Securities

3 Months Ended

Mar. 31, 2013

Securities

4. Securities – The following tables provide the amortized cost and fair values of securities at March 31, 2013 and December 31, 2012.

Securities Available for Sale	March 31, 2013
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)			Gains		Losses
U.S. Government	$	1,748.1	$	34.3	$	—	$	1,782.4
Obligations of States and Political Subdivisions		13.9		0.8		—		14.7
Government Sponsored Agency		16,747.3		116.7		4.6		16,859.4
Corporate Debt		2,927.7		17.4		3.3		2,941.8
Covered Bonds		1,820.6		47.9		—		1,868.5
Supranational and Non-U.S. Agency Bonds		808.7		7.0		—		815.7
Residential Mortgage-Backed		78.7		0.1		7.9		70.9
Other Asset-Backed		2,436.0		3.1		0.4		2,438.7
Auction Rate		98.7		2.3		1.4		99.6
Other		279.3		0.9		—		280.2
Total	$	26,959.0	$	230.5	$	17.6	$	27,171.9

Securities Held to Maturity	March 31, 2013
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)			Gains		Losses
Obligations of States and Political Subdivisions	$	292.7	$	15.6	$	—	$	308.3
Government Sponsored Agency		80.2		2.7		—		82.9
Non-U.S. Government Debt		210.8		—		—		210.8
Certificates of Deposit		2,069.9		0.2		0.9		2,069.2
Other		278.1		1.0		7.0		272.1
Total	$	2,931.7	$	19.5	$	7.9	$	2,943.3

Securities Available for Sale	December 31, 2012
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)			Gains		Losses
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

Securities Held to Maturity	December 31, 2012
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)			Gains		Losses
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

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 March 31, 2013.

(In Millions)	Amortized Cost		Fair Value
Available for Sale
Due in One Year or Less	$	6,818.3	$	6,839.7
Due After One Year Through Five Years		17,678.8		17,850.1
Due After Five Years Through Ten Years		1,748.5		1,762.7
Due After Ten Years		713.4		719.4
Total		26,959.0		27,171.9
Held to Maturity
Due in One Year or Less		2,430.0		2,431.9
Due After One Year Through Five Years		429.3		440.4
Due After Five Years Through Ten Years		37.9		41.9
Due After Ten Years		34.5		29.1
Total	$	2,931.7	$	2,943.3

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 $0.2 million were recognized for the three months ended March 31, 2013, representing net realized gains from the sale of securities. Gross proceeds from the sale of securities during the three months ended March 31, 2013 of $55.7 million resulted in gross realized gains of $0.2 million. Net investment security losses of $2.4 million were recognized for the three months ended March 31, 2012 and included OTTI losses of $3.1 million and net realized gains of $0.7 million from the sale of securities. Gross proceeds from the sale of securities during the three months ended March 31, 2012 of $1.3 billion resulted in gross realized gains of $1.6 million and gross realized losses of $0.9 million.

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 March 31, 2013 and December 31, 2012.

Securities with Unrealized Losses as of March 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
Government Sponsored Agency	$	980.1	$	2.2	$	278.2	$	2.4	$	1,258.3	$	4.6
Corporate Debt		760.2		3.2		25.0		0.1		785.2		3.3
Residential Mortgage-Backed		—		—		68.1		7.9		68.1		7.9
Other Asset-Backed		624.3		0.3		25.5		0.1		649.8		0.4
Certificates of Deposit		1,081.9		0.9		—		—		1,081.9		0.9
Auction Rate		1.0		0.1		15.5		1.3		16.5		1.4
Other		10.5		2.5		40.2		4.5		50.7		7.0
Total	$	3,458.0	$	9.2	$	452.5	$	16.3	$	3,910.5	$	25.5

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 March 31, 2013, 245 securities with a combined fair value of $3.9 billion were in an unrealized loss position, with their unrealized losses totaling $25.5 million. Unrealized losses on residential mortgage-backed securities totaling $7.9 million reflect the impact of wider credit and liquidity spreads on the valuations of 9 residential mortgage-backed securities since purchase, with $68.1 million having been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities at March 31, 2013 had a total amortized cost and fair value of $78.7 million and $70.9 million, respectively. Securities classified as “other asset-backed” had average lives less than 5 years, and 99% were rated triple-A.

Unrealized losses of $4.6 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase. The majority of the $7.0 million of unrealized losses in securities classified as “other” at March 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 $1.4 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. Unrealized losses of $3.3 million within corporate debt securities primarily reflect widened credit spreads; 47% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. The remaining unrealized losses on Northern Trust’s securities portfolio as of March 31, 2013 are attributable to changes in overall market interest rates, increased credit spreads, or reduced market liquidity.

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 March 31, 2013, 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. March 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.

						Loss Severity Rates
Security Type	Amortized Cost		Weighted Average Ultimate Default Rates			Low			High			Weighted Average
Prime	$	8.2		18.2	%		34.4	%		45.0	%		41.5	%
Alt-A		12.7		41.3			67.7			67.7			67.7
Subprime		41.7		48.7			57.0			85.6			79.7
2nd Lien		16.1		33.3			98.9			99.0			99.0
Total Non-Agency Residential Mortgage-Backed Securities	$	78.7		40.8	%		34.4	%		99.0	%		77.7	%

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. There were no OTTI losses recognized during the three months ended March 31, 2013. OTTI losses of $3.1 million were recorded for the three months ended March 31, 2012, of which $1.5 million related to non-agency residential mortgage-backed securities and $1.6 million related to auction rate 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 months ended March 31, 2013 and 2012.

	Three Months Ended March 31,
(In Millions)	2013		2012
Changes in OTTI Losses (1)	$	—	$	(3.1	)
Noncredit-related Losses Recorded in / (Reclassified from) OCI (2)		—		—
Net Impairment Losses Recognized in Earnings	$	—	$	(3.1	)

(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.

	Three Months Ended March 31,
(In Millions)	2013			2012
Cumulative Credit-Related Losses on Securities Held – Beginning of Period	$	42.3		$	68.2
Plus: Losses on Newly Identified Impairments		—			1.6
Additional Losses on Previously Identified Impairments		—			1.5
Less: Current and Prior Period Losses on Securities Sold During the Period		(33.5	)		(26.5	)
Cumulative Credit-Related Losses on Securities Held – End of Period	$	8.8		$	44.8

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

(In Millions)	March 31, 2013			December 31, 2012
Fair Value	$	42.2		$	51.5
Amortized Cost Basis		47.6			59.0
Noncredit-related Losses Recognized in OCI		(5.4	)		(7.5	)
Tax Effect		2.0			2.8
Amount Recorded in OCI	$	(3.4	)	$	(4.7	)