Note 4 – Securities

Securities Available for Sale. The following tables provide the amortized cost, fair values, and remaining maturities of securities available for sale.


RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES AVAILABLE FOR SALE	DECEMBER 31, 2013
(In Millions)	AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
U.S. Government	$	1,896.7	$	22.6	$	1.4	$	1,917.9
Obligations of States and Political Subdivisions		4.5		0.1		–		4.6
Government Sponsored Agency		17,495.2		80.7		47.9		17,528.0
Corporate Debt		3,615.2		10.5		101.2		3,524.5
Covered Bonds		1,898.9		50.9		5.9		1,943.9
Supranational, Sovereign and Non-U.S. Agency Bonds		717.0		5.3		1.7		720.6
Residential Mortgage-Backed		52.4		0.1		4.4		48.1
Other Asset-Backed		2,390.8		1.4		0.4		2,391.8
Auction Rate		97.5		2.2		0.8		98.9
Other		214.1		0.4		–		214.5

Total	$	28,382.3	$	174.2	$	163.7	$	28,392.8

	DECEMBER 31, 2012
(In Millions)	AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
U.S. Government	$	1,747.9	$	36.7	$	–	$	1,784.6
Obligations of States and Political Subdivisions		13.9		0.2		–		14.1
Government Sponsored Agency		18,520.6		122.2		4.0		18,638.8
Corporate Debt		2,602.4		18.1		2.1		2,618.4
Covered Bonds		1,697.1		51.0		0.1		1,748.0
Supranational Bonds		1,053.9		7.0		0.2		1,060.7
Residential Mortgage-Backed		102.4		0.4		10.8		92.0
Other Asset-Backed		2,280.0		4.3		0.4		2,283.9
Auction Rate		99.6		2.1		3.9		97.8
Other		304.4		0.8		–		305.2

Total	$	28,422.2	$	242.8	$	21.5	$	28,643.5


REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE	DECEMBER 31, 2013				DECEMBER 31, 2012
(In Millions)	AMORTIZED COST		FAIR VALUE		AMORTIZED COST		FAIR VALUE
Due in One Year or Less	$	9,552.9	$	9,565.7	$	7,431.7	$	7,451.2
Due After One Year Through Five Years		15,011.4		15,067.2		18,663.4		18,840.4
Due After Five Years Through Ten Years		2,545.9		2,494.1		1,724.0		1,738.0
Due After Ten Years		1,272.1		1,265.8		603.1		613.9

Total	$	28,382.3	$	28,392.8	$	28,422.2	$	28,643.5

Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.

Securities Held to Maturity. The following tables provide the amortized cost, fair values and remaining maturities of securities held to maturity.

RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF
SECURITIES HELD TO MATURITY

DECEMBER 31, 2013

(In Millions)

AMORTIZED

COST

GROSS

UNREALIZED

GAINS

GROSS

UNREALIZED

LOSSES

FAIR

VALUE

Obligations of States and Political Subdivisions

225.2

10.3

–

235.5

Government Sponsored Agency

35.9

1.1

–

37.0

Non-U.S. Government Debt

197.3

–

197.3

Certificates of Deposit

698.1

–

0.2

697.9

Supranational, Sovereign and Non-U.S. Agency Bonds

1,109.4

0.8

4.3

1,105.9

Other

59.9

0.1

12.2

47.8

Total

2,325.8

12.3

16.7

2,321.4

DECEMBER 31, 2012

(In Millions)

AMORTIZED

COST

GROSS

UNREALIZED

GAINS

GROSS

UNREALIZED

LOSSES

FAIR

VALUE

Obligations of States and Political Subdivisions

329.3

17.2

–

346.5

Government Sponsored Agency

112.9

3.8

–

116.7

Non-U.S. Government Debt

205.0

–

205.0

Certificates of Deposit

1,667.6

0.2

0.6

1,667.2

Other

67.2

0.3

8.1

59.4

Total

2,382.0

21.5

8.7

2,394.8


REMAINING MATURITY OF SECURITIES HELD TO MATURITY	DECEMBER 31, 2013				DECEMBER 31, 2012
(In Millions)	AMORTIZED COST		FAIR VALUE		AMORTIZED COST		FAIR VALUE
Due in One Year or Less	$	1,009.9	$	1,011.2	$	2,029.5	$	2,030.6
Due After One Year Through Five Years		1,254.9		1,257.0		268.1		280.2
Due After Five Years Through Ten Years		26.1		27.1		45.4		49.8
Due After Ten Years		34.9		26.1		39.0		34.2

Total	$	2,325.8	$	2,321.4	$	2,382.0	$	2,394.8

Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.

Securities held to maturity consist of debt securities that management intends to, and Northern Trust has the ability to, hold until maturity.

Investment Security Gains and Losses. Net investment security losses totaling $1.5 million, $1.7 million, and $23.9 million were recognized in 2013, 2012, and 2011, respectively. Losses in 2012 and 2011 included $3.3 million, and $23.3 million of OTTI losses, respectively. There were no OTTI losses in 2013. Gross proceeds of $0.5 billion from the sale of securities in 2013 resulted in gross realized gains of $0.8 million and gross realized losses of $2.3 million. Gross proceeds of $2.7 billion from the sale of securities in 2012 resulted in gross realized gains of $23.5 million and gross realized losses of $21.9 million. There were $0.6 million of other realized net security losses in 2011.

Securities with Unrealized Losses. The following tables provide information regarding securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of December 31, 2013 and 2012.

SECURITIES WITH UNREALIZED
LOSSES AS OF DECEMBER 31, 2013

LESS THAN 12 MONTHS

12 MONTHS OR LONGER

TOTAL

(In Millions)

FAIR

VALUE

UNREALIZED

LOSSES

FAIR

VALUE

UNREALIZED

LOSSES

FAIR

VALUE

UNREALIZED

LOSSES

U.S. Government

896.4

1.4

–

896.4

1.4

Government Sponsored Agency

4,340.8

42.6

413.7

5.3

4,754.5

47.9

Corporate Debt

1,759.5

85.4

267.0

15.8

2,026.5

101.2

Covered Bonds

278.8

5.7

9.9

0.2

288.7

5.9

Supranational Sovereign and Non U.S. Agency Bonds

789.4

6.0

–

789.4

6.0

Residential Mortgage-Backed

–

42.0

4.4

42.0

4.4

Other Asset-Backed

677.0

0.4

–

677.0

0.4

Certificates of Deposit

684.2

0.2

–

684.2

0.2

Auction Rate

22.1

0.1

14.0

0.7

36.1

0.8

Other

25.7

4.0

29.5

8.2

55.2

12.2

Total

9,473.9

145.8

776.1

34.6

10,250.0

180.4

SECURITIES WITH UNREALIZED
LOSSES AS OF DECEMBER 31, 2012

LESS THAN 12 MONTHS

12 MONTHS OR LONGER

TOTAL

(In Millions)

FAIR

VALUE

UNREALIZED

LOSSES

FAIR

VALUE

UNREALIZED

LOSSES

FAIR

VALUE

UNREALIZED

LOSSES

Government Sponsored Agency

482.2

1.0

1,171.8

3.0

1,654.0

4.0

Corporate Debt

441.5

2.0

50.0

0.1

491.5

2.1

Covered Bonds

20.1

0.1

–

20.1

0.1

Supranational Bonds

113.8

0.2

–

113.8

0.2

Residential Mortgage-Backed

–

84.7

10.8

84.7

10.8

Other Asset-Backed

146.1

0.1

40.0

0.3

186.1

0.4

Certificates of Deposit

1,178.8

0.6

–

1,178.8

0.6

Auction Rate

2.7

0.3

41.0

3.6

43.7

3.9

Other

9.3

1.9

43.8

6.2

53.1

8.1

Total

2,394.5

6.2

1,431.3

24.0

3,825.8

30.2

As of December 31, 2013, 444 securities with a combined fair value of $10.3 billion were in an unrealized loss position, with their unrealized losses totaling $180.4 million. Unrealized losses of $101.2 million within corporate debt securities primarily reflect widened credit spreads and higher market rates since purchase; 51% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $47.9 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase.

Unrealized losses on residential mortgage-backed securities totaling $4.4 million reflect the impact of wider credit and liquidity spreads on the valuations of 5 residential mortgage-backed securities since purchase, with $42.0 million having been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities at December 31, 2013 had a total amortized cost and fair value of $52.4 million and $48.1 million, respectively. Securities classified as “other asset-backed” at December 31, 2013 had average lives of less than 5 years, and 99% were rated triple-A.

The majority of the $12.2 million of unrealized losses in securities classified as “other” at December 31, 2013 relate to securities which Northern Trust purchases for compliance with the Community Reinvestment Act (CRA). Unrealized losses on these CRA related other securities are attributable to their purchase at below market rates for the purpose of supporting institutions and programs that benefit low to moderate income communities within Northern Trust’s market area. Unrealized losses of $0.8 million related to auction rate securities primarily reflect reduced market liquidity as a majority of auctions continue to fail preventing holders from liquidating their investments at par. The remaining unrealized losses on Northern Trust’s securities portfolio as of December 31, 2013 are attributable to changes in overall market interest rates, increased credit spreads, or reduced market liquidity. As of December 31, 2013, Northern Trust does not intend to sell any investment in an unrealized loss position and it is not more likely than not that Northern Trust will be required to sell any such investment before the recovery of its amortized cost basis, which may be maturity.

Security impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible OTTI. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is other-than-temporary include, but are not limited to, the length of time the security has been impaired; the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that it will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if OTTI has occurred.

While all securities are considered, the following describes Northern Trust’s process for identifying credit impairment within non-agency residential mortgage-backed securities, the security type for which Northern Trust has previously recognized the majority of its OTTI. To determine if an unrealized loss on a non-agency residential mortgage-backed security is other-than-temporary, economic models are used to perform cash flow analyses by developing multiple scenarios in order to create reasonable forecasts of the security’s future performance using available data including servicers’ loan charge off patterns, prepayment speeds, annualized default rates, each security’s current delinquency pipeline, the delinquency pipeline’s growth rate, the roll rate from delinquency to default, loan loss severities and historical performance of like collateral, along with Northern Trust’s outlook for the housing market and the overall economy. If the present value of future cash flows projected as a result of this analysis is less than the current amortized cost of the security, a credit-related OTTI loss is recorded to earnings equal to the difference between the two amounts.

Impairments of non-agency residential mortgage-backed securities are influenced by a number of factors, including but not limited to, U.S. economic and housing market performance, security credit enhancement level, insurance coverage, year of origination, and type of collateral. The factors used in estimating losses on non-agency residential mortgage-backed securities vary by year of origination and type of collateral. As of December 31, 2013, loss estimates for subprime, Alt-A, prime and 2^nd lien collateral portfolios were developed using default roll rates, determined primarily by the stage of delinquency of the underlying instrument, that generally assumed ultimate default rates approximating 5% to 30% for current loans; 30% for loans 30 to 60 days delinquent; 80% for loans 60 to 90 days delinquent; 90% for loans delinquent greater than 90 days; and 100% for OREO properties and loans that are in foreclosure.

December 31, 2013 amortized cost, weighted average ultimate default rates, and impairment severity rates for the non-agency residential mortgage-backed securities portfolio, by security type, are provided in the following table.

DECEMBER 31, 2013

LOSS SEVERITY RATES

($ In Millions)

AMORTIZED
COST

WEIGHTED AVERAGE
ULTIMATE DEFAULT
RATES

LOW

HIGH

WEIGHTED
AVERAGE

Prime

7.2

21.5

32.7

45.0

41.3

Alt-A

12.1

40.3

65.5

Subprime

23.4

48.6

75.6

79.3

76.5

2^nd Lien

9.7

32.8

98.9

99.0

Total Non-Agency Residential Mortgage-Backed Securities

52.4

39.5

32.7

99.0

73.3

Northern Trust’s processes for identifying credit impairment within auction rate securities are largely consistent with the processes utilized for non-agency residential mortgage-backed securities and include analyses of loss severities and default rates adjusted for the type of underlying loan and the presence of government guarantees, as applicable. There were no OTTI losses recognized during the year ended December 31, 2013. There were $3.3 million of OTTI losses in 2012, of which $1.7 million related to non-agency residential mortgage-backed securities and $1.6 million related to auction rate securities, and $23.3 million of OTTI losses in 2011, all of which related to non-agency residential mortgage-backed securities.

Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily impaired securities, including noncredit-related amounts recognized in other comprehensive income and net impairment losses recognized in earnings, for the years ended December 31, 2013, 2012, and 2011.


	DECEMBER 31,
(In Millions)	2013		2012			2011
Changes in Other-Than-Temporary Impairment Losses⁽¹⁾	$	–	$	(2.7	)	$	(1.1	)
Noncredit-related Losses Recorded in / (Reclassified from) OCI⁽²⁾		–		(0.6	)		(22.2	)

Net Impairment Losses Recognized in Earnings	$	–	$	(3.3	)	$	(23.3	)

(1) For initial other-than-temporary impairments in the respective period, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For subsequent impairments of the same security, the balance includes any additional changes in fair value of the security subsequent to its most recently recorded OTTI.

(2) For initial other-than-temporary impairments in the respective period, the balance includes the portion of the excess of amortized cost over the fair value of the impaired securities that was recorded in OCI. For subsequent impairments of the same security, the balance includes additional changes in OCI for that security subsequent to its most recently recorded OTTI.

Provided in the table below are the cumulative credit-related losses recognized in earnings on debt securities other-than-temporarily impaired.


	YEAR ENDED DECEMBER 31,
(In Millions)	2013			2012
Cumulative Credit-Related Losses on Securities Held – Beginning of Year	$	42.3		$	68.2
Plus: Losses on Newly Identified Impairments		–			1.6
Additional Losses on Previously Identified Impairments		–			1.7
Less: Current and Prior Period Losses on Securities Sold During the Year		(33.5	)		(29.2	)

Cumulative Credit-Related Losses on Securities Held – End of Year	$	8.8		$	42.3

The table below provides information regarding debt securities held as of December 31, 2013 and 2012, for which an OTTI loss has been recognized in the current year or previously.


	DECEMBER 31,
(In Millions)	2013			2012
Fair Value	$	38.3		$	51.5
Amortized Cost Basis		42.8			59.0

Noncredit-related Losses Recognized in OCI		(4.5	)		(7.5	)
Tax Effect		1.7			2.8

Amount Recognized in OCI	$	(2.8	)	$	(4.7	)