5. Loans and Leases – Amounts outstanding for loans and leases, by segment and class, are shown below.


	June 30,			December 31,
(In Millions)	2011			2010
Commercial
Commercial and Institutional	$	6,293.9		$	5,914.5
Commercial Real Estate		3,093.1			3,242.4
Lease Financing, net		1,022.8			1,063.7
Non-U.S.		1,676.0			1,046.2
Other		350.8			346.6

Total Commercial		12,436.6			11,613.4

Personal
Residential Real Estate		10,684.1			10,854.9
Private Client		5,191.0			5,423.7
Other		254.3			240.0

Total Personal		16,129.4			16,518.6

Total Loans and Leases		28,566.0			28,132.0

Allowance for Credit Losses Assigned to Loans and Leases		(311.3	)		(319.6	)

Net Loans and Leases	$	28,254.7		$	27,812.4

Included within the non-U.S., commercial-other, and personal-other classes were short duration advances primarily related to the processing of custodied client investments that totaled $2.1 billion and $1.4 billion at June 30, 2011 and December 31, 2010, respectively. Residential real estate loans classified as held for sale totaled $1.5 million at June 30, 2011 and $2.2 million at December 31, 2010 and are included in the residential real estate class.

Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics 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, management reporting, and the calculation of loss reserves and economic capital.

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, return on assets, asset size, and capital levels;

•

Commercial Real Estate: debt service coverage and leasing status for income-producing properties; loan-to-value and loan-to-cost ratios, leasing status, and guarantor support for loans associated with construction and development properties;

•

Lease Financing and Commercial-Other: leverage and profit margin levels;

•

Non-U.S.: entity type, liquidity, size, and leverage;

•

Residential Real Estate: payment history and cash flow-to-debt and net worth ratios;

•

Private Client: cash flow-to-debt and net worth ratios, leverage, and profit margin levels; 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 validated at least annually.

Loan and lease segment and class balances for June 30, 2011 and December 31, 2010 are provided below, segregated by borrower ratings into below average risk, average risk, and watch list categories.


	June 30, 2011								December 31, 2010
	Below Average		Average		Watch				Below Average		Average		Watch
(In Millions)	Risk		Risk		List		Total		Risk		Risk		List		Total
Commercial
Commercial and Institutional	$	3,039.7	$	3,010.4	$	243.8	$	6,293.9	$	2,821.5	$	2,849.8	$	243.2	$	5,914.5
Commercial Real Estate		1,336.4		1,409.4		347.3		3,093.1		1,232.8		1,594.3		415.3		3,242.4
Lease Financing, net		497.0		511.6		14.2		1,022.8		571.6		473.0		19.1		1,063.7
Non-U.S.		847.1		823.4		5.5		1,676.0		430.0		596.5		19.7		1,046.2
Other		220.3		130.5		—		350.8		209.5		137.1		—		346.6

Total Commercial		5,940.5		5,885.3		610.8		12,436.6		5,265.4		5,650.7		697.3		11,613.4

Personal
Residential Real Estate		2,665.6		7,617.0		401.5		10,684.1		2,896.0		7,586.9		372.0		10,854.9
Private Client		2,871.6		2,287.0		32.4		5,191.0		3,326.5		2,064.1		33.1		5,423.7
Other		81.0		173.3		—		254.3		78.1		161.9		—		240.0

Total Personal		5,618.2		10,077.3		433.9		16,129.4		6,300.6		9,812.9		405.1		16,518.6

Total Loans and Leases	$	11,558.7	$	15,962.6	$	1,044.7	$	28,566.0	$	11,566.0	$	15,463.6	$	1,102.4	$	28,132.0

Borrowers designated as below average risk represent exposures with borrower ratings from “1 - 3”. These credits 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.

Borrowers designated as average risk represent exposures with borrower ratings of “4” and “5”. These credits are expected to exhibit moderate to acceptable probabilities of default and are characterized by borrowers with less financial flexibility than those in the below average risk 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.

Borrowers designated as watch list represent exposures with elevated credit risk profiles that are monitored through internal watch lists, and consist of credits with borrower ratings of “6 - 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.

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. Interest income on loans 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 are considered past due if the required principal or interest payments have not been received as of the date such payments are due according to the contractual terms of the agreement. At the time a loan is determined to be nonperforming, interest accrued but not collected is reversed against interest income of the current period and the loan is classified as nonperforming. Interest collected on nonperforming loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt.

Loans are returned to performing status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to performing 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 performing status when one of the following conditions are met: (i) no principal and interest is due and unpaid and repayment of the remaining contractual principal and interest is expected; (ii) there has been a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time and repayment of the remaining contractual principal and interest is expected; or (iii) 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). Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and of 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 months) under the revised terms.

The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the total other real estate owned and nonperforming asset balances, as of June 30, 2011 and December 31, 2010.


	June 30, 2011
(In Millions)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past		Current		Total Performing		Nonperforming		Total Loans and Leases
Commercial
Commercial and Institutional	$	26.9	$	22.8	$	3.3	$	6,185.2	$	6,238.2	$	55.7	$	6,293.9
Commercial Real Estate		12.5		6.5		8.1		2,959.5		2,986.6		106.5		3,093.1
Lease Financing, net		36.5		1.8		2.6		981.9		1,022.8		—		1,022.8
Non-U.S.		—		—		—		1,676.0		1,676.0		—		1,676.0
Other		—		—		—		350.8		350.8		—		350.8

Total Commercial	$	75.9	$	31.1	$	14.0	$	12,153.4	$	12,274.4	$	162.2	$	12,436.6

Personal
Residential Real Estate	$	19.7	$	21.1	$	3.9	$	10,476.4	$	10,521.1	$	163.0	$	10,684.1
Private Client		20.4		5.7		3.8		5,158.3		5,188.2		2.8		5,191.0
Other		—		—		—		254.3		254.3		—		254.3

Total Personal		40.1		26.8		7.7		15,889.0		15,963.6		165.8		16,129.4

Total Loans and Leases	$	116.0	$	57.9	$	21.7	$	28,042.4	$	28,238.0	$	328.0	$	28,566.0

						Total Other Real Estate Owned						31.1

						Total Nonperforming Assets					$	359.1


	December 31, 2010
	30-59 Days		60-89 Days		90 Days or				Total				Total Loans
(In Millions)	Past Due		Past Due		More Past		Current		Performing		Nonperforming		and Leases
Commercial
Commercial and Institutional	$	16.3	$	8.2	$	.8	$	5,831.2	$	5,856.5	$	58.0	$	5,914.5
Commercial Real Estate		24.2		15.7		9.4		3,076.7		3,126.0		116.4		3,242.4
Lease Financing, net		—		—		—		1,063.7		1,063.7		—		1,063.7
Non-U.S.		—		—		—		1,046.2		1,046.2		—		1,046.2
Other		—		—		—		346.6		346.6		—		346.6

Total Commercial		40.5		23.9		10.2		11,364.4		11,439.0		174.4		11,613.4

Personal
Residential Real Estate		76.1		17.2		.9		10,607.4		10,701.6		153.3		10,854.9
Private Client		35.7		13.0		1.9		5,367.8		5,418.4		5.3		5,423.7
Other		—		—		—		240.0		240.0		—		240.0

Total Personal		111.8		30.2		2.8		16,215.2		16,360.0		158.6		16,518.6

Total Loans and Leases	$	152.3	$	54.1	$	13.0	$	27,579.6	$	27,799.0	$	333.0	$	28,132.0

						Total Other Real Estate Owned						45.5

						Total Nonperforming Assets					$	378.5

The following tables provide information related to impaired loans by segment and class.

As of June 30, 2011

Three Months Ended
June 30, 2011

Six Months Ended
June 30, 2011

(In Millions)

Recorded
Investment

Unpaid
Principal
Balance

Specific
Reserve

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

With No Related Specific Reserve

Commercial and Institutional

24.6

31.8

—

18.2

—

17.6

—

Commercial Real Estate

36.2

58.8

—

27.2

—

26.3

Residential Real Estate

117.6

150.8

—

106.6

109.9

1.1

Private Client

2.8

8.0

—

2.3

—

2.2

—

With a Related Specific Reserve

Commercial and Institutional

36.6

48.6

18.8

34.9

—

34.9

—

Commercial Real Estate

77.8

102.1

26.8

71.4

—

77.0

—

Residential Real Estate

7.1

7.6

3.2

7.1

—

6.9

—

Private Client

1.7

—

2.4

—

Total

Commercial

175.2

241.3

45.6

151.7

—

155.8

Personal

129.2

168.1

3.7

117.7

121.4

1.1

Total

304.4

409.4

49.3

269.4

277.2

1.2


	As of December 31, 2010
(In Millions)	Recorded Investment		Unpaid Principal Balance		Specific Reserve
With No Related Specific Reserve
Commercial and Institutional	$	17.9	$	26.1	$	—
Commercial Real Estate		43.7		62.4		—
Residential Real Estate		111.9		138.1		—
Private Client		3.7		3.9		—
With a Related Specific Reserve
Commercial and Institutional		41.7		47.8		19.8
Commercial Real Estate		77.2		88.9		29.5
Residential Real Estate		5.1		5.1		2.4
Total
Commercial		180.5		225.2		49.3
Personal		120.7		147.1		2.4

Total	$	301.2	$	372.3	$	51.7

The following table provides average recorded investments in impaired loans and the interest income that would have been recorded on nonperforming loans in accordance with their original terms, for the three and six months ended June 30, 2011 and 2010.


	Three Months Ended June 30,				Six Months Ended June 30,
(In Millions)	2011		2010		2011		2010
Average Recorded Investment in Impaired Loans	$	269.4	$	230.5	$	277.2	$	221.5
Interest Income That Would Have Been Recorded on Nonperforming Loans in Accordance with Their Original Terms		3.9		3.5		8.1		7.6

*	Average recorded investment in impaired loans is calculated as the average of the month-end impaired loan balances for the period.

A loan is considered to be impaired when, based on current information and events, management determines that it is probable that Northern Trust will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is also considered to be impaired if its terms have been modified as a concession resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring (TDR). All TDRs are considered impaired loans in the calendar year of their restructuring. In subsequent years, a TDR may cease being classified as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if it satisfies the six month performance requirement; however, it will remain classified as impaired. Impaired loans are measured based upon the loan’s market price, the present value of expected future cash flows, discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, based on the certainty of loss, either a specific reserve is established or a charge-off is recorded for the difference. Smaller balance (individually less than $250,000) homogeneous loans are collectively evaluated for impairment and excluded from impaired loan disclosures in accordance with applicable accounting standards. Northern Trust’s accounting policies for impaired loans is consistent across all classes of loans and leases.

Impaired loans are identified through ongoing credit management and risk rating processes, including the formal review of past due and watch list credits. Payment performance and delinquency status are critical factors in identifying impairment for all loans and leases, particularly those within the residential real estate, private client and personal-other classes. Other factors considered in identifying impairment of loans and leases within the commercial and institutional, non-U.S., lease financing, and commercial-other classes relate to the borrower’s ability to perform under the terms of the obligation as measured through the assessment of future cash flows, including consideration of collateral value, market value, and other factors.

Included within impaired loans as of June 30, 2011 and December 31, 2010 were $98.8 million and $56.3 million, respectively, of loans deemed to be TDRs. As of June 30, 2011 and December 31, 2010, there were $68.9 million and $33.4 million of nonperforming TDRs, respectively, and $29.9 million and $22.9 million of performing TDRs, respectively. There were $12.5 million and $16.3 million of unfunded loan commitments and standby letters of credit at June 30, 2011 and December 31, 2010, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.