Note 6 – Loans and Leases

Amounts outstanding for loans and leases, by segment and class, are shown below.


	DECEMBER 31
(In Millions)	2011			2010
Commercial
Commercial and Institutional	$	6,918.7		$	5,914.5
Commercial Real Estate		2,981.7			3,242.4
Lease Financing, net		978.8			1,063.7
Non-U.S.		1,057.5			1,046.2
Other		417.6			346.6

Total Commercial		12,354.3			11,613.4

Personal
Residential Real Estate		10,708.9			10,854.9
Private Client		5,651.4			5,423.7
Other		349.3			240.0

Total Personal		16,709.6			16,518.6

Total Loans and Leases	$	29,063.9		$	28,132.0
Allowance for Credit Losses Assigned to Loans and Leases		(294.8	)		(319.6	)

Net Loans and Leases	$	28,769.1		$	27,812.4

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 $1.6 billion and $1.4 billion at December 31, 2011 and 2010, respectively. Demand deposits reclassified as loan balances totaled $191.6 million and $76.6 million at December 31, 2011 and 2010, respectively. Loans classified as held for sale totaled $9.3 million at December 31, 2011 and $2.2 million at December 31, 2010.

The components of the net investment in direct finance and leveraged leases are as follows:


	DECEMBER 31
(In Millions)	2011			2010
Direct Finance Leases:
Lease Receivable	$	156.3		$	148.4
Residual Value		149.2			176.1
Initial Direct Costs		2.9			1.8
Unearned Income		(44.1	)		(44.9	)

Investment in Direct Finance Leases	$	264.3		$	281.4

Leveraged Leases:
Net Rental Receivable		326.0			353.0
Residual Value		622.7			743.8
Unearned Income		(234.2	)		(314.5	)

Investment in Leveraged Leases	$	714.5		$	782.3

Lease Financing, net	$	978.8		$	1,063.7

The following schedule reflects the future minimum lease payments to be received over the next five years under direct finance leases:


(In Millions)	FUTURE MINIMUM LEASE PAYMENTS
2012	$	33.9
2013		28.9
2014		25.1
2015		21.4
2016		15.6

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 that 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.

_Ÿ

Commercial and Institutional: leverage, profit margin, liquidity, return on assets, asset size, and capital levels;

_Ÿ

Commercial Real Estate: debt service coverage, leasing status, loan-to-value, loan-to-cost, and guarantor support;

_Ÿ

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

_Ÿ

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

_Ÿ

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

_Ÿ

Private Client: cash flow-to-debt, net worth, and leverage; and

_Ÿ

Personal-Other: cash flow-to-debt and net worth ratios.

While the criteria vary by model, the objective is for 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 warranted. Risk ratings are validated at least annually.

Loan and lease segment and class balances at December 31, 2011 and December 31, 2010 are provided below, segregated by borrower ratings into “1 to 3”, “4 to 5”, and “6 to 9”(watch list), categories.


	DECEMBER 31, 2011								DECEMBER 31, 2010
(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	$	3,681.8	$	3,029.1	$	207.8	$	6,918.7	$	2,821.5	$	2,849.8	$	243.2	$	5,914.5
Commercial Real Estate		1,247.1		1,467.2		267.4		2,981.7		1,232.8		1,594.3		415.3		3,242.4
Lease Financing, net		547.7		422.3		8.8		978.8		571.6		473.0		19.1		1,063.7
Non-U.S.		519.0		527.3		11.2		1,057.5		430.0		596.5		19.7		1,046.2
Other		241.4		176.2		–		417.6		209.5		137.1		–		346.6

Total Commercial		6,237.0		5,622.1		495.2		12,354.3		5,265.4		5,650.7		697.3		11,613.4

Personal
Residential Real Estate		2,777.1		7,501.0		430.8		10,708.9		2,896.0		7,586.9		372.0		10,854.9
Private Client		3,390.6		2,245.9		14.9		5,651.4		3,326.5		2,064.1		33.1		5,423.7
Other		162.3		187.0		–		349.3		78.1		161.9		–		240.0

Total Personal		6,330.0		9,933.9		445.7		16,709.6		6,300.6		9,812.9		405.1		16,518.6

Total Loans and Leases	$	12,567.0	$	15,556.0	$	940.9	$	29,063.9	$	11,566.0	$	15,463.6	$	1,102.4	$	28,132.0

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.

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.

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 loans and leases, 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.

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 December 31, 2011 and December 31, 2010.

(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

DECEMBER 31, 2011

Commercial

Commercial and Institutional

6,869.2

15.0

2.7

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


(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
DECEMBER 31, 2010
Commercial
Commercial and Institutional	$	5,831.2	$	16.3	$	8.2	$	.8	$	5,856.5	$	58.0	$	5,914.5
Commercial Real Estate		3,076.7		24.2		15.7		9.4		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		11,364.4		40.5		23.9		10.2		11,439.0		174.4		11,613.4

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

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

Total Loans and Leases	$	27,579.6	$	152.3	$	54.1	$	13.0	$	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 DECEMBER 31, 2011

AS OF DECEMBER 31, 2010

(In Millions)

RECORDED
INVESTMENT

UNPAID

PRINCIPAL
BALANCE

SPECIFIC
ALLOWANCE

RECORDED
INVESTMENT

UNPAID

PRINCIPAL
BALANCE

SPECIFIC
ALLOWANCE

With no related specific allowance:

Commercial and Institutional

21.4

24.0

–

17.9

26.1

–

Commercial Real Estate

46.5

68.0

–

43.7

62.4

–

Residential Real Estate

134.4

162.6

–

111.9

138.1

–

Private Client

1.6

1.9

–

3.7

3.9

–

With a related specific allowance:

Commercial and Institutional

11.9

20.5

8.8

41.7

47.8

19.8

Commercial Real Estate

41.4

50.1

14.1

77.2

88.9

29.5

Residential Real Estate

18.9

26.2

8.9

5.1

2.4

Private Client

3.3

3.6

1.0

–

Total:

Commercial

121.2

162.6

22.9

180.5

225.2

49.3

Personal

158.2

194.3

9.9

120.7

147.1

2.4

Total

279.4

356.9

32.8

301.2

372.3

51.7


	YEAR ENDED DECEMBER 31, 2011
(In Millions)	AVERAGE RECORDED INVESTMENT		INTEREST INCOME RECOGNIZED
With no related specific allowance:
Commercial and Institutional	$	18.3	$	.1
Commercial Real Estate		33.0		.5
Residential Real Estate		111.8		2.1
Private Client		2.2		–
With a related specific allowance:
Commercial and Institutional		23.6		–
Commercial Real Estate		59.8		–
Residential Real Estate		9.7		–
Private Client		2.0		–
Total:
Commercial		134.7		.6
Personal		125.7		2.1

Total	$	260.4	$	2.7

Note: Average recorded investments in impaired loans are calculated as the average of the month-end impaired loan balances for the period.

Interest income that would have been recorded on nonperforming loans in accordance with their original terms totaled approximately $15.4 million in 2011, $16.0 million in 2010, and $8.0 million in 2009.

The average recorded investment in impaired loans was $253.8 million for the year ended December 31, 2010.

There were $9.7 million and $16.3 million of unfunded loan commitments and standby letters of credit at December 31, 2011 and 2010, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.

Troubled Debt Restructurings. As of December 31, 2011 and December 31, 2010, there were $72.2 million and $33.4 million, respectively, of nonperforming TDRs and $41.1 million and $22.9 million, respectively, of performing TDRs, included within impaired loans.

The following table provides, by segment and class, the number of loans and leases modified in TDRs during the year ended December 31, 2011, and their total recorded investments and unpaid principal balances as of December 31, 2011.

($ In Millions)

NUMBER OF
LOANS AND
LEASES

RECORDED
INVESTMENT

UNPAID
PRINCIPAL
BALANCE

Commercial

Commercial and Institutional

10.4

12.1

Commercial Real Estate

34.0

42.6

Total Commercial

44.4

54.7

Personal

Residential Real Estate

148

32.6

40.4

Private Client

–

Total Personal

149

32.6

40.4

Total Loans and Leases

171

77.0

95.1

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

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 to non-troubled borrowers. During the year ended December 31, 2011, TDR modifications of loans within the commercial and institutional class were primarily interest rate concessions, deferrals of principal and other modifications; modifications of commercial real estate loans were primarily interest rate concessions, extensions of term and other modifications; and modifications of residential real estate loans were primarily interest rate concessions, deferrals of principal and extensions of term.

The following table provides, by segment and class, the number of loans and leases modified in troubled debt restructurings during the previous 12 months which subsequently became nonperforming during the year ended December 31, 2011 as well as their total recorded investments and unpaid principal balances as of December 31, 2011.

($ In Millions)

NUMBER OF
LOANS AND
LEASES

RECORDED
INVESTMENT

UNPAID
PRINCIPAL
BALANCE

Commercial

Commercial and Institutional

–

Total Commercial

–

Personal

Residential Real Estate

2.1

2.6

Private Client

1.1

Total Personal

2.9

3.7

Total Loans and Leases

2.9

4.1

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

All loans and leases modified in TDRs 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.