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


	September 30,			December 31,
(In Millions)	2012			2011
Commercial
Commercial and Institutional	$	7,316.5		$	6,918.7
Commercial Real Estate		3,002.4			2,981.7
Lease Financing, net		1,011.6			978.8
Non-U.S.		1,038.1			1,057.5
Other		631.0			417.6

Total Commercial		12,999.6			12,354.3

Personal
Residential Real Estate		10,435.3			10,708.9
Private Client		5,751.4			5,651.4
Other		356.4			349.3

Total Personal		16,543.1			16,709.6

Total Loans and Leases		29,542.7			29,063.9

Allowance for Credit Losses Assigned to Loans and Leases		(298.6	)		(294.8	)

Net Loans and Leases	$	29,244.1		$	28,769.1

Residential real estate loans consist of conventional home 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 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 September 30, 2012 and December 31, 2011, equity credit lines totaled $2.4 billion and $2.6 billion, respectively, and equity credit lines for which the first liens were held by Northern Trust at those dates represented 86% of the respective totals.

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 $1.8 billion and $1.6 billion at September 30, 2012 and December 31, 2011, respectively. Demand deposits reclassified as loan balances totaled $46.9 million and $191.6 million at September 30, 2012 and December 31, 2011, respectively. Loans classified as held for sale totaled $9.3 million at December 31, 2011; there were no loans held for sale at September 30, 2012.

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, management reporting, and the calculation of credit loss allowances 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 as of September 30, 2012 and December 31, 2011 are provided below, segregated by borrower ratings into “1 to 3”, “4 to 5” and “6 to 9” (watch list), categories.


	September 30, 2012								December 31, 2011
					6 to 9								6 to 9
	1 to 3		4 to 5		Category				1 to 3		4 to 5		Category
(In Millions)	Category		Category		(Watch List)		Total		Category		Category		(Watch List)		Total
Commercial
Commercial and Institutional	$	4,154.8	$	2,959.6	$	202.1	$	7,316.5	$	3,681.8	$	3,029.1	$	207.8	$	6,918.7
Commercial Real Estate		970.4		1,766.0		266.0		3,002.4		1,247.1		1,467.2		267.4		2,981.7
Lease Financing, net		703.1		302.3		6.2		1,011.6		547.7		422.3		8.8		978.8
Non-U.S.		629.9		405.3		2.9		1,038.1		519.0		527.3		11.2		1,057.5
Other		273.3		357.7		—		631.0		241.4		176.2		—		417.6

Total Commercial		6,731.5		5,790.9		477.2		12,999.6		6,237.0		5,622.1		495.2		12,354.3

Personal
Residential Real Estate		2,984.0		7,037.7		413.6		10,435.3		2,777.1		7,501.0		430.8		10,708.9
Private Client		3,309.0		2,419.3		23.1		5,751.4		3,390.6		2,245.9		14.9		5,651.4
Other		167.9		188.5		—		356.4		162.3		187.0		—		349.3
Total Personal	$	6,460.9	$	9,645.5	$	436.7	$	16,543.1	$	6,330.0	$	9,933.9	$	445.7	$	16,709.6

Total Loans and Leases	$	13,192.4	$	15,436.4	$	913.9	$	29,542.7	$	12,567.0	$	15,556.0	$	940.9	$	29,063.9

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 - 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.

Recognition of Income. 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. 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. 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. Nonperforming 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: (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 performing status provided 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.

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 months) under the revised terms.

Past due status is based on how long since the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans that are 29 days past due or less are reported as current. 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 September 30, 2012 and December 31, 2011.

September 30, 2012

(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

Commercial

Commercial and Institutional

7,268.1

9.9

6.5

2.1

7,286.6

29.9

7,316.5

Commercial Real Estate

2,908.1

16.1

10.9

7.6

2,942.7

59.7

3,002.4

Lease Financing, net

1,011.6

—

1,011.6

—

1,011.6

Non-U.S.

1,038.1

—

1,038.1

—

1,038.1

Other

631.0

—

631.0

—

631.0

Total Commercial

12,856.9

26.0

17.4

9.7

12,910.0

89.6

12,999.6

Personal

Residential Real Estate

10,198.9

17.3

29.8

12.7

10,258.7

176.6

10,435.3

Private Client

5,703.0

31.8

4.1

9.7

5,748.6

2.8

5,751.4

Other

356.4

—

356.4

—

356.4

Total Personal

16,258.3

49.1

33.9

22.4

16,363.7

179.4

16,543.1

Total Loans and Leases

29,115.2

75.1

51.3

32.1

29,273.7

269.0

29,542.7

Total Other Real Estate Owned

20.6

Total Nonperforming Assets

289.6


December 31, 2011
(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
Commercial
Commercial and Institutional	$	6,869.2	$	15.0	$	2.7	$	0.5	$	6,887.4	$	31.3	$	6,918.7
Commercial Real Estate		2,878.2		10.8		10.3		2.9		2,902.2		79.5		2,981.7
Lease Financing, net		978.8		—		—		—		978.8		—		978.8
Non-U.S.		1,057.5		—		—		—		1,057.5		—		1,057.5
Other		417.6		—		—		—		417.6		—		417.6

Total Commercial		12,201.3		25.8		13.0		3.4		12,243.5		110.8		12,354.3

Personal
Residential Real Estate		10,428.0		67.7		27.6		8.0		10,531.3		177.6		10,708.9
Private Client		5,623.0		15.7		5.7		1.7		5,646.1		5.3		5,651.4
Other		349.3		—		—		—		349.3		—		349.3

Total Personal		16,400.3		83.4		33.3		9.7		16,526.7		182.9		16,709.6

Total Loans and Leases	$	28,601.6	$	109.2	$	46.3	$	13.1	$	28,770.2	$	293.7	$	29,063.9

								Total Other Real Estate Owned				21.2

								Total Nonperforming Assets			$	314.9

Impaired Loans. 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) and discussed in further detail below. Impairment is 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 allowance 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 as allowed under 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 key 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.

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


	As of September 30, 2012						As of December 31, 2011
(In Millions)	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Recorded Investment		Unpaid Principal Balance		Specific Allowance
With No Related Specific Allowance
Commercial and Institutional	$	26.3	$	30.8			$	21.4	$	24.0
Commercial Real Estate		59.1		84.2				46.5		68.0
Lease Financing, net		5.2		5.2				—		—
Residential Real Estate		129.4		162.6				134.4		162.6
Private Client		2.2		2.2				1.6		1.9
With a Related Specific Allowance
Commercial and Institutional		5.2		7.1	$	3.2		11.9		20.5	$	8.8
Commercial Real Estate		28.9		33.2		8.8		41.4		50.1		14.1
Residential Real Estate		15.8		17.0		9.2		18.9		26.2		8.9
Private Client		0.9		0.9		0.9		3.3		3.6		1.0
Total
Commercial		124.7		160.5		12.0		121.2		162.6		22.9
Personal		148.3		182.7		10.1		158.2		194.3		9.9

Total	$	273.0	$	343.2	$	22.1	$	279.4	$	356.9	$	32.8


	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2011				2012				2011
(In Millions)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With No Related Specific Allowance
Commercial and Institutional	$	27.0	$	0.1	$	20.1	$	—	$	25.2	$	0.2	$	21.0	$	—
Commercial Real Estate		54.7		—		34.2		0.3		49.6		0.2		34.5		0.4
Lease Financing, net		5.2		—		—		—		3.5		—		—		—
Residential Real Estate		120.7		0.2		107.9		0.5		114.0		0.8		123.2		1.6
Private Client		2.2		—		3.2		—		1.8		—		3.5		—
With a Related Specific Allowance
Commercial and Institutional		5.2		—		12.7		—		6.5		—		29.1		—
Commercial Real Estate		22.1		—		45.2		—		20.2		—		71.0		—
Residential Real Estate		15.3		—		7.5		—		15.3		—		8.3		—
Private Client		0.9		—		1.7		—		1.1		—		2.2		—
Total
Commercial		114.2		0.1		112.2		0.3		105.0		0.4		155.6		0.4
Personal		139.1		0.2		120.3		0.5		132.2		0.8		137.2		1.6

Total	$	253.3	$	0.3	$	232.5	$	0.8	$	237.2	$	1.2	$	292.8	$	2.0

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

Interest income that would have been recorded for nonperforming loans in accordance with their original terms for the three months ended September 30, 2012 and 2011 was $2.9 million and $3.7 million, respectively. Interest income that would have been recorded for nonperforming loans in accordance with their original terms for the nine months ended September 30, 2012 and 2011 was $8.7 million and $11.8 million, respectively.

There were $3.5 million and $9.7 million of combined unfunded loan commitments and standby letters of credit at September 30, 2012 and December 31, 2011, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.

Troubled Debt Restructurings. As of September 30, 2012 and December 31, 2011, there were $45.7 million and $72.2 million of nonperforming TDRs, respectively, and $63.5 million and $41.1 million of performing TDRs, respectively, included within impaired loans. All TDRs are reported as impaired loans in the calendar year of their restructuring. In subsequent years, a TDR may cease being reported as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months, although it will continue to be reported as a TDR. 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 reported as impaired.

The following tables provide, by segment and class, the number of loans and leases modified in TDRs during the three and nine month periods ended September 30, 2012 and 2011, and the recorded investments and unpaid principal balances as of September 30, 2012 and 2011.


($ In Millions)	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Number of		Recorded		Unpaid Principal		Number of		Recorded		Unpaid Principal
	Loans and Leases		Investment		Balance		Loans and Leases		Investment		Balance
Commercial
Commercial and Institutional		—	$	—	$	—		2	$	0.5	$	1.1
Commercial Real Estate		1		2.7		2.7		7		24.6		26.2
Lease Financing, net		—		—		—		1		5.2		5.2

Total Commercial		1		2.7		2.7		10		30.3		32.5

Personal
Residential Real Estate		23		2.0		2.6		84		10.1		13.5
Private Client		—		—		—		1		0.8		0.8

Total Personal		23		2.0		2.6		85		10.9		14.3

Total Loans and Leases		24	$	4.7	$	5.3		95	$	41.2	$	46.8


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

($ In Millions)	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	Number of		Recorded		Unpaid Principal		Number of		Recorded		Unpaid Principal
	Loans and Leases		Investment		Balance		Loans and Leases		Investment		Balance
Commercial
Commercial and Institutional		2	$	5.4	$	6.4		5	$	8.6	$	10.1
Commercial Real Estate		6		10.6		12.3		14		39.4		46.0

Total Commercial		8		16.0		18.7		19		48.0		56.1

Personal
Residential Real Estate		25		7.1		9.1		113		22.0		27.9
Private Client		—		—		—		1		—		—

Total Personal		25		7.1		9.1		114		22.0		27.9

Total Loans and Leases		33	$	23.1	$	27.8		133	$	70.0	$	84.0

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

TDR modifications primarily involve interest rate concessions, extensions of term, deferrals of principal, and other modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-troubled situations.

During the three and nine month periods ended September 30, 2012, TDR modifications of loans within the commercial and institutional, commercial real estate, lease financing and private client classes were primarily deferrals of principal and extensions of term. During the same periods ended September 30, 2012, TDR modifications of loans within the residential real estate class were primarily deferrals of principal and interest rate concessions.

During the three and nine month periods ended September 30, 2011, TDR modifications of loans within the commercial and institutional, commercial real estate, lease financing and private client classes were primarily deferrals of principal, extensions of term and other modifications. During the same periods ended September 30, 2011, TDR modifications of loans within the residential real estate class were primarily deferrals of principal and interest rate concessions.

There were no loans modified as TDRs in the previous 12 months which became nonperforming during the three month period ended September 30, 2012. There were 2 residential real estate loans modified as TDRs in the previous 12 months which became nonperforming during the nine month period ended September 30, 2012. The total recorded investment and unpaid principal balance for these loans were each $89.4 thousand as of September 30, 2012. The following table provides, by segment and class, the number of loans and leases which became nonperforming during the three and nine month periods ended September 30, 2011, which were modified in the proceeding 12-month period.


($ In Millions)	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	Number of		Recorded		Unpaid Principal		Number of		Recorded		Unpaid Principal
	Loans and Leases		Investment		Balance		Loans and Leases		Investment		Balance
Commercial
Commercial and Institutional		1	$	0.2	$	0.6		1	$	0.2	$	0.6

Total Commercial		1		0.2		0.6		1		0.2		0.6

Personal
Residential Real Estate		1		0.1		0.1		7		2.0		2.5

Total Personal		1		0.1		0.1		7		2.0		2.5

Total Loans and Leases		2	$	0.3	$	0.7		8	$	2.2	$	3.1

Note:

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

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.