Note 7 – Allowance for Credit Losses

The allowance for credit losses, which represents management’s estimate of probable losses related to specific borrower relationships and inherent in the various loan and lease portfolios, undrawn commitments, and standby letters of credit, is determined by management through a disciplined credit review process. Northern Trust’s accounting policies related to the estimation of the allowance for credit losses and the charging off of loans, leases and other extensions of credit deemed uncollectible are consistent across both loan and lease segments.

In establishing the inherent portion of the allowance for credit losses, Northern Trust’s Loan Loss Reserve Committee assesses a common set of qualitative factors applicable to both the commercial and personal loan segments. The risk characteristics underlying these qualitative factors, and management’s assessments as to the relative importance of a qualitative factor, can vary between loan segments and between classes within loan segments. Factors evaluated include those related to external matters, such as economic conditions and changes in collateral value, and those related to internal matters, such as changes in asset quality metrics and loan review activities. In addition to the factors noted above, risk characteristics such as portfolio delinquencies, percentage of portfolio on the watch list and on nonperforming status, and average borrower ratings are assessed in the determination of the inherent allowance.

Loan-to-value levels are considered for collateral-secured loans and leases in both the personal and commercial segments. Borrower debt service coverage is evaluated in the personal segment, and cash flow coverage is analyzed in the commercial segment.

Similar risk characteristics by type of exposure are analyzed when determining the allowance for undrawn commitments and standby letters of credit. These qualitative factors, together with historical loss rates, serve as the basis for the allowance for credit losses.

Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance for credit losses. Subsequent recoveries, if any, are credited to the allowance. Determinations as to whether an uncollectible loan is charged off or a specific allowance is established are based on management’s assessment as to the level of certainty regarding the amount of loss.

Changes in the allowance for credit losses by segment were as follows:

TABLE 63: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES


	2014									2013									2012
(In Millions)	COMMERCIAL			PERSONAL			TOTAL			COMMERCIAL			PERSONAL			TOTAL			COMMERCIAL			PERSONAL			TOTAL
Balance at Beginning of Year	$	168.0		$	139.9		$	307.9		$	194.2		$	133.4		$	327.6		$	211.0		$	117.9		$	328.9
Charge-Offs		(12.9	)		(23.2	)		(36.1	)		(16.7	)		(42.6	)		(59.3	)		(19.9	)		(43.1	)		(63.0	)
Recoveries		11.1			7.0			18.1			8.6			11.0			19.6			20.3			16.4			36.7

Net (Charge-Offs) Recoveries		(1.8	)		(16.2	)		(18.0	)		(8.1	)		(31.6	)		(39.7	)		0.4			(26.7	)		(26.3	)
Provision for Credit Losses		3.5			2.5			6.0			(18.1	)		38.1			20.0			(17.2	)		42.2			25.0

Balance at End of Year	$	169.7		$	126.2		$	295.9		$	168.0		$	139.9		$	307.9		$	194.2		$	133.4		$	327.6

Allowance for Credit Losses Assigned to:
Loans and Leases	$	143.8		$	123.2		$	267.0		$	140.9		$	137.2		$	278.1		$	166.1		$	131.8		$	297.9
Undrawn Commitments and Standby Letters of Credit		25.9			3.0			28.9			27.1			2.7			29.8			28.1			1.6			29.7

Total Allowance for Credit Losses	$	169.7		$	126.2		$	295.9		$	168.0		$	139.9		$	307.9		$	194.2		$	133.4		$	327.6

The following tables provide information regarding the recorded investments in loans and leases and the allowance for credit losses by segment as of December 31, 2014, and 2013.

TABLE 64: RECORDED INVESTMENTS IN LOANS AND LEASES

(In Millions)

COMMERCIAL

PERSONAL

TOTAL

DECEMBER 31, 2014

Loans and Leases

Specifically Evaluated for Impairment

78.9

163.3

242.2

Evaluated for Inherent Impairment

14,274.7

17,123.3

31,398.0

Total Loans and Leases

14,353.6

17,286.6

31,640.2

Allowance for Credit Losses on Credit Exposures

Specifically Evaluated for Impairment

5.8

0.8

6.6

Evaluated for Inherent Impairment

138.0

122.4

260.4

Allowance assigned to loans and leases

143.8

123.2

267.0

Allowance for Undrawn Exposures

Commitments and Standby Letters of Credit

25.9

3.0

28.9

Total Allowance for Credit Losses

169.7

126.2

295.9


(In Millions)	COMMERCIAL		PERSONAL		TOTAL
DECEMBER 31, 2013
Loans and Leases
Specifically Evaluated for Impairment	$	99.5	$	193.9	$	293.4
Evaluated for Inherent Impairment		12,520.5		16,571.6		29,092.1

Total Loans and Leases		12,620.0		16,765.5		29,385.5
Allowance for Credit Losses on Credit Exposures
Specifically Evaluated for Impairment		8.1		2.3		10.4
Evaluated for Inherent Impairment		132.8		134.9		267.7

Allowance assigned to loans and leases		140.9		137.2		278.1
Allowance for Undrawn Exposures
Commitments and Standby Letters of Credit		27.1		2.7		29.8

Total Allowance for Credit Losses	$	168.0	$	139.9	$	307.9