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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, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | |
| 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, 2017, including mandatorily redeemable capital stock, registrant had 18,648,304 total outstanding shares of Class B Capital Stock.
TABLE OF CONTENTS
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 deposits | 750 |
| | 650 |
|
Federal Funds sold | 9,849 |
| | 4,075 |
|
Securities purchased under agreements to resell | 3,750 |
| | 2,300 |
|
Investment securities - | | | |
Trading, | 71 | and | 97 | pledged | 236 |
| | 1,045 |
|
Available-for-sale | 13,532 |
| | 14,918 |
|
Held-to-maturity, | 4,184 | and | 5,516 | fair value | 3,768 |
| | 5,072 |
|
Investment securities | 17,536 |
| | 21,035 |
|
Advances, | 785 | | and | 672 | | carried at fair value | 50,153 |
| | 45,067 |
|
MPF Loans held in portfolio, net of, | (2) | and | (3) | allowance for credit losses | 5,024 |
| | 4,967 |
|
Derivative assets | 3 |
| | 6 |
|
Other assets, | 171 | and | 44 | carried at fair value | 391 |
| | 241 |
|
Assets | $ | 87,488 |
| | $ | 78,692 |
|
| | | |
Liabilities | | | |
Deposits - | | | |
Noninterest bearing | $ | 52 |
| | $ | 53 |
|
Interest bearing, | 15 | and | 16 | from other FHLBs | 548 |
| | 443 |
|
Deposits | 600 |
| | 496 |
|
Consolidated obligations, net - | | | |
Discount notes, | 872 | and | 6,368 | carried at fair value | 45,460 |
| | 35,949 |
|
Bonds, | 5,206 | and | 5,443 | carried at fair value | 35,890 |
| | 36,903 |
|
Consolidated obligations, net | 81,350 |
| | 72,852 |
|
Derivative liabilities | 28 |
| | 43 |
|
Affordable Housing Program assessment payable | 87 |
| | 86 |
|
Mandatorily redeemable capital stock | 308 |
| | 301 |
|
Other liabilities | 243 |
| | 219 |
|
Liabilities | 82,616 |
| | 73,997 |
|
Commitments and contingencies - see notes to the financial statements |
|
| |
|
|
Capital | | | |
Class B1 activity stock, | 14 | and | 12 | million shares issued and outstanding | 1,351 |
| | 1,160 |
|
Class B2 membership stock, | 2 | and | 6 | million shares issued and outstanding | 206 |
| | 551 |
|
Capital stock - putable, | $100 | and | $100 | par value | 1,557 |
| | 1,711 |
|
Retained earnings - unrestricted | 2,784 |
| | 2,631 |
|
Retained earnings - restricted | 435 |
| | 389 |
|
Retained earnings | 3,219 |
| | 3,020 |
|
Accumulated other comprehensive income (loss) (AOCI) | 96 |
| | (36 | ) |
Capital | 4,872 |
| | 4,695 |
|
Liabilities and capital | $ | 87,488 |
| | $ | 78,692 |
|
The accompanying notes are an integral part of these financial statements (unaudited).
Statements of Income (unaudited)
(Dollars in millions)
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Interest income | | $ | 411 |
| | $ | 309 |
| | $ | 1,121 |
| | $ | 944 |
|
Interest expense | | 288 |
| | 196 |
| | 768 |
| | 600 |
|
Net interest income | | 123 |
| | 113 |
| | 353 |
| | 344 |
|
Provision for (reversal of) credit losses | | (1 | ) | | — |
| | — |
| | — |
|
Net interest income after provision for (reversal of) credit losses | | 124 |
| | 113 |
| | 353 |
| | 344 |
|
| | | | | | | | |
Noninterest income - | | | | | | | | |
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 |
|
| | | | | | | | |
Noninterest expense - | | | | | | | | |
Compensation and benefits | | 26 |
| | 26 |
| | 77 |
| | 71 |
|
Operating expenses | | 15 |
| | 15 |
| | 45 |
| | 44 |
|
Other | | 2 |
| | 1 |
| | 7 |
| | 13 |
|
Noninterest expense | | 43 |
| | 42 |
| | 129 |
| | 128 |
|
| | | | | | | | |
Income before assessments | | 86 |
| | 85 |
| | 255 |
| | 277 |
|
| | | | | | | | |
Affordable Housing Program | | 9 |
| | 9 |
| | 26 |
| | 28 |
|
| | | | | | | | |
Net income | | $ | 77 |
| | $ | 76 |
| | $ | 229 |
| | $ | 249 |
|
The accompanying notes are an integral part of these financial statements (unaudited).
Statements of Comprehensive Income (unaudited)
(Dollars in millions)
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 77 |
| | $ | 76 |
| | $ | 229 |
| | $ | 249 |
|
| |
| | | | | | |
Other comprehensive income (loss) - | |
| | | | | | |
Net unrealized gain (loss) available-for-sale securities | | (24 | ) | | (13 | ) | | (5 | ) | | (113 | ) |
Noncredit OTTI held-to-maturity securities | | 8 |
| | 9 |
| | 25 |
| | 30 |
|
Net unrealized gain (loss) cash flow hedges | | 42 |
| | 83 |
| | 111 |
| | 38 |
|
Postretirement plans | | 3 |
| | — |
| | 1 |
| | 1 |
|
Other comprehensive income (loss) | | 29 |
| | 79 |
| | 132 |
| | (44 | ) |
| |
| | | |
| | |
Comprehensive income | | $ | 106 |
| | $ | 155 |
| | $ | 361 |
| | $ | 205 |
|
The accompanying notes are an integral part of these financial statements (unaudited).
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, 2016 | 12 |
| | $ | 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 stock | 21 |
| | 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 period | 2 |
| | 191 |
| | (4 | ) | | (345 | ) | | (2 | ) | | (154 | ) | | 153 |
| | 46 |
| | 199 |
| | 132 |
| | 177 |
|
September 30, 2017 | 14 |
| | $ | 1,351 |
| | 2 |
| | $ | 206 |
| | 16 |
| | $ | 1,557 |
| | $ | 2,784 |
| | $ | 435 |
| | $ | 3,219 |
| | $ | 96 |
| | $ | 4,872 |
|
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | 13 |
| | $ | 1,313 |
| | 6 |
| | $ | 637 |
| | 19 |
| | $ | 1,950 |
| | $ | 2,407 |
| | $ | 323 |
| | $ | 2,730 |
| | $ | (28 | ) | | $ | 4,652 |
|
Comprehensive income | | | | | | | | | | | | | 198 |
| | 51 |
| | 249 |
| | (44 | ) | | 205 |
|
Proceeds from issuance of capital stock | 10 |
| | 952 |
| | — |
| | 12 |
| | 10 |
| | 964 |
| | | | | | | | | | 964 |
|
Repurchases of capital stock | (6 | ) | | (586 | ) | | (3 | ) | | (392 | ) | | (9 | ) | | (978 | ) | | | | | | | | | | (978 | ) |
Capital stock reclassified to mandatorily redeemable capital stock (liabilities) | (3 | ) | | (295 | ) | | — |
| | (5 | ) | | (3 | ) | | (300 | ) | | | | | | | | | | (300 | ) |
Transfers between classes of capital stock | (3 | ) | | (321 | ) | | 3 |
| | 321 |
| | | | | | | | | | | | | |
|
|
Cash dividends - class B1 | | | | | | | | | | | | | (25 | ) | | | | (25 | ) | | | | (25 | ) |
Class B1 annualized rate | | | | | | | | | | | | | | | | | | | | | 2.73 | % |
Cash dividends - class B2 | | | | | | | | | | | | | (3 | ) | | | | (3 | ) | | | | (3 | ) |
Class B2 annualized rate | | | | | | | | | | | | | | | | | | | | | 0.60 | % |
Total change in period | (2 | ) | | (250 | ) | | — |
| | (64 | ) | | (2 | ) | | (314 | ) | | 170 |
| | 51 |
| | 221 |
| | (44 | ) | | (137 | ) |
September 30, 2016 | 11 |
|
| $ | 1,063 |
|
| 6 |
|
| $ | 573 |
|
| 17 |
|
| $ | 1,636 |
|
| $ | 2,577 |
|
| $ | 374 |
|
| $ | 2,951 |
|
| $ | (72 | ) |
| $ | 4,515 |
|
The accompanying notes are an integral part of these financial statements (unaudited).
Condensed Statements of Cash Flows (unaudited)
(Dollars in millions)
|
| | | | | | | | | | |
| Nine months ended September 30, | | 2017 | | 2016 | |
Operating | Net cash provided by (used in) operating activities | | $ | 337 |
| | $ | 184 |
| |
Investing | Net change interest bearing deposits | | (100 | ) | | — |
| |
| Net change Federal Funds sold | | (5,774 | ) | | (2,105 | ) | |
| Net change securities purchased under agreements to resell | | (1,450 | ) | | 375 |
| |
| Trading securities - | | | | | |
| Sales | | 801 |
| | 2,158 |
| |
| Proceeds from maturities and paydowns | | 205 |
| | 108 |
| |
| Purchases | | (200 | ) | | (2,156 | ) | |
| Available-for-sale securities - | | | | | |
| Proceeds from maturities and paydowns | | 1,307 |
| | 1,777 |
| |
| Purchases | | (5 | ) | | (2 | ) | |
| Held-to-maturity securities - | | | | | |
| Short-term held-to-maturity securities, net | | 570 |
| a | 543 |
| a |
| Proceeds from maturities and paydowns | | 816 |
| | 740 |
| |
| Purchases | | (27 | ) | | (30 | ) | |
| Advances - | | | | | |
| Principal collected | | 543,511 |
| | 548,381 |
| |
| Issued | | (548,590 | ) | | (554,570 | ) | |
| MPF Loans held in portfolio - | | | | | |
| Principal collected | | 761 |
| | 867 |
| |
| Purchases | | (821 | ) | | (759 | ) | |
| Other investing activities | | 20 |
| | 27 |
| |
| Net cash provided by (used in) investing activities | | (8,976 | ) | | (4,646 | ) | |
Financing | Net change deposits | | 104 |
| | (26 | ) | |
| Discount notes - | | | | | |
| Net proceeds from issuance | | 1,080,879 |
| | 438,057 |
| |
| Payments for maturing and retiring | | (1,071,386 | ) | | (440,500 | ) | |
| Consolidated obligation bonds - | | | | | |
| Net proceeds from issuance | | 13,947 |
| | 24,439 |
| |
| Payments for maturing and retiring | | (15,024 | ) | | (16,943 | ) | |
| Payments for retirement of subordinated notes | | — |
| | (944 | ) | |
| Capital stock - | | | | | |
| Proceeds from issuance | | 2,172 |
| | 964 |
| |
| Repurchases | | (2,320 | ) | | (978 | ) | |
| Cash dividends paid | | (30 | ) | | (28 | ) | |
| Other financing activities | | (22 | ) | | (47 | ) | |
| Net cash provided by (used in) financing activities | | 8,320 |
| | 3,994 |
| |
| Net increase (decrease) in cash and due from banks | | (319 | ) | | (468 | ) | |
| Cash and due from banks at beginning of period | | 351 |
| | 499 |
| |
| Cash and due from banks at end of period | | $ | 32 |
| | $ | 31 |
| |
The accompanying notes are an integral part of these financial statements (unaudited).
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, 2016, included in our Annual Report on Form 10-K (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.
See the Glossary of Terms starting on page 63 for the definitions of certain terms used herein.
Use of Estimates and Assumptions
We are required to make estimates and assumptions when preparing our financial statements in accordance with GAAP. The most significant of these estimates and assumptions applies to fair value measurements and allowance for credit losses. Our actual results may differ from the results reported in our financial statements due to such estimates and 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.
Basis of Presentation
The basis of presentation pertaining to the consolidation of our variable interest entities has not significantly changed since we filed 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 DCO. 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 and our gross versus net presentation of financial instruments for further details.
Notes to Financial Statements - (Unaudited)
(Dollars in tables 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, 2016, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our 2016 Form 10-K. We adopted the following policies year to date in 2017:
Accounting for Variation Margin Payments
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 cleared derivative assets and derivative liabilities. See Note 1 - Background and Basis for Presentation for further details. This change in accounting did not have any effect on the accounting of our existing 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 hedge accounting provided no additional changes are made by the DCOs that would preclude the use of 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.
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 the "host contract" for purposes of this assessment. Specifically, we are no longer required to consider the event triggering the acceleration of an embedded contingent call (put) option when assessing whether it is clearly and closely related to the debt instrument or host contract. We adopted the new guidance effective January 1, 2017. The new guidance did not have any effect on our financial condition, results of operations, or cash flows at the time of adoption.
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
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
In 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 and will be applied retrospectively for each period our statements of cash flows are presented at the time of adoption. The new guidance is not expected to have any effect on our financial condition, results of operations, and cash flows since our existing practice is consistent with the provisions that are applicable to us. The provisions applicable to us are outlined below.
| |
• | We classify cash payments related to prepaying or extinguishing our consolidated obligations as financing activities in our statements of cash 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. |
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
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 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 in which an other-than-temporary-impairment (OTTI) impairment had been recognized before our effective date. The 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. |
| |
• | Improvements in expected cash flows subsequent to adoption for such securities will continue to be accounted for as yield adjustments over their remaining life. |
| |
• | 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.
Leases
In February of 2016, the FASB issued new guidance pertaining to lease accounting. The new guidance requires us to recognize 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. 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, 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.
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 are as follows:
| |
• | The ability to elect the fair value option will continue to be permitted. |
| |
• | The portion of instrument-specific credit risk attributable to the total change in fair value of our consolidated obligations that are carried at fair value under the fair value 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. |
| |
• | The 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. |
Revenue from Contracts with Customers
In May of 2014, the FASB issued new guidance governing revenue recognition from contracts with customers. Subsequently the FASB issued several other related pronouncements that provide additional revenue recognition guidance and clarifications to the original guidance issued in 2014. The new guidance becomes effective January 1, 2018. We do not expect the new revenue recognition guidance will have any effect on our financial condition, results of operations, or cash flows at the time of adoption. This is because the majority of our financial instruments and other contractual rights that generate revenue are covered by other GAAP, and therefore, are scoped out of this new guidance. Further, we believe that our current method of recognition of our service fee revenue, which is insignificant, is already consistent with this new guidance. In the event of an adjustment, if any, we would apply the modified retrospective method.
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 income | 106 |
| | 109 |
| | 321 |
| | 334 |
|
Available-for-sale prepayment fees | 9 |
| | 7 |
| | 20 |
| | 33 |
|
Available-for-sale | 115 |
| | 116 |
| | 341 |
| | 367 |
|
Held-to-maturity | 47 |
| | 56 |
| | 148 |
| | 171 |
|
Investment securities | 163 |
| | 174 |
| | 492 |
| | 545 |
|
|
| | | | | | |
Advances | 157 |
| | 74 |
| | 386 |
| | 211 |
|
MPF Loans held in portfolio | 53 |
| | 53 |
| | 160 |
| | 165 |
|
Federal funds sold and securities purchased under agreements to resell | 34 |
| | 7 |
| | 74 |
| | 16 |
|
Other | 4 |
| | 1 |
| | 9 |
| | 7 |
|
| | | | | | | |
Interest income | 411 |
| | 309 |
| | 1,121 |
| | 944 |
|
|
| | | | | | |
Interest expense - |
| | | | | | |
| | | | | | | |
Consolidated obligations - |
| | | | | | |
Discount notes | 148 |
| | 95 |
| | 363 |
| | 272 |
|
Bonds | 136 |
| | 99 |
| | 394 |
| | 299 |
|
|
| | | | | | |
Subordinated notes | — |
| | — |
| | — |
| | 24 |
|
Other | 4 |
| | 2 |
| | 11 |
| | 5 |
|
| | | | | | | |
Interest expense | 288 |
| | 196 |
| | 768 |
| | 600 |
|
|
| | | | | | |
Net interest income | 123 |
| | 113 |
| | 353 |
| | 344 |
|
Provision for (reversal of) credit losses | (1 | ) | | — |
| | — |
| | — |
|
Net interest income after provision for (reversal of) credit losses | $ | 124 |
| | $ | 113 |
| | $ | 353 |
| | $ | 344 |
|
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 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 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. Our unrealized gains or losses on trading 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 |
|
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 agency | 20 |
| | — |
| | — |
| | 20 |
|
FFELP ABS | 4,087 |
| | 235 |
| | (7 | ) | | 4,315 |
|
Residential MBS: | | | | | | | |
GSE | 7,615 |
| | 178 |
| | (3 | ) | | 7,790 |
|
Government guaranteed | 1,048 |
| | 28 |
| | — |
| | 1,076 |
|
Private label | 42 |
| | 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 agency | 19 |
| | — |
| | — |
| | 19 |
|
FFELP ABS | 4,431 |
| | 165 |
| | (24 | ) | | 4,572 |
|
Residential MBS: | | | | | | |
|
GSE | 8,291 |
| | 266 |
| | (2 | ) | | 8,555 |
|
Government guaranteed | 1,346 |
| | 34 |
| | — |
| | 1,380 |
|
Private label | 50 |
| | 6 |
| | — |
| | 56 |
|
Available-for-sale securities | $ | 14,459 |
|
| $ | 486 |
|
| $ | (27 | ) |
| $ | 14,918 |
|
We had no sales of AFS securities for the periods presented.
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 agency | 10 |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
Residential MBS: | | | | | | | | | | | |
GSE | 1,590 |
| | — |
| | 1,590 |
| | 79 |
| | — |
| | 1,669 |
|
Government guaranteed | 633 |
| | — |
| | 633 |
| | 8 |
| | — |
| | 641 |
|
Private label | 711 |
| | (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 agency | 13 |
| | — |
| | 13 |
| | — |
| | — |
| | 13 |
|
Residential MBS: | | | | |
| | | | | |
|
GSE | 1,856 |
| | — |
| | 1,856 |
| | 100 |
| | — |
| | 1,956 |
|
Government guaranteed | 791 |
| | — |
| | 791 |
| | 10 |
| | — |
| | 801 |
|
Private label | 856 |
| | (177 | ) | | 679 |
| | 294 |
| | (1 | ) | | 972 |
|
Held-to-maturity securities | $ | 5,249 |
|
| $ | (177 | ) |
| $ | 5,072 |
|
| $ | 446 |
|
| $ | (2 | ) |
| $ | 5,516 |
|
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.
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Aging of Unrealized Temporary Losses
The following table 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. Refer to the 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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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: | | | | |
| | | | | | |
GSE | 89 |
| | — |
| | 809 |
| | (3 | ) | | 898 |
| | (3 | ) |
Government guaranteed | 1 |
| | — |
| | — |
| | — |
| | 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 agency | 7 |
| | — |
| | — |
| | — |
| | 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 guaranteed | 117 |
| | — |
| | — |
| | — |
| | 117 |
| | — |
|
Private label | — |
| | — |
| | 934 |
| | (178 | ) | | 934 |
|
| (178 | ) |
Held-to-maturity securities | $ | 143 |
|
| $ | — |
|
| $ | 956 |
|
| $ | (179 | ) |
| $ | 1,099 |
|
| $ | (179 | ) |
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Other-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.
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%.
The following table presents the changes in the cumulative amount of previously recorded OTTI credit losses on investment securities recognized into earnings for the reporting periods indicated.
|
| | | | | | | | | | | | | | | | |
| | 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.
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 | % | |
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.
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 |
|
The following advance borrowers exceeded 10% of our advances outstanding:
|
| | | | | | | |
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 | % |
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 historically 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 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, 2017 | | December 31, 2016 |
Medium term (15 years or less) | | $ | 292 |
| | $ | 417 |
|
Long term (greater than 15 years) | | 4,662 |
| | 4,489 |
|
Unpaid principal balance | | 4,954 |
| | 4,906 |
|
Net premiums, credit enhancement and deferred loan fees | | 49 |
| | 38 |
|
Fair value hedging adjustments | | 23 |
| | 26 |
|
MPF Loans held in portfolio, before allowance for credit losses | | 5,026 |
| | 4,970 |
|
Allowance for credit losses on MPF Loans | | (2 | ) | | (3 | ) |
MPF Loans held in portfolio, net | | $ | 5,024 |
| | $ | 4,967 |
|
| | | | |
Conventional mortgage loans | | $ | 3,946 |
| | $ | 3,818 |
|
Government Loans | | 1,008 |
| | 1,088 |
|
Unpaid principal balance | | $ | 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 Losses to the financial statements for information related to our credit losses on MPF Loans held in portfolio.
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 2016 Form 10-K for further details regarding our allowance for credit losses methodology for each of the portfolio segments 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-15 in our 2016 Form 10-K. There has been no material activity in our allowance for credit losses since December 31, 2016. The following table presents the recorded investment and the allowance for credit losses in conventional MPF Loans by impairment methodology.
|
| | | | | | | | |
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 |
|
Government Loans Held in Portfolio
Servicers 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 servicers 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.
Notes to Financial Statements - (Unaudited)
(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, 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 |
| |
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 |
|
We do not recognize interest income on impaired loans.
Term Federal Funds Sold and Term Securities Purchased Under Agreements to Resell
We only held overnight Federal Funds sold and Securities Purchased Under Agreements to Resell as of September 30, 2017, and December 31, 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 agreements to resell since all payments due under the contractual terms have been received and we hold sufficient underlying collateral.
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 9 – Derivatives and Hedging Activities
See Note 2 - Summary of Significant Accounting Policies in our 2016 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. 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 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. See Note 13 - Fair Value to the financial statements in this Form 10-Q and Note 16 - Fair Value in our 2016 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.
For 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. 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 would not have been material at September 30, 2017.
Cleared Derivative 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 our initial margin collateral payments and make variation margin settlement payments through our FCMs, on behalf of the DCO, which could expose us to institutional credit risk in the event that the 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 variation margin settlement payments are made daily through the FCMs for changes in the value of cleared derivatives. The DCO determines initial margin requirements for cleared derivatives. In this regard, we pledged $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, 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.
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The following table presents details on the notional amounts, and derivative assets and liabilities on our 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 |
| |
| |
a | $313 million and $689 million at September 30, 2017, and December 31, 2016, and cash collateral received was $35 million and $40 million. |
The following table presents the noninterest income on derivatives and hedging activities as presented in the statements of income. The amounts attributable to fair value and cash flow hedges represent hedge ineffectiveness.
|
| | | | | | | | | | | | | | | | |
| | 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 | ) |
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
The following table presents details regarding the offsetting of our derivative assets and liabilities on our 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| |
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.
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 | ) |
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 $(2) million as of September 30, 2017. The maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is 3 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 | ) |
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 |
|
The following table presents consolidated obligation bonds outstanding by call feature:
|
| | | | | | | | |
As of | | September 30, 2017 | | December 31, 2016 |
Noncallable | | $ | 22,327 |
| | $ | 22,356 |
|
Callable | | 13,732 |
| | 14,778 |
|
Par value | | 36,059 |
| | 37,134 |
|
Fair value hedging adjustments | | (165 | ) | | (229 | ) |
Other adjustments | | (4 | ) | | (2 | ) |
Consolidated obligation bonds | | $ | 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, 2017, and December 31, 2016. See Note 17 - Commitments and Contingencies to the financial statements in our 2016 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 | % |
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 11 – Capital and Mandatorily Redeemable Capital Stock (MRCS)
Under our Capital Plan our stock consists of two sub-classes of stock, Class B1 activity stock and Class B2 membership stock (together, Class B stock), both with a par value of $100 and redeemable on five years' written notice, subject to certain conditions. Under the Capital Plan, each member is required to own capital stock in an amount equal to the greater of a membership stock requirement or an activity stock requirement. Class B1 activity stock is available to support a member's activity stock requirement. Class B2 membership stock is available to support a member's membership stock requirement and any activity stock requirement.
Minimum Capital Requirements
For details on our minimum capital requirements, including how the ratios below were calculated, see Minimum Capital Requirements on page F-43 of our 2016 Form 10-K. We complied with our minimum regulatory capital requirements as shown below.
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Requirement | | Actual | | Requirement | | Actual |
Risk-based capital | | $ | 1,055 |
| | $ | 5,084 |
| | $ | 1,088 |
| | $ | 5,032 |
|
Total regulatory capital | | $ | 3,500 |
| | $ | 5,084 |
| | $ | 3,148 |
| | $ | 5,032 |
|
Total regulatory capital ratio | | 4.00 | % | | 5.81 | % | | 4.00 | % | | 6.40 | % |
Leverage capital | | $ | 4,374 |
| | $ | 7,626 |
| | $ | 3,935 |
| | $ | 7,549 |
|
Leverage capital ratio | | 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 exceeded 10% of our regulatory capital stock outstanding (which includes MRCS):
|
| | | | | | | | | | | |
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. |
Repurchase of Excess Capital Stock
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, but remain subject to our regulatory requirements, certain financial and capital 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 page 57 of our 2016 Form 10-K.
As of September 30, 2017, our regulatory capital stock outstanding was $1.9 billion, a net decrease of $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 3.30% dividend (annualized) for Class B1 activity stock and a 1.25% dividend (annualized) for Class B2 membership stock 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.
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Note 12 - Accumulated Other Comprehensive Income (Loss)
The following table summarizes the 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 | ) |
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. See Note 2 - Summary of Significant Accounting Policies to the financial statements in our 2016 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 2016 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 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 deposits | 750 |
| | 750 |
| | 750 |
| | — |
| | — |
| |
Federal Funds sold | 9,849 |
| | 9,849 |
| | — |
| | 9,849 |
| | — |
| |
Securities purchased under agreements to resell | 3,750 |
| | 3,750 |
| | — |
| | 3,750 |
| | — |
| |
Held-to-maturity securities | 3,768 |
| | 4,184 |
| | — |
| | 3,328 |
| | 856 |
| |
Advances | 50,153 |
| | 50,181 |
| | — |
| | 50,181 |
| | — |
| |
MPF Loans held in portfolio, net | 5,024 |
| | 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 deposits | 650 |
| | 650 |
| | 650 |
| | — |
| | — |
| |
Federal Funds sold | 4,075 |
| | 4,075 |
| | — |
| | 4,075 |
| | — |
| |
Securities purchased under agreements to resell | 2,300 |
| | 2,300 |
| | — |
| | 2,300 |
| | — |
| |
Held-to-maturity securities | 5,072 |
| | 5,516 |
| | — |
| | 4,544 |
| | 972 |
| |
Advances | 45,067 |
| | 45,065 |
| | — |
| | 45,065 |
| | — |
| |
MPF Loans held in portfolio, net | 4,967 |
| | 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 | ) | | — |
| | — |
| |
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. This includes advances, consolidated obligation discount notes and bonds, and mortgage loans held for sale for 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 | ) |
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 bonds in cases where hedge accounting treatment may not be achieved due to the inability to meet the hedge effectiveness testing criterion. Financial instruments for which we elected the fair value option along with their related fair value are shown on our Statements of Condition. Refer to our Note 2 – Summary of Significant Accounting Policies to the financial 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 |
|
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 |
|
| |
a | $720 million and $486 million of member standby letters of credit at September 30, 2017, and December 31, 2016, which were renewable annually. |
For a description of defined terms see Note 17 - Commitments and Contingencies to the financial statements in our 2016 Form 10-K.
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 either members whose officers or directors serve on our Board of Directors, or members that control more than 10% of our 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 a related 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) as of the periods presented.
|
| | | | | | | | |
As of | | September 30, 2017 | | December 31, 2016 |
Assets - Advances | | $ | 141 |
| | $ | 107 |
|
Liabilities - Deposits | | 13 |
| | 8 |
|
Equity - Capital Stock | | 8 |
| | 18 |
|
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.
(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, 2017 | | June 30, 2017 | | March 31, 2017 | | December 31, 2016 | | September 30, 2016 | |
Selected statements of condition data | | | | | | | | | | | |
Investments a | | $ | 31,885 |
| | $ | 29,461 |
| | $ | 28,547 |
| | $ | 28,060 |
| | $ | 26,853 |
| |
Advances | | 50,153 |
| | 46,844 |
| | 42,328 |
| | 45,067 |
| | 43,117 |
| |
MPF Loans held in portfolio, gross | | 5,026 |
| | 4,968 |
| | 4,943 |
| | 4,970 |
| | 4,723 |
| |
Less: allowance for credit losses | | (2 | ) | | (3 | ) | | (3 | ) | | (3 | ) | | (3 | ) | |
Total assets | | 87,488 |
| | 81,779 |
| | 76,109 |
| | 78,692 |
| | 74,983 |
| |
Consolidated obligation discount notes, net | | 45,460 |
| | 37,944 |
| | 32,806 |
| | 35,949 |
| | 39,144 |
| |
Consolidated obligation bonds, net | | 35,890 |
| | 37,878 |
| | 37,662 |
| | 36,903 |
| | 30,139 |
| |
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) | | 308 |
| | 303 |
| | 301 |
| | 301 |
| | 302 |
| |
Total capital | | 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 | | $ | 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) | | 1,028,710 |
| | 1,011,526 |
| | 959,280 |
| | 989,311 |
| | 967,728 |
| |
Number of members | | 717 |
| | 721 |
| | 726 |
| | 728 |
| | 730 |
| |
Total employees (full and part time) | | 457 |
| | 457 |
| | 452 |
| | 440 |
| | 443 |
| |
Selected statements of income data | | | | | | | | | | | |
Net interest income after provision for credit losses | | $ | 124 |
|
| $ | 116 |
|
| $ | 113 |
|
| $ | 111 |
|
| $ | 113 |
| |
Non-interest gain (loss) | | 5 |
| | 16 |
| | 10 |
| | 15 |
| | 14 |
| |
Non-interest expense | | 43 |
| | 44 |
| | 42 |
| | 39 |
| | 42 |
| |
Net income | | 77 |
| | 79 |
| | 73 |
| | 78 |
| | 76 |
| |
Other selected data during the periods | | | | | | | | | | | |
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) | | | | | | | | | | | |
Regulatory capital to assets ratio | | 5.81 | % | | 6.09 | % | | 6.13 | % | | 6.40 | % | | 6.52 | % | |
Market value of equity to book value of equity | | 107 | % | | 108 | % | | 108 | % | | 108 | % | | 108 | % | |
Investments - % of total assets | | 36 | % |
| 36 | % | | 38 | % | | 36 | % | | 36 | % | |
Advances - % of total assets | | 57 | % |
| 57 | % | | 56 | % | | 57 | % | | 58 | % | |
MPF Loans held in portfolio, net - % of total assets | | 6 | % |
| 6 | % | | 6 | % | | 6 | % | | 6 | % | |
Dividend rate class B1 activity stock-period paid | | 3.30 | % | | 3.15 | % | | 3.00 | % | | 2.80 | % | | 2.80 | % | |
Dividend rate class B2 membership stock-period paid | | 1.25 | % | | 1.05 | % | | 0.85 | % | | 0.60 | % | | 0.60 | % | |
Return on average assets | | 0.36 | % | | 0.39 | % | | 0.36 | % | | 0.40 | % | | 0.38 | % | |
Return on average equity | | 6.54 | % | | 6.99 | % | | 6.46 | % | | 6.84 | % | | 6.70 | % | |
Average equity to average assets | | 5.50 | % | | 5.58 | % | | 5.57 | % | | 5.85 | % | | 5.67 | % | |
Net yield on average interest-earning assets | | 0.59 | % | | 0.58 | % | | 0.57 | % | | 0.57 | % | | 0.57 | % | |
Return on average Regulatory Capital spread to three month LIBOR index | | 4.89 | % | | 5.47 | % | | 5.09 | % | | 5.37 | % | | 5.34 | % | |
Cash dividends | | $ | 11 |
| | $ | 9 |
| | $ | 10 |
| | $ | 9 |
| | $ | 9 |
| |
Dividend payout ratio | | 14 | % |
| 11 | % |
| 14 | % |
| 12 | % |
| 12 | % | |
| |
a | Investments includes investment securities, interest bearing deposits, Federal Funds sold, and securities purchased under agreements to resell. |
| |
b | MPF off-balance sheet loans include MPF Loans purchased from PFIs under the MPF Xtra, MPF Direct and MPF Government MBS products. See Mortgage Partnership Finance Program beginning on page 7 in our 2016 Form 10-K. |
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Forward-Looking Information
Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions of management, may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “expects,” “could,” “estimates,” “may,” “should,” “will,” their negatives, or other variations of these terms. We caution that, by their nature, forward-looking statements involve risks and uncertainties related to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in these forward-looking statements and could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, undue reliance should not be placed on such statements.
These forward-looking statements involve risks and uncertainties including, but not limited to, the following:
| |
• | changes in the demand by our members for advances, including the impact of the availability of other sources of funding for our members, such as deposits; |
| |
• | limits on our investments; |
| |
• | 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; |
(Dollars in tables in millions except per share amounts unless otherwise indicated)
| |
• | membership changes, including the withdrawal of members due to restrictions on our dividends or the loss of members through mergers and consolidations 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 2016 Form 10-K on page 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.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Executive Summary
Third Quarter 2017 Financial Highlights
| |
• | We recorded net income of $77 million in the third quarter of 2017, up from $76 million in the third quarter of 2016. |
| |
• | Net interest income for the third quarter of 2017 was $123 million, up 9% from $113 million for the third quarter of 2016 as we benefited both from the rising rate environment and higher levels of interest earning assets. |
| |
• | Total investment securities decreased 17% to $17.5 billion at September 30, 2017, down from $21.0 billion at December 31, 2016, as our investment portfolio continued to pay down. |
| |
• | Advances outstanding increased 11% to $50.2 billion at September 30, 2017, up from $45.1 billion at December 31, 2016. |
| |
• | MPF Loans held in portfolio, net of allowance for credit losses, increased $57 million or 1% to $5.0 billion at September 30, 2017. |
| |
• | Total assets increased 11% to $87.5 billion as of September 30, 2017, compared to $78.7 billion as of December 31, 2016. |
| |
• | We remained in compliance with all of our regulatory capital requirements as of September 30, 2017. |
Summary and Outlook
Third Quarter 2017 Dividend
On October 24, 2017, the Bank's Board of Directors declared a dividend of 3.30% (annualized) for Class B1 activity capital stock for members that borrow from the Bank and a dividend of 1.25% (annualized) for Class B2 membership capital 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 Owned. Member Focused.
As a member-focused cooperative, we strive to offer products and services that meet our members’ business needs. At September 30, 2017, advances were $50.2 billion, up 11% from December 31, 2016, and letters of credit were $15.4 billion, up 43% from December 31, 2016. In addition, the volume 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 impact on community development and affordable housing in their neighborhoods.
Also this fall, we joined the ten other Federal Home Loan Banks to donate to hurricane relief efforts in Texas and the Gulf Coast, Florida and the Southeast, Puerto Rico, and the U.S. Virgin Islands. Together we are committed to supporting members as they help to rebuild their communities.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
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 table on the following page presents 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. |
| |
• | 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. |
| |
• | Any changes due to the combined volume/rate variance have been allocated ratably to volume and rate. |
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Increase or decrease in interest income and expense due to volume or rate variances
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | September 30, 2016 | | Increase (decrease) due to |
| Average Balance | | Total Interest | | Yield/ Rate | | Average Balance | | Total Interest | | Yield/ Rate | | Volume | | Rate | | Net Change |
For the three months ended | | | | | | | | | | | | | | | | | |
Investment securities | $ | 17,949 |
| | $ | 163 |
| | 3.63 | % | | $ | 21,547 |
| | $ | 174 |
| | 3.23 | % | | $ | (33 | ) | | $ | 22 |
| | $ | (11 | ) |
Advances | 47,135 |
| | 157 |
| | 1.33 | % | | 44,300 |
| | 74 |
| | 0.67 | % | | 10 |
| | 73 |
| | 83 |
|
MPF Loans held in portfolio | 4,927 |
| | 53 |
| | 4.30 | % | | 4,657 |
| | 53 |
| | 4.55 | % | | 3 |
| | (3 | ) | | — |
|
Federal funds sold and securities purchased under agreements to resell | 11,467 |
| | 34 |
| | 1.19 | % | | 6,857 |
| | 7 |
| | 0.41 | % | | 14 |
| | 13 |
| | 27 |
|
Other | 1,247 |
| | 4 |
| | 1.28 | % | | 1,586 |
| | 1 |
| | 0.25 | % | | (1 | ) | | 4 |
| | 3 |
|
Interest income on assets | 82,725 |
| | 411 |
| | 1.99 | % | | 78,947 |
| | 309 |
| | 1.57 | % | | 19 |
| | 83 |
| | 102 |
|
Consolidated obligation discount notes | 41,241 |
| | 148 |
| | 1.44 | % | | 44,417 |
| | 95 |
| | 0.86 | % | | (11 | ) | | 64 |
| | 53 |
|
Consolidated obligation bonds | 36,437 |
| | 136 |
| | 1.49 | % | | 29,461 |
| | 99 |
| | 1.34 | % | | 26 |
| | 11 |
| | 37 |
|
Subordinated notes | — |
| | — |
| | — | % | | — |
| | — |
| | — | % | | — |
| | — |
| | — |
|
Other | 918 |
| | 4 |
| | 1.74 | % | | 845 |
| | 2 |
| | 0.95 | % | | — |
| | 2 |
| | 2 |
|
Interest expense on liabilities | 78,596 |
| | 288 |
| | 1.47 | % | | 74,723 |
| | 196 |
| | 1.05 | % | | 14 |
| | 78 |
| | 92 |
|
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 | $ | 18,639 |
| | $ | 492 |
| | 3.52 | % | | $ | 22,342 |
| | $ | 545 |
| | 3.25 | % | | $ | (98 | ) | | $ | 45 |
| | $ | (53 | ) |
Advances | 46,191 |
| | 386 |
| | 1.11 | % | | 42,141 |
| | 211 |
| | 0.67 | % | | 36 |
| | 139 |
| | 175 |
|
MPF Loans held in portfolio | 4,906 |
| | 160 |
| | 4.35 | % | | 4,684 |
| | 165 |
| | 4.70 | % | | 7 |
| | (12 | ) | | (5 | ) |
Federal funds sold and securities purchased under agreements to resell | 10,211 |
| | 74 |
| | 0.97 | % | | 5,779 |
| | 16 |
| | 0.37 | % | | 32 |
| | 26 |
| | 58 |
|
Other | 1,273 |
| | 9 |
| | 0.94 | % | | 1,567 |
| | 7 |
| | 0.60 | % | | (2 | ) | | 4 |
| | 2 |
|
Interest income on assets | 81,220 |
| | 1,121 |
| | 1.84 | % | | 76,513 |
| | 944 |
| | 1.65 | % | | 68 |
| | 109 |
| | 177 |
|
Consolidated obligation discount notes | 38,940 |
| | 363 |
| | 1.24 | % | | 44,647 |
| | 272 |
| | 0.81 | % | | (53 | ) | | 144 |
| | 91 |
|
Consolidated obligation bonds | 37,278 |
| | 394 |
| | 1.41 | % | | 26,184 |
| | 299 |
| | 1.52 | % | | 117 |
| | (22 | ) | | 95 |
|
Subordinated notes | — |
| | — |
| | — | % | | 565 |
| | 24 |
| | 5.66 | % | | (24 | ) | | — |
| | (24 | ) |
Other | 888 |
| | 11 |
| | 1.65 | % | | 825 |
| | 5 |
| | 0.81 | % | | 1 |
| | 5 |
| | 6 |
|
Interest expense on liabilities | 77,106 |
| | 768 |
| | 1.33 | % | | 72,221 |
| | 600 |
| | 1.11 | % | | 49 |
| | 119 |
| | 168 |
|
Net yield on interest earning assets | $ | 81,220 |
| | $ | 353 |
| | 0.58 | % | | $ | 76,513 |
| | $ | 344 |
| | 0.60 | % | | $ | 20 |
| | $ | (11 | ) | | $ | 9 |
|
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.
| |
• | 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 advances increased primarily due to a rise in interest rates and, to a lesser extent, higher member demand for advances. Higher interest rates resulted primarily from rate hikes by the Federal Reserve Bank. |
(Dollars in tables in millions except per share amounts unless otherwise indicated)
| |
• | Interest income from MPF Loans held in portfolio declined slightly due to lower average interest rates (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 Federal Funds sold and securities purchased under agreements to resell increased both due to higher volumes outstanding and increases in interest rates by the Federal Reserve Bank. |
| |
• | Interest expense on our shorter termed consolidated obligation discount notes increased due to rising short term interest rates 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 as 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 money market reforms which increased demand for FHLB debt in the market, but this effect reversed in the third quarter of 2017 as rates rose. |
| |
• | Our subordinated notes were paid off on June 13, 2016. |
| |
• | 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, |
| | 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 |
|
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
Derivatives and hedging activities, and instruments held under the fair value option were not significant to our statements of income over the last year. Instead, the majority of the effect from our derivatives and hedging activities is recorded in net interest income.
The table on the following page details the effect of all of these transactions on our results of operations. Note that we economically hedge only a portion of our trading securities.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Total Net Effect Gain (Loss) of Hedging Activities
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 activities | 1 |
|
| (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 | ) |
| | | | | | | | | | | | | |
Three months ended September 30, 2016 | | | | | | | | | | | | | |
Recorded in net interest income | $ | (16 | ) | | $ | (31 | ) | | $ | (2 | ) | | $ | (49 | ) | | $ | 12 |
| | $ | — |
| | $ | (86 | ) |
Recorded in derivatives & hedging activities | 6 |
| | 1 |
| | 6 |
| | (3 | ) | | (3 | ) | | — |
| | 7 |
|
Recorded on instruments held under fair value option | (4 | ) | | — |
| | (1 | ) | | (2 | ) | | 7 |
| | — |
| | — |
|
Total net effect gain (loss) of hedging activities | $ | (14 | ) | | $ | (30 | ) | | $ | 3 |
| | $ | (54 | ) | | $ | 16 |
| | $ | — |
| | $ | (79 | ) |
| | | | | | | | | | | | | |
Nine months ended September 30, 2017 | | | | | | | | | | | | | |
Recorded in net interest income | $ | (20 | ) |
| $ | (70 | ) |
| $ | (5 | ) |
| $ | (128 | ) |
| $ | 27 |
|
| $ | — |
| | $ | (196 | ) |
Recorded in derivatives & hedging activities | (2 | ) |
| (5 | ) |
| 5 |
|
| 2 |
|
| 5 |
|
| 1 |
| | 6 |
|
Recorded in trading securities - hedged only | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Recorded on instruments held under fair value option | 2 |
| | — |
| | (2 | ) | | (1 | ) | | (2 | ) | | — |
| | (3 | ) |
Total net effect gain (loss) of hedging activities | $ | (20 | ) |
| $ | (74 | ) |
| $ | (2 | ) |
| $ | (127 | ) |
| $ | 30 |
|
| $ | 1 |
| | $ | (192 | ) |
| | | | | | | | | | | | | |
Nine months ended September 30, 2016 | | | | | | | | | | | | | |
Recorded in net interest income | $ | (50 | ) |
| $ | (93 | ) |
| $ | (7 | ) |
| $ | (147 | ) |
| $ | 49 |
|
| $ | — |
| | $ | (248 | ) |
Recorded in derivatives & hedging activities | (14 | ) |
| (5 | ) |
| 13 |
|
| 2 |
|
| (3 | ) |
| — |
| | (7 | ) |
Recorded in trading securities - hedged only | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Recorded in instruments held under fair value option | 12 |
| | — |
| | (1 | ) | | (7 | ) | | 2 |
| | — |
| | 6 |
|
Total net effect gain (loss) of hedging activities | $ | (52 | ) |
| $ | (99 | ) |
| $ | 5 |
|
| $ | (152 | ) |
| $ | 48 |
|
| $ | — |
| | $ | (250 | ) |
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.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Noninterest Expense
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Compensation and benefits | | $ | 26 |
| | $ | 26 |
| | $ | 77 |
| | $ | 71 |
|
Operating expenses | | 15 |
| | 15 |
| | 45 |
| | 44 |
|
Other | | 2 |
| | 1 |
| | 7 |
| | 13 |
|
Noninterest expense | | $ | 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 due to increased employee headcount and increases in salaries and wages. We had 457 employees as of September 30, 2017, compared to 443 as of September 30, 2016.
Other decreased in the nine months ended September 30, 2017, due to $5 million in legal fees we 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 related to our investment 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 2017.
Assessments
We fund the Affordable Housing Program (AHP) program at a calculated rate of 10% of income before assessments, excluding interest expense on MRCS.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Other Comprehensive Income (Loss)
|
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | Balance remaining in AOCI as of |
| | 2017 | | 2016 | | 2017 | | 2016 | | September 30, 2017 |
Net unrealized gain (loss) available-for-sale securities | | $ | (24 | ) | | $ | (13 | ) | | $ | (5 | ) | | $ | (113 | ) | | $ | 454 |
|
Noncredit OTTI held-to-maturity securities | | 8 |
| | 9 |
| | 25 |
| | 30 |
| | (152 | ) |
Net unrealized gain (loss) cash flow hedges | | 42 |
| | 83 |
| | 111 |
| | 38 |
| | (201 | ) |
Postretirement plans | | 3 |
| | — |
| | 1 |
| | 1 |
| | (5 | ) |
Other comprehensive income (loss) | | $ | 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 sale (AFS) portfolio has experienced a small net unrealized loss during 2017, which was due to a slight increase in longer term market interest rates and 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 are expected to pay at par value on maturity. During 2016, our AFS portfolio had a large net unrealized loss primarily due to an increase in longer term market interest rates.
Noncredit OTTI on held-to-maturity securities
The gains in noncredit OTTI held-to-maturity (HTM) securities are the amounts accreted to their carrying amounts as these securities are performing better than expected when we took the original noncredit OTTI charge 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 extent that further losses are expected to be incurred, we would immediately recognize those amounts as additional OTTI in our statements of income.
Net unrealized gain (loss) on cash flow hedges
The net unrealized gain on cash flow hedges during both 2017 and 2016 resulted from an increase in shorter term interest rates as a result of actions by the Federal Reserve Bank.
For further details on the activity in our Other Comprehensive Income (Loss) see Note 12 - Accumulated Other Comprehensive Income (Loss) to the financial statements.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Statements of Condition
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreement to resell | $ | 14,381 |
| | $ | 7,376 |
|
Investment securities | 17,536 |
| | 21,035 |
|
Advances | 50,153 |
| | 45,067 |
|
MPF Loans held in portfolio, net of allowance for credit losses | 5,024 |
| | 4,967 |
|
Other | 394 |
| | 247 |
|
Assets | 87,488 |
| | 78,692 |
|
Consolidated obligation discount notes | 45,460 |
| | 35,949 |
|
Consolidated obligation bonds | 35,890 |
| | 36,903 |
|
Other | 1,266 |
| | 1,145 |
|
Liabilities | 82,616 |
| | 73,997 |
|
Capital stock | 1,557 |
| | 1,711 |
|
Retained earnings | 3,219 |
| | 3,020 |
|
Accumulated other comprehensive income (loss) | 96 |
| | (36 | ) |
Capital | 4,872 |
| | 4,695 |
|
Total liabilities and capital | $ | 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; |
| |
• | Counterparties available; and |
| |
• | Collateral availability on securities purchased under agreements to resell. |
Investment Securities
Investment securities declined as securities matured or paid down and were not replaced, as noted in Results of Operations on page 40.
Advances
Advances increased to the highest outstanding quarter-end balance in our history at September 30, 2017. See Note 6 - Advances to the financial statements.
While advance demand is 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.
MPF Loans Held in Portfolio, Net of Allowance for Credit Losses
We had a small net increase in our outstanding MPF Loans from year end, as our purchases of new loans during 2017 offset maturities and paydowns experienced in our MPF Loan portfolio.
(Dollars in tables in 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.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Liquidity, Funding, & Capital Resources
Liquidity
For the period ending September 30, 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 2016 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, 2017, our overnight liquidity was $20.7 billion or 24% of total assets, giving us an excess overnight liquidity of $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, 2017, we had excess liquidity of $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 $17.7 billion as of September 30, 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 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 are 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 21 in the Risk Factors section of our 2016 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 |
As of September 30, 2017 | | | Available-for Sale | | Held-to-Maturity |
Year of Expected Principal Cash Flows | | | | | | |
One year or less | | $ | 888 |
| | $ | 1,182 |
| | $ | 1,367 |
|
After one year through five years | | 1,979 |
| | 9,630 |
| | 2,166 |
|
After five years through ten years | | 1,155 |
| | 1,465 |
| | 349 |
|
After ten years | | 932 |
| | 620 |
| | 132 |
|
Total | | $ | 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 2016 Form 10-K.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Funding
Conditions in Financial Markets
The Federal Open Market Committee (FOMC) maintained the target range from 1.00 to 1.25 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 agency mortgage backed securities. The markets predict another 25 basis point increase in the target range in the fourth quarter 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
|
| | | | | | | | | | | | |
Nine months ended September 30, | | 2017 | | 2016 | | Change |
Net cash provided by (used in) operating activities | | $ | 337 |
| | $ | 184 |
| | $ | 153 |
|
Net cash provided by operating activities primarily result from the following:
| |
• | A noncash adjustment related to derivatives and hedging activities; minus |
| |
• | Net cash outflows related to the purchase of 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, | | 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 of liquid assets, securities held for investment, and advances. The $(4.3) billion change in net cash provided by (used in) investing activities primarily resulted from the following:
| |
• | Liquid 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 advances outstanding during 2017, but at a slower rate than 2016. |
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Cash flows from financing activities with significant changes
|
| | | | | | | | | | | | |
Nine months ended September 30, | | 2017 | | 2016 | | Change |
Net cash provided by (used in) financing activities - | | | | | | |
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 | | (96 | ) | | (115 | ) | | 19 |
|
Net cash provided by (used in) financing activities | | $ | 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 discount notes and bonds were primarily utilized to fund the net increases in our investing as noted above. The $4.3 billion change in net cash provided by (used in) financing activities primarily resulted from the following:
| |
• | An increase in the amount of our consolidated obligations used to fund the growth in our balance sheet. We relied on shorter term discount notes for our funding in 2017 compared to longer term bonds in 2016. |
| |
• | The payment for the retirement of our subordinated 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. Each member’s activity stock requirement remained at 4.5% for non-RCAP 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.
The Board may periodically adjust members’ membership stock requirement within a range of 0.20% to 2% of a member’s mortgage assets. Each member’s membership stock requirement is 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. The cap on each member’s membership stock requirement is now $5 million, which is less than 9.9% of the Bank’s total capital stock outstanding at December 31, 2016, and is thus the operative cap during the remainder of 2017 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.
For details on our capital stock requirement changes in 2016, see Capital Resource on page 54 of our 2016 Form 10-K.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
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 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 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 began repurchasing all excess Class B2 membership 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, but remain subject to our regulatory requirements, certain financial and capital 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 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 other liabilities in our statements of condition.
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| | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | Change |
Capital Stock | | $ | 1,557 |
| | $ | 1,711 |
| | $ | (154 | ) |
MRCS | | 308 |
| | 301 |
| | 7 |
|
Regulatory capital stock | | 1,865 |
| | 2,012 |
| | (147 | ) |
Retained earnings | | 3,219 |
| | 3,020 |
| | 199 |
|
Regulatory capital | | $ | 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 |
|
Accumulated other comprehensive income (loss) in the above table consists of changes in market value of various balance sheet accounts where the change is not recorded in earnings but are instead recorded in equity capital as the income (loss) is not yet realized. For details on these changes please see Note 12 - Accumulated Other Comprehensive Income (Loss) to the financial statements.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
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 24, 2017, our Board of Directors declared a 3.30% dividend (annualized) for Class B1 activity stock and a 1.25% dividend (annualized) for Class B2 membership stock 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. The Class B2 capital stock dividend is intended to enhance the value of membership; the Class B1 capital stock dividend reduces the effective cost of borrowing from the Bank and rewards our members who support the entire 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. On 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 & Dividends on page 57 in our 2016 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-44 in our 2016 Form 10-K.
Critical Accounting Policies
For a detailed description of our Critical Accounting Policies and Estimates see page 61 in our 2016 Form 10-K.
Also 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 subsequent to December 31, 2016.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Risk Management - Credit Risk
Managing Our Credit Risk Exposure Related to Member Credit Products
Our credit risk rating system focuses primarily on our member's overall financial health and takes into account the member's asset quality, earnings, and capital position. For further information please see Member Credit Risk Ratings on page 64 in our 2016 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, $50.0 billion were advances (par value) and $15.4 billion were letters of credit at September 30, 2017, compared to $45.0 billion and $10.8 billion at December 31, 2016.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
1-3 | | 499 |
| | 97 | % | | $ | 65,443 |
| | 100 | % | | $ | 116,386 |
| | 483 |
| | 97 | % | | $ | 55,750 |
| | 100 | % | | $ | 106,814 |
|
4 | | 7 |
| | 1 | % | | 59 |
| | — | % | | 102 |
| | 7 |
| | 1 | % | | 47 |
| | — | % | | 103 |
|
5 | | 10 |
| | 2 | % | | 113 |
| | — | % | | 199 |
| | 11 |
| | 2 | % | | 140 |
| | — | % | | 390 |
|
Total | | 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.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
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.
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| | | | | | | | | | |
| | 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% |
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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. |
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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
For 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, see Mortgage Repurchase Risk on page 67 in our 2016 Form 10-K.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
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 were no material changes in the credit ratings of these securities since December 31, 2016. For further details see page 70 in our 2016 Form 10-K. Except for private label MBS, we have never taken an impairment charge on our investment securities.
Our private label MBS are predominantly variable rate securities rated below investment grade (BBB). There were no material changes in overall credit quality since December 31, 2016, nor have we acquired any new private label MBS. We last had an other-than-temporary impairment (OTTI) loss on private label MBS in 2012. We currently have unrealized gains on these securities as their market values have improved from the impaired values and subsequent to 2012 we have begun recording accretion gains on these securities back into income. For further details see Note 5 - Investment Securities to the financial 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 2016 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.
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| | | | | | | | | | | | | | | | | | | | |
As of September 30, 2017 | | AA | | A | | BBB | | Unrated | | Total |
Domestic U.S. | | | | | | | | | | |
Interest-Bearing Deposits | | $ | — |
| | $ | 750 |
| | $ | — |
| | $ | — |
| | $ | 750 |
|
Fed Funds Sold | | — |
| | — |
| | 147 |
| | 27 |
| | 174 |
|
U.S. branches and agency offices of foreign commercial banks - Federal Funds sold: | | | | | | | | | | |
Australia | | 1,750 |
| | — |
| | — |
| | — |
| | 1,750 |
|
Canada | | 500 |
| | 2,225 |
| | — |
| | — |
| | 2,725 |
|
France | | — |
| | 600 |
| | — |
| | — |
| | 600 |
|
Japan | | — |
| | 700 |
| | — |
| | — |
| | 700 |
|
Netherlands | | — |
| | 600 |
| | — |
| | — |
| | 600 |
|
Norway | | — |
| | 600 |
| | — |
| | — |
| | 600 |
|
Sweden | | 2,000 |
| | 700 |
| | — |
| | — |
| | 2,700 |
|
Total unsecured credit exposure | | $ | 4,250 |
| | $ | 6,175 |
| | $ | 147 |
| | $ | 27 |
| | $ | 10,599 |
|
All $10.6 billion of the unsecured credit exposure shown in the above table were overnight investments.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
Managing Our Credit Risk Exposure Related to Derivative Agreements
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.
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| | | | | | | | | | | | | | | | | |
| | Net Derivative Fair Value Before Collateral | | Cash Collateral Pledged | | Non-cash Collateral Pledged | | Net Credit Exposure to Counterparties | |
As of September 30, 2017 | | | | | | | | | |
Non-member counterparties - | | | | | | | | | |
Undercollateralized asset positions - | | | | | | | | | |
Bilateral derivatives - | | | | | | | | | |
BBB | | $ | 2 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| |
Overcollateralized liability positions - | | | | | | | | | |
Bilateral derivatives - | | | | | | | | | |
A rated | | (71 | ) | | 72 |
| | — |
| | 1 |
| a |
Cleared derivatives | | (6 | ) | | — |
| b | 71 |
| | 65 |
| |
Non-member counterparties | | (75 | ) | | 70 |
| | 71 |
| | 66 |
| |
Member institutions | | 1 |
| | — |
| | — |
| | 1 |
| |
Total | | $ | (74 | ) | | $ | 70 |
| | $ | 71 |
| | $ | 67 |
| |
| | | | | | | | | |
As of December 31, 2016 | | | | | | | | | |
Non-member counterparties - | | | | | | | | | |
Overcollateralized liability positions - | | | | | | | | | |
Bilateral derivatives - | | | | | | | | | |
AA rated | | $ | (60 | ) | | $ | 60 |
| | $ | — |
| | $ | — |
| a |
A rated | | (57 | ) | | 60 |
| | — |
| | 3 |
| |
Cleared derivatives | | (206 | ) | | 198 |
| b | 97 |
| | 89 |
| |
Non-member counterparties | | (323 | ) |
| 318 |
|
| 97 |
|
| 92 |
| |
Member institutions | | 2 |
| | — |
| | — |
| | 2 |
| |
Total | | $ | (321 | ) |
| $ | 318 |
|
| $ | 97 |
|
| $ | 94 |
| |
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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. |
(Dollars in tables in millions except per share amounts unless otherwise indicated)
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 July 25, 2017, the FHFA published a final rule, effective August 24, 2017, amending its Minority and Women Inclusion regulations to clarify the scope of the FHLBs’ obligation to promote diversity and ensure inclusion. The final rule updates the existing FHFA regulations aimed at promoting diversity and the inclusion and use of minorities, women, and individuals with disabilities, and the businesses they own (MWDOB) in all FHLB business and activities, including management, employment, and contracting. The final rule will:
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• | 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; |
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• | encourage the FHLBs to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements; |
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• | require the FHLBs to develop policies that address reasonable accommodations for employees to observe their religious beliefs; |
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• | require the FHLBs to amend their policies on equal opportunity in employment by adding sexual orientation, gender identity, and status as a parent to the list of protected classifications; |
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• | require the FHLBs to provide information in their annual reports to the FHFA about their efforts to advance diversity and inclusion through financial 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 and strategies for promoting the diversity of supervisors and managers; and |
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• | 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. |
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 amount of tracking, monitoring, and reporting that would be required of us.
(Dollars in tables in millions except per share amounts unless otherwise indicated)
FHLB Capital Requirements
On July 3, 2017, the FHFA published a proposed rule to adopt, with amendments, the regulations 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 FHLBs 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 FHLBs establish and use their own internal rating methodology. With respect to derivatives, the proposed rule would impose a new capital charge for cleared derivatives, which under the existing rule do not carry a capital charge, to align with the Dodd-Frank Act’s clearing mandate. The proposed rule also would revise the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The FHFA proposes 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 but do not expect this rule, if adopted in final form, to materially affect our financial condition or results of operations.
Mandatory Contractual Stay Requirements for Qualified Financial Contracts (QFCs)
On September 12, 2017, the Federal Reserve Board (FRB) published a final rule, effective November 13, 2017, requiring certain global systemically important banking institutions (GSIBs) regulated by the FRB to amend their covered qualified financial contracts (QFCs) to prevent a counterparty’s immediate termination of, and limit the exercise of default rights under, the QFCs in the event of bankruptcy or receivership of the GSIB or an affiliate of the GSIB. QFCs include derivatives, repurchase agreements (known as repos) and reverse repos, and securities lending and borrowing agreements. On September 27, 2017, the Federal Deposit Insurance Corporation (FDIC) adopted a substantively identical final rule, effective January 1, 2018, with respect to QFCs entered into with certain FDIC-supervised institutions.
Although we are not a covered entity under these rules, as a counterparty to covered entities under QFCs, we may be required to amend QFCs entered into with FRB-regulated GSIBs or applicable FDIC-supervised institutions. We do not expect these final rules to materially affect our financial condition or results of operations.
(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.
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| | 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.
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| | | | | | | | | | | | | | | | | | |
| | | 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, 2017, our sensitivity to changes in implied volatility was $(1) million. At December 31, 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.
(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.
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| | | | | | | | | | | | |
| | 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 |
As of September 30, 2017, on a U.S. GAAP basis, our fair value surplus (relative to book value) was $385 million, and our market value of equity to book value of equity ratio was 107%, compared to $388 million and 108% at December 31, 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.
(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, see Item 9A. Controls and Procedures on page 84 of our 2016 Form 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
For a discussion of the litigation relating to private label MBS bonds purchased by the Bank, see Item 3. Legal Proceedings on page 31 of our 2016 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 18 in our 2016 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.
Item 5. Other Information.
None.
Item 6. Exhibits.
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Glossary of Terms
Advances: Secured loans to members.
ABS: Asset backed securities.
AFS: Available-for-sale securities.
AOCI: Accumulated Other Comprehensive Income.
Capital Plan: The Second Amended and Restated Capital Plan of the Federal Home Loan Bank of Chicago, effective as of October 1, 2015.
CE Amount: A PFI's assumption of credit risk on conventional MPF Loan products held in an MPF Bank's portfolio that are funded by, or sold to, an MPF 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 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.
FHLBC: The Federal Home Loan Bank of Chicago.
FHLB Chicago: The Federal Home Loan Bank of Chicago.
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.
Government Loans: Mortgage loans insured or guaranteed by the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), the Department of Veteran Affairs (VA) or Department of Agriculture Rural Housing 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 non-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 redeemable capital stock.
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.
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. 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.
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.
UPB: Unpaid Principal Balance.
U.S.: United States
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | FEDERAL HOME LOAN BANK OF CHICAGO |
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| | /s/ Matthew R. Feldman |
| | Name: | | Matthew R. Feldman |
| | Title: | | President and Chief Executive Officer |
Date: | November 6, 2017 | (Principal Executive Officer) |
| | | | |
| | /s/ Roger D. Lundstrom |
| | Name: | | Roger D. Lundstrom |
| | Title: | | Executive Vice President and Chief Financial Officer |
Date: | November 6, 2017 | (Principal Financial Officer and Principal Accounting Officer) |