Concentrations of Credit Risk

12 Months Ended

Dec. 31, 2022

Concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The fact that a credit exposure falls into one of these groups does not necessarily indicate that the credit has a higher than normal degree of credit risk. These groups are: banks and bank holding companies, residential real estate, and commercial real estate.

Banks and Bank Holding Companies. At December 31, 2022, on-balance sheet credit risk to banks and bank holding companies, both U.S. and non-U.S., consisted primarily of Interest-Bearing Deposits with Banks of $1.9 billion, demand balances maintained at correspondent banks of $4.6 billion, and Securities Purchased under Agreements to Resell of $1.1 billion. At December 31, 2021, on-balance sheet credit risk to banks and bank holding companies, both U.S. and non-U.S., consisted primarily of Interest-Bearing Deposits with Banks of $1.9 billion, demand balances maintained at correspondent banks of $3.0 billion, and Securities Purchased under Agreements to Resell of $686.4 million. Credit risk associated with U.S. and non-U.S. banks and bank holding companies deemed to be counterparties by Credit Risk Management is managed by the Capital Markets Credit Committee. Credit limits are established through a review process that includes an internally-prepared financial analysis, use of an internal risk rating system and consideration of external ratings from rating agencies. Northern Trust places deposits with banks that have strong internal and external credit ratings and the average life to maturity of deposits with banks is maintained on a short-term basis in order to respond quickly to changing credit conditions.

Residential Real Estate. Residential real estate loans totaled $6.4 billion at December 31, 2022 and $6.3 billion at December 31, 2021, representing 16% and 17%, respectively, of total U.S. loans and leases. Residential real estate loans consist of traditional first lien mortgages and equity credit lines, which generally require a loan-to-collateral value ratio of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties. Legally binding undrawn commitments to extend residential real estate credit, which are primarily equity credit lines, totaled $783.4 million and $665.9 million at December 31, 2022 and 2021, respectively. The table below provides additional detail regarding residential real estate loans by geographic region.

TABLE 77: RESIDENTIAL REAL ESTATE LOANS BY GEOGRAPHIC REGION


	DECEMBER 31,
(In Millions)	2022		2021
Residential Real Estate by geographic region:
Florida	$	1,603.2	$	1,554.8
California	1,508.1		1,449.0
Illinois	686.9		738.8
New York	498.7		449.4
Colorado	364.2		309.0
Texas	312.4		320.3
All other(1)	1,440.0		1,498.6
Total Residential Real Estate	$	6,413.5	$	6,319.9

(1) The remainder is distributed throughout the other geographic regions within the U.S. served by Northern Trust.

Commercial Real Estate. In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower’s principal business activity is the acquisition or the development of real estate for commercial purposes; (2) the principal collateral is real estate held for commercial purposes, and loan repayment is expected to flow from the operation of the property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to experienced investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required. Commercial mortgage financing is provided for the acquisition or refinancing of income-producing properties. Cash flows from the properties generally are sufficient to amortize the loan. These loans are primarily located in the California, Illinois, Florida, Texas, and New York markets. Construction, acquisition and development loans provide financing for commercial real estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or refinance the loan through a commercial mortgage with Northern Trust or another financial institution upon completion. At December 31, 2022, legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $449.3 million and $69.7 million, respectively. At December 31, 2021, legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $357.9 million and $30.0 million, respectively.

The table below provides additional detail regarding commercial real estate loan types.

TABLE 78: COMMERCIAL REAL ESTATE LOANS


	DECEMBER 31,
(In Millions)	2022		2021
Commercial Mortgages
Office	$	1,054.0	$	1,011.4
Apartment/ Multi-family	1,392.7		1,288.8
Retail	572.2		601.8
Industrial/ Warehouse	596.2		442.9
Other	548.0		516.8
Total Commercial Mortgages	4,163.1		3,861.7
Construction, Acquisition and Development Loans	609.9		464.6
Total Commercial Real Estate Loans	$	4,773.0	$	4,326.3