Note 4 – Securities

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

TABLE 46: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF SECURITIES AVAILABLE FOR SALE


	DECEMBER 31, 2014
(In Millions)	AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
U.S. Government	$	4,493.5	$	15.1	$	1.7	$	4,506.9
Obligations of States and Political Subdivisions		4.5		0.1		–		4.6
Government Sponsored Agency		16,326.4		82.3		19.5		16,389.2
Non-U.S. Government		309.5		0.9		–		310.4
Corporate Debt		3,617.5		1.8		41.6		3,577.7
Covered Bonds		1,899.9		7.9		0.3		1,907.5
Supranational and Non-U.S. Agency Bonds		360.0		1.5		0.9		360.6
Residential Mortgage-Backed		6.9		–		0.5		6.4
Other Asset-Backed		2,321.8		0.5		1.0		2,321.3
Auction Rate		18.4		0.5		0.8		18.1
Other		155.7		0.3		0.2		155.8

Total	$	29,514.1	$	110.9	$	66.5	$	29,558.5

	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
Non-U.S. Government		307.0		3.6		–		310.6
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 and Non-U.S. Agency Bonds		410.0		1.7		1.7		410.0
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

TABLE 47: REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE


	DECEMBER 31, 2014				DECEMBER 31, 2013
(In Millions)	AMORTIZED COST		FAIR VALUE		AMORTIZED COST		FAIR VALUE
Due in One Year or Less	$	7,467.4	$	7,487.9	$	9,552.9	$	9,565.7
Due After One Year Through Five Years		17,132.7		17,157.6		15,011.4		15,067.2
Due After Five Years Through Ten Years		3,394.2		3,418.0		2,545.9		2,494.1
Due After Ten Years		1,519.8		1,495.0		1,272.1		1,265.8

Total	$	29,514.1	$	29,558.5	$	28,382.3	$	28,392.8

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.

TABLE 48: RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES HELD TO MATURITY


	DECEMBER 31, 2014
(In Millions)	AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
Obligations of States and Political Subdivisions	$	121.9	$	7.4	$	–	$	129.3
Government Sponsored Agency		18.4		1.1		–		19.5
Non-U.S. Government		1,281.6		6.6		0.4		1,287.8
Certificates of Deposit		924.3		0.1		0.1		924.3
Supranational and Non-U.S. Agency Bonds		1,745.8		10.9		0.5		1,756.2
Other		78.8		0.3		20.1		59.0

Total	$	4,170.8	$	26.4	$	21.1	$	4,176.1

	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		722.0		0.8		1.1		721.7
Certificates of Deposit		698.1		–		0.2		697.9
Supranational and Non-U.S. Agency Bonds		584.7		–		3.2		581.5
Other		59.9		0.1		12.2		47.8

Total	$	2,325.8	$	12.3	$	16.7	$	2,321.4

TABLE 49: REMAINING MATURITY OF SECURITIES HELD TO MATURITY


	DECEMBER 31, 2014				DECEMBER 31, 2013
(In Millions)	AMORTIZED COST		FAIR VALUE		AMORTIZED COST		FAIR VALUE
Due in One Year or Less	$	1,503.5	$	1,504.7	$	1,009.9	$	1,011.2
Due After One Year Through Five Years		2,602.8		2,622.3		1,254.9		1,257.0
Due After Five Years Through Ten Years		23.5		21.5		26.1		27.1
Due After Ten Years		41.0		27.6		34.9		26.1

Total	$	4,170.8	$	4,176.1	$	2,325.8	$	2,321.4

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 of $4.3 million were recognized in 2014 and include $4.2 million of charges related to the OTTI of certain Community Reinvestment Act (CRA) eligible held to maturity securities. Net investment security losses of $1.5 million, and $1.7 million were recognized in 2013, and 2012, respectively. Losses in 2012 include $3.3 million of OTTI losses. There were no OTTI losses in 2013. Proceeds of $851.8 million from the sale of securities in 2014 resulted in gross realized gains and losses of $2.8 million and $2.9 million, respectively. Proceeds of $0.5 billion from the sale of securities in 2013 resulted in gross realized gains and losses of $0.8 million and $2.3 million, respectively. Proceeds of $2.7 billion from the sale of securities in 2012 resulted in gross realized gains and losses of $23.5 million and $21.9 million, respectively.

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, 2014, and 2013.

TABLE 50: SECURITIES WITH UNREALIZED LOSSES

AS OF DECEMBER 31, 2014

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

998.2

1.7

–

998.2

1.7

Government Sponsored Agency

2,344.9

6.6

1,730.0

12.9

4,074.9

19.5

Non-U.S. Government

292.9

0.4

–

292.9

0.4

Corporate Debt

1,244.5

3.9

1,338.8

37.7

2,583.3

41.6

Covered Bonds

142.3

0.2

10.0

0.1

152.3

0.3

Supranational and Non-U.S. Agency Bonds

313.2

0.3

175.5

1.1

488.7

1.4

Residential Mortgage-Backed

–

4.5

0.5

4.5

0.5

Other Asset-Backed

1,297.6

1.0

–

1,297.6

1.0

Certificates of Deposit

438.6

0.1

–

438.6

0.1

Auction Rate

2.4

0.2

4.7

0.6

7.1

0.8

Other

27.1

12.1

45.6

8.2

72.7

20.3

Total

7,101.7

26.5

3,309.1

61.1

10,410.8

87.6

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

Non-U.S. Government

176.7

1.1

–

176.7

1.1

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 and Non-U.S. Agency Bonds

612.7

4.9

–

612.7

4.9

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 December 31, 2014, 515 securities with a combined fair value of $10.4 billion were in an unrealized loss position, with their unrealized losses totaling $87.6 million. Unrealized losses of $41.6 million within corporate debt securities primarily reflect widened credit spreads and higher market rates since purchase; 40% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $19.5 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 $0.5 million reflect the impact of wider credit and liquidity spreads on the valuations of one residential mortgage-backed security since purchase, with it having been in an unrealized loss position for more than 12 months. Securities classified as “other asset-backed” at December 31, 2014 had average lives of less than 5 years, and 100% were rated triple-A.

The majority of the $20.3 million of unrealized losses in securities classified as “other” at December 31, 2014, relate to securities primarily purchased at a premium or par by Northern Trust for compliance with the Community Reinvestment Act (CRA). Unrealized losses on these CRA related other 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 $0.8 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, 2014, are attributable to changes in overall market interest rates, increased credit spreads, or reduced market liquidity. As of December 31, 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 process for identifying credit impairment within CRA eligible mortgage-backed securities, the security type for which Northern Trust has recognized all of the OTTI in 2014, incorporates an expected loss approach using discounted cash flows on the underlying collateral pools. To evaluate whether an unrealized loss on CRA mortgage-backed securities is other-than-temporary, a calculation of the security’s present value is made using current pool data, the current delinquency pipeline, default rates and loan loss severities based on the historical performance of like collateral, and Northern Trust’s outlook for the housing market and the overall economy. If the present value of the collateral pools was found to be less than the current amortized cost of the security, a credit-related OTTI loss would be recorded in 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 December 31, 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. Lastly, book values were compared against collateral values net of expected losses in order to determine OTTI.

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 in 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, 2014, loss estimates for 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, 2014, 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.

TABLE 51: NON-AGENCY RESIDENTIAL MORTGAGE-BACKED SECURITIES

DECEMBER 31, 2014

LOSS SEVERITY RATES

($ In Millions)

AMORTIZED
COST

WEIGHTED AVERAGE
ULTIMATE DEFAULT
RATES

LOW

HIGH

WEIGHTED
AVERAGE

Prime

1.9

5.0

32.1

2^nd Lien

5.0

32.2

99.0

Total Non-Agency Residential Mortgage-Backed Securities

6.9

25.3

32.1

99.0

81.1

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 $4.2 million of OTTI losses recognized in 2014, all of which related to CRA eligible mortgage-backed securities. No OTTI losses were 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.

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, 2014, 2013, and 2012.


TABLE 52: NET IMPAIRMENT LOSSES RECOGNIZED IN EARNINGS	DECEMBER 31,
(In Millions)	2014			2013		2012
Changes in Other-Than-Temporary Impairment Losses⁽¹⁾	$	(4.9	)	$	–	$	(2.7	)
Noncredit-related Losses Recorded in / (Reclassified from) OCI⁽²⁾		0.7			–		(0.6	)

Net Impairment Losses Recognized in Earnings	$	(4.2	)	$	–	$	(3.3	)

(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.


TABLE 53: CUMULATIVE CREDIT-RELATED LOSSES ON SECURITIES HELD	YEAR ENDED DECEMBER 31,
(In Millions)	2014			2013
Cumulative Credit-Related Losses on Securities Held – Beginning of Year	$	8.8		$	42.3
Plus: Losses on Newly Identified Impairments		1.8			–
Additional Losses on Previously Identified Impairments		2.4			–
Less: Current and Prior Period Losses on Securities Sold During the Year		(7.8	)		(33.5	)

Cumulative Credit-Related Losses on Securities Held – End of Year	$	5.2		$	8.8