Fair Value Measurements

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 nine months ended September 30, 2017 or the year ended December 31, 2016.

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 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 September 30, 2017, Northern Trust’s available for sale securities portfolio included 1,428 Level 2 securities with an aggregate market value of $28.1 billion. All 1,428 securities were valued by external pricing vendors. As of December 31, 2016, Northern Trust’s available for sale securities portfolio included 1,409 Level 2 securities with an aggregate market value of $28.1 billion. All 1,409 securities were valued by external pricing vendors. Trading account securities, which totaled $0.8 million and $0.3 million as of September 30, 2017 and December 31, 2016, 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; 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 assets consist of auction rate securities purchased in 2008 from Northern Trust clients. To estimate the fair value of auction rate securities, Northern Trust uses external pricing vendors that incorporate transaction details and market- based inputs such as past auction results, trades and bids. The significant unobservable inputs used in the fair value measurement are the prices of the securities supported by little market activity and for which trading is limited.

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 19 — “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 presents the fair values of, and the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for, Northern Trust’s Level 3 assets and liabilities as of September 30, 2017 and December 31, 2016.

Table 30: Level 3 Significant Unobservable Inputs



	September 30, 2017
Financial Instrument	Fair Value			Valuation Technique	Unobservable Inputs	Range of Inputs
Auction Rate Securities	$	4.1	million	Comparables	Price	$87		—	99
Swaps Related to Sale of Certain Visa Class B Common Shares	$	27.7	million	Discounted Cash Flow	Visa Class A Appreciation	7.0	%	—	11.0%
				Discounted Cash Flow	Conversion Rate	1.63	x	—	1.65x
					Expected Duration	1.5		—	4.0 years



	December 31, 2016
Financial Instrument	Fair Value			Valuation Technique	Unobservable Inputs	Range of Inputs
Auction Rate Securities	$	4.7	million	Comparables	Price	$84		—	99
Swap Related to Sale of Certain Visa Class B Common Shares	$	25.2	million	Discounted Cash Flow	Visa Class A Appreciation	7.0	%	—	11.0%
				Discounted Cash Flow	Conversion Rate	1.63	x	—	1.65x
					Expected Duration	1.5		—	4.5 years

The following tables present assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, segregated by fair value hierarchy level.

Table 31: Recurring Basis Hierarchy Leveling



(In Millions)	Level 1		Level 2		Level 3		Netting			Assets/Liabilities at Fair Value
September 30, 2017
Securities
Available for Sale
U.S. Government	$	5,744.4	$	—	$	—	$	—		$	5,744.4
Obligations of States and Political Subdivisions	—		765.9		—		—			765.9
Government Sponsored Agency	—		18,082.8		—		—			18,082.8
Non-U.S. Government	—		138.7		—		—			138.7
Corporate Debt	—		3,181.3		—		—			3,181.3
Covered Bonds	—		832.1		—		—			832.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	—		2,202.8		—		—			2,202.8
Other Asset-Backed	—		2,394.3		—		—			2,394.3
Auction Rate	—		—		4.1		—			4.1
Commercial Mortgage-Backed	—		466.5		—		—			466.5
Other	—		32.0		—		—			32.0
Total Available for Sale	5,744.4		28,096.4		4.1		—			33,844.9
Trading Account	—		0.8		—		—			0.8
Total Available for Sale and Trading Securities	5,744.4		28,097.2		4.1		—			33,845.7
Other Assets
Derivative Assets
Foreign Exchange Contracts	—		3,100.1		—		—			3,100.1
Interest Rate Contracts	—		117.1		—		—			117.1
Total Derivative Assets	—		3,217.2		—		(2,373.5		)	843.7
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	—		3,168.6		—		—			3,168.6
Interest Rate Contracts	—		84.1		—		—			84.1
Other Financial Derivatives ⁽¹⁾	—		—		27.7		—			27.7
Total Derivative Liabilities	$	—	$	3,252.7	$	27.7	$	(2,089.8	)	$	1,190.6

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 September 30, 2017, derivative assets and liabilities shown above also include reductions of $617.9 million and $334.2 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.



(In Millions)	Level 1		Level 2		Level 3		Netting			Assets/Liabilities at Fair Value
December 31, 2016
Securities
Available for Sale
U.S. Government	$	7,522.6	$	—	$	—	$	—		$	7,522.6
Obligations of States and Political Subdivisions	—		885.2		—		—			885.2
Government Sponsored Agency	—		17,892.8		—		—			17,892.8
Non-U.S. Government	—		417.9		—		—			417.9
Corporate Debt	—		3,765.2		—		—			3,765.2
Covered Bonds	—		1,143.9		—		—			1,143.9
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	—		1,340.7		—		—			1,340.7
Other Asset-Backed	—		2,085.1		—		—			2,085.1
Auction Rate	—		—		4.7		—			4.7
Commercial Mortgage-Backed	—		471.6		—		—			471.6
Other	—		50.1		—		—			50.1
Total Available for Sale	7,522.6		28,052.5		4.7		—			35,579.8
Trading Account	—		0.3		—		—			0.3
Total Available for Sale and Trading Securities	7,522.6		28,052.8		4.7		—			35,580.1
Other Assets
Derivative Assets
Foreign Exchange Contracts	—		3,609.6		—		—			3,609.6
Interest Rate Contracts	—		247.2		—		—			247.2
Total Derivative Assets	—		3,856.8		—		(2,170.4		)	1,686.4
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	—		3,242.9		—		—			3,242.9
Interest Rate Contracts	—		108.0		—		—			108.0
Other Financial Derivatives ⁽¹⁾	—		—		25.2		—			25.2
Total Derivative Liabilities	$	—	$	3,350.9	$	25.2	$	(2,431.2	)	$	944.9

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 December 31, 2016, derivative assets and liabilities shown above also include reductions of $461.3 million and $722.1 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 tables present the changes in Level 3 assets and liabilities for the three and nine months ended September 30, 2017 and 2016.

Table 32: Changes in Level 3 Assets



Level 3 Assets (In Millions)	Auction Rate Securities
Three Months Ended September 30,	2017		2016
Fair Value at July 1	$	4.1	$	6.1
Total Gains (Losses):
Included in Earnings	—		—
Included in Other Comprehensive Income ⁽¹⁾	—		(0.1		)
Purchases, Issues, Sales, and Settlements
Sales	—		—
Settlements	—		(0.2		)
Fair Value at September 30	$	4.1	$	5.8




Nine Months Ended September 30,	2017			2016
Fair Value at January 1	$	4.7		$	17.1
Total Gains (Losses):
Included in Earnings	—			—
Included in Other Comprehensive Income ⁽¹⁾	—			(0.7		)
Purchases, Issues, Sales, and Settlements
Sales	—			(10.1		)
Settlements	(0.6		)	(0.5		)
Fair Value at September 30	$	4.1		$	5.8


⁽¹⁾	Unrealized gains (losses) are included in net unrealized gains (losses) on securities available for sale in the consolidated statements of comprehensive income.

Table 33: Changes in Level 3 Liabilities



Level 3 Liabilities (In Millions)	Swaps Related to Sale of Certain Visa Class B Common Shares
Three Months Ended September 30,	2017			2016
Fair Value at July 1	$	25.9		$	28.7
Total (Gains) Losses:
Included in Earnings ⁽¹⁾	4.0			2.3
Purchases, Issues, Sales, and Settlements
Purchases	—			—
Settlements	(2.2		)	(1.5		)
Fair Value at September 30	$	27.7		$	29.5



Nine Months Ended September 30,	2017			2016
Fair Value at January 1	$	25.2		$	10.8
Total (Gains) Losses:
Included in Earnings ⁽¹⁾	8.4			6.9
Purchases, Issues, Sales, and Settlements
Purchases	—			14.9
Settlements	(5.9		)	(3.1		)
Fair Value at September 30	$	27.7		$	29.5


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

During the nine months ended September 30, 2017 and 2016, there were no transfers into or out of Level 3 assets or 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 disclose separately these subsequent fair value measurements and to classify them under the fair value hierarchy.

Assets measured at fair value on a nonrecurring basis at September 30, 2017 and 2016, 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 and OREO assets that have been adjusted to fair value totaled $12.6 million and $1.4 million, respectively, at September 30, 2017, and $6.7 million and $1.8 million, respectively, at September 30, 2016. Assets measured at fair value on a nonrecurring basis reflect management’s judgment as to realizable value.

The following table provides the fair value of, and the valuation technique, significant unobservable inputs and quantitative information used to develop the significant unobservable inputs for, Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016.

Table 34: Level 3 Nonrecurring Basis Significant Unobservable Inputs



	September 30, 2017
Financial Instrument	Fair Value	Valuation Technique	Unobservable Input	Range of Discounts Applied
Loans	$12.6 million	Market Approach	Discount to reflect realizable value	15.0	%	-	25.0%
OREO	$1.4 million	Market Approach	Discount to reflect realizable value	15.0	%	-	20.0%



	December 31, 2016
Financial Instrument	Fair Value	Valuation Technique	Unobservable Input	Range of Discounts Applied
Loans	$6.7 million	Market Approach	Discount to reflect realizable value	15.0	%	-	25.0%
OREO	$0.7 million	Market Approach	Discount to reflect realizable value	15.0	%	-	20.0%

Fair Value of Financial Instruments. GAAP requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate fair value. It excludes from this requirement nonfinancial assets and liabilities, as well as a wide range of franchise, relationship and intangible values that add value to Northern Trust. Accordingly, the required fair value disclosures provide only a partial estimate of the fair value of Northern Trust. Financial instruments recorded at fair value in Northern Trust’s consolidated balance sheets are discussed above. The following methods and assumptions were used in estimating the fair values of financial instruments that are not carried at fair value.

Held to Maturity Securities. The fair values of held to maturity securities, excluding U.S. Treasury securities, were obtained from external pricing vendors, or in limited cases internally, using widely accepted models which are based on an income approach (discounted cash flow) that incorporates current market yield curves. The fair values of U.S. Treasury securities were determined using quoted, active market prices for identical securities.

Loans (excluding lease receivables). The fair value of the loan portfolio was estimated using an income approach (discounted cash flow) that incorporates current market rates offered by Northern Trust as of the date of the consolidated financial statements. The fair values of all loans were adjusted to reflect current assessments of loan collectability. Loans held for sale are recorded at the lower of cost or fair value.

Federal Reserve and Federal Home Loan Bank Stock. The fair values of Federal Reserve and Federal Home Loan Bank stock are equal to their carrying values which represent redemption value.

Community Development Investments. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates current market rates.

Employee Benefit and Deferred Compensation. These assets include U.S. Treasury securities and investments in mutual and collective trust funds held to fund certain supplemental employee benefit obligations and deferred compensation plans. Fair values of U.S. Treasury securities were determined using quoted, active market prices for identical securities. The fair values of investments in mutual and collective trust funds were valued at the funds’ net asset values based on a market approach.

Savings Certificates and Other Time Deposits. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates currently offered by Northern Trust for deposits with similar maturities.

Senior Notes, Subordinated Debt, and Floating Rate Capital Debt. Fair values were determined using a market approach based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted market prices for comparable instruments.

Federal Home Loan Bank Borrowings. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates available to Northern Trust.

Loan Commitments. The fair values of loan commitments represent the estimated costs to terminate or otherwise settle the obligations with a third party adjusted for any related allowance for credit losses.

Standby Letters of Credit. The fair values of standby letters of credit are measured as the amount of unamortized fees on these instruments, inclusive of the related allowance for credit losses. Fees are determined by applying basis points to the principal amounts of the letters of credit.

Financial Instruments Valued at Carrying Value. Due to their short maturity, the carrying values of certain financial instruments approximated their fair values. These financial instruments include: cash and due from banks; federal funds sold and securities purchased under agreements to resell; interest-bearing deposits with banks; Federal Reserve and other central bank deposits; client security settlement receivables; non-U.S. offices interest-bearing deposits; federal funds purchased; securities sold under agreements to repurchase; and other borrowings (includes term federal funds purchased and other short-term borrowings). The fair values of demand, noninterest-bearing, savings, and money market deposits represent the amounts payable on demand as of the reporting date, although such deposits are typically priced at a premium in banking industry consolidations.

The following tables summarize the fair values of all financial instruments.

Table 35: Fair Value of Financial Instruments



(In Millions)	September 30, 2017
	Book Value		Total Fair Value		Fair Value
					Level 1		Level 2		Level 3
Assets
Cash and Due from Banks	$	5,262.9	$	5,262.9	$	5,262.9	$	—	$	—
Federal Reserve and Other Central Bank Deposits	34,060.7		34,060.7		—		34,060.7		—
Interest-Bearing Deposits with Banks	5,684.4		5,684.4		—		5,684.4		—
Federal Funds Sold and Resell Agreements	1,670.8		1,670.8		—		1,670.8		—
Securities
Available for Sale (Note)	33,844.9		33,844.9		5,744.4		28,096.4		4.1
Held to Maturity	10,811.0		10,778.7		23.9		10,754.8		—
Trading Account	0.8		0.8		—		0.8		—
Loans (excluding Leases)
Held for Investment	32,950.3		33,077.6		—		—		33,077.6
Held for Sale	—		—		—		—		—
Client Security Settlement Receivables	1,274.0		1,274.0		—		1,274.0		—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock	248.1		248.1		—		248.1		—
Community Development Investments	333.8		345.0		—		345.0		—
Employee Benefit and Deferred Compensation	180.3		180.7		118.0		62.7		—
Liabilities
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	42,342.1	$	42,342.1	$	42,342.1	$	—	$	—
Savings Certificates and Other Time	1,227.4		1,229.2		—		1,229.2		—
Non U.S. Offices Interest-Bearing	62,241.1		62,241.1		—		62,241.1		—
Federal Funds Purchased	2,142.2		2,142.2		—		2,142.2		—
Securities Sold under Agreements to Repurchase	523.9		523.9		—		523.9		—
Other Borrowings	6,052.3		6,053.3		—		6,053.3		—
Senior Notes	1,497.1		1,541.4		—		1,541.4		—
Long Term Debt (excluding Leases)
Subordinated Debt	1,647.3		1,657.8		—		1,657.8		—
Floating Rate Capital Debt	277.5		259.3		—		259.3		—
Other Liabilities
Standby Letters of Credit	34.9		34.9		—		—		34.9
Loan Commitments	29.6		29.6		—		—		29.6
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets	$	52.7	$	52.7	$	—	$	52.7	$	—
Liabilities	166.3		166.3		—		166.3		—
Interest Rate Contracts
Assets	35.6		35.6		—		35.6		—
Liabilities	16.8		16.8		—		16.8		—
Other Financial Derivatives
Liabilities ⁽¹⁾	27.7		27.7		—		—		27.7
Client-Related and Trading
Foreign Exchange Contracts
Assets	3,047.4		3,047.4		—		3,047.4		—
Liabilities	3,002.2		3,002.2		—		3,002.2		—
Interest Rate Contracts
Assets	81.5		81.5		—		81.5		—
Liabilities	67.3		67.3		—		67.3		—

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


⁽¹⁾	This line consists of swaps related to the sale of certain Visa Class B common shares.



(In Millions)	December 31, 2016
	Book Value		Total Fair Value		Fair Value
					Level 1		Level 2		Level 3
Assets
Cash and Due from Banks	$	5,332.0	$	5,332.0	$	5,332.0	$	—	$	—
Federal Reserve and Other Central Bank Deposits	26,674.2		26,674.2		—		26,674.2		—
Interest-Bearing Deposits with Banks	4,800.6		4,800.6		—		4,800.6		—
Federal Funds Sold and Resell Agreements	1,974.3		1,974.3		—		1,974.3		—
Securities
Available for Sale (Note)	35,579.8		35,579.8		7,522.6		28,052.5		4.7
Held to Maturity	8,921.1		8,905.1		15.0		8,890.1		—
Trading Account	0.3		0.3		—		0.3		—
Loans (excluding Leases)
Held for Investment	33,354.1		33,471.3		—		—		33,471.3
Held for Sale	13.4		13.4		—		—		13.4
Client Security Settlement Receivables	1,043.7		1,043.7		—		1,043.7		—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock	203.1		203.1		—		203.1		—
Community Development Investments	218.9		215.5		—		215.5		—
Employee Benefit and Deferred Compensation	166.2		162.5		107.2		55.3		—
Liabilities
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	46,671.9	$	46,671.9	$	46,671.9	$	—	$	—
Savings Certificates and Other Time	1,331.7		1,337.5		—		1,337.5		—
Non U.S. Offices Interest-Bearing	53,648.1		53,648.1		—		53,648.1		—
Federal Funds Purchased	204.8		204.8		—		204.8		—
Securities Sold under Agreements to Repurchase	473.7		473.7		—		473.7		—
Other Borrowings	5,109.5		5,113.4		—		5,113.4		—
Senior Notes	1,496.6		1,535.5		—		1,535.5		—
Long Term Debt (excluding Leases)
Subordinated Debt	1,307.9		1,316.0		—		1,316.0		—
Floating Rate Capital Debt	277.4		251.0		—		251.0		—
Other Liabilities
Standby Letters of Credit	37.2		37.2		—		—		37.2
Loan Commitments	41.2		41.2		—		—		41.2
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets	$	335.4	$	335.4	$	—	$	335.4	$	—
Liabilities	21.2		21.2		—		21.2		—
Interest Rate Contracts
Assets	160.2		160.2		—		160.2		—
Liabilities	22.8		22.8		—		22.8		—
Other Financial Derivatives
Liabilities ⁽¹⁾	25.2		25.2		—		—		25.2
Client-Related and Trading
Foreign Exchange Contracts
Assets	3,274.2		3,274.2		—		3,274.2		—
Liabilities	3,221.7		3,221.7		—		3,221.7		—
Interest Rate Contracts
Assets	87.0		87.0		—		87.0		—
Liabilities	85.2		85.2		—		85.2		—

Note: Refer to the table located on page 41 for the disaggregation of available for sale securities.


⁽¹⁾	This line consists of swaps related to the sale of certain Visa Class B common shares.