Concentrations of Credit Risk

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, 2018, 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 $4.3 billion, federal funds sold and securities purchased under agreements to resell of $1.2 billion, and demand balances maintained at correspondent banks of $4.5 billion. At December 31, 2017, 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 $5.6 billion, federal funds sold and securities purchased under agreements to resell of $1.3 billion, and demand balances maintained at correspondent banks of $4.3 billion. 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. At December 31, 2018, residential real estate loans totaled $6.5 billion, or 22% of total U.S. loans and leases at December 31, 2018, compared with $7.2 billion, or 23% of total U.S. loans and leases at December 31, 2017. 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. Of the total $6.5 billion in residential real estate loans, $1.7 billion were in Florida, $1.3 billion were in California, and $1.2 billion were in the greater Chicago area, with the remainder distributed throughout the other geographic regions within the U.S. served by Northern Trust. Legally binding undrawn commitments to extend residential real estate credit, which are primarily equity credit lines, totaled $824.0 million and $1.0 billion at December 31, 2018 and 2017, respectively.

Commercial Real Estate. The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended 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 Arizona 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.

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

TABLE 70: COMMERCIAL REAL ESTATE LOANS



	DECEMBER 31,
(In Millions)	2018		2017
Commercial Mortgages
Office	$	811.2	$	825.2
Apartment/ Multi-family	490.7		623.3
Retail	529.7		631.1
Industrial/ Warehouse	254.9		311.1
Other	426.6		445.6

Total Commercial Mortgages	2,513.1		2,836.3
Construction, Acquisition and Development Loans	420.6		350.8
Single Family Investment	127.0		164.8
Other Commercial Real Estate Related	168.1		130.8

Total Commercial Real Estate Loans	$	3,228.8	$	3,482.7