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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018
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
logoa29.jpgFederal 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 March 31, 2018, including mandatorily redeemable capital stock, registrant had 18,903,682 total outstanding shares of Class B Capital Stock.

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logoa26.jpg Federal Home Loan Bank of Chicago 


TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


2

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logoa36.jpg Federal Home Loan Bank of Chicago 


PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
Statements of Condition (unaudited)
(Dollars in millions, except capital stock par value)
 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
Cash and due from banks
$
40

 
$
42

Interest bearing deposits
775

 
775

Federal Funds sold
9,361

 
7,561

Securities purchased under agreements to resell
6,250

 
5,000

Investment securities -
 
 
 
Trading,
64
and
67
pledged
2,596

 
233

Available-for-sale
12,388

 
12,957

Held-to-maturity,
3,791
and
4,538
fair value
3,448

 
4,157

Investment securities
18,432

 
17,347

Advances,
917
 
and
776
 
carried at fair value
50,840

 
48,085

MPF Loans held in portfolio, net of
(2)
and
(2)
allowance for credit losses
5,357

 
5,193

Derivative assets
2

 
3

Other assets,
76
and
118
carried at fair value
334

 
349

Assets
$
91,391

 
$
84,355

 
 
 
 
Liabilities
 
 
 
Deposits -
 
 
 
Noninterest bearing
$
53

 
$
51

Interest bearing,
11
and
32
from other FHLBs
632

 
473

Deposits
685

 
524

Consolidated obligations, net -
 
 
 
Discount notes,
0
and
749
carried at fair value
41,483

 
41,191

Bonds,
4,985
and
5,260
carried at fair value
43,516

 
37,121

Consolidated obligations, net
84,999

 
78,312

Derivative liabilities
19

 
20

Affordable Housing Program assessment payable
86

 
88

Mandatorily redeemable capital stock
311

 
311

Other liabilities
228

 
248

Liabilities
86,328

 
79,503

Commitments and contingencies - see notes to the financial statements


 


Capital
 
 
 
Class B1 activity stock,
14
and
12
million shares issued and outstanding
1,368

 
1,241

Class B2 membership stock,
2
and
2
million shares issued and outstanding
211

 
202

Capital stock - putable,
$100
and
$100
par value per share
1,579

 
1,443

Retained earnings - unrestricted
2,891

 
2,845

Retained earnings - restricted
467

 
452

Retained earnings
3,358

 
3,297

Accumulated other comprehensive income (loss) (AOCI)
126

 
112

Capital
5,063

 
4,852

Liabilities and capital
$
91,391

 
$
84,355




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

3

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logoa36.jpg Federal Home Loan Bank of Chicago 


Statements of Income (unaudited)
(Dollars in millions)

 
 
Three months ended March 31,
 
 
2018
 
2017
Interest income
 
$
480

 
$
337

Interest expense
 
356

 
224

Net interest income
 
124

 
113

 
 
 
 
 
Noninterest income -
 
 
 
 
Derivatives and hedging activities
 
(3
)
 
3

Instruments held under fair value option
 
(7
)
 
(2
)
MPF fees,
6

and
5

from other FHLBs
 
8

 
7

Other, net
 
2

 
2

Noninterest income
 

 
10

 
 
 
 
 
Noninterest expense -
 
 
 
 
Compensation and benefits
 
24

 
25

Operating expenses
 
15

 
15

Other
 
3

 
2

Noninterest expense
 
42

 
42

 
 
 
 
 
Income before assessments
 
82

 
81

 
 
 
 
 
Affordable Housing Program
 
8

 
8

 
 
 
 
 
Net income
 
$
74

 
$
73



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



4

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logoa36.jpg Federal Home Loan Bank of Chicago 


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

 
 
Three months ended March 31,
 
 
2018
 
2017
Net income
 
$
74

 
$
73

 
 
 
 
 
Other comprehensive income (loss) -
 
 
 
 
Net unrealized gain (loss) available-for-sale securities
 
(49
)
 
38

Noncredit OTTI held-to-maturity securities
 
7

 
9

Net unrealized gain (loss) cash flow hedges
 
58

 
44

Postretirement plans
 
(2
)
 
(2
)
Other comprehensive income (loss)
 
14

 
89

 
 

 
 
Comprehensive income
 
$
88

 
$
162



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



5

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logoa36.jpg Federal Home Loan Bank of Chicago 


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

 
Capital Stock - Putable - B1 Activity
 
Capital Stock - Putable - B2 Membership
 
Capital Stock
 
Retained Earnings
 
 
 
Total
 
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
Unrestricted
 
Restricted
 
Total
 
AOCI
 
December 31, 2017
12

 
$
1,241

 
2

 
$
202

 
14

 
$
1,443

 
$
2,845

 
$
452

 
$
3,297

 
$
112

 
$
4,852

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
59

 
15

 
74

 
14

 
88

Proceeds from issuance of capital stock
9

 
822

 

 
1

 
9

 
823

 
 
 
 
 
 
 
 
 
823

Repurchases of capital stock

 
(1
)
 
(7
)
 
(686
)
 
(7
)
 
(687
)
 
 
 
 
 
 
 
 
 
(687
)
Transfers between classes of capital stock
(7
)
 
(694
)
 
7

 
694

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends - class B1
 
 
 
 
 
 
 
 
 
 
 
 
(12
)
 


 
(12
)
 
 
 
(12
)
Class B1 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.50
%
Cash dividends - class B2
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
 
 
 
(1
)
Class B2 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.50
%
Total change in period
2

 
127

 

 
9

 
2

 
136

 
46

 
15

 
61

 
14

 
211

March 31, 2018
14

 
$
1,368

 
2

 
$
211

 
16

 
$
1,579

 
$
2,891

 
$
467

 
$
3,358

 
$
126

 
$
5,063

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
12

 
$
1,160

 
6

 
$
551

 
18

 
$
1,711

 
$
2,631

 
$
389

 
$
3,020

 
$
(36
)
 
$
4,695

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
59

 
14

 
73

 
89

 
162

Proceeds from issuance of capital stock
4

 
533

 

 
1

 
4

 
534

 
 
 
 
 
 
 
 
 
534

Repurchases of capital stock

 
(34
)
 
(10
)
 
(926
)
 
(10
)
 
(960
)
 
 
 
 
 
 
 
 
 
(960
)
Capital stock reclassified to mandatorily redeemable capital stock liability

 
(3
)
 

 

 

 
(3
)
 
 
 
 
 
 
 
 
 
(3
)
Transfers between classes of capital stock
(6
)
 
(619
)
 
6

 
619

 
 
 
 
 
 
 
 
 
 
 
 
 


Cash dividends - class B1
 
 
 
 
 
 
 
 
 
 
 
 
(9
)
 
 
 
(9
)
 
 
 
(9
)
Class B1 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.00
%
Cash dividends - class B2
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
 
 
 
(1
)
Class B2 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.85
%
Total change in period
(2
)
 
(123
)
 
(4
)
 
(306
)
 
(6
)
 
(429
)
 
49

 
14

 
63

 
89

 
(277
)
March 31, 2017
10


$
1,037


2


$
245


12


$
1,282


$
2,680


$
403


$
3,083


$
53


$
4,418



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

6

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logoa36.jpg Federal Home Loan Bank of Chicago 


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

 
Three months ended March 31,
 
2018
 
2017
 
Operating
Net cash provided by (used in) operating activities
 
$
135

 
$
159

 
Investing
Net change interest bearing deposits
 

 
(50
)
 
 
Net change Federal Funds sold
 
(1,800
)
 
(4,242
)
 
 
Net change securities purchased under agreements to resell
 
(1,250
)
 
1,800

 
 
Trading securities -
 
 
 
 
 
 
Sales
 
200

 
801

 
 
Proceeds from maturities and paydowns
 
2

 
1

 
 
Purchases
 
(2,559
)
 

 
 
Available-for-sale securities -
 
 
 
 
 
 
Proceeds from maturities and paydowns
 
478

 
354

 
 
Held-to-maturity securities -
 
 
 
 
 
 
Short-term held-to-maturity securities, net
 
535

a 
619

a 
 
Proceeds from maturities and paydowns
 
188

 
256

 
 
Purchases
 
(14
)
 
(3
)
 
 
Advances -
 
 
 
 
 
 
Principal collected
 
320,511

 
141,871

 
 
Issued
 
(323,358
)
 
(139,145
)
 
 
MPF Loans held in portfolio -
 
 
 
 
 
 
Principal collected
 
187

 
264

 
 
Purchases
 
(355
)
 
(241
)
 
 
Other investing activities
 
3

 
9

 
 
Net cash provided by (used in) investing activities
 
(7,232
)
 
2,294

 
Financing
Net change deposits
 
161

 
68

 
 
Discount notes -
 
 
 
 
 
 
Net proceeds from issuance
 
436,144

 
320,127

 
 
Payments for maturing and retiring
 
(435,852
)
 
(323,269
)
 
 
Consolidated obligation bonds -
 
 
 
 
 
 
Net proceeds from issuance
 
11,586

 
4,130

 
 
Payments for maturing and retiring
 
(5,062
)
 
(3,380
)
 
 
Capital stock -
 
 
 
 
 
 
Proceeds from issuance
 
823

 
534

 
 
Repurchases
 
(687
)
 
(960
)
 
 
Cash dividends paid
 
(13
)
 
(10
)
 
 
Other financing activities
 
(5
)
 
(10
)
 
 
Net cash provided by (used in) financing activities
 
7,095

 
(2,770
)
 
 
Net increase (decrease) in cash and due from banks
 
(2
)
 
(317
)
 
 
Cash and due from banks at beginning of period
 
42

 
351

 
 
Cash and due from banks at end of period
 
$
40

 
$
34

 
a 
Short-term assets and liabilities may be presented on a net basis provided that the original maturity of the asset or liability is three months or less from the date of origination or the date of purchase.

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

7

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logoa29.jpg Federal Home Loan Bank of Chicago 
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, 2017, included in our Annual Report on Form 10-K (2017 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 58 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 changed since we filed our 2017 Form 10-K.  The basis of presentation pertaining to our gross versus net presentation of financial instruments also has not changed since we filed our 2017 Form 10-K.

Refer to Note 1- Background and Basis of Presentation to the financial statements in our 2017 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.

8

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logoa29.jpg Federal Home Loan Bank of Chicago 
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, 2017, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our 2017 Form 10-K. We adopted the following policies effective January 1, 2018:

Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)

We are required to recognize 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 in our statements of comprehensive income. We measure such instrument-specific credit risk based on our nonperformance risk, which includes our nonperformance risk and the credit risk associated with the joint and several liability of other FHLBs. The new guidance did not have an effect on our financial condition, results of operations, and cash flows at the time of adoption.

Revenue from Contracts with Customers (ASU 2014-09)

The revenue recognition guidance did not 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, were scoped out of this new guidance. Further, our prior method of recognizing service fee revenue was consistent with this new guidance. As a result, no cumulative effect adjustment to our opening balance of retained earnings in 2018 was required under the modified retrospective method.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)

We are required to classify the service cost component of our net periodic pension and postretirement benefit costs as compensation costs. All other components of our net periodic pension and postretirement benefit costs are required to be classified as Noninterest expense - Other. Previously, our total net periodic pension and postretirement costs were classified as compensation costs. We made this classification change on a prospective rather than retrospective basis due to materiality. This classification guidance did not 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 (ASU 2016-15)

We classify and disclose interest expense on zero coupon discount notes within operating activities, which is consistent with our prior and current classification practice. As a result, this guidance did have any effect on our financial condition, results of operations, and cash flows at the time of adoption.







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logoa29.jpg Federal Home Loan Bank of Chicago 
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 (ASU 2017-12)

In August of 2017, the FASB issued targeted improvements to existing derivatives and hedging guidance to facilitate financial reporting that more closely reflects an entity’s risk management activities. We plan to adopt this guidance as of January 1, 2019. We are in the process of determining the expected effect of this guidance on our financial condition, results of operations, and cash flows. Outlined below are the significant changes to existing GAAP guidance that are relevant to us.

Cash Flow Hedges:

For a cash flow hedge of interest rate risk of a variable-rate financial instrument, we would be able to designate the variability in cash flows attributable to the contractually specified interest rate as the hedged risk. By eliminating the concept of benchmark interest rates for hedges of variable-rate instruments under current GAAP, the amendments remove the requirement to designate only the overall variability in cash flows as the hedged risk in a cash flow hedge of a variable-rate instrument indexed to a non-benchmark interest rate.

The entire change in fair value of the hedging instrument is recorded in AOCI. Reclassification from AOCI into our statements of income, including hedge ineffectiveness, will depend on whether a recognition event has occurred, such as the discontinuation of the hedge relationship.

Fair Value Hedges:

Permits hedged risk to be the changes in fair value based on the contractual coupon’s benchmark rate component determined at hedge inception on the hedged item. Only the hedged risk of changes in fair value based on the full contractual coupon cash flows is permitted under existing GAAP.
 
Permits hedged risk to be partial-term of the hedged item, which only includes the designated cash flows being hedged.
 
Permits hedged risk to be a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments in conjunction with a partial-term hedge election. The designated hedged item must have at least one asset or beneficial interest that will be outstanding at the end of the partial-term hedge election -that is, at least one asset or beneficial interest is not expected to be affected by prepayments, defaults, and other factors affecting the timing and amount of cash flows. This designation is referred to as the last-of-layer-method.

Cash Flow Hedges and Fair Value Hedges:

Requires both the effective and ineffective portion of a hedging relationship to be presented in either interest income or interest expense, whichever is appropriate. As a result, ineffectiveness related to hedging relationships would no longer be presented in derivatives and hedging activities.

Enables applying the long-haul method of assessing hedge effectiveness in cases where the shortcut method was initially applied but subsequently becomes no longer appropriate. This is provided only if we documented at hedge inception which long-haul methodology we would use in the event the shortcut method is discontinued.

Enables hedge effectiveness to be qualitatively assessed at the time of adoption for existing hedge relationships and for new hedge relationships entered into after adoption subsequent to their hedge inception in cases where initial quantitative testing is required. Such qualitative assessments would require us to quarterly verify and document that the facts and circumstances underlying the hedging relationship have not changed since hedge inception.

Transition:

Upon adoption, the modified retrospective method will be applied. This means all cumulative-effect adjustments, which includes eliminating the separate measurement of ineffectiveness to AOCI, will be recognized to the opening balance of retained earnings as of the beginning of January 1, 2019.
  
Permits us to modify the risk being hedged without de-designation of the fair value hedging relationship. Such a modification will require us to recognize a cumulative-effect adjustment. We also may elect to de-designate a portion of the modified hedged item. In such cases, we reverse the portion of the cumulative basis adjustment related to the hedged item de-designated cumulative basis adjustment with the offsetting entry recognized as a cumulative effect adjustment.


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logoa29.jpg Federal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

Permits us to reclassify a debt security from held-to-maturity to available-for-sale if the debt security is eligible to be included in the hedged item involving the last-of-the layer method. Any unrealized gain or loss at the date of the transfer would be recorded in AOCI.

The presentation and disclosure guidance will be adopted on a prospective basis.

Measurement of Credit Losses on Financial Instruments (ASU 2016-13)

In June of 2016, the FASB amended existing GAAP guidance applicable to measuring credit losses on financial instruments. Specifically, the amendment 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. Accordingly, the amendment is expected to result in recognizing credit losses in the financial statements on a timelier basis by utilizing forward looking information.

In addition, the accounting for securities is amended as follows:

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 new guidance takes effect January 1, 2020. Upon adoption, any difference in the credit loss amount attributable to both our on balance sheet and off balance sheet financial instruments resulting from applying the expected credit loss methodology compared to our existing incurred loss methodology will be recognized as a cumulative-effect adjustment to our January 1, 2020 opening retained earnings balance. A prospective transition approach is required for debt securities. Accordingly, any OTTI write-downs on securities recognized prior to January 1, 2020 may not be reversed at the time of our adoption. Improvements in expected cash flows for these securities will continue to be accounted for as yield adjustments over their remaining life. Additionally, recoveries for these securities will be recorded in earnings only 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 (ASU 2016-02)

In February of 2016, the FASB issued new lease accounting guidance. A modified retrospective transition approach will be utilized at the time of adoption, which is January 1, 2019. The new guidance requires us to recognize operating leases and right-to-use assets with terms exceeding 12 months, if any, in our statements of condition. Our existing practice is to recognize operating leases off-balance sheet. The expense related to our lease payments and the interest expense on our lease obligations will continue to be included in a single line item in our statements of income. We do not expect the new guidance to have a significant effect on our financial condition, results of operations, and cash flows since our existing off-balance sheet operating leases are not material.



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logoa29.jpg Federal Home Loan Bank of Chicago 
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 March 31,
 
 
2018
 
2017
Interest income -
 
 
 
 
 
 
 
 
 
Trading
 
$
6

 
$
1

 
 
 
 
 
Available-for-sale interest income
 
104

 
108

Available-for-sale prepayment fees
 
7

 
4

Available-for-sale
 
111

 
112

 
 
 
 
 
Held-to-maturity
 
46

 
53

 
 
 
 
 
Investment securities
 
163

 
166

 
 
 
 
 
Advances
 
214

 
99

 
 
 
 
 
MPF Loans held in portfolio
 
55

 
54

Federal funds sold and securities purchased under agreements to resell
 
44

 
15

Other
 
4

 
3

 
 
 
 
 
Interest income
 
480

 
337

 
 
 
 
 
Interest expense -
 
 
 
 
 
 
 
 
 
Consolidated obligations -
 
 
 
 
Discount notes
 
183

 
96

Bonds
 
169

 
125

 
 
 
 
 
Other
 
4

 
3

 
 
 
 
 
Interest expense
 
356

 
224

 
 
 
 
 
Net interest income
 
$
124

 
$
113




12

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logoa29.jpg Federal Home Loan Bank of Chicago 
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. 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
 
March 31, 2018
 
December 31, 2017
U.S. Government & other government related
 
$
2,565

 
$
202

Residential MBS
 
 
 
 
GSE
 
30

 
30

Government guaranteed
 
1

 
1

Trading securities
 
$
2,596

 
$
233




13

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logoa29.jpg Federal Home Loan Bank of Chicago 
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 March 31, 2018
 
 
 
 
 
 
 
U.S. Government & other government related
$
236

 
$
13

 
$

 
$
249

State or local housing agency
17

 

 

 
17

FFELP ABS
3,891

 
239

 

 
4,130

Residential MBS
 
 
 
 
 
 
 
GSE
6,944

 
81

 
(2
)
 
7,023

Government guaranteed
903

 
18

 

 
921

Private label
39

 
9

 

 
48

Available-for-sale securities
$
12,030

 
$
360

 
$
(2
)
 
$
12,388

 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
U.S. Government & other government related
$
256

 
$
15

 
$

 
$
271

State or local housing agency
21

 

 

 
21

FFELP ABS
3,987

 
234

 
(7
)
 
4,214

Residential MBS
 
 
 
 
 
 

GSE
7,275

 
132

 
(1
)
 
7,406

Government guaranteed
971

 
24

 

 
995

Private label
40

 
10

 

 
50

Available-for-sale securities
$
12,550


$
415


$
(8
)

$
12,957



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


14

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logoa29.jpg Federal Home Loan Bank of Chicago 
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 March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
967

 
$

 
$
967

 
$
16

 
$
(2
)
 
$
981

State or local housing agency
8

 

 
8

 

 

 
8

Residential MBS
 
 
 
 
 
 
 
 
 
 
 
GSE
1,453

 

 
1,453

 
46

 

 
1,499

Government guaranteed
531

 

 
531

 
4

 

 
535

Private label
625

 
(136
)
 
489

 
279

 

 
768

Held-to-maturity securities
$
3,584

 
$
(136
)
 
$
3,448

 
$
345

 
$
(2
)
 
$
3,791

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
1,531

 
$

 
$
1,531

 
$
29

 
$
(1
)
 
$
1,559

State or local housing agency
9

 

 
9

 

 

 
9

Residential MBS
 
 
 
 

 
 
 
 
 

GSE
1,513

 

 
1,513

 
62

 

 
1,575

Government guaranteed
585

 

 
585

 
6

 

 
591

Private label
662

 
(143
)
 
519

 
285

 

 
804

Held-to-maturity securities
$
4,300


$
(143
)

$
4,157


$
382


$
(1
)

$
4,538



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



Contractual Maturity Terms

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

 
 
Available-for-Sale
 
Held-to-Maturity
As of March 31, 2018
 
Amortized Cost Basis
 
Carrying Amount and Fair Value
 
Carrying Amount
 
Fair Value
Year of Maturity -
 
 
 
 
 
 
 
 
Due in one year or less
 
$
22

 
$