Loans and Leases

3 Months Ended

Mar. 31, 2020

Amounts outstanding for loans and leases, by segment and class, are shown in the following table. During the first quarter of 2020, the Corporation implemented a change in the classification of certain loans and leases to specific segments to enhance the consistency of its reporting across various regulatory regimes. As a result, the loan and lease balances as of December 31, 2019 below have been adjusted to conform to the presentation for periods ended after such date. The adjustments generally reflected reclassification of loans from the commercial real estate class to commercial and institutional, residential real estate, and private client classes. There was no impact on total loans and leases previously reported.

TABLE 40: LOANS AND LEASES



(In Millions)	MARCH 31, 2020		DECEMBER 31, 2019
Commercial
Commercial and Institutional	$	12,327.3	$	9,091.1
Commercial Real Estate	3,085.2		3,104.3
Non-U.S.	3,923.0		1,576.3
Lease Financing, net	64.8		65.6
Other	336.5		164.0
Total Commercial	19,736.8		14,001.3
Personal
Private Client	11,609.9		11,071.4
Residential Real Estate	6,074.3		6,095.0
Non-U.S.	346.9		174.8
Other	69.8		67.1
Total Personal	18,100.9		17,408.3
Total Loans and Leases	$	37,837.7	$	31,409.6

Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan-to-collateral value 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 March 31, 2020 and December 31, 2019, equity credit lines totaled $429.6 million and $448.5 million, respectively, and equity credit lines for which first liens were held by Northern Trust represented 96% and 97% of the total equity credit lines as of March 31, 2020 and December 31, 2019, respectively.

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, totaling $3.8 billion at March 31, 2020 and $1.1 billion at December 31, 2019, respectively. Demand deposit overdrafts reclassified as loan balances totaled $26.7 million and $90.4 million at March 31, 2020 and December 31, 2019, respectively.

As of March 31, 2020 and December 31, 2019, there were $52.8 million and $53.6 million of leases, respectively, classified as held for sale related to the decision to sell substantially all of the lease portfolio. As of March 31, 2020 and December 31, 2019, there were no loans classified as held for sale.

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 as of March 31, 2020 and December 31, 2019 are provided in the following table, segregated by borrower ratings into “1 to 3,” “4 to 5” and “6 to 9” (watch list and nonaccrual status) categories by year of origination at amortized cost basis.

TABLE 41: CREDIT QUALITY INDICATOR AT AMORTIZED COST BASIS BY ORIGINATION YEAR



March 31, 2020	TERM LOANS AND LEASES												REVOLVING LOANS		REVOLVING LOANS CONVERTED TO TERM LOANS
(In Millions)	2020		2019		2018		2017		2016		PRIOR						TOTAL
Commercial
Commercial and Institutional
Risk Rating:
1 to 3 Category	$	151.0	$	787.4	$	340.4	$	287.4	$	533.0	$	509.2	$	5,880.6	$	4.9	$	8,493.9
4 to 5 Category	137.7		668.7		370.5		449.0		120.2		203.8		1,676.4		51.1		3,677.4
6 to 9 Category	23.9		11.8		9.0		9.4		19.4		6.1		74.0		2.4		156.0
Total Commercial and Institutional	312.6		1,467.9		719.9		745.8		672.6		719.1		7,631.0		58.4		12,327.3
Commercial Real Estate
Risk Rating:
1 to 3 Category	121.0		285.9		100.5		61.2		100.5		170.7		106.6		6.1		952.5
4 to 5 Category	166.3		749.8		343.9		154.3		168.0		454.2		66.0		20.1		2,122.6
6 to 9 Category	2.2		—		—		4.4		3.0		0.5		—		—		10.1
Total Commercial Real Estate	289.5		1,035.7		444.4		219.9		271.5		625.4		172.6		26.2		3,085.2
Non-U.S.
Risk Rating:
1 to 3 Category	2,488.3		12.2		10.0		5.6		—		13.5		169.1		—		2,698.7
4 to 5 Category	905.6		5.9		1.9		6.7		—		70.9		38.6		1.8		1,031.4
6 to 9 Category	1.4		23.1		—		—		—		—		168.4		—		192.9
Total Non-U.S.	3,395.3		41.2		11.9		12.3		—		84.4		376.1		1.8		3,923.0
Lease Financing, net
Risk Rating:
1 to 3 Category	—		—		—		—		—		52.8		—		—		52.8
4 to 5 Category	—		—		—		—		—		12.0		—		—		12.0
6 to 9 Category	—		—		—		—		—		—		—		—		—
Total Lease Financing, net	—		—		—		—		—		64.8		—		—		64.8
Other
Risk Rating:
1 to 3 Category	117.4		—		—		—		—		—		—		—		117.4
4 to 5 Category	219.1		—		—		—		—		—		—		—		219.1
6 to 9 Category	—		—		—		—		—		—		—		—		—
Total Other	336.5		—		—		—		—		—		—		—		336.5
Total Commercial	4,333.9		2,544.8		1,176.2		978.0		944.1		1,493.7		8,179.7		86.4		19,736.8
Personal
Private Client
Risk Rating:
1 to 3 Category	131.1		486.6		75.1		126.9		38.9		150.2		4,965.0		20.9		5,994.7
4 to 5 Category	50.4		531.2		259.6		171.5		97.5		103.7		4,076.9		243.2		5,534.0
6 to 9 Category	—		0.6		23.2		—		0.1		—		47.0		10.3		81.2
Total Private Client	181.5		1,018.4		357.9		298.4		136.5		253.9		9,088.9		274.4		11,609.9
Residential Real Estate
Risk Rating:
1 to 3 Category	222.8		801.7		112.6		156.3		244.7		942.8		228.8		1.3		2,711.0
4 to 5 Category	122.4		441.7		229.0		248.9		417.5		1,397.2		330.8		4.0		3,191.5
6 to 9 Category	0.3		11.3		10.4		0.6		3.0		124.2		22.0		—		171.8
Total Residential Real Estate	345.5		1,254.7		352.0		405.8		665.2		2,464.2		581.6		5.3		6,074.3
Non-U.S.
Risk Rating:
1 to 3 Category	2.2		41.5		—		—		—		2.0		58.4		—		104.1
4 to 5 Category	—		19.1		14.0		0.6		0.5		9.6		193.0		5.1		241.9
6 to 9 Category	—		—		—		—		—		0.6		0.3		—		0.9
Total Non-U.S.	2.2		60.6		14.0		0.6		0.5		12.2		251.7		5.1		346.9
Other
Risk Rating:
1 to 3 Category	36.5		—		—		—		—		—		—		—		36.5
4 to 5 Category	33.3		—		—		—		—		—		—		—		33.3
6 to 9 Category	—		—		—		—		—		—		—		—		—
Total Other	69.8		—		—		—		—		—		—		—		69.8
Total Personal	599.0		2,333.7		723.9		704.8		802.2		2,730.3		9,922.2		284.8		18,100.9
Total Loans and Leases	$	4,932.9	$	4,878.5	$	1,900.1	$	1,682.8	$	1,746.3	$	4,224.0	$	18,101.9	$	371.2	$	37,837.7

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 fewer financial resources to manage through economic downturns. 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 nonaccrual 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.

For credit quality indicator information that was required under the former provisions of Accounting Standards Code (ASC) Topic 310, please refer to Note 6 — Loans and Leases of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2019.

Past Due Status. Past due status is based on the length of time from the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans and leases that are 29 days past due or less are reported as current.

The following table provides balances and delinquency status of accrual and nonaccrual loans and leases by segment and class, as well as the other real estate owned and nonaccrual asset balances, as of March 31, 2020 and December 31, 2019.

TABLE 42: DELINQUENCY STATUS



	ACCRUAL														NONACCRUAL WITH NO ALLOWANCE
(In Millions)	CURRENT		30 – 59 DAYS PAST DUE		60 – 89 DAYS PAST DUE		90 DAYS OR MORE PAST DUE		TOTAL ACCRUAL		NONACCRUAL		TOTAL LOANS AND LEASES
March 31, 2020
Commercial
Commercial and Institutional	$	12,216.7	$	71.3	$	5.4	$	1.0	$	12,294.4	$	32.9	$	12,327.3	$	17.9
Commercial Real Estate	3,069.3		8.5		—		4.7		3,082.5		2.7		3,085.2		2.7
Non-U.S.	3,923.0		—		—		—		3,923.0		—		3,923.0		—
Lease Financing, net	64.8		—		—		—		64.8		—		64.8		—
Other	336.5		—		—		—		336.5		—		336.5		—
Total Commercial	19,610.3		79.8		5.4		5.7		19,701.2		35.6		19,736.8		20.6
Personal
Private Client	11,522.5		77.3		8.4		1.2		11,609.4		0.5		11,609.9		0.5
Residential Real Estate	5,974.1		31.9		0.8		0.2		6,007.0		67.3		6,074.3		63.7
Non-U.S.	341.3		5.1		—		—		346.4		0.5		346.9		0.5
Other	69.8		—		—		—		69.8		—		69.8		—
Total Personal	17,907.7		114.3		9.2		1.4		18,032.6		68.3		18,100.9		64.7
Total Loans and Leases	$	37,518.0	$	194.1	$	14.6	$	7.1	$	37,733.8	$	103.9	$	37,837.7	$	85.3
	Other Real Estate Owned										$	1.6
	Total Nonaccrual Assets										$	105.5



	ACCRUAL														NONACCRUAL WITH NO ALLOWANCE
(In Millions)	CURRENT		30 – 59 DAYS PAST DUE		60 – 89 DAYS PAST DUE		90 DAYS OR MORE PAST DUE		TOTAL ACCRUAL		NONACCRUAL		TOTAL LOANS AND LEASES
December 31, 2019
Commercial
Commercial and Institutional	$	9,068.3	$	4.1	$	9.9	$	1.2	$	9,083.5	$	7.6	$	9,091.1	$	0.8
Commercial Real Estate	3,089.6		2.3		4.1		4.7		3,100.7		3.6		3,104.3		2.4
Non-U.S.	1,576.3		—		—		—		1,576.3		—		1,576.3		—
Lease Financing, net	65.6		—		—		—		65.6		—		65.6		—
Other	164.0		—		—		—		164.0		—		164.0		—
Total Commercial	13,963.8		6.4		14.0		5.9		13,990.1		11.2		14,001.3		3.2
Personal
Private Client	11,027.9		33.2		9.5		0.3		11,070.9		0.5		11,071.4		0.5
Residential Real Estate	5,997.7		19.8		4.9		1.2		6,023.6		71.4		6,095.0		66.4
Non-U.S	174.1		0.2		—		—		174.3		0.5		174.8		0.5
Other	67.1		—		—		—		67.1		—		67.1		—
Total Personal	17,266.8		53.2		14.4		1.5		17,335.9		72.4		17,408.3		67.4
Total Loans and Leases	$	31,230.6	$	59.6	$	28.4	$	7.4	$	31,326.0	$	83.6	$	31,409.6	$	70.6
	Other Real Estate Owned										$	3.2
	Total Nonaccrual Assets										$	86.8

Recognition of Income. Interest income on loans and leases is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. Loans meeting such criteria are classified as nonaccrual and interest income is recorded on a cash basis. At the time a loan is determined to be nonaccrual, interest

accrued but not collected is reversed against interest income in the current period. Interest collected on nonaccrual loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt. Management’s assessment of the indicators of loan and lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent resumption of income recognition, do not meaningfully vary between loan and lease classes. Nonaccrual loans are returned to accrual status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to accrual status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate primarily to expected payment performance. Loans are eligible to be returned to accrual status when: (i) no principal or interest that is due is unpaid and repayment of the remaining contractual principal and interest is expected or (ii) the loan has otherwise become well-secured (possessing realizable value sufficient to discharge the debt, including accrued interest, in full) and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current status in the near future). A loan that has not been brought fully current may be restored to accrual status provided there has been a sustained period of repayment performance (generally a minimum of six payment periods) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time. Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial condition and prospects of repayment under the revised terms and there has been a sustained period of repayment performance (generally a minimum of six payment periods) under the revised terms.

Nonaccrual Loans and Troubled Debt Restructurings (TDRs). A loan that has been modified as a concession by Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties is referred to as a troubled debt restructuring (TDR). All TDRs are reported as TDRs starting in the calendar year of their restructuring. In subsequent years, a TDR may cease being reported as a TDR if the loan was modified at a market rate and has performed according to the modified terms for at least six payment periods. A loan that has been modified at a below market rate will return to accrual status if it satisfies the six-payment-period performance requirement.

The expected credit loss is measured based upon the present value of expected future cash flows, discounted at the effective interest rate based on the original contractual rate. If a loan’s contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, the loan’s effective interest rate is calculated based on the factor as it changes over the life of the loan. Northern Trust elected not to project changes in the factor for purposes of estimating expected future cash flows. Further, Northern Trust elected not to adjust the effective interest rate for prepayments. If the loan is collateral dependent, the expected loss is measured based on the fair value of the collateral at the reporting date.

If the loan valuation is less than the recorded value of the loan, either an allowance is established, or a charge-off is recorded, for the difference. Smaller balance (individually less than $1 million) homogeneous loans are collectively evaluated. Northern Trust’s accounting policies for material nonaccrual loans is consistent across all classes of loans and leases.

All loans and leases with TDR modifications are evaluated for additional expected credit losses. The nature and extent of further deterioration in credit quality, including a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses.

Included within nonaccrual loans were $73.4 million and $54.9 million of nonaccrual TDRs, and $22.6 million and $27.7 million of accrual TDRs as of March 31, 2020 and December 31, 2019, respectively.

There were $11.7 million and $8.2 million of aggregate undrawn loan commitments and standby letters of credit at March 31, 2020 and December 31, 2019, respectively, issued to borrowers with TDR modifications of loans.

The following table provides, by segment and class, the number of TDR modifications of loans and leases during the three-month periods ended March 31, 2020 and 2019, and the recorded investments and unpaid principal balances as of March 31, 2020 and 2019.

TABLE 43: TROUBLED DEBT RESTRUCTURINGS



	THREE MONTHS ENDED MARCH 31, 2020
($ In Millions)	NUMBER OF LOANS AND LEASES	RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE
Commercial
Commercial and Institutional	2	$	24.3	$	24.5
Total Commercial	2	24.3		24.5
Personal
Residential Real Estate	6	1.0		1.2
Total Personal	6	1.0		1.2
Total Loans and Leases	8	$	25.3	$	25.7

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



	THREE MONTHS ENDED MARCH 31, 2019
($ In Millions)	NUMBER OF LOANS AND LEASES	RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE
Commercial
Commercial and Institutional	1	$	7.6	$	8.8
Total Commercial	1	7.6		8.8
Personal
Residential Real Estate	13	9.8		9.9
Total Personal	13	9.8		9.9
Total Loans and Leases	14	$	17.4	$	18.7

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

TDR modifications 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 three months ended March 31, 2020, the TDR modifications of loans within residential real estate were extensions of term, other modifications, interest rate concessions, and deferred principal. During the three months ended March 31, 2020, the TDR modifications within commercial and institutional were other modifications. During the three months ended March 31, 2019, the TDR modifications of loans within residential real estate were extensions of term, other modifications, and deferred principal. During the three months ended March 31, 2019, the TDR modification within commercial and institutional was an other modification.

There were no residential real estate loan TDR modifications during the twelve months ended December 31, 2019, which subsequently had a payment default during the three months ended March 31, 2020. There were no residential real estate loan TDR modifications during the twelve months ended December 31, 2018, which subsequently had a payment default during the three months ended March 31, 2019.

Northern Trust may obtain physical possession of real estate via foreclosure on an in-substance repossession. As of March 31, 2020, Northern Trust held foreclosed real estate properties with a carrying value of $1.6 million as a result of obtaining physical possession. In addition, as of March 31, 2020, Northern Trust had loans with a carrying value of $20.8 million for which formal foreclosure proceedings were in process.

Collateral Dependent Financial Assets. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Most of Northern Trust’s collateral dependent credit exposure relates to its residential real estate portfolio for which the collateral is usually the underlying real estate property. For collateral dependent financial assets, it is Northern Trust’s policy to reserve or charge-off the difference between the amortized cost basis of the loan and the value of the collateral. The collateral dependent financial asset balance as of March 31, 2020 was immaterial to Northern Trust’s financial statements.