Securities

6 Months Ended

Jun. 30, 2014

Securities

4. Securities – The following tables provide the amortized cost and fair values of securities at June 30, 2014 and December 31, 2013.

Securities Available for Sale	June 30, 2014
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)			Gains		Losses
U.S. Government	$	2,396.3	$	21.4	$	—	$	2,417.7
Obligations of States and Political Subdivisions		4.5		0.1		—		4.6
Government Sponsored Agency		18,112.8		79.7		23.6		18,168.9
Corporate Debt		3,696.3		5.6		31.2		3,670.7
Covered Bonds		1,974.6		14.3		0.1		1,988.8
Supranational, Sovereign and Non-U.S. Agency Bonds		720.6		2.6		0.9		722.3
Residential Mortgage-Backed		44.5		0.4		2.0		42.9
Other Asset-Backed		2,388.9		2.1		—		2,391.0
Auction Rate		97.1		2.4		0.7		98.8
Other		183.3		0.4		—		183.7
Total	$	29,618.9	$	129.0	$	58.5	$	29,689.4

Securities Held to Maturity	June 30, 2014
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)			Gains		Losses
Obligations of States and Political Subdivisions	$	157.0	$	9.2	$	—	$	166.2
Government Sponsored Agency		27.7		1.3		—		29.0
Non-U.S. Government Debt		171.7		—		—		171.7
Certificates of Deposit		1,533.0		0.2		—		1,533.2
Supranational, Sovereign and Non-U.S. Agency Bonds		2,317.6		6.9		9.3		2,315.2
Other		63.6		0.1		13.6		50.1
Total	$	4,270.6	$	17.7	$	22.9	$	4,265.4

Securities Available for Sale	December 31, 2013
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)			Gains		Losses
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

Securities Held to Maturity	December 31, 2013
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)			Gains		Losses
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

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

The following table provides the remaining maturity of securities as of June 30, 2014.

(In Millions)	Amortized Cost		Fair Value
Available for Sale
Due in One Year or Less	$	8,619.5	$	8,629.4
Due After One Year Through Five Years		16,807.1		16,861.6
Due After Five Years Through Ten Years		3,045.0		3,045.5
Due After Ten Years		1,147.3		1,152.9
Total		29,618.9		29,689.4
Held to Maturity
Due in One Year or Less		1,864.9		1,868.3
Due After One Year Through Five Years		2,348.2		2,348.6
Due After Five Years Through Ten Years		22.1		23.3
Due After Ten Years		35.4		25.2
Total	$	4,270.6	$	4,265.4

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

Investment Security Gains and Losses. Net investment security gains of $0.4 million and $0.1 million were recognized in the three months ended June 30, 2014 and 2013, respectively, representing net realized gains from the sale of securities. Gross proceeds from the sale of securities during the three months ended June 30, 2014 of $264.2 million resulted in gross realized gains of $0.4 million. Gross proceeds from the sale of securities during the three months ended June 30, 2013 of $26.0 million resulted in gross realized gains of $0.1 million.

Net investment security losses of $3.6 million were recognized in the six months ended June 30, 2014 and include $3.9 million of charges related to the other-than-temporary impairment of certain Community Reinvestment Act (CRA) eligible held to maturity securities. Net investment security gains of $0.3 million were recognized in the six months ended June 30, 2013, representing net realized gains from the sale of securities. For the six months ended June 30, 2014, proceeds of $463.9 million were received from the sale of securities and gross realized gains and losses totaled $0.7 million and $0.4 million, respectively. For the six months ended June 30, 2013, proceeds of $81.7 million were received from the sale of securities and gross realized gains of $0.3 billion were realized.

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 June 30, 2014 and December 31, 2013.

Securities with Unrealized Losses as of June 30, 2014	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	$	2,612.6	$	8.3	$	1,958.6	$	15.3	$	4,571.2	$	23.6
Corporate Debt		579.2		1.1		1,282.3		30.1		1,861.5		31.2
Covered Bonds		—		—		10.0		0.1		10.0		0.1
Supranational, Sovereign and Non-U.S. Agency Bonds		1,406.2		9.3		58.9		0.9		1,465.1		10.2
Residential Mortgage-Backed		—		—		23.1		2.0		23.1		2.0
Auction Rate		2.4		0.1		13.5		0.6		15.9		0.7
Other		22.8		7.3		33.2		6.3		56.0		13.6
Total	$	4,623.2	$	26.1	$	3,379.6	$	55.3	$	8,002.8	$	81.4

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

As of June 30, 2014, 382 securities with a combined fair value of $8.0 billion were in an unrealized loss position, with their unrealized losses totaling $81.4 million. Unrealized losses of $23.6 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase. Unrealized losses of $31.2 million within corporate debt securities primarily reflect widened credit spreads and higher market rates since purchase; 44% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities.

Unrealized losses on residential mortgage-backed securities totaling $2.0 million reflect the impact of wider credit and liquidity spreads on the valuations of 4 residential mortgage-backed securities since purchase, with $23.1 million having been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities at June 30, 2014 had a total amortized cost and fair value of $44.5 million and $42.9 million, respectively. Securities classified as “other asset-backed” had average lives less than 5 years, and 99% were rated triple-A.

The majority of the $13.6 million of unrealized losses in securities classified as “other” at June 30, 2014 relate to securities purchased at a premium or par by Northern Trust for compliance with CRA. Unrealized losses on these CRA related securities are attributable to yields that are 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 $0.7 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 June 30, 2014 are attributable to changes in overall market interest rates, increased credit spreads, or reduced market liquidity. As of June 30, 2014, 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 June 30, 2014, loss estimates for subprime, Alt-A, prime and 2nd 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. Amortized cost, weighted average ultimate default rates, and impairment severity rates for the non-agency residential mortgage-backed securities portfolio, by security type as of June 30, 2014, are provided in the following table.

($ In Millions)	June 30, 2014
						Loss Severity Rates
Security Type	Amortized Cost		Weighted Average Ultimate Default Rates			Low			High			Weighted Average
Prime	$	6.3		23.1	%		32.3	%		53.4	%		46.1	%
Alt-A		11.6		42.1			64.1			64.1			64.1
Subprime		20.1		46.3			72.7			75.4			73.3
2nd Lien		6.5		32.4			98.7			100.0			99.7
Total Non-Agency Residential Mortgage-Backed Securities	$	44.5		39.4	%		32.3	%		100.0	%		70.9	%

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 expected loss severities and default rates adjusted for the type of underlying loan and the presence of government guarantees, as applicable.

The process for identifying credit impairment within CRA eligible mortgage-backed securities incorporates an expected loss approach on the underlying collateral pools. To evaluate whether an unrealized loss on CRA mortgage-backed securities is other-than-temporary, a reasonable forecast of the security’s ultimate recovery value is calculated using available data including default rates, current delinquency pipeline, 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 estimated recovery value of the collateral pools 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 CRA mortgage-backed securities are influenced by a number of factors, including but not limited to, U.S. economic and housing market performance, pool credit enhancement level, year of origination, and estimated credit quality of the collateral. The factors used in estimating losses related to CRA mortgage-backed securities vary by vintage of loan origination and collateral quality.

As of June 30, 2014, impairment estimates for CRA mortgage-backed securities were developed using default and loss severity rates sourced from industry mortgage data. Ultimate recovery value of the securities was determined by applying default and severity rates against remaining collateral balances in the pools. An expected loss amount was calculated by applying loss severity rates on defaulted amounts. Book values were compared against collateral values net of expected losses in order to determine OTTI.

There were no OTTI losses recognized in the three months ended June 30, 2014 or in the three or six months ended June 30, 2013. There were $3.9 million of OTTI losses recognized during the six months ended June 30, 2014 related to CRA eligible 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 three and six months ended June 30, 2014 and 2013.

	Three Months Ended June 30,				Six Months Ended June 30,
(In Millions)	2014		2013		2014			2013
Changes in OTTI Losses*	$	—	$	—	$	(4.6	)	$	—
Noncredit-related Losses Recorded in / (Reclassified from) OCI**		—		—		0.7			—
Net Impairment Losses Recognized in Earnings	$	—	$	—	$	(3.9	)	$	—

* 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.

** 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.

	Three Months Ended June 30,				Six Months Ended June 30,
(In Millions)	2014		2013		2014		2013
Cumulative Credit-Related Losses on Securities Held – Beginning of Period	$	12.7	$	8.8	$	8.8	$	42.3
Plus: Losses on Newly Identified Impairments		—		—		1.8		—
Additional Losses on Previously Identified Impairments		—		—		2.1		—
Less: Current and Prior Period Losses on Securities Sold During the Period		—		—		—		(33.5	)
Cumulative Credit-Related Losses on Securities Held – End of Period	$	12.7	$	8.8	$	12.7	$	8.8

The table below provides information regarding debt securities held as of June 30, 2014 and December 31, 2013, for which an OTTI loss has been recognized in the current period or previously.

(In Millions)	June 30, 2014			December 31, 2013
Fair Value	$	46.9		$	38.3
Amortized Cost Basis		53.2			42.8
Noncredit-related Losses Recognized in OCI		(6.3	)		(4.5	)
Tax Effect		2.4			1.7
Amount Recorded in OCI	$	(3.9	)	$	(2.8	)