Loans and Leases

During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the consistency of its reporting across various regulatory regimes. As a result, certain prior-period loan and lease balances below have been adjusted to conform with current-period presentation. The adjustments generally reflected reclassification of loans and leases from the commercial and institutional class to the residential real estate class. There was no impact on total loans and leases previously reported. The previously reported allowance for credit losses remains unadjusted, as the impact of the reclassification on the allowance was immaterial.

Amounts outstanding for loans and leases, by segment and class, are shown below.

TABLE 60: LOANS AND LEASES



	DECEMBER 31,
(In Millions)	2017			2016
Commercial
Commercial and Institutional	$	9,042.2		$	9,287.4
Commercial Real Estate	3,482.7			4,002.5
Non-U.S.	1,538.5			1,877.8
Lease Financing, net	229.2			293.9
Other	265.4			205.1

Total Commercial	14,558.0			15,666.7

Personal
Private Client	10,753.1			10,052.0
Residential Real Estate	7,247.6			8,077.5
Other	33.5			25.9

Total Personal	18,034.2			18,155.4

Total Loans and Leases	$	32,592.2		$	33,822.1
Allowance for Credit Losses Assigned to Loans and Leases	(131.2		)	(161.0		)

Net Loans and Leases	$	32,461.0		$	33,661.1

Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan to collateral value ratio of no more than 65% to 80% at inception. Northern Trust’s equity credit line products generally have draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding balance to an amortizing payment loan. As of December 31, 2017 and 2016, equity credit lines totaled $908.6 million and $1.2 billion, respectively, and equity credit lines for which first liens were held by Northern Trust represented 93% and 91%, respectively, of the total equity credit lines as of those dates.

Included within the non-U.S., commercial-other, and personal-other classes are short duration advances, primarily related to the processing of custodied client investments, that totaled $906.4 million and $1.4 billion at December 31, 2017 and 2016, respectively. Demand deposit overdrafts reclassified as loan balances totaled $127.6 million and $88.1 million at December 31, 2017 and 2016, respectively. Loans classified as held for sale totaled $20.9 million and $13.4 million at December 31, 2017 and December 31, 2016, respectively. Leases classified as held for sale totaled $33.1 million and $43.0 million at December 31, 2017 and December 31, 2016, respectively, related to the decision to exit a non-strategic loan and lease portfolio.

The components of the net investment in direct finance and leveraged leases are as follows:

TABLE 61: DIRECT FINANCE AND LEVERAGED LEASES



	DECEMBER 31,
(In Millions)	2017			2016
Direct Finance Leases
Lease Receivable	$	26.6		$	37.6
Residual Value	72.4			75.3
Initial Direct Costs	0.7			1.0
Unearned Income	(1.5		)	(3.5		)

Investment in Direct Finance Leases	98.2			110.4

Leveraged Leases
Net Rental Receivable	76.1			110.1
Residual Value	85.6			106.2
Unearned Income	(30.7		)	(32.8		)

Investment in Leveraged Leases	131.0			183.5

Lease Financing, net	$	229.2		$	293.9

The following schedule reflects the future minimum lease payments to be received over the next five years under direct finance leases.

TABLE 62: FUTURE MINIMUM LEASE PAYMENTS



(In Millions)	FUTURE MINIMUM LEASE PAYMENTS
2018	$	11.2
2019	9.0
2020	3.9
2021	2.1
2022	—

Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels.

As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting and management reporting.

Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s borrower rating models, by loan and lease class.


•	Commercial and Institutional: leverage, profit margin, liquidity, asset size and capital levels;


•	Commercial Real Estate: debt service coverage, loan-to-value ratio, leasing status and guarantor support;


•	Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels;


•	Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels;


•	Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio;


•	Private Client: cash flow-to-debt and net worth ratios, leverage and liquidity; and


•	Personal-Other: cash flow-to-debt and net worth ratios.

While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required. Risk ratings are generally validated at least annually.

Loan and lease segment and class balances at December 31, 2017 and 2016 are provided below, segregated by borrower ratings into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.

TABLE 63: BORROWER RATINGS



	DECEMBER 31, 2017								DECEMBER 31, 2016
(In Millions)	1 TO 3 CATEGORY		4 TO 5 CATEGORY		6 TO 9 CATEGORY (WATCH LIST)		TOTAL		1 TO 3 CATEGORY		4 TO 5 CATEGORY		6 TO 9 CATEGORY (WATCH LIST)		TOTAL
Commercial
Commercial and Institutional	$	5,832.9	$	3,133.4	$	75.9	$	9,042.2	$	6,187.2	$	3,013.9	$	86.3	$	9,287.4
Commercial Real Estate	1,280.7		2,187.5		14.5		3,482.7		1,825.7		2,134.8		42.0		4,002.5
Non-U.S.	606.6		930.5		1.4		1,538.5		602.8		1,273.5		1.5		1,877.8
Lease Financing, net	191.4		37.8		—		229.2		214.3		79.6		—		293.9
Other	155.5		109.9		—		265.4		135.5		67.9		1.7		205.1

Total Commercial	8,067.1		6,399.1		91.8		14,558.0		8,965.5		6,569.7		131.5		15,666.7

Personal
Private Client	6,716.0		4,027.8		9.3		10,753.1		6,373.2		3,668.4		10.4		10,052.0
Residential Real Estate	2,960.5		3,978.8		308.3		7,247.6		2,723.8		5,008.5		345.2		8,077.5
Other	19.6		13.9		—		33.5		17.1		8.5		0.3		25.9

Total Personal	9,696.1		8,020.5		317.6		18,034.2		9,114.1		8,685.4		355.9		18,155.4

Total Loans and Leases	$	17,763.2	$	14,419.6	$	409.4	$	32,592.2	$	18,079.6	$	15,255.1	$	487.4	$	33,822.1

Loans and leases in the “1 to 3” category are expected to exhibit minimal to modest probabilities of default and are characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and capital levels. Borrowers assigned these ratings are anticipated to experience very little to moderate financial pressure in adverse down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a minimal to modest likelihood of loss.

Loans and leases in the “4 to 5” category are expected to exhibit moderate to acceptable probabilities of default and are characterized by borrowers with less financial flexibility than those in the “1 to 3” category. Cash flows and capital levels are generally sufficient to allow for borrowers to meet current requirements, but have reduced cushion in adverse down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a moderate likelihood of loss.

Loans and leases in the watch list category have elevated credit risk profiles that are monitored through internal watch lists, and consist of credits with borrower ratings of “6 to 9”. These credits, which include all nonperforming credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default. Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable likelihood of loss.

The following table provides balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the other real estate owned and total nonperforming asset balances, as of December 31, 2017 and 2016.

TABLE 64: DELINQUENCY STATUS



(In Millions)	CURRENT		30 – 59 DAYS PAST DUE		60 – 89 DAYS PAST DUE		90 DAYS OR MORE PAST DUE		TOTAL PERFORMING		NONPERFORMING		TOTAL LOANS AND LEASES
December 31, 2017
Commercial
Commercial and Institutional	$	8,999.4	$	13.3	$	3.1	$	0.4	$	9,016.2	$	26.0	$	9,042.2
Commercial Real Estate	3,455.3		14.1		4.1		0.9		3,474.4		8.3		3,482.7
Non-U.S.	1,538.3		0.2		—		—		1,538.5		—		1,538.5
Lease Financing, net	229.2		—		—		—		229.2		—		229.2
Other	265.4		—		—		—		265.4		—		265.4

Total Commercial	14,487.6		27.6		7.2		1.3		14,523.7		34.3		14,558.0

Personal
Private Client	10,687.5		55.3		9.7		0.6		10,753.1		—		10,753.1
Residential Real Estate	7,059.4		53.8		11.9		6.1		7,131.2		116.4		7,247.6
Other	33.5		—		—		—		33.5		—		33.5

Total Personal	17,780.4		109.1		21.6		6.7		17,917.8		116.4		18,034.2

Total Loans and Leases	$	32,268.0	$	136.7	$	28.8	$	8.0	$	32,441.5	$	150.7	$	32,592.2
					Other Real Estate Owned						$	4.6
					Total Nonperforming Assets						$	155.3



(In Millions)	CURRENT		30 – 59 DAYS PAST DUE		60 – 89 DAYS PAST DUE		90 DAYS OR MORE PAST DUE		TOTAL PERFORMING		NONPERFORMING		TOTAL LOANS AND LEASES
December 31, 2016
Commercial
Commercial and Institutional	$	9,269.8	$	5.3	$	1.9	$	1.2	$	9,278.2	$	9.2	$	9,287.4
Commercial Real Estate	3,974.4		10.9		1.0		4.6		3,990.9		11.6		4,002.5
Non-U.S.	1,877.7		0.1		—		—		1,877.8		—		1,877.8
Lease Financing, net	293.9		—		—		—		293.9		—		293.9
Other	205.1		—		—		—		205.1		—		205.1

Total Commercial	15,620.9		16.3		2.9		5.8		15,645.9		20.8		15,666.7

Personal
Private Client	9,988.7		40.8		8.5		13.7		10,051.7		0.3		10,052.0
Residential Real Estate	7,875.9		44.5		6.5		11.5		7,938.4		139.1		8,077.5
Other	25.9		—		—		—		25.9		—		25.9

Total Personal	17,890.5		85.3		15.0		25.2		18,016.0		139.4		18,155.4

Total Loans and Leases	$	33,511.4	$	101.6	$	17.9	$	31.0	$	33,661.9	$	160.2	$	33,822.1
					Other Real Estate Owned						$	5.2
					Total Nonperforming Assets						$	165.4

The following table provides information related to impaired loans by segment and class.

TABLE 65: IMPAIRED LOANS



	AS OF DECEMBER 31, 2017						AS OF DECEMBER 31, 2016
(In Millions)	RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE		SPECIFIC ALLOWANCE		RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE		SPECIFIC ALLOWANCE
With no related specific allowance
Commercial and Institutional	$	24.9	$	30.3	$	—	$	7.9	$	8.7	$	—
Commercial Real Estate	5.7		7.6		—		14.7		18.6		—
Residential Real Estate	90.9		124.9		—		125.5		164.3		—
Private Client	0.7		0.7		—		0.3		0.3		—
With a related specific allowance
Commercial and Institutional	0.5		5.4		0.5		—		—		—
Commercial Real Estate	2.8		2.8		0.6		—		—		—
Residential Real Estate	14.3		14.9		4.3		7.7		7.9		2.1
Total
Commercial	33.9		46.1		1.1		22.6		27.3		—
Personal	105.9		140.5		4.3		133.5		172.5		2.1

Total	$	139.8	$	186.6	$	5.4	$	156.1	$	199.8	$	2.1



	YEAR ENDED DECEMBER 31, 2017				YEAR ENDED DECEMBER 31, 2016
(In Millions)	AVERAGE RECORDED INVESTMENT		INTEREST INCOME RECOGNIZED		AVERAGE RECORDED INVESTMENT		INTEREST INCOME RECOGNIZED
With no related specific allowance
Commercial and Institutional	$	8.7	$	—	$	8.6	$	—
Commercial Real Estate	9.2		0.1		17.0		0.3
Lease Financing, net	—		—		0.6		0.1
Residential Real Estate	105.0		1.5		121.4		1.9
Private Client	0.2		—		1.2		—
With a related specific allowance
Commercial and Institutional	6.5		—		7.6		—
Commercial Real Estate	2.6		—		—		—
Lease Financing, net	—		—		1.2		—
Residential Real Estate	17.0		—		2.1		—
Total
Commercial	27.0		0.1		35.0		0.4
Personal	122.2		1.5		124.7		1.9

Total	$	149.2	$	1.6	$	159.7	$	2.3

Note: Average recorded investments in impaired loans are calculated as the average of the month-end impaired loan balances for the period.

Interest income that would have been recorded on nonperforming loans in accordance with their original terms totaled approximately $9.1 million in 2017, $8.5 million in 2016, and $8.1 million in 2015.

There were $9.4 million and $2.3 million of aggregate undrawn loan commitments and standby letters of credit at December 31, 2017 and 2016, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.

Troubled Debt Restructurings (TDRs). Included within impaired loans were $72.5 million and $85.2 million of nonperforming TDRs and $25.9 million and $42.4 million of performing TDRs as of December 31, 2017 and 2016, respectively.

The following tables provide, by segment and class, the number of loans and leases modified in TDRs during the years ended December 31, 2017, and 2016, and the recorded investments and unpaid principal balances as of December 31, 2017 and 2016.

TABLE 66: TROUBLED DEBT RESTRUCTURINGS



($ In Millions)	NUMBER OF LOANS AND LEASES	RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE
December 31, 2017
Commercial
Commercial and Institutional	3	$	0.4	$	1.4
Commercial Real Estate	2	1.8		1.8

Total Commercial	5	2.2		3.2

Personal
Residential Real Estate	66	22.1		22.8
Private Client	3	0.2		0.5

Total Personal	69	22.3		23.3

Total Loans and Leases	74	$	24.5	$	26.5

Note: Period-end balances reflect all paydowns and charge-offs during the year.



($ In Millions)	NUMBER OF LOANS AND LEASES	RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE
December 31, 2016
Commercial
Commercial and Institutional	7	$	4.3	$	6.5
Commercial Real Estate	7	8.7		11.0

Total Commercial	14	13.0		17.5

Personal
Residential Real Estate	73	22.2		23.5
Private Client	2	2.1		2.1

Total Personal	75	24.3		25.6

Total Loans and Leases	89	$	37.3	$	43.1

Note: Period-end balances reflect all paydowns and charge-offs during the year.

TDR modifications primarily involve extensions of term, deferrals of principal, interest rate concessions, and other modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-troubled situations. During the year ended December 31, 2017 TDR modifications of loans within residential real estate were primarily extensions of term, deferrals of principal, interest rate concessions, and other modifications. During the year ended December 31, 2017, the majority of TDR modifications of loans within commercial and institutional, commercial real estate, and private client classes were primarily extensions of term or deferrals of principal. During the year ended December 31, 2016, TDR modifications of loans within residential real estate loans were primarily extensions of term, deferrals of principal, interest rate concessions and other modifications; modification within commercial and institutional, commercial real estate, and private client classes were primarily extensions of term and other modifications.

There were two loans or leases modified in TDRs during the previous twelve-month periods which subsequently became nonperforming during the year ended December 31, 2017. There were five loans or leases modified in TDRs during the previous twelve-month periods which subsequently became nonperforming during the year ended

December 31, 2016.

All loans and leases modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses.

Northern Trust may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure. As of December 31, 2017 and 2016, Northern Trust held foreclosed residential real estate properties with a carrying value of $4.3 million and $4.6 million, respectively, as a result of obtaining physical possession. In addition, as of December 31, 2017 and 2016, Northern Trust had consumer loans with a carrying value of $14.1 million and $25.9 million, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.