Fair Value Measurements

12 Months Ended

Dec. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Fair value under GAAP is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date.

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 into or out of Level 3 occurred during the years ended December 31, 2022, or 2021.

Level 1 – Quoted, active market prices for identical assets or liabilities. Northern Trust’s Level 1 assets are comprised primarily of AFS 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 AFS and certain 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 December 31, 2022, Northern Trust’s AFS debt securities portfolio included 1,163 Level 2 securities with an aggregate market value of $24.0 billion. All 1,163 debt securities were valued by external pricing vendors. As of December 31, 2021, Northern Trust’s AFS debt securities portfolio included 2,547 Level 2 debt securities with an aggregate market value of $35.6 billion. All 2,547 debt securities were valued by external pricing vendors.

Northern Trust has established processes and procedures to assess the suitability of valuation methodologies used by external pricing vendors, including reviews of valuation techniques and assumptions used for selected securities. On a daily basis, periodic quality control reviews of prices received from vendors are conducted which include comparisons to prices on similar security types received from multiple pricing vendors and to the previous day’s reported prices for each security. Predetermined tolerance level exceptions are researched and may result in additional validation through available market information or the use of an alternate pricing vendor. Quarterly, Northern Trust reviews documentation from third-party pricing vendors regarding the valuation processes and assumptions used in their valuations and assesses whether the fair value levels assigned by Northern Trust to each security classification are appropriate. Annually, valuation inputs used within third-party pricing vendor valuations are reviewed for propriety on a sample basis through a comparison of inputs used to comparable market data, including security classifications that are less actively traded and security classifications comprising significant portions of the portfolio.

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 25, “Commitments and 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.

Management of various businesses and departments of Northern Trust (including Corporate Market Risk, Credit Risk Management, Corporate Finance, Asset Servicing and Wealth Management) reviews valuation methods and models for Level 3 assets and liabilities. Fair value measurements are performed upon acquisitions of an asset or liability. Management of the appropriate business or department reviews assumed inputs, especially when unobservable in the marketplace, in order to substantiate their use in each fair value measurement. When appropriate, management reviews forecasts used in the valuation process in light of other relevant financial projections to understand any variances between current and previous fair value measurements. In certain circumstances, third party information is used to support the fair value measurements. If certain third party information seems inconsistent with consensus views, a review of the information is performed by management of the respective business or department to determine the appropriate fair value of the asset or liability.

The following table presents the fair values of Northern Trust’s Level 3 liabilities as of December 31, 2022 and 2021, 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 52: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS

	DECEMBER 31, 2022
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	$34.8 million	Discounted Cash Flow	Conversion Rate	1.60x			1.60x
			Visa Class A Appreciation	8.53%			8.53%
			Expected Duration	12	-	33 months	20 months

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

	DECEMBER 31, 2021
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	$37.5 million	Discounted Cash Flow	Conversion Rate	1.62x			1.62x
			Visa Class A Appreciation	10.10%			10.10%
			Expected Duration	12	-	33 months	20 months

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

The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021, segregated by fair value hierarchy level.

TABLE 53: RECURRING BASIS HIERARCHY LEVELING

	DECEMBER 31, 2022
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		NETTING		ASSETS/ LIABILITIES AT FAIR VALUE
Debt Securities
Available for Sale
U.S. Government	$	2,747.4	$	—	$	—	$	—	$	2,747.4
Obligations of States and Political Subdivisions	—		787.6		—		—		787.6
Government Sponsored Agency	—		11,545.2		—		—		11,545.2
Non-U.S. Government	—		360.0		—		—		360.0
Corporate Debt	—		1,747.6		—		—		1,747.6
Covered Bonds	—		388.7		—		—		388.7
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	—		2,479.4		—		—		2,479.4
Other Asset-Backed	—		5,256.2		—		—		5,256.2
Commercial Mortgage-Backed	—		1,387.8		—		—		1,387.8
Total Available for Sale	2,747.4		23,952.5		—		—		26,699.9
Trading Account	95.0		0.2		—		—		95.2
Total Available for Sale and Trading Debt Securities	2,842.4		23,952.7		—		—		26,795.1
Other Assets
Derivative Assets
Foreign Exchange Contracts	—		3,510.1		—		(2,666.4)		843.7
Interest Rate Contracts	—		222.0		—		(144.3)		77.7
Other Financial Derivatives(1)	—		0.3		—		—		0.3
Total Derivative Assets	—		3,732.4		—		(2,810.7)		921.7
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	—		3,187.5		—		(1,826.7)		1,360.8
Interest Rate Contracts	—		431.8		—		(5.9)		425.9
Other Financial Derivatives(2)	—		—		34.8		(33.3)		1.5
Total Derivative Liabilities	$	—	$	3,619.3	$	34.8	$	(1,865.9)	$	1,788.2

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, 2022, derivative assets and liabilities shown above also include reductions of $1,140.2 million and $195.3 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

(1) This line consists of total return swap contracts.

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

	DECEMBER 31, 2021
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		NETTING		ASSETS/ LIABILITIES AT FAIR VALUE
Debt Securities
Available for Sale
U.S. Government	$	2,426.1	$	—	$	—	$	—	$	2,426.1
Obligations of States and Political Subdivisions	—		3,876.1		—		—		3,876.1
Government Sponsored Agency	—		18,075.6		—		—		18,075.6
Non-U.S. Government	—		374.0		—		—		374.0
Corporate Debt	—		2,341.7		—		—		2,341.7
Covered Bonds	—		505.6		—		—		505.6
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	—		3,045.1		—		—		3,045.1
Other Asset-Backed	—		5,941.6		—		—		5,941.6
Commercial Mortgage Backed	—		1,424.7		—		—		1,424.7
Total Available for Sale	2,426.1		35,584.4		—		—		38,010.5
Trading Account	—		0.3		—		—		0.3
Total Available for Sale and Trading Debt Securities	2,426.1		35,584.7		—		—		38,010.8
Other Assets
Derivative Assets
Foreign Exchange Contracts	—		2,207.4		—		(1,530.7)		676.7
Interest Rate Contracts	—		140.0		—		(3.1)		136.9
Total Derivatives Assets	—		2,347.4		—		(1,533.8)		813.6
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	—		1,998.8		—		(1,234.5)		764.3
Interest Rate Contracts	—		98.9		—		(48.1)		50.8
Other Financial Derivative(1)	—		—		37.5		(0.9)		36.6
Total Derivative Liabilities	$	—	$	2,097.7	$	37.5	$	(1,283.5)	$	851.7

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, 2021, derivative assets and liabilities shown above also include reductions of $389.4 million and $139.0 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.

The following table presents the changes in Level 3 liabilities for the years ended December 31, 2022 and 2021.

TABLE 54: CHANGES IN LEVEL 3 LIABILITIES

LEVEL 3 LIABILITIES	SWAPS RELATED TO SALE OF CERTAIN VISA CLASS B COMMON SHARES
(In Millions)	2022		2021
Fair Value at January 1	$	37.5	$	35.3
Total (Gains) Losses:
Included in Earnings(1)	22.6		21.3
Purchases, Issues, Sales, and Settlements
Settlements	(25.3)		(19.1)
Fair Value at December 31	$	34.8	$	37.5
Unrealized Losses (Gains) Included in Earnings Related to Financial Instruments Held at December 31(1)	$	16.6	$	22.0

(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 December 31, 2022 and 2021, 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 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 17.2% and 15.4% as of December 31, 2022 and 2021, 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-dependent nonaccrual loans that have been adjusted to fair value totaled $6.6 million and $15.0 million at December 31, 2022 and 2021, 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 December 31, 2022 and 2021, 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 55: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS

	DECEMBER 31, 2022
FINANCIAL INSTRUMENT	FAIR VALUE(1)	VALUATION  TECHNIQUE	UNOBSERVABLE INPUTS	INPUT VALUES			WEIGHTED-AVERAGE INPUT VALUES
Loans	$6.6 million	Market Approach	Discount factor applied to real estate collateral-dependent loans to reflect realizable value	15.0%	–	20.0%	17.2%

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

	DECEMBER 31, 2021
FINANCIAL INSTRUMENT	FAIR VALUE(1)	VALUATION  TECHNIQUE	UNOBSERVABLE INPUTS	INPUT VALUES			WEIGHTED-AVERAGE INPUT VALUES
Loans	$15.0 million	Market Approach	Discount factor applied to real estate collateral-dependent loans to reflect realizable value	15.0%	–	20.0%	15.4%

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

The following tables presents the book value and estimated fair value, including the fair value hierarchy level, of Northern Trust’s financial instruments that are not measured at fair value on the consolidated balance sheets as of December 31, 2022 and 2021. The following tables exclude those items measured at fair value on a recurring basis.

TABLE 56: FAIR VALUE OF FINANCIAL INSTRUMENTS

	DECEMBER 31, 2022
					ESTIMATED FAIR VALUE
(In Millions)	BOOK VALUE		TOTAL ESTIMATED FAIR VALUE		LEVEL 1		LEVEL 2		LEVEL 3
FINANCIAL ASSETS
Cash and Due from Banks	$	4,654.2	$	4,654.2	$	4,654.2	$	—	$	—
Federal Reserve and Other Central Bank Deposits	40,030.4		40,030.4		—		40,030.4		—
Interest-Bearing Deposits with Banks	1,941.1		1,941.1		—		1,941.1		—
Federal Funds Sold	32.0		32.0		—		32.0		—
Securities Purchased under Agreements to Resell	1,070.3		1,070.3		—		1,070.3		—
Debt Securities - Held to Maturity	25,036.1		22,879.3		50.0		22,829.3		—
Loans (excluding Leases)
Held for Investment	42,749.0		42,636.5		—		—		42,636.5
Other Assets	1,476.9		1,460.4		94.7		1,365.7		—
FINANCIAL LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	56,468.9	$	56,468.9	$	56,468.9	$	—	$	—
Savings Certificates and Other Time	1,981.3		1,976.1		—		1,976.1		—
Non U.S. Offices Interest-Bearing	65,481.9		65,481.9		—		65,481.9		—
Federal Funds Purchased	1,896.9		1,896.9		—		1,896.9		—
Securities Sold Under Agreements to Repurchase	567.2		567.2		—		567.2		—
Other Borrowings	7,592.3		7,592.8		—		7,592.8		—
Senior Notes	2,724.2		2,729.8		—		2,729.8		—
Long-Term Debt	2,066.2		2,110.7		—		2,110.7		—
Unfunded Commitments	218.9		218.9		—		218.9		—
Other Liabilities	73.2		73.2		—		—		73.2

	DECEMBER 31, 2021
					ESTIMATED FAIR VALUE
(In Millions)	BOOK VALUE		TOTAL ESTIMATED FAIR VALUE		LEVEL 1		LEVEL 2		LEVEL 3
FINANCIAL ASSETS
Cash and Due from Banks	$	3,056.8	$	3,056.8	$	3,056.8	$	—	$	—
Federal Reserve and Other Central Bank Deposits	64,582.2		64,582.2		—		64,582.2		—
Interest-Bearing Deposits with Banks	1,949.4		1,949.4		—		1,949.4		—
Securities Purchased under Agreements to Resell	686.4		686.4		—		686.4		—
Debt Securities - Held to Maturity	23,564.5		23,315.4		47.0		23,268.4		—
Loans (excluding Leases)
Held for Investment	40,319.3		40,208.2		—		—		40,208.2
Held for Sale	12.3		24.5		—		24.5		—
Other Assets	1,275.3		1,279.8		119.1		1,160.7		—
FINANCIAL LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	83,318.6	$	83,318.6	$	83,318.6	$	—	$	—
Savings Certificates and Other Time	842.7		843.8		—		843.8		—
Non U.S. Offices Interest-Bearing	75,767.1		75,767.1		—		75,767.1		—
Federal Funds Purchased	0.2		0.2		—		0.2		—
Securities Sold Under Agreements to Repurchase	531.9		531.9		—		531.9		—
Other Borrowings	3,583.8		3,583.9		—		3,583.9		—
Senior Notes	2,505.5		2,591.4		—		2,591.4		—
Long-Term Debt	1,145.7		1,189.4		—		1,189.4		—
Unfunded Commitments	289.3		289.3		—		289.3		—
Other Liabilities	75.5		75.5		—		—		75.5