Fair Value Measurements

3 Months Ended

Mar. 31, 2020

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. No transfers into or out of Level 3 occurred during the three months ended March 31, 2020 or the twelve months ended December 31, 2019.

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 March 31, 2020, Northern Trust’s available for sale debt securities portfolio included 1,771 Level 2 debt securities with an aggregate market value of $34.9 billion. All 1,771 debt securities were valued by external pricing vendors. As of December 31, 2019, Northern Trust’s available for sale debt securities portfolio included 1,704 Level 2 debt securities with an aggregate market value of $34.3 billion. All 1,704 debt securities were valued by external pricing vendors. Trading account debt securities, which totaled $1.2 million and $0.3 million as of March 31, 2020 and December 31, 2019, 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 20 — 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 March 31, 2020 and December 31, 2019, 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 27: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS



	MARCH 31, 2020
FINANCIAL INSTRUMENT	FAIR VALUE	VALUATION TECHNIQUE	UNOBSERVABLE INPUTS	INPUT VALUES			WEIGHTED-AVERAGE INPUT VALUES⁽¹⁾
Swaps Related to Sale of Certain Visa Class B Common Shares	$26.5 million	Discounted Cash Flow	Conversion Rate	1.62x			1.62x
			Visa Class A Appreciation	9.93%			9.93%
			Expected Duration	12	-	33 months	20 months

⁽¹⁾Weighted average of expected duration based on scenario probability.



	DECEMBER 31, 2019
FINANCIAL INSTRUMENT	FAIR VALUE	VALUATION TECHNIQUE	UNOBSERVABLE INPUTS	INPUT VALUES			WEIGHTED-AVERAGE INPUT VALUES ⁽¹⁾
Swaps Related to Sale of Certain Visa Class B Common Shares	$33.4 million	Discounted Cash Flow	Conversion Rate	1.62x			1.62x
			Visa Class A Appreciation	8.54%			8.54%
			Expected Duration	12	-	36 months	22 months

⁽¹⁾Weighted average of expected duration based on scenario probability.

The following table presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, segregated by fair value hierarchy level.

TABLE 28: RECURRING BASIS HIERARCHY LEVELING



	MARCH 31, 2020
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		NETTING			ASSETS/LIABILITIES AT FAIR VALUE
Debt Securities
Available for Sale
U.S. Government	$	4,584.1	$	—	$	—	$	—		$	4,584.1
Obligations of States and Political Subdivisions	—		1,776.3		—		—			1,776.3
Government Sponsored Agency	—		23,870.0		—		—			23,870.0
Non-U.S. Government	—		3.4		—		—			3.4
Corporate Debt	—		2,436.0		—		—			2,436.0
Covered Bonds	—		553.4		—		—			553.4
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	—		2,105.5		—		—			2,105.5
Other Asset-Backed	—		3,182.1		—		—			3,182.1
Commercial Mortgage-Backed	—		922.6		—		—			922.6
Other	—		8.3		—		—			8.3
Total Available for Sale	4,584.1		34,857.6		—		—			39,441.7
Trading Account	—		1.2		—		—			1.2
Total Available for Sale and Trading Debt Securities	4,584.1		34,858.8		—		—			39,442.9
Other Assets
Derivative Assets
Foreign Exchange Contracts	—		5,935.4		—		(2,062.6		)	3,872.8
Interest Rate Contracts	—		341.5		—		(3.2		)	338.3
Total Derivative Assets	—		6,276.9		—		(2,065.8		)	4,211.1
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	—		5,763.4		—		(4,763.3		)	1,000.1
Interest Rate Contracts	—		160.1		—		(126.9		)	33.2
Other Financial Derivatives ⁽¹⁾	—		—		26.5		—			26.5
Total Derivative Liabilities	$	—	$	5,923.5	$	26.5	$	(4,890.2	)	$	1,059.8

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 March 31, 2020, derivative assets and liabilities shown above also include reductions of $197.6 million and $3,022.0 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.



	DECEMBER 31, 2019
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		NETTING			ASSETS/LIABILITIES AT FAIR VALUE
Debt Securities
Available for Sale
U.S. Government	$	4,549.1	$	—	$	—	$	—		$	4,549.1
Obligations of States and Political Subdivisions	—		1,615.3		—		—			1,615.3
Government Sponsored Agency	—		23,271.2		—		—			23,271.2
Non-U.S. Government	—		3.3		—		—			3.3
Corporate Debt	—		2,402.7		—		—			2,402.7
Covered Bonds	—		769.9		—		—			769.9
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	—		2,127.6		—		—			2,127.6
Other Asset-Backed	—		3,330.5		—		—			3,330.5
Commercial Mortgage-Backed	—		797.7		—		—			797.7
Other	—		9.0		—		—			9.0
Total Available for Sale	4,549.1		34,327.2		—		—			38,876.3
Trading Account	—		0.3		—		—			0.3
Total Available for Sale and Trading Debt Securities	4,549.1		34,327.5		—		—			38,876.6
Other Assets
Derivative Assets
Foreign Exchange Contracts	—		3,234.8		—		(2,334.1		)	900.7
Interest Rate Contracts	—		152.9		—		(3.9		)	149.0
Total Derivative Assets	—		3,387.7		—		(2,338.0		)	1,049.7
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	—		3,182.2		—		(1,548.6		)	1,633.6
Interest Rate Contracts	—		97.4		—		(57.3		)	40.1
Other Financial Derivatives ⁽¹⁾	—		—		33.4		(12.5		)	20.9
Total Derivative Liabilities	$	—	$	3,279.6	$	33.4	$	(1,618.4	)	$	1,694.6

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, 2019, derivative assets and liabilities shown above also include reductions of $1,136.8 million and $417.2 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.

The following table presents the changes in Level 3 liabilities for the three months ended March 31, 2020 and 2019.

TABLE 29: CHANGES IN LEVEL 3 LIABILITIES



(In Millions)	SWAPS RELATED TO SALE OF CERTAIN VISA CLASS B COMMON SHARES
THREE MONTHS ENDED MARCH 31,	2020			2019
Fair Value at January 1	$	33.4		$	32.8
Total (Gains) Losses:
Included in Earnings ⁽¹⁾	(2.9		)	5.1
Purchases, Issues, Sales, and Settlements
Settlements	(4.0		)	(2.9		)
Fair Value at March 31	$	26.5		$	35.0

⁽¹⁾ (Gains) losses are recorded in Other Operating Income on the consolidated statements of income.

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 March 31, 2020 and December 31, 2019, all of which were categorized as Level 3 under the fair value hierarchy, were comprised of nonaccrual 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. The fair values of real estate loan collateral were subject to adjustments to reflect management’s judgment as to realizable value and consisted of discount factors ranging from 15.0% to 20.0% with a weighted average based on fair values of 15.4% and 15.3% as of March 31, 2020 and December 31, 2019, respectively. 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 nonaccrual loans that have been adjusted to fair value totaled $12.9 million and $8.0 million at March 31, 2020 and December 31, 2019, respectively.

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 March 31, 2020 and December 31, 2019, 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 30: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS



	MARCH 31, 2020
FINANCIAL INSTRUMENT	FAIR VALUE⁽¹⁾	VALUATION TECHNIQUE	UNOBSERVABLE INPUTS	INPUT VALUES				WEIGHTED-AVERAGE INPUT VALUES
Loans	$12.9 million	Market Approach	Discount factor applied to real estate collateral-based loans to reflect realizable value	15.0	%	-	20.0%	15.4%

⁽¹⁾ Includes real estate collateral-based loans and other collateral-based loans.



	DECEMBER 31, 2019
FINANCIAL INSTRUMENT	FAIR VALUE⁽¹⁾	VALUATION TECHNIQUE	UNOBSERVABLE INPUTS	INPUT VALUES				WEIGHTED-AVERAGE INPUT VALUES
Loans	$8.0 million	Market Approach	Discount factor applied to real estate collateral-based loans to reflect realizable value	15.0	%	-	20.0%	15.3%

⁽¹⁾ Includes real estate collateral-based loans and other collateral-based loans.

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

TABLE 31: FAIR VALUE OF FINANCIAL INSTRUMENTS



	MARCH 31, 2020
					FAIR VALUE
(In Millions)	BOOK VALUE		TOTAL FAIR VALUE		LEVEL 1		LEVEL 2		LEVEL 3
ASSETS
Cash and Due from Banks	$	5,833.2	$	5,833.2	$	5,833.2	$	—	$	—
Federal Reserve and Other Central Bank Deposits	44,661.5		44,661.5		—		44,661.5		—
Interest-Bearing Deposits with Banks	5,358.9		5,358.9		—		5,358.9		—
Federal Funds Sold and Securities Purchased under Agreements to Resell	998.2		998.2		—		998.2		—
Debt Securities
Available for Sale⁽¹⁾	39,441.7		39,441.7		4,584.1		34,857.6		—
Held to Maturity	12,635.7		12,533.0		105.0		12,428.0		—
Trading Account	1.2		1.2		—		1.2		—
Loans (excluding Leases)
Held for Investment	37,626.2		38,076.3		—		—		38,076.3
Client Security Settlement Receivables	2,116.9		2,116.9		—		2,116.9		—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock	301.2		301.2		—		301.2		—
Community Development Investments	746.2		746.2		—		746.2		—
Employee Benefit and Deferred Compensation	204.7		218.9		147.1		71.8		—
LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	60,793.4	$	60,793.4	$	60,793.4	$	—	$	—
Savings Certificates and Other Time	918.7		927.9		—		927.9		—
Non U.S. Offices Interest-Bearing	69,779.1		69,779.1		—		69,779.1		—
Federal Funds Purchased	4,370.6		4,370.6		—		4,370.6		—
Securities Sold Under Agreements to Repurchase	34.1		34.1		—		34.1		—
Other Borrowings	5,955.9		5,949.8		—		5,949.8		—
Senior Notes	2,668.5		2,583.6		—		2,583.6		—
Long-Term Debt
Subordinated Debt	1,196.0		1,122.6		—		1,122.6		—
Floating Rate Capital Debt	277.7		255.5		—		255.5		—
Other Liabilities
Standby Letters of Credit	27.2		27.2		—		—		27.2
Loan Commitments	49.0		49.0		—		—		49.0
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets	$	149.3	$	149.3	$	—	$	149.3	$	—
Liabilities	17.3		17.3		—		17.3		—
Interest Rate Contracts
Assets	12.9		12.9		—		12.9		—
Liabilities	18.3		18.3		—		18.3		—
Other Financial Derivatives
Liabilities⁽²⁾	26.5		26.5		—		—		26.5
Client-Related and Trading
Foreign Exchange Contracts
Assets	5,786.1		5,786.1		—		5,786.1		—
Liabilities	5,746.1		5,746.1		—		5,746.1		—
Interest Rate Contracts
Assets	328.6		328.6		—		328.6		—
Liabilities	141.8		141.8		—		141.8		—

⁽¹⁾Refer to the table located on page 38 for the disaggregation of available for sale debt securities.

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



	DECEMBER 31, 2019
					FAIR VALUE
(In Millions)	BOOK VALUE		TOTAL FAIR VALUE		LEVEL 1		LEVEL 2		LEVEL 3
ASSETS
Cash and Due from Banks	$	4,459.2	$	4,459.2	$	4,459.2	$	—	$	—
Federal Reserve and Other Central Bank Deposits	33,886.0		33,886.0		—		33,886.0		—
Interest-Bearing Deposits with Banks	4,877.1		4,877.1		—		4,877.1		—
Federal Funds Sold and Securities Purchased under Agreements to Resell	712.8		712.8		—		712.8		—
Debt Securities
Available for Sale⁽¹⁾	38,876.3		38,876.3		4,549.1		34,327.2		—
Held to Maturity	12,284.5		12,249.3		138.8		12,110.5		—
Trading Account	0.3		0.3		—		0.3		—
Loans (excluding Leases)
Held for Investment	31,239.5		31,517.8		—		—		31,517.8
Client Security Settlement Receivables	845.7		845.7		—		845.7		—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock	301.2		301.2		—		301.2		—
Community Development Investments	749.3		749.3		—		749.3		—
Employee Benefit and Deferred Compensation	199.5		207.6		131.0		76.6		—
LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	47,733.6	$	47,733.6	$	47,733.6	$	—	$	—
Savings Certificates and Other Time	986.7		994.2		—		994.2		—
Non U.S. Offices Interest-Bearing	60,400.3		60,400.3		—		60,400.3		—
Federal Funds Purchased	552.9		552.9		—		552.9		—
Securities Sold Under Agreements to Repurchase	489.7		489.7		—		489.7		—
Other Borrowings	6,744.8		6,745.9		—		6,745.9		—
Senior Notes	2,573.0		2,593.0		—		2,593.0		—
Long-Term Debt
Subordinated Debt	1,148.1		1,169.5		—		1,169.5		—
Floating Rate Capital Debt	277.7		262.1		—		262.1		—
Other Liabilities
Standby Letters of Credit	25.5		25.5		—		—		25.5
Loan Commitments	32.3		32.3		—		—		32.3
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets	$	83.1	$	83.1	$	—	$	83.1	$	—
Liabilities	24.1		24.1		—		24.1		—
Interest Rate Contracts
Assets	20.5		20.5		—		20.5		—
Liabilities	21.1		21.1		—		21.1		—
Other Financial Derivatives
Liabilities ⁽²⁾	33.4		33.4		—		—		33.4
Client-Related and Trading
Foreign Exchange Contracts
Assets	3,151.7		3,151.7		—		3,151.7		—
Liabilities	3,158.1		3,158.1		—		3,158.1		—
Interest Rate Contracts
Assets	132.4		132.4		—		132.4		—
Liabilities	76.3		76.3		—		76.3		—

⁽¹⁾Refer to the table located on page 39 for the disaggregation of available for sale debt securities.

⁽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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