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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 March 31, 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
logo11.jpg
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 March 31, 2017, including mandatorily redeemable capital stock, registrant had 15,829,748 total outstanding shares of Class B Capital Stock.

1

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TABLE OF CONTENTS


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


2

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PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
Statements of Condition (unaudited)
(Dollars in millions, except capital stock par value)
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
34

 
$
351

Interest bearing deposits
700

 
650

Federal Funds sold
8,317

 
4,075

Securities purchased under agreements to resell
500

 
2,300

Investment securities -
 
 
 
Trading, $78 and $97 pledged
240

 
1,045

Available-for-sale
14,571

 
14,918

Held-to-maturity, $4,642 and $5,516 fair value
4,219

 
5,072

Investment securities
19,030

 
21,035

Advances, $782 and $672 carried at fair value
42,328

 
45,067

MPF Loans held in portfolio, net of allowance for credit losses of $(3) and $(3)
4,940

 
4,967

Derivative assets
3

 
6

Other assets, $56 and $44 carried at fair value
257

 
241

Assets
$
76,109

 
$
78,692

 
 
 
 
Liabilities
 
 
 
Deposits -
 
 
 
Noninterest bearing
$
43

 
$
53

Interest bearing, $14 and $16 from other FHLBs
521

 
443

Deposits
564

 
496

Consolidated obligations, net -
 
 
 
Discount notes, $1,871 and $6,368 carried at fair value
32,806

 
35,949

Bonds, $5,384 and $5,443 carried at fair value
37,662

 
36,903

Consolidated obligations, net
70,468

 
72,852

Derivative liabilities
39

 
43

Affordable Housing Program assessment payable
86

 
86

Mandatorily redeemable capital stock
301

 
301

Other liabilities
233

 
219

Liabilities
71,691

 
73,997

Commitments and contingencies - see notes to the financial statements


 


Capital
 
 
 
Class B1 activity stock - putable $100 par value - 10 million and 12 million shares issued and outstanding
1,037

 
1,160

Class B2 membership stock - putable $100 par value - 2 million and 6 million shares issued and outstanding
245

 
551

Capital stock
1,282

 
1,711

Retained earnings - unrestricted
2,680

 
2,631

Retained earnings - restricted
403

 
389

Retained earnings
3,083

 
3,020

Accumulated other comprehensive income (loss) (AOCI)
53

 
(36
)
Capital
4,418

 
4,695

Liabilities and capital
$
76,109

 
$
78,692



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

3

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Statements of Income (unaudited)
(Dollars in millions)

 
 
Three months ended March 31,
 
 
2017
 
2016
Interest income
 
$
337

 
$
318

Interest expense
 
224

 
198

Net interest income
 
113

 
120

 
 
 
 
 
Noninterest income -
 
 
 
 
Trading securities
 

 
1

Derivatives and hedging activities
 
3

 
(16
)
Instruments held under fair value option
 
(2
)
 
5

MPF fees from other FHLBs
 
5

 
3

Other, net
 
4

 
4

Noninterest income
 
10

 
(3
)
 
 
 
 
 
Noninterest expense -
 
 
 
 
Compensation and benefits
 
25

 
23

Operating expenses
 
15

 
15

Other
 
2

 
2

Noninterest expense
 
42

 
40

 
 
 
 
 
Income before assessments
 
81

 
77

 
 
 
 
 
Affordable Housing Program assessment
 
8

 
8

 
 
 
 
 
Net income
 
$
73

 
$
69



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



4

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

 
 
Three months ended March 31,
 
 
2017
 
2016
Net income
 
$
73

 
$
69

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

 
(40
)
Noncredit OTTI held-to-maturity securities
 
9

 
11

Net unrealized gain (loss) cash flow hedges
 
44

 
(53
)
Postretirement plans
 
(2
)
 

Other comprehensive income (loss)
 
89

 
(82
)
 
 

 
 
Comprehensive income
 
$
162

 
$
(13
)


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



5

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

 
Capital Stock - Putable - B1 Activity
 
Capital Stock - Putable - B2 Membership
 
Capital Stock
 
Retained Earnings
 
 
 
Capital
 
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
 
 
 
 
 
 
 
 
 
 
 
 
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 (liabilities)

 
(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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
13

 
$
1,313

 
6

 
$
637

 
19

 
$
1,950

 
$
2,407

 
$
323

 
$
2,730

 
$
(28
)
 
$
4,652

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
55

 
14

 
69

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

 
183

 

 
1

 
2

 
184

 
 
 
 
 
 
 
 
 
184

Repurchases of capital stock
(1
)
 
(104
)
 

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

 

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

 
48

 
 
 
 
 
 
 
 
 
 
 
 
 


Cash dividends - class B1
 
 
 
 
 
 
 
 
 
 
 
 
(8
)
 
 
 
(8
)
 
 
 
(8
)
Class B1 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.60
%
Cash dividends - class B2
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
 
 
 
(1
)
Class B2 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.60
%
Total change in period
(3
)
 
(263
)
 
1

 
46

 
(2
)
 
(217
)
 
46

 
14

 
60

 
(82
)
 
(239
)
March 31, 2016
10


$
1,050


7


$
683


17


$
1,733


$
2,453


$
337


$
2,790


$
(110
)

$
4,413



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

6

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

 
Three months ended March 31,
 
2017
 
2016
 
Operating
Net cash provided by (used in) operating activities
 
$
159

 
$
(9
)
 
Investing
Net change interest bearing deposits
 
(50
)
 

 
 
Net change Federal Funds sold
 
(4,242
)
 
(1,908
)
 
 
Net change securities purchased under agreements to resell
 
1,800

 
1,125

 
 
Trading securities -
 
 
 
 
 
 
Sales
 
801

 

 
 
Proceeds from maturities and paydowns
 
1

 
103

 
 
Purchases
 

 
(100
)
 
 
Available-for-sale securities -
 
 
 
 
 
 
Proceeds from maturities and paydowns
 
354

 
727

 
 
Purchases
 

 
(2
)
 
 
Held-to-maturity securities -
 
 
 
 
 
 
Short-term held-to-maturity securities, net
 
619

a 
581

a 
 
Proceeds from maturities and paydowns
 
256

 
232

 
 
Purchases
 
(3
)
 
(11
)
 
 
Advances -
 
 
 
 
 
 
Principal collected
 
141,871

 
149,976

 
 
Issued
 
(139,145
)
 
(151,432
)
 
 
MPF Loans held in portfolio -
 
 
 
 
 
 
Principal collected
 
264

 
282

 
 
Purchases
 
(241
)
 
(132
)
 
 
Other investing activities
 
9

 
6

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

 
(553
)
 
Financing
Net change deposits
 
68

 
(40
)
 
 
Discount notes -
 
 
 
 
 
 
Net proceeds from issuance
 
320,127

 
42,844

 
 
Payments for maturing and retiring
 
(323,269
)
 
(44,124
)
 
 
Consolidated obligation bonds -
 
 
 
 
 
 
Net proceeds from issuance
 
4,130

 
4,410

 
 
Payments for maturing and retiring
 
(3,380
)
 
(3,050
)
 
 
Capital stock -
 
 
 
 
 
 
Proceeds from issuance
 
534

 
184

 
 
Repurchases
 
(960
)
 
(107
)
 
 
Cash dividends paid
 
(10
)
 
(9
)
 
 
Other financing activities
 
(10
)
 
(12
)
 
 
Net cash provided by (used in) financing activities
 
(2,770
)
 
96

 
 
Net increase (decrease) in cash and due from banks
 
(317
)
 
(466
)
 
 
Cash and due from banks at beginning of period
 
351

 
499

 
 
Cash and due from banks at end of period
 
$
34

 
$
33

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

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

7

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


Note 1 – Background and Basis of Presentation

The Federal Home Loan Bank of Chicago is a federally chartered corporation and one of 11 Federal Home Loan Banks (the FHLBs) that, with the Office of Finance, comprise the Federal Home Loan Bank System (the System).  The FHLBs are government-sponsored enterprises (GSE) of the United States of America and were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLB Act), in order to improve the availability of funds to support home ownership.  We are supervised and regulated by the Federal Housing Finance Agency (FHFA), an independent federal agency in the executive branch of the United States (U.S.) government.

Each FHLB is a member-owned cooperative with members from a specifically defined geographic district. Our defined geographic district is Illinois and Wisconsin. All federally-insured depository institutions, insurance companies engaged in residential housing finance, credit unions and community development financial institutions located in our district are eligible to apply for membership with us. All our members are required to purchase our capital stock as a condition of membership. Our capital stock is not publicly traded, and is issued, repurchased or redeemed at par value, $100 per share, subject to certain statutory and regulatory limits. As a cooperative, we do business with our members, and former members (under limited circumstances). Specifically, we provide credit principally in the form of secured loans called advances. We also provide liquidity for home mortgage loans to members approved as Participating Financial Institutions (PFIs) through the Mortgage Partnership Finance® (MPF®) Program.

Our accounting and financial reporting policies conform to generally accepted accounting principles in the United States of America (GAAP). Amounts in prior periods may be reclassified to conform to the current presentation and if material are disclosed in the following notes.

In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements and the following footnotes should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 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 59 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.

Consolidation of Variable Interest Entities

We are not the primary beneficiary of any variable interest entity. Specifically, we do not have the power to direct the activities of any variable interest entity that would most significantly impact its economic performance and we do not have the obligation to absorb losses or the right to receive benefits from any variable interest entity that could potentially be significant to a variable interest entity. As a result, we do not consolidate any of our investments in variable interest entities. Instead, we classify variable interest entities as investment securities in our statements of condition. Such investment securities include, but are not limited to, senior interests in private-label mortgage backed securities (MBS) and Federal Family Education Loan Program asset backed securities (FFELP ABS). Our maximum loss exposure for these investment securities is limited to their carrying amounts. We have no liabilities related to these investments in variable interest entities. We have not provided financial or other support (explicitly or implicitly) to these investment securities that we were not previously contractually required to provide, nor do we intend to provide such support in the future.


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

Gross versus Net Presentation of Financial Instruments

Our over-the-counter derivative transactions may be entered into through a bilateral agreement with an individual counterparty. We present these derivative transactions on a net basis in our statements of condition on the basis that our right to net amounts due to our counterparties is enforceable at law upon early termination. Derivatives are netted by contract (e.g., master netting agreement), to discharge all or a portion of the amounts that would be owed to our counterparty by applying them against the amounts that our counterparty owes to us. If these netted amounts are positive, they are classified as a derivative asset and if negative, they are classified as a derivative liability. The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the netting requirements, any excess cash collateral received or pledged is recognized as a derivative liability or asset.

We also enter into 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.
   
See Note 9 - Derivatives and Hedging Activities for further details.

Our policy is to report securities purchased under agreements to resell and securities sold under agreements to repurchase, if any, and securities borrowing transactions, if any, on a gross basis.


Note 2 – Summary of Significant Accounting Policies

Our Summary of Significant Accounting Policies through December 31, 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 hedging 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 as the "host contract". Specifically, entities no longer will be required to assess whether the event triggering the acceleration of an embedded contingent call (put) option within a debt instrument is clearly and closely related to its host contract. We adopted the new guidance using the modified retrospective approach on 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.



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

Note 3 – Recently Issued but Not Yet Adopted Accounting Standards


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

In March of 2017, the FASB issued amendments to current GAAP requiring the service cost component of our defined benefit pension and postretirement plans to be classified in the same statement of income line item as our compensation costs. The other components of net benefit cost related to our defined benefit pension and postretirement plans are required to be presented in a statement of income line item that is separate from compensation costs. Currently, we include the total net periodic pension costs and net periodic postretirement costs in the same statement of income line item as our compensation costs. As a result, the amendments will require us to reclassify the other components of net benefit costs into Noninterest Expense - Other operating expenses. Such reclassification would be made on a retrospective basis at the time of adoption, which is 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.

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, with earlier adoption permitted. The new guidance must be applied retrospectively to each period our statements of cash flows are presented at the time of adoption. Our existing practice is consistent with the requirements 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.

We are reviewing the expected effect of the guidance’s remaining provisions on our statements of cash flows. This guidance does not have any effect on our financial condition and results of operations.

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.

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


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 OTTI impairment had been recognized before our effective date. The accounting implications of such an approach is 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 primary change to our existing accounting practice resulting from the new guidance is the requirement to recognize operating leases and right-to-use assets with a term exceeding 12 months in our statements of condition rather than to recognize them 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, the beginning of the earliest comparative period presented in the financial statements. 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.

Recognition and Measurement of Financial Assets and Financial

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. The key provisions applicable to us include, but are not limited to, the following:

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

Requires recognizing the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk in other comprehensive income when we elect to carry that liability at fair value under the fair value option. We do not expect the change in fair value attributable to the instrument-specific credit risk on our consolidated obligations carried at fair value to have a material effect on our financial condition, results of operations, and cash flows; however, we will continue to monitor its potential effect. This is primarily because of the historically stable high debt ratings for our consolidated obligations and the fact that all FHLBs are joint and severally liable for consolidated obligation debt.

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

Revenue from Contracts with Customers

In May of 2014, the FASB issued new guidance governing revenue recognition from contracts with customers. Subsequently, the FASB deferred the effective date of the new guidance until January 1, 2018 and issued several pronouncements that provide additional revenue recognition guidance and clarifications to new guidance. The new revenue recognition guidance is not expected to have a material effect, if any, 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, the revenue recognition guidance is not applicable to these financial instruments and other contractual rights.

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

Note 4 – Interest Income and Interest Expense
The following table presents interest income and interest expense for the periods indicated:
 
Three months ended March 31,
 
2017
 
2016
Interest income -
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell
$
15

 
$
4

 
 
 
 
Trading
1

 
2

 
 
 
 
Available-for-sale interest income
108

 
111

Available-for-sale prepayment fees
4

 
21

Available-for-sale
112

 
132

 
 
 
 
Held-to-maturity interest income
53

 
59

 
 
 
 
Investment securities
166

 
193

 
 
 
 
Advance interest income
98

 
62

Advance prepayment fees
1

 
1

Advances
99

 
63

 
 
 
 
MPF Loans held in portfolio
54

 
57

Other interest bearing assets
3

 
1

 
 
 
 
Interest income
337

 
318

 
 
 
 
Interest expense -
 
 
 
 
 
 
 
Discount notes
96

 
82

Bonds
125

 
102

Consolidated obligations
221

 
184

 
 
 
 
Subordinated notes

 
14

Other interest bearing liabilities
3

 

 
 
 
 
Interest expense
224

 
198

 
 
 
 
Net interest income
$
113

 
$
120


 

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

Note 5 – Investment Securities


We classify securities as either trading, held-to-maturity (HTM), or available-for-sale (AFS). Our security disclosures within these classifications are disaggregated by major security types as shown below. Our major security types are based on the nature and risks of the security.

U.S. Government & other government related may consist of the sovereign debt of the United States; debt issued by government sponsored enterprises (GSE); and non-mortgage-backed securities of the Small Business Administration and Tennessee Valley Authority.
Federal Family Education Loan Program - asset backed securities (FFELP ABS).
GSE residential mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac.
Government-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. We had no material unrealized gains or losses on trading securities.

As of
 
March 31, 2017
 
December 31, 2016
U.S. Government & other government related
 
$
200

 
$
1,005

Residential MBS:
 
 
 
 
GSE
 
39

 
39

Government-guaranteed
 
1

 
1

Trading securities
 
$
240

 
$
1,045




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

Amortized Cost Basis and Fair Value – Available-for-Sale Securities (AFS)

 
Amortized Cost Basis
 
Gross Unrealized Gains in AOCI
 
Gross Unrealized (Losses) in AOCI
 
Carrying Amount and Fair Value
As of March 31, 2017
 
 
 
 
 
 
 
U.S. Government & other government related
$
295

 
$
13

 
$

 
$
308

State or local housing agency
18

 

 

 
18

FFELP ABS
4,317

 
216

 
(9
)
 
4,524

Residential MBS:
 
 
 
 
 
 
 
GSE
8,154

 
242

 
(2
)
 
8,394

Government-guaranteed
1,243

 
29

 

 
1,272

Private-label
47

 
8

 

 
55

Available-for-sale securities
$
14,074

 
$
508

 
$
(11
)
 
$
14,571

 
 
 
 
 
 
 
 
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.


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

Amortized Cost Basis, Carrying Amount, and Fair Value - Held-to-Maturity Securities (HTM)

 
Amortized Cost Basis
 
Non-credit OTTI Recognized in AOCI (Loss)
 
Carrying Amount
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding (Losses)
 
Fair Value
As of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
1,034

 
$

 
$
1,034

 
$
38

 
$
(1
)
 
$
1,071

State or local housing agency
12

 

 
12

 

 

 
12

Residential MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE
1,791

 

 
1,791

 
92

 

 
1,883

Government-guaranteed
737

 

 
737

 
9

 

 
746

Private-label
813

 
(168
)
 
645

 
286

 
(1
)
 
930

Held-to-maturity securities
$
4,387

 
$
(168
)
 
$
4,219

 
$
425

 
$
(2
)
 
$
4,642

 
 
 
 
 
 
 
 
 
 
 
 
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

 
(