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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 June 30, 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
logoa58.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 June 30, 2018, including mandatorily redeemable capital stock, registrant had 21,184,919 total outstanding shares of Class B Capital Stock.

1
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logoa57.jpg Federal Home Loan Bank of Chicago 


TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
Table of Contents
logoa54.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)
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Cash and due from banks
$
29

 
$
42

Interest bearing deposits
775

 
775

Federal Funds sold
10,170

 
7,561

Securities purchased under agreements to resell
7,000

 
5,000

Investment securities -
 
 
 
Trading,
74
and
67
pledged
2,602

 
233

Available-for-sale
11,768

 
12,957

Held-to-maturity,
4,050
and
4,538
fair value
3,733

 
4,157

Investment securities
18,103

 
17,347

Advances,
859
 
and
776
 
carried at fair value
54,468

 
48,085

MPF Loans held in portfolio, net of
(1)
and
(2)
allowance for credit losses
5,779

 
5,193

Derivative assets
5

 
3

Other assets,
111
and
118
carried at fair value
402

 
349

Assets
$
96,731

 
$
84,355

 
 
 
 
Liabilities
 
 
 
Deposits -
 
 
 
Noninterest bearing
$
53

 
$
51

Interest bearing,
18
and
32
from other FHLBs
537

 
473

Deposits
590

 
524

Consolidated obligations, net -
 
 
 
Discount notes,
0
and
749
carried at fair value
43,007

 
41,191

Bonds,
4,067
and
5,260
carried at fair value
46,854

 
37,121

Consolidated obligations, net
89,861

 
78,312

Derivative liabilities
19

 
20

Affordable Housing Program assessment payable
87

 
88

Mandatorily redeemable capital stock
314

 
311

Other liabilities
505

 
248

Liabilities
91,376

 
79,503

Commitments and contingencies - see notes to the financial statements


 


Capital
 
 
 
Class B1 activity stock,
15
and
12
million shares issued and outstanding
1,498

 
1,241

Class B2 membership stock,
3
and
2
million shares issued and outstanding
307

 
202

Capital stock - putable,
$100
and
$100
par value per share
1,805

 
1,443

Retained earnings - unrestricted
2,944

 
2,845

Retained earnings - restricted
484

 
452

Retained earnings
3,428

 
3,297

Accumulated other comprehensive income (loss) (AOCI)
122

 
112

Capital
5,355

 
4,852

Liabilities and capital
$
96,731

 
$
84,355




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

3
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logoa54.jpg Federal Home Loan Bank of Chicago 


Statements of Income (unaudited)
(Dollars in millions)

 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest income
 
$
577

 
$
373

 
$
1,057

 
$
710

Interest expense
 
445

 
256

 
801

 
480

Net interest income
 
132

 
117

 
256

 
230

Provision for (reversal of) credit losses
 
—

 
1

 
—

 
1

Net interest income after provision for (reversal of) credit losses
 
132

 
116

 
256

 
229

 
 
 
 
 
 
 
 
 
Noninterest income -
 
 
 
 
 
 
 
 
Derivatives and hedging activities
 
3

 
3

 
—

 
6

Instruments held under fair value option
 
(10
)
 
4

 
(17
)
 
2

MPF fees,
6
,
5
,
12
and
10
from other FHLBs
 
7

 
7

 
15

 
13

Other, net
 
9

 
2


11

 
5

Noninterest income
 
9

 
16

 
9

 
26

 
 
 
 
 
 
 
 
 
Noninterest expense -
 
 
 
 
 
 
 
 
Compensation and benefits
 
28

 
26

 
52

 
51

Operating expenses
 
17

 
15

 
32

 
30

Other
 
1

 
3

 
4

 
5

Noninterest expense
 
46

 
44

 
88

 
86

 
 
 
 
 
 
 
 
 
Income before assessments
 
95

 
88

 
177

 
169

 
 
 
 
 
 
 
 
 
Affordable Housing Program
 
10

 
9

 
18

 
17

 
 
 
 
 
 
 
 
 
Net income
 
$
85

 
$
79

 
$
159

 
$
152



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



4
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logoa54.jpg Federal Home Loan Bank of Chicago 


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

 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
85

 
$
79

 
$
159

 
$
152

 
 

 
 
 
 
 
 
Other comprehensive income (loss) -
 

 
 
 
 
 
 
Net unrealized gain (loss) available-for-sale securities
 
(43
)
 
(19
)
 
(92
)
 
19

Noncredit OTTI held-to-maturity securities
 
8

 
8

 
15

 
17

Net unrealized gain (loss) cash flow hedges
 
32

 
25

 
90

 
69

Postretirement plans
 
(1
)
 
—

 
(3
)
 
(2
)
Other comprehensive income (loss)
 
(4
)
 
14

 
10

 
103

 
 

 
 
 

 
 
Comprehensive income
 
$
81

 
$
93

 
$
169

 
$
255



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



5
Table of Contents
logoa54.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
 
Total
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
 
 
 
 
 
 
 
 
 
 
 
 
127

 
32

 
159

 
10

 
169

Proceeds from issuance of capital stock
17

 
1,698

 
—

 
11

 
17

 
1,709

 
 
 
 
 
 
 
 
 
1,709

Repurchases of capital stock
—

 
—

 
(13
)
 
(1,345
)
 
(13
)
 
(1,345
)
 
 
 
 
 
 
 
 
 
(1,345
)
Capital stock reclassified to mandatorily redeemable capital stock liability
—

 
(1
)
 
—

 
(1
)
 
—

 
(2
)
 
 
 
 
 
 
 
 
 
(2
)
Transfers between classes of capital stock
(14
)
 
(1,440
)
 
14

 
1,440

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends - class B1
 
 
 
 
 
 
 
 
 
 
 
 
(27
)
 


 
(27
)
 
 
 
(27
)
Class B1 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.75
%
Cash dividends - class B2
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
 
 
 
(1
)
Class B2 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.55
%
Total change in period
3

 
257

 
1

 
105

 
4

 
362

 
99

 
32

 
131

 
10

 
503

June 30, 2018
15

 
$
1,498

 
3

 
$
307

 
18

 
$
1,805

 
$
2,944

 
$
484

 
$
3,428

 
$
122

 
$
5,355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
12

 
$
1,160

 
6

 
$
551

 
18

 
$
1,711

 
$
2,631

 
$
389

 
$
3,020

 
$
(36
)
 
$
4,695

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
122

 
30

 
152

 
103

 
255

Proceeds from issuance of capital stock
13

 
1,452

 
—

 
10

 
13

 
1,462

 
 
 
 
 
 
 
 
 
1,462

Repurchases of capital stock
—

 
(34
)
 
(16
)
 
(1,607
)
 
(16
)
 
(1,641
)
 
 
 
 
 
 
 
 
 
(1,641
)
Capital stock reclassified to mandatorily redeemable capital stock liability
—

 
(3
)
 
—

 
(3
)
 
—

 
(6
)
 
 
 
 
 
 
 
 
 
(6
)
Transfers between classes of capital stock
(13
)
 
(1,339
)
 
13

 
1,339

 
 
 
 
 
 
 
 
 
 
 
 
 


Cash dividends - class B1
 
 
 
 
 
 
 
 
 
 
 
 
(17
)
 
 
 
(17
)
 
 
 
(17
)
Class B1 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.08
%
Cash dividends - class B2
 
 
 
 
 
 
 
 
 
 
 
 
(2
)
 
 
 
(2
)
 
 
 
(2
)
Class B2 annualized rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.95
%
Total change in period
—

 
76

 
(3
)
 
(261
)
 
(3
)
 
(185
)
 
103

 
30

 
133

 
103

 
51

June 30, 2017
12


$
1,236


3


$
290


15


$
1,526


$
2,734


$
419


$
3,153


$
67


$
4,746



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

6
Table of Contents
logoa54.jpg Federal Home Loan Bank of Chicago 


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

 
Six months ended June 30,
 
2018
 
2017
 
Operating
Net cash provided by (used in) operating activities
 
$
235

 
$
225

 
Investing
Net change interest bearing deposits
 
—

 
(100
)
 
 
Net change Federal Funds sold
 
(2,609
)
 
(3,608
)
 
 
Net change securities purchased under agreements to resell
 
(2,000
)
 
50

 
 
Trading securities -
 
 
 
 
 
 
Sales
 
200

 
801

 
 
Proceeds from maturities and paydowns
 
4

 
2

 
 
Purchases
 
(2,559
)
 
—

 
 
Available-for-sale securities -
 
 
 
 
 
 
Proceeds from maturities and paydowns
 
1,420

 
828

 
 
Purchases
 
(129
)
 
—

 
 
Held-to-maturity securities -
 
 
 
 
 
 
Short-term held-to-maturity securities, net
 
65

a 
90

a 
 
Proceeds from maturities and paydowns
 
389

 
553

 
 
Purchases
 
(15
)
 
(17
)
 
 
Advances -
 
 
 
 
 
 
Principal collected
 
674,825

 
359,395

 
 
Issued
 
(681,320
)
 
(361,153
)
 
 
MPF Loans held in portfolio -
 
 
 
 
 
 
Principal collected
 
396

 
511

 
 
Purchases
 
(988
)
 
(513
)
 
 
Other investing activities
 
8

 
14

 
 
Net cash provided by (used in) investing activities
 
(12,313
)
 
(3,147
)
 
Financing
Net change deposits
 
66

 
62

 
 
Discount notes -
 
 
 
 
 
 
Net proceeds from issuance
 
1,011,104

 
725,466

 
 
Payments for maturing and retiring
 
(1,009,303
)
 
(723,480
)
 
 
Consolidated obligation bonds -
 
 
 
 
 
 
Net proceeds from issuance
 
23,685

 
10,579

 
 
Payments for maturing and retiring
 
(13,812
)
 
(9,670
)
 
 
Capital stock -
 
 
 
 
 
 
Proceeds from issuance
 
1,709

 
1,462

 
 
Repurchases
 
(1,345
)
 
(1,641
)
 
 
Cash dividends paid
 
(28
)
 
(19
)
 
 
Other financing activities
 
(11
)
 
(20
)
 
 
Net cash provided by (used in) financing activities
 
12,065

 
2,739

 
 
Net increase (decrease) in cash and due from banks
 
(13
)
 
(183
)
 
 
Cash and due from banks at beginning of period
 
42

 
351

 
 
Cash and due from banks at end of period
 
$
29

 
$
168

 
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
Table of Contents
logoa58.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 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.

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
Table of Contents
logoa58.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.







9
Table of Contents
logoa58.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. We will 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 may have an effect on us.


Newly Permitted Hedging Strategies:

•
Permits us to enter into a cash flow hedge of the variability in cash flows in a financial instrument that has a contractually specified interest rate.
•
Permits us to hedge the benchmark risk component of cash flows in a fair value hedge.
•
Permits us to enter into a partial-term fair value hedge of the hedged item.
•
Permits us to enter into last-of-layer fair value hedges.


Assessment of Hedge Effectiveness:

•
Permits qualitative assessment of hedge effectiveness.
•
Enables applying the long-haul method of assessing hedge effectiveness in cases where the shortcut method was initially applied but subsequently is not or no longer is appropriate.


Financial Statement Presentation:

•
Requires the entire change in fair value of the hedging instrument in a cash flow hedge to be recorded and deferred in AOCI until reclassification to our statements of income would be required.
•
Requires hedge ineffectiveness to be presented in either interest income or interest expense, whichever is appropriate rather than in derivatives and hedging activities in our statements of income.
•
The presentation and disclosure guidance will be prospectively adopted.


Transition:

•
Prior reporting periods are not restated.
•
Requires recognition of cumulative effect adjustment to AOCI with a corresponding adjustment to the opening balance of retained earnings related to ineffectiveness recognized in prior reporting periods attributable to open cash flow hedges as of January 1, 2019.  
•
Permits us to modify the risk hedged under the existing fair value hedges of interest rate risk with the risk under newly permitted hedging strategies as of January 1, 2019. Such an election will require an adjustment to the opening balance of retained earnings.
•
We are permitted to reclassify a debt security from held-to-maturity to available-for-sale if the debt security is eligible to be hedged under the last-of-the layer method.


10
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

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. This guidance takes effect January 1, 2020. We are in the process of reviewing the expected effect of this guidance on our financial condition, results of operations, and cash flows. Specifically, the amendment replaces the “incurred loss” impairment methodology applied under current GAAP with a “currently expected credit losses” or CECL methodology. The measurement of CECL 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. Upon adoption, any difference between our existing and CECL allowance for credit losses will be recognized as a cumulative-effect adjustment to the opening balance of our retained earnings as of January 1, 2020.

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.

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.


Leases (ASU 2016-02)

In February of 2016, the FASB issued lease accounting guidance that becomes effective January 1, 2019. Upon adoption, we are required to apply the guidance to the beginning of our earliest statement of condition presented or December 31, 2018. The guidance requires us to recognize and measure our operating leases and right-to-use assets, if any, with terms that exceed 12 months in our statements of condition. Expenses attributable to our leases will continue to be included in noninterest expense - operating expenses 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.



11
Table of Contents
logoa58.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 June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest income -
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
Trading
 
$
9

 
$
1

 
$
15

 
$
2

 
 
 
 
 
 
 
 
 
Available-for-sale interest income
 
107

 
107

 
211

 
215

Available-for-sale prepayment fees
 
13

 
7

 
20

 
11

Available-for-sale
 
120

 
114

 
231

 
226

 
 
 
 
 
 
 
 
 
Held-to-maturity
 
43

 
48

 
89

 
101

 
 
 
 
 
 
 
 
 
Investment securities
 
172

 
163

 
335

 
329

 
 

 
 
 
 
 
 
Advances
 
285

 
130

 
499

 
229

 
 


 
 
 
 
 
 
MPF Loans held in portfolio
 
60

 
53

 
115

 
107

Federal funds sold and securities purchased under agreements to resell
 
54

 
25

 
98

 
40

Other
 
6

 
2

 
10

 
5

 
 
 
 
 
 
 
 
 
Interest income
 
577

 
373

 
1,057

 
710

 
 

 
 
 
 
 
 
Interest expense -
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations -
 

 
 
 
 
 
 
Discount notes
 
205

 
119

 
388

 
215

Bonds
 
233

 
133

 
402

 
258

 
 

 
 
 
 
 
 
Other
 
7

 
4

 
11

 
7

 
 
 
 
 
 
 
 
 
Interest expense
 
445

 
256

 
801

 
480

 
 

 
 
 
 
 
 
Net interest income
 
132

 
117

 
$
256

 
$
230

Provision for (reversal of) credit losses
 
—

 
1

 
—

 
1

Net interest income after provision for (reversal of) credit losses
 
$
132

 
$
116

 
$
256

 
$
229




12
Table of Contents
logoa58.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); debt issued by the Tennessee Valley Authority; and securities guaranteed by the Small Business Administration.
•
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
 
June 30, 2018
 
December 31, 2017
U.S. Government & other government related
 
$
2,574

 
$
202

Residential MBS
 
 
 
 
GSE
 
27

 
30

Government guaranteed
 
1

 
1

Trading securities
 
$
2,602

 
$
233




13
Table of Contents
logoa58.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 June 30, 2018
 
 
 
 
 
 
 
U.S. Government & other government related
$
229

 
$
9

 
$
—

 
$
238

State or local housing agency
18

 
—

 
—

 
18

FFELP ABS
3,788

 
230

 
—

 
4,018

Residential MBS
 
 
 
 
 
 
 
GSE
6,556

 
53

 
(3
)
 
6,606

Government guaranteed
824

 
17

 
—

 
841

Private label
38

 
9

 
—

 
47

Available-for-sale securities
$
11,453

 
$
318

 
$
(3
)
 
$
11,768

 
 
 
 
 
 
 
 
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 gains or losses, or sales of AFS securities for the periods presented.


14
Table of Contents
logoa58.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 June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
1,406

 
$
—

 
$
1,406

 
$
15

 
$
(2
)
 
$
1,419

State or local housing agency
8

 
—

 
8

 
—

 
—

 
8

Residential MBS
 
 
 
 
 
 
 
 
 
 
 
GSE
1,385

 
—

 
1,385

 
36

 
—

 
1,421

Government guaranteed
479

 
—

 
479

 
3

 
—

 
482

Private label
583

 
(128
)
 
455

 
265

 
—

 
720

Held-to-maturity securities
$
3,861

 
$
(128
)
 
$
3,733

 
$
319

 
$
(2
)
 
$
4,050

 
 
 
 
 
 
 
 
 
 
 
 
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 gains or losses from the 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 June 30, 2018
 
Amortized Cost Basis
 
Carrying Amount and Fair Value
 
Carrying Amount
 
Fair Value
Year of Maturity -
 
 
 
 
 
 
 
 
Due in one year or less
 
$
21

 
$
21

 
$
610

 
$
609

Due after one year through five years
 
2

 
2

 
157

 
159

Due after five years through ten years
 
51

 
52

 
127

 
127

Due after ten years
 
173

 
181

 
520

 
532

ABS and MBS without a single maturity date
 
11,206

 
11,512

 
2,319

 
2,623

Total securities
 
$
11,453

 
$
11,768

 
$
3,733

 
$
4,050




15
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
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 June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
3

 
$
—

 
$
—

 
$
—

 
$
3

 
$
—

State or local housing agency
9

 
—

 
—

 
—

 
9

 
—

FFELP ABS
—

 
—

 
615

 
—

 
615

 
—

Residential MBS
 
 
 
 

 
 
 
 
 
 
GSE
266

 
(1
)
 
798

 
(2
)
 
1,064

 
(3
)
Private label
—

 
—

 
6

 
—

 
6

 
—

Available-for-sale securities
$
278


$
(1
)

$
1,419


$
(2
)

$
1,697


$
(3
)
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
3

 
$
—

 
$
—

 
$
—

 
$
3


$
—

State or local housing agency
4

 
—

 
—

 
—

 
4


—

FFELP ABS
—

 
—

 
644

 
(7
)
 
644


(7
)
Residential MBS
 
 
 
 
 
 
 
 



GSE
51

 
—

 
801

 
(1
)
 
852


(1
)
Private label
—

 
—

 
7

 
—

 
7


—

Available-for-sale securities
$
58


$
—


$
1,452


$
(8
)

$
1,510


$
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
101

 
$
—

 
$
23


$
(2
)
 
$
124

 
$
(2
)
State or local housing agency
2

 
—

 
—

 
—

 
2

 
—

Residential MBS
 
 
 
 

 

 
 
 
 
Government-guaranteed
179

 
—

 
—

 
—

 
179

 
—

Private label
—

 
—

 
686

 
(128
)
 
686

 
(128
)
Held-to-maturity securities
$
282


$
—


$
709


$
(130
)

$
991


$
(130
)
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Government & other government related
$
594

 
$
—

 
$
24

 
$
(1
)
 
$
618


$
(1
)
State or local housing agency
2

 
—

 
—

 
—

 
2


—

Residential MBS
 
 
 
 
 
 
 
 





GSE
—

 
—

 
2

 
—

 
2


—

Private label
—

 
—

 
769

 
(143
)
 
769


(143
)
Held-to-maturity securities
$
596


$
—


$
795


$
(144
)

$
1,391


$
(144
)



16
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
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 2017 Form 10-K.

As of June 30, 2018, we had a base case short-term housing price forecast for all markets with projected changes ranging from -8.0% to +13.0% over the twelve month period beginning April 1, 2018. For the vast majority of markets, the short-term forecast has changes ranging from +2.0% to +7.0%. 

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 June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Beginning Balance
 
$
468

 
$
508

 
$
477

 
$
520

Reductions:
 

 
 
 
 
 
 
Increases in cash flows expected to be collected and recognized into interest income
 
(9
)
 
(9
)
 
(18
)
 
(21
)
Ending Balance
 
$
459

 
$
499

 
$
459

 
$
499






17
Table of Contents
logoa58.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 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 June 30, 2018
 
Amount  
 
Weighted Average Contractual Interest Rate
 
Due in one year or less
 
$
23,376

 
1.98
%
 
One to two years
 
3,002

 
2.08
%
 
Two to three years
 
1,895

 
2.13
%
 
Three to four years
 
2,108

 
2.08
%
 
Four to five years
 
5,481

 
2.31
%
 
More than five years
 
18,653

 
2.11
%
 
Par value
 
$
54,515

 
2.07
%
 




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
 
June 30, 2018
 
December 31, 2017
Par value
 
$
54,515

 
$
48,020

Fair value hedging adjustments
 
(31
)
 
69

Other adjustments
 
(16
)
 
(4
)
Advances
 
$
54,468

 
$
48,085




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

As of June 30, 2018
 
Par Value
 
% of Total Outstanding
One Mortgage Partners Corp.
 
$
11,000

a 
20.2
%
The Northern Trust Company
 
7,600

 
13.9
%
BMO Harris Bank, NA
 
6,975

 
12.8
%
a 
One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA.

18
Table of Contents
logoa58.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 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
 
June 30, 2018
 
December 31, 2017
Medium term (15 years or less)
 
$
307

 
$
285

Long term (greater than 15 years)
 
5,391

 
4,835

Unpaid principal balance
 
5,698

 
5,120

Net premiums, credit enhancement and deferred loan fees
 
69

 
55

Fair value hedging adjustments
 
13

 
20

MPF Loans held in portfolio, before allowance for credit losses
 
5,780

 
5,195

Allowance for credit losses on MPF Loans
 
(1
)
 
(2
)
MPF Loans held in portfolio, net
 
$
5,779

 
$
5,193

 
 
 
 
 
Conventional mortgage loans
 
$
4,748

 
$
4,133

Government Loans
 
950

 
987

Unpaid principal balance
 
$
5,698

 
$
5,120


The above table excludes MPF Loans acquired under the MPF Xtra, MPF Direct, and MPF Government MBS products. See Note 2 - Summary of Significant Accounting Policies in our 2017 Form 10-K for information related to the accounting treatment of these off balance sheet MPF Loan products.

See Note 8 - Allowance for Credit Losses to the financial statements for information related to our credit losses on MPF Loans held in portfolio.



19
Table of Contents
logoa58.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 8 – Allowance for Credit Losses


See Note 2 - Summary of Significant Accounting Policies to the financial statements in our 2017 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-16 in our 2017 Form 10-K. There has been no material activity in our allowance for credit losses since December 31, 2017. The following table presents the recorded investment and the allowance for credit losses in conventional MPF Loans by impairment methodology.
As of
 
June 30, 2018
 
December 31, 2017
Recorded investment -
 
 
 
 
Individually evaluated for impairment
 
$
40

 
$
49

Collectively evaluated for impairment
 
4,800

 
4,167

Recorded investment
 
$
4,840

 
$
4,216

 
 
 
 
 
Allowance for credit losses -
 
 
 
 
Collectively evaluated for impairment
 
$
1

 
$
2




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.


20
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
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. We do not recognize interest income on impaired conventional MPF Loans.

 
 
June 30, 2018
 
December 31, 2017
 
As of
 
Conventional
 
Government
 
Total
 
Conventional
 
Government
 
Total
 
Past due 30-59 days
 
$
63

 
$
40

 
$
103

 
$
74

 
$
48

 
$
122

 
Past due 60-89 days
 
13

 
12

 
25

 
21

 
16

 
37

 
Past due 90 days or more
 
39

 
19

 
58

 
48

 
21

 
69

 
Past due
 
115

 
71

 
186

 
143


85

 
228

 
Current
 
4,725

 
899

 
5,624

 
4,073

 
921

 
4,994

 
Recorded investment
 
$
4,840

 
$
970

 
$
5,810

 
$
4,216


$
1,006

 
$
5,222

 
In process of foreclosure
 
$
17

 
$
6

 
$
23

 
$
21

 
$
7

 
$
28

 
Serious delinquency rate
 
0.83
%
 
1.94
%
 
1.01
%
 
1.16
%
 
2.11
%
 
1.34
%
 
Past due 90 days or more and still accruing interest
 
$
6

 
$
19

 
$
25

 
$
8

 
$
21

 
$
29

 
Impaired loans without an allowance for credit losses and on nonaccrual status
 
40

 
—

 
40

 
49

 
—

 
49

 
Unpaid principal balance of impaired loans without an allowance for credit losses
 
43

 
—

 
43

 
53

 
—

 
53

 



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 June 30, 2018, and December 31, 2017. 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.

21
Table of Contents
logoa58.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 9 – Derivatives and Hedging Activities

Refer to Note 2 - Summary of Significant Accounting Policies in our 2017 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 Derivatives Clearing Organizations (DCOs) through Futures Commission Merchants (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 (bilateral) 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 16 - Fair Value in our 2017 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 nearly all 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 Commodity Futures Trading Commission (CFTC). For certain transactions executed prior to March 1, 2017, we may be required to post net additional collateral with our counterparties 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 June 30, 2018.

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 to the financial statements in this Form 10-Q and our 2017 Form 10-K 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 $74 million of investment securities that can be sold or repledged, as part of our initial margin related to cleared derivative transactions at June 30, 2018. 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 June 30, 2018.


22
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
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 cleared and bilateral derivative assets and liabilities on our statements of condition. To conform with our current presentation method, we reclassified variation margin for cleared derivatives as of December 31, 2017, in the amounts of $16 million on our derivative assets and $168 million on our derivative liabilities, to the appropriate interest rate contracts line items.

 
 
June 30, 2018
 
December 31, 2017
 
As of
 
Notional Amount
 
Derivative Assets
 
Derivative Liabilities
 
Notional Amount
 
Derivative Assets
 
Derivative Liabilities
 
Derivatives in hedge accounting relationships-
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
29,848

 
$
43

 
$
347

 
$
26,655

 
$
25

 
$
367

 
Derivatives not in hedge accounting relationships-
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
23,674


102


77

 
20,506

 
199

 
122

 
Other
 
987


1


1

 
810

 
1

 
1

 
Derivatives not in hedge accounting relationships
 
24,661

 
103

 
78

 
21,316


200


123

 
Gross derivative amount before netting adjustments and cash collateral
 
$
54,509

 
146

 
425

 
$
47,971


225


490

 
Netting adjustments and cash collateral
 
 
 
(141
)
 
(406
)
 
 
 
(222
)
 
(470
)
 
Derivatives on statements of condition
 
 
 
$
5

 
$
19

 
 
 
$
3

 
$
20

 
Cash collateral received on derivative assets
 
 
 
$
25

 
 
 
 
 
$
35

 
 
 
Cash collateral posted on derivative liabilities
 
 
 
 
 
$
290

 
 
 
 
 
$
284

 



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 June 30,
 
Six months ended June 30,
For the periods ending
 
2018
 
2017
 
2018
 
2017
Fair value hedges - interest rate contracts
 
$
(2
)
 
$
(2
)
 
$
—

 
$
—

Cash flow hedges - interest rate contracts
 
—

 
—

 
1

 
1

Economic hedges -
 
 
 
 
 
 
 
 
Interest rate contracts
 
6

 
1

 
(1
)
 
1

Other
 
(2
)
 
3

 
(1
)
 
3

Economic hedges
 
4

 
4

 
(2
)
 
4

Variation margin on daily settled cleared derivatives
 
1

 
1

 
1

 
1

Noninterest income on derivatives and hedging activities
 
$
3

 
$
3

 
$
—

 
$
6



23
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
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.
 
 
Derivative Assets
 
Derivative Liabilities
 
 
 
Bilateral
 
Cleared
 
Total
 
Bilateral
 
Cleared
 
Total
 
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives with legal right of offset -
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross recognized amount
 
$
135

 
$
10

 
$
145

 
$
405

 
$
19

 
$
424

 
Netting adjustments and cash collateral
 
(131
)
 
(10
)
 
(141
)
 
(396
)
 
(10
)
 
(406
)
 
Derivatives with legal right of offset - net
 
4

 
—

 
4

 
9

 
9

 
18

 
Derivatives without legal right of offset
 
1

 
—

 
1

 
1

 
—

 
1

 
Derivatives on statements of condition
 
5

 
—

 
5

 
10

 
9

 
19

 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncash collateral received or pledged and cannot be sold or repledged
 
—

 
—

 
—

 
—

 
9

 
9

 
Net amount
 
$
5

 
$
—

 
$
5

 
$
10

 
$
—

 
$
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives with legal right of offset -
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross recognized amount
 
$
216

 
$
8

 
$
224

 
$
476

 
$
13

 
$
489

 
Netting adjustments and cash collateral
 
(214
)
 
(8
)
 
(222
)
 
(463
)
 
(7
)
 
(470
)
 
Derivatives with legal right of offset - net
 
2


—


2


13


6


19

 
Derivatives without legal right of offset
 
1

 
—

 
1

 
1

 
—

 
1

 
Derivatives on statements of condition
 
3


—


3


14


6


20

 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncash collateral received or pledged and cannot be sold or repledged
 
—

 
(1
)
 
(1
)
 
—

 
6

 
6

 
Net amount
 
$
3

 
$
1

 
$
4

 
$
14

 
$
—

 
$
14

 



At June 30, 2018, 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 position. We had $60 million of comparable exposure at December 31, 2017.






24
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
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.

 
 
Gain (Loss) on Hedging Instrument
 
Gain (Loss) on Hedged Item
 
Total Ineffectiveness Recognized in Derivatives and Hedging Activities
 
Amount Recorded in Net Interest Income
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
12

 
$
(14
)
 
$
(2
)
 
$
(12
)
Advances
 
23

 
(19
)
 
4

 
5

MPF Loans held for portfolio
 
—

 
—

 
—

 
(1
)
Consolidated obligation bonds
 
(25
)
 
21

 
(4
)
 
(14
)
Total
 
$
10

 
$
(12
)
 
$
(2
)
 
$
(22
)
Three months ended June 30, 2017
 
 
 
 
 
 
 

Available-for-sale securities
 
$
10

 
$
(12
)
 
$
(2
)
 
$
(25
)
Advances
 
(27
)
 
28

 
1

 
(8
)
MPF Loans held for portfolio
 
—

 
—

 
—

 
(1
)
Consolidated obligation bonds
 
50

 
(51
)
 
(1
)
 
9

Total
 
$
33


$
(35
)

$
(2
)
 
$
(25
)
Six months ended June 30, 2018
 
 
 
 
 
 
 

Available-for-sale securities
 
$
49

 
$
(51
)
 
$
(2
)
 
$
(30
)
Advances
 
107

 
(101
)
 
6

 
3

MPF Loans held for portfolio
 
—

 
—

 
—

 
(2
)
Consolidated obligation bonds
 
(149
)
 
145

 
(4
)
 
(16
)
Total
 
$
7

 
$
(7
)
 
$
—

 
$
(45
)
Six months ended June 30, 2017
 
 
 
 
 
 
 

Available-for-sale securities
 
$
35

 
$
(38
)
 
$
(3
)
 
$
(49
)
Advances
 
(15
)
 
18

 
3

 
(19
)
MPF Loans held for portfolio
 
—

 
—

 
—

 
(3
)
Consolidated obligation bonds
 
59

 
(59
)
 
—

 
22

Total
 
$
79

 
$
(79
)
 
$
—

 
$
(49
)


25
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

Cash Flow Hedges

We are exposed to the variability in the total net proceeds received from forecasted zero-coupon discount note issuances, which is attributable to changes in the benchmark interest rate, London Interbank Offering Rate ("LIBOR"). As a result, we enter into cash flow hedge relationships utilizing derivative agreements to hedge the total net proceeds received from our "rolling" forecasted zero-coupon discount note issuances attributable to changes in LIBOR. The maximum length of time over which we are hedging this exposure is 2 years. 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 for the periods presented. The deferred net gains (losses) on derivative instruments in AOCI that are expected to be reclassified to earnings during the next twelve months were not material as of June 30, 2018.

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.
 
 
 
Ineffectiveness Recorded in Derivatives and Hedging Activities
 
Effective Portion Recorded in AOCI
 
Amount Recorded in Net Interest Income
Three months ended June 30, 2018
 
 
 
 
 
 
Advances
 
$
—

 
$
—

 
$
1

Discount notes
 
—

 
29

 
(29
)
Bonds
 
—

 
—

 
(1
)
Total
 
$
—

 
$
29

 
$
(29
)
 
 
 
 
 
 
 
Three months ended June 30, 2017
 
 
 
 
 

Advances
 
$
—

 
$
—

 
$
4

Discount notes
 
—

 
27

 
(43
)
Bonds
 
—

 
—

 
(1
)
Total

$
—


$
27


$
(40
)
 
 
 
 
 
 
 
Six months ended June 30, 2018
 
 
 
 
 

Advances
 
$
—


$
—

 
$
1

Discount notes
 
$
1

 
$
88

 
$
(64
)
Bonds
 
—

 
—

 
(1
)
Total
 
$
1

 
$
88

 
$
(64
)
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
 
 
 
 

Advances
 
$
—

 
$
—

 
$
6

Discount notes
 
1

 
73

 
(88
)
Bonds
 
—

 
—

 
(2
)
Total
 
$
1

 
$
73

 
$
(84
)


26
Table of Contents
logoa58.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 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
 
June 30, 2018
 
December 31, 2017

Carrying Amount
 
$
43,007

 
$
41,191

Weighted Average Interest Rate
 
1.79
%
 
1.23
%


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 June 30, 2018
 
Contractual Maturity
 
Weighted Average Interest Rate
 
By Maturity or Next Call Date
Due in one year or less
 
$
26,347

 
1.75
%
 
$
37,758

One to two years
 
6,112

 
1.75
%
 
5,388

Two to three years
 
4,230

 
2.03
%
 
2,247

Three to four years
 
3,464

 
1.84
%
 
450

Four to five years
 
3,155

 
2.77
%
 
992

Thereafter
 
3,912

 
2.89
%
 
385

Total par value
 
$
47,220

 
1.94
%
 
$
47,220




The following table presents consolidated obligation bonds outstanding by call feature:
As of
 
June 30, 2018
 
December 31, 2017
Noncallable
 
$
33,963

 
$
23,644

Callable
 
13,257

 
13,703

Par value
 
47,220

 
37,347

Fair value hedging adjustments
 
(354
)
 
(214
)
Other adjustments
 
(12
)
 
(12
)
Consolidated obligation bonds
 
$
46,854

 
$
37,121



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 June 30, 2018, and December 31, 2017. See Note 17 - Commitments and Contingencies in our 2017 Form 10-K for further details.
 
 
June 30, 2018
 
December 31, 2017
Par values as of
 
Bonds
 
Discount
Notes
 
Total
 
Bonds
 
Discount
Notes
 
Total
FHLB System total consolidated obligations
 
$
646,112

 
$
413,747

 
$
1,059,859

 
$
642,211

 
$
392,049

 
$
1,034,260

FHLB Chicago as primary obligor
 
47,220

 
43,055

 
90,275

 
37,347

 
41,235

 
78,582

As a percent of the FHLB System
 
7
%
 
10
%
 
9
%
 
6
%
 
11
%
 
8
%

 

27
Table of Contents
logoa58.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 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. See Note 13 – Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements in our 2017 Form 10-K for further information on our capital stock and MRCS.

Minimum Capital Requirements

For details on our minimum capital requirements, including how the ratios below were calculated, see Minimum Capital Requirements on page F-44 of our 2017 Form 10-K. We complied with our minimum regulatory capital requirements as shown below.
 
 
June 30, 2018
 
December 31, 2017
 
 
Requirement
 
Actual
 
Requirement
 
Actual
Risk-based capital
 
$
1,195

 
$
5,547

 
$
1,075

 
$
5,051

Total regulatory capital
 
$
3,869

 
$
5,547

 
$
3,374

 
$
5,051

Total regulatory capital ratio
 
4.00
%
 
5.73
%
 
4.00
%
 
5.99
%
Leverage capital
 
$
4,837

 
$
8,320

 
$
4,218

 
$
7,577

Leverage capital ratio
 
5.00
%
 
8.60
%
 
5.00
%
 
8.98
%

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 had regulatory capital stock exceeding 10% of our total regulatory capital stock outstanding (which includes MRCS):
As of June 30, 2018
 
Regulatory Capital Stock Outstanding
 
% of Total Outstanding
 
Amount of Which is Classified as a Liability (MRCS)
BMO Harris Bank, NA
 
$
314

 
14.8
%
 
$
—

One Mortgage Partners Corp.
 
245

a 
11.6
%
 
245

The Northern Trust Company
 
227

 
10.7
%
 
—

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

Repurchase of Excess Capital Stock

Beginning in 2017, we began repurchasing all excess Class B2 membership stock on a weekly basis at par value, i.e., at $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.




28
Table of Contents
logoa58.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 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 June 30, 2018
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
358

 
$
(136
)
 
$
(89
)
 
$
(7
)

$
126

Change in the period recorded to the statements of condition, before reclassifications to statements of income
 
(43
)
 
8

 
29

 
(1
)

(7
)
Amounts reclassified in period to statements of income:
 


 


 


 


 


Net interest income
 
—

 
—

 
3

 
 
 
3

Ending balance
 
$
315

 
$
(128
)
 
$
(57
)
 
$
(8
)
 
$
122

Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
497

 
$
(168
)
 
$
(268
)
 
$
(8
)
 
$
53

Change in the period recorded to the statements of condition, before reclassifications to statements of income
 
(19
)
 
8

 
27

 
—

 
16

Amounts reclassified in period to statements of income:
 
 
 
 
 
 
 
 
 


Net interest income
 
—

 
—

 
(2
)
 
 
 
(2
)
Ending balance
 
$
478


$
(160
)

$
(243
)

$
(8
)

$
67

 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
407

 
$
(143
)
 
$
(147
)
 
$
(5
)
 
$
112

Change in the period recorded to the statements of condition, before reclassifications to statements of income
 
(92
)
 
15

 
88

 
(3
)
 
8

Amounts reclassified in period to statements of income:
 
 
 
 
 
 
 
 
 


Net interest income
 
—

 
—

 
3

 
 
 
3

Non-interest gain (loss)
 
—

 
—

 
(1
)
 
 
 
(1
)
Ending balance
 
$
315

 
$
(128
)
 
$
(57
)
 
$
(8
)
 
$
122

Six months ended June 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
 
19

 
17

 
73

 
(2
)
 
107

Amounts reclassified in period to statements of income:
 
 
 
 
 
 
 
 
 
 
Net interest income
 
—

 
—

 
(3
)
 
 
 
(3
)
Non-interest gain (loss)
 
—

 
—

 
(1
)
 
 
 
(1
)
Ending balance
 
$
478

 
$
(160
)
 
$
(243
)
 
$
(8
)
 
$
67



29
Table of Contents
logoa58.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 13 - Fair Value

The following table is a summary of the fair value estimates and related levels in the hierarchy. The carrying amounts are per the statements of condition. Fair value estimates represent the exit prices that we would receive to sell assets or pay to transfer liabilities in an orderly transaction with market participants at the measurement date. They do not represent an estimate of our overall market value as a going concern, as they do not take into account future business opportunities or profitability of assets and liabilities. We measure instrument-specific credit risk attributable to our consolidated obligations based on our nonperformance risk, which includes the credit risk associated with the joint and several liability of other FHLBs. As a result, we did not recognize any instrument-specific credit risk attributable to our consolidated obligations that are carried at fair value. See Note 2 - Summary of Significant Accounting Policies in our 2017 Form 10-K for our fair value policies and Note 16 - Fair Value in our 2017 Form 10-K for our valuation techniques and significant inputs. The netting adjustment amount includes cash collateral (either received or paid by us) and related accrued interest in cases where we have a legal right, by contract (e.g., master netting agreement) or otherwise, to offset cash flow obligations between us and our counterparty into a single net payable or receivable. See Note 9 - Derivatives and Hedging Activities.
 
 
Carrying Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting & Cash Collateral
 
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Carried at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
29

 
$
29

 
$
29

 
$
—

 
$
—

 
 
 
Interest bearing deposits
 
775

 
775

 
775

 
—

 
—

 
 
 
Federal Funds sold and securities purchased under agreements to resell
 
17,170


17,170


—


17,170


—

 
 
 
Held-to-maturity securities
 
3,733

 
4,050

 
—

 
3,330

 
720

 
 
 
Advances
 
53,609

 
53,655

 
—

 
53,655

 
—

 
 
 
MPF Loans held in portfolio, net
 
5,773

 
5,787

 
—

 
5,777

 
10

 
 
 
Other assets
 
163

 
163

 
—

 
163

 
—

 
 
 
Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
2,602

 
2,602

 
—

 
2,602

 
—

 
 
 
Government related non-MBS, ABS, and MBS
 
11,721


11,721


—


11,721


—

 
 
 
Private label residential MBS
 
47

 
47

 
—

 
—

 
47

 
 
 
Available-for-sale securities
 
11,768

 
11,768

 
—

 
11,721

 
47

 
 
 
Advances - fair value option election
 
859

 
859

 
—

 
859

 
—

 
 
 
Derivative assets
 
5

 
5

 
—

 
146

 
—

 
$
(141
)
 
Other assets - fair value option election
 
111

 
111

 
—

 
111

 
—

 
 
 
Carried at fair value on a nonrecurring basis
 
 
 
 
 
 
 
 
 
 
 
 
 
MPF Loans held in portfolio, net
 
6

 
6

 
—

 
—

 
6

 
 
 
Other assets
 
2

 
2

 
—

 
—

 
2

 
 
 
Total financial assets
 
96,605

 
$
96,982

 
$
804

 
$
95,534

 
$
785

 
$
(141
)
 
Other non financial assets
 
126

 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
96,731

 
 
 
 
 
 
 
 
 
 
 
Carried at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
(590
)
 
$
(590
)
 
$
—

 
$
(590
)
 
$
—

 
 
 
Consolidated obligation discount notes
 
(43,007
)
 
(43,004
)
 
—

 
(43,004
)
 
—

 
 
 
Consolidated obligation bonds
 
(42,787
)
 
(42,809
)
 
—

 
(42,809
)
 
—

 
 
 
Mandatorily redeemable capital stock
 
(314
)
 
(314
)
 
(314
)
 
—

 
—

 
 
 
Other liabilities
 
(123
)
 
(123
)
 
—

 
(123
)
 
—

 
 
 
Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation bonds - fair value option
 
(4,067
)
 
(4,067
)
 
—

 
(4,067
)
 
—

 
 
 
Derivative liabilities
 
(19
)
 
(19
)
 
—

 
(425
)
 
—

 
$
406

 
Total financial liabilities
 
(90,907
)
 
$
(90,926
)
 
$
(314
)
 
$
(91,018
)
 
$
—

 
$
406

 
Other non financial liabilities
 
(469
)
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
(91,376
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


30
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

 
 
Carrying Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting
 
December 31, 2017
 
 
 
Carried at amortized cost
 


 


 


 


 


 
 
 
Cash and due from banks
 
$
42

 
$
42

 
$
42

 
$
—

 
$
—

 
 
 
Interest bearing deposits
 
775

 
775

 
775

 
—

 
—

 
 
 
Federal Funds sold and securities purchased under agreements to resell
 
12,561

 
12,561

 
—

 
12,561

 
—

 
 
 
Held-to-maturity securities
 
4,157

 
4,538

 
—

 
3,734

 
804

 
 
 
Advances
 
47,309

 
47,336

 
—

 
47,336

 
—

 
 
 
MPF Loans held in portfolio, net
 
5,186

 
5,306

 
—

 
5,295

 
11

 
 
 
Other assets
 
119

 
119

 
—

 
119

 
—

 
 
 
Carried at fair value on a recurring basis
 


 
 
 
 
 


 
 
 
 
 
Trading securities
 
233

 
233

 
—

 
233

 
—

 
 
 
Government related non-MBS, ABS, and MBS
 
12,907


12,907


—


12,907


—

 
 
 
Private label residential MBS
 
50

 
50

 
—

 
—

 
50

 
 
 
Available-for-sale securities
 
12,957

 
12,957

 
—

 
12,907

 
50

 


 
Advances - fair value option election
 
776

 
776

 
—

 
776

 
—

 
 
 
Derivative assets
 
3

 
3

 
—

 
225

 
—

 
$
(222
)
 
Other assets - fair value option election
 
118

 
118

 
—

 
118

 
—

 
 
 
Carried at fair value on a nonrecurring basis
 
 
 
 
 
 
 
 
 
 
 
 
 
MPF Loans held in portfolio, net
 
7

 
7

 
—

 
—

 
7

 
 
 
Other assets
 
3

 
3

 
—

 
—

 
3

 
 
 
Total financial assets
 
84,246


$
84,774


$
817


$
83,304


$
875


$
(222
)
 
Other non financial assets
 
109

 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
84,355

 
 
 
 
 
 
 
 
 
 
 
Carried at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(524
)
 
(524
)
 
—

 
(524
)
 
—

 
 
 
Consolidated obligation discount notes
 
(40,442
)
 
(40,437
)
 
—

 
(40,437
)
 
—

 
 
 
Consolidated obligation bonds
 
(31,861
)
 
(32,011
)
 
—

 
(32,011
)
 
—

 
 
 
Mandatorily redeemable capital stock
 
(311
)
 
(311
)
 
(311
)
 
—

 
—

 
 
 
Other liabilities
 
(94
)
 
(94
)
 
—

 
(94
)
 
—

 
 
 
Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation discount notes - fair value option
 
(749
)
 
(749
)
 
—

 
(749
)
 
—

 
 
 
Consolidated obligation bonds - fair value option
 
(5,260
)
 
(5,260
)
 
—

 
(5,260
)
 
—

 
 
 
Derivative liabilities
 
(20
)
 
(20
)
 
—

 
(490
)
 
—

 
470

 
Total financial liabilities
 
(79,261
)
 
$
(79,406
)
 
$
(311
)
 
$
(79,565
)
 
$
—

 
$
470

 
Other non financial liabilities
 
(242
)
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
(79,503
)
 
 
 
 
 
 
 
 
 
 
 



We had no transfers between levels for the periods shown.

31
Table of Contents
logoa58.jpg Federal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(Dollars in tables in millions except per share amounts unless otherwise indicated)

Fair Value Option

We may 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 2017 Form 10-K for further details.

The following table presents the changes in fair values of financial assets and liabilities carried at fair value under the fair value option. These changes were recognized in noninterest income - instruments held under the fair value option in our statements of income.

 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Advances
 
$
(1
)
 
$
3

 
$
(10
)
 
$
3

Consolidated obligation bonds
 
(7
)
 
1

 
(2
)
 
—

Other assets
 
(2
)
 
—

 
(5
)
 
(1
)
Noninterest income - Instruments held under fair value option
 
$
(10
)
 
$
4

 
$
(17
)
 
$
2



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.

 
 
June 30, 2018
 
December 31, 2017
As of
 
Advances
 
Consolidated Obligation Bonds
 
Advances
 
Consolidated Obligation Bonds
Unpaid principal balance
 
$
879

 
$
4,076


$
786

 
$
5,270

Fair value over (under) UPB
 
(20
)
 
(9
)
 
(10
)
 
(10
)
Fair value  
 
$
859

 
$
4,067

 
$
776

 
$
5,260


  

32
Table of Contents
logoa58.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 14 – Commitments and Contingencies

The following table shows our commitments outstanding, which represent off-balance sheet obligations.

 
 
June 30, 2018
 
December 31, 2017
As of
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Unsettled consolidated obligation bonds
 
$
35

 
$
—

 
$
35

 
$
—

 
$
—

 
$
—

Member standby letters of credit
 
16,568

 
5,019

a 
21,587

 
15,703

 
3,869

a 
19,572

Housing authority standby bond purchase agreements
 
73

 
238

 
311

 
—

 
337

 
337

Advance commitments
 
523

 
3

 
526

 
151

 
—

 
151

MPF delivery commitments
 
524

 
—

 
524

 
371

 
—

 
371

Other
 
4

 
—

 
4

 
14

 
—

 
14

Commitments
 
$
17,727

 
$
5,260

 
$
22,987

 
$
16,239

 
$
4,206

 
$
20,445


a 
Contains $1.0 billion and $750 million of member standby letters of credit at June 30, 2018, and December 31, 2017, which were renewable annually.

For a description of defined terms see Note 17 - Commitments and Contingencies to the financial statements in our 2017 Form 10-K.


33
Table of Contents
logoa58.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 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. These 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 material balances we had with our members who are related parties as defined above (including their affiliates) as of the periods presented. The related impacts to our Statements of Income were not material.

As of
 
June 30, 2018
 
December 31, 2017
Assets - Advances
 
$
643

 
$
165

Liabilities - Deposits
 
6

 
13

Equity - Capital Stock
 
27

 
10




Other FHLBs

From time to time, we may loan to, or borrow from, other FHLBs. These 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.

In addition, we provide programmatic and operational support in our role as the administrator of the MPF Program on behalf of the other MPF Banks for a fee.

Material transactions with other FHLBs, if any, are identified on the face of our Financial Statements.



34
Table of Contents
logoa53.jpg Federal Home Loan Bank of Chicago 
(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
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
Selected statements of condition data
 
 
 
 
 
 
 
 
 
 
 
Investments a
 
$
36,048

 
$
34,818

 
$
30,683

 
$
31,885

 
$
29,461

 
Advances
 
54,468

 
50,840

 
48,085

 
50,153

 
46,844

 
MPF Loans held in portfolio, net
 
5,779

 
5,357


5,193


5,024


4,965

 
Total assets
 
96,731

 
91,391

 
84,355

 
87,488

 
81,779

 
Consolidated obligation discount notes, net
 
43,007

 
41,483

 
41,191

 
45,460

 
37,944

 
Consolidated obligation bonds, net
 
46,854

 
43,516

 
37,121

 
35,890

 
37,878

 
Mandatorily redeemable capital stock (MRCS) recorded as a liability
 
314

 
311

 
311

 
308

 
303

 
Capital stock
 
1,805

 
1,579

 
1,443

 
1,557

 
1,526

 
Retained earnings
 
3,428

 
3,358

 
3,297

 
3,219

 
3,153

 
Total capital
 
5,355

 
5,063

 
4,852

 
4,872

 
4,746

 
Other selected data at period end
 
 
 
 
 
 
 
 
 
 
 
Member standby letters of credit outstanding
 
$
21,587

 
$
20,132

 
$
19,572

 
$
15,411

 
$
13,220

 
MPF Loans par value outstanding - FHLB System b
 
54,572

 
52,582

 
51,563

 
49,970

 
48,260

 
MPF Loans par value outstanding - FHLB Chicago PFIs b
 
13,189

 
12,692

 
12,484

 
12,187

 
11,987

 
Number of members
 
719

 
719

 
720

 
717

 
721

 
Total employees (full and part time)
 
462

 
461

 
460

 
457

 
457

 
Selected statements of income data
 
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for credit losses
 
$
132


$
124


$
130


$
124


$
116

 
Non-interest gain (loss)
 
9

 
—

 
13

 
5

 
16

 
Non-interest expense
 
46

 
42

 
45

 
43

 
44

 
Net income
 
85

 
74

 
88

 
77

 
79

 
Other selected data during the periods
 
 
 
 
 
 
 
 
 
 
 
MPF Loans par value amounts funded - FHLB System b
 
$
3,555

 
$
2,494

 
$
3,280

 
$
3,474

 
$
3,088

 
Number of PFIs funding MPF products - FHLB System b
 
767

 
720

 
750

 
769

 
776

 
MPF Loans par value amounts funded - FHLB Chicago PFIs b
 
$
892

 
$
566

 
$
729

 
$
655

 
$
620

 
Number of PFIs funding MPF products - FHLB Chicago b
 
184

 
174

 
175

 
175

 
176

 
Selected ratios (rates annualized)
 
 
 
 
 
 
 
 
 
 
 
Total regulatory capital to assets ratio
 
5.73
%
 
5.74
%
 
5.99
%
 
5.81
%
 
6.09
%
 
Market value of equity to book value of equity
 
106
%
 
107
%
 
107
%
 
107
%
 
108
%
 
Primary mission asset ratio c
 
69.9
%
 
69.1
%
 
67.3
%
 
67.2
%
 
67.2
%
 
Dividend rate class B1 activity stock-period paid
 
4.00
%
 
3.50
%
 
3.30
%
 
3.30
%
 
3.15
%
 
Dividend rate class B2 membership stock-period paid
 
1.60
%
 
1.50
%
 
1.25
%
 
1.25
%
 
1.05
%
 
Return on average assets
 
0.36
%
 
0.33
%
 
0.41
%
 
0.36
%
 
0.39
%
 
Return on average equity
 
6.42
%
 
5.82
%
 
7.34
%
 
6.54
%
 
6.99
%
 
Average equity to average assets
 
5.61
%
 
5.67
%
 
5.59
%
 
5.50
%
 
5.58
%
 
Net yield on average interest-earning assets
 
0.56
%
 
0.55
%
 
0.60
%
 
0.59
%
 
0.58
%
 
Return on average Regulatory Capital spread to three month LIBOR index
 
3.90
%
 
3.77
%
 
5.54
%
 
4.89
%
 
5.47
%
 
Cash dividends
 
$
15

 
$
13

 
$
10

 
$
11

 
$
9

 
Dividend payout ratio
 
18
%

18
%

11
%

14
%

11
%
 
a 
Includes investment securities, interest bearing deposits, Federal Funds sold, and securities purchased under agreements to resell.
b 
Includes all MPF products, on and off our balance sheet. See Mortgage Partnership Finance Program on page 8 in our 2017 Form 10-K.
c 
In 2015, the FHFA issued an advisory bulletin that provides guidance relating to how the FHFA will assess each FHLB's core mission achievement by using a ratio of primary mission assets (which includes advances and mortgage loans acquired from members) to consolidated obligations. The primary mission asset ratios presented in this 10-Q are on an annual average year to date basis. See Mission Asset Ratio on page 5 in our 2017 Form 10-K for more information.

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logoa53.jpg Federal Home Loan Bank of Chicago 
(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 and continue to offer the Reduced Capitalization Advance Program 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; 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;



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logoa53.jpg Federal Home Loan Bank of Chicago 
(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 or changes affecting our regulator and changes in the FHLB Act or applicable regulations as a result of the Housing and Economic Recovery Act of 2008 (Housing Act) or as may otherwise be issued by our regulator; the potential designation of us as a nonbank financial company for supervision by the Federal Reserve;

•
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 2017 Form 10-K on page 16.

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.


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logoa53.jpg Federal Home Loan Bank of Chicago 
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Executive Summary

Second Quarter 2018 Financial Highlights
•
Advances outstanding increased $6.4 billion to $54.5 billion at June 30, 2018, up from $48.1 billion at December 31, 2017.
•
MPF Loans held in portfolio increased to $5.8 billion at June 30, 2018, up from $5.2 billion at December 31, 2017, as new MPF Loan purchases continued to moderately outpace paydown and maturity activity due to an increased number of PFIs and the introduction this June of more competitive pricing for low balance MPF Loans.
•
Total investment securities increased 4% to $18.1 billion at June 30, 2018, up from $17.3 billion at December 31, 2017, as we increased our purchase of Treasury securities and MBS.
•
Total assets increased to $96.7 billion as of June 30, 2018, compared to $84.4 billion as of December 31, 2017.
•
We recorded net income of $85 million in the second quarter of 2018, up from $79 million in the second quarter of 2017.
•
Net interest income for the second quarter of 2018 was $132 million, up from $117 million for the second quarter of 2017, as we benefited both from the rising rate environment and higher levels of interest earning assets.
•
Letters of credit commitments increased to $21.6 billion at June 30, 2018, up from $19.6 billion at December 31, 2017.
•
We remained in compliance with all of our regulatory capital requirements as of June 30, 2018.


Summary and Outlook

Second Quarter 2018 Dividend

On July 26, 2018, the Bank's Board of Directors increased the dividends declared per share on both sub-classes of capital stock. Based on the Bank's preliminary financial results for the second quarter of 2018, the Board of Directors declared a dividend of 4.25% (annualized) for Class B1 activity capital stock (an increase of 25 basis points from the previous quarter) and a dividend of 1.70% (annualized) for Class B2 membership capital stock (an increase of 10 basis points from the previous quarter).

The Bank pays a higher dividend per share on Class B1 activity stock than on Class B2 membership stock to reward members who use the Bank’s advances and, thereby, support the entire cooperative. The higher dividend members receive on Class B1 activity stock has the effect of lowering their borrowing costs.

Members Maximizing the Benefits of Our Products and Programs

During the second quarter of 2018, the Bank continued to see strong utilization of its advances, letters of credit, and MPF products, and participation in its community investment programs. Advances outstanding totaled $54.5 billion and letters of credit totaled $21.6 billion at the end of the second quarter of 2018, up $6.4 billion and $2 billion from year-end 2017, respectively. MPF Loans outstanding on balance sheet totaled $5.8 billion at the end of the second quarter of 2018, up from $5.2 billion at year-end 2017. The increasing number of PFIs selling into MPF Traditional products, along with the introduction in June 2018 of more competitive pricing for low balance MPF Loans, helped contribute to the highest levels of MPF activity since 2015 when the Bank made these MPF products available again for its members. Additionally, the competitive AHP round closed on June 15, 2018 with 91 applications requesting a total of $51.8 million. The Bank expects to award approximately $25.1 million in AHP funding in early December 2018.

A New Way to Support Small Business Lending: Community Small Business Advance

In July 2018, the Bank began offering the new Community Small Business Advance as a way for members to support their local economy and community revitalization efforts. This new fixed rate, fixed term advance provides members with funding at a 0% interest rate in exchange for a commitment from members limiting the rate they charge to customers benefiting from this funding to no more than 3.5%. The Bank believes this new advance will help members finance small business projects in their communities.

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(Dollars in tables in millions except per share amounts unless otherwise indicated)



Critical Accounting Policies and Estimates

For a detailed description of our Critical Accounting Policies and Estimates see page 38 in our 2017 Form 10-K.

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, 2017.

There have been no significant changes to our critical accounting estimates in 2018.


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;
•
OTTI security yield adjustments due to either subsequent increases or decreases in estimated cash flows;
•
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. Amortized cost basis is used to compute the average balances for most of our financial instruments, including MPF Loans held in portfolio that are on nonaccrual status and available-for-sale securities. The calculation of the yield on our available-for-sale securities does not give effect to changes in fair value that are reflected as a component of accumulated other comprehensive income (AOCI). 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 the net interest income components, as discussed above, applicable to our interest earning assets and interest bearing liabilities.

•
Yield/Rate: Effective yields/rates are based on total interest and average balances as defined above. Yields/rates are calculated on an annualized basis.

•
Any changes due to the combined volume/rate variance have been allocated to volume.

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(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
 
June 30, 2018
 
June 30, 2017
 
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
$
17,750

 
$
172

 
3.88
%
 
$
18,216

 
$
163

 
3.58
%
 
$
(5
)
 
$
14

 
$
9

Advances
56,953

 
285

 
2.00
%
 
46,225

 
130

 
1.12
%
 
53

 
102

 
155

MPF Loans held in portfolio
5,517

 
60

 
4.35
%
 
4,972

 
53

 
4.26
%
 
6

 
1

 
7

Federal funds sold and securities purchased under agreements to resell
12,638

 
54

 
1.71
%
 
10,496

 
25

 
0.95
%
 
9

 
20

 
29

Other interest bearing assets
1,200

 
6

 
2.00
%
 
1,073

 
2

 
0.75
%
 
1

 
3

 
4

Interest bearing assets
94,058

 
577

 
2.45
%
 
80,982

 
373

 
1.84
%
 
81

 
123

 
204

Noninterest bearing assets
764

 
 
 
 
 
921

 
 
 
 
 
 
 
 
 
 
Total assets
94,822

 
 
 
 
 
81,903

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation discount notes
40,816

 
205

 
2.01
%
 
38,413

 
119

 
1.24
%
 
12

 
74

 
86

Consolidated obligation bonds
47,541

 
233

 
1.96
%
 
37,732

 
133

 
1.41
%
 
48

 
52

 
100

Other interest bearing liabilities
876

 
7

 
3.20
%
 
838

 
4

 
1.91
%
 
—

 
3

 
3

Interest bearing liabilities
89,233

 
445

 
1.99
%
 
76,983

 
256

 
1.33
%
 
62

 
127

 
189

Noninterest bearing liabilities
235

 
 
 
 
 
337

 
 
 
 
 
 
 
 
 
 
Total liabilities
89,468

 
 
 
 
 
77,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net yield interest earning assets
$
94,058

 
$
132

 
0.56
%
 
$
80,982

 
$
117

 
0.58
%
 
$
19

 
$
(4
)
 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
$
18,092

 
$
335

 
3.70
%
 
$
18,989

 
$
329

 
3.47
%
 
$
(16
)
 
$
22

 
$
6

Advances
54,895

 
499

 
1.82
%
 
45,712

 
229

 
1.00
%
 
83

 
187

 
270

MPF Loans held in portfolio
5,372

 
115

 
4.28
%
 
4,964

 
107

 
4.31
%
 
9

 
(1
)
 
8

Federal funds sold and securities purchased under agreements to resell
12,305

 
98

 
1.59
%
 
9,573

 
40

 
0.84
%
 
22

 
36

 
58

Other interest bearing assets
1,208

 
10

 
1.66
%
 
1,217

 
5

 
0.82
%
 
—

 
5

 
5

Interest bearing assets
91,872

 
1,057

 
2.30
%
 
80,455

 
710

 
1.76
%
 
130

 
217

 
347

Noninterest bearing assets
716

 
 
 
 
 
764

 
 
 
 
 
 
 
 
 
 
Total assets
92,588

 
 
 
 
 
81,219

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation discount notes
41,899

 
388

 
1.85
%
 
37,771

 
215

 
1.14
%
 
39

 
134

 
173

Consolidated obligation bonds
44,358

 
402

 
1.81
%
 
37,706

 
258

 
1.37
%
 
61

 
83

 
144

Other interest bearing liabilities
864

 
11

 
2.55
%
 
869

 
7

 
1.61
%
 
—

 
4

 
4

Interest bearing liabilities
87,121

 
801

 
1.84
%
 
76,346

 
480

 
1.26
%
 
100

 
221

 
321

Noninterest bearing liabilities
244

 
 
 
 
 
332

 
 
 
 
 
 
 
 
 
 
Total liabilities
87,365

 
 
 
 
 
76,678

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net yield interest earning assets
$
91,872

 
$
256

 
0.56
%
 
$
80,455

 
$
230

 
0.57
%
 
$
30

 
$
(4
)
 
$
26



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logoa53.jpg Federal Home Loan Bank of Chicago 
(Dollars in tables in millions except per share amounts unless otherwise indicated)


The following is an analysis of the preceding table and unless otherwise indicated, comparisons apply to the three and six month periods ending June 30, 2018 compared to the same periods ending June 30, 2017.
 

•
Interest income from investment securities increased due to increases in rates, partially offset by declines in volumes. Subject to FHFA regulatory limits as discussed in Investments on page 10 in our 2017 Form 10-K, we began making investments in MBS in June 2018; however the amount of new MBS purchases did not exceed the amount of maturities or paydowns year to date.

•
Interest income from advances increased primarily due to a rise in rates, which resulted primarily from interest rate hikes by the Federal Reserve Bank during the periods presented. Interest income also increased to a lesser extent as a result of higher member demand for advances. As our members experience increased loan demands outpacing their deposit growth, utilization of our advances increased.

•
Interest income from MPF Loans held in portfolio increased due to higher volumes, as new MPF loan purchases continued to moderately outpace paydown and maturity activity due to an increased number of PFIs and more competitive pricing for low balance MPF Loans. Rates on MPF Loans were essentially unchanged.

•
Interest income from Federal Funds sold and securities purchased under agreements to resell increased primarily due to increases in interest rates by the Federal Reserve Bank; and to a lesser extent by higher volumes as we increased the amounts of these liquid assets as demand for our advances and letters of credit increased.

•
Interest expense on both our shorter termed consolidated obligation discount notes and our longer termed consolidated obligation bonds increased, primarily due to rising rates; and to a lesser extent, an increase in notes and bonds outstanding.

•
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 table on the following page.


Noninterest Income 

 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Noninterest income -
 
 
 
 
 
 
 
 
Derivatives and hedging activities
 
$
3

 
$
3

 
$
—

 
$
6

Instruments held under fair value option
 
(10
)
 
4

 
(17
)
 
2

MPF fees,
6
,
5
,
12
and
10
from other FHLBs
 
7

 
7

 
15

 
13

Other, net
 
9

 
2

 
11

 
5

Noninterest income
 
$
9

 
$
16

 
$
9

 
$
26


The following is an analysis of the above table and unless otherwise indicated, comparisons apply to the three and six month periods ending June 30, 2018 and the same periods ending June 30, 2017.

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 the most significant drivers of our noninterest income over the periods presented. Instead, the majority of the effect from our derivatives and hedging activities is recorded in net interest income. The following table details the effect of all of these transactions on our statements of income.



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(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 June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded in net interest income
$
6


$
(12
)

$
(1
)

$
(29
)

$
(15
)

$
—

 
$
(51
)
Recorded in derivatives & hedging activities
8


(1
)

(1
)

—


(4
)

1

 
3

Recorded in other, net
—

 
3

 
—

 
—

 
—

 
—

 
3

Recorded on instruments held under fair value option
(1
)

—


—


—


(9
)
 
—

 
(10
)
Total net effect gain (loss) of hedging activities
$
13


$
(10
)

$
(2
)

$
(29
)

$
(28
)

$
1


$
(55
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded in net interest income
$
(4
)
 
$
(25
)
 
$
(1
)
 
$
(43
)
 
$
8

 
$
—

 
$
(65
)
Recorded in derivatives & hedging activities
(5
)
 
(3
)
 
4

 
1

 
6

 
—

 
3

Recorded on instruments held under fair value option
3

 
—

 
(1
)
 
—

 
2

 
—

 
4

Total net effect gain (loss) of hedging activities
$
(6
)
 
$
(28
)
 
$
2

 
$
(42
)
 
$
16

 
$
—

 
$
(58
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded in net interest income
$
4


$
(30
)

$
(2
)

$
(64
)

$
(17
)

$
—

 
$
(109
)
Recorded in derivatives & hedging activities
22


—


(2
)

1


(21
)

—

 
—

Recorded in other, net
—

 
3

 
—

 
—

 
—

 
—

 
3

Recorded on instruments held under fair value option
(10
)
 
—

 
(4
)
 
—

 
(3
)
 
—

 
(17
)
Total net effect gain (loss) of hedging activities
$
16


$
(27
)

$
(8
)

$
(63
)

$
(41
)

$
—

 
$
(123
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded in net interest income
$
(13
)

$
(49
)

$
(3
)

$
(88
)

$
20


$
—

 
$
(133
)
Recorded in derivatives & hedging activities
(3
)

(3
)

3


2


7


—

 
6

Recorded in other, net
—

 
1

 
—

 
—

 
—

 
—

 
1

Recorded on instruments held under fair value option
3

 
—

 
(1
)
 
—

 
—

 
—

 
2

Total net effect gain (loss) of hedging activities
$
(13
)

$
(51
)

$
(1
)

$
(86
)

$
27


$
—

 
$
(124
)


MPF fees (including from other FHLBs)

A majority of MPF fees are from other FHLBs that pay us a fixed membership fee to participate in the MPF Program and a volume based fee for us to provide services related to MPF Loans carried on their balance sheets. MPF fees also include income from other third party off-balance sheet MPF Loan products and other related transaction fees. These fees are designed to offset a portion of the expenses we incur to administer the program. MPF fees have grown as off balance sheet MPF Loan volumes increased.


Other, net

The increases in Other, net were primarily due to increased fee income earned on member standby letter of credit products, as noted in Item 2. Selected Financial Data. We also incurred an unrealized loss of $4 million on our trading securities in the second quarter of 2018, due to rising interest rates. We expect this unrealized loss to reverse as the securities mature over the next year. We had no significant trading gains or losses in the other periods presented.



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logoa53.jpg Federal Home Loan Bank of Chicago 
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Noninterest Expense

 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Compensation and benefits
 
$
28

 
$
26

 
$
52

 
$
51

Operating expenses
 
17

 
15

 
32

 
30

Other
 
1

 
3

 
4

 
5

Noninterest expense
 
$
46

 
$
44

 
$
88

 
$
86



The following is an analysis of the preceding table and unless otherwise indicated, comparisons apply to the three and six month periods ending June 30, 2018 and the same periods ending June 30, 2017.

We had 462 employees as of June 30, 2018, compared to 457 as of June 30, 2017. Total compensation and benefits increased primarily due to salary and wage increases.

Operating expenses primarily increased in both the three and six month ending June 2018 due to $1 million in non-service cost components (interest and amortization) related to our pensions.

Other consists primarily of our share of the funding for the FHFA, our regulator, and the Office of Finance, which manages the consolidated obligation debt issuances of the FHLBs. In addition, Other includes MPF related non-operating expenses/gains on the sale of real estate owned.


Assessments

We record the Affordable Housing Program (AHP) assessment expense at a rate of 10% of income before assessments, excluding interest expense on MRCS. See Note 11 - Affordable Housing Program in our 2017 Form 10-K for further details.



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logoa53.jpg Federal Home Loan Bank of Chicago 
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Other Comprehensive Income (Loss)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
Balance remaining in AOCI as of
 
 
2018
 
2017
 
2018
 
2017
 
June 30, 2018
Net unrealized gain (loss) available-for-sale securities
 
$
(43
)
 
$
(19
)
 
$
(92
)
 
$
19

 
$
315

Noncredit OTTI held-to-maturity securities
 
8

 
8

 
15

 
17

 
(128
)
Net unrealized gain (loss) cash flow hedges
 
32

 
25

 
90

 
69

 
(57
)
Postretirement plans
 
(1
)
 
—

 
(3
)
 
(2
)
 
(8
)
Other comprehensive income (loss)
 
$
(4
)
 
$
14

 
$
10

 
$
103

 
$
122



The following is an analysis of the above table and unless otherwise indicated, comparisons apply to the three and six month periods ending June 30, 2018 and the same periods ending June 30, 2017.

Net unrealized gain (loss) on available-for-sale securities

The net unrealized loss on our available-for-sale (AFS) portfolio for 2018 is attributable to the reversal of net unrealized gains from prior reporting periods as interest rates rose due to Federal Reserve Bank actions and as these securities approach maturity (since we expect to receive par value at maturity). As of June 30, 2018, we had a net unrealized gain balance remaining in AOCI attributable to our AFS portfolio.

Noncredit OTTI on held-to-maturity securities

We recorded unrealized noncredit impairments on held-to-maturity securities during the last financial crisis. As the market has recovered and because we intend to hold these securities to maturity, we are recording accretion to the carrying amount of the securities, reversing the remaining loss balance in AOCI.

Net unrealized gain (loss) on cash flow hedges

The net unrealized gain on cash flow hedges during the periods presented resulted from an increase in shorter term interest rates as a result of actions by the Federal Reserve Bank.


We did not recognize any instrument-specific credit risk in our statements of comprehensive income as of June 30, 2018 due to our credit standing.

For further details on the activity in our Other Comprehensive Income (Loss) see Note 12 - Accumulated Other Comprehensive Income (Loss) to the financial statements.

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logoa53.jpg Federal Home Loan Bank of Chicago 
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Statements of Condition
 
June 30, 2018
 
December 31, 2017
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreement to resell
$
17,974

 
$
13,378

Investment securities
18,103

 
17,347

Advances
54,468

 
48,085

MPF Loans held in portfolio, net of allowance for credit losses
5,779

 
5,193

Other
407

 
352

Assets
96,731

 
84,355

Consolidated obligation discount notes
43,007

 
41,191

Consolidated obligation bonds
46,854

 
37,121

Other
1,515

 
1,191

Liabilities
91,376

 
79,503

Capital stock
1,805

 
1,443

Retained earnings
3,428

 
3,297

Accumulated other comprehensive income (loss)
122

 
112

Capital
5,355

 
4,852

Total liabilities and capital
$
96,731

 
$
84,355


The following is an analysis of the above table and comparisons apply to June 30, 2018 compared to December 31, 2017.

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;
•
Liquidity requirements;
•
Counterparties available; and
•
Collateral availability on securities purchased under agreements to resell.

We increased the amounts of these liquid assets as demand for our advances and letters of credit increased.

Investment Securities

Investment securities increased primarily due to the purchase of $2.6 billion in short term U.S. Government securities in our trading securities portfolio during 2018. This increase was partially offset by declines in MBS/ABS securities in our available-for-sale and held-to-maturity portfolios that matured or paid down and were only partially replaced starting in June 2018, as noted in Results of Operations on page 41.

Advances

Advances increased to the highest outstanding quarter end balance in our history due to strong market demand for funding in our district. As our members experience increased loan demands outpacing their deposit growth, utilization of our advances increased. 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 may decrease.

MPF Loans Held in Portfolio, Net of Allowance for Credit Losses

MPF Loans held in portfolio increased due to higher volumes, as new MPF loan purchases continued to moderately outpace paydown and maturity activity due to an increased number of PFIs and more competitive pricing for low balance MPF Loans.

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.

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logoa53.jpg Federal Home Loan Bank of Chicago 
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Liquidity, Funding, & Capital Resources

Liquidity
For the period ending June 30, 2018, we 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 2017 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 $3.4 billion of total assets. As of June 30, 2018, our overnight liquidity was $22.1 billion or 23% of total assets, giving us an excess overnight liquidity of $18.7 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 June 30, 2018, we had excess liquidity of $51.6 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 $20.0 billion as of June 30, 2018.

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 five 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 18 in the Risk Factors section of our 2017 Form 10-K.

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 rather than contractual cash flows of our assets, including prepayments made in advance of maturity.

 
 
MPF Loans Held in Portfolio
 
Investment Securities
As of June 30, 2018
 
 
Available-for Sale
 
Held-to-Maturity
Year of Expected Principal Cash Flows
 
 
 
 
 
 
One year or less
 
$
682

 
$
3,569

 
$
1,722

After one year through five years
 
2,189

 
5,606

 
1,828

After five years through ten years
 
1,493

 
1,405

 
420

After ten years
 
1,334

 
535

 
109

Total
 
$
5,698

 
$
11,115

 
$
4,079



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 22 of the Risk Factors section in our 2017 Form 10-K.


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logoa53.jpg Federal Home Loan Bank of Chicago 
(Dollars in tables in millions except per share amounts unless otherwise indicated)


Funding

Conditions in Financial Markets

In June 2018, the Federal Open Market Committee (FOMC) raised the target range for the federal fund rate by 25 basis points to a range of 1.75 percent to 2.00 percent.  This is the seventh rate hike since the FOMC began to raise rates in December 2015.  The markets anticipate another 25 basis point increase in the target range for the federal fund rate in the third quarter of 2018.
We maintained ready access to funding during the second quarter of 2018.
Cash flows from operating activities
Six months ended June 30,
 
2018
 
2017
Net cash provided by (used in) operating activities
 
$
235

 
$
225


The increase in net cash provided by operating activities resulted primarily from an increase in net income and noncash adjustments.
Cash flows from investing activities with significant changes
Six months ended June 30,
 
2018
 
2017
Liquid assets (Federal Funds sold, securities purchased under agreements to resell, and interest bearing deposits)
 
$
(4,609
)

$
(3,658
)
Investment securities
 
(625
)
 
2,257

Advances
 
(6,495
)

(1,758
)
MPF Loans held in portfolio
 
(592
)

(2
)
Other
 
8

 
14

Net cash provided by (used in) investing activities
 
$
(12,313
)
 
$
(3,147
)

Our investing activities consist predominantly of liquid assets, securities held for investment, and advances. The decline in net cash provided by (used in) investing activities primarily resulted from the following:

•
The increase in liquid assets reflect our increased liquidity needs to meet the demands of our members.

•
Securities held for investment primarily reflect the purchases made in our trading security portfolio in 2018. Subject to FHFA limits, we also began purchasing MBS securities in our available-for-sale security portfolio. Our purchases were partially offset by continued paydowns in the rest of our investment security portfolio.

•
Advances reflect the increase in advances outstanding during 2018 due to strong member demand, as compared to the smaller increase in advances outstanding in 2017.

•
MPF Loans held in portfolio reflect the increase in MPF Loans outstanding during 2018 as compared to 2017 due to an increasing number of PFIs and the introduction of more competitive pricing for low balance MPF Loans.

Cash flows from financing activities with significant changes
Six months ended June 30,
 
2018
 
2017
Consolidated obligation discount notes
 
$
1,801

 
$
1,986

Consolidated obligation bonds
 
9,873

 
909

Capital stock
 
364

 
(179
)
Other
 
27

 
23

Net cash provided by (used in) financing activities
 
$
12,065

 
$
2,739


Our financing activities primarily reflect cash flows related to issuing and repaying consolidated obligations. The proceeds from our discount notes and bonds were primarily utilized to fund our investing activities as noted above. The increase in net cash provided by (used in) financing activities primarily resulted from the following:


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logoa53.jpg Federal Home Loan Bank of Chicago 
(Dollars in tables in millions except per share amounts unless otherwise indicated)


•
An increase in 2018 in the amount of our consolidated obligations used to fund the growth in our balance sheet, compared to 2017, when there was a smaller increase in our consolidated obligations outstanding. In 2018, we relied primarily on consolidated obligation bonds for our funding, as compared to stronger reliance on discount notes in 2017.

•
An increase in capital stock outstanding as members purchased capital stock to support their advance borrowings.

Capital Resources

Capital Rules

Under the 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 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.

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 the Reduced Capitalization Advance Program (RCAP) as further discussed below. Each member’s activity stock requirement remains 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, 2017, and is thus the operative cap during the remainder of 2018 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.

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. 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.

For details on our capital stock requirements under our Capital Plan during 2017, see Capital Resource on page 53 of our 2017 Form 10-K. 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.

For details on our minimum regulatory capital requirements see Note 11 - Capital and Mandatorily Redeemable Capital Stock (MRCS) to the financial statements in this Form 10-Q, and Minimum Capital Requirements on page F-44 of our 2017 Form 10-K.


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(Dollars in tables in millions except per share amounts unless otherwise indicated)


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 of June 30, 2018, and December 31, 2017, RCAP advances outstanding total $26.0 billion to 158 members and $24.7 billion to 158 members, respectively.

Repurchase of Excess Capital Stock

Beginning in 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. For details on the financial and capital thresholds relating to repurchases, see Repurchase of Excess Capital Stock on page 57 of our 2017 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.
 
 
June 30, 2018
 
December 31, 2017
 
Change
Capital Stock
 
$
1,805

 
$
1,443

 
$
362

MRCS
 
314

 
311

 
3

Regulatory capital stock
 
2,119

 
1,754

 
365

Retained earnings
 
3,428

 
3,297

 
131

Regulatory capital
 
$
5,547

 
$
5,051

 
$
496

 
 
 
 
 
 
 
Capital stock
 
$
1,805

 
$
1,443

 
$
362

Retained earnings
 
3,428

 
3,297

 
131

Accumulated other comprehensive income (loss)
 
122

 
112

 
10

GAAP capital
 
$
5,355

 
$
4,852

 
$
503


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.

Although we have had no OTTI year to date in 2018, 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 the Risk Factors section on page 16 of our 2017 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 July 26, 2018, our Board of Directors declared a 4.25% dividend (annualized) for Class B1 activity stock and a 1.70% dividend (annualized) for Class B2 membership stock based on our preliminary financial results for the second quarter of 2018. This dividend, including dividends on mandatorily redeemable capital stock, totaled $19 million and is scheduled for payment on August 15, 2018.  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. For further information see Retained Earnings & Dividends on page 57 in our 2017 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-45 in our 2017 Form 10-K.

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logoa53.jpg Federal Home Loan Bank of Chicago 
(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 Credit Risk starting on page 60 in our 2017 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, $54.5 billion were advances (par value) and $21.6 billion were letters of credit at June 30, 2018, compared to $48.0 billion and $19.6 billion at December 31, 2017.

 
 
June 30, 2018
 
December 31, 2017
Rating
 
Borrowing Members
 
Credit Outstanding
 
Collateral Loan Value
 
Borrowing Members
 
Credit Outstanding
 
Collateral Loan Value
1-3
 
504

 
$
75,564

 
$
123,715

 
495

 
$
67,105

 
$
116,810

4
 
6

 
539

 
602

 
7

 
498

 
577

5
 
11

 
138

 
213

 
11

 
120

 
234

Total
 
521

 
$
76,241

 
$
124,530

 
513


$
67,723


$
117,621



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 to 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 credit losses due to borrower default on contractual principal and interest, which would result from the 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. For further details see Loss Structure for Credit Risk Sharing Products on page 9 of our 2017 Form 10-K, and Credit Risk Exposure and Setting Credit Enhancement Levels on page 63 of our 2017 Form 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 65 in our 2017 Form 10-K.



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logoa53.jpg Federal Home Loan Bank of Chicago 
(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, 2017. For further details see Investment Securities by Rating on page 67 in our 2017 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, 2017, 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

See Unsecured Short-Term Investments page 70 in our 2017 Form 10-K for further details on our unsecured short-term investments as well as policies and procedures to limit and monitor our unsecured credit risk exposure.

The following table presents the credit ratings of our unsecured investment counterparties, organized by the domicile of the counterparty or, where the counterparty is a U.S. branch or agency office of a foreign commercial bank, by the domicile of the counterparty's parent. 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.

As of June 30, 2018
 
AA
 
A
 
BBB
 
Total
Domestic U.S.
 
 
 
 
 
 
 
 
Interest-Bearing Deposits
 
$
—

 
$
775

 
$
—

 
$
775

Fed Funds Sold
 
1,500

 
1,000

 
170

 
2,670

U.S. branches and agency offices of foreign commercial banks - Federal Funds sold:
 
 
 
 
 
 
 
 
Australia
 
1,000

 
—

 
—

 
1,000

Canada
 
—

 
2,575

 
—

 
2,575

France
 
—

 
650

 
—

 
650

Netherlands
 
—

 
475

 
—

 
475

Norway
 
—

 
600

 
—

 
600

Sweden
 
1,500

 
700

 
—

 
2,200

Total unsecured credit exposure
 
$
4,000

 
$
6,775

 
$
170

 
$
10,945



All $10.9 billion of the unsecured credit exposure shown in the above table were overnight investments.

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logoa53.jpg Federal Home Loan Bank of Chicago 
(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 NRSROs. 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.

 
 
Net Derivative Fair Value Before Collateral
 
Cash Collateral Pledged
 
Noncash Collateral Pledged
 
Net Credit Exposure to Counterparties
 
As of June 30, 2018
 
 
 
 
 
 
 
 
 
Nonmember counterparties -
 
 
 
 
 
 
 
 
 
Undercollateralized asset positions -
 
 
 
 
 
 
 
 
 
Bilateral derivatives -
 
 
 
 
 
 
 
 
 
BBB
 
$
21

 
$
(20
)
 
$
—

 
$
1

 
Overcollateralized liability positions -
 
 
 
 
 
 
 
 
 
Bilateral derivatives -
 
 
 
 
 
 
 
 
 
AA rated
 
(2
)
 
2

 
—

 
—

a 
A rated
 
(34
)
 
38

 
—

 
4

 
Cleared derivatives
 
(10
)
 
—

 
74

 
64

 
Nonmember counterparties
 
(25
)
 
20

 
74

 
69

 
Member institutions
 
1

 
—

 
—

 
1

 
Total
 
$
(24
)
 
$
20

 
$
74

 
$
70

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
Nonmember counterparties -
 
 
 
 
 
 
 
 
 
Undercollateralized asset positions -
 
 
 
 
 
 
 
 
 
Bilateral derivatives -
 
 
 
 
 
 
 
 
 
BBB
 
$
8


$
(8
)

$
—


$
—

a 
Overcollateralized liability positions -
 
 
 
 
 
 
 
 
 
Bilateral derivatives -
 
 
 
 
 
 
 
 
 
AA rated
 
(52
)
 
52

 
—

 
—

a 
A rated
 
(75
)
 
76

 
—

 
1

 
Cleared derivatives
 
(6
)
 
—

 
67

 
61

 
Nonmember counterparties
 
(125
)
 
121

 
67

 
63

 
Member counterparties
 
1

 
—

 
—

 
1

 
Total
 
$
(124
)
 
$
121

 
$
67

 
$
64

 
a 
Less than $1 million.


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(Dollars in tables in millions except per share amounts unless otherwise indicated)


Legislative and Regulatory Developments

Significant regulatory actions and developments are summarized below.

Adoption of Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations by Board of Governors of the Federal Reserve System.
On August 6, 2018, the Board of Governors of the Federal Reserve System adopted a final rule establishing single-counterparty credit limits applicable to bank holding companies and foreign banking organizations with total consolidated assets of $250 billion or more, including global systemically important bank holding companies (“GSIBs”) in the United States. These entities are considered to be “covered companies” under the rule. The FHLBs are exempt from the limits and reporting requirements contained in this rule. However, credit exposure to individual FHLBs must be monitored, and reported on as required, by any entity that is a covered company under this rule.
Under the final rule, a covered company and its subsidiaries may not have aggregate net credit exposure to an FHLB and (in certain cases if applicable) economically interdependent entities in excess of 25% of the company’s tier 1 capital. Such credit exposure does not include advances from an FHLB, but generally includes collateral pledged to an FHLB in excess of a covered company’s outstanding advances. Also included toward a covered company’s net credit exposure is its investment in FHLB capital stock and debt instruments, deposits with an FHLB, FHLB-issued letters of credit where a covered company is the named beneficiary, and other obligations to an FHLB, including repurchase or reverse repurchase transactions net of collateral that create a credit exposure to an FHLB. Intra-day exposures are exempt from the final rule.
With respect to the FHLBs’ consolidated obligations held by a covered company, the company must monitor, and report on as required, its credit exposure for such obligations. It is not clear if the Federal Reserve will require consolidated obligations to be aggregated with other exposures to an FHLB or the FHLB System.
The final rule gives major covered companies (i.e., GSIBs) until January 1, 2020 to comply; all other covered companies will have until July 1, 2020 to comply.
The Bank is continuing to study the overall effect of the rule, but does not believe the rule will materially affect its financial condition or results of operations.



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(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.

 
 
June 30, 2018
 
December 31, 2017
Scenario as of
 
Change in Market Value of Equity
 
Loss Limit
 
Change in Market Value of Equity
 
Loss Limit
-200 bp
 
$
132

 
$
(450
)
 
$
202

 
$
(370
)
-100 bp
 
55

 
(200
)
 
66

 
(155
)
-50 bp
 
34

 
(90
)
 
31

 
(60
)
-25 bp
 
18

 
(45
)
 
16

 
(30
)
+25 bp
 
(20
)
 
(45
)
 
(17
)
 
(30
)
+50 bp
 
(41
)
 
(90
)
 
(37
)
 
(60
)
+100 bp
 
(90
)
 
(200
)
 
(83
)
 
(155
)
+200 bp
 
(205
)
 
(450
)
 
(195
)
 
(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.

 
 
 
Option Risk
 
Basis Risk
 
Yield Curve Risk
 
Implied Volatility
 
Prepayment Speeds
 
Spread to Swap Curve
 
Mortgage Spread
As of June 30, 2018
$
(1
)
 
$
(2
)
 
$
(2
)
 
(12
)
 
$
1

As of December 31, 2017
(1
)
 
(2
)
 
(2
)
 
(13
)
 
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.



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(Dollars in tables in millions except per share amounts unless otherwise indicated)


As of June 30, 2018, our sensitivity to changes in implied volatility was $(2) million. At December 31, 2017, our sensitivity to changes in implied volatility was $(2) 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.

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.


 
Duration of equity
Scenario as of
 
Down 200 bps
 
Base
 
Up 200 bps
June 30, 2018
 
1.8
 
1.3
 
2.1
December 31, 2017
 
2.9
 
1.2
 
2.2


As of June 30, 2018, on a U.S. GAAP basis, our fair value surplus (relative to book value) was $325 million, and our market value of equity to book value of equity ratio was 106%, compared to $371 million and 107% at December 31, 2017. 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.



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(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 81 of our 2017 Form 10-K.



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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 30 of our 2017 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 16 in our 2017 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.



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Item 6. Exhibits.

 
 
 
 
 
 
 
 
 
 
 
 
101.INS
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

a Filed as Exhibit 10.1 with our Form 8-K on May 25, 2018, SEC FIle No. 000-51401

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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.

CFTC: Commodity Futures Trading Commission

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.

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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 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. 

NRSRO: Nationally Recognized Statistical Rating Organization.

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.
 

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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

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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.
 
 
 
 
 
 
 
 
FEDERAL HOME LOAN BANK OF CHICAGO
 
 
 
 
 
 
 
/s/    Matthew R. Feldman
 
 
Name:
 
Matthew R. Feldman
 
 
Title:
 
President and Chief Executive Officer
Date:
August 7, 2018
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/   Roger D. Lundstrom
 
 
Name:
 
Roger D. Lundstrom
 
 
Title:
 
Executive Vice President and Chief Financial Officer
Date:
August 7, 2018
(Principal Financial Officer and Principal Accounting Officer)


S-1