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 September 30, 20182019

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
logoa74.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) (312565-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
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 every Interactive Data File required to be submitted 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 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 filero
 
Accelerated filero
 
Non-accelerated filerx
 
Smaller reporting companyo
    
Emerging growth companyo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x


As of September 30, 2018,2019, including mandatorily redeemable capital stock, registrant had 20,301,77721,702,727 total outstanding shares of Class B Capital Stock.

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logoa70.jpgFederal 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.
 
 


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logoa71.jpgFederal Home Loan Bank of Chicago 


PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
Statements of Condition (unaudited)
(U.S. Dollars in millions, except capital stock par value)
September 30, 2018 December 31, 2017 September 30,
2019
 December 31,
2018
AssetsAssets   Assets   
Cash and due from banksCash and due from banks$44
 $42
Cash and due from banks$65
 $28
Interest bearing depositsInterest bearing deposits775
 775
Interest bearing deposits1,255
 775
Federal Funds soldFederal Funds sold7,685
 7,561
Federal Funds sold8,751
 7,704
Securities purchased under agreements to resellSecurities purchased under agreements to resell2,150
 5,000
Securities purchased under agreements to resell2,600
 2,900
Investment debt securities -Investment debt securities -   Investment debt securities -   
Trading,Trading,177and67pledged2,596
 233
Trading,471and269pledged4,496
 3,478
Available-for-saleAvailable-for-sale13,707
 12,957
Available-for-sale16,214
 14,614
Held-to-maturity,Held-to-maturity,3,217and4,538fair value2,928
 4,157
Held-to-maturity,2,422and3,492fair value2,159
 3,213
Investment debt securitiesInvestment debt securities19,231
 17,347
Investment debt securities22,869
 21,305
Advances,Advances,908 and776 carried at fair value54,667
 48,085
Advances,2,900 and1,025carried at fair value57,629
 52,628
MPF Loans held in portfolio, net ofMPF Loans held in portfolio, net of(1)and(2)allowance for credit losses6,439
 5,193
MPF Loans held in portfolio, net of(1)and(1)allowance for credit losses9,004
 7,103
Derivative assetsDerivative assets11
 3
Derivative assets11
 6
Other assets,Other assets,116and118carried at fair value408
 349
Other assets,88and108carried at fair value359
 408
AssetsAssets$91,410
 $84,355
Assets$102,543
 $92,857
       
LiabilitiesLiabilities   Liabilities   
Deposits -Deposits -   Deposits -   
Noninterest bearingNoninterest bearing$50
 $51
Noninterest bearing$223
 $54
Interest bearing,Interest bearing,14and32from other FHLBs531
 473
Interest bearing,16and29from other FHLBs809
 497
DepositsDeposits581
 524
Deposits1,032
 551
Consolidated obligations, net -Consolidated obligations, net -   Consolidated obligations, net -   
Discount notes,Discount notes,0and749carried at fair value37,674
 41,191
Discount notes,0and992carried at fair value47,647
 43,166
Bonds,2,202and5,260carried at fair value46,232
 37,121
6,639and2,352carried at fair value46,738
 42,250
Consolidated obligations, netConsolidated obligations, net83,906
 78,312
Consolidated obligations, net94,385
 85,416
Derivative liabilitiesDerivative liabilities25
 20
Derivative liabilities18
 16
Affordable Housing Program assessment payableAffordable Housing Program assessment payable88
 88
Affordable Housing Program assessment payable83
 84
Mandatorily redeemable capital stockMandatorily redeemable capital stock313
 311
Mandatorily redeemable capital stock324
 313
Other liabilitiesOther liabilities1,173
 248
Other liabilities1,155
 1,188
LiabilitiesLiabilities86,086
 79,503
Liabilities96,997
 87,568
Commitments and contingencies - see notes to the financial statementsCommitments and contingencies - see notes to the financial statements


 


Commitments and contingencies - see notes to the financial statements


 


CapitalCapital   Capital   
Class B1 activity stock,Class B1 activity stock,15and12million shares issued and outstanding1,543
 1,241
Class B1 activity stock,16and15million shares issued and outstanding1,645
 1,476
Class B2 membership stock,Class B2 membership stock,2and2million shares issued and outstanding175
 202
Class B2 membership stock,2and2million shares issued and outstanding201
 222
Capital stock - putable,Capital stock - putable,$100and$100par value per share1,718
 1,443
Capital stock - putable,$100and$100par value per share1,846
 1,698
Retained earnings - unrestrictedRetained earnings - unrestricted2,989
 2,845
Retained earnings - unrestricted3,163
 3,023
Retained earnings - restrictedRetained earnings - restricted499
 452
Retained earnings - restricted559
 513
Retained earningsRetained earnings3,488
 3,297
Retained earnings3,722
 3,536
Accumulated other comprehensive income (loss) (AOCI)Accumulated other comprehensive income (loss) (AOCI)118
 112
Accumulated other comprehensive income (loss) (AOCI)(22) 55
CapitalCapital5,324
 4,852
Capital5,546
 5,289
Liabilities and capitalLiabilities and capital$91,410
 $84,355
Liabilities and capital$102,543
 $92,857



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

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Statements of Income (unaudited)
(U.S. Dollars in millions)

 Three months ended September 30, Nine months ended September 30,  Three months ended September 30, Nine months ended September 30,
 2018 2017 2018 2017  2019 2018 2019 2018
Interest incomeInterest income $603
 $411
 $1,660
 $1,121
Interest income $662
 $603
 $2,051
 $1,660
Interest expenseInterest expense 477
 288
 1,278
 768
Interest expense 549
 477
 1,704
 1,278
Net interest incomeNet interest income 126
 123
 382
 353
Net interest income 113
 126
 347
 382
Provision for (reversal of) credit lossesProvision for (reversal of) credit losses (1) (1) (1) 
Provision for (reversal of) credit losses 
 (1) 
 (1)
Net interest income after provision for (reversal of) credit lossesNet interest income after provision for (reversal of) credit losses 127
 124
 383
 353
Net interest income after provision for (reversal of) credit losses 113
 127
 347
 383
                 
Noninterest income -Noninterest income -        Noninterest income -        
Trading securitiesTrading securities (3) 5
 20
 8
Derivatives and hedging activitiesDerivatives and hedging activities (5) 
 (5) 6
Derivatives and hedging activities (5) (5) (31) (5)
Instruments held under fair value optionInstruments held under fair value option (3) (5) (20) (3)Instruments held under fair value option 24
 (3) 43
 (20)
MPF fees,6,5,18and15from other FHLBs 9
 8
 24
 21
8,6,21and18from other FHLBs 10
 9
 27
 24
Other, netOther, net 5
 2

16
 7
Other, net 3
 

9
 8
Noninterest incomeNoninterest income 6
 5
 15
 31
Noninterest income 29
 6
 68
 15
                 
Noninterest expense -Noninterest expense -        Noninterest expense -        
Compensation and benefitsCompensation and benefits 26
 26
 78
 77
Compensation and benefits 27
 26
 82
 78
Operating expensesOperating expenses 20
 15
 52
 45
Operating expenses 23
 20
 66
 52
OtherOther 1
 2
 5
 7
Other 4
 1
 8
 5
Noninterest expenseNoninterest expense 47
 43
 135
 129
Noninterest expense 54
 47
 156
 135
                 
Income before assessmentsIncome before assessments 86
 86
 263
 255
Income before assessments 88
 86
 259
 263
                 
Affordable Housing ProgramAffordable Housing Program 9
 9
 27
 26
Affordable Housing Program 9
 9
 27
 27
                 
Net incomeNet income $77
 $77
 $236
 $229
Net income $79
 $77
 $232
 $236


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



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Statements of Comprehensive Income (unaudited)
(U.S. Dollars in millions)

 Three months ended September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30,
 2018 2017 2018 2017 2019 2018 2019 2018
Net income $77
 $77
 $236
 $229
 $79
 $77
 $232
 $236
 
       
      
Other comprehensive income (loss) - 
       
      
Net unrealized gain (loss) available-for-sale debt securities (32) (24) (124) (5) (61) (32) (80) (124)
Noncredit OTTI held-to-maturity debt securities 7
 8
 22
 25
 7
 7
 20
 22
Net unrealized gain (loss) cash flow hedges 25
 42
 115
 111
 (4) 25
 (17) 115
Postretirement plans (4) 3
 (7) 1
 (5) (4) 
 (7)
Other comprehensive income (loss) (4) 29
 6
 132
 (63) (4) (77) 6
 
   
   
   
  
Comprehensive income $73
 $106
 $242
 $361
 $16
 $73
 $155
 $242


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



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Statements of Capital (unaudited)
(U.S. Dollars and shares in millions)

Capital Stock - Putable - B1 Activity Capital Stock - Putable - B2 Membership 
Total
Capital Stock
 Retained Earnings    Capital Stock - Putable - B1 Activity Capital Stock - Putable - B2 Membership Retained Earnings    
Shares Value Shares Value Shares Value Unrestricted Restricted Total AOCI TotalShares Value Shares Value Unrestricted Restricted Total AOCI Total
December 31, 201712
 $1,241
 2
 $202
 14
 $1,443
 $2,845
 $452
 $3,297
 $112
 $4,852
June 30, 201914

$1,394

3

$284

$3,120

$543

$3,663

$41

$5,382
Comprehensive income







63

16

79

(63)
16
Proceeds from issuance of capital stock6
 611
 
 12
 
 
 
 
 623
Repurchases of capital stock
 
 (5) (455) 
 
 
 
 (455)
Transfers between classes of capital stock(4) (360) 4
 360
 

 

 

 
 
Cash dividends - class B1

 

 
 
 (19) 

 (19) 
 (19)
Class B1 annualized rate

 5.00% 
 
 

 

 

 
  
Cash dividends - class B2

 

 
 
 (1) 

 (1) 
 (1)
Class B2 annualized rate

 

 
 2.25% 

 

 

 
  
Total change in period2

251

(1)
(83)
43

16

59

(63)
164
September 30, 201916

$1,645

2

$201

$3,163

$559

$3,722

$(22)
$5,546
                 
December 31, 201815
 $1,476
 2
 $222
 $3,023
 $513
 $3,536
 $55
 $5,289
Cumulative effect adjustment - see Note 2        16
 
 16
   16
Comprehensive income            189
 47
 236
 6
 242
        186
 46
 232
 (77) 155
Proceeds from issuance of capital stock23
 2,254
 
 11
 23
 2,265
         2,265
20
 2,065
 
 24
         2,089
Repurchases of capital stock
 
 (20) (1,988) (20) (1,988)         (1,988)
 
 (19) (1,931)         (1,931)
Capital stock reclassed to mandatorily redeemable capital stock liability
 (1) 
 (1) 
 (2)         (2)
 (9) 
 (1)         (10)
Transfers between classes of capital stock(20) (1,951) 20
 1,951
              (19) (1,887) 19
 1,887
          
Cash dividends - class B1            (43) 

 (43)   (43)        (59) 

 (59)   (59)
Class B1 annualized rate                    3.92%  5.00%              
Cash dividends - class B2            (2)   (2)   (2)        (3)   (3)   (3)
Class B2 annualized rate                    1.60%      2.17%          
Total change in period3
 302
 
 (27) 3
 275
 144
 47
 191
 6
 472
1
 169
 
 (21) 140
 46
 186
 (77) 257
September 30, 201815
 $1,543
 2
 $175
 17
 $1,718
 $2,989
 $499
 $3,488
 $118
 $5,324
September 30, 201916
 $1,645
 2
 $201
 $3,163
 $559
 $3,722
 $(22) $5,546
                                      
                     
December 31, 201612
 $1,160
 6
 $551
 18
 $1,711
 $2,631
 $389
 $3,020
 $(36) $4,695
Comprehensive income            183
 46
 229
 132
 361
Proceeds from issuance of capital stock21
 2,162
 
 10
 21
 2,172
         2,172
Repurchases of capital stock
 (35) (23) (2,285) (23) (2,320)         (2,320)
Capital stock reclassed to mandatorily redeemable capital stock liability
 (3) 
 (3) 
 (6)         (6)
Transfers between classes of capital stock(19) (1,933) 19
 1,933
             

Cash dividends - class B1            (28)   (28)   (28)
Class B1 annualized rate                    3.15%
Cash dividends - class B2            (2)   (2)   (2)
Class B2 annualized rate                    1.05%
Total change in period2
 191
 (4) (345) (2) (154) 153
 46
 199
 132
 177
September 30, 201714

$1,351

2

$206

16

$1,557

$2,784

$435

$3,219

$96

$4,872


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

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logoa71.jpgFederal Home Loan Bank of Chicago 


Condensed Statements of Cash Flows (unaudited)
 Capital Stock - Putable - B1 Activity Capital Stock - Putable - B2 Membership Retained Earnings    
 Shares Value Shares Value Unrestricted Restricted Total AOCI Total
June 30, 201815

$1,498

3

$307

$2,944

$484

$3,428

$122

$5,355
Comprehensive income        62

15

77

(4)
73
Proceeds from issuance of capital stock6
 556
 
 
         556
Repurchases of capital stock
 
 (7) (643)         (643)
Transfers between classes of capital stock(6) (511) 6
 511
         

Cash dividends - class B1        (16) 

 (16) 

 (16)
Class B1 annualized rate  4.25%             

Cash dividends - class B2        (1) 

 (1) 

 (1)
Class B2 annualized rate      1.70% 

 

 

 

 

Total change in period

45

(1)
(132)
45

15

60

(4)
(31)
September 30, 201815

$1,543

2

$175

$2,989

$499

$3,488

$118

$5,324
                  
December 31, 201712
 $1,241
 2
 $202
 $2,845
 $452
 $3,297
 $112
 $4,852
Comprehensive income        189
 47
 236
 6
 242
Proceeds from issuance of capital stock23
 2,254
 
 11
         2,265
Repurchases of capital stock
 
 (20) (1,988)         (1,988)
Capital stock reclassed to mandatorily redeemable capital stock liability
 (1) 
 (1)         (2)
Transfers between classes of capital stock(20) (1,951) 20
 1,951
         

Cash dividends - class B1        (43)   (43)   (43)
Class B1 annualized rate  3.92%             

Cash dividends - class B2        (2)   (2)   (2)
Class B2 annualized rate      1.60%         

Total change in period3
 302
 
 (27) 144
 47
 191
 6
 472
September 30, 201815

$1,543

2

$175

$2,989

$499

$3,488

$118

$5,324
                  
(Dollars in millions)

 Nine months ended September 30, 2018 2017 
OperatingNet cash provided by (used in) operating activities $447
 $337
 
InvestingNet change interest bearing deposits 
 (100) 
 Net change Federal Funds sold (124) (5,774) 
 Net change securities purchased under agreements to resell 2,850
 (1,450) 
 Trading debt securities -     
 Sales 200
 801
 
 Proceeds from maturities and paydowns 8
 205
 
 Purchases (2,566) (200) 
 Available-for-sale debt securities -     
 Proceeds from maturities and paydowns 2,365
 1,307
 
 Purchases (2,476) (5) 
 Held-to-maturity debt securities -     
 Short-term held-to-maturity securities, net 497
a 
570
a 
 Proceeds from maturities and paydowns 786
 816
 
 Purchases (22) (27) 
 Advances -     
 Principal collected 1,017,269
 543,511
 
 Issued (1,024,012) (548,590) 
 MPF Loans held in portfolio -     
 Principal collected 595
 761
 
 Purchases (1,848) (821) 
 Other investing activities 14
 20
 
 Net cash provided by (used in) investing activities (6,464) (8,976) 
FinancingNet change deposits 57
 104
 
 Discount notes -     
 Net proceeds from issuance 1,469,628
 1,080,879
 
 Payments for maturing and retiring (1,473,155) (1,071,386) 
 Consolidated obligation bonds -     
 Net proceeds from issuance 32,132
 13,947
 
 Payments for maturing and retiring (22,862) (15,024) 
 Capital stock -     
 Proceeds from issuance 2,265
 2,172
 
 Repurchases (1,988) (2,320) 
 Cash dividends paid (45) (30) 
 Other financing activities (13) (22) 
 Net cash provided by (used in) financing activities 6,019
 8,320
 
 Net increase (decrease) in cash and due from banks 2
 (319) 
 Cash and due from banks at beginning of period 42
 351
 
 Cash and due from banks at end of period $44
 $32
 
a
Short-term assets and liabilities are 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).

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logoa71.jpgFederal Home Loan Bank of Chicago 


Condensed Statements of Cash Flows (unaudited)
(U.S. Dollars in millions)

 Nine months ended September 30, 2019 2018
OperatingNet cash provided by (used in) operating activities $(625) $447
InvestingNet change interest bearing deposits (480) 
 Net change Federal Funds sold (1,047) (124)
 Net change securities purchased under agreements to resell 300
 2,850
 Trading debt securities -    
 Sales 1,952
 200
 Proceeds from maturities and paydowns 1,504
 8
 Purchases (4,476) (2,566)
 Available-for-sale debt securities -    
 Proceeds from maturities and paydowns 3,508
 2,365
 Purchases (4,430) (2,476)
 
Held-to-maturity debt securities - a
    
 Proceeds from maturities and paydowns 2,553
 2,795
 Purchases (1,462) (1,534)
 Advances -    
 Principal collected 1,134,786
 1,017,269
 Issued (1,139,298) (1,024,012)
 MPF Loans held in portfolio -    
 Principal collected 995
 595
 Purchases (2,908) (1,848)
 Other investing activities 8
 14
 Net cash provided by (used in) investing activities (8,495) (6,464)
FinancingNet change deposits, incl.(12)and(19)from other FHLBs 481
 57
 Discount notes -    
 Net proceeds from issuance 1,095,704
 1,469,628
 Payments for maturing and retiring (1,091,275) (1,473,155)
 Consolidated obligation bonds -    
 Net proceeds from issuance 33,034
 32,132
 Payments for maturing and retiring (28,885) (22,862)
 Capital stock -    
 Proceeds from issuance 2,089
 2,265
 Repurchases (1,931) (1,988)
 Cash dividends paid (62) (45)
 Other financing activities 2
 (13)
 Net cash provided by (used in) financing activities 9,157
 6,019
 Net increase (decrease) in cash and due from banks 37
 2
 Cash and due from banks at beginning of period 28
 42
 Cash and due from banks at end of period $65
 $44
a
Presentation of cash flow amounts in prior periods have been reclassified to reflect short-term held-to-maturity purchases and proceeds on a gross, rather than net, basis. Certain reclassifications made to prior periods to properly present gross cash flows were not material.

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

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logoa74.jpgFederal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(U.S. 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 discloseddetailed 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, 2017,2018, included in our Annual Report on Form 10-K (2017(2018 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 5962 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.measurements. 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 20172018 Form 10-K.  The basis of presentation pertaining to our gross versus net presentation of derivative financial instruments also has not changed since we filed our 20172018 Form 10-K.

Refer to Note 1- Background and Basis of Presentation to the financial statements in our 20172018 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.

89

logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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, 2017,2018, can be found in Note 2 – Summary of Significant Accounting Policies to the financial statements in our 20172018 Form 10-K. We adopted the following policies effective January 1, 2018:2019:


Recognition and MeasurementInclusion of Financial Assets and Financial Liabilities (ASU 2016-01)the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (FASB ASU 2018-16)

We are requiredIn October of 2018, the FASB issued an amendment that adds the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes, in light of the plan for a phase out of the oversight of LIBOR. The SOFR OIS rate is the fixed rate on a U.S. dollar, constant-notional interest rate swap that has its variable-rate leg referenced to recognizeSOFR (an overnight rate) with no additional spread over SOFR on that variable-rate leg. That fixed rate is the portionderived rate that would result in the swap having a zero fair value at inception because the present value of instrument-specific credit risk attributablefixed cash flows, based on that rate, equates to the total change in fairpresent value of our consolidated obligations that are carried at fair value in our statements of comprehensive income. We measure such instrument-specific credit riskthe variable cash flows. Including the OIS rate based on our nonperformanceSOFR as an eligible benchmark interest rate during the early stages of the marketplace transition should facilitate the LIBOR to SOFR transition and provide sufficient lead time for us to prepare for changes to interest rate risk which includes our nonperformancehedging strategies for both risk management and the credit risk associated with the joint and several liability of other FHLBs.hedge accounting purposes. We adopted this amendment on a prospective basis for qualifying new hedging relationships entered on or after January 1, 2019. The new guidance did not have an effect on our financial condition, results of operations, and cash flows at the time of adoption.adoption but we continue to evaluate potential future impacts.


Revenue from Contracts with CustomersTargeted Improvements to Accounting for Hedging Activities (ASU 2014-09)2017-12)

In August of 2017, the FASB issued targeted improvements to existing derivatives and hedging guidance. Upon adoption, we modified the risk of certain fair value hedges from contractual coupon interest rate to benchmark rate component improving hedge effectiveness. The revenue recognitionopening cumulative adjustment related to modifying the risk being hedged was an increase to retained earnings of $16 million and a corresponding increase to the cumulative basis adjustment (carrying value) of the hedged items. The opening adjustment to retained earnings related to ineffectiveness recognized in prior reporting periods attributable to open cash flow hedges was not material. Prior reporting periods were not restated.

Significant changes to existing GAAP guidance did not have any effect on our financial condition, resultswere as follows:

Hedging Strategies Newly Permitted:

Permits entering into a cash flow hedge of operations, orthe variability in cash flows atin a financial instrument that has a contractually specified interest rate.
Permits hedging the timebenchmark risk component of adoption. This is becausecash flows in a fair value hedge.
Permits entering into a partial-term fair value hedge of the majorityhedged item.
Permits entering into last-of-layer fair value hedges.

Assessment 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 priorHedge Effectiveness:

Permits qualitatively assessing hedge effectiveness.
Enabled applying the long-haul method of recognizing service fee revenueassessing hedge effectiveness in cases where the shortcut method was consistent with this new guidance. Asinitially applied but subsequently is not or is no longer appropriate.

Financial Statement Presentation:

Required the entire change in fair value of the hedging instrument in a result, no cumulative effect adjustmentcash flow hedge to be recorded and deferred in AOCI until reclassification to our opening balancestatements of retained earnings in 2018 was required under the modified retrospective method.income would be required.


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 requiredRequired hedge ineffectiveness to be classified as Noninterestpresented in either interest income or interest expense, - Other. Previously, our total net periodic pension and postretirement costs were classified as compensation costs. We made this classification change on a prospectivewhichever is appropriate, rather than retrospective basis dueinto noninterest income on derivatives and hedging activities in our statements of income. This means that changes in fair value on AFS debt securities in a fair value hedging relationship are immediately recognized into interest income in our statement of income.
The above presentation guidance was prospectively adopted. Prior to materiality. This classification guidance did not have a significant effectJanuary 1, 2019, hedge ineffectiveness was classified in noninterest income on derivatives and hedging activities in our financial condition, resultsstatements 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 not have any effect on our financial condition, results of operations, and cash flows at the time of adoption.





income.


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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

Leases (ASU 2016-02)

In February of 2016, the FASB issued lease accounting guidance that became effective January 1, 2019. Upon adoption, we applied the guidance to the beginning of January 1, 2019, using the modified retrospective approach. Prior financial statements were not restated. There was 0 cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2019. The guidance required us to recognize and measure our operating leases as right-of-use assets, with terms that exceed 12 months, in our statements of condition - that amount, which was $11 million, was recognized in other assets and other liabilities as of January 1, 2019. Expenses attributable to our leases are included in noninterest expense - operating expenses in our statements of income. Payments related to our operating leases are classified within operating activities in our statements of cash flows.


Note 3 – Recently Issued but Not Yet Adopted Accounting Standards


Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)

In AugustThe following table provides a summary of 2017, the FASBrecently issued targeted improvements to existing derivatives and hedging guidance. We will adopt this guidance as of January 1, 2019, and we may modify the risk of certain fair value hedges from contractual coupon interest rate to benchmark rate component improving hedge effectiveness. We dobut not expect the opening adjustment to retained earnings related to ineffectiveness recognized in prior reporting periods attributable to open cash flows hedges to be material as of January 1, 2019. We are still assessing the impact of other potential impacts of implementing ASU 2017-12 at this time.

Outlined below are the significant changes to existing GAAP guidance thatyet adopted accounting standards which may have an effect on us.our financial statements.

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.
Accounting Standards Update (ASU)DescriptionEffective DateEffect on the Financial Statements or Other Significant Matters
Measurement of Credit Losses on Financial Instruments (ASU 2016-13)

In June of 2016, the FASB amended existing GAAP guidance applicable to measuring credit losses on financial instruments. Specifically, the amendment replaces the “incurred loss” impairment methodology applied under current GAAP with a “currently expected credit losses” or CECL methodology. The presentationmeasurement of CECL is based on relevant information about past events, including historical experience, current conditions, and disclosure guidancereasonable 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.This guidance becomes effective for the interim and annual periods beginning on January 1, 2020.We do not expect this guidance to have a material effect on our financial condition, results of operations, and cash flows.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (ASU 2018-15)In August of 2018, the FASB issued amendments to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The amendments should be applied either retrospectively or prospectively adopted.to all implementation costs incurred after the date of adoption.This guidance becomes effective for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted.
The guidance is not expected to have a significant effect on our financial condition, results of operations, and cash flows.


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.

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.


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Table of Contents
logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

In addition, the accounting for securities is amended
Accounting Standards Update (ASU)DescriptionEffective DateEffect on the Financial Statements or Other Significant Matters
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (ASU 2019-4)
In April of 2019, the FASB issued codification improvements applicable to financial instrument guidance. Codification improvements relevant to the Bank are as follows:

- Provides various options for determining currently expected credit losses for accrued interest receivable as well as flexibility in presenting accrued interest receivable separately from the financial instrument’s amortized cost basis provided certain disclosures are made.

- Clarifies that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off.

- Clarifies consideration of estimated costs to sell when foreclosure is probable should not be discounted.

- Clarifies issues related to partial-term fair value hedges of interest rate risk, amortization of fair value hedge basis adjustments and various other derivative and hedging issues.
These amendments take effect January 1, 2020.We are in the process of evaluating the effect of this new guidance on our financial condition, results of operation, and cash flows.
Financial Instruments - Credit Losses Topic 326 - Targeted Transition Relief (ASU 2019-05)
In May of 2019, the FASB issued an amendment providing transition relief to FASB ASU 2016-13 or CECL. Specifically, the amendment permits entities with an option to irrevocably elect the fair value option on an instrument by instrument basis for eligible instruments such as loans carried at amortized cost. This fair value election does not apply to HTM debt securities.

The difference between the carrying amount of the instruments and the fair value amount of the instruments in which the fair value option is irrevocably elected upon adoption would be recorded as a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2020.
The election would coincide with the adoption of CECL or January 1, 2020.We are in the process of evaluating whether or not to utilize this transition relief.

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 income presented, that is, January 1, 2017, using the modified retrospective approach. Prior statements of income will not need to be restated. The cumulative effect adjustment to the opening balance of retained earnings, if applicable, will be recognized as of January 1, 2019. The guidance requires us to recognize and measure our operating leases as right-of-use assets, 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.


Fair value Measurement Disclosures (ASU 2018-13)

In August of 2018, the FASB issued an amendment to existing fair value measurement disclosure requirements. The amendment removes, modifies or adds to existing fair value measurement disclosure requirements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments related to additional Level 3 disclosures should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted to remove or modify disclosures under this amendment and new disclosures required under this amendment may be deferred to the December 15, 2019 effective date.


Compensation-Retirement Benefits-Defined Benefit Plans Disclosures (ASU 2018-14)

In August of 2018, the FASB issued an amendment to existing defined benefit plan disclosure requirements. The amendment removes certain requirements and adds a requirement to explain the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments are effective January 1, 2021. Early adoption is permitted. We are required to apply the amendments on a retrospective basis to all periods presented.


Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (ASU 2018-15)

In August of 2018, the FASB issued amendments to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. The amendments are effective January 1, 2020. Early adoption of the amendments is permitted, including adoption in any interim period. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We do not expect the new guidance to have a significant effect on our financial condition, results of operations, and cash flows.

1112

logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)


Note 4 – Interest Income and Interest Expense
The following table presents interest income and interest expense for the periods indicated:

 Three months ended September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30,
 2018 2017 2018 2017 2019 2018 2019 2018
Interest income -                
 

       

      
Trading $8
 $1
 $23
 $3
 $24
 $8
 $62
 $23
                
Available-for-sale interest income 107
 106
 318
 321
 126
 107
 378
 318
Available-for-sale prepayment fees 7
 9
 27
 20
 1
 7
 3
 27
Available-for-sale 114
 115
 345
 341
 127
 114
 381
 345
                
Held-to-maturity 46
 47
 135
 148
 33
 46
 105
 135
                
Investment debt securities 168
 163
 503
 492
 184
 168
 548
 503
 
       
      
Advances 312
 157
 811
 386
 326
 312
 1,046
 811
MPF Loans held in portfolio 62
 53
 177
 160
 79
 62
 233
 177
Federal funds sold and securities purchased under agreements to resell 54
 34
 152
 74
 64
 54
 201
 152
Other 7
 4
 17
 9
 9
 7
 23
 17
Interest income 603
 411
 1,660
 1,121
 662
 603
 2,051
 1,660
 
       
      
Interest expense - 
       
      
                
Consolidated obligations - 
       
      
Discount notes 208
 148
 596
 363
 270
 208
 831
 596
Bonds 263
 136
 665
 394
 272
 263
 851
 665
 
       
      
Other 6
 4
 17
 11
 7
 6
 22
 17
                
Interest expense 477
 288
 1,278
 768
 549
 477
 1,704
 1,278
 
       
      
Net interest income 126
 123
 $382
 $353
 113
 126
 347
 382
Provision for (reversal of) credit losses (1) (1) (1) 
 
 (1) 
 (1)
Net interest income after provision for (reversal of) credit losses $127
 $124
 $383
 $353
 $113
 $127
 $347
 $383



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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 5 – Investment Debt Securities


We classify debt 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 residential 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 Debt Securities

The following table presents the fair value of our trading debt securities. Our unrealized gains (losses) on trading debt securities still held on our statement of condition as of the end of the reporting period were $8 million at September 30, 2018 and were not material at December 31, 2017.

As of September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
U.S. Government & other government related $2,574
 $202
 $4,482
 $3,460
Residential MBS        
GSE 21
 30
 13
 17
Government guaranteed 1
 1
 1
 1
Trading debt securities $2,596
 $233
 $4,496
 $3,478



13

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logoa63.jpgFederal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(DollarsThe following table presents our gains and losses on trading debt securities recorded in tables in millions except per share amounts unless otherwise indicated)

Amortized Cost Basis and Fair Value – Available-for-Sale Debt Securities (AFS)Noninterest Income Other.

 Amortized Cost Basis Gross Unrealized Gains in AOCI Gross Unrealized (Losses) in AOCI Carrying Amount and Fair Value
As of September 30, 2018       
U.S. Government & other government related$440
 $8
 $(1) $447
State or local housing agency16
 
 
 16
FFELP ABS3,680
 220
 
 3,900
Residential MBS       
GSE8,520
 38
 (4) 8,554
Government guaranteed732
 14
 
 746
Private label36
 8
 
 44
Available-for-sale debt securities$13,424
 $288
 $(5) $13,707
        
As of December 31, 2017       
U.S. Government & other government related$256
 $15
 $
 $271
State or local housing agency21
 
 
 21
FFELP ABS3,987
 234
 (7) 4,214
Residential MBS      
GSE7,275
 132
 (1) 7,406
Government guaranteed971
 24
 
 995
Private label40
 10
 
 50
Available-for-sale debt securities$12,550

$415

$(8)
$12,957
  Three months ended September 30, Nine months ended September 30,
  2019 2018 2019 2018
Net unrealized gains (losses) on securities held at period end $(9) $4
 $3
 $8
Net realized gains (losses) on securities sold/matured during the period 6
 1
 17
 
Net gains (losses) on trading debt securities $(3) $5
 $20
 $8


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


14

Table of Contents
logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

Amortized Cost Basis Carrying Amount, and Fair Value - Held-to-Maturity– Available-for-Sale Debt Securities (HTM)(AFS)

Amortized Cost Basis Non-credit OTTI Recognized in AOCI (Loss) Carrying Amount Gross Unrecognized Holding Gains Gross Unrecognized Holding (Losses) Fair ValueAmortized Cost Basis Gross Unrealized Gains in AOCI Gross Unrealized (Losses) in AOCI Carrying Amount and Fair Value
As of September 30, 2018           
As of September 30, 2019       
U.S. Government & other government related$880
 $
 $880
 $7
 $(2) $885
$715
 $40
 $
 $755
State or local housing agency7
 
 7
 
 
 7
14
 1
 
 15
FFELP ABS3,309
 155
 (5) 3,459
Residential MBS                  
GSE1,201
 
 1,201
 28
 
 1,229
11,614
 10
 (87) 11,537
Government guaranteed425
 
 425
 3
 
 428
401
 10
 
 411
Private label536
 (121) 415
 253
 
 668
30
 7
 
 37
Held-to-maturity debt securities$3,049
 $(121) $2,928
 $291
 $(2) $3,217
Available-for-sale debt securities$16,083
 $223
 $(92) $16,214
                  
As of December 31, 2017           
As of December 31, 2018       
U.S. Government & other government related$1,531
 $
 $1,531
 $29
 $(1) $1,559
$528
 $15
 $
 $543
State or local housing agency9
 
 9
 
 
 9
17
 
 
 17
FFELP ABS3,578
 203
 
 3,781
Residential MBS    
     
      
GSE1,513
 
 1,513
 62
 
 1,575
9,602
 20
 (48) 9,574
Government guaranteed585
 
 585
 6
 
 591
645
 13
 
 658
Private label662
 (143) 519
 285
 
 804
33
 8
 
 41
Held-to-maturity debt securities$4,300

$(143)
$4,157

$382

$(1)
$4,538
Available-for-sale debt securities$14,403

$259

$(48)
$14,614


We had no sales of HTMAFS 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 September 30, 2018 Amortized Cost Basis Carrying Amount and Fair Value Carrying Amount Fair Value
Year of Maturity -        
Due in one year or less $3
 $3
 $178
 $177
Due after one year through five years 2
 2
 93
 94
Due after five years through ten years 163
 163
 109
 109
Due after ten years 288
 295
 507
 512
ABS and MBS without a single maturity date 12,968
 13,244
 2,041
 2,325
Total debt securities $13,424
 $13,707
 $2,928
 $3,217



15

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

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

 Amortized Cost Basis Non-credit OTTI Recognized in AOCI (Loss) Carrying Amount Gross Unrecognized Holding Gains Gross Unrecognized Holding (Losses) Fair Value
As of September 30, 2019           
U.S. Government & other government related$666
 $
 $666
 $24
 $
 $690
State or local housing agency4
 
 4
 
 
 4
Residential MBS           
GSE964
 
 964
 35
 
 999
Government guaranteed211
 
 211
 3
 
 214
Private label408
 (94) 314
 201
 
 515
Held-to-maturity debt securities$2,253
 $(94) $2,159
 $263
 $
 $2,422
            
As of December 31, 2018           
U.S. Government & other government related$1,305
 $
 $1,305
 $18
 $(1) $1,322
State or local housing agency6
 
 6
 
 
 6
Residential MBS    
     
GSE1,141
 
 1,141
 30
 
 1,171
Government guaranteed369
 
 369
 2
 
 371
Private label506
 (114) 392
 230
 
 622
Held-to-maturity debt securities$3,327

$(114)
$3,213

$280

$(1)
$3,492


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


Contractual Maturity Terms

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

  Available-for-Sale Held-to-Maturity
As of September 30, 2019 Carrying Amount and Fair Value Carrying Amount Fair Value
Year of Maturity -      
Due in one year or less $
 $126
 $126
Due after one year through five years 6
 41
 42
Due after five years through ten years 250
 79
 79
Due after ten years 514
 424
 447
ABS and MBS without a single maturity date 15,444
 1,489
 1,728
Total debt securities $16,214
 $2,159
 $2,422


16

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logoa74.jpgFederal Home Loan Bank of Chicago
Notes to Financial Statements - (Unaudited)
(U.S. 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 in the following 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 TotalLess than 12 Months 12 Months or More Total
Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)
Available-for-sale debt securities                      
As of September 30, 2018           
As of September 30, 2019           
U.S. Government & other government related$239
 $(1) $
 $
 $239
 $(1)$
 $
 $3
 $
 $3
 $
State or local housing agency9
 
 
 
 9
 
FFELP ABS
 
 597
 
 597
 
530
 (5) 
 
 530
 (5)
Residential MBS    
          
      
GSE1,634
 (3) 604
 (1) 2,238
 (4)8,202
 (64) 1,162
 (23) 9,364
 (87)
Private label
 
 6
 
 6
 

 
 5
 
 5
 
Available-for-sale debt securities$1,882

$(4)
$1,207

$(1)
$3,089

$(5)$8,732

$(69)
$1,170

$(23)
$9,902

$(92)
           
As of December 31, 2017           
As of December 31, 2018           
U.S. Government & other government related$3
 $
 $
 $
 $3

$
$
 $
 $3
 $
 $3

$
State or local housing agency4
 
 
 
 4


1
 
 3
 
 4


FFELP ABS
 
 644
 (7) 644

(7)
Residential MBS        


        


GSE51
 
 801
 (1) 852

(1)5,573
 (46) 48
 (2) 5,621

(48)
Government guaranteed31
 
 
 
 31
 
Private label
 
 7
 
 7



 
 5
 
 5


Available-for-sale debt securities$58

$

$1,452

$(8)
$1,510

$(8)$5,605

$(46)
$59

$(2)
$5,664

$(48)
                      
Held-to-maturity debt securities                      
As of September 30, 2018           
U.S. Government & other government related$145
 $(1) $19

$(1) $164
 $(2)
As of September 30, 2019           
State or local housing agency3
 
 
 
 3
 
2
 
 
 
 2
 
Residential MBS    
 
        
 
    
GSE197
 
 
 
 197
 
5
 
 
 
 5
 
Government-guaranteed179
 
 
 
 179
 
45
 
 24
 
 69
 
Private label
 
 637
 (121) 637
 (121)
 
 490
 (94) 490
 (94)
Held-to-maturity debt securities$524

$(1)
$656

$(122)
$1,180

$(123)$52

$

$514

$(94)
$566

$(94)
           
As of December 31, 2017           
As of December 31, 2018           
U.S. Government & other government related$594
 $
 $24
 $(1) $618

$(1)$459
 $
 $23
 $(1) $482

$(1)
State or local housing agency2
 
 
 
 2



 
 2
 
 2


Residential MBS        




        




GSE
 
 2
 
 2


Government guaranteed170
 
 
 
 170
 
Private label
 
 769
 (143) 769

(143)
 
 592
 (114) 592

(114)
Held-to-maturity debt securities$596

$

$795

$(144)
$1,391

$(144)$629

$

$617

$(115)
$1,246

$(115)



1617

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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 debt securities for the periods presented. This is because weWe do not intend to sell these securities and we believe it is more likely than not that we will not be required to sell them prior to recovering their amortized cost basis, and webasis. 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 September 30, 2018, we had a base case short-term housing price forecast for all markets with projected changes ranging from -10.0% to +15.0% over the twelve month period beginning July 1, 2018. For the vast majority of markets, the short-term forecast has changes ranging from +3.0% to +7.0%. 

The following table presents the changes in the cumulative amount of previously recorded OTTI credit losses on investment debt securities recognized into earnings for the reporting periods indicated.

 Three months ended September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30,
 2018 2017 2018 2017 2019 2018 2019 2018
Beginning Balance $459
 $499
 $477
 $520
 $427
 $459
 $442
 $477
Reductions: 
       
      
Securities sold, matured, or fully prepaid over the period 
 
 (1) 
Increases in cash flows expected to be collected and recognized into interest income (8) (10) (26) (31) (6) (8) (20) (26)
Ending Balance $451
 $489
 $451
 $489
 $421
 $451
 $421
 $451





1718

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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.maturity and the related weighted average contractual interest rate.  For amortizing advances, contractual maturity is determined based on the advance’s amortization schedule. Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay advances with or without penalties.

As of September 30, 2018 Amount   Weighted Average Contractual Interest Rate 
As of September 30, 2019 Amount   Weighted Average Contractual Interest Rate 
Due in one year or less $23,638
 2.19%  $24,504
 2.06% 
One to two years 2,556
 2.05%  2,964
 2.20% 
Two to three years 2,651
 2.19%  3,000
 2.36% 
Three to four years 1,910
 2.32%  6,451
 2.44% 
Four to five years 8,175
 2.42%  7,296
 2.22% 
More than five years 15,833
 2.28%  12,900
 2.24% 
Par value $54,763
 2.25%  $57,115
 2.19% 




We have no allowance for credit losses on our advances. See Note 8 - Allowance for Credit Losses to the financial statements for further information related to our credit risk on advances.

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

As of September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Par value $54,763
 $48,020
 $57,115
 $52,606
Fair value hedging adjustments (79) 69
 469
 30
Other adjustments (17) (4) 45
 (8)
Advances $54,667
 $48,085
 $57,629
 $52,628



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

As of September 30, 2018 Par Value % of Total Outstanding
As of September 30, 2019 Par Value % of Total Outstanding
One Mortgage Partners Corp. $11,000
a 
20.1% $11,000
a 
19.3%
BMO Harris Bank, National Association 10,975
 19.2%
The Northern Trust Company 7,700
 14.1% 7,700
 13.5%
BMO Harris Bank, NA 6,975
 12.7%
a 
One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA.

1819

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 7 – MPF Loans Held in Portfolio


We acquire MPF Loans from PFIs to hold in our portfolio and historically purchased participations in pools of eligible mortgage loans from other FHLBs (MPF Banks). MPF Loans that are held in portfolio are fixed-rate conventional and Government Loans secured by one-to-four family residential properties with maturities ranging from 5 years to 30 years or participations in pools of similar eligible mortgage loans from other MPF Banks.

The following table presents information on MPF Loans held in portfolio by contractual maturity at the time of purchase.

As of September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Medium term (15 years or less) $318
 $285
 $546
 $334
Long term (greater than 15 years) 6,026
 4,835
 8,301
 6,662
Unpaid principal balance 6,344
 5,120
 8,847
 6,996
Net premiums, credit enhancement, and/or deferred loan fees 86
 55
 147
 100
Fair value hedging adjustments 10
 20
Fair value and economic hedging adjustments 11
 8
MPF Loans held in portfolio, before allowance for credit losses 6,440
 5,195
 9,005
 7,104
Allowance for credit losses on MPF Loans (1) (2) (1) (1)
MPF Loans held in portfolio, net $6,439
 $5,193
 $9,004
 $7,103
    
Conventional mortgage loans $5,402
 $4,133
 $7,936
 $6,062
Government Loans 942
 987
 911
 934
Unpaid principal balance $6,344
 $5,120
 $8,847
 $6,996


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 20172018 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.



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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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 20172018 Form 10-K for further details regarding our allowance for credit losses methodology for each of the following portfolio segments discussed below.segments:

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 only have not recorded anyan 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.


Conventionalconventional MPF Loans Heldheld in Portfolio

portfolio as further discussed below. For further detail of our MPF Risk Sharing Structure see page F-16F-15 in our 20172018 Form 10-K. There has been no material activity in our allowance for credit losses since December 31, 2017.2018. The following table presents the recorded investment and the allowance for credit losses in conventional MPF Loans by impairment methodology.
As of September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Recorded investment -    
Conventional mortgage loans -    
Individually evaluated for impairment $38
 $49
 $29
 $33
Collectively evaluated for impairment 5,473
 4,167
 8,093
 6,155
Recorded investment $5,511
 $4,216
 $8,122
 $6,188
    
Allowance for credit losses -    
Collectively evaluated for impairment $1
 $2
Allowance for credit losses - Collectively evaluated for impairment
 $1
 $1



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

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logoa63.jpgFederal 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.

Conventional MPF Loans are individually evaluated for impairment when they are adversely classified. There is no allowance for credit losses attributable to conventional MPF Loans that are individually evaluated for impairment, since the related allowance for credit losses has been charged off.

We do not recognize interest income on impaired conventional MPF Loans.
 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
As of Conventional Government Total Conventional Government Total Conventional Government Total Conventional Government Total
Past due 30-59 days $59
 $37
 $96
 $74
 $48
 $122
 $66
 $39
 $105
 $59
 $42
 $101
Past due 60-89 days 14
 14
 28
 21
 16
 37
 19
 11
 30
 17
 14
 31
Past due 90 days or more 35
 18
 53
 48
 21
 69
 28
 15
 43
 31
 19
 50
Past due 108
 69
 177
 143

85
 228
 113
 65
 178
 107

75
 182
Current 5,403
 893
 6,296
 4,073
 921
 4,994
 8,009
 866
 8,875
 6,081
 879
 6,960
Recorded investment $5,511
 $962
 $6,473
 $4,216

$1,006
 $5,222
 $8,122
 $931
 $9,053
 $6,188

$954
 $7,142
In process of foreclosure $16
 $6
 $22
 $21
 $7
 $28
 $10
 $3
 $13
 $13
 $6
 $19
Serious delinquency rate 0.66% 1.87% 0.84% 1.16% 2.11% 1.34% 0.35% 1.53% 0.47% 0.51% 1.95% 0.70%
Past due 90 days or more and still accruing interest $5
 $18
 $23
 $8
 $21
 $29
 $4
 $14
 $18
 $5
 $19
 $24
Impaired loans without an allowance for credit losses and on nonaccrual status 38
 
 38
 49
 
 49
 29
   29
 33
   33
Unpaid principal balance of impaired loans without an allowance for credit losses 41
 
 41
 53
 
 53
 32
   32
 36
   36



Term Federal Funds Sold and Term Securities Purchased Under Agreements to Resell

We only held overnight Federal Funds sold and Securities Purchased Under Agreements to Resell as of September 30, 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

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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 20172018 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 of a benchmark interest rate, for example the London Interbank Offering Rate (LIBOR), related to (1) a recognized asset or liability or (2) an unrecognized firm commitment. Our hedge strategy for cash flow hedges is to hedge the total proceeds received from rolling forecasted zero-coupon discount note issuances attributable to changes in the benchmark interest rate or LIBOR by entering into interest rate swaps to mitigate such risk. 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. BasedAs of September 30, 2019, based on credit analyses and collateral requirements, we dohave not anticipate anyrecorded a credit lossesloss on our over-the-counter derivative agreements. See Note 16 - Fair Value in our 20172018 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$3 million at September 30, 2018.2019.

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 20172018 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 $177$471 million of investment securities that can be sold or repledged, as part of our initial margin related to cleared derivative transactions at September 30, 2018.2019. Additionally, an FCM may require additional initial margin to be posted based on credit considerations, including but not limited to, if our credit rating downgrades.  We had no requirement to post additional initial margin by our FCMs at September 30, 2018.2019.


22

Table of Contents
logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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. 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.

 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
As of Notional Amount Derivative Assets Derivative Liabilities Notional Amount Derivative Assets Derivative Liabilities Notional Amount Derivative Assets Derivative Liabilities Notional Amount Derivative Assets Derivative Liabilities
Derivatives in hedge accounting relationships-                        
Interest rate contracts $31,281
 $60
 $338
 $26,655
 $25
 $367
 $35,906
 $43
 $363
 $35,549
 $39
 $261
Derivatives not in hedge accounting relationships-                        
Interest rate contracts 20,696

110

81
 20,506
 199
 122
 18,934

164

111
 19,803
 100
 59
Other 811

1

1
 810
 1
 1
 1,905

2

4
 619
 1
 1
Derivatives not in hedge accounting relationships 21,507
 111
 82
 21,316

200

123
 20,839
 166
 115
 20,422

101

60
Gross derivative amount before netting adjustments and cash collateral $52,788
 171
 420
 $47,971

225

490
 $56,745
 209
 478
 $55,971

140

321
Netting adjustments and cash collateral   (160) (395)   (222) (470)   (198) (460)   (134) (305)
Derivatives on statements of condition   $11
 $25
   $3
 $20
   $11
 $18
   $6
 $16
Cash collateral received on derivative assets   $45
     $35
  
Cash collateral posted on derivative liabilities     $281
     $284
 Cash Collateral     Cash Collateral    
Cash collateral posted and related accrued interest $312
     $203
    
Cash collateral received and related accrued interest 50
     32
    



The following table presents the noninterestNoninterest income on derivatives- Derivatives and hedging activities as presented in the statementsStatements of income. The amounts attributable toIncome. For fair value and cash flow hedges representhedging relationships, the portion of net gains (losses) representing hedge ineffectiveness.ineffectiveness are recorded in Noninterest income for periods prior to January 1, 2019.

 Three months ended September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30,
For the periods ending 2018 2017 2018 2017 2019 2018 2019 2018
Fair value hedges - interest rate contracts $(6) $(3) $(6) $(3)   $(6)   $(6)
Cash flow hedges - interest rate contracts 
 1
 1
 2
   
   1
Economic hedges -                
Interest rate contracts 2
 2
 1
 3
 $(9) 2
 $(44) 1
Other (1) 
 (2) 3
 (1) (1) 4
 (2)
Economic hedges 1
 2
 (1) 6
 (10) 1
 (40) (1)
Variation margin on daily settled cleared derivatives 
 
 1
 1
 5
 
 9
 1
Noninterest income on derivatives and hedging activities $(5) $
 $(5) $6
Noninterest income - Derivatives and hedging activities $(5) $(5) $(31) $(5)


23

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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. 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.
 Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
 Bilateral Cleared Total Bilateral Cleared Total Bilateral Cleared Total Bilateral Cleared Total
As of September 30, 2018            
As of September 30, 2019            
Derivatives with legal right of offset -                        
Gross recognized amount $148
 $23
 $171
 $381
 $38
 $419
 $136
 $71
 $207
 $407
 $68
 $475
Netting adjustments and cash collateral (138) (22) (160) (374) (21) (395) (134) (64) (198) (396) (64) (460)
Derivatives with legal right of offset - net 10
 1
 11
 7
 17
 24
 2
 7
 9
 11
 4
 15
Derivatives without legal right of offset 
 
 
 1
 
 1
 2
 
 2
 3
 
 3
Derivatives on statements of condition 10
 1
 11
 8
 17
 25
 4
 7
 11
 14
 4
 18
Less:                        
Noncash collateral received or pledged and cannot be sold or repledged 
 
 
 
 17
 17
 
 
 
 
 4
 4
Net amount $10
 $1
 $11
 $8
 $
 $8
 $4
 $7
 $11
 $14
 $
 $14
                        
As of December 31, 2017            
As of December 31, 2018            
Derivatives with legal right of offset -                        
Gross recognized amount $216
 $8
 $224
 $476
 $13
 $489
 $107
 $32
 $139
 $279
 $41
 $320
Netting adjustments and cash collateral (214) (8) (222) (463) (7) (470) (102) (32) (134) (273) (32) (305)
Derivatives with legal right of offset - net 2



2

13

6

19
 5



5

6

9

15
Derivatives without legal right of offset 1
 
 1
 1
 
 1
 1
 
 1
 1
 
 1
Derivatives on statements of condition 3



3

14

6

20
 6



6

7

9

16
Less:                 

      
Noncash collateral received or pledged and cannot be sold or repledged 
 (1) (1) 
 6
 6
 
 
 
 
 9
 9
Net amount $3
 $1
 $4
 $14
 $
 $14
 $6
 $
 $6
 $7
 $
 $7



At September 30, 2018,2019, we had $160$468 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$260 million of comparable exposure at December 31, 2017.




2018.


24

Table of Contents
logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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 were not material, 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.
Beginning January 1, 2019, on a prospective basis, hedge ineffectiveness, which represents the difference between changes in fair value of the derivative hedging instrument and the related change in fair value of the hedged item is recognized into net interest income in the same line item as the earnings effect of the hedged item. Prior to January 1, 2019, hedge ineffectiveness was classified in noninterest income on derivatives and hedging activities.
  Gain (Loss) on Derivative Gain (Loss) on Hedged Item Amount Recorded in Derivatives and Hedging Activities Amount Recorded in Net Interest Income
Three months ended September 30, 2019        
Available-for-sale debt securities $(302) $294
   $(8)
Advances (131) 134
   3
MPF Loans held for portfolio 
 (1)   (1)
Consolidated obligation bonds 23
 (30)   (7)
Total $(410) $397
   $(13)
Three months ended September 30, 2018       
Available-for-sale debt securities $46
 $(50) (4) $(14)
Advances 43
 (47) (4) 6
MPF Loans held for portfolio 
 
 
 (1)
Consolidated obligation bonds (17) 19
 2
 (18)
Total $72

$(78)
$(6) $(27)
Nine months ended September 30, 2019       
Available-for-sale debt securities $(825) $798
   $(27)
Advances (404) 429
   25
MPF Loans held for portfolio 
 (1)   (1)
Consolidated obligation bonds 255
 (307)   (52)
Total $(974) $919
   $(55)
Nine months ended September 30, 2018       
Available-for-sale debt securities $95
 $(101) $(6) $(44)
Advances 150
 (148) 2
 9
MPF Loans held for portfolio 
 
 
 (3)
Consolidated obligation bonds (166) 164
 (2) (34)
Total $79
 $(85) $(6) $(72)


The following table presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost basis of the hedged items. The line for MPF Loans held for portfolio relates to discontinued closed fair value hedges that are being amortized over the remaining life of the loans, as of September 30, 2019 we did not have any active fair value hedges on our MPF Loans.
 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 September 30, 2018        
Available-for-sale debt securities $46
 $(50) $(4) $(14)
As of September 30, 2019 Amortized cost of hedged asset/(liability) Basis adjustments active hedges included in amortized cost Basis adjustments discontinued hedges included in amortized cost Cumulative amount of fair value hedging basis adjustments
Advances 43
 (47) (4) 6
 $10,457
 $469
 $
 $469
Available-for-sale securities 10,894
 947
 1
 948
MPF Loans held for portfolio 
 
 
 (1) 726
 
 13
 13
Consolidated obligation bonds (17) 19
 2
 (18) (16,282) (112) 32
 (80)
Total $72
 $(78) $(6) $(27)
Three months ended September 30, 2017       
Available-for-sale debt securities $23
 $(26) $(3) $(21)
Advances 9
 (9) 
 (8)
MPF Loans held for portfolio 
 
 
 (2)
Consolidated obligation bonds (4) 4
 
 7
Total $28

$(31)
$(3) $(24)
Nine months ended September 30, 2018       
Available-for-sale debt securities $95
 $(101) $(6) $(44)
Advances 150
 (148) 2
 9
MPF Loans held for portfolio 
 
 
 (3)
Consolidated obligation bonds (166) 164
 (2) (34)
Total $79
 $(85) $(6) $(72)
Nine months ended September 30, 2017       
Available-for-sale debt securities $58
 $(64) $(6) $(70)
Advances (6) 9
 3
 (27)
MPF Loans held for portfolio 
 
 
 (5)
Consolidated obligation bonds 55
 (55) 
 29
Total $107
 $(110) $(3) $(73)


25

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

Cash Flow Hedges

Beginning January 1, 2019 on a prospective basis, hedge ineffectiveness, which represents the difference between changes in fair value of the derivative hedging instrument and the related change in fair value of the hedged item, is recognized into net interest income in the same line item as the earnings effect of the hedged item. For cash flow hedges, recognition occurs only when amounts are reclassified out of accumulated other comprehensive income. Such recognition occurs when earnings are affected by the hedged item. Prior to January 1, 2019, hedge ineffectiveness was classified in noninterest income on derivatives and hedging activities.

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).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 10 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$2 million as of September 30, 2018.2019.

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 inReclassified from AOCI into 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 initially recorded directlyin AOCI and are reclassified 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   Gross Amount Initially Recognized in AOCI Amount Reclassified from AOCI into Net Interest Income
Three months ended September 30, 2019      
Discount notes   $(8)
$(4)
Total   $(8)
$(4)
      
Nine months ended September 30, 2019     
Discount notes   $(40) $(22)
Bonds   
 (1)
Total   $(40) $(23)
 Ineffectiveness Recorded in Derivatives and Hedging Activities Effective Portion Recorded in AOCI Amount Recorded in Net Interest Income
Three months ended September 30, 2018            
Discount notes $
 $15
 $(22)
      
Three months ended September 30, 2017     
Advances $
 $
 $1
Discount notes 1
 44
 (40) 
 15
 (22)
Total
$1

$44
 $(39) $
 $15
 $(22)
            
Nine months ended September 30, 2018     
      
Advances $

$
 $1
 $
 $
 $1
Discount notes 1
 103
 (86) 1
 103
 (86)
Bonds 
 
 (1) 
 
 (1)
Total $1
 $103
 $(86) $1
 $103
 $(86)
      
Nine months ended September 30, 2017     
Advances $
 $
 $7
Discount notes 2
 117
 (128)
Bonds 
 
 (2)
Total $2
 $117
 $(123)



26

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

Note 10 – Consolidated Obligations

The FHLBs issue consolidated obligations through the Office of Finance as their agent. Consolidated obligations consist of discount notes and consolidated obligation bonds. Consolidated discount notes are issued to raise short-term funds, are issued at less than their face amount and redeemed at par value when they mature. The maturity of consolidated obligation bonds may range from less than one year to over 20 years, but they are not subject to any statutory or regulatory limits on maturity.

The following table presents our consolidated obligation discount notes for which we are the primary obligor. All are due in one year or less.
As of September 30, 2018 December 31, 2017
 September 30, 2019 December 31, 2018
Carrying Amount $37,674
 $41,191
Consolidated obligation discount notes $47,647
 $43,166
Weighted Average Interest Rate 1.98% 1.23% 1.91% 2.28%


The following table presents maturities and contractual interest rates on our consolidated obligation bonds, for which we are the primary obligor, including callable bonds that are redeemable in whole, or in part, at our discretion on predetermined call dates.
As of September 30, 2018 Contractual Maturity Weighted Average Interest Rate By Maturity or Next Call Date
As of September 30, 2019 Contractual Maturity Weighted Average Interest Rate By Maturity or Next Call Date
Due in one year or less $24,310
 1.88% $35,432
 $18,387
 1.94% $30,437
One to two years 7,011
 1.82% 6,503
 11,365
 2.17% 8,891
Two to three years 4,714
 2.16% 1,867
 6,637
 2.31% 3,820
Three to four years 4,152
 2.23% 1,268
 2,768
 2.70% 2,104
Four to five years 2,061
 2.94% 983
 1,806
 2.49% 562
Thereafter 4,369
 3.03% 564
 5,679
 3.08% 828
Total par value $46,617
 2.08% $46,617
 $46,642
 2.25% $46,642



The following table presents consolidated obligation bonds outstanding by call feature:
As of September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Noncallable $33,202
 $23,644
 $32,207
 $27,999
Callable 13,415
 13,703
 14,435
 14,487
Par value 46,617
 37,347
 46,642
 42,486
Fair value hedging adjustments (373) (214) 80
 (227)
Other adjustments (12) (12) 16
 (9)
Consolidated obligation bonds $46,232
 $37,121
 $46,738
 $42,250


The following table summarizes the consolidated obligations of the FHLBs and those for which we are the primary obligor. We did not accrue a liability for our joint and several liability related to the other FHLBs’ share of the consolidated obligations as of September 30, 2018,2019, and December 31, 2017.2018. See Note 17 - Commitments and Contingencies in our 20172018 Form 10-K for further details.
 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Par values as of Bonds 
Discount
Notes
 Total Bonds 
Discount
Notes
 Total Bonds 
Discount
Notes
 Total Bonds 
Discount
Notes
 Total
FHLB System total consolidated obligations $615,216
 $403,882
 $1,019,098
 $642,211
 $392,049
 $1,034,260
 $621,082
 $389,189
 $1,010,271
 $604,250
 $427,367
 $1,031,617
FHLB Chicago as primary obligor 46,617
 37,741
 84,358
 37,347
 41,235
 78,582
 46,642
 47,733
 94,375
 42,486
 43,280
 85,766
As a percent of the FHLB System 8% 9% 8% 6% 11% 8% 8% 12% 9% 7% 10% 8%

 

27

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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 20172018 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-44F-42 of our 20172018 Form 10-K. We complied with our minimum regulatory capital requirements as shown below.
 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
 Requirement Actual Requirement Actual Requirement Actual Requirement Actual
Risk-based capital $1,219
 $5,519
 $1,075
 $5,051
Total regulatory capital $3,656
 $5,519
 $3,374
 $5,051
 $4,102
 $5,892
 $3,714
 $5,547
Total regulatory capital ratio 4.00% 6.04% 4.00% 5.99% 4.00% 5.75% 4.00% 5.97%
Leverage capital $4,571
 $8,278
 $4,218
 $7,577
 $5,127
 $8,838
 $4,643
 $8,321
Leverage capital ratio 5.00% 9.06% 5.00% 8.98% 5.00% 8.62% 5.00% 8.96%
Risk-based capital $1,152
 $5,892
 $1,111
 $5,547

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 September 30, 2018 Regulatory Capital Stock Outstanding % of Total Outstanding Amount of Which is Classified as a Liability (MRCS)
BMO Harris Bank, NA $314
 15.5% $
As of September 30, 2019 Regulatory Capital Stock Outstanding % of Total Outstanding Amount of Which is Classified as a Liability (MRCS)
BMO Harris Bank, National Association $494
 22.8% $
The Northern Trust Company 247
 12.2% 
 247
 11.4% 
One Mortgage Partners Corp. 245
a 
12.1% 245
 245
a 
11.3% 245
a 
One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase Bank NA.

On August 14, 2019, the FHFA issued an Advisory Bulletin (the “AB”) providing guidance for each FHLB to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the Bank. Beginning in February 2020, the FHFA will consider the proportion of capital stock to assets, measured on a daily average basis at month end, when assessing each FHLB’s capital management practices.

Dividends

Our ability to pay dividends is subject to the FHLB Act and FHFA regulations. On October 23, 2018,22, 2019, our Board of Directors declared a 4.50%5.00% dividend (annualized) for Class B1 activity stock and a 1.80%2.25% dividend (annualized) for Class B2 membership stock based on our preliminary financial results for the third quarter of 2018.2019. This dividend includingtotaled $24 million (recorded as $20 million dividends on capital stock and $4 million interest expense on mandatorily redeemable capital stock, totaled $20 millionstock) and is scheduled for payment on November 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.

14, 2019. Any future dividend determinationpayment remains subject to declaration by ourthe 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.

Repurchase of Excess Capital Stock

We repurchase 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

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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     Net Unrealized - Non-credit OTTI - Net Unrealized - Cash Flow Hedges    
 Available-for-sale Securities Held-to-maturity Securities Post-Retirement Plans AOCI Available-for-sale Securities Held-to-maturity Securities Post-Retirement Plans Total in AOCI
Three months ended September 30, 2019          
Beginning balance $192
 $(101) $(44) $(6)
$41
Change in the period recorded to the statements of condition, before reclassifications to statements of income (61) 7
 (8) (6)
(68)
Amounts reclassified in period to statements of income: 

 

 

 

 

Net interest income 
 
 4
   4
Noninterest expense       1
 1
Ending balance $131
 $(94) $(48) $(11) $(22)
Three months ended September 30, 2018                    
Beginning balance $315
 $(128) $(57) $(8)
$122
 $315
 $(128) $(57) $(8) $122
Change in the period recorded to the statements of condition, before reclassifications to statements of income (32) 7
 15
 (5)
(15) (32) 7
 15
 (5) (15)
Amounts reclassified in period to statements of income: 

 

 

 

 

         

Net interest income 
 
 10
   10
 
 
 10
   10
Noninterest expense       1
 1
       1
 1
Ending balance $283
 $(121) $(32) $(12) $118
 $283

$(121)
$(32)
$(12)
$118
Three months ended September 30, 2017          
          
Nine months ended September 30, 2019          
Beginning balance $478
 $(160) $(243) $(8) $67
 $211
 $(114) $(31) $(11) $55
Change in the period recorded to the statements of condition, before reclassifications to statements of income (24) 8
 44
 3
 31
 (80) 20
 (40) (2) (102)
Amounts reclassified in period to statements of income:         

         

Net interest income 
 
 (1)   (1) 
 
 23
 

 23
Noninterest gain (loss) 
 
 (1)   (1)
Noninterest expense       2
 2
Ending balance $454

$(152)
$(201)
$(5)
$96
 $131
 $(94) $(48) $(11) $(22)
          
Nine months ended September 30, 2018                    
Beginning balance $407
 $(143) $(147) $(5) $112
 $407
 $(143) $(147) $(5) $112
Change in the period recorded to the statements of condition, before reclassifications to statements of income (124) 22
 103
 (8) (7) (124) 22
 103
 (8) (7)
Amounts reclassified in period to statements of income:         

          
Net interest income 
 
 13
   13
 
 
 13
   13
Noninterest gain (loss) 
 
 (1)   (1)
Noninterest income 


 


 (1) 

 (1)
Noninterest expense       1
 1
       1
 1
Ending balance $283
 $(121) $(32) $(12) $118
 $283
 $(121) $(32) $(12) $118
Nine months ended September 30, 2017          
Beginning balance $459
 $(177) $(312) $(6) $(36)
Change in the period recorded to the statements of condition, before reclassifications to statements of income (5) 25
 117
 1
 138
Amounts reclassified in period to statements of income:          
Net interest income 
 
 (4)   (4)
Noninterest gain (loss) 
 
 (2)   (2)
Ending balance $454
 $(152) $(201) $(5) $96



29

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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 20172018 Form 10-K for our fair value policies and Note 16 - Fair Value in our 20172018 Form 10-K for our valuation techniques and significant inputs. See Note 9 - Derivatives and Hedging Activities for more information on the Netting and Cash Collateral amounts.
 Carrying Amount Fair Value Level 1 Level 2 Level 3 Netting & Cash Collateral  Carrying Amount Fair Value Level 1 Level 2 Level 3 Netting & Cash Collateral 
September 30, 2018             
September 30, 2019             
Carried at amortized cost                          
Cash and due from banks $44
 $44
 $44
 $
 $
    $65
 $65
 $65
 $
 $
   
Interest bearing deposits 775
 775
 775
 
 
    1,255
 1,255
 1,255
 
 
   
Federal Funds sold and securities purchased under agreements to resell 9,835

9,835



9,835


    11,351

11,351



11,351


   
Held-to-maturity debt securities 2,928
 3,217
 
 2,549
 668
    2,159
 2,422
 
 1,907
 515
   
Advances 53,759
 53,784
 
 53,784
 
    54,729
 54,794
 
 54,794
 
   
MPF Loans held in portfolio, net 6,433
 6,396
 
 6,387
 9
    9,000
 9,210
 
 9,203
 7
   
Other assets 169
 169
 
 169
 
    163
 163
 
 163
 
   
Carried at fair value on a recurring basis                          
Trading securities 2,596
 2,596
 
 2,596
 
   
Trading debt securities 4,496
 4,496
 
 4,496
 
   
Government related non-MBS, ABS, and MBS 13,663

13,663



13,663


    16,177

16,177



16,177


   
Private label residential MBS 44
 44
 
 
 44
    37
 37
 
 
 37
   
Available-for-sale debt securities 13,707
 13,707
 
 13,663
 44
    16,214
 16,214
 
 16,177
 37
   
Advances - fair value option election 908
 908
 
 908
 
    2,900
 2,900
 
 2,900
 
   
Derivative assets 11
 11
 1
 170
 
 $(160)  11
 11
 1
 208
 
 $(198) 
Other assets - fair value option election 116
 116
 
 116
 
   
Other assets - held for sale at fair value 88
 88
 
 88
 
   
Carried at fair value on a nonrecurring basis                          
MPF Loans held in portfolio, net 6
 6
 
 
 6
    4
 4
 
 
 4
   
Other assets 1
 1
 
 
 1
    1
 1
 
 
 1
   
Financial assets 91,288
 $91,565
 $820
 $90,177
 $728
 $(160)  102,436
 $102,974
 $1,321
 $101,287
 $564
 $(198) 
Other non financial assets 122
            107
           
Assets $91,410
            $102,543
           
Carried at amortized cost                          
Deposits $(581) $(581) $
 $(581) $
    $(1,032) $(1,032) $
 $(1,032) $
   
Consolidated obligation discount notes (37,674) (37,667) 
 (37,667) 
    (47,647) (47,651) 
 (47,651) 
   
Consolidated obligation bonds (44,030) (43,996) 
 (43,996) 
    (40,099) (40,329) 
 (40,329) 
   
Mandatorily redeemable capital stock (313) (313) (313) 
 
    (324) (324) (324) 
 
   
Other liabilities (154) (154) 
 (154) 
    (152) (152) 
 (152) 
   
Carried at fair value on a recurring basis                          
Consolidated obligation bonds - fair value option (2,202) (2,202) 
 (2,202) 
    (6,639) (6,639) 
 (6,639) 
   
Derivative liabilities (25) (25) 
 (420) 
 $395
  (18) (18) 
 (478) 
 $460
 
Financial liabilities (84,979) $(84,938) $(313) $(85,020) $
 $395
  (95,911) $(96,145) $(324) $(96,281) $
 $460
 
Other non financial liabilities (1,086)           
Liabilities $(96,997)           
             


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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)

Other non financial liabilities (1,107)           
Liabilities $(86,086)           
              Carrying Amount Fair Value Level 1 Level 2 Level 3 Netting 
 Carrying Amount Fair Value Level 1 Level 2 Level 3 Netting 
December 31, 2017   
December 31, 2018   
Carried at amortized cost 

 

 

 

 

    

 

 

 

 

   
Cash and due from banks $42
 $42
 $42
 $
 $
    $28
 $28
 $28
 $
 $
   
Interest bearing deposits 775
 775
 775
 
 
    775
 775
 775
 
 
   
Federal Funds sold and securities purchased under agreements to resell 12,561
 12,561
 
 12,561
 
    10,604
 10,604
 
 10,604
 
   
Held-to-maturity debt securities 4,157
 4,538
 
 3,734
 804
    3,213
 3,492
 
 2,870
 622
   
Advances 47,309
 47,336
 
 47,336
 
    51,603
 51,615
 
 51,615
 
   
MPF Loans held in portfolio, net 5,186
 5,306
 
 5,295
 11
    7,096
 7,091
 
 7,085
 6
   
Other assets 119
 119
 
 119
 
    190
 190
 
 190
 
   
Carried at fair value on a recurring basis 

     

      

 

   

     
Trading securities 233
 233
 
 233
 
   
Trading debt securities 3,478
 3,478
 
 3,478
 
   
Government related non-MBS, ABS, and MBS 12,907

12,907



12,907


    14,573

14,573



14,573


   
Private label residential MBS 50
 50
 
 
 50
    41
 41
 
 
 41
   
Available-for-sale debt securities 12,957
 12,957
 
 12,907
 50
 

  14,614
 14,614
 
 14,573
 41
 

 
Advances - fair value option election 776
 776
 
 776
 
    1,025
 1,025
 
 1,025
 
   
Derivative assets 3
 3
 
 225
 
 $(222)  6
 6
 
 140
 
 $(134) 
Other assets - fair value option election 118
 118
 
 118
 
   
Other assets - held for sale at fair value 108
 108
 
 108
 
   
Carried at fair value on a nonrecurring basis                

         
MPF Loans held in portfolio, net 7
 7
 
 
 7
    7
 7
 
 
 7
   
Other assets 3
 3
 
 
 3
    1
 1
 
 
 1
   
Financial assets 84,246

$84,774

$817

$83,304

$875

$(222)  92,748

$93,034

$803

$91,688

$677

$(134) 
Other non financial assets 109
            109
 

         
Assets $84,355
            $92,857
 

         
Carried at amortized cost                

         
Deposits (524) (524) 
 (524) 
    (551) (551) 
 (551) 
   
Consolidated obligation discount notes (40,442) (40,437) 
 (40,437) 
    (42,174) (42,170) 
 (42,170) 
   
Consolidated obligation bonds (31,861) (32,011) 
 (32,011) 
    (39,898) (39,895) 
 (39,895) 
   
Mandatorily redeemable capital stock (311) (311) (311) 
 
    (313) (313) (313) 
 
   
Other liabilities (94) (94) 
 (94) 
    (153) (153) 
 (153) 
   
Carried at fair value on a recurring basis                

         
Consolidated obligation discount notes - fair value option (749) (749) 
 (749) 
    (992) (992) 
 (992) 
   
Consolidated obligation bonds - fair value option (5,260) (5,260) 
 (5,260) 
    (2,352) (2,352) 
 (2,352) 
   
Derivative liabilities (20) (20) 
 (490) 
 470
  (16) (16) 
 (321) 
 305
 
Financial liabilities (79,261) $(79,406) $(311) $(79,565) $
 $470
  (86,449) $(86,442) $(313) $(86,434) $
 $305
 
Other non financial liabilities (242)            (1,119)           
Liabilities $(79,503)            $(87,568)           



We had no transfers between levels for the periods shown.

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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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.criteria. 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 20172018 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 September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30,
 2018 2017 2018 2017 2019 2018 2019 2018
Advances $(1) $(1) $(11) $2
 $18
 $(1) $52
 $(11)
Discount notes 
 (1) 
 (1)
Other assets 
 (1) 
 (6)
Consolidated obligation bonds (1) (3) (3) (3) 6
 (1) (9) (3)
Other assets (1) 
 (6) (1)
Noninterest income - Instruments held under fair value option $(3) $(5) $(20) $(3) $24
 $(3) $43
 $(20)


The following table reflects the difference between the aggregate unpaid principal balance (UPB) outstanding and the aggregate fair value for our long term financial instruments for which the fair value option has been elected. None of the advances were 90 days or more past due and none were on nonaccrual status.

 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
As of Advances Consolidated Obligation Bonds Advances Consolidated Obligation Bonds Advances Consolidated Obligation Bonds Advances Consolidated Obligation Bonds
Unpaid principal balance $929
 $2,213

$786
 $5,270
 $2,857
 $6,617

$1,037
 $2,358
Fair value over (under) UPB (21) (11) (10) (10) 43
 22
 (12) (6)
Fair value  $908
 $2,202
 $776
 $5,260
 $2,900
 $6,639
 $1,025
 $2,352


  


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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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.

 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
As of Expire within one year Expire after one year Total Expire within one year Expire after one year Total Expire within one year Expire after one year Total Expire within one year Expire after one year Total
Unsettled consolidated obligation bonds $25
 $
 $25
 $
 $
 $
 $148
 $
 $148
 $114
 $
 $114
Member standby letters of credit 18,407
 4,308
a 
22,715
 15,703
 3,869
a 
19,572
 16,226
 7,527
a 
23,753
 19,971
 4,335
a 
24,306
Housing authority standby bond purchase agreements 71
 295
 366
 
 337
 337
 152
 298
 450
 84
 289
 373
Advance commitments 1,647
 3
 1,650
 151
 
 151
 9
 30
 39
 267
 7
 274
MPF delivery commitments 433
 
 433
 371
 
 371
 1,058
 
 1,058
 336
 
 336
Other 3
 
 3
 14
 
 14
 1
 
 1
 3
 
 3
Commitments $20,586
 $4,606
 $25,192
 $16,239
 $4,206
 $20,445
 $17,594
 $7,855
 $25,449
 $20,775
 $4,631
 $25,406

a 
Contains $1.6$4.8 billion and $750 million$1.7 billion of member standby letters of credit as of September 30, 2018,2019, and December 31, 2017,2018, which were renewable annually.

For a description of defined terms see Note 17 - Commitments and Contingencies to the financial statements in our 20172018 Form 10-K.



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logoa74.jpgFederal Home Loan Bank of Chicago 
Notes to Financial Statements - (Unaudited)
(U.S. 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 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Assets - Advances $629
 $165
 $678
 $665
Liabilities - Deposits 6
 13
 9
 6
Equity - Capital Stock 27
 10
 32
 27



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 are identified on the face of our Financial Statements. starting on page 3.



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logoa73.jpgFederal Home Loan Bank of Chicago 
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Selected Financial Data
As of or for the three months ended September 30, 2018 June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017  September 30, 2019 June 30, 2019 March 31, 2019 December 31, 2018 September 30, 2018
Selected statements of condition data                     
Investments a
 $29,841
 $36,048
 $34,818
 $30,683
 $31,885
  $35,475
 $36,739
 $35,394
 $32,684
 $29,841
Advances 54,667
 54,468
 50,840
 48,085
 50,153
  57,629
 51,141
 50,776
 52,628
 54,667
MPF Loans held in portfolio, net 6,439
 5,779

5,357

5,193

5,024
  9,004
 8,265

7,578

7,103

6,439
Total assets 91,410
 96,731
 91,391
 84,355
 87,488
  102,543
 96,559
 94,122
 92,857
 91,410
Consolidated obligation discount notes, net 37,674
 43,007
 41,483
 41,191
 45,460
  47,647
 44,893
 39,639
 43,166
 37,674
Consolidated obligation bonds, net 46,232
 46,854
 43,516
 37,121
 35,890
  46,738
 43,941
 47,047
 42,250
 46,232
Mandatorily redeemable capital stock recorded as a liability 313
 314
 311
 311
 308
  324
 323
 315
 313
 313
Capital stock 1,718
 1,805
 1,579
 1,443
 1,557
  1,846
 1,678
 1,660
 1,698
 1,718
Retained earnings 3,488
 3,428
 3,358
 3,297
 3,219
  3,722
 3,663
 3,608
 3,536
 3,488
Total capital 5,324
 5,355
 5,063
 4,852
 4,872
  5,546
 5,382
 5,329
 5,289
 5,324
Other selected data at period end                     
Member standby letters of credit outstanding $22,715
 $21,587
 $20,132
 $19,572
 $15,411
  $23,753
 $25,790
 $23,410
 $24,306
 $22,715
MPF Loans par value outstanding - FHLB System b
 56,687
 54,572
 52,582
 51,563
 49,970
  65,669
 62,574
 60,236
 58,820
 56,687
MPF Loans par value outstanding - FHLB Chicago PFIs b
 13,858
 13,189
 12,692
 12,484
 12,187
  16,441
 15,631
 14,961
 14,522
 13,858
FHLB system consolidated obligations par value outstanding 1,010,271
 1,048,412
 1,010,895
 1,031,617
 1,019,098
Number of members 711
 719
 719
 720
 717
  697
 695
 703
 705
 711
Total employees (full and part time) 469
 462
 461
 460
 457
  484
 477
 472
 468
 469
Selected statements of income data                     
Net interest income after provision for credit losses $127

$132

$124

$130

$124
  $113

$116

$118

$130

$127
Non-interest gain (loss) 6
 9
 
 13
 5
 
Non-interest expense 47
 46
 42
 45
 43
 
Noninterest income 29
 21
 18
 1
 6
Noninterest expense 54
 52
 50
 56
 47
Net income 77
 85
 74
 88
 77
  79
 76
 77
 67
 77
Other selected data during the periods           
MPF Loans par value amounts funded - FHLB System b
 $3,968
 $3,555
 $2,494
 $3,280
 $3,474
 
Number of PFIs funding MPF products - FHLB System b
 761
 767
 720
 750
 769
 
MPF Loans par value amounts funded - FHLB Chicago PFIs b
 $1,119
 $892
 $566
 $729
 $655
 
Number of PFIs funding MPF products - FHLB Chicago b
 180
 184
 174
 175
 175
 
Other selected MPF data during the periods b
          
MPF Loans par value amounts funded - FHLB System $6,391
 $4,480
 $2,788
 $3,600
 $3,968
Quarterly number of PFIs funding MPF products - FHLB System 794
 753
 729
 750
 761
MPF Loans par value amounts funded - FHLB Chicago PFIs $1,699
 $1,224
 $771
 $1,037
 $1,119
Quarterly number of PFIs funding MPF products - FHLB Chicago 192
 189
 176
 184
 180
Selected ratios (rates annualized)                     
Total regulatory capital to assets ratio 6.04% 5.73% 5.74% 5.99% 5.81%  5.75% 5.87% 5.93% 5.97% 6.04%
Market value of equity to book value of equity 105% 106% 107% 107% 107%  105% 105% 105% 105% 105%
Primary mission asset ratio c
 70.7% 69.9% 69.1% 67.3% 67.2%  72.5% 72.9% 73.2% 71.1% 70.7%
Dividend rate class B1 activity stock-period paid 4.25% 4.00% 3.50% 3.30% 3.30%  5.00% 5.00% 5.00% 4.50% 4.25%
Dividend rate class B2 membership stock-period paid 1.70% 1.60% 1.50% 1.25% 1.25%  2.25% 2.25% 2.00% 1.80% 1.70%
Return on average assets 0.33% 0.36% 0.33% 0.41% 0.36%  0.32% 0.31% 0.32% 0.28% 0.33%
Return on average equity 5.82% 6.42% 5.82% 7.34% 6.54%  5.55% 5.30% 5.60% 4.93% 5.82%
Average equity to average assets 5.67% 5.61% 5.67% 5.59% 5.50%  5.77% 5.85% 5.71% 5.68% 5.67%
Net yield on average interest-earning assets 0.55% 0.56% 0.55% 0.60% 0.59%  0.46% 0.49% 0.50% 0.56% 0.55%
Return on average Regulatory Capital spread to three month LIBOR index 3.24% 3.90% 3.77% 5.54% 4.89%  3.29% 2.81% 2.86% 2.10% 3.24%
Cash dividends $17
 $15
 $13
 $10
 $11
 
Dividend payout ratio 22%
18%
18%
11%
14% 
Cash dividends-period paid $20
 $21
 $21
 $19
 $17
Dividend payout ratio-period paid 25%
28%
27%
28%
22%
a 
Includes investment debt 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 87 in our 20172018 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 annualAnnual average year to date basis. See Mission Asset Ratio on page 5 in our 20172018 Form 10-K for more information.

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logoa73.jpgFederal Home Loan Bank of Chicago 
(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)


Forward-Looking Information

Statements contained in this report, including statements describing the plans, objectives, projections, estimates, strategies, or future predictions of management, statements of belief, any projections or guidance on dividends or other financial items, or any statements of assumptions underlying the foregoing, may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “expects,” “could,” "plans," “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 pricing increases and the availability of other sources of funding for our members, such as deposits; 

regulatory 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;redemptions, and our ability to maintain compliance with regulatory and statutory requirements relating to our dividend payments ;

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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logoa73.jpgFederal Home Loan Bank of Chicago 
(U.S. 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;

uncertainties relating to the potential phase-out of the London Interbank Offered Rate (LIBOR);

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, changes to 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, capital requirements, and liquidity 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.risks; and

the reliability of our projections, assumptions, and models on our future financial performance and condition, including dividend projections.

For a more detailed discussion of the risk factors applicable to us, see Risk Factors in our 20172018 Form 10-K on page 16.17.

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


Executive Summary

Third Quarter 20182019 Financial Highlights

Advances outstanding increased $6.6$5.0 billion to $54.7$57.6 billion at September 30, 2018,2019, up from $48.1$52.6 billion at December 31, 2017.2018.
MPF Loans held in portfolio increased to $6.4 billion at September 30, 2018, up from $5.2 billion at December 31, 2017, due to increased utilization by PFIs and the addition of new PFIs to the MPF Program.
Total investment debt securities increased 11% to $19.2$9.0 billion at September 30, 2018,2019, up from $17.3$7.1 billion at December 31, 2017,2018, due mainly to refinancing and loan origination activity as wemortgage rates have declined.
Total investment securities increased our purchase of Treasury securities7% to $22.9 billion at September 30, 2019, up from $21.3 billion at December 31, 2018, as purchases exceeded paydowns and MBS.maturities.
Total assets increased to $91.4$102.5 billion as of September 30, 2018,2019, compared to $84.4$92.9 billion as of December 31, 2017.2018, due mainly to growth in our advances outstanding, MPF Loans, and total investment securities.
We recorded net income of $79 million in the third quarter of 2019, up from $77 million in the third quarter of 2018, the same amount we recorded in the third quarter of 2017.2018.
Net interest income for the third quarter of 20182019 was $126$113 million, updown from $123$126 million for the third quarter of 2017, as2018, primarily due to our higher-earning legacy investment portfolio continuing to pay down, increasing our lower-yielding liquidity portfolio, and funding our statement of condition with debt at higher rates than the same period a year ago.
In the third quarter of 2019, noninterest income was $29 million, up $23 million from $6 million for the third quarter of 2018, primarily due to net gains from financial instruments for which we benefited from higher levels of interest earning assets.have elected the fair value option.
Letters of credit commitments increaseddecreased to $22.7$23.8 billion at September 30, 2018, up2019, down from $19.6$24.3 billion at December 31, 2017.2018.
We remained in compliance with all of our regulatory capital requirements as of September 30, 2018.2019.

Summary and Outlook

Third Quarter 20182019 Dividend and Dividend Guidance for the Next Two Quarters

On October 23, 2018,22, 2019, the Bank's Board of Directors increasedof the dividendsBank approved maintaining the dividend declared per sharein the second quarter of 2019 on both subclasses of capitalthe Class B1 activity stock and the Class B2 membership stock. Based on the Bank'sBank’s preliminary financial results for the third quarter of 2018,2019, the Board of Directors declared a dividend of 4.5%5.00% (annualized) for Class B1 activity capital stock (an increase of 25 basis points from the previous quarter) and a dividend of 1.80%2.25% (annualized)for Class B2 membership capital stock (an increasestock. The dividend for the third quarter of 10 basis points from the previous quarter).2019 will be paid by crediting members’ DID account on November 14, 2019.

The Bank pays a higher dividend per share on Class B1 activity capital stock to rewardrecognize members for using the Bank’sthat use advances and, thereby, supportingsupport the entire cooperative. The higher dividend members receivereceived on Class B1 activity capital stock has the effect of lowering theirmembers’ borrowing costs.costs, and this benefit has increased on a relative basis as the Federal Reserve has cut short-term interest rates twice in the third quarter of 2019.

GrowthBased on current projections and assumptions about the Bank’s financial condition and the economic outlook, the Bank expects to maintain a 5.00% (annualized) level of dividend for Class B1 activity stock for the fourth quarter of 2019 and the first quarter of 2020. The Bank continues to work to support a reliable dividend on its stock, but any future dividend payment remains subject to determination and declaration by the Board of Directors and may be impacted by a change in Member Product Use Continuesfinancial or economic conditions, regulatory and statutory limitations, and any other relevant factors. For additional discussion of risks that may impact the Bank’s dividend payments, see the Risk Factors section starting on page 17 of our 2018 Form 10-K. The Bank is providing this dividend guidance to assist members in planning their advance activity with the Bank.


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



Repurchase of Excess Stock

Beginning on October 31, 2019, the Bank will no longer automatically repurchase excess stock on a weekly basis. Members can continue to request repurchases of excess stock on any business day. This change will enable members to retain excess stock, which for many members will simplify the management of their stock balances and will provide a dividend benefit on the excess Class B2 membership stock retained.


Third Quarter 2019 Financial Highlights: Advances, Letters of Credit, and MPF

At the end of the third quarter of 2018,2019, activity on advances, letters of credit, and MPF Program loans outstanding remained strong.

Advances outstanding totaled $54.7$57.6 billion, up $6.6$5.0 billion from year-end 2017, and letters2018.
Letters of credit commitments totaled $22.7$23.8 billion, up $3.1down $0.5 billion from year-end 2017. 2018.
MPF Loansloans held in portfolio totaled $6.4$9.0 billion, at the end of the third quarter of 2018, up $1.2$1.9 billion from year-end 2017, and the number of PFIs selling into MPF Traditional products also grew during the third quarter of 2018.

Investments in Member Communities

Investing In the second year of ourMembers’ Communities: Community First® Capacity-Building Grant Program,, Disaster Relief Funding, DPP®, and AHP

Earlier this month, the Bank provided $250,000 to seven nonprofit lending organizationsannounced $500,000 in financial assistance for flood-hit communities in Illinois and Wisconsin to help them expand their capacity, and, in turn, enhance community development in the communities served by the Bank’s members. In October 2018, the Bank announced $125,000 inWisconsin. Through its Community First Disaster Relief Program, funding for recovery efforts from the severe storms, flooding, and mudslides that occurred in June 2018 in the Federal Emergency Management Agency (FEMA)-declared disaster area of Ashland, Bayfield, Burnett, Clark, Douglas, and Iron counties in Wisconsin. Bank$5,000 grants are available on a first-come, first-served basis through December 20, 2019, to help members can offer $5,000 grantsto provide assistance to eligible households and businesses withinin certain FEMA-declared disaster areas.

In addition, the disaster area,Bank’s Downpayment Plus® (DPP) and together,Downpayment Plus Advantage® (DPP Advantage®) funds are still available for reservation in the Bank and its members can help rebuild the communities that sustained damages from this severe weather event.fourth quarter of 2019.

Chief Diversity Officer NamedFinally, in December, the Bank will announce its competitive Affordable Housing Program (AHP) awards to support the construction, acquisition, and/or rehabilitation of housing units across its district and throughout the country.

In September 2018, Cedric D. Thurman joined the Bank as a member of the Executive Team in the newly created position of Chief Diversity Officer. Mr. Thurman has a unique background that combines meaningful and relevant business experience in community banking, commercial banking, and real estate with a substantial background in diversity and inclusion; having led diversity initiatives at two major institutions in Chicago. Building a diverse and inclusive culture is central to the Bank’s support of its members, and their increasingly diverse communities.


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(U.S. 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 20172018 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, 2017.2018.

There have been no significant changes to the amounts of our critical accounting estimates in 2018.2019.


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:

Amortization of premiums;
Accretion of discounts and credit OTTI reversals;
Beginning January 1, 2019 on a prospective basis, hedge ineffectiveness, which represents the difference between changes in fair value of the derivative hedging instrument and the related change in fair value of the hedged item is recognized into either interest income or interest expense, whichever is appropriate. For cash flow hedges, recognition occurs only when amounts are reclassified out of accumulated other comprehensive income. Such recognition occurs when earnings are affected by the hedged item. Prior to January 1, 2019, hedge ineffectiveness was classified in noninterest income on derivatives and hedging activities;
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 estimatedfair value and cash flows;
Amortization offlow closed hedge adjustments;
Advance and investment prepayment fees; and
MPF credit enhancement fees.

The table on the following pagetable 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.

The change in volume is calculated as the change in average balance multiplied by the current year yield. The change in rate is calculated as the change in yield multiplied by the prior year average balance. Any changes due to the combined volume/rate variance have been allocated to volume.


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


Increase or decrease in interest income and expense due to volume or rate variances

 September 30, 2018 September 30, 2017 Increase (decrease) due to September 30, 2019 September 30, 2018 Increase (decrease) due to
 Average Balance Total Interest Yield/ Rate Average Balance Total Interest Yield/ Rate Volume Rate Net Change Average Balance Total Interest Yield/ Rate Average Balance Total Interest Yield/ Rate Volume Rate Net Change
For the three months ended                                    
Investment debt securities $17,677
 $168
 3.80% $17,949
 $163
 3.63% $(3) $8
 $5
 $21,275
 $184
 3.46% $17,677
 $168
 3.80% $31
 $(15) $16
Advances 56,109
 312
 2.22% 47,135
 157
 1.33% 50
 105
 155
 54,658
 326
 2.39% 56,109
 312
 2.22% (10) 24
 14
MPF Loans held in portfolio 6,033
 62
 4.11% 4,927
 53
 4.30% 11
 (2) 9
 8,563
 79
 3.69% 6,033
 62
 4.11% 23
 (6) 17
Federal funds sold and securities purchased under agreements to resell 11,009
 54
 1.96% 11,467
 34
 1.19% (2) 22
 20
 11,479
 64
 2.23% 11,009
 54
 1.96% 3
 7
 10
Other interest bearing assets 1,180
 7
 2.37% 1,247
 4
 1.28% 
 3
 3
 1,563
 9
 2.30% 1,180
 7
 2.37% 2
 
 2
Interest bearing assets 92,008
 603
 2.62% 82,725
 411
 1.99% 62
 130
 192
 97,538
 662
 2.71% 92,008
 603
 2.62% 38
 21
 59
Noninterest bearing assets 929
     929
           2,173
     929
          
Total assets 92,937
     83,654
           99,711
     92,937
          
                                    
Consolidated obligation discount notes 37,649
 208
 2.21% 41,241
 148
 1.44% (19) 79
 60
 47,764
 270
 2.26% 37,649
 208
 2.21% 57
 5
 62
Consolidated obligation bonds 48,392
 263
 2.17% 36,437
 136
 1.49% 65
 62
 127
 43,709
 272
 2.49% 48,392
 263
 2.17% (30) 39
 9
Other interest bearing liabilities 922
 6
 2.60% 918
 4
 1.74% 
 2
 2
 1,048
 7
 2.67% 922
 6
 2.60% 1
 
 1
Interest bearing liabilities 86,963
 477
 2.19% 78,596
 288
 1.47% 48
 141
 189
 92,521
 549
 2.37% 86,963
 477
 2.19% 33
 39
 72
Noninterest bearing liabilities 567
     384
           1,479
     567
          
Total liabilities 87,530
   �� 78,980
           94,000
     87,530
          
                                    
Net yield interest earning assets $92,008
 $126
 0.55% $82,725
 $123
 0.59% $11
 $(8) $3
 $97,538
 $113
 0.46% $92,008
 $126
 0.55% $8
 $(21) $(13)
                                    
For the nine months ended                                    
Investment debt securities $17,952
 $503
 3.74% $18,639
 $492
 3.52% $(20) $31
 $11
 $20,368
 $548
 3.59% $17,952
 $503
 3.74% $65
 $(20) $45
Advances 55,304
 811
 1.96% 46,191
 386
 1.11% 131
 294
 425
 55,198
 1,046
 2.53% 55,304
 811
 1.96% (1) 236
 235
MPF Loans held in portfolio 5,595
 177
 4.22% 4,906
 160
 4.35% 22
 (5) 17
 7,920
 233
 3.92% 5,595
 177
 4.22% 69
 (13) 56
Federal funds sold and securities purchased under agreements to resell 11,868
 152
 1.71% 10,211
 74
 0.97% 21
 57
 78
 11,417
 201
 2.35% 11,868
 152
 1.71% (8) 57
 49
Other interest bearing assets 1,199
 17
 1.89% 1,273
 9
 0.94% (1) 9
 8
 1,263
 23
 2.43% 1,199
 17
 1.89% 1
 5
 6
Interest bearing assets 91,918
 1,660
 2.41% 81,220
 1,121
 1.84% 192
 347
 539
 96,166
 2,051
 2.84% 91,918
 1,660
 2.41% 95
 296
 391
Noninterest bearing assets 788
     819
           1,858
     788
          
Total assets 92,706
     82,039
           98,024
     92,706
          
                                    
Consolidated obligation discount notes 40,467
 596
 1.96% 38,940
 363
 1.24% 23
 210
 233
 45,949
 831
 2.41% 40,467
 596
 1.96% 98
 137
 235
Consolidated obligation bonds 45,718
 665
 1.94% 37,278
 394
 1.41% 123
 148
 271
 44,205
 851
 2.57% 45,718
 665
 1.94% (30) 216
 186
Other interest bearing liabilities 883
 17
 2.57% 888
 11
 1.65% 
 6
 6
 945
 22
 3.10% 883
 17
 2.57% 1
 4
 5
Interest bearing liabilities 87,068
 1,278
 1.96% 77,106
 768
 1.33% 146
 364
 510
 91,099
 1,704
 2.49% 87,068
 1,278
 1.96% 80
 346
 426
Noninterest bearing liabilities 353
     348
           1,287
     353
          
Total liabilities 87,421
     77,454
           92,386
     87,421
          
                                    
Net yield interest earning assets $91,918
 $382
 0.55% $81,220
 $353
 0.58% $47
 $(18) $29
 $96,166
 $347
 0.48% $91,918
 $382
 0.55% $13
 $(48) $(35)


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(U.S. 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 nine month periods ending September 30, 2018 compared topresented in the same periods ending September 30, 2017.
above table unless otherwise indicated.

Interest income from investment debt securities increased due to increases in rates, partially offset by declines in volumes.volume as purchases exceed paydowns and maturities. Subject to FHFA regulatory limits as discussed in Investments on page 10 in our 20172018 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 on an average basis year to date.2018.

Interest income from advances increased primarily due to a risehigher overall market interest rates in 2019 compared to the same period in 2018 despite market interest 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 customer borrowing demand outpacing their deposit growth, utilization of our advances increased.now declining in 2019.

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 mainly to refinancing and loan origination activity as mortgage rates have declined. In addition, increased utilization by our PFIs and the addition of new Bank PFIs to the MPF Program. RatesProgram continue to contribute to higher volume in our MPF Loans held in portfolio. The increase in interest income due to volume was somewhat offset by the decline in interest income on MPF Loans declined slightly as the most seasoned loans, and highestheld in portfolio that are being replaced by lower rate loans, in our portfolio pay down.loans.

Interest income from overnight Federal Funds sold and securities purchased under agreements to resell increased primarily due to increases in interest rates by the Federal Reserve Bank. They also increased to a lesser extent due to higher volumes as we increasedoverall market interest rates in 2019 compared to the amounts of these liquid assets as demand for our advances and letters of credit increased, although the higher volume trend reversed slightlysame period in the third quarter of 2018.2018 despite market interest rates now declining in 2019.

Interest expense on both our shorter termed consolidated obligation discount notes and our longer termed consolidated obligation bondsfor the three months ended September 30 primarily increased primarily due to rising rates. They also increased to a lesser extent due to higher volumes, as we increasedwhereas higher rates were the amounts of debt we issueprimary driver for the increase in interest expense for these notes for the nine months ended September 30 due to higher market interest rates in 2019 compared to the same period in 2018 despite market interest rates now declining in 2019. We issued additional consolidated obligation discount notes to fund demand for our advances and other assets. However, the

Interest expense on our longer termed consolidated obligation bonds increased due to higher volume trend in discount notes reversed slightly in the third quarter of 2018 as we took advantage of favorable variableoverall market interest rates on longer term bonds.in 2019 compared to the same period in 2018 despite market interest rates now declining in 2019.

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 September 30, Nine months ended September 30,  Three months ended September 30, Nine months ended September 30,
 2018 2017 2018 2017  2019 2018 2019 2018
Noninterest income -Noninterest income -        Noninterest income -        
Trading securitiesTrading securities (3) 5
 $20
 $8
Derivatives and hedging activitiesDerivatives and hedging activities $(5) $
 $(5) $6
Derivatives and hedging activities $(5) $(5) (31) (5)
Instruments held under fair value optionInstruments held under fair value option (3) (5) (20) (3)Instruments held under fair value option 24
 (3) 43
 (20)
MPF fees,6,5,18and15from other FHLBs 9
 8
 24
 21
8,6,21and18from other FHLBs 10
 9
 27
 24
Other, netOther, net 5
 2
 16
 7
Other, net 3
 
 9
 8
Noninterest incomeNoninterest income $6
 $5
 $15
 $31
Noninterest income $29
 $6
 $68
 $15

The following is an analysis of the above table and unless otherwise indicated, comparisons apply to the threeperiods presented in the above table.  

Trading Securities, Derivatives and nine monthHedging Activities, and Instruments Held Under Fair Value Option

Maturities and unrealized gains in our trading securities and unrealized gains in instruments held under the fair value option were the most significant drivers of our increase in noninterest income over the periods ending September 30, 2018presented, offset in part by a loss in derivatives and hedging activities. The corresponding gains and losses were primarily attributable to the same periods ending September 30, 2017.

decline in market interest rates in the third quarter of 2019.

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


Derivatives and Hedging Activities, and Instruments Held Under Fair Value Option

Instruments held under the fair value option were the most significant driversof our decrease in noninterest income over the nine month periods presented, primarily due to rising interest rates. 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.

Total Net Effect Gain (Loss) of Hedging Activities
 Advances Investments MPF Loans Discount Notes Bonds Other Total
Three months ended September 30, 2018             
Recorded in net interest income$6

$(14)
$(1)
$(22)
$(18)
$
 $(49)
Recorded in derivatives & hedging activities(2)
(3)
(2)


1

1
 (5)
Recorded in other, net
 5
 
 
 
 
 5
Recorded on instruments held under fair value option(1)


(2)



 
 (3)
Total net effect gain (loss) of hedging activities$3

$(12)
$(5)
$(22)
$(17)
$1

$(52)
              
Three months ended September 30, 2017             
Recorded in net interest income$(7) $(21) $(2) $(40) $7
 $
 $(63)
Recorded in derivatives & hedging activities1
 (2) 2
 
 (2) 1
 
Recorded on instruments held under fair value option(1) 
 (1) (1) (2) 
 (5)
Total net effect gain (loss) of hedging activities$(7) $(23) $(1) $(41) $3
 $1
 $(68)
              
Nine months ended September 30, 2018             
Recorded in net interest income$10

$(44)
$(3)
$(86)
$(35)
$
 $(158)
Recorded in derivatives & hedging activities20

(3)
(4)
1

(20)
1
 (5)
Recorded in other, net
 8
 
 
 
 
 8
Recorded on instruments held under fair value option(11) 
 (6) 
 (3) 
 (20)
Total net effect gain (loss) of hedging activities$19

$(39)
$(13)
$(85)
$(58)
$1
 $(175)
              
Nine months ended September 30, 2017             
Recorded in net interest income$(20)
$(70)
$(5)
$(128)
$27

$
 $(196)
Recorded in derivatives & hedging activities(2)
(5)
5

2

5

1
 6
Recorded in other, net
 1
 
 
 
 
 1
Recorded on instruments held under fair value option2
 
 (2) (1) (2) 
 (3)
Total net effect gain (loss) of hedging activities$(20)
$(74)
$(2)
$(127)
$30

$1
 $(192)

 Advances Investments MPF Loans Discount Notes Bonds Other Total
Three months ended September 30, 2019             
Recorded in net interest income$1

$(9)
$

$(4)
$(8)
$
 $(20)
Recorded in derivatives & hedging activities(18)
3

6



(1)
5
 (5)
Recorded in trading securities
 (4) 
 
 
 
 (4)
Recorded on instruments held under fair value option18







6
 
 24
Total net effect gain (loss) of hedging activities$1

$(10)
$6

$(4)
$(3)
$5

$(5)
              
Three months ended September 30, 2018             
Recorded in net interest income$6
 $(14) $(1) $(22) $(18) $
 $(49)
Recorded in derivatives & hedging activities(2) (3) (2) 
 1
 1
 (5)
Recorded in other, net
 5
 
 
 
 
 5
Recorded on instruments held under fair value option(1) 
 (2) 
 -
 
 (3)
Total net effect gain (loss) of hedging activities$3
 $(12) $(5) $(22) $(17) $1
 $(52)
              
Nine months ended September 30, 2019             
Recorded in net interest income$25

$(27)
$(1)
$(22)
$(52)
$
 $(77)
Recorded in derivatives & hedging activities(59)
(14)
20

3

10

9
 (31)
Recorded in trading securities
 19
 
 
 
 
 19
Recorded on instruments held under fair value option52
 
 
 
 (9) 
 43
Total net effect gain (loss) of hedging activities$18

$(22)
$19

$(19)
$(51)
$9
 $(46)
              
Nine months ended September 30, 2018             
Recorded in net interest income$10

$(44)
$(3)
$(86)
$(35)
$
 $(158)
Recorded in derivatives & hedging activities20

(3)
(4)
1

(20)
1
 (5)
Recorded in other, net
 8
 
 
 
 
 8
Recorded on instruments held under fair value option(11) 
 (6) 
 (3) 
 (20)
Total net effect gain (loss) of hedging activities$19

$(39)
$(13)
$(85)
$(58)
$1
 $(175)

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.

program for them. We had a slight increase in fee income for 2019 compared to 2018.

Other, net

We recorded an unrealized gain (loss) of $5 million in the third quarter and $8 million year-to-date in 2018 on our trading securities, as noted in the preceding table, which consist primarily of U.S. Treasury securities held for liquidity purposes. We expect this to reverse as the securities mature over the next year or so. We had no significant trading gains or losses in the 2017 year periods presented. The remainder of Other, net consists primarily of fee income earned on member standby letter of credit products, which has increased as noted in Item 2. Selected Financial Data.on page 35.


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


Noninterest Expense

 Three months ended September 30, Nine months ended September 30, Three months ended September 30, Nine months ended September 30,
 2018 2017 2018 2017 2019 2018 2019 2018
Compensation and benefits $26
 $26
 $78
 $77
 $27
 $26
 $82
 $78
Operating expenses 20
 15
 52
 45
 23
 20
 66
 52
Other 1
 2
 5
 7
 4
 1
 8
 5
Noninterest expense $47
 $43
 $135
 $129
 $54
 $47
 $156
 $135


The following is an analysis of the preceding table and unless otherwise indicated, comparisons apply to the three and nine month periods ending September 30, 2018 andpresented in the same periods ending September 30, 2017.above table. 

As noted in Noninterest Income on page 42 and 43, we earn MPF fees from the MPF Program, a majority of which are from other FHLBs but also include income from other third party investors. These fees are designed to offset a portion of the expenses we incur to administer the program. Our expenses relating to the MPF fees earned are included in the relevant line items in the noninterest expense table shown above. The following table summarizes MPF related fees and expenses.

  Three months ended September 30, Nine months ended September 30,
  2019 2018 2019 2018
MPF fees earned $10
 $9
 $27
 $24
Expenses related to MPF fees earned $7
 $8
 $24
 $24


Compensation and benefits increased primarily due to increased employee headcount and increases in salaries and incentive compensation expenses. We had 469484 employees as of September 30, 2018,2019, compared to 457469 as of September 30, 2017, and total compensation and benefits were unchanged.2018.

Operating expenses increased in both the three and nine month comparisonsprimarily due to increased non-service cost components (interesta planned investment in information technology, specifically applications, infrastructure and amortization) related to our pensions, and also in the third quarter of 2018 due to additional voluntary contributions that we made to our community investment programs.resiliency.

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, which were unchanged.FHLBs. In addition, Other includes MPF related nonoperating expenses/gains on the sale of real estate owned, which declined slightly.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 20172018 Form 10-K for further details.



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


Other Comprehensive Income (Loss)

 Three months ended September 30, Nine months ended September 30, Balance remaining in AOCI as of Three months ended September 30, Nine months ended September 30, Balance remaining in AOCI as of
 2018 2017 2018 2017 September 30, 2018 2019 2018 2019 2018 September 30, 2019
Net unrealized gain (loss) available-for-sale debt securities $(32) $(24) $(124) $(5) $283
 $(61) $(32) $(80) $(124) $131
Noncredit OTTI held-to-maturity debt securities 7
 8
 22
 25
 (121) 7
 7
 20
 22
 (94)
Net unrealized gain (loss) cash flow hedges 25
 42
 115
 111
 (32) (4) 25
 (17) 115
 (48)
Postretirement plans (4) 3
 (7) 1
 (12) (5) (4) 
 (7) (11)
Other comprehensive income (loss) $(4) $29
 $6
 $132
 $118
 $(63) $(4) $(77) $6
 $(22)


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

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

The net unrealized loss on our available-for-sale (AFS) portfolio for 20182019 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). The smaller unrealized loss during 2019 compared to 2018 resulted from decreases in market interest rates for 2019. As of September 30, 2018,2019, we still had a sizable net unrealized gain balance remaining in AOCI attributable to our AFS portfolio that we expect to reverse over the remaining life of these securities.

Noncredit OTTI on held-to-maturity debt securities

We recorded unrealized noncredit impairments on held-to-maturity debt 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 over the remaining life of these securities.

Net unrealized gain (loss) on cash flow hedges

The net unrealized gainloss on cash flow hedges during the periods presentedfor 2019 resulted from an increasea decrease in shorter termoverall market interest rates as a result of actions by the Federal Reserve Bank.

for 2019.

We did not recognize any instrument-specific credit risk in our statements of comprehensive income as of September 30, 20182019 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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(U.S. Dollars in tables in millions except per share amounts unless otherwise indicated)


Statements of Condition
September 30, 2018 December 31, 2017September 30,
2019
 December 31, 2018
Cash and due from banks, interest bearing deposits, Federal Funds sold, and securities purchased under agreement to resell$10,654
 $13,378
$12,671
 $11,407
Investment debt securities19,231
 17,347
22,869
 21,305
Advances54,667
 48,085
57,629
 52,628
MPF Loans held in portfolio, net of allowance for credit losses6,439
 5,193
9,004
 7,103
Other419
 352
370
 414
Assets91,410
 84,355
102,543
 92,857
   
Consolidated obligation discount notes37,674
 41,191
47,647
 43,166
Consolidated obligation bonds46,232
 37,121
46,738
 42,250
Other2,180
 1,191
2,612
 2,152
Liabilities86,086
 79,503
96,997
 87,568
Capital stock1,718
 1,443
1,846
 1,698
Retained earnings3,488
 3,297
3,722
 3,536
Accumulated other comprehensive income (loss)118
 112
(22) 55
Capital5,324
 4,852
5,546
 5,289
Total liabilities and capital$91,410
 $84,355
$102,543
 $92,857

The following is an analysis of the above table and comparisons apply to September 30, 20182019 compared to December 31, 2017.2018.

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 decreasedincreased the amounts of these liquid assets in the third quarter2019, maintaining a sufficient pool of 2018, as the costliquidity to fund anticipated current advances and letters of funding these assets versus the expected return was not as favorable as in earlier periods.credit demand of our members.

Investment Debt Securities

Investment debt securities slightly increased primarily due to the purchase of $2.6 billionpurchases in short term U.S. Governmentour trading, AFS, and HTM securities portfolio in 2019. This increase was offset by declines in our MBS/ABS securities in our trading, securities portfolio during 2018. This increase was partially offset by declines in MBS/ABS securities in our available-for-saleAFS, and held-to-maturityHTM portfolios that matured or paid down and were only partially replaceddown. We resumed making investments in MBS securities starting in June 2018, as noted in Results of Operations on page 39.41 and 42.

Advances

Although advances declined slightly inAdvance balances increased at the end of third quarter of 2018 from the highest outstanding quarter end balance in our history as of June 30, 2018, advances are still up2019 compared to year end 2017 due2018 primarily as a result of the sudden spike in rates for repurchase agreements in September, which led 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 theircompetitively priced advances. Advance balances will vary based primarily on member demand or need for wholesale funding needs change, orand the underlying cost of the advance to the extent they elect alternative funding resources.member. 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 as new-purchase volume continued to outpace paydown and maturity activity due mainly to refinancing and loan origination activity as mortgage rates have declined. In addition, increased utilization by our PFIs and the addition of new Bank PFIs to the MPF Program.Program continue to contribute to higher volume in our MPF Loans held in portfolio. 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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Liquidity, Funding, & Capital Resources

Liquidity
For the period ending September 30, 2018,2019, 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 current liquidity requirements. See Liquidity, Funding, & Capital Resources on page 48 in our 20172018 Form 10-K for a detailed description of our current liquidity requirements, which will be revised as discussed below.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 $3.2$3.6 billion of total assets. As of September 30, 2018,2019, our overnight liquidity was $18.3$23.7 billion or 20%23% of total assets, giving us an excess overnight liquidity of $15.1$20.2 billion.
Deposit Coverage – To support our member deposits, FHFA regulations require us to have an amount equal to the current deposits invested in obligations of the U.S. Government, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. As of September 30, 2018,2019, we had excess liquidity of $44.3$51.0 billion to support member deposits.

Contingency Liquidity – The cumulative five business day liquidity measurement assumes there is a localized credit crisis for all FHLBs where the FHLBs do not have the ability to issue new consolidated obligations or borrow unsecured funds from other sources (e.g., purchasing Federal Funds or customer deposits). Our net liquidity in excess of our total uses and reserves over a cumulative five-business-day period was $18.2$27.3 billion as of September 30, 2018.

Additionally, FHFA guidance, which will2019. As discussed on page 49 in the Liquidity, Funding, & Capital Resources section of our 2018 Form 10-K, this Contingent Liquidity regulation is scheduled to be revisedrescinded as discussed below, requires us to maintain daily liquidity through short-term investmentsof January 1, 2020 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 "15 Days Scenario"). 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 (the "Five Days Scenario"). 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 maturitieslight of the related investments or advances.Liquidity AB (as discussed below).

As furtherAdditionally, as discussed in Legislative and Regulatory Developments on page 54, on August 23,49 in the Liquidity, Funding, & Capital Resources section of our 2018 theForm 10-K, FHFA issued new guidance on liquidity (the “Liquidity AB”) that communicates the FHFA’s expectations with respect to the maintenance of sufficient liquidity to enable the FHLBs to fund advances and letters of credit for members during a sustained capital markets disruption. In connection with the Liquidity AB, the FHFA also issued a supervisory letter that identifies initial applicable thresholds for certain measures identified in the Liquidity AB. As market conditions warrant, the FHFA may update its supervisory letter to identify new thresholds within the ranges set forth in the Liquidity AB.

The Liquidity AB eliminates the 15 Days Scenario, and replaces the Five Days Scenario with the requirementwhich went into effect on March 31, 2019, requires that we hold positive cash flow assuming no access to the capital markets for an increaseda period of between ten to thirty calendar days, and assuming the renewal of all maturing advances. The Liquidity AB also requires the Bank to maintain liquidity reserves between one and 20 percent of our outstanding letter of credit commitments. These new requirements go into effect on March 31, 2019.

While the Bank is still analyzing the impact of theThe Liquidity AB it will likely requirerequires the Bank to hold an additional amount of liquid assets, to meet the new guidance, which could reduce the Bank’s ability to invest in higher-yielding assets, and may in turn negatively impact net interest income. To the extent that the Bank must adjustadjusts pricing for its short-term advances and letters of credit, these products may become less competitive, which may adversely affect advance and capital stock levels as well as letters of credit levels. For additional discussion of how our liquidity requirements may impact our earnings, see page 2019 in the Risk Factors section of our 20172018 Form 10-K.

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. The Liquidity AB provides guidance on maintaining appropriate funding gaps for three-month (-10% to -20%) and one-year (-25% to -35%) maturity horizons, which we were required to meet by December 31, 2018. Subject to market conditions, the Bank’s cost of funding may increase if we are required to achieve the appropriate funding gap by using longer term funding, on which we generally pay higher interest than on our short-term funding.


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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 flowsflow of our assets, including prepayments made in advance of maturity.

 MPF Loans Held in Portfolio Investment Securities MPF Loans Held in Portfolio Investment Debt Securities
As of September 30, 2018 Available-for Sale Held-to-Maturity
As of September 30, 2019 MPF Loans Held in Portfolio Available-for Sale Held-to-Maturity
Year of Expected Principal Cash Flows          
One year or less $695
 $4,355
 $1,204
 $2,143
 $1,962
 $1,365
After one year through five years 2,345
 4,189
 1,554
 3,968
 2,188
 704
After five years through ten years 1,702
 2,348
 388
 1,628
 6,476
 295
After ten years 1,602
 2,479
 111
 1,108
 4,399
 69
Total $6,344
 $13,371
 $3,257
 $8,847
 $15,025
 $2,433


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 2223 of the Risk Factors section in our 20172018 Form 10-K.

In an effort to provide limits to reduce the liquidity risks associated with a mismatch in assets and liability maturities, the Liquidity AB provides guidance on maintaining appropriate funding gaps for three-month (-10% to -20%) and one-year (-25% to -35%) maturity horizons, which must be met by December 31, 2018. Subject to market conditions, the Bank’s cost of funding may increase if it is required to achieve the appropriate funding gap with longer term funding.

Funding

Conditions in Financial Markets

In the third quarter of 2019, the ten-year treasury rate fell 57 basis points to 1.46 percent in the beginning of September 2018,2019 due to fears of slowing U.S. and international growth. The ten-year treasury rate ended the third quarter of 2019 at 1.67 percent as the economic outlook improved.  On July 31, 2019, the Federal Open Market Committee (FOMC) raisedlowered the target range for the federal fundFederal Funds rate by 25 basis points fromto 2.00 percent to 2.25 percent. This is the eighth rate hike sincefirst time the FOMC began to raise rates in December 2015.has reduced the benchmark interest rate since 2008.  The markets anticipate anotherFOMC repeated their 25 basis point increase inreduction of the target range for the federal fundFederal Funds rate on September 19, 2019, decreasing the range to 1.75 to 2.00.  Additionally, the rate paid on bank reserves was lowered by 30 basis points to 1.80 percent on September 19, 2019 by the FOMC. September was also notable for the sudden spike in rates for repurchase agreements. To mitigate this pressure, the fourth quarter of 2018.Federal Reserve conducted overnight repurchase operations for the first time since the financial crisis. 

We maintained ready access to funding during the secondthird quarter of 2018.2019.


LIBOR Transition

In July 2017, the United Kingdom's (U.K.) Financial Conduct Authority (FCA), a regulator of financial services firms and financial markets in the U.K., announced its intention to cease sustaining the LIBOR indices after 2021. In response, the Federal Reserve Board (FRB) and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC) to identify a set of alternative reference interest rates for possible use as market benchmarks. The ARRC has identified the Secured Overnight Financing Rate (SOFR) as such anits recommended alternative rate and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018.rate. SOFR is based on a broad segment of the overnight Treasuries repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018 and the FHLB System issued its first SOFR-linked debt in the market on November 13, 2018. In January 2019, we participated in our first SOFR-indexed bond issuance and in February 2019, we began offering our first SOFR-linked advance. Many of our assets and liabilities are indexed to LIBOR.LIBOR, some with maturities or termination dates extending past December 31, 2021. We are currently evaluating the potential impact ofand planning for the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the replacement. For further discussion of the risks related to theprimary replacement of LIBOR, see page 23 of the Risk Factors section in our 2017 Form 10-K.rate.


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We have developed an initial LIBOR transition action plan and convened a project team to implement the transition, which is led by a senior executive and comprised of representatives from various areas across the Bank. Our Asset-Liability Management Committee (ALCO) is the management committee responsible for overseeing the transition from LIBOR. In addition, on September 27, 2019, the FHFA issued a Supervisory Letter (the "Supervisory Letter") that the FHFA stated is designed to ensure the FHLBs will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. Among other things, the Supervisory Letter provides that the FHLBs should cease entering into certain transactions referencing LIBOR that mature after December 31, 2021. See Legislative and Regulatory Developments on page 57 for a discussion of the Supervisory Letter and its potential impact on the Bank. For further discussion of the risks related to the replacement of LIBOR, see page 24 of the Risk Factors section in our 2018 Form 10-K.

In assessing our current exposure to LIBOR, we have begun to develop an inventory of financial instruments impacted and begun to identify contracts that may require adding or adjusting the "fallback" language which provides for contractual alternatives to the use of LIBOR when LIBOR can not be determined based on the method provided in the agreement. We have amended the terms of certain advance products to include fallback language and the OF has added and updated fallback language applicable to FHLB consolidated obligations. We continue to monitor the market-wide efforts to address fallback language related to derivatives and investment securities as well as fallback language for new activities and issuances of financial instruments. We are in the process of assessing our operational readiness,including updating our processes and information technology systems to support the transition from LIBOR to an alternative reference rate.

Market activity in SOFR-indexed financial instruments continues to increase and we continue to participate in the issuance of SOFR-indexed consolidated bonds. During the nine months ended September 30, 2019, we have participated in the issuance of $11.4 billion in SOFR-linked consolidated bonds. We continue to execute LIBOR-indexed derivatives to manage interest-rate risk. We have also begun to use Federal Funds Overnight Index Swap (Fed Funds OIS) swaps as an interest rate hedging strategy for financial instruments that do not have embedded options, as an alternative to using LIBOR when entering into new derivative transactions. In addition, a SOFR-based derivative market has begun to emerge. We have begun to offer SOFR-linked advances to our members, and during the nine months ended September 30, 2019, have issued $10 million in SOFR-linked advances.

Variable-Rate Financial Instruments by Interest-Rate Index and LIBOR-Indexed Financial Instruments

We have advances, investment securities, consolidated bonds, and derivatives with interest rates indexed to LIBOR. The following table presents our variable rate financial instruments by interest-rate index at September 30, 2019. The table reflects only variable-rate indexed instruments, and may not include instruments that otherwise incorporate LIBOR or another interest rate index. The table does not consider the impact of any fallback language contained in our financial products.

  Principal Amount Outstanding Notional Amount
As of September 30, 2019 Advances Investments Consolidated Obligations Derivatives
         
Amount of variable rate instruments outstanding        
LIBOR $4,266
 $4,147
 $(8,079) $46,058
SOFR 
 
 (11,386) 
Fed Funds OIS 
 
 
 6,316
Other 23,338
 529
 
 2,401
Total $27,604
 $4,676
 $(19,465) $54,775
         
LIBOR indexed instruments by contractual maturity/termination date        
Before January 1, 2022 $1,344
 $47
 $(7,780) $20,520
January 1, 2022, and thereafter 2,922
 4,100
 (299) 25,538
  $4,266
 $4,147
 $(8,079) $46,058

ABS and MBS are presented in the above table by contractual maturity, however, their expected maturities will likely differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

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


Condensed Statements of Cash Flows

Cash flows from operating activities
Nine months ended September 30, 2018 2017 2019 2018
Net cash provided by (used in) operating activities $447
 $337
 $(625) $447

The increasedecrease in net cash provided by operating activities resulted primarily from a decreasechanges in cash outflowsfair value adjustments related to derivatives and hedging activities, the purchaseresult of MPF Loans held for sale.declining long term market rates in 2019 compared to rising rates in 2018.

Cash flows from investing activities with significant activity
Nine months ended September 30, 2018 2017 2019 2018
Liquid assets (Federal Funds sold, securities purchased under agreements to resell, and interest bearing deposits) $2,726

$(7,324) $(1,227)
$2,726
Investment debt securities (1,208) 3,467
 (851) (1,208)
Advances (6,743)
(5,079) (4,512)
(6,743)
MPF Loans held in portfolio (1,253)
(60) (1,913)
(1,253)
Other 14
 20
 8
 14
Net cash provided by (used in) investing activities $(6,464) $(8,976) $(8,495) $(6,464)

Our investing activities consist predominantly of liquid assets, investment debt securities, held for investment, MPF Loans in portfolio, and advances. The change in net cash provided by (used in) investing activities and changes in allocation within investing activities are discussed below.

We decreasedIn 2019 we invested in liquid assets to increase our liquidity position to comply with new FHFA liquidity guidance that was published in August 2018.  In addition, we invested in liquid assets to earn additional interest income. 
Investment debt securities increased by approximately the same amount from 2018, as we achieved key liquidity, MBS, and mission asset ratios.
Our advances outstanding increased in 3Q 2019 due to increased member demand for wholesale funding, especially at quarter end.  Advance balances vary based primarily on member demand or need for wholesale funding and the underlying cost of funding these assets versus the expected return was not as favorable as in earlier periods.

Debt securities held for investment primarily reflectadvance to the purchases made in our trading and available-for-sale debt security portfolios in 2018. Subject to FHFA limits, we began purchasing MBS securities in our available-for-sale debt security portfolio in June 2018. Our purchases were partially offset by continued paydowns in the rest of our investment debt security portfolio.

Advances reflect the increase in advances outstanding duringmember.  In 2018, due to continued increase in member demand as compared to the smaller increasefor wholesale funding also increased.
Net investment in advances outstanding in 2017.

MPF Loans held in portfolio reflect the increaseincreased in MPF Loans outstanding during 2018 as2019 compared to 20172018 mainly due to increased utilization by PFIs and the addition ofdecline in mortgage rates resulting in both new PFIs to the MPF Program.purchase loans, as well as refinancings.

Cash flows from financing activities with significant activity
Nine months ended September 30, 2018 2017 2019 2018
Consolidated obligation discount notes $(3,527) $9,493
 $4,429
 $(3,527)
Consolidated obligation bonds 9,270
 (1,077) 4,149
 9,270
Capital stock 277
 (148)
Other (1) 52
 579
 276
Net cash provided by (used in) financing activities $6,019
 $8,320
 $9,157
 $6,019

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 change in net cash provided by (used in) financing activities and change in funding allocations are discussed below.

A net decrease resulting from a decline in issuingNet issuances of shorter termed discount notes increased as our investments in 2018 relative to theliquid assets and investment debt securities also increased used of consolidated obligationin 2019 as noted in investing activities above.
We issued less longer termed bonds which more than offset the net increase in consolidation obligation bonds described below.

A net increase in 2018 in the amount of our consolidated obligation bonds used to fund the growth in our balance sheet,2019 compared to 2017. In 2018 we relied primarily on consolidated obligation bonds for our fundingdue to reduced increases in advances as we took advantage of favorable variable interest rates on longer term bonds, as comparednoted in investing activities above.
Other increased primarily due to a higher reliance on discount notes in 2017.increased member deposits.

Capital stock outstanding increased as members purchased capital stock to support their advance borrowings.

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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 per share 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, 2017,2018, and is thus the operative cap during the remainder of 20182019 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 2017,2018, see Capital Resource on page 5355 of our 20172018 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-44F-42 of our 20172018 Form 10-K.

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 current 4.5% requirement under our Capital Plan’s general provisions. As of September 30, 2018,2019, and December 31, 2017,2018, RCAP advances outstanding total $24.6$24.5 billion to 153155 members and $24.7$23.4 billion to 158149 members, respectively. We may implement future programs for advances with a reduced activity stock requirement that may or may not have the same characteristics as current RCAP offerings.


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Repurchase of Excess Capital Stock

We are currentlyBeginning on October 31, 2019, we stopped repurchasing excess Class B2 membership stock on a weekly basis at par value, i.e., $100 per share.basis. MembersHowever, members may continue to request repurchase of excess capital stock on any business day in addition to the weekly repurchase.day. All repurchases of excess capital stock including automatic weekly repurchases,requested by members 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 5758 of our 20172018 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.

 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Capital Stock $1,718
 $1,443
 $1,846
 $1,698
MRCS 313
 311
 324
 313
Regulatory capital stock 2,031
 1,754
 2,170
 2,011
Retained earnings 3,488
 3,297
 3,722
 3,536
Regulatory capital $5,519
 $5,051
 $5,892
 $5,547
        
Capital stock $1,718
 $1,443
 $1,846
 $1,698
Retained earnings 3,488
 3,297
 3,722
 3,536
Accumulated other comprehensive income (loss) 118
 112
 (22) 55
GAAP capital $5,324
 $4,852
 $5,546
 $5,289

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 2018,2019, 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

We may not pay dividends if we fail to satisfy our minimum capital and liquidity requirements under the FHLB Act and FHFA regulations. On October 22, 2019, our Board of Directors declared a 5.00% dividend (annualized) for Class B1 activity stock and a 2.25% dividend (annualized) for Class B2 membership stock based on our preliminary financial results for the third quarter of 2019. This dividend totaled $24 million (recorded as $20 million dividends on capital stock and $4 million interest expense on mandatorily redeemable capital stock) and is scheduled for payment on November 14, 2019. As further discussed in Risk FactorsExecutive Summary section on page 16 of38, on October 22, 2019, the Bank also provided dividend guidance for the next two quarters.

Although we continue to work to maintain our 2017financial 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 59 in our 2018 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-45F-43 in our 20172018 Form 10-K.

On August 14, 2019, the FHFA issued an Advisory Bulletin (the “AB”) providing guidance for each FHLB to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the Bank. Beginning in February 2020, the FHFA will consider the proportion of capital stock to assets, measured on a daily average basis at month end, when assessing each FHLB’s capital management practices. See Legislative and Regulatory Developments on page 57 for a discussion of the AB and its potential impact on the Bank.
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FICO Dissolution

On October 2019, the Financing Corporation (FICO), formed pursuant to the Federal Savings and Loan Insurance Corporation Recapitalization Act of 1987 to provide financing for the resolution of failed savings and loan associations, commenced the process of dissolution in accordance with relevant statutory requirements and the terms of a plan of dissolution approved by the Director of the FHFA.  Subject to the satisfaction of any claims and the payment of other administrative expenses upon FICO’s dissolution, which is expected to occur in the first half of 2020, any surplus and remaining cash on hand of FICO is expected to be distributed to the FHLBs, as FICO's sole stockholders, in proportion to their ownership in FICO’s nonvoting capital stock. The Bank’s ownership in FICO’s nonvoting capital stock is 9.69%.  The receipt by the Bank of any such distribution from FICO will be treated as a partial return of its prior capital contributions to FICO and credited to its unrestricted retained earnings. The Bank does not expect any distribution from FICO to materially affect the Bank’s financial condition or combined results of operations.


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Credit 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 6062 in our 20172018 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, $54.8$57.1 billion were advances (par value) and $22.7$23.8 billion were letters of credit at September 30, 2018,2019, compared to $48.0$52.6 billion and $19.6$24.3 billion at December 31, 2017.2018.

 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Rating Borrowing Members Credit Outstanding Collateral Loan Value Borrowing Members Credit Outstanding Collateral Loan Value Borrowing Members Credit Outstanding Collateral Loan Value Borrowing Members Credit Outstanding Collateral Loan Value
1-3 505
 $76,985
 $126,577
 495
 $67,105
 $116,810
 489
 $80,223
 $140,055
 509
 $76,456
 $130,791
4 3
 506
 536
 7
 498
 577
 2
 785
 822
 2
 504
 536
5 11
 140
 224
 11
 120
 234
 10
 63
 91
 11
 126
 193
Total 519
 $77,631
 $127,337
 513

$67,723

$117,621
 501
 $81,071
 $140,968
 522

$77,086

$131,520


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 lossesrisk of loss due to borrower default on contractual principal and interest which would result frompayments, and the depreciation in the valueloss severity after liquidation of the real estate collateral securing the MPF Loan, offset byLoan. The loss severity takes into consideration our ability to recover losses from PMI, Recoverable CE Fees, and the CE Amount which(which may include SMI.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 20172018 Form 10-K, and Credit Risk Exposure and Setting Credit Enhancement Levels on page 6365 of our 20172018 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 6567 in our 20172018 Form 10-K.



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Investment Debt 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, 2017.2018. For further details see Investment Securities by Rating on page 6769 in our 20172018 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, 2017,2018, 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 gainsto accrete expected increases in cash flow on these securities back into interest income. For further details see Note 5 - Investment Debt Securities to the financial statements.


Unsecured Short-Term Investments

See Unsecured Short-Term Investments page 7071 in our 20172018 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 September 30, 2018 AA A BBB Total
Domestic U.S.        
Interest-Bearing Deposits $
 $775
 $
 $775
Fed Funds Sold 
 1,100
 210
 1,310
U.S. branches and agency offices of foreign commercial banks - Federal Funds sold:        
Australia 1,000
 
 
 1,000
Austria 
 250
 
 250
Canada 
 2,575
 
 2,575
France 
 600
 
 600
Japan 
 700
 
 700
Netherlands 
 325
 
 325
Norway 
 600
 
 600
Sweden 325
 
 
 325
Total unsecured credit exposure
$1,325

$6,925

$210

$8,460

As of September 30, 2019 AA A Total
Domestic U.S.      
Interest-Bearing Deposits $
 $1,255
 $1,255
Fed Funds Sold 
 2,976
 2,976
Total Domestic U.S. 
 4,231
 4,231
U.S. branches and agency offices of foreign commercial banks - Federal Funds sold:      
Australia 1,000
 
 1,000
Canada 
 1,925
 1,925
France 
 200
 200
Netherlands 
 250
 250
Norway 600
 
 600
Sweden 400
 700
 1,100
Switzerland 
 700
 700
Total U.S. branches and agency offices of foreign commercial banks 2,000
 3,775
 5,775
Total unsecured credit exposure $2,000

$8,006

$10,006

All $8.460$10.006 billion of the unsecured credit exposure shown in the above table were overnight investments.

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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  Net Derivative Fair Value Before Collateral Cash Collateral Pledged Noncash Collateral Pledged 
Net Credit Exposure to Counterparties a
As of September 30, 2018         
As of September 30, 2019        
Nonmember counterparties -        
Undercollateralized asset positions -        
Cleared derivatives $6
 $
 $380
 $386
Overcollateralized liability positions -       

Bilateral derivatives -       

AA 
 1
 
 1
A (24) 25
 
 1
BBB (91) 92
 
 1
Cleared derivatives (2) 
 92
 90
Nonmember counterparties (111) 118
 472
 479
Member institutions 2
 
 
 2
Total $(109) $118
 $472
 $481
        
As of December 31, 2018        
Nonmember counterparties -                 
Undercollateralized asset positions -                 
Bilateral derivatives -                 
AA $1
 $(1) $
 $
BBB $10
 $(8) $
 $2
  31

(30)


1
Overcollateralized liability positions -                

Bilateral derivatives -                

AA rated (2) 2
 
 
a 
A rated (156) 163
 
 7
 
AA (1) 1
 
 
A (111) 115
 
 4
BBB (69) 70
 
 1
  (53) 53
 
 
Cleared derivatives (16) 
 177
 161
 
Total $(233) $227
 $177
 $171
 
         
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
  (9) 
 269
 260
Nonmember counterparties (125) 121
 67
 63
  (142)
138

269

265
Member counterparties 1
 
 
 1
  1
 
 
 1
Total $(124) $121
 $67
 $64
  $(141)
$138

$269

$266
a 
Less than $1 million.million is shown as zero.


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Legislative and Regulatory Developments

Significant regulatory actions and developments are summarized below.

Advisory Bulletin (AB) 2018-07 Federal Home Loan(AB 2019-03) - Capital Stock Management
On August 14, 2019, the FHFA issued an Advisory Bulletin (the “AB”) providing guidance for each FHLB to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the Bank. Beginning in February 2020, the FHFA will consider the proportion of capital stock to assets, measured on a daily average basis at month end, when assessing each FHLB’s capital management practices.
To maintain the recommended level of capital stock under this guidance, the Bank Liquidity Guidance (Liquidity Guidance AB).may reduce short-term investments as necessary, which may have a negative impact on the Bank’s financial condition and results of operation. If the Bank’s balance sheet composition changes in the future, the Bank may consider other capital management measures to maintain the recommended ratio of at least two percent of capital stock to total assets.  This capital stock ratio does not include other components of regulatory capital, such as retained earnings.  For more information about how the Bank calculates and complies with its 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-42 of our 2018 Form 10-K.

FHFA Supervisory Letter - Planning for LIBOR Phase-Out
On August 23, 2018,September 27, 2019, the FHFA issued a final AB on FHLB liquiditySupervisory Letter (the “Supervisory Letter”) to the FHLBs that communicates the FHFA’s expectationsFHFA stated is designed to ensure the FHLBs will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The Supervisory Letter provides that the FHLBs should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the maintenance of sufficient liquidityFHLBs should, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021.These phase-out dates do not apply to enablecollateral accepted by the FHLBs. The Supervisory Letter also directs the FHLBs to provide advances and letters of credit forupdate their pledged collateral certification reporting requirements by March 31, 2020 in an effort to encourage members for a specified time without access to the capital markets or other unsecured funding sources. The Liquidity Guidance AB rescinds 2009 liquidity guidance previously issued by the FHFA. Contemporaneously with the issuance of the Liquidity Guidance AB, the FHFA issued a supervisory letter that identifies initial thresholds for measures of liquidity.distinguish LIBOR-linked collateral maturing after December 31, 2021.

The Liquidity Guidance AB provides guidance onAcknowledging that there may be LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes for the level of on-balance sheet liquid assets related to base case liquidity. As part ofFHLBs that do not currently have readily available alternatives, the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit (SLOCs). In addition, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.

With respect to base case liquidity, the FHFA revised previous guidance that requiredSupervisory Letter permits the FHLBs to assumejointly submit a 5-day period without access to capital markets due to a change in certain assumptions underlyingsingle list of LIBOR-linked products maturing after 2021 that guidance. Under the Liquidity Guidance AB, FHLBs would be requiredlike to hold positive cash flow assuming no accesscontinue to capital markets for an increased period of between ten to thirty calendar days, with a specific measurement period set forth in the supervisory letter. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to SLOCs, the guidance states that FHLBs should maintain a liquidity reserve of between one percent and 20 percent of its outstanding SLOC commitments, as specified in the supervisory letter.

With respect to funding gaps and possible asset and liability mismatches, the Liquidity Guidance AB provides guidance on maintaining appropriate funding gaps for three-month (-10% to -20%) and one-year (-25 % to -35 %) maturity horizons, with specific initial percentages within these ranges identified in the supervisory letter. The Liquidity Guidance AB provides for these limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short term debt funding, which may increase debt rollover risk.

The Liquidity Guidance AB also addressed liquidity stress testing, contingency funding plans and an adjustment to an FHLB’s core mission achievement calculation. Portions of the Liquidity Guidance AB will be implemented beginning December 31, 2018, with further implementation onuse after March 31, 2019, and full implementation on December 31, 2019. While the Bank is still analyzing the impact of the Liquidity Guidance AB, it will likely require the Bank to hold an additional amount of liquid assets to meet the new guidance, which could reduce the Bank’s ability to invest in higher-yielding assets, and may in turn negatively impact net interest income. To the extent that the Bank must adjust pricing for its short-term advances and letters of credit, these products may become less competitive, which may adversely affect advance and capital stock levels as well as letters of credit levels. Additionally, subject to market conditions, the Bank’s cost of funding may increase if it is required to achieve the appropriate funding gap with longer term funding.


Proposed Amendment to Rule Regarding Golden Parachute and Indemnification Payments.

On August 28, 2018, the FHFA proposed amending its rule on golden parachute payments (Golden Parachute Rule) to better align the Golden Parachute Rule with areas of the FHFA’s supervisory concern and reduce administrative and compliance burdens. The Golden Parachute Rule sets forth the standards that the FHFA would take into consideration when limiting or prohibiting golden parachute and indemnification payments by an FHLB or the OF to an entity-affiliated party when such entity is in troubled condition, in conservatorship or receivership, or insolvent. The proposed amendments would:

Focus these standards on payments to and agreements with executive officers, broad-based plans, such as severance plans, covering large numbers of employees and payments made to non-executive-officer employees who may have engaged in certain types of wrongdoings;
Revise and clarify definitions, exemptions and procedures to implement the FHFA’s supervisory approach; and
Align procedures and outcomes of review with requirements of the FHFA’s rule on executive compensation.

Comments on the proposed rule were due by October 12, 2018. Ten of the FHLBs and the OF provided a joint comment letter on October 12 related to clarifying certain provisions of the proposed amendment. The Bank is currently assessing the effect of the proposed rule but does not anticipate that, if adopted, it would materially impact the Bank.2020.

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Final Rule on Indemnification Payments.
On October 4, 2018, the FHFA publishedAs a final rule establishing standards for identifying when an indemnification payment by an FHLB or the OF to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the FHFA is prohibited or permissible. The rule generally prohibits these payments except in the following circumstances:
premiums for any commercial insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favorresult of the FHFA or a civil money penalty imposed bySupervisory Letter, beginning April 1, 2020, the FHFA;
expenses of defending an action, subjectBank expects to an agreement to repay those expensessuspend transactions in certain instances;structured advances and
amounts due under an indemnification agreement entered advances with terms directly linked to LIBOR that mature after December 31, 2021. In addition, beginning April 1, 2020, the Bank expects to no longer enter into with a named affiliated party on or priorcertain derivatives indexed to September 20, 2016 (the date the rule was proposed).

The rule also requiresLIBOR that prior to making permitted payments related to expenses of defending an action, the board of directors must conduct a due investigation and make a written determination in good faith that: (1) the affiliated party acted in good faith and in a manner that he or she reasonably believed to be in the best interest of the FHLB or OF, and (2) such payments will not materially adversely affect the safety and soundness of the FHLB or the OF (as the case may be). The rule became effective November 5, 2018.terminate after December 31, 2021. The Bank does not expect the rule will materially impact the Bank.

Office of the Comptroller of the Currency (OCC), FRB, Federal Deposit Insurance Corporation (FDIC), Farm Credit Administrationcease purchasing investments that reference LIBOR and FHFA Proposed Rule on Margin and Capital Requirements for Covered Swap Entities.

On October 10, 2018, the OCC, FRB, FDIC, Farm Credit Administration, and the FHFA adopted final amendments to each agency’s final rule on Margin and Capital Requirements for Covered Swap Entities (Swap Margin Rules) to conform the definition of “eligible master netting agreement” in such rules to the FRB’s, OCC’s and FDIC’s final qualified financial contract (QFC) rules. The final amendments also clarify that a legacy swap would not be deemed to be a covered swap under the Swap Margin Rules if it is amended to conform to the QFC rules. The QFC rules previously published by the OCC, FRB, and FDIC require their respective regulated entities to amend covered QFCs to limit a counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the regulated entity or its affiliate(s).

mature after December 31, 2021.
The Bank continues to evaluate the effectpotential impact of this rule,the Supervisory Letter on its financial condition and results of operations, but does not anticipate that it would materiallythe Bank may experience lower overall demand or increased costs for its advances, which in turn may negatively impact the Bank.future composition of the Bank’s balance sheet, capital stock levels, primary mission assets ratio, and net income. If, as a result of the Supervisory Letter, the Bank is not permitted to continue to use instruments that reference LIBOR for hedging and risk-mitigating purposes, the Bank will have to alter its hedging strategies and interest rate risk management, which may have a negative impact on the Bank’s financial condition and results of operation.


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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.

 September 30, 2018 December 31, 2017 September 30, 2019 December 31, 2018
Scenario as of Change in Market Value of Equity Loss Limit Change in Market Value of Equity Loss Limit Change in Market Value of Equity Loss Limit Change in Market Value of Equity Loss Limit
-200 bp $122
 $(450) $202
 $(370) $119
 $(450) $27
 $(450)
-100 bp 68
 (200) 66
 (155) 74
 (200) 7
 (200)
-50 bp 41
 (90) 31
 (60) 30
 (90) 12
 (90)
-25 bp 22
 (45) 16
 (30) 14
 (45) 9
 (45)
+25 bp (23) (45) (17) (30) (13) (45) (12) (45)
+50 bp (47) (90) (37) (60) (24) (90) (27) (90)
+100 bp (102) (200) (83) (155) (59) (200) (62) (200)
+200 bp (228) (450) (195) (370) (174) (450) (159) (450)

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 September 30, 2018$(1) $(3) $(1) (14) $
As of December 31, 2017(1) (2) (2) (13) 1
   Option Risk Basis Risk
 Yield Curve Risk Implied Volatility Prepayment Speeds Spread to Swap Curve Mortgage Spread
As of September 30, 2019$(1) $
 $(4) (22) $
As of December 31, 2018
 (1) (2) (16) 


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 September 30, 2019, our sensitivity to changes in implied volatility using these models was nil. At December 31, 2018, our sensitivity to changes in implied volatility was $(3) million. At December 31, 2017, our sensitivity to changes in implied volatility was $(2)$(1) million. These sensitivities are limited in that they do not incorporate other risks, including but not limited to, non-parallel changes in yield curves, prepayment speeds, and basis risk related to differences between the swap and the other curves. Option positions embedded in our mortgage assets and callable debt impact our yield curve risk profile, such that swap curve changes significantly greater than one basis point cannot be linearly interpolated from the table above.


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


Duration of equity is another measure to express interest rate sensitivity. We report the results of our duration of equity calculations to the FHFA each quarter. We measure duration of equity in a base case using the actual yield curve as of a specified date and then shock it with an instantaneous shift of the entire curve. The following table presents the duration of equity reported by us to the FHFA in accordance with the FHFA's guidance, which prescribes that down and up interest-rate shocks equal 200 basis points. The results are shown in years of duration equity.


 Duration of equity
Scenario as of Down 200 bps Base Up 200 bps
September 30, 2018 1.5 1.5 2.3
December 31, 2017 2.9 1.2 2.2

 Duration of equity in years
Scenario as of Down 200 bps Base Up 200 bps
September 30, 2019 2.6 0.9 2.1
December 31, 2018 1.1 0.7 1.9


As of September 30, 2018,2019, on a U.S. GAAP basis, our fair value surplus (relative to book value) was $309$296 million, and our market value of equity to book value of equity ratio was 105%, compared to $371$294 million and 107%105% at December 31, 2017.2018. 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 8182 of our 20172018 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 3031 of our 20172018 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 1617 in our 20172018 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.INSXBRL 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.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.


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Glossary of Terms

Advances: Secured loans to members.
 
ABS: Asset backed securities.
 
AFS: Available-for-sale debt 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, 2010.2010, and as amended from time to time.
 
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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FHLB Chicago: The Federal Home Loan Bank of Chicago.

FLA: First loss account is a memo account used to track the MPF Bank's exposure to losses until the CE Amount is available to cover losses.
 
Freddie Mac: Federal Home Loan Mortgage Corporation.
 
GAAP: Generally accepted accounting principles in the United States of America.
 
Ginnie Mae: Government National Mortgage Association.

Ginnie Mae MBS: Mortgage-backed securities guaranteed by Ginnie Mae. 
 
Government Loans: Mortgage loans insured or guaranteed by the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), the Department of Veteran Affairs (VA) or Department of Agriculture Rural Housing Service (RHS).
 
GSE: Government sponsored enterprise.

HFS: Held for sale.

HTM: Held-to-maturity debt securities.

LIBOR: London Interbank Offered Rate.

Liquidity AB: Advisory Bulletin 2018-07 Liquidity Guidance, issued by the FHFA on August 23, 2018.

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.

OIS: Overnight Index Swap


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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.

SOFR: Secured Overnight Financing Rate.

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:November 6, 20187, 2019(Principal Executive Officer)
     
  /s/   Roger D. Lundstrom
  Name: Roger D. Lundstrom
  Title: Executive Vice President and Chief Financial Officer
Date:November 6, 20187, 2019(Principal Financial Officer and Principal Accounting Officer)


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