Federal Home Loan Bank of Chicago - FORM 10-Q - November 6, 2015

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10-Q - 10-Q PDF - Federal Home Loan Bank of Chicagoa20153q10q.pdf
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, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 000-51401
Federal Home Loan Bank of Chicago
(Exact name of registrant as specified in its charter)

 
Federally chartered corporation
 
36-6001019
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
200 East Randolph Drive
Chicago, IL
 
60601
 
 
(Address of principal executive offices)
 
(Zip Code)
 

Registrant's telephone number, including area code: (312) 565-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer   o
 
Accelerated filer  o
 
Non-accelerated filer   x  (Do not check if a smaller reporting company)
 
Smaller reporting company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x


As of October 31, 2015, including mandatorily redeemable capital stock, registrant had 18,956,348 total outstanding shares of Class B Capital Stock.


1
Federal Home Loan Bank of Chicago

TABLE OF CONTENTS


Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 


2
Federal Home Loan Bank of Chicago

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
Statements of Condition (unaudited)
(Dollars in millions, except capital stock par value)

 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Cash and due from banks
$
606

 
$
342

Interest bearing deposits
560

 
560

Federal Funds sold
720

 
1,525

Securities purchased under agreements to resell
3,400

 
3,400

Investment securities -
 
 
 
Trading, $58 and $71 pledged
155

 
167

Available-for-sale
18,308

 
19,975

Held-to-maturity, $6,375 and $7,824 fair value
5,740

 
7,118

Total investment securities
24,203

 
27,260

Advances, $95 and $83 carried at fair value
35,044

 
32,485

MPF Loans held in portfolio, net of allowance for credit losses of $(3) and $(15)
5,079

 
6,057

Derivative assets
2

 
29

Other assets
210

 
183

Total assets
$
69,824

 
$
71,841

 
 
 
 
Liabilities
 
 
 
Deposits -
 
 
 
Noninterest bearing
$
41

 
$
49

Interest bearing, $15 and $13 from other FHLBs
469

 
617

Total Deposits
510

 
666

Consolidated obligations, net -
 
 
 
Discount notes, $6,472 and $1,799 carried at fair value
37,290

 
31,054

Bonds, $980 and $2,785 carried at fair value
26,062

 
34,251

Total consolidated obligations, net
63,352

 
65,305

Derivative liabilities
44

 
55

Affordable Housing Program assessment payable
92

 
90

Other liabilities
309

 
256

Subordinated notes
944

 
944

Total liabilities
65,251

 
67,316

Commitments and contingencies - see notes to the financial statements


 


Capital
 
 
 
Class B1 activity stock - putable $100 par value - 10 million and 8 million shares issued and outstanding
966

 
827

Class B2 membership stock - putable $100 par value - 9 million and 11 million shares issued and outstanding
926

 
1,075

Total capital stock
1,892

 
1,902

Retained earnings - unrestricted
2,336

 
2,152

Retained earnings - restricted
304

 
254

Total retained earnings
2,640

 
2,406

Accumulated other comprehensive income (loss) (AOCI)
41

 
217

Total capital
4,573

 
4,525

Total liabilities and capital
$
69,824

 
$
71,841


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

3
Federal Home Loan Bank of Chicago

Statements of Income (unaudited)
(Dollars in millions)

 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest income
 
$
304

 
$
333

 
$
934

 
$
1,033

Interest expense
 
182

 
195

 
561

 
649

Net interest income before provision for (reversal of) credit losses
 
122

 
138

 
373

 
384

Provision for (reversal of) credit losses
 
1

 
(2
)
 
5

 
(8
)
Net interest income
 
121

 
140

 
368

 
392

 
 
 
 
 
 
 
 
 
Noninterest gain (loss) on -
 
 
 
 
 
 
 
 
Trading securities
 
(1
)
 
(6
)
 
(2
)
 
(18
)
Derivatives and hedging activities
 
(15
)
 
1

 
(17
)
 
(11
)
Instruments held under fair value option
 
1

 
10

 
4

 
11

Litigation settlement awards
 
2

 
1

 
13

 
18

Other, net
 
7

 
5

 
15

 
14

Noninterest gain (loss)
 
(6
)
 
11

 
13

 
14

 
 
 
 
 
 
 
 
 
Noninterest expense -
 
 
 
 
 
 
 
 
Compensation and benefits
 
20

 
17

 
57

 
49

Other operating expenses
 
13

 
12

 
38

 
34

Other
 
2

 
(1
)
 
6

 
6

Noninterest expense
 
35

 
28

 
101

 
89

 
 
 
 
 
 
 
 
 
Income before assessments
 
80

 
123

 
280

 
317

 
 
 
 
 
 
 
 
 
Affordable Housing Program assessment
 
8

 
13

 
28

 
32

 
 
 
 
 
 
 
 
 
Net income
 
$
72

 
$
110

 
$
252

 
$
285



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



4
Federal Home Loan Bank of Chicago

Statements of Comprehensive Income (unaudited)
(Dollars in millions)

 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
72

 
$
110

 
$
252

 
$
285

 
 

 
 
 
 
 
 
Other comprehensive income (loss) -
 

 
 
 
 
 
 
Net unrealized gain (loss) on available-for-sale securities
 
(79
)
 
(99
)
 
(214
)
 
37

Non-credit OTTI on held-to-maturity securities
 
11

 
15

 
37

 
43

Net unrealized gain (loss) on cash flow hedges
 
(31
)
 
85

 
8

 
91

Post-retirement plans
 
1

 
(2
)
 
(7
)
 
1

Other comprehensive income (loss)
 
(98
)
 
(1
)
 
(176
)
 
172

 
 

 
 
 

 
 
Comprehensive income
 
$
(26
)
 
$
109

 
$
76

 
$
457



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



5
Federal Home Loan Bank of Chicago

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

 
Capital Stock - Putable - B1 Activity
 
Capital Stock - Putable - B2 Membership
 
Total
Capital Stock
 
Retained Earnings
 
 
 
 
 
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
Unrestricted
 
Restricted
 
Total
 
AOCI
 
Total
December 31, 2014
8

 
$
827

 
11

 
$
1,075

 
19

 
$
1,902

 
$
2,152

 
$
254

 
$
2,406

 
$
217

 
$
4,525

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
202

 
50

 
252

 
(176
)
 
76

Proceeds from issuance of capital stock
3

 
228

 
—

 
15

 
3

 
243

 
 
 
 
 
 
 
 
 
243

Repurchases of capital stock
—

 
(29
)
 
(3
)
 
(223
)
 
(3
)
 
(252
)
 
 
 
 
 
 
 
 
 
(252
)
Capital stock reclassified to mandatorily redeemable capital stock
—

 
—

 
—

 
(1
)
 
—

 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Transfers between classes of capital stock
(1
)
 
(60
)
 
1

 
60

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends - class B1(2.25% annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
(14
)
 


 
(14
)
 
 
 
(14
)
Cash dividends - class B2(0.50% annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
(4
)
 
 
 
(4
)
 
 
 
(4
)
September 30, 2015
10

 
$
966

 
9

 
$
926

 
19

 
$
1,892

 
$
2,336

 
$
304

 
$
2,640

 
$
41

 
$
4,573

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
7

 
$
629

 
10

 
$
1,041

 
17

 
$
1,670

 
$
1,853

 
$
175

 
$
2,028

 
$
67

 
$
3,765

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
228

 
57

 
285

 
172

 
457

Proceeds from issuance of capital stock
2

 
234

 
1

 
43

 
3

 
277

 
 
 
 
 
 
 
 
 
277

Repurchases of capital stock
(1
)
 
(45
)
 
(1
)
 
(101
)
 
(2
)
 
(146
)
 
 
 
 
 
 
 
 
 
(146
)
Transfers between classes of capital stock
(1
)
 
(115
)
 
1

 
115

 
 
 
 
 
 
 
 
 
 
 
 
 


Cash dividends - class B1(1.43% annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
(5
)
 
 
 
(5
)
 
 
 
(5
)
Cash dividends - class B2(0.43% annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
(4
)
 
 
 
(4
)
 
 
 
(4
)
September 30, 2014
7


$
703


11


$
1,098


18


$
1,801


$
2,072


$
232


$
2,304


$
239


$
4,344



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

6
Federal Home Loan Bank of Chicago

Condensed Statements of Cash Flows (unaudited)
(Dollars in millions)
 
Nine months ended September 30,
 
2015
 
2014
 
Operating
Net cash provided by (used in) operating activities
 
$
375

 
$
592

 
Investing
Net change interest bearing deposits
 
—

 
(560
)
 
 
Net change Federal Funds sold
 
805

 
(1,283
)
 
 
Net change securities purchased under agreements to resell
 
—

 
4,550

 
 
Advances -
 
 
 
 
 
 
Principal collected
 
251,066

 
188,332

 
 
Issued
 
(253,574
)
 
(191,556
)
 
 
MPF Loans held in portfolio -
 
 
 
 
 
 
Principal collected
 
1,085

 
1,353

 
 
Purchases
 
(117
)
 
(64
)
 
 
Trading securities -
 
 
 
 
 
 
Sales
 
—

 
2,002

 
 
Proceeds from maturities and paydowns
 
109

 
867

 
 
Purchases
 
(101
)
 
(1,812
)
 
 
Held-to-maturity securities -
 
 
 
 
 
 
Short-term held-to-maturity securities, net
 
675

a 
503

a 
 
Proceeds from maturities and paydowns
 
793

 
833

 
 
Purchases
 
(16
)
 
(22
)
 
 
Available-for-sale securities -
 
 
 
 
 
 
Proceeds from maturities and paydowns
 
1,452

 
1,157

 
 
Purchases
 
(12
)
 
—

 
 
Proceeds from sale of foreclosed assets
 
47

 
76

 
 
Capital expenditures for software and equipment
 
(8
)
 
(8
)
 
 
Net cash provided by (used in) investing activities
 
2,204

 
4,368

 
Financing
Net change deposits
 
(156
)
 
(14
)
 
 
Net proceeds from issuance of consolidated obligations -
 
 
 
 
 
 
Discount notes
 
210,023

 
924,591

 
 
Bonds
 
8,503

 
16,891

 
 
Payments for maturing and retiring consolidated obligations -
 
 
 
 
 
 
Discount notes
 
(203,798
)
 
(925,174
)
 
 
Bonds
 
(16,777
)
 
(13,888
)
 
 
Net proceeds (payments) on derivative contracts with financing element
 
(47
)
 
(46
)
 
 
Net proceeds (payments) on bond transfers to other FHLBs
 
(35
)
 
—

 
 
Proceeds from issuance of capital stock
 
243

 
277

 
 
Repurchase or redemption of capital stock
 
(252
)
 
(146
)
 
 
Redemptions of mandatorily redeemable capital stock
 
(1
)
 
—

 
 
Cash dividends paid
 
(18
)
 
(9
)
 
 
Net cash provided by (used in) financing activities
 
(2,315
)
 
2,482

 
 
Net increase (decrease) in cash and due from banks
 
264

 
7,442

 
 
Cash and due from banks at beginning of period
 
342

 
971

 
 
Cash and due from banks at end of period
 
$
606

 
$
8,413

 
a 
Short-term held-to-maturity securities, net, consists of investment securities with a maturity of less than 90 days when purchased.

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

7
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)


Note 1 – Background and Basis of Presentation

The Federal Home Loan Bank of Chicago a is a federally chartered corporation and one of 11 Federal Home Loan Banks (the FHLBs) that, with the Office of Finance, comprise the Federal Home Loan Bank System (the System).  The FHLBs are government-sponsored enterprises (GSE) of the United States of America and were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLB Act), in order to improve the availability of funds to support home ownership.  The FHLBs are regulated by the Federal Housing Finance Agency (FHFA), an independent federal agency. We provide credit to members principally in the form of secured loans called advances. We also provide liquidity for home mortgage loans to members approved as Participating Financial Institutions (PFIs) through the Mortgage Partnership Finance® (MPF®) Program b.

Our accounting and financial reporting policies conform to generally accepted accounting principles in the United States of America (GAAP).

In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements and the following footnotes should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 2014, included in our Annual Report on Form 10-K (2014 Form 10-K) starting on page F-1, as filed with the SEC.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires us to make assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant of these assumptions and estimates applies to fair value measurements and allowance for credit losses. Actual results could differ from these assumptions and estimates.

Consolidation of Variable Interest Entities

We do not consolidate any of our investments in variable interest entities since we are not the primary beneficiary. We classify variable interest entities as investment securities in our statements of condition. Such investment securities include, but are not limited to, senior interests in private label mortgage backed securities (MBS) and Federal Family Education Loan Program asset backed securities (FFELP ABS). Our maximum loss exposure for these investment securities is limited to their carrying amounts. We have no liabilities related to these investments in variable interest entities. We have not provided financial or other support (explicitly or implicitly) to these investment securities that we were not previously contractually required to provide nor do we intend to provide such support in the future.

Gross versus Net Presentation of Financial Instruments

We present our derivative assets and liabilities on a net basis in our statements of condition. GAAP requires disclosure of both gross information and net information related to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing or lending transactions regardless of whether we offset these transactions in our statements of condition. For the periods presented to date, these rights of offset only apply to our derivatives.
                                                                        
a 
Unless otherwise specified, references to we, us, our, and the Bank are to the Federal Home Loan Bank of Chicago.
b 
“Mortgage Partnership Finance”, “MPF”, “MPF Xtra”, and "Community First" are registered trademarks of the Federal Home Loan Bank of Chicago.




8
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Note 2 – Summary of Significant Accounting Policies

Our Summary of Significant Accounting Policies through December 31, 2014, can be found in our 2014 Form 10-K starting on page F-10. We adopted the following policies in 2015:

Asset Classification and Charge-off Provisions

On April 9, 2012, the FHFA issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02). The guidance in AB 2012-02 is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. AB 2012-02 establishes a standard and uniform methodology for classifying assets, prescribes the timing of asset charge-offs (excluding investment securities), and provides measurement guidance with respect to determining our allowance for credit losses, and fair value measurement guidance for conventional MPF Loans that are classified as Substandard, Doubtful, or Loss, and Real Estate Owned (REO) related to conventional MPF Loans. Subsequent to the issuance of AB 2012-02, the FHFA issued interpretative guidance clarifying that implementation of the asset classification framework may occur in two phases. We implemented the asset classification provisions effective January 1, 2014. We prospectively adopted the remaining provisions of AB 2012-02 on January 1, 2015. The effect of implementing the remaining provisions was as follows:
•
The AB 2012-02 allowance for credit losses measurement guidance did not have a material effect on our financial condition, results of operations, or cash flows at the time of adoption.
•
We recorded a $10 million charge-off in the first quarter of 2015 to our allowance for credit losses on MPF Loans to conform our charge-off policies to AB 2012-02. In particular, we now write-down a conventional MPF Loan to its fair value less estimated selling costs when such a loan is classified as "Loss" and when a conventional MPF Loan is transferred to REO. Our prior practice was to record a charge-off when a conventional MPF Loan was transferred to REO. Exposures classified "Loss" are considered uncollectible and of such little value that the exposures continuance as a balance sheet asset is not warranted. This classification does not mean that the exposure has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer charging off this asset, even though partial recovery may occur in the future. Examples of confirming events indicating that a "Loss" exists include, but are not limited to, the following:

▪
A current assessment of value is made before a single family residential loan is more than 180 days past due. Any outstanding loan balance in excess of the fair value of the property, less cost to sell, is classified as "Loss" when the loan is no more than 180 days delinquent.
•
When a borrower is in bankruptcy, loans are written down to the fair value of the collateral, less costs to sell, within 60 days of receipt of the notification of filing from the bankruptcy court or within the delinquency time frames specified in the guidance, whichever is shorter. A loan is not written down if the loan is performing, the borrower continues making payments on the loan, and repayment in full is expected.
•
Fraudulent loans, not covered by any existing representations and warranties in the loan purchase agreement, are charged off within 90 days of discovery of the fraud, or within the delinquency time frames specified in the adverse classification guidance, whichever is shorter.

•
We began using an Automated Valuation Methodology (AVM) to determine the fair value of our impaired conventional MPF Loans held in portfolio and REO. Our prior practice was to determine fair value using broker price opinions, if available, to measure impaired conventional MPF Loans held in portfolio and REO. If a current broker price opinion was not available, we estimated fair value based on our current actual loss severity rates we experienced on sales, excluding any estimated selling costs. The use of AVM's to determine fair value may result in increased volatility with respect to our provision for credit losses.

•
We now place a conventional MPF Loan held in portfolio on nonaccrual when it is adversely classified as either "Substandard," "Doubtful", or "Loss". An adverse classification means that such a loan is not considered well secured and in the process of collection. Exposures classified "Substandard" are inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Exposure so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the exposure. These weaknesses are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Exposures classified "Doubtful" have all the weaknesses inherent in those exposures classified "Substandard" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Our prior practice was to place conventional MPF Loans held in portfolio on nonaccrual when the loan was 90 or more days past due (or 60 days past due in the case of a bankruptcy) and the loan was not well-secured and in the process of collection. This change in nonaccrual practice did not have a material effect on our nonaccrual loans outstanding at the time of adoption.

9
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure

In August of 2014, the FASB issued new guidance that requires certain government-guaranteed mortgage loans to be derecognized upon foreclosure and established as a separate receivable. Our foreclosed government MPF Loans meet the conditions specified by the new guidance and will be classified as a receivable rather than REO. Our foreclosed government MPF Loans were previously classified in REO in Other Assets. We prospectively adopted this new guidance on January 1, 2015, for our government MPF Loans. The new guidance did not have a material effect on our operating activities or our financial statements since our credit risk on government MPF Loans is limited to whether or not the servicing PFI fails to pay for losses not covered by Federal Housing Administration (FHA) insurance, or Department of Veteran Affairs (VA), Department of Housing and Urban Development (HUD) or Department of Agriculture Rural Housing Service (RHS) guarantees.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

In January of 2014, the FASB issued new accounting guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to REO. The new guidance became effective on January 1, 2015. The new guidance is consistent with our previous accounting and did not have an effect on our operating activities or our financial statements.

Held for Sale Mortgage Loans

We classify MPF Xtra, MPF Direct, and government mortgage loans obtained for a Ginnie Mae securitization transaction as mortgage loans held for sale (HFS), as we sell such loans in an outright sale or in a securitization transaction. If material, HFS mortgage loans are classified as a separate line item in our statements of condition; otherwise, we classify HFS mortgage loans in Other Assets. We have elected the fair value option for HFS mortgage loans. Since these HFS mortgage loans are carried at fair value, the loans do not require an allowance for credit losses. We measure the fair value of HFS mortgage loans based on to-be-announced (TBA) securities, which represent quoted market prices for new mortgage-backed securities issued by U.S. government sponsored enterprises. Any initial premium or discount is recognized as part of the fair value measurement process rather than amortized as a yield adjustment. Any transaction fees, such as extension fees, or costs are immediately recognized into other noninterest income. HFS mortgage loans are classified as an operating activity within our statements of cash flows.

10
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Note 3 – Recently Issued but Not Yet Adopted Accounting Standards


Simplifying the Presentation of Debt Issuance Cost (i.e., Concession Fees)

In April of 2015, the FASB issued new guidance requiring concession fees to be presented as a direct deduction from the debt it relates to rather than separately presented as a deferred cost in Other Assets. As required, we expect to adopt the new guidance January 1, 2016 on a retrospective basis for all periods presented in our financial statements. The new guidance is not expected to have a material effect on our financial statements.


Amendments to Consolidation Analysis
In February of 2015, the FASB issued amended guidance concerning consolidation analysis. The new guidance is intended to enhance consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The new guidance will be effective for periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We do not expect the new guidance to affect our financial condition, results of operations, or cash flows.


Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

In August of 2014, the FASB issued guidance that requires an entity's management to assess the entity's ability to continue as a going concern. Specifically, for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise “substantial doubt” about the entity’s ability to continue as a going concern. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity is unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The guidance becomes effective for the interim and annual periods ending after December 15, 2016, and early application is permitted. This guidance is not expected to have any effect on our financial condition or results of operations at the time of adoption.


Revenue from Contracts with Customers

In May of 2014, the FASB issued new guidance governing revenue recognition from contracts with customers. The new guidance focuses on the timing and amount of revenue recognition that best depicts the transfer by an entity of promised goods or services to its customers. Financial instruments and other contractual rights within the scope of other GAAP guidance are excluded from the scope of this new revenue recognition guidance. As a result, we anticipate that a majority of our contracts with members would be excluded from the scope of this new guidance. In August of 2015, the FASB deferred the effective date for the new revenue recognition guidance until January 1, 2018. We are in the process of reviewing our contracts with members to determine the effect, if any, on our operating activities and financial statements.


11
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars 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,
 
2015
 
2014
 
2015
 
2014
Interest income -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits, Federal Funds sold and securities purchased under agreements to resell
$
2

 
$
2

 
$
6

 
$
6

 

 
 
 
 
 
 
Investment securities -

 
 
 
 
 
 
Trading
—

 
6

 
2

 
21

Available-for-sale
132

 
136

 
396

 
415

Held-to-maturity
63

 
72

 
201

 
223

Total investment securities
195

 
214

 
599

 
659

 

 
 
 
 
 
 
Advances -
 
 
 
 
 
 
 
Advance interest income
44

 
35

 
125

 
108

Advance prepayment fees, including related hedge adjustment gains (losses) of $0, $0, $1, and $0
1

 
4

 
7

 
8

Total Advances
45

 
39

 
132

 
116

 


 
 
 
 
 
 
MPF Loans held in portfolio
62

 
78

 
197

 
252

 


 
 
 
 
 
 
Total interest income
304

 
333

 
934

 
1,033

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense -

 
 
 
 
 
 
 

 
 
 
 
 
 
Consolidated obligations -

 
 
 
 
 
 
Discount notes
72

 
68

 
216

 
201

Bonds
96

 
114

 
304

 
408

Total consolidated obligations
168

 
182

 
520

 
609

 

 
 
 
 
 
 
Subordinated notes
14

 
13

 
41

 
40

 
 
 
 
 
 
 
 
Total interest expense
182

 
195

 
561

 
649

 

 
 
 
 
 
 
Net interest income before provision for (reversal of) credit losses
122

 
138

 
373

 
384

Provision for (reversal of) credit losses
1

 
(2
)
 
5

 
(8
)
Net interest income
$
121

 
$
140

 
$
368

 
$
392


12
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Note 5 – Investment Securities

Our major security types presented in the tables below are defined as follows:

•
U.S. Government & other government related may consist of the sovereign debt of the United States; debt issued by Fannie Mae, Freddie Mac, and the Federal Farm Credit Banks Funding Corporation; and non-mortgage-backed securities of the Small Business Administration and Tennessee Valley Authority.
•
Federal Family Education Loan Program - asset backed securities (FFELP ABS).
•
Government Sponsored Enterprises (GSE) residential mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac.
•
Government-guaranteed residential, multifamily, and reverse mortgage MBS.
•
Private-label residential MBS.
•
State or local housing agency obligations.


Pledged Collateral

We transact most of our derivatives with large banks and major broker-dealers. Derivative transactions may be entered into either through an over-the-counter bilateral agreement with an individual counterparty or through a Futures Commission Merchant (FCM or clearing member) with a derivatives clearing organization (clearinghouse). We may pledge investment securities as collateral under these agreements, and in such cases, the amounts pledged are parenthetically disclosed 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 had no material gains or losses realized from the sales of trading securities.

As of
 
September 30, 2015
 
December 31, 2014
U.S. Government & other government related
 
$
101

 
$
102

Residential MBS:
 
 
 
 
GSE
 
52

 
63

Government-guaranteed
 
2

 
2

Total Residential MBS
 
54

 
65

Trading securities
 
$
155

 
$
167



13
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars 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, 2015
 
 
 
 
 
 
 
U.S. Government & other government related
$
416

 
$
26

 
$
(3
)
 
$
439

State or local housing agency
15

 
—

 
—

 
15

FFELP ABS
5,269

 
274

 
(23
)
 
5,520

 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
GSE
9,769

 
501

 
(13
)
 
10,257

Government-guaranteed
1,931

 
79

 
—

 
2,010

Private-label
62

 
5

 
—

 
67

Total Residential MBS
11,762

 
585

 
(13
)
 
12,334

Total
$
17,462

 
$
885

 
$
(39
)
 
$
18,308

 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
U.S. Government & other government related
$
479

 
$
29

 
$
—

 
$
508

State or local housing agency
3

 
—

 
—

 
3

FFELP ABS
5,824

 
408

 
(11
)
 
6,221

 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
GSE
10,285

 
550

 
(8
)
 
10,827

Government-guaranteed
2,258

 
87

 
—

 
2,345

Private-label
66

 
5

 
—

 
71

Total Residential MBS
12,609

 
642

 
(8
)
 
13,243

Total
$
18,915

 
$
1,079

 
$
(19
)
 
$
19,975


We had no sales of AFS securities for the periods presented.


14
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars 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, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
1,414

 
$
—

 
$
1,414

 
$
78

 
$
—

 
$
1,492

State or local housing agency
16

 
—

 
16

 
—

 
—

 
16

 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE
2,373

 
—

 
2,373

 
173

 
—

 
2,546

Government-guaranteed
1,009

 
—

 
1,009

 
26

 
—

 
1,035

Private-label
1,155

 
(227
)
 
928

 
359

 
(1
)
 
1,286

Total Residential MBS
4,537

 
(227
)
 
4,310

 
558

 
(1
)
 
4,867

Total
$
5,967

 
$
(227
)
 
$
5,740

 
$
636

 
$
(1
)
 
$
6,375

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
2,222

 
$
—

 
$
2,222

 
$
76

 
$
(1
)
 
$
2,297

State or local housing agency
18

 
—

 
18

 
—

 
—

 
18

 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE
2,695

 
—

 
2,695

 
189

 
—

 
2,884

Government-guaranteed
1,129

 
—

 
1,129

 
28

 
—

 
1,157

Private-label
1,318

 
(264
)
 
1,054

 
415

 
(1
)
 
1,468

Total Residential MBS
5,142

 
(264
)
 
4,878

 
632

 
(1
)
 
5,509

Total
$
7,382

 
$
(264
)
 
$
7,118

 
$
708

 
$
(2
)
 
$
7,824


We had no sales of HTM securities for the periods presented.


15
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Aging of Unrealized Temporary Losses

The following tables present unrealized temporary losses on our AFS and HTM portfolio for periods less than 12 months and for 12 months or more. We recognized no OTTI charges on these unrealized loss positions because we expect to recover the entire amortized cost basis, we do not intend to sell these securities, and we believe it is more likely than not that we will not be required to sell them prior to recovering their amortized cost basis. In the tables below, in cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.


Available-for-Sale Securities

 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
As of September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
77

 
$
(3
)
 
$
—

 
$
—

 
$
77

 
$
(3
)
State or local housing agency
2

 
—

 
—

 
—

 
2

 
—

FFELP ABS
90

 
—

 
799

 
(23
)
 
889

 
(23
)
 
 
 
 
 

 
 
 
 
 
 
Residential MBS:
 
 
 
 

 
 
 
 
 
 
GSE
759

 
(1
)
 
1,796

 
(12
)
 
2,555

 
(13
)
Private-label
—

 
—

 
1

 
—

 
1

 
—

Total Residential MBS
759

 
(1
)
 
1,797

 
(12
)
 
2,556

 
(13
)
Total
$
928

 
$
(4
)
 
$
2,596

 
$
(35
)
 
$
3,524

 
$
(39
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
48

 
$
—

 
$
—

 
$
—

 
$
48

 
$
—

State or local housing agency
3

 
—

 
—

 
—

 
3

 
—

FFELP ABS
14

 
—

 
877

 
(11
)
 
891

 
(11
)
 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE
—

 
—

 
1,996

 
(8
)
 
1,996

 
(8
)
Private-label
—

 
—

 
16

 
—

 
16

 
—

Total Residential MBS
—

 
—

 
2,012

 
(8
)
 
2,012

 
(8
)
Total
$
65

 
$
—

 
$
2,889

 
$
(19
)
 
$
2,954

 
$
(19
)




16
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Held-to-Maturity 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
As of September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
—

 
$
—

 
$
16

 
$
—

 
$
16

 
$
—

State or local housing agency
1

 
—

 
10

 
—

 
11

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
Private-label
2

 
—

 
1,228

 
(228
)
 
1,230

 
(228
)
Total Residential MBS
2

 
—

 
1,228

 
(228
)
 
1,230

 
(228
)
Total
$
3

 
$
—

 
$
1,254

 
$
(228
)
 
$
1,257

 
$
(228
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
13

 
$
—

 
$
5

 
$
(1
)
 
$
18

 
$
(1
)
State or local housing agency
10

 
—

 
—

 
—

 
10

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE
—

 
—

 
5

 
—

 
5

 
—

Private-label
12

 
—

 
1,384

 
(265
)
 
1,396

 
(265
)
Total Residential MBS
12

 
—

 
1,389

 
(265
)
 
1,401

 
(265
)
Total
$
35

 
$
—

 
$
1,394

 
$
(266
)
 
$
1,429

 
$
(266
)


Contractual Maturity Terms

The table below presents the amortized cost basis and fair value of AFS and HTM securities by contractual maturity, excluding ABS and MBS securities. These securities are excluded because their expected maturities may differ from their contractual maturities if borrowers of the underlying loans elect to prepay their loans.

 
 
Available-for-Sale
 
Held-to-Maturity
As of September 30, 2015
 
Amortized Cost Basis
 
Carrying Amount and Fair Value
 
Carrying Amount
 
Fair 
Value
Year of Maturity -
 
 
 
 
 
 
 
 
Due in one year or less
 
$
—

 
$
—

 
$
139

 
$
139

Due after one year through five years
 
75

 
78

 
199

 
205

Due after five years through ten years
 
28

 
29

 
203

 
214

Due after ten years
 
328

 
347

 
889

 
950

ABS and MBS without a single maturity date
 
17,031

 
17,854

 
4,310

 
4,867

Total securities
 
$
17,462

 
$
18,308

 
$
5,740

 
$
6,375





17
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Other-Than-Temporary Impairment Analysis

Significant Inputs Used to Determine OTTI

Our analysis for OTTI on our private-label MBS includes key modeling assumptions, inputs, and methodologies provided by an FHLB System OTTI Committee. We use the information provided to generate cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS. The OTTI Committee was formed by the FHLBs to achieve consistency among the FHLBs in their analyses of the OTTI of private-label MBS. We are responsible for making our own determination of impairment, which includes determining the reasonableness of assumptions, inputs, and methodologies used, and performing the required present value calculations using appropriate historical cost bases and yields.

As of September 30, 2015, we had a short-term housing price forecast with projected changes ranging from -3.0% to +8.0% over the twelve month period beginning July 1, 2015, for all markets. For the vast majority of markets, the short-term forecast has changes ranging from +2.0% to +5.0%.  For periods beginning after June 30, 2016, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.

Based on these inputs and assumptions, we had no OTTI charges for the three or nine months ended September 30, 2015, and 2014.

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

 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Beginning Balance
 
$
591

 
$
649

 
$
620

 
$
677

Reductions:
 

 
 
 
 
 
 
Increases in expected future cash flows recorded as credit-related accretion into interest income
 
(12
)
 
(15
)
 
(41
)
 
(43
)
Ending Balance
 
$
579

 
$
634

 
$
579

 
$
634



18
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Note 6 – Advances

We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. The following table presents our advances by callable/putable features:

As of
 
September 30, 2015
 
December 31, 2014
Noncallable/nonputable
 
$
32,165

 
$
29,666

Callable
 
961

 
964

Putable
 
1,685

 
1,673

Par value advances
 
34,811

 
32,303

Hedging adjustments
 
214

 
166

Other adjustments
 
19

 
16

Total advances
 
$
35,044

 
$
32,485



The following table presents our advances by redemption terms:

As of September 30, 2015
 
Amount  
 
Weighted Average Interest Rate
 
Next Maturity or Call Date  
 
Next Maturity or Put Date  
Due in one year or less
 
$
8,908

 
0.65
%
 
$
9,819

 
$
9,826

One to two years
 
3,750

 
1.15
%
 
3,693

 
3,375

Two to three years
 
4,641

 
1.05
%
 
4,164

 
4,133

Three to four years
 
6,988

 
0.37
%
a 
6,816

 
6,983

Four to five years
 
7,985

 
0.35
%
a 
7,785

 
8,042

More than five years
 
2,539

 
2.13
%
 
2,534

 
2,452

Total par value
 
$
34,811

 
0.74
%
 
$
34,811

 
$
34,811