Federal Home Loan Bank of Chicago - FORM 10-Q - May 5, 2016

Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Chicagoex20161q-312.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Chicagoex20161q-311.htm
EX-32.1 - EXHIBIT 32.1 - Federal Home Loan Bank of Chicagoex20161q-321.htm
EX-32.2 - EXHIBIT 32.2 - Federal Home Loan Bank of Chicagoex20161q-322.htm
10-Q - 10-Q PDF - Federal Home Loan Bank of Chicagoa20161q10q.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 March 31, 2016
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 April 30, 2016, including mandatorily redeemable capital stock, registrant had 20,326,577 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)
 
March 31, 2016
 
December 31, 2015
Assets
 
 
 
Cash and due from banks
$
33

 
$
499

Interest bearing deposits
650

 
650

Federal Funds sold
3,610

 
1,702

Securities purchased under agreements to resell
250

 
1,375

Investment securities -
 
 
 
Trading, $103 and $62 pledged
1,156

 
1,160

Available-for-sale
16,742

 
17,470

Held-to-maturity, $5,741 and $6,513 fair value
5,189

 
5,967

Investment securities
23,087

 
24,597

Advances, $605 and $511 carried at fair value
38,353

 
36,778

MPF Loans held in portfolio, net of allowance for credit losses of $(2) and $(3)
4,679

 
4,828

Derivative assets
3

 
2

Other assets
248

 
240

Assets
$
70,913

 
$
70,671

 
 
 
 
Liabilities
 
 
 
Deposits -
 
 
 
Noninterest bearing
$
44

 
$
41

Interest bearing, $17 and $12 from other FHLBs
454

 
497

Deposits
498

 
538

Consolidated obligations, net -
 
 
 
Discount notes, $2,237 and $9,006 carried at fair value
40,293

 
41,564

Bonds, $3,811 and $952 carried at fair value
24,021

 
22,582

Consolidated obligations, net
64,314

 
64,146

Derivative liabilities
60

 
55

Affordable Housing Program assessment payable
90

 
89

Mandatorily redeemable capital stock
302

 
8

Other liabilities
292

 
239

Subordinated notes
944

 
944

Liabilities
66,500

 
66,019

Commitments and contingencies - see notes to the financial statements


 
 
Capital
 
 
 
Class B1 activity stock - putable $100 par value - 10 million and 13 million shares issued and outstanding
1,050

 
1,313

Class B2 membership stock - putable $100 par value - 7 million and 6 million shares issued and outstanding
683

 
637

Capital stock
1,733

 
1,950

Retained earnings - unrestricted
2,453

 
2,407

Retained earnings - restricted
337

 
323

Retained earnings
2,790

 
2,730

Accumulated other comprehensive income (loss) (AOCI)
(110
)
 
(28
)
Capital
4,413

 
4,652

Liabilities and capital
$
70,913

 
$
70,671


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 March 31,
 
 
2016
 
2015
Interest income
 
$
318

 
$
321

Interest expense
 
198

 
191

Net interest income
 
120

 
130

 
 
 
 
 
Noninterest gain (loss) on -
 
 
 
 
Trading securities
 
1

 
(1
)
Derivatives and hedging activities
 
(16
)
 
(11
)
Instruments held under fair value option
 
5

 
3

Other, net
 
7

 
4

Noninterest gain (loss)
 
(3
)
 
(5
)
 
 
 
 
 
Noninterest expense -
 
 
 
 
Compensation and benefits
 
23

 
19

Other operating expenses
 
15

 
11

Other
 
2

 
3

Noninterest expense
 
40

 
33

 
 
 
 
 
Income before assessments
 
77

 
92

 
 
 
 
 
Affordable Housing Program assessment
 
8

 
9

 
 
 
 
 
Net income
 
$
69

 
$
83



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 March 31,
 
 
2016
 
2015
Net income
 
$
69

 
$
83

 
 

 
 
Other comprehensive income (loss) -
 

 
 
Net unrealized gain (loss) available-for-sale securities
 
(40
)
 
(22
)
Non-credit OTTI held-to-maturity securities
 
11

 
13

Net unrealized gain (loss) cash flow hedges
 
(53
)
 
(28
)
Post-retirement plans
 
—

 
(8
)
Other comprehensive income (loss)
 
(82
)
 
(45
)
 
 

 
 
Comprehensive income
 
$
(13
)
 
$
38



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
 
Capital Stock
 
Retained Earnings
 
 
 
 
 
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
Unrestricted
 
Restricted
 
Total
 
AOCI
 
Capital
December 31, 2015
13

 
$
1,313

 
6

 
$
637

 
19

 
$
1,950

 
$
2,407

 
$
323

 
$
2,730

 
$
(28
)
 
$
4,652

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
55

 
14

 
69

 
(82
)
 
(13
)
Proceeds from issuance of capital stock
2

 
183

 
—

 
1

 
2

 
184

 
 
 
 
 
 
 
 
 
184

Repurchases of capital stock
(1
)
 
(104
)
 
—

 
(3
)
 
(1
)
 
(107
)
 
 
 
 
 
 
 
 
 
(107
)
Capital stock reclassified to mandatorily redeemable capital stock
(3
)
 
(294
)
 
—

 
—

 
(3
)
 
(294
)
 
 
 
 
 
 
 
 
 
(294
)
Transfers between classes of capital stock
(1
)
 
(48
)
 
1

 
48

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends - class B1(2.60% annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
(8
)
 


 
(8
)
 
 
 
(8
)
Cash dividends - class B2(0.60% annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
 
 
 
(1
)
March 31, 2016
10

 
$
1,050

 
7

 
$
683

 
17

 
$
1,733

 
$
2,453

 
$
337

 
$
2,790

 
$
(110
)
 
$
4,413

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
8

 
$
827

 
11

 
$
1,075

 
19

 
$
1,902

 
$
2,152

 
$
254

 
$
2,406

 
$
217

 
$
4,525

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
67

 
16

 
83

 
(45
)
 
38

Proceeds from issuance of capital stock
—

 
32

 
—

 
6

 
—

 
38

 
 
 
 
 
 
 
 
 
38

Repurchases of capital stock
—

 
(1
)
 
—

 
(16
)
 
—

 
(17
)
 
 
 
 
 
 
 
 
 
(17
)
Transfers between classes of capital stock
—

 
(31
)
 
—

 
31

 
 
 
 
 
 
 
 
 
 
 
 
 


Cash dividends - class B1(2.25% annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
(4
)
 
 
 
(4
)
 
 
 
(4
)
Cash dividends - class B2(0.50% annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
 
 
 
(1
)
March 31, 2015
8


$
827


11


$
1,096


19


$
1,923


$
2,214


$
270


$
2,484


$
172


$
4,579



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)

 
Three months ended March 31,
 
2016
 
2015
 
Operating
Net cash provided by (used in) operating activities
 
$
(9
)
 
$
121

 
Investing
Net change Federal Funds sold
 
(1,908
)
 
(1,497
)
 
 
Net change securities purchased under agreements to resell
 
1,125

 
2,000

 
 
Advances -
 
 
 
 
 
 
Principal collected
 
149,976

 
52,328

 
 
Issued
 
(151,432
)
 
(51,723
)
 
 
MPF Loans held in portfolio -
 
 
 
 
 
 
Principal collected
 
282

 
337

 
 
Purchases
 
(132
)
 
(13
)
 
 
Trading securities -
 
 
 
 
 
 
Proceeds from maturities and paydowns
 
103

 
3

 
 
Purchases
 
(100
)
 
—

 
 
Held-to-maturity securities -
 
 
 
 
 
 
Short-term held-to-maturity securities, net
 
581

a 
705

a 
 
Proceeds from maturities and paydowns
 
232

 
232

 
 
Purchases
 
(11
)
 
(6
)
 
 
Available-for-sale securities -
 
 
 
 
 
 
Proceeds from maturities and paydowns
 
727

 
517

 
 
Purchases
 
(2
)
 
—

 
 
Other investing activities
 
6

 
11

 
 
Net cash provided by (used in) investing activities
 
(553
)
 
2,894

 
Financing
Net change deposits
 
(40
)
 
(20
)
 
 
Net proceeds from issuance of consolidated obligations -
 
 
 
 
 
 
Discount notes
 
42,844

 
149,597

 
 
Bonds
 
4,410

 
4,885

 
 
Payments for maturing and retiring consolidated obligations-
 
 
 
 
 
 
Discount notes
 
(44,124
)
 
(150,180
)
 
 
Bonds
 
(3,050
)
 
(6,179
)
 
 
Net proceeds (payments) on derivative contracts with financing element
 
(12
)
 
(18
)
 
 
Proceeds from issuance of capital stock
 
184

 
38

 
 
Repurchase of capital stock
 
(107
)
 
(17
)
 
 
Cash dividends paid
 
(9
)
 
(5
)
 
 
Net cash provided by (used in) financing activities
 
96

 
(1,899
)
 
 
Net increase (decrease) in cash and due from banks
 
(466
)
 
1,116

 
 
Cash and due from banks at beginning of period
 
499

 
342

 
 
Cash and due from banks at end of period
 
$
33

 
$
1,458

 
Noncash
Capital stock reclassified to mandatorily redeemable capital stock
 
$
294

 
$
—

 
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 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, included in our Annual Report on Form 10-K (2015 Form 10-K) starting on page F-1, as filed with the 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.

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 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 activities of a variable interest entity that most significantly impact the entity’s economic performance.

•
We have the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

We did not consolidate any of our investments in variable interest entities since we are not the primary beneficiary. We classify variable interest entities as investment securities in our statements of condition. Such investment securities include, but are not limited to, senior interests in private-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.


8
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars 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 the Bank's right of setoff with its clearing agents and/or its counterparties is enforceable at law. 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) or otherwise, to discharge all or a portion of the debt owed to our counterparty by applying against the debt an amount that our counterparty owes to us. Additionally, we clear certain derivatives transactions with clearinghouses classified as a Derivatives Clearing Organization (DCO) through a Futures Commission Merchant (FCM). If these netted amounts are positive, they are classified as a derivative asset and if negative, they are classified as a derivative liability.  Any over-collateralization amount received by us is not offset against another derivative asset counterparty exposure for which there is no legal right of offset, while any over-collateralization delivered by us is not offset against another derivative liability counterparty exposure for which there is no legal right of offset. 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, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our 2015 Form 10-K. We adopted the following policies in 2016:

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

In April of 2015, the FASB issued new guidance requiring any concession fee to be presented as a direct deduction from the debt it relates to rather than separately presented as a deferred cost in Other Assets. We retrospectively adopted the new guidance January 1, 2016 by reclassifying deferred concession fees from Other Assets to its related debt, which includes our Consolidated obligations discount notes, Consolidated obligation bonds and Subordinated notes. This reclassification did not have a material effect on our financial condition, results of operations, cash flows, or percentage net interest yield on our consolidated obligations at the time of adoption.

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

In March of 2016, the FASB issued new guidance clarifying that a change in counterparty (novation) to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or be considered a change in the critical term of the hedging relationship. We early adopted this new guidance on a prospective basis effective January 1, 2016. The new guidance did not have a material effect on our financial condition, results of operations, or cash flows 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)

Note 3 – Recently Issued but Not Yet Adopted Accounting Standards

Contingent Put and Call Options in Debt Instruments

In March of 2016, the FASB issued new guidance clarifying the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Specifically, the FASB clarified that the determination as to whether an embedded call (put) option is clearly and closely related to its debt host contract, should be determined solely based on the four-step decision sequence outlined in existing GAAP. Entities no longer will be required to assess whether the event triggering the acceleration of the contingent call (put) option is related to interest rates or credit risk as opposed to some extraneous event or factor in order to determine whether an embedded contingent call (put) option is clearly and closely related to its debt host. We plan to adopt the new guidance on its effective date, which is January 1, 2017. The modified retrospective approach is required when adopting the new guidance. We do not expect the new guidance to have a material effect on our financial condition, results of operations, or cash flows at the time of adoption.

Leases

In February of 2016, the FASB issued new guidance pertaining to lease accounting. Outlined below are the key provisions relevant to us. These provisions provide guidance governing lessee accounting for operating leases. Currently, we record operating leases off-balance sheet rather than on-balance sheet in our statements of condition.

•
Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments, in our statement of condition.

•
Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.

•
Classify all cash payments within operating activities in our statement of cash flows.

•
For leases with a term of 12 months or less, we would be permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.

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. We are in the process of reviewing its expected effect on our financial condition, results of operations, and cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January of 2016, the FASB issued new guidance pertaining to the recognition and measurement of financial assets and financial liabilities. The key provisions applicable to us include, but are not limited to the following:

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

•
Requires recognizing the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk in other comprehensive income when we elect to carry that liability at fair value under the fair value option.

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

•
Eliminates the requirement to disclose the method(s) and assumptions used to estimate fair value of financial instruments measured at amortized cost on our statements of condition.

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.



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

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 for the new revenue recognition guidance until January 1, 2018. In March of 2016, the FASB issued additional guidance related to distinguishing when an entity is acting as a principal versus an agent in contracts with customers. The distinction is relevant to reporting revenue gross (as principal) or net (as agent). In April of 2016, the FASB issued additional guidance for identifying performance obligations and licensing agreements for purposes of revenue recognition. Financial instruments and other contractual rights within the scope of other GAAP guidance are excluded from the scope of this new revenue recognition guidance. We have completed our review of the new guidance, including the guidance issued in March and April of 2016 described above. We concluded that since the majority of contracts with our members are excluded from the scope of this new guidance, 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.


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 March 31,
 
2016
 
2015
Interest income -
 
 
 
 
 
 
 
Interest bearing deposits, Federal Funds sold and securities purchased under agreements to resell
$
5

 
$
3

 

 
 
Investment securities -

 
 
Trading
2

 
1

Available-for-sale
132

 
134

Held-to-maturity
59

 
69

Investment securities
193

 
204

 

 
 
Advances -
 
 
 
Advance interest income
62

 
39

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

 
6

Advances
63

 
45

 


 
 
MPF Loans held in portfolio
57

 
69

 


 
 
Interest income
318

 
321

 

 
 
Interest expense -

 
 
 

 
 
Consolidated obligations -

 
 
Discount notes
82

 
72

Bonds
102

 
105

Consolidated obligations
184

 
177

 

 
 
Subordinated notes
14

 
14

 
 
 
 
Interest expense
198

 
191

 

 
 
Net interest income
$
120

 
$
130


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

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-guaranteed MBS.
•
Private-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 parenthetically on our statements of condition. See Note 9 - Derivatives and Hedging Activities for further details.

Trading Securities

The following table presents the fair value of our trading securities. We did not hold a material amount of securities we issued through our MPF Government MBS product as of the dates presented. We had no material unrealized gains or losses on trading securities.

As of
 
March 31, 2016
 
December 31, 2015
U.S. Government & other government related
 
$
1,106

 
$
1,108

Residential MBS:
 
 
 
 
GSE
 
48

 
50

Government-guaranteed
 
2

 
2

Residential MBS
 
50

 
52

Trading securities
 
$
1,156

 
$
1,160



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 March 31, 2016
 
 
 
 
 
 
 
U.S. Government & other government related
$
380

 
$
24

 
$
(6
)
 
$
398

State or local housing agency
20

 
—

 
—

 
20

FFELP ABS
4,915

 
165

 
(27
)
 
5,053

 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
GSE
9,063

 
414

 
(15
)
 
9,462

Government-guaranteed
1,687

 
60

 
—

 
1,747

Private-label
59

 
3

 
—

 
62

Residential MBS
10,809

 
477

 
(15
)
 
11,271

Available-for-sale securities
$
16,124

 
$
666

 
$
(48
)
 
$
16,742

 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
U.S. Government & other government related
$
405

 
$
21

 
$
(4
)
 
$
422

State or local housing agency
18

 
—

 
—

 
18

FFELP ABS
5,090

 
233

 
(24
)
 
5,299

 
 
 
 
 
 
 

Residential MBS:
 
 
 
 
 
 

GSE
9,427

 
383

 
(12
)
 
9,798

Government-guaranteed
1,811

 
57

 
—

 
1,868

Private-label
61

 
4

 
—

 
65

Residential MBS
11,299


444


(12
)

11,731

Available-for-sale securities
$
16,812


$
698


$
(40
)

$
17,470


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


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 March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
1,307

 
$
—

 
$
1,307

 
$
80

 
$
—

 
$
1,387

State or local housing agency
15

 
—

 
15

 
—

 
—

 
15

 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE
2,093

 
—

 
2,093

 
151

 
—

 
2,244

Government-guaranteed
928

 
—

 
928

 
19

 
—

 
947

Private-label
1,052

 
(206
)
 
846

 
303

 
(1
)
 
1,148

Residential MBS
4,073

 
(206
)
 
3,867

 
473

 
(1
)
 
4,339

Held-to-maturity securities
$
5,395

 
$
(206
)
 
$
5,189

 
$
553

 
$
(1
)
 
$
5,741

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
1,932

 
$
—

 
$
1,932

 
$
64

 
$
(1
)
 
$
1,995

State or local housing agency
16

 
—

 
16

 
—

 
—

 
16

 
 
 
 
 

 
 
 
 
 

Residential MBS:
 
 
 
 

 
 
 
 
 

GSE
2,163

 
—

 
2,163

 
134

 
—

 
2,297

Government-guaranteed
969

 
—

 
969

 
16

 
—

 
985

Private-label
1,104

 
(217
)
 
887

 
334

 
(1
)
 
1,220

Residential MBS
4,236


(217
)

4,019


484


(1
)

4,502

Held-to-maturity securities
$
6,184


$
(217
)

$
5,967


$
548


$
(2
)

$
6,513


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


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 March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
32

 
$
(2
)
 
$
47

 
$
(4
)
 
$
79

 
$
(6
)
FFELP ABS
60

 
(1
)
 
762

 
(26
)
 
822

 
(27
)
 
 
 
 
 

 
 
 
 
 
 
Residential MBS:
 
 
 
 

 
 
 
 
 
 
GSE
1,544

 
(5
)
 
1,014

 
(10
)
 
2,558

 
(15
)
Government-guaranteed
25

 
—

 
—

 
—

 
25

 
—

Private-label
—

 
—

 
21

 
—

 
21

 
—

Residential MBS
1,569

 
(5
)
 
1,035

 
(10
)
 
2,604

 
(15
)
Available-for-sale securities
$
1,661

 
$
(8
)
 
$
1,844

 
$
(40
)
 
$
3,505

 
$
(48
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
30

 
$
(1
)
 
$
45

 
$
(3
)
 
$
75


$
(4
)
State or local housing agency
4

 
—

 
—

 
—

 
4


—

FFELP ABS
64

 
(1
)
 
787

 
(23
)
 
851


(24
)
 
 
 
 
 
 
 
 
 



Residential MBS:
 
 
 
 
 
 
 
 



GSE
1,081

 
(3
)
 
1,006

 
(9
)
 
2,087


(12
)
Government-guaranteed
90

 
—

 
—

 
—

 
90


—

Private-label
—

 
—

 
8

 
—

 
8


—

Residential MBS
1,171


(3
)

1,014


(9
)

2,185


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


$
(5
)

$
1,846


$
(35
)

$
3,115


$
(40
)


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 March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
—

 
$
—

 
$
16

 
$
—

 
$
16

 
$
—

State or local housing agency
1

 
—

 
9

 
—

 
10

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE
4

 
—

 
—

 
—

 
4

 
—

Government-guaranteed
141

 
—

 
—

 
—

 
141

 
—

Private-label
6

 
—

 
1,098

 
(207
)
 
1,104

 
(207
)
Residential MBS
151

 
—

 
1,098

 
(207
)
 
1,249

 
(207
)
Held-to-maturity securities
$
152

 
$
—

 
$
1,123

 
$
(207
)
 
$
1,275

 
$
(207
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
606

 
$
—

 
$
16

 
$
(1
)
 
$
622


$
(1
)
State or local housing agency
1

 
—

 
10

 
—

 
11


—

 
 
 
 
 
 
 
 
 





Residential MBS:
 
 
 
 
 
 
 
 





GSE
4

 
—

 
—

 
—

 
4


—

Private-label
—

 
—

 
1,167

 
(218
)
 
1,167


(218
)
Residential MBS
4


—


1,167


(218
)

1,171


(218
)
Held-to-maturity securities
$
611


$
—


$
1,193


$
(219
)

$
1,804


$
(219
)


Contractual Maturity Terms

The following table 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 March 31, 2016
 
Amortized Cost Basis
 
Carrying Amount and Fair Value
 
Carrying Amount
 
Fair Value
Year of Maturity -
 
 
 
 
 
 
 
 
Due in one year or less
 
$
—

 
$
—

 
$
123

 
$
124

Due after one year through five years
 
65

 
68

 
314

 
329

Due after five years through ten years
 
28

 
29

 
76

 
78

Due after ten years
 
307

 
321

 
809

 
871

ABS and MBS without a single maturity date
 
15,724

 
16,324

 
3,867

 
4,339

Total securities
 
$
16,124

 
$
16,742

 
$
5,189

 
$
5,741


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

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 generate cash flow projections utilizing key modeling assumptions, significant inputs, and methodologies provided by an FHLB System OTTI Committee, which was formed by the FHLBs to achieve consistency among the FHLBs in their OTTI analyses for private-label MBS. We then utilize these cash flow projections to determine OTTI on our private-label MBS; however, we are still responsible for making our own OTTI determination, which includes determining the reasonableness of assumptions, significant inputs, and methodologies used, and performing the required present value calculations using appropriate historical cost bases and yields. 

Cash Flow Analysis

We perform a cash flow analysis for substantially all of these private-label securities utilizing two models provided by independent third parties as described below,

•
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.

At March 31, 2016, we had a short-term housing price forecast with projected changes ranging from -1.0% to +8.0% over the twelve month period beginning January 1, 2016 over all markets. For the vast majority of markets, the short-term forecast has changes ranging from +3.0% to +5.0%. 

Based on these inputs and assumptions, we had no OTTI for the periods presented.

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 March 31,
 
 
2016
 
2015
Beginning Balance
 
$
568

 
$
620

Reductions:
 

 
 
Increases in expected future cash flows recorded as accretion into interest income
 
(13
)
 
(15
)
Ending Balance
 
$
555

 
$
605


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 April 30, 2016, the remaining litigation covers four private-label MBS bonds in the aggregate original principal amount of $77.5 million.

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 redemption terms. Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay advances with or without penalties.

As of March 31, 2016
 
Weighted Average Interest Rate
 
Amount  
Due in one year or less
 
0.74
%
 
$
9,603

One to two years
 
0.84
%
 
7,851

Two to three years
 
0.70
%
a 
5,515

Three to four years
 
0.59
%
a 
7,037

Four to five years
 
0.77
%
a 
4,119

More than five years
 
1.71
%
 
3,935

Par value
 
0.83
%
 
$
38,060

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


See Note 8 - Allowance for Credit Losses for information related to our credit risk on advances and allowance methodology for credit losses.

The following table reconciles the par value of our advances to the carrying amount on our statements of condition as of the dates indicated.

As of
 
March 31, 2016
 
December 31, 2015
Par value
 
$
38,060

 
$
36,605

Hedging adjustments
 
268

 
159

Other adjustments
 
25

 
14

Advances
 
$
38,353

 
$
36,778



The following advance borrowers exceeded 10% of our total advances outstanding:

As of March 31, 2016
 
Par Value
 
% of Total Outstanding
One Mortgage Partners Corp
 
$
11,000

a 
29
%
The Northern Trust Company
 
4,000

 
11
%
a 
One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA.


19
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Note 7 – MPF Loans Held in Portfolio

We acquire MPF Loans from PFIs to hold in our portfolio, and in some cases we purchased participations in pools of eligible mortgage loans from other FHLBs (MPF Banks). MPF Loans are defined as fixed-rate conventional and government mortgage loans secured by one-to-four family residential properties with maturities ranging from 5 years to 30 years or participations in pools of 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
 
March 31, 2016
 
December 31, 2015
Medium term (15 years or less)
 
$
580

 
$
662

Long term (greater than 15 years)
 
4,046

 
4,112

Unpaid principal balance
 
4,626

 
4,774

Net premiums, credit enhancement and deferred loan fees
 
21

 
20

Hedging adjustments
 
34

 
37

MPF Loans held in portfolio, before allowance for credit losses
 
4,681

 
4,831

Allowance for credit losses on MPF Loans
 
(2
)
 
(3
)
MPF Loans held in portfolio, net
 
$
4,679

 
$
4,828

 
 
 
 
 
Conventional mortgage loans
 
$
3,453

 
$
3,568

Government Loans
 
1,173

 
1,206

Unpaid principal balance
 
$
4,626

 
$
4,774



See the MPF Risk Sharing Structure on page F-14 in our 2015 Form 10-K 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.


20
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)

Note 8 – Allowance for Credit Losses

See Note 2 - Summary of Significant Accounting Policies to the financial statements in our 2015 Form 10-K for further details pertaining to the methodologies and factors we consider when determining the amount to recognize as an allowance for credit losses, if any, for each portfolio segment identified below.

We have 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 liability to reflect an allowance for credit losses for our member credit products with off-balance sheet credit exposures.

Conventional MPF Loans Held in Portfolio

For further detail of our MPF Risk Sharing Structure see page F-14 in our 2015 Form 10-K.

The following table presents the changes in the allowance for credit losses attributable to our portfolio segment for conventional MPF Loans held in portfolio.

 
 
Three months ended March 31,
 
 
2016
 
2015
Balance, beginning of period
 
$
3

 
$
15

Losses charged to the allowance
 
(1
)
 
(11
)
Balance, end of period
 
$
2

 
$
4



The following table presents the recorded investment 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
 
March 31, 2016
 
December 31, 2015
Allowance for credit losses on conventional MPF Loans -
 
 
 
 
Homogeneous pools of loans collectively evaluated for impairment
 
$
2

 
$
3

 
 
 
 
 
Recorded investment in conventional MPF Loans -
 
 
 
 
Individually evaluated for impairment
 
$
96

 
$
107

Collectively evaluated for impairment
 
3,415

 
3,519

Recorded investment
 
$
3,511

 
$
3,626



Government Loans Held in Portfolio

Any losses incurred on Government Loans that are not recovered from the government insurer or guarantor are absorbed by the servicing PFI. We did not establish an allowance for credit losses of our portfolio segment for Government Loans included in our MPF Loan held in portfolio for the reporting periods presented based on our assessment of our servicing PFIs' ability to absorb such losses. Further, Government Loans were not placed on nonaccrual status or disclosed as troubled debt restructurings for the same reason.

21
Federal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(Dollars in millions except per share amounts unless otherwise indicated)


Credit Quality Indicators - MPF Loans

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.
•
"Past due 90 days or more still accruing interest" consists of MPF Loans that are either government guaranteed or conventional mortgage loans that are well secured (by collateral that have a realizable value sufficient to discharge the debt or by the guarantee or insurance, such as PMI, of a financially responsible party) and in the process of collection.

 
 
March 31, 2016
 
December 31, 2015
 
As of
 
Conventional
 
Government
 
Total
 
Conventional
 
Government
 
Total
 
Past due 30-59 days
 
$
92

 
$
52

 
$
144

 
$
99

 
$
63

 
$
162

 
Past due 60-89 days
 
28

 
16

 
44

 
32

 
21

 
53

 
Past due 90 days or more
 
91

 
16

 
107

 
100

 
15

 
115

 
Past due
 
211

 
84

 
295

 
231


99

 
330

 
Current
 
3,300

 
1,111

 
4,411

 
3,395

 
1,130

 
4,525

 
Recorded investment
 
$
3,511

 
$
1,195

 
$
4,706

 
$
3,626


$
1,229

 
$
4,855

 
Also in process of foreclosure
 
$
49

 
$
3

 
$
52

 
$
51

 
$
3

 
$
54

 
Serious delinquency rate
 
2.59
%
 
1.36
%
 
2.28
%