Loans and Leases

12 Months Ended

Dec. 31, 2014

Loans and Leases

Note 6 – Loans and Leases

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

TABLE 56: LOANS AND LEASES	DECEMBER 31,
(In Millions)	2014			2013
Commercial
Commercial and Institutional	$	8,381.9		$	7,375.8
Commercial Real Estate		3,333.3			2,955.8
Lease Financing, net		916.3			975.1
Non-U.S.		1,530.6			954.7
Other		191.5			358.6
Total Commercial		14,353.6			12,620.0
Personal
Residential Real Estate		9,782.6			10,271.3
Private Client		7,466.9			6,445.6
Other		37.1			48.6
Total Personal		17,286.6			16,765.5
Total Loans and Leases	$	31,640.2		$	29,385.5
Allowance for Credit Losses Assigned to Loans and Leases		(267.0	)		(278.1	)
Net Loans and Leases	$	31,373.2		$	29,107.4

Residential real estate loans consist of traditional first lien 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 December 31, 2014, and 2013, equity credit lines totaled $1.8 billion and $2.0 billion, respectively, and equity credit lines for which first liens were held by Northern Trust represented 89% and 87%, respectively, 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 $1.5 billion and $1.3 billion at December 31, 2014, and 2013, respectively. Demand deposits reclassified as loan balances totaled $92.1 million and $104.1 million at December 31, 2014, and 2013, respectively. Loans classified as held for sale totaled $2.5 million at December 31, 2014. There were no loans classified as held for sale at December 31, 2013.

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

TABLE 57: DIRECT FINANCE AND LEVERAGED LEASES	DECEMBER 31,
(In Millions)	2014			2013
Direct Finance Leases:
Lease Receivable	$	195.4		$	189.4
Residual Value		208.8			143.1
Initial Direct Costs		3.6			2.5
Unearned Income		(39.1	)		(31.1	)
Investment in Direct Finance Leases		368.7			303.9
Leveraged Leases:
Net Rental Receivable		413.6			544.4
Residual Value		285.6			295.6
Unearned Income		(151.6	)		(168.8	)
Investment in Leveraged Leases		547.6			671.2
Lease Financing, net	$	916.3		$	975.1

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

TABLE 58: FUTURE MINIMUM LEASE PAYMENTS

(In Millions)	FUTURE MINIMUM LEASE PAYMENTS
2015	$	48.4
2016		40.4
2017		37.6
2018		29.8
2019		17.9

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.

_Ÿ Commercial and Institutional: leverage, profit margin, liquidity, asset size and capital levels;

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

_Ÿ Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels;

_Ÿ Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels;

_Ÿ Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio;

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

_Ÿ 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 generally validated at least annually.

Loan and lease segment and class balances at December 31, 2014, and 2013 are provided below, segregated by borrower ratings into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.

TABLE 59: BORROWER RATINGS

	DECEMBER 31, 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	$	5,340.9	$	2,947.3	$	93.7	$	8,381.9	$	4,432.5	$	2,801.5	$	141.8	$	7,375.8
Commercial Real Estate		1,371.7		1,861.8		99.8		3,333.3		1,053.7		1,748.7		153.4		2,955.8
Lease Financing, net		552.5		360.3		3.5		916.3		685.7		285.0		4.4		975.1
Non-U.S.		636.8		892.9		0.9		1,530.6		442.8		511.9		–		954.7
Other		108.1		83.4		–		191.5		157.7		200.9		–		358.6
Total Commercial		8,010.0		6,145.7		197.9		14,353.6		6,772.4		5,548.0		299.6		12,620.0
Personal
Residential Real Estate		3,148.0		6,207.0		427.6		9,782.6		3,204.6		6,563.6		503.1		10,271.3
Private Client		5,143.8		2,311.7		11.4		7,466.9		3,957.6		2,481.2		6.8		6,445.6
Other		21.1		16.0		–		37.1		21.2		27.4		–		48.6
Total Personal		8,312.9		8,534.7		439.0		17,286.6		7,183.4		9,072.2		509.9		16,765.5
Total Loans and Leases	$	16,322.9	$	14,680.4	$	636.9	$	31,640.2	$	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.

The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the other real estate owned and total nonperforming asset balances, as of December 31, 2014, and 2013.

TABLE 60: DELINQUENCY STATUS
(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, 2014
Commercial
Commercial and Institutional	$	8,340.5	$	14.5	$	4.0	$	7.9	$	8,366.9	$	15.0	$	8,381.9
Commercial Real Estate		3,274.3		9.6		9.8		2.5		3,296.2		37.1		3,333.3
Lease Financing, net		916.3		–		–		–		916.3		–		916.3
Non-U.S.		1,530.6		–		–		–		1,530.6		–		1,530.6
Other		191.5		–		–		–		191.5		–		191.5
Total Commercial		14,253.2		24.1		13.8		10.4		14,301.5		52.1		14,353.6
Personal
Residential Real Estate		9,556.3		49.5		9.9		4.5		9,620.2		162.4		9,782.6
Private Client		7,396.0		56.0		5.9		7.8		7,465.7		1.2		7,466.9
Other		37.1		–		–		–		37.1		–		37.1
Total Personal		16,989.4		105.5		15.8		12.3		17,123.0		163.6		17,286.6
Total Loans and Leases	$	31,242.6	$	129.6	$	29.6	$	22.7	$	31,424.5	$	215.7	$	31,640.2
						Other Real Estate Owned					$	16.6
						Total Nonperforming Assets					$	232.3

(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, 2013
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

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

TABLE 61: IMPAIRED LOANS
	AS OF DECEMBER 31, 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	$	9.0	$	12.0	$	–	$	12.2	$	18.1	$	–
Commercial Real Estate		47.0		52.4		–		46.6		57.1		–
Lease Financing, net		4.2		4.2		–		4.4		4.4		–
Residential Real Estate		160.9		204.8		–		185.0		227.8		–
Private Client		0.2		0.5		–		0.8		0.8		–
With a related specific allowance
Commercial and Institutional		6.5		6.6		2.9		9.6		12.1		3.6
Commercial Real Estate		12.2		18.3		2.9		26.7		31.5		4.5
Residential Real Estate		1.4		1.4		0.4		8.1		8.7		2.3
Private Client		0.8		0.8		0.4		–		–		–
Total
Commercial		78.9		93.5		5.8		99.5		123.2		8.1
Personal		163.3		207.5		0.8		193.9		237.3		2.3
Total	$	242.2	$	301.0	$	6.6	$	293.4	$	360.5	$	10.4

	YEAR ENDED DECEMBER 31, 2014				YEAR ENDED DECEMBER 31, 2013
(In Millions)	AVERAGE RECORDED INVESTMENT		INTEREST INCOME RECOGNIZED		AVERAGE RECORDED INVESTMENT		INTEREST INCOME RECOGNIZED
With no related specific allowance
Commercial and Institutional	$	11.3	$	0.1	$	11.7	$	0.2
Commercial Real Estate		46.1		1.0		42.4		0.9
Lease Financing, net		4.3		0.2		4.5		0.2
Residential Real Estate		176.7		2.6		160.2		2.5
Private Client		0.5		–		10.2		–
With a related specific allowance
Commercial and Institutional		9.6		–		12.5		–
Commercial Real Estate		18.8		–		31.0		–
Lease Financing, net		–		–		0.7		–
Residential Real Estate		3.3		–		5.7		–
Private Client		0.6		–		4.0		–
Total
Commercial		90.1		1.3		102.8		1.3
Personal		181.1		2.6		180.1		2.5
Total	$	271.2	$	3.9	$	282.9	$	3.8

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 $9.1 million in 2014, $10.6 million in 2013, and $11.6 million in 2012.

There were $2.4 million and $3.4 million of aggregate undrawn loan commitments and standby letters of credit at December 31, 2014, and 2013, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.

Troubled Debt Restructurings (TDRs): Included within impaired loans were $82.7 million and $72.7 million of nonperforming TDRs and $68.6 million and $89.8 million of performing TDRs as of December 31, 2014, and 2013, respectively.

The following tables provide, by segment and class, the number of loans and leases modified in TDRs during the years ended December 31, 2014, and 2013, and the recorded investments and unpaid principal balances as of December 31, 2014, and 2013.

TABLE 62: TROUBLED DEBT RESTRUCTURINGS
($ In Millions)	NUMBER OF LOANS AND LEASES		RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE
December 31, 2014
Commercial
Commercial and Institutional		2	$	0.7	$	0.8
Commercial Real Estate		8		3.9		4.8
Total Commercial		10		4.6		5.6
Personal
Residential Real Estate		124		15.0		17.9
Private Client		4		0.2		0.5
Total Personal		128		15.2		18.4
Total Loans and Leases		138	$	19.8	$	24.0

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

($ In Millions)	NUMBER OF LOANS AND LEASES		RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE
December 31, 2013
Commercial
Commercial and Institutional		14	$	3.4	$	4.7
Commercial Real Estate		12		27.7		36.2
Total Commercial		26		31.1		40.9
Personal
Residential Real Estate		168		49.1		60.0
Private Client		9		12.9		12.9
Total Personal		177		62.0		72.9
Total Loans and Leases		203	$	93.1	$	113.8

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 in non-troubled situations. During the year ended December 31, 2014, the majority of TDR modifications of loans within commercial and institutional, commercial real estate, and private client classes were primarily extensions of term and other modifications. During the year ended December 31, 2014 TDR modifications of loans within residential real estate were primarily deferrals of principal, extension of term and other modifications. During the year ended December 31, 2013, TDR modifications of loans within commercial and institutional, commercial real estate, lease financing, and private client classes were primarily deferrals of principal, extensions of term, and other modifications; modifications of residential real estate loans were primarily deferrals of principal, extensions of term, interest rate concessions and other modifications.

There were no loans or leases modified in troubled debt restructurings during the previous twelve-month periods which subsequently became nonperforming during the years ended December 31, 2014, or 2013.

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.