Fair Value Measurements

6 Months Ended

Jun. 30, 2019

Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred. No transfers between fair value levels occurred during the six months ended June 30, 2019 or the year ended December 31, 2018.

Level 1 — Quoted, active market prices for identical assets or liabilities.

Northern Trust’s Level 1 assets are comprised of available for sale investments in U.S. treasury securities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets.

Northern Trust’s Level 2 assets include available for sale and trading account debt securities, the fair values of which are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and third-party prices. If a security price obtained from a pricing vendor is determined to exceed pre-determined tolerance levels that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated, an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of June 30, 2019, Northern Trust’s available for sale debt securities portfolio included 1,509 Level 2 debt securities with an aggregate market value of $32.8 billion. All 1,509 debt securities were valued by external pricing vendors. As of December 31, 2018, Northern Trust’s available for sale debt securities portfolio included 1,479 Level 2 debt securities with an aggregate market value of $31.7 billion. All 1,479 debt securities were valued by external pricing vendors. Trading account debt securities, which totaled $0.8 million and $0.3 million as of June 30, 2019 and December 31, 2018, respectively, were all valued using external pricing vendors.

Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting arrangements or similar agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been considered material.

Level 3 — Valuation techniques in which one or more significant inputs are unobservable in the marketplace.

Northern Trust’s Level 3 liabilities consist of swaps that Northern Trust entered into with the purchaser of 1.1 million and 1.0 million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern Trust and sold in June 2016 and 2015, respectively. Pursuant to the swaps, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-dilutive adjustments to the ratio. The swaps also require periodic payments from Northern Trust to the counterparty calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swaps is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. See “Visa Class B Common Shares” under Note 21 – “Contingent Liabilities” for further information.

Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.

The following table presents the fair values of Northern Trust’s Level 3 liabilities as of June 30, 2019 and December 31, 2018, as well as the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for such liabilities as of such dates.

Table 32: Level 3 Significant Unobservable Inputs

June 30, 2019

Financial Instrument

Fair Value

Valuation

Technique

Unobservable Inputs

Range of Inputs

Swaps Related to Sale of Certain Visa Class B Common Shares

34.7

million

Discounted Cash Flow

Visa Class A Appreciation

7.0

—

11.0%

Conversion Rate

1.62

—

1.64x

Expected Duration

1.5

—

3.5 years

December 31, 2018

Financial Instrument

Fair Value

Valuation

Technique

Unobservable Inputs

Range of Inputs

Swaps Related to Sale of Certain Visa Class B Common Shares

32.8

million

Discounted Cash Flow

Visa Class A Appreciation

7.0

—

11.0%

Conversion Rate

1.62

—

1.64x

Expected Duration

1.5

—

4.0 years

The following table presents assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, segregated by fair value hierarchy level.

Table 33: Recurring Basis Hierarchy Leveling



(In Millions)	Level 1		Level 2		Level 3		Netting			Assets/Liabilities at Fair Value
June 30, 2019
Debt Securities
Available for Sale
U.S. Government	$	5,079.4	$	—	$	—	$	—		$	5,079.4
Obligations of States and Political Subdivisions	—		753.2		—		—			753.2
Government Sponsored Agency	—		22,505.4		—		—			22,505.4
Non-U.S. Government	—		143.2		—		—			143.2
Corporate Debt	—		2,421.8		—		—			2,421.8
Covered Bonds	—		863.4		—		—			863.4
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	—		2,286.4		—		—			2,286.4
Other Asset-Backed	—		2,989.6		—		—			2,989.6
Commercial Mortgage-Backed	—		811.5		—		—			811.5
Other	—		13.6		—		—			13.6
Total Available for Sale	5,079.4		32,788.1		—		—			37,867.5
Trading Account	—		0.8		—		—			0.8
Total Available for Sale and Trading Debt Securities	5,079.4		32,788.9		—		—			37,868.3
Other Assets
Derivative Assets
Foreign Exchange Contracts	—		1,741.4		—		—			1,741.4
Interest Rate Contracts	—		150.4		—		—			150.4
Total Derivative Assets	—		1,891.8		—		(1,171.6		)	720.2
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	—		1,682.7		—		—			1,682.7
Interest Rate Contracts	—		97.5		—		—			97.5
Other Financial Derivatives ⁽¹⁾	—		0.6		34.7		—			35.3
Total Derivative Liabilities	$	—	$	1,780.8	$	34.7	$	(1,248.6	)	$	566.9

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of June 30, 2019, derivative assets and liabilities shown above also include reductions of $180.8 million and $257.8 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.


⁽¹⁾	This line consists of swaps related to the sale of certain Visa Class B common shares and a total return swap contract.



(In Millions)	Level 1		Level 2		Level 3		Netting			Assets/Liabilities at Fair Value
December 31, 2018
Debt Securities
Available for Sale
U.S. Government	$	5,185.3	$	—	$	—	$	—		$	5,185.3
Obligations of States and Political Subdivisions	—		655.9		—		—			655.9
Government Sponsored Agency	—		22,424.6		—		—			22,424.6
Non-U.S. Government	—		142.2		—		—			142.2
Corporate Debt	—		2,294.7		—		—			2,294.7
Covered Bonds	—		829.3		—		—			829.3
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	—		2,096.2		—		—			2,096.2
Other Asset-Backed	—		2,657.7		—		—			2,657.7
Commercial Mortgage-Backed	—		587.2		—		—			587.2
Other	—		15.7		—		—			15.7
Total Available for Sale	5,185.3		31,703.5		—		—			36,888.8
Trading Account	—		0.3		—		—			0.3
Total Available for Sale and Trading Debt Securities	5,185.3		31,703.8		—		—			36,889.1
Other Assets
Derivative Assets
Foreign Exchange Contracts	—		2,466.1		—		—			2,466.1
Interest Rate Contracts	—		96.1		—		—			96.1
Other Financial Derivatives ⁽¹⁾	—		1.3		—		—			1.3
Total Derivative Assets	—		2,563.5		—		(1,357.1		)	1,206.4
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	—		2,262.5		—		—			2,262.5
Interest Rate Contracts	—		93.1		—		—			93.1
Other Financial Derivatives ⁽²⁾	—		—		32.8		—			32.8
Total Derivative Liabilities	$	—	$	2,355.6	$	32.8	$	(1,796.3	)	$	592.1

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2018, derivative assets and liabilities shown above also include reductions of $134.5 million and $573.7 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.


⁽¹⁾	This line consists of a total return swap contract.


⁽²⁾	This line consists of swaps related to the sale of certain Visa Class B common shares.

The following table presents the changes in Level 3 liabilities for the three and six months ended June 30, 2019 and 2018.

Table 34: Changes in Level 3 Liabilities



Level 3 Liabilities (In Millions)	Swaps Related to Sale of Certain Visa Class B Common Shares
Three Months Ended June 30,	2019			2018
Fair Value at April 1	$	35.0		$	31.3
Total (Gains) Losses:
Included in Earnings ⁽¹⁾	3.1			7.5
Purchases, Issues, Sales, and Settlements
Settlements	(3.4		)	(2.7		)
Fair Value at June 30	$	34.7		$	36.1



Six Months Ended June 30,	2019			2018
Fair Value at January 1	$	32.8		$	29.7
Total (Gains) Losses:
Included in Earnings ⁽¹⁾	8.2			11.7
Purchases, Issues, Sales, and Settlements
Settlements	(6.3		)	(5.3		)
Fair Value at June 30	$	34.7		$	36.1


⁽¹⁾	(Gains) losses are recorded in other operating income in the consolidated statements of income.

During the six months ended June 30, 2019 and 2018, there were no transfers into or out of Level 3 liabilities.

Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to separately disclose these subsequent fair value measurements and to classify them under the fair value hierarchy.

Assets measured at fair value on a nonrecurring basis at June 30, 2019 and 2018, all of which were categorized as Level 3 under the fair value hierarchy, were comprised of impaired loans whose values were based on real estate and other available collateral, and of other real estate owned (OREO) properties. Fair values of real estate loan collateral were estimated using a market approach typically supported by third-party valuations and property-specific fees and taxes, and were subject to adjustments to reflect management’s judgment as to realizable value. Other loan collateral, which typically consists of accounts receivable, inventory and equipment, is valued using a market approach adjusted for asset-specific characteristics and in limited instances third-party valuations are used. OREO assets are carried at the lower of cost or fair value less estimated costs to sell, with fair value typically based on third-party appraisals.

Collateral-based impaired loans that have been adjusted to fair value totaled $27.3 million at June 30, 2019. Collateral-based impaired loans and OREO assets that have been adjusted to fair value totaled $13.8 million and $0.2 million, respectively, at June 30, 2018. Assets measured at fair value on a nonrecurring basis reflect management’s judgment as to realizable value.

The following table presents the fair values of Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of June 30, 2019 and December 31, 2018, as well as the valuation technique, significant unobservable inputs and quantitative information used to develop the significant unobservable inputs for such assets as of such dates.

Table 35: Level 3 Nonrecurring Basis Significant Unobservable Inputs



	June 30, 2019
Financial Instrument	Fair Value	Valuation Technique	Unobservable Input	Range of Discounts Applied
Loans	$27.3 million	Market Approach	Discount to reflect realizable value	15.0	%	-	30.0%



	December 31, 2018
Financial Instrument	Fair Value	Valuation Technique	Unobservable Input	Range of Discounts Applied
Loans	$24.9 million	Market Approach	Discount to reflect realizable value	15.0	%	-	30.0%
OREO	$0.4 million	Market Approach	Discount to reflect realizable value	15.0	%	-	30.0%

The following table summarizes the fair values of all financial instruments.

Table 36: Fair Value of Financial Instruments



(In Millions)	June 30, 2019
	Book Value		Total Fair Value		Fair Value
					Level 1		Level 2		Level 3
Assets
Cash and Due from Banks	$	5,348.3	$	5,348.3	$	5,348.3	$	—	$	—
Federal Reserve and Other Central Bank Deposits	27,553.5		27,553.5		—		27,553.5		—
Interest-Bearing Deposits with Banks	4,193.6		4,193.6		—		4,193.6		—
Federal Funds Sold and Securities Purchased under Agreements to Resell	660.5		660.5		—		660.5		—
Debt Securities
Available for Sale (Note)	37,867.5		37,867.5		5,079.4		32,788.1		—
Held to Maturity	10,351.2		10,325.4		117.7		10,207.7		—
Trading Account	0.8		0.8		—		0.8		—
Loans (excluding Leases)
Held for Investment	30,783.1		31,048.6		—		—		31,048.6
Client Security Settlement Receivables	1,311.1		1,311.1		—		1,311.1		—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock	301.2		301.2		—		301.2		—
Community Development Investments	589.9		589.9		—		589.9		—
Employee Benefit and Deferred Compensation	203.8		208.8		135.3		73.5		—
Liabilities
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	40,305.1	$	40,305.1	$	40,305.1	$	—	$	—
Savings Certificates and Other Time	897.3		904.9		—		904.9		—
Non U.S. Offices Interest-Bearing	59,028.0		59,028.0		—		59,028.0		—
Federal Funds Purchased	368.0		368.0		—		368.0		—
Securities Sold Under Agreements to Repurchase	125.2		125.2		—		125.2		—
Other Borrowings	7,766.4		7,772.2		—		7,772.2		—
Senior Notes	2,565.6		2,582.9		—		2,582.9		—
Long-Term Debt
Subordinated Debt	1,147.6		1,163.1		—		1,163.1		—
Floating Rate Capital Debt	277.6		257.1		—		257.1		—
Other Liabilities
Standby Letters of Credit	30.5		30.5		—		—		30.5
Loan Commitments	32.4		32.4		—		—		32.4
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets	$	62.3	$	62.3	$	—	$	62.3	$	—
Liabilities	18.1		18.1		—		18.1		—
Interest Rate Contracts
Assets	22.6		22.6		—		22.6		—
Liabilities	24.6		24.6		—		24.6		—
Other Financial Derivatives
Liabilities ⁽¹⁾	35.3		35.3		—		0.6		34.7
Client-Related and Trading
Foreign Exchange Contracts
Assets	1,679.1		1,679.1		—		1,679.1		—
Liabilities	1,664.6		1,664.6		—		1,664.6		—
Interest Rate Contracts
Assets	127.8		127.8		—		127.8		—
Liabilities	72.9		72.9		—		72.9		—

Note: Refer to the table located on page 39 for the disaggregation of available for sale debt securities.


(1)	This line consists of a total return swap contract and swaps related to the sale of certain Visa Class B common shares.



(In Millions)	December 31, 2018
	Book Value		Total Fair Value		Fair Value
					Level 1		Level 2		Level 3
Assets
Cash and Due from Banks	$	4,581.6	$	4,581.6	$	4,581.6	$	—	$	—
Federal Reserve and Other Central Bank Deposits	30,080.2		30,080.2		—		30,080.2		—
Interest-Bearing Deposits with Banks	4,264.2		4,264.2		—		4,264.2		—
Federal Funds Sold and Securities Purchased under Agreements to Resell	1,165.2		1,165.2		—		1,165.2		—
Debt Securities
Available for Sale (Note)	36,888.8		36,888.8		5,185.3		31,703.5		—
Held to Maturity	14,354.0		14,267.0		101.6		14,165.4		—
Trading Account	0.3		0.3		—		0.3		—
Loans (excluding Leases)
Held for Investment	32,287.0		32,339.2		—		—		32,339.2
Client Security Settlement Receivables	1,646.1		1,646.1		—		1,646.1		—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock	300.3		300.3		—		300.3		—
Community Development Investments	606.6		606.6		—		606.6		—
Employee Benefit and Deferred Compensation	202.3		194.5		125.0		69.5		—
Liabilities
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	37,340.1	$	37,340.1	$	37,340.1	$	—	$	—
Savings Certificates and Other Time	688.7		691.8		—		691.8		—
Non U.S. Offices Interest-Bearing	66,468.0		66,468.0		—		66,468.0		—
Federal Funds Purchased	2,594.2		2,594.2		—		2,594.2		—
Securities Sold Under Agreements to Repurchase	168.3		168.3		—		168.3		—
Other Borrowings	7,901.7		7,904.1		—		7,904.1		—
Senior Notes	2,011.3		1,994.4		—		1,994.4		—
Long-Term Debt
Subordinated Debt	1,112.4		1,089.7		—		1,089.7		—
Floating Rate Capital Debt	277.6		253.5		—		253.5		—
Other Liabilities
Standby Letters of Credit	30.8		30.8		—		—		30.8
Loan Commitments	34.3		34.3		—		—		34.3
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets	$	306.7	$	306.7	$	—	$	306.7	$	—
Liabilities	72.5		72.5		—		72.5		—
Interest Rate Contracts
Assets	30.0		30.0		—		30.0		—
Liabilities	24.5		24.5		—		24.5		—
Other Financial Derivatives
Assets ⁽¹⁾	1.3		1.3		—		1.3		—
Liabilities ⁽²⁾	32.8		32.8		—		—		32.8
Client-Related and Trading
Foreign Exchange Contracts
Assets	2,159.4		2,159.4		—		2,159.4		—
Liabilities	2,190.0		2,190.0		—		2,190.0		—
Interest Rate Contracts
Assets	66.1		66.1		—		66.1		—
Liabilities	68.6		68.6		—		68.6		—

Note: Refer to the table located on page 40 for the disaggregation of available for sale debt securities.

(1) This line consists of a total return swap contract.

(2) This line consists of swaps related to the sale of certain Visa Class B common shares.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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