| Fair Value Measurements | 3. Fair
Value Measurements — Fair Value Hierarchy.
Level 1
Northern Trust’s Level 1 assets are comprised of available
for sale investments in U.S. treasury securities.
Level 2 —
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 June 30,
2015, Northern Trust’s available for sale securities
portfolio included 975 Level 2 securities with an aggregate market
value of $26.8 billion. All 975 securities were valued by external
pricing vendors. As of December 31, 2014, Northern Trust’s
available for sale securities portfolio included 881 Level 2
securities with an aggregate market value of $25.0 billion. All 881
securities were valued by external pricing vendors. Trading account
securities, which totaled $1.2 million and $4.7 million as of June
30, 2015, and December 31, 2014, respectively, were all valued
using 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; 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 —
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, for which
trading is limited and market prices are generally unavailable,
Northern Trust developed and maintains a pricing model that
discounts estimated cash flows over their estimated remaining
lives. Significant inputs to the model include the contractual
terms of the securities, credit risk ratings, discount rates,
forward interest rates, credit/liquidity spreads, and Northern
Trust’s own assumptions about the estimated remaining lives
of the securities. The significant unobservable inputs used in the
fair value measurement are Northern Trust’s own assumptions
about the estimated remaining lives of the securities and the
applicable discount rates. Significant increases (decreases) in the
estimated remaining lives or the discount rates in isolation would
result in a significantly lower (higher) fair value
measurement.
As of June 30, 2015, Northern Trust’s Level 3 liabilities
consisted of a swap that Northern Trust entered into with the
purchaser of 1.0 million shares of Visa Inc. Class B common stock
(Visa Class B common shares) previously held by Northern Trust.
Pursuant to the swap, 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 swap also requires 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 swap 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 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.
Management of various businesses and departments of Northern Trust
(including Corporate Market Risk, Credit Risk Management, Corporate
Financial Management, Corporate & Institutional Services
(C&IS) and Wealth Management) determine the valuation policies
and procedures for Level 3 assets and liabilities. Generally,
valuation policies are reviewed by management of each business or
department. Fair value measurements are performed upon acquisitions
of an asset or liability. As necessary, the valuation models are
reviewed by management of the appropriate business or department,
and adjusted for changes in inputs. Management of each business or
department reviews the inputs in order to substantiate the
unobservable inputs used 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 conclude as to the appropriate fair value
of the asset or liability.
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 June
30, 2015.
Table 28: Level 3 Significant Unobservable Inputs
Financial Instrument Fair Value Valuation Unobservable Inputs Range of Lives
Auction Rate Securities $ 16.6 million Discounted Cash Remaining lives Discount rates
0.9 — 8.6 years 0.1% — 8.1%
Swap Related to
Sale of Certain Visa Class B Common Shares $ 11.3 million Discounted Cash
Visa Class A Appreciation Conversion Rate Expected Conversion Rate 10-15% 1.61x — 1.65x 2-5 years
The following tables present assets and liabilities measured at
fair value on a recurring basis as of June 30, 2015 and December
31, 2014, segregated by fair value hierarchy level.
Table 29: Recurring Basis Hierarchy Leveling
(In Millions) Level 1 Level 2 Level 3 Netting Assets/Liabilities
June 30, 2015
Securities
Available for Sale
U.S. Government $ 5,018.8 $ — $ — $ — $ 5,018.8
Obligations of States and Political Subdivisions — 4.5 — — 4.5
Government Sponsored Agency — 16,765.4 — — 16,765.4
Non-U.S. Government — 311.0 — — 311.0
Corporate Debt — 3,734.8 — — 3,734.8
Covered Bonds — 1,982.2 — — 1,982.2
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds — 560.7 — — 560.7
Other Asset-Backed — 3,119.2 — — 3,119.2
Auction Rate — — 16.6 — 16.6
Commercial Mortgage-Backed — 198.7 — — 198.7
Other — 123.7 — — 123.7
Total Available for Sale 5,018.8 26,800.2 16.6 — 31,835.6
Trading Account — 1.2 — — 1.2
Total Available for Sale and Trading Securities 5,018.8 26,801.4 16.6 — 31,836.8
Other Assets
Derivative Assets
Foreign Exchange Contracts
— 2,482.1 — — 2,482.1
Interest Rate Contracts
— 204.2 — — 204.2
Total Derivative Assets
— 2,686.3 — (1,698.0 ) 988.3
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
— 2,475.4 — — 2,475.4
Interest Rate Contracts
— 120.5 — — 120.5
Other Financial Derivatives (1)
— — 11.3 — 11.3
Total Derivative Liabilities $ — $ 2,595.9 $ 11.3 $ (1,461.8 ) $ 1,145.4
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, 2015, derivative assets and
liabilities shown above also include reductions of $387.9 million
and $151.7 million, respectively, as a result of cash collateral
received from and deposited with derivative counterparties.
(1) This line includes a swap related
to the sale of certain Visa Class B common shares.
(In Millions) Level 1 Level 2 Level 3 Netting Assets/Liabilities
December 31, 2014
Securities
Available for Sale
U.S. Government $ 4,506.9 $
— $
— $
— $ 4,506.9
Obligations of States and Political Subdivisions
— 4.6
—
— 4.6
Government Sponsored Agency
— 16,389.2
—
— 16,389.2
Non-U.S. Government
— 310.4
—
— 310.4
Corporate Debt
— 3,577.7
—
— 3,577.7
Covered Bonds
— 1,907.5
—
— 1,907.5
Supranational and Non-U.S. Agency Bonds
— 360.6
—
— 360.6
Residential Mortgage-Backed
— 6.4
—
— 6.4
Other Asset-Backed
— 2,321.3
—
— 2,321.3
Auction Rate
—
— 18.1
— 18.1
Other
— 155.8
—
— 155.8
Total Available for Sale 4,506.9 25,033.5 18.1
— 29,558.5
Trading Account
— 4.7
—
— 4.7
Total Available for Sale and Trading Securities 4,506.9 25,038.2 18.1
— 29,563.2
Other Assets
Derivative Assets
Foreign Exchange Contracts
— 4,275.2
—
— 4,275.2
Interest Rate Contracts
— 232.3
—
— 232.3
Total Derivative Assets
— 4,507.5
— (2,257.1 ) 2,250.4
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
— 4,095.5
—
— 4,095.5
Interest Rate Contracts
— 131.8
—
— 131.8
Total Derivative Liabilities $
— $ 4,227.3 $
— $ (3,173.3 ) $ 1,054.0
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, 2014, derivative assets and
liabilities shown above also include reductions of $315.8 million
and $1.2 billion, respectively, as a result of cash collateral
received from and deposited with derivative counterparties.
The following tables present the changes in Level 3 assets and
liabilities for the three and six months ended June 30, 2015,
and 2014.
Table 30: Changes in Level 3 Assets
Level 3 Assets Auction Rate Securities
Three Months Ended June 30,
2015
2014
Fair Value at April 1 $ 17.5 $ 98.5
Total Gains (Losses):
Included in Other Comprehensive Income (1) 0.5 0.5
Purchases, Issues, Sales, and Settlements
Sales (1.2 ) —
Settlements (0.2 ) (0.2 )
Fair Value at June 30 $ 16.6 $ 98.8
Six Months Ended June 30, 2015 2014
Fair Value at January 1 $ 18.1 $ 98.9
Total Gains (Losses):
Included in Other Comprehensive Income (1) 0.2 0.3
Purchases, Issues, Sales, and Settlements
Sales (1.2 ) 0.1
Settlements (0.5 ) (0.5 )
Fair Value at June 30 $ 16.6 $ 98.8
(1) Unrealized gains (losses) are
included in net unrealized gains (losses) on securities available
for sale in the consolidated statements of comprehensive
income.
Table 31: Changes in Level 3 Liabilities
Level 3 Liabilities Contingent
Swap Related to Sale of
Three Months Ended June 30,
2015
2014
2015
2014
Fair Value at April 1 $
— $
— $
— $
—
Total (Gains) Losses:
Included in Earnings (1)
—
— 11.3
—
Included in Other Comprehensive Income
—
—
—
—
Purchases, Issues, Sales, and Settlements
Purchases
—
—
—
—
Settlements
—
—
—
—
Fair Value at June 30 $
— $
— $ 11.3 $
—
Six Months Ended June 30, 2015 2014 2015 2014
Fair Value at January 1 $
— $ 55.4 $
— $
—
Total (Gains) Losses:
Included in Earnings (1)
— (0.1 ) 11.3
—
Included in Other Comprehensive Income
—
—
—
—
Purchases, Issues, Sales, and Settlements
Purchases
—
—
—
—
Settlements
— (55.3 )
—
—
Fair Value at June 30 $
— $
— $ 11.3 $
—
(1) (Gains) losses are recorded in
other operating income (expense) in the consolidated statements of
income.
During the six months ended June 30, 2015 and 2014, 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
June 30, 2015, and 2014, 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 $20.9 million and $0.3 million,
respectively, at June 30, 2015, and $16.9 million and $1.4
million, respectively, at June 30, 2014. 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 June 30, 2015.
Table 32: Level 3 Nonrecurring Basis Significant Unobservable
Inputs
Financial Instrument
Fair Value
Valuation
Unobservable Input
Range of Discounts
Loans $20.9 million Market Approach Discount to reflect
realizable value 15% —
25%
OREO $0.3 million Market Approach Discount to reflect realizable
value 15% —
20%
Fair Value of Financial Instruments.
Held to Maturity Securities.
Loans (excluding lease receivables).
Federal Reserve and Federal Home Loan Bank Stock.
Community Development Investments.
Employee Benefit and Deferred Compensation.
Savings Certificates and Other Time Deposits.
Senior Notes, Subordinated Debt, and Floating Rate Capital
Debt.
Federal Home Loan Bank Borrowings.
Loan Commitments.
Standby Letters of Credit.
Financial Instruments Valued at Carrying Value.
The following tables summarize the fair values of all financial
instruments.
Table 33: Fair Value of Financial Instruments
(In Millions) June 30, 2015
Book Total Fair Value
Level 1 Level 2 Level 3
Assets
Cash and Due from Banks $ 7,152.9 $ 7,152.9 $ 7,152.9 $
— $
—
Federal Funds Sold and Resell Agreements 1,020.0 1,020.0
— 1,020.0
—
Interest-Bearing Deposits with Banks 15,650.3 15,650.3
— 15,650.3
—
Federal Reserve Deposits 17,488.7 17,488.7
— 17,488.7
—
Securities
Available for Sale (1) 31,835.6 31,835.6 5,018.8 26,800.2 16.6
Held to Maturity 6,990.8 6,986.4
— 6,986.4
—
Trading Account 1.2 1.2
— 1.2
—
Loans (excluding Leases)
Held for Investment 31,863.4 32,022.3
—
— 32,022.3
Held for Sale 3.9 3.9
—
— 3.9
Client Security Settlement Receivables 2,034.2 2,034.2
— 2,034.2
—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock 178.1 178.1
— 178.1
—
Community Development Investments 187.4 186.2
— 186.2
—
Employee Benefit and Deferred Compensation 161.3 161.1 109.5 51.6
—
Liabilities
Deposits
Demand, Noninterest-Bearing, Savings and Money Market $ 46,237.5 $ 46,237.5 $ 46,237.5 $
— $
—
Savings Certificates and Other Time 1,540.5 1,554.4
— 1,554.4
—
Non U.S. Offices Interest-Bearing 52,909.9 52,909.9
— 52,909.9
—
Federal Funds Purchased 351.3 351.3
— 351.3
—
Securities Sold under Agreements to Repurchase 29.8 29.8
— 29.8
—
Other Borrowings 3,322.9 3,325.2
— 3,325.2
—
Senior Notes 1,497.2 1,534.1
— 1,534.1
—
Long Term Debt (excluding Leases)
Subordinated Debt 1,330.1 1,338.3
— 1,338.3
—
Floating Rate Capital Debt 277.3 244.6
— 244.6
—
Other Liabilities
Standby Letters of Credit 43.5 43.5
—
— 43.5
Loan Commitments 25.6 25.6
—
— 25.6
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets $ 30.8 $ 30.8 $
— $ 30.8 $
—
Liabilities 58.7 58.7
— 58.7
—
Interest Rate Contracts
Assets 107.7 107.7
— 107.7
—
Liabilities 27.4 27.4
— 27.4
—
Other Financial Derivatives (2)
Liabilities 11.3 11.3
—
— 11.3
Client-Related and Trading
Foreign Exchange Contracts
Assets 2,451.3 2,451.3
— 2,451.3
—
Liabilities 2,416.7 2,416.7
— 2,416.7
—
Interest Rate Contracts
Assets 96.5 96.5
— 96.5
—
Liabilities 93.1 93.1
— 93.1
—
(1) Refer to the table located on page 39
for the disaggregation of available for sale securities.
(2) This line includes a swap related to
the sale of certain Visa Class B common shares.
(In Millions) December 31,
2014
Book Total Fair Value
Level 1 Level 2 Level 3
Assets
Cash and Due from Banks $ 3,050.6 $ 3,050.6 $ 3,050.6 $
— $
—
Federal Funds Sold and Resell Agreements 1,062.7 1,062.7
— 1,062.7
—
Interest-Bearing Deposits with Banks 14,928.3 14,928.3
— 14,928.3
—
Federal Reserve Deposits 17,386.3 17,386.3
— 17,386.3
—
Securities
Available for Sale (1) 29,558.5 29,558.5 4,506.9 25,033.5 18.1
Held to Maturity 4,170.8 4,176.1
— 4,176.1
—
Trading Account 4.7 4.7
— 4.7
—
Loans (excluding Leases)
Held for Investment 30,458.0 30,600.4
—
— 30,600.4
Held for Sale 2.5 2.5
—
— 2.5
Client Security Settlement Receivables 1,568.8 1,568.8
— 1,568.8
—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock 207.5 207.5
— 207.5
—
Community Development Investments 209.9 210.8
— 210.8
—
Employee Benefit and Deferred Compensation 143.2 146.7 96.7 50.0
—
Liabilities
Deposits
Demand, Noninterest-Bearing, Savings and Money Market $ 41,454.6 $ 41,454.6 $ 41,454.6 $
— $
—
Savings Certificates and Other Time 1,757.4 1,757.0
— 1,757.0
—
Non U.S. Offices Interest-Bearing 47,545.0 47,545.0
— 47,545.0
—
Federal Funds Purchased 932.9 932.9
— 932.9
—
Securities Sold under Agreements to Repurchase 885.1 885.1
— 885.1
—
Other Borrowings 1,685.2 1,686.2
— 1,686.2
—
Senior Notes 1,497.0 1,541.8
— 1,541.8
—
Long Term Debt (excluding Leases)
Subordinated Debt 1,583.3 1,583.4
— 1,583.4
—
Floating Rate Capital Debt 277.2 242.8
— 242.8
—
Other Liabilities
Standby Letters of Credit 60.1 60.1
—
— 60.1
Loan Commitments 28.3 28.3
—
— 28.3
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets $ 125.7 $ 125.7 $
— $ 125.7 $
—
Liabilities 23.5 23.5
— 23.5
—
Interest Rate Contracts
Assets 126.8 126.8
— 126.8
—
Liabilities 30.5 30.5
— 30.5
—
Client-Related and Trading
Foreign Exchange Contracts
Assets 4,149.5 4,149.5
— 4,149.5
—
Liabilities 4,072.0 4,072.0
— 4,072.0
—
Interest Rate Contracts
Assets 105.5 105.5
— 105.5
—
Liabilities 101.3 101.3
— 101.3
—
(1) Refer to the table located on page 40
for the disaggregation of available for sale securities. |
