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


(In Millions)	June 30, 2014			December 31, 2013
Commercial
Commercial and Institutional	$	8,042.6		$	7,375.8
Commercial Real Estate		3,075.5			2,955.8
Lease Financing, net		926.4			975.1
Non-U.S.		1,334.0			954.7
Other		612.9			358.6

Total Commercial		13,991.4			12,620.0

Personal
Residential Real Estate		9,992.6			10,271.3
Private Client		6,630.5			6,445.6
Other		83.1			48.6

Total Personal		16,706.2			16,765.5

Total Loans and Leases		30,697.6			29,385.5

Allowance for Credit Losses Assigned to Loans and Leases		(275.2	)		(278.1	)

Net Loans and Leases	$	30,422.4		$	29,107.4

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 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 June 30, 2014 and December 31, 2013, equity credit lines totaled $1.9 billion and $2.0 billion, respectively, and equity credit lines for which first liens were held by Northern Trust represented 87% 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 $1.9 billion at June 30, 2014 and $1.3 billion at December 31, 2013. Demand deposits reclassified as loan balances totaled $83.9 million and $104.1 million at June 30, 2014 and December 31, 2013, respectively. Loans classified as held for sale totaled $9.5 million at June 30, 2014. There were no loans classified as held for sale at December 31, 2013.

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, credit bureau scores, 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 June 30, 2014 and December 31, 2013 are provided below, segregated by borrower ratings into “1 to 3”, “4 to 5” and “6 to 9” (watch list), categories.


	June 30, 2014								December 31, 2013
(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	$	4,853.8	$	3,072.8	$	116.0	$	8,042.6	$	4,432.5	$	2,801.5	$	141.8	$	7,375.8
Commercial Real Estate		1,203.5		1,736.3		135.7		3,075.5		1,053.7		1,748.7		153.4		2,955.8
Lease Financing, net		504.1		418.0		4.3		926.4		685.7		285.0		4.4		975.1
Non-U.S.		588.6		744.4		1.0		1,334.0		442.8		511.9		—		954.7
Other		520.9		92.0		—		612.9		157.7		200.9		—		358.6

Total Commercial		7,670.9		6,063.5		257.0		13,991.4		6,772.4		5,548.0		299.6		12,620.0

Personal
Residential Real Estate		3,075.4		6,452.4		464.8		9,992.6		3,204.6		6,563.6		503.1		10,271.3
Private Client		4,177.9		2,447.8		4.8		6,630.5		3,957.6		2,481.2		6.8		6,445.6
Other		70.6		12.5		—		83.1		21.2		27.4		—		48.6

Total Personal		7,323.9		8,912.7		469.6		16,706.2		7,183.4		9,072.2		509.9		16,765.5

Total Loans and Leases	$	14,994.8	$	14,976.2	$	726.6	$	30,697.6	$	13,955.8	$	14,620.2	$	809.5	$	29,385.5

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.

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 June 30, 2014 and December 31, 2013.

June 30, 2014

(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

7,977.8

30.3

12.4

1.3

8,021.8

20.8

8,042.6

Commercial Real Estate

3,012.9

9.6

5.7

1.9

3,030.1

45.4

3,075.5

Lease Financing, net

926.4

—

926.4

—

926.4

Non-U.S.

1,334.0

—

1,334.0

—

1,334.0

Other

612.9

—

612.9

—

612.9

Total Commercial

13,864.0

39.9

18.1

3.2

13,925.2

66.2

13,991.4

Personal

Residential Real Estate

9,802.6

12.4

11.1

4.8

9,830.9

161.7

9,992.6

Private Client

6,564.1

44.3

15.6

5.1

6,629.1

1.4

6,630.5

Other

83.1

—

83.1

—

83.1

Total Personal

16,449.8

56.7

26.7

9.9

16,543.1

163.1

16,706.2

Total Loans and Leases

30,313.8

96.6

44.8

13.1

30,468.3

229.3

30,697.6

Other Real Estate Owned

12.6

Total Nonperforming Assets

241.9


December 31, 2013
(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	$	7,332.3	$	5.0	$	12.1	$	3.3	$	7,352.7	$	23.1	$	7,375.8
Commercial Real Estate		2,881.1		4.1		14.6		6.8		2,906.6		49.2		2,955.8
Lease Financing, net		975.1		—		—		—		975.1		—		975.1
Non-U.S.		954.7		—		—		—		954.7		—		954.7
Other		358.6		—		—		—		358.6		—		358.6

Total Commercial		12,501.8		9.1		26.7		10.1		12,547.7		72.3		12,620.0

Personal
Residential Real Estate		9,934.4		129.3		15.6		2.9		10,082.2		189.1		10,271.3
Private Client		6,404.2		29.1		7.5		3.4		6,444.2		1.4		6,445.6
Other		48.6		—		—		—		48.6		—		48.6

Total Personal		16,387.2		158.4		23.1		6.3		16,575.0		190.5		16,765.5

Total Loans and Leases	$	28,889.0	$	167.5	$	49.8	$	16.4	$	29,122.7	$	262.8	$	29,385.5

								Other Real Estate Owned				11.9

								Total Nonperforming Assets			$	274.7

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 June 30, 2014						As of December 31, 2013
(In Millions)	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Recorded Investment		Unpaid Principal Balance		Specific Allowance
With No Related Specific Allowance
Commercial and Institutional	$	12.6	$	15.3	$	—	$	12.2	$	18.1	$	—
Commercial Real Estate		49.7		57.1		—		46.6		57.1		—
Lease Financing, net		4.3		4.3		—		4.4		4.4		—
Residential Real Estate		177.9		225.8		—		185.0		227.8		—
Private Client		0.4		0.4		—		0.8		0.8		—
With a Related Specific Allowance
Commercial and Institutional		7.7		7.8		3.7		9.6		12.1		3.6
Commercial Real Estate		15.7		21.6		3.9		26.7		31.5		4.5
Residential Real Estate		1.4		1.5		0.4		8.1		8.7		2.3
Private Client		0.9		0.9		0.5		—		—		—
Total
Commercial		90.0		106.1		7.6		99.5		123.2		8.1
Personal		180.6		228.6		0.9		193.9		237.3		2.3

Total	$	270.6	$	334.7	$	8.5	$	293.4	$	360.5	$	10.4


	Three Months Ended June 30,								Six Months Ended June 30,
	2014				2013				2014				2013
(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	$	10.6	$	—	$	10.8	$	0.1	$	11.0	$	—	$	11.5	$	0.1
Commercial Real Estate		44.7		0.2		40.3		0.2		44.8		0.5		40.0		0.4
Lease Financing, net		4.3		—		4.6		0.1		4.4		0.1		4.6		0.1
Residential Real Estate		181.2		0.7		156.6		0.6		185.2		1.3		148.7		1.1
Private Client		0.7		—		13.3		0.2		0.7		—		11.4		0.3
With a Related Specific Allowance
Commercial and Institutional		9.7		—		12.5		—		9.9		—		11.7		—
Commercial Real Estate		22.7		—		33.2		—		24.6		—		31.7		—
Residential Real Estate		3.8		—		8.3		—		5.4		—		9.0		—
Private Client		0.5		—		1.6		—		0.3		—		1.4		—
Total
Commercial		92.0		0.2		101.4		0.4		94.7		0.6		99.5		0.6
Personal		186.2		0.7		179.8		0.8		191.6		1.3		170.5		1.4

Total	$	278.2	$	0.9	$	281.2	$	1.2	$	286.3	$	1.9	$	270.0	$	2.0

Note: 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 was $2.4 million and $2.6 million, respectively, for the three months ended June 30, 2014 and 2013, and $4.9 million and $5.2 million, respectively, for the six months ended June 30, 2014 and 2013.

There were $1.5 million and $3.4 million of aggregate undrawn loan commitments and standby letters of credit at June 30, 2014 and December 31, 2013, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.

Troubled Debt Restructurings (TDRs). Included within impaired loans were $62.8 million and $72.7 million of nonperforming TDRs, and $91.9 million and $89.8 million of performing TDRs as of June 30, 2014 and December 31, 2013, respectively. 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. 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 six month periods ended June 30, 2014 and 2013, and the recorded investments and unpaid principal balances as of June 30, 2014 and 2013.


($ In Millions)	Three Months Ended June 30, 2014						Six Months Ended June 30, 2014
	Number of Loans and Leases		Recorded Investment		Unpaid Principal Balance		Number of Loans and Leases		Recorded Investment		Unpaid Principal Balance
Commercial
Commercial and Institutional		2	$	0.7	$	1.0		2	$	0.7	$	1.0
Commercial Real Estate		—		—		—		1		0.7		0.7
Lease Financing, net		—		—		—		—		—		—

Total Commercial		2		0.7		1.0		3		1.4		1.7

Personal
Residential Real Estate		34		4.9		5.7		68		8.4		9.4
Private Client		2		0.3		0.3		3		0.3		0.3

Total Personal		36		5.2		6.0		71		8.7		9.7

Total Loans and Leases		38	$	5.9	$	7.0		74	$	10.1	$	11.4

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


($ In Millions)	Three Months Ended June 30, 2013						Six Months Ended June 30, 2013
	Number of Loans and Leases		Recorded Investment		Unpaid Principal Balance		Number of Loans and Leases		Recorded Investment		Unpaid Principal Balance
Commercial
Commercial and Institutional		—	$	—	$	—		7	$	0.5	$	1.0
Commercial Real Estate		3		4.7		6.9		4		4.7		7.0

Total Commercial		3		4.7		6.9		11		5.2		8.0

Personal
Residential Real Estate		36		5.3		6.9		84		45.0		48.5
Private Client		1		—		—		6		12.8		12.8

Total Personal		37		5.3		6.9		90		57.8		61.3

Total Loans and Leases		40	$	10.0	$	13.8		101	$	63.0	$	69.3

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

TDR modifications 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 six months ended June 30, 2014, the majority of TDR modifications of loans within the commercial real estate, residential real estate, and private client classes were extensions of term. During the three and six months ended June 30, 2013, TDR modifications of loans within the commercial and institutional, commercial real estate, and private client classes were primarily deferrals of principal; extensions of term, and other modifications, and modifications of loans within the residential real estate class were primarily deferrals of principal, interest rate concessions, extensions of term, and other modifications.

There were three residential real estate loans modified as TDRs in the 12 months ended March 31, 2014 which subsequently became nonperforming during the three and six months ended June 30, 2014. The total recorded investment and unpaid principal balance for these loans were $487.4 thousand and $862.7 thousand, respectively. There was one private client loan modified as a TDR in the 12 months ended March 31, 2014 which subsequently became nonperforming during the three and six months ended June 30, 2014. The total recorded investment and unpaid principal balance for this loan was $5 thousand.

There were no loans or leases modified in TDRs in the 12 months ended March 31, 2013 which subsequently became nonperforming during the three or six months ended June 30, 2013.

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