a 
Less than $1 million.
b
Effective in January of 2017 we began accounting for variation margin payments made to or received by the DCOs through our FCMs as settlements to our derivative assets and derivative liabilities. Accordingly, we no longer include variation margin in the Cash Collateral Pledged column. See Note 1 - Background and Basis of Presentation,Note 2 - Summary of Significant Accounting Policies and Note 9 - Derivatives and Hedging Activities for further details.



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Legislative and Regulatory Developments



Significant regulatory actions and developments are summarized below.


Information Security Management Advisory Bulletin

On September 28, 2017, the FHFA issued an Advisory Bulletin that supersedes previous guidance on an FHLB’s information security program. The Advisory Bulletin describes three main components of an information security program and provides the expectation that each FHLB will use a risk-based approach to implement its information security program. The Advisory Bulletin contains expectations related to (i) governance, including guidance related to roles and responsibilities, risk assessments, industry standards, and cyber-insurance; (ii) engineering and architecture, including guidance on network security, software security, and security of endpoints; and (iii) operations, including guidance on continuous monitoring, vulnerability management, baseline configuration, asset life cycle, awareness and training, incident response and recovery, user access management, data classification and protection, oversight of third parties, and threat intelligence sharing.

We do not expect this Advisory Bulletin to materially affect our financial condition or results of operations.

Minority and Women Inclusion

On October 27, 2016,July 25, 2017, the FHFA proposed amendments topublished a final rule, effective August 24, 2017, amending its Minority and Women Inclusion regulations that, if adopted, wouldto clarify the scope of the FHLBs’ obligation to promote diversity and ensure inclusion. These proposed amendments updateThe final rule updates the existing FHFA regulations aimed at promoting diversity and the inclusion and utilizationuse of minorities, women, and individuals with disabilities, and the businesses they own (MWDOB) in all BankFHLB business and activities, including management, employment, and contracting. The final rule will:
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 develop policies that address reasonable accommodations for employees to observe their religious beliefs;
require the FHLBs to amend their policies on equal opportunity in employment and contracting 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 marketfinancial transactions, identification of ways in which FHLBs might be able to improve MWDOB business with the FHLB by enhancing customer access by MWDOB businesses, including through its affordable housing and community investment programs initiatives to improve access to mortgage credit, and strategies for promoting the diversity of supervisors and managers.managers; and

require the FHLBs to classify and provide additional data in their annual reports about the number of and amounts paid under its contracts with MWDOB.
Comments on
We do not expect this final rule to materially affect our financial condition or results of operations, but anticipate that it may result in increased compliance costs and substantially increase 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 membershipamount of tracking, monitoring, and reporting 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 asbe required 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 FHFA 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 FHFA or a civil money penalty;
expenses of defending an action, subject to an agreement to repay those expenses in certain instances; and
amounts due under an indemnification agreement entered into on or prior to September 20, 2016.

The proposed rule also outlines the process a board of directors must undertake prior to making any permitted indemnification payment for expenses of defending an action instituted by the FHFA.

Comments are due on the proposed rule by December 21, 2016. We are currently assessing the effect the proposed rule would have on us if adopted.


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FRB Framework for Implementing the U.S. Basel III CountercyclicalFHLB Capital BufferRequirements


On September 8, 2016,July 3, 2017, the FRB adoptedFHFA published a final policy statement (“Policy Statement”) describingproposed rule to adopt, with amendments, the frameworkregulations of the Federal Housing Finance Board (predecessor to the FHFA) pertaining to the capital requirements for the FHLBs. The proposed rule would carry over most of the existing regulations without material change but would substantively revise the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions would remove requirements that the FRB will follow in settingFHLBs calculate credit risk capital charges and unsecured credit limits based on ratings issued by a nationally recognized statistical rating organization, and instead, require that the countercyclicalFHLBs establish and use their own internal rating methodology. With respect to derivatives, the proposed rule would impose a new capital buffer (“CCyB”)charge for banking organizations that are subjectcleared derivatives, which under the existing rule do not carry a capital charge, to align with 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 proposed a rule that, if adopted, would reduce the scope of new business activities (“NBAs”) for which a FHLB must seek approval from the FHFA and would establish more certain timelines for FHFA review and approval of NBA notices.Dodd-Frank Act’s clearing mandate. The proposed rule also would clarifyrevise the protocolpercentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The FHFA review of NBAs. Underproposes to retain, for now, the percentages used in the tables to calculate capital charges for mortgage-related assets, and to address the methodology for residential mortgage assets at a later date. While a March 2009 regulatory directive pertaining to certain liquidity matters will continue to remain in place, the FHFA also proposes to rescind certain minimum regulatory liquidity requirements for the FHLBs and address these liquidity requirements in a separate rulemaking.

We submitted a joint comment letter with the other FHLBs on August 31, 2017. We are continuing to evaluate 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 acceptance. Instead, the FHFA would review new collateral types as part of the annual exam process.

On October 24, 2016, the FHLBs provided comments to the proposed rule, which primarily relate to certain procedures under the proposed rule. Webut do not anticipate that the proposedexpect this rule, if adopted wouldin final form, to materially impact us.affect our financial condition or results of operations.


Mandatory Contractual Stay Requirements for Qualified Financial Contracts (“QFCs”)(QFCs)


On August 19, 2016,September 12, 2017, the Office of the Comptroller of the Currency (“OCC”) issuedFederal Reserve Board (FRB) published a proposedfinal rule, which, if adopted, would requireeffective November 13, 2017, requiring certain global systemically important financialbanking institutions (“SIFI”)(GSIBs) regulated by the OCCFRB to amend their covered qualified financial contracts (“QFCs”)(QFCs) to limitprevent a counterparty’s immediate termination orof, and limit the exercise of default rights under, the QFCs in the event of bankruptcy or receivership of the SIFIGSIB or an affiliate of the SIFI. CoveredGSIB. QFCs include derivatives, repurchase agreements (known as “repos”)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,September 27, 2017, the Federal Deposit Insurance Corporation ("FDIC") issued(FDIC) adopted a substantively identical proposedfinal rule, effective January 1, 2018, with respect to QFCs entered into with certain FDIC-supervised institutions.


The FHLBs provided comments on the FRB proposed rule on August 5, 2016 andAlthough we are not a covered entity under these rules, as a counterparty to the OCC proposed rule on October 18, 2016, which primarily seek clarification of an exemption and the recognition of a safe harbor. The FHLBs are considering whethercovered entities under QFCs, we may be required to comment on the FDIC's proposed rule.amend QFCs entered into with FRB-regulated GSIBs or applicable FDIC-supervised institutions. We do not anticipate that the proposedexpect these final rules if adopted, wouldto materially impact us.affect our financial condition or results of operations.


European 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 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 FHLBs are examining whether this exemption applies. If the exemption does not apply, we anticipate that the most significant impact of the MAR on us will be more stringent and detailed recordkeeping, creation of detailed lists on parties who have access to inside information, and notification requirements.

Financial Industry Regulatory Authority (“FINRA”) Rule 4210 establishing margin requirements for the TBA Market

On June 15, 2016, the SEC approved a proposed rule by FINRA to require the margining of 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 are 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 counterparty.

FINRA members will be required to comply with the new margin requirements beginning in December 2017. We are currently assessing the financial and operational impacts of this rule.


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(Dollars in tables in millions except per share amounts unless otherwise indicated)




Item 3. Quantitative and Qualitative Disclosures About Market Risk.



Our Asset/Liability Management Committee provides oversight of risk management practices and policies. This includes routine reporting to senior Bank 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 policy.

  September 30, 2017 December 31, 2016
Scenario as of Change in Market Value of Equity Loss Limit Change in Market Value of Equity Loss Limit
-200 bp $222
 $(370) $192
 $(370)
-100 bp 74
 (155) 101
 (155)
-50 bp 32
 (60) 38
 (60)
-25 bp 15
 (30) 17
 (30)
+25 bp (15) (30) (17) (30)
+50 bp (32) (60) (36) (60)
+100 bp (73) (155) (76) (155)
+200 bp (167) (370) (167) (370)

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
 Yield Curve Risk Implied Volatility Prepayment Speeds Spread to Swap Curve Mortgage Spread
As of September 30, 2016         
Advances$(4) $
 $
 $(10) $
MPF Loans(1)
(1)
(3)
(2)
1
Mortgage Backed Securities(3) 
 (1) (4) 
Other interest earning assets(1) 
 
 (3) 
Interest-bearing liabilities5
 3
 
 5
 
Derivatives3
 (2) 
 
 
Total$(1) $
 $(4) n/m
 $1
          
As of December 31, 2015         
Advances$(3) $
 $
 $(10) $
MPF Loans(1) (2) (2) (2) 1
Mortgage Backed Securities(4) (1) (1) (5) 
Other interest earning assets(1) 
 
 (3) 
Interest-bearing liabilities6
 5
 
 6
 
Derivatives3
 (3) 
 
 
Total$
 $(1) $(3) n/m
 $1
n/mSpread movements to the swap curve within each category are independent of the other categories and therefore a total is not meaningful.

   Option Risk Basis Risk
 Yield Curve Risk Implied Volatility Prepayment Speeds Spread to Swap Curve Mortgage Spread
As of September 30, 2017$(1) $(1) $(3) (13) $1
As of December 31, 2016(1) (1) (2) (14) 1

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, 2016,2017, our sensitivity to changes in implied volatility was zero.$(1) million. At December 31, 2015,2016, 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.




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(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, 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
  September 30, 2017 December 31, 2016
Scenario as of Down 200 bps Base Up 200 bps Down 200 bps Base Up 200 bps
Duration of equity 2.6 1.1 1.7 2.3 1.3 1.8


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, 2016, our duration gap was 0.9 months, compared to 0.5 months as of December 31, 2015.

As of September 30, 2016,2017, on a U.S. GAAP basis, our fair value surplus (relative to book value) was $399$385 million, and our market value of equity to book value of equity ratio was 108%107%, compared to $351$388 million and 108% at December 31, 2015.2016. 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, 2016 December 31, 2015
Scenario as of Change in Market Value of Equity Loss Limit Change in Market Value of Equity Loss Limit
-200 bp $60.1
 $(370.0) $123.0
 $(370.0)
-100 bp 125.7
 (155.0) 65.2
 (155.0)
-50 bp 42.4
 (60.0) 21.8
 (60.0)
-25 bp 16.9
 (30.0) 7.5
 (30.0)
+25 bp (11.4) (30.0) (6.4) (30.0)
+50 bp (20.2) (60.0) (13.9) (60.0)
+100 bp (35.9) (155.0) (31.3) (155.0)
+200 bp (80.3) (370.0) (62.8) (370.0)



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(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 most 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, seeItem 9A. Controls and Procedures on page 8284 of our 20152016 Form 10-K.





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PART II - OTHER INFORMATION




Item 1. Legal Proceedings.


On October 15, 2010,For a discussion of the Bank instituted litigation relating to 64 private-labelprivate label MBS bonds purchased by the Bank, in an aggregate original principal amountsee Item 3. Legal Proceedings on page 31 of $4.29 billion. Of the three cases that were filed by the Bank, only the action filed in the Circuit Court of Cook County, Illinois remains active. As of September 30,our 2016 this litigation covers four private-label MBS bonds in the aggregate original principal amount of $77.5 million.
In this 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 September 30, 2016, Morgan Stanley & Co., Incorporated, and certain of its affiliates, remain as the sole defendants in the Illinois action.Form 10-K.
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 1918 in our 20152016 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.




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.






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Item 5. Other Information.


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.”None.


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.




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Item 6. Exhibits.


  
10.1MPF Consolidated Interbank Agreement, dated as of July 22, 2016
31.1
  
  
  
  
101.INSXBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRL Taxonomy Extension Presentation Linkbase Document





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Glossary of Terms


Advances: Secured loans to members.
 
ABS: Asset-backed-securities.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.


CBSA: Core Based Statistical Areas (CBSAs), whichCE Amount: A PFI's assumption of credit risk on conventional MPF Loan products held in an MPF Bank's portfolio that are based uponfunded by, or sold to, an assessmentMPF Bank by providing credit enhancement either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide SMI. Does not apply to the MPF Government, MPF Xtra, MPF Direct or MPF Government MBS product.

CE Fee: Credit enhancement fee. PFIs are paid a credit enhancement fee for managing credit risk and in some instances, all or a portion 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.CE Fee may be performance based.


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.
 
FFELP: Federal Family Education Loan Program.
 
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.


FHLB Chicago:FHLBC: The Federal Home Loan Bank of Chicago.

FHLB Chicago: The Federal Home Loan Bank of Chicago.


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FLA: First loss account is a memo account used to track the MPF Bank's exposure to losses until the CE Amount is available to cover losses.
 
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. 

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Government Loans: Mortgage loans insured or guaranteed by the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), the Department of VeteransVeteran Affairs (VA) or Department of Agriculture Rural Housing Service.Service (RHS).
 
GSE: Government sponsored enterprise.


HFS: Held for sale.


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 jumbonon-conforming (jumbo) MPF Loans from PFIs without any CE Amount 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 Guides: MPF Program Guide, MPF Selling Guide, and MPF Servicing Guide including the Selling and Servicing Guides and manuals for specific MPF Loan products.

MPF Loans: Conventional and government 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 without any CE Amount and concurrently resell them to Fannie Mae.


MRCS: mandatorily Mandatorily redeemable capital stock. 


Nonaccrual MPF Loans: 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 by the Finance Board to facilitate issuing and servicing of consolidated obligations.


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.
 

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PMI: Primary Mortgage Insurance.

PwC: 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.Loans. 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.

Recoverable CE Fee: Under the MPF Program, the PFI may receive a contingent performance based credit enhancement fee whereby such fees are reduced up to the amount of the FLA by losses arising under the Master Commitment.
 
Regulatory capital: Regulatory capital stock plus retained earnings.



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Regulatory capital stock: The sum of the paid-in value of capital stock and mandatorily redeemable capital stock.


REO: Real estate owned.

SEC: Securities and Exchange Commission.


SMI: Supplemental mortgage insurance.

System or FHLB System: The Federal Home Loan Bank System consisting of the 11 Federal Home Loan Banks and the Office of Finance.


TBA: 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


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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.
 
     
  FEDERAL HOME LOAN BANK OF CHICAGO
     
  /s/    Matthew R. Feldman
  Name: Matthew R. Feldman
  Title: President and Chief Executive Officer
Date:November 3, 20166, 2017(Principal Executive Officer)
     
  /s/   Roger D. Lundstrom
  Name: Roger D. Lundstrom
  Title: Executive Vice President and Chief Financial Officer
Date:November 3, 20166, 2017(Principal Financial Officer and Principal Accounting Officer)




S-1