4. Asset Quality

We manage our exposure to credit risk by closely monitoring loan performance trends and general economic conditions. An indicator of potential credit losses is the level of nonperforming assets and past due loans.

Our nonperforming assets and past due loans were as follows:


in millions	June 30, 2013		December 31, 2012		June 30, 2012

Total nonperforming loans ^{(a), (b)}	$	652	$	674	$	657
Nonperforming loans held for sale		14		25		38
OREO		18		22		28
Other nonperforming assets		9		14		28

Total nonperforming assets	$	693	$	735	$	751

Nonperforming assets from discontinued operations - education lending ^(c)	$	19	$	20	$	18


Restructured loans included in nonperforming loans ^(a)	$	195	$	249	$	163
Restructured loans with an allocated specific allowance ^(d)		65		114		71
Specifically allocated allowance for restructured loans ^(e)		30		33		34

Accruing loans past due 90 days or more	$	80	$	78	$	131
Accruing loans past due 30 through 89 days		251		424		362

(a)	December 31, 2012 loan balance includes $72 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed, as addressed in updated regulatory guidance issued in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs.

(b)	June 30, 2013 and December 31, 2012, loan balance exclude $19 million and $23 million of PCI loans, respectively.

(c)	Includes approximately $8 million and $3 million of restructured loans at June 30, 2013 and December 31, 2012, respectively. There were no additional restructured loans at June 30, 2012. See Note 11 (“Acquisitions and Discontinued Operations”) for further discussion.

(d)	Included in individually impaired loans allocated a specific allowance.

(e)	Included in allowance for individually evaluated impaired loans.

We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are deemed PCI and initially recorded at fair value without recording an allowance for loan losses. At the date of acquisition, the estimated gross contractual amount receivable of PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) was $11 million, and the accretable amount was approximately $5 million. The difference between the fair value and the cash flows expected to be collected from the purchased loans is accreted to interest income over the remaining term of the loans.

At June 30, 2013, the outstanding unpaid principal balance and carrying value of all PCI loans was $27 million and $19 million, respectively. Changes in the accretable yield during 2013 included accretion of $1 million and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at June 30, 2013.

At June 30, 2013, the approximate carrying amount of our commercial nonperforming loans outstanding represented 63% of their original contractual amount, total nonperforming loans outstanding represented 76% of their original contractual amount owed, and nonperforming assets in total were carried at 74% of their original contractual amount.

At June 30, 2013, our twenty largest nonperforming loans totaled $191 million, representing 29% of total loans on nonperforming status from continuing operations. At June 30, 2012, the twenty largest nonperforming loans totaled $220 million, representing 33% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $13 million for the six months ended June 30, 2013, and $25 million for the year ended December 31, 2012.

The following tables set forth a further breakdown of individually impaired loans as of June 30, 2013, December 31, 2012 and June 30, 2012:


June 30, 2013 in millions	Recorded Investment		^(a)	Unpaid Principal Balance		^(b)	Specific Allowance		Average Recorded Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	89		$	140			—	$	91
Commercial real estate:
Commercial mortgage		88			138			—		88
Construction		50			157			—		49

Total commercial real estate loans		138			295			—		137

Total commercial loans with no related allowance recorded		227			435			—		228

Real estate — residential mortgage		16			16			—		16

Home equity:
Key Community Bank		69			69			—		66
Other		2			2			—		2

Total home equity loans		71			71			—		68
Consumer other:
Marine		3			3			—		3

Total consumer other		3			3			—		3

Total consumer loans		90			90			—		87

Total loans with no related allowance recorded		317			525			—		315

With an allowance recorded:
Commercial, financial and agricultural		22			31		$	6		18
Commercial real estate:
Commercial mortgage		5			6			2		7
Construction		2			12			—		1

Total commercial real estate loans		7			18			2		8

Total commercial loans with an allowance recorded		29			49			8		26


Real estate — residential mortgage		20			20			5		19

Home equity:
Key Community Bank		30			30			9		28
Other		10			10			1		10

Total home equity loans		40			40			10		38

Consumer other — Key Community Bank		3			3			1		3
Credit cards		4			4			—		4
Consumer other:
Marine		50			50			10		49
Other		1			1			—		1

Total consumer other		51			51			10		50

Total consumer loans		118			118			26		114

Total loans with an allowance recorded		147			167			34		140

Total	$	464		$	692		$	34	$	455

(a)

The Recorded Investment in impaired loans represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

(b)	The Unpaid Principal Balance represents the customer's legal obligation to us.


December 31, 2012 in millions	Recorded Investment		^(a)	Unpaid Principal Balance		^(b)	Specific Allowance		Average Recorded Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	32		$	64			—	$	60
Commercial real estate:
Commercial mortgage		89			142			—		95
Construction		48			182			—		39

Total commercial real estate loans		137			324			—		134

Total commercial loans with no related allowance recorded		169			388			—		194

Real estate — residential mortgage		21			21			—		10

Home equity:
Key Community Bank		65			65			—		33
Other		3			3			—		1

Total home equity loans		68			68			—		34

Total consumer loans		89			89			—		44

Total loans with no related allowance recorded		258			477			—		238

With an allowance recorded:
Commercial, financial and agricultural		33			42		$	12		48
Commercial real estate:
Commercial mortgage		7			7			1		51
Construction		—			—			—		6

Total commercial real estate loans		7			7			1		57

Total commercial loans with an allowance recorded		40			49			13		105


Real estate — residential mortgage		17			17			1		8

Home equity:
Key Community Bank		22			22			11		11
Other		9			9			1		5

Total home equity loans		31			31			12		16

Consumer other — Key Community Bank		2			2			2		1
Credit cards		2			2			—		1
Consumer other:
Marine		60			60			7		30
Other		1			1			—		1

Total consumer other		61			61			7		31

Total consumer loans		113			113			22		57

Total loans with an allowance recorded		153			162			35		162

Total	$	411		$	639		$	35	$	400

(a)

(b)	The Unpaid Principal Balance represents the customer’s legal obligation to us.


June 30, 2012 in millions	Recorded Investment		^(a)	Unpaid Principal Balance		^(b)	Specific Allowance		Average Recorded Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	59		$	142			—	$	68
Commercial real estate:
Commercial mortgage		112			199			—		113
Construction		51			204			—		49

Total commercial real estate loans		163			403			—		162

Total commercial loans with no related allowance recorded		222			545			—		230

Real estate — residential mortgage		1			1			—		1

Home equity:
Key Community Bank		—			—			—		—
Other		—			—			—		—

Total home equity loans		—			—			—		—

Consumer other — Key Community Bank		—			—			—		—
Credit cards		—			—			—		—
Consumer other:
Marine		—			—			—		—
Other		—			—			—		—

Total consumer other		—			—			—		—

Total consumer loans		1			1			—		1

Total loans with no related allowance recorded		223			546			—		231

With an allowance recorded:
Commercial, financial and agricultural		43			53		$	12		46
Commercial real estate:
Commercial mortgage		56			98			15		63
Construction		4			4			3		4

Total commercial real estate loans		60			102			18		67
Commercial lease financing		—			—			—		—

Total commercial loans with an allowance recorded		103			155			30		113


Real estate — residential mortgage		16			17			2		8

Home equity:
Key Community Bank		11			11			3		6
Other		6			6			1		3

Total home equity loans		17			17			4		9

Consumer other — Key Community Bank		2			2			1		1
Credit cards		—			—			—		—
Consumer other:
Marine		50			50			11		25
Other		—			—			—		—

Total consumer other		50			50			11		25

Total consumer loans		85			86			18		43

Total loans with an allowance recorded		188			241			48		156

Total	$	411		$	787		$	48	$	387

(a)

(b)	The Unpaid Principal Balance represents the customer's legal obligation to us.

For the three months ended June 30, 2013, and 2012, interest income recognized on the outstanding balances of accruing impaired loans totaled $1 million and $2 million, respectively.

At June 30, 2013, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $311 million, compared to $320 million at December 31, 2012, and $274 million at June 30, 2012. We added $72 million in restructured loans during the first six months of 2013, which were offset by $81 million in payments and charge-offs.

A further breakdown of TDRs included in nonperforming loans by loan category as of June 30, 2013, follows:


June 30, 2013 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		43	$	53	$	24
Commercial real estate:
Real estate — commercial mortgage		15		58		21
Real estate — construction		6		19		5

Total commercial real estate loans		21		77		26

Total commercial loans		64		130		50
Real estate — residential mortgage		381		23		23
Home equity:
Key Community Bank		1,683		89		87
Other		262		8		8

Total home equity loans		1,945		97		95
Consumer other — Key Community Bank		54		2		2
Credit cards		506		3		3
Consumer other:
Marine		360		41		21
Other		48		2		1

Total consumer other		408		43		22

Total consumer loans		3,294		168		145

Total nonperforming TDRs		3,358		298		195

Prior-year accruing ^(a)
Commercial, financial and agricultural		87		10		5
Commercial real estate:
Real estate — commercial mortgage		4		22		15
Real estate — construction		1		23		32

Total commercial real estate loans		5		45		47

Total commercial loans		92		55		52
Real estate — residential mortgage		118		12		12
Home equity:
Key Community Bank		134		14		14
Other		178		5		5

Total home equity loans		312		19		19
Consumer other — Key Community Bank		26		1		1
Credit cards		309		2		2
Consumer other:
Marine		243		29		28
Other		49		2		2

Total consumer other		292		31		30

Total consumer loans		1,057		65		64

Total prior-year accruing TDRs		1,149		120		116

Total TDRs		4,507	$	418	$	311

(a)	All TDRs that were restructured prior to January 1, 2013, and are fully accruing.

A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2012, follows:


December 31, 2012 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		82	$	76	$	39
Commercial real estate:
Real estate — commercial mortgage		15		62		25
Real estate — construction		8		53		33

Total commercial real estate loans		23		115		58

Total commercial loans		105		191		97
Real estate — residential mortgage		372		28		28
Home equity:
Key Community Bank		1,577		87		82
Other		322		9		8

Total home equity loans		1,899		96		90
Consumer other — Key Community Bank		28		1		1
Credit cards		405		3		3
Consumer other:
Marine		251		30		29
Other		34		1		1

Total consumer other		285		31		30

Total consumer loans		2,989		159		152

Total nonperforming TDRs		3,094		350		249

Prior-year accruing ^(a)
Commercial, financial and agricultural		122		12		6
Commercial real estate:
Real estate — commercial mortgage		4		22		15

Total commercial real estate loans		4		22		15

Total commercial loans		126		34		21
Real estate — residential mortgage		101		10		10
Home equity:
Key Community Bank		76		5		5
Other		84		3		3

Total home equity loans		160		8		8
Consumer other — Key Community Bank		16		—		—
Consumer other:
Marine		117		31		31
Other		43		1		1

Total consumer other		160		32		32

Total consumer loans		437		50		50

Total prior-year accruing TDRs		563		84		71

Total TDRs		3,657	$	434	$	320

(a)	All TDRs that were restructured prior to January 1, 2012, and are fully accruing.

A further breakdown of TDRs included in nonperforming loans by loan category as of June 30, 2012, follows:


June 30, 2012 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		95	$	108	$	59
Commercial real estate:
Real estate — commercial mortgage		16		47		31
Real estate — construction		11		60		43

Total commercial real estate loans		27		107		74

Total commercial loans		122		215		133
Real estate — residential mortgage		56		7		7
Home equity:
Key Community Bank		50		4		4
Other		74		2		1

Total home equity loans		124		6		5
Consumer other — Key Community Bank		11		1		1
Consumer other:
Marine		139		17		17
Other		11		1		—

Total consumer other		150		18		17

Total consumer loans		341		32		30

Total nonperforming TDRs		463		247		163

Prior-year accruing ^(a)
Commercial, financial and agricultural		115		8		6
Commercial real estate:
Real estate — commercial mortgage		7		71		48
Real estate — construction		1		15		1

Total commercial real estate loans		8		86		49

Total commercial loans		123		94		55
Real estate — residential mortgage		111		11		11
Home equity:
Key Community Bank		88		7		7
Other		101		3		3

Total home equity loans		189		10		10
Consumer other — Key Community Bank		20		1		—
Consumer other:
Marine		135		34		33
Other		53		2		2

Total consumer other		188		36		35

Total consumer loans		508		58		56

Total prior-year accruing TDRs		631		152		111

Total TDRs		1,094	$	399	$	274

(a)	All TDRs that were restructured prior to January 1, 2012, and are fully accruing.

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession to the borrower without commensurate financial, structural, or legal consideration. All commercial and consumer loan TDRs, regardless of size, are evaluated for impairment individually to determine the probable loss content and are assigned a specific loan allowance if deemed appropriate. The financial effects of TDRs are reflected in the components that make up the allowance for loan and lease losses in either the amount of a charge-off or the loan loss provision. These components affect the ultimate allowance level. Additional information regarding TDRs for discontinued operations is provided in Note 11 (“Acquisitions and Discontinued Operations”).

Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. There were 127 consumer loan TDRs with a combined recorded investment of $5 million that have experienced payment defaults during the three months ended June 30, 2013 compared to 240 consumer TDRs with a combined recorded investment of $14 million during the three months ended March 31, 2013 from modifications resulting in TDR status during 2012. There were no significant payment defaults during the first six months of 2013 arising from commercial loans that were designated as TDRs during 2012.

Our loan modifications are handled on a case by case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our client’s financial needs. Our concession types are primarily interest rate reductions, forgiveness of principal and other modifications. Other loan term modifications for consumer TDRs include concessions made due to updated regulatory guidance issued in the third quarter of 2012.

The following table shows the concession types for our commercial and consumer accruing and nonaccruing TDRs and other selected financial data.


dollars in millions	June 30, 2013		December 31, 2012		June 30, 2012

Commercial loans:
Interest rate reduction	$	88	$	104	$	155
Forgiveness of principal		6		7		13
Other modification of loan terms		8		7		20

Total	$	102	$	118	$	188


Consumer loans:
Interest rate reduction	$	104	$	122	$	81
Forgiveness of principal		5		6		5
Other modification of loan terms		100		74		—

Total	$	209	$	202	$	86


Total commercial and consumer TDRs ^(a)	$	311	$	320	$	274
Total loans		53,101		52,822		49,605

(a)	Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $25 million, $32 million, and $45 million at June 30, 2013, December 31, 2012, and June 30, 2012, respectively.

Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans and resuming accrual of interest for our commercial and consumer loan portfolios are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Nonperforming Loans” on page 120 of our 2012 Form 10-K. Pursuant to regulatory guidance issued in January 2012, the above-mentioned policy for nonperforming loans was revised effective for the second quarter of 2012. Beginning in the second quarter of 2012, any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure or for which the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. This policy was implemented prospectively, and, therefore, prior periods were not restated or re-presented. Credit card loans on which payments are past due for 90 days are placed on nonaccrual status.

At June 30, 2013, approximately $52.1 billion, or 98.1%, of our total loans are current. At June 30, 2013, total past due loans and nonperforming loans of $983 million represent approximately 1.9% of total loans.

The following aging analysis as of June 30, 2013, December 31, 2012, and June 30, 2012, of past due and current loans provides further information regarding Key's credit exposure.


June 30, 2013 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans

LOAN TYPE
Commercial, financial and agricultural	$	23,512	$	37	$	9	$	11	$	146	$	203		—	$	23,715
Commercial real estate:
Commercial mortgage		7,307		16		5		38		106		165	$	2		7,474
Construction		1,031		3		—		—		26		29		—		1,060

Total commercial real estate loans		8,338		19		5		38		132		194		2		8,534
Commercial lease financing		4,734		14		7		5		14		40		—		4,774

Total commercial loans	$	36,584	$	70	$	21	$	54	$	292	$	437	$	2	$	37,023


Real estate — residential mortgage	$	2,037	$	20	$	7	$	3	$	94	$	124	$	15	$	2,176
Home equity:
Key Community Bank		9,877		51		25		13		205		294		2		10,173
Other		347		7		3		2		16		28		—		375

Total home equity loans		10,224		58		28		15		221		322		2		10,548
Consumer other — Key Community Bank		1,403		9		3		6		3		21		—		1,424
Credit cards		680		6		4		—		11		21		—		701
Consumer other:
Marine		1,106		18		5		1		30		54		—		1,160
Other		65		2		—		1		1		4		—		69

Total consumer other		1,171		20		5		2		31		58		—		1,229

Total consumer loans	$	15,515	$	113	$	47	$	26	$	360	$	546	$	17	$	16,078


Total loans	$	52,099	$	183	$	68	$	80	$	652	$	983	$	19	$	53,101



December 31, 2012 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans ^(a)		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans

LOAN TYPE
Commercial, financial and agricultural	$	23,030	$	56	$	34	$	22	$	99	$	211	$	1	$	23,242
Commercial real estate:
Commercial mortgage		7,556		21		11		9		120		161		3		7,720
Construction		943		1		2		1		56		60		—		1,003

Total commercial real estate loans		8,499		22		13		10		176		221		3		8,723
Commercial lease financing		4,772		88		31		8		16		143		—		4,915

Total commercial loans	$	36,301	$	166	$	78	$	40	$	291	$	575	$	4	$	36,880


Real estate — residential mortgage	$	2,023	$	16	$	10	$	6	$	103	$	135	$	16	$	2,174
Home equity:
Key Community Bank		9,506		54		26		17		210		307		3		9,816
Other		387		9		4		2		21		36		—		423

Total home equity loans		9,893		63		30		19		231		343		3		10,239
Consumer other — Key Community Bank		1,325		9		5		8		2		24		—		1,349
Credit cards		706		7		5		—		11		23		—		729
Consumer other:
Marine		1,288		23		9		4		34		70		—		1,358
Other		87		2		1		1		2		6		—		93

Total consumer other		1,375		25		10		5		36		76		—		1,451

Total consumer loans	$	15,322	$	120	$	60	$	38	$	383	$	601	$	19	$	15,942


Total loans	$	51,623	$	286	$	138	$	78	$	674	$	1,176	$	23	$	52,822

(a)	Includes $72 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed as addressed in updated regulatory guidance issued in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs.


June 30, 2012 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Total Loans

LOAN TYPE
Commercial, financial and agricultural	$	20,678	$	60	$	13	$	24	$	141	$	238	$	20,916
Commercial real estate:
Commercial mortgage		7,182		15		16		24		172		227		7,409
Construction		1,033		12		24		35		68		139		1,172

Total commercial real estate loans		8,215		27		40		59		240		366		8,581
Commercial lease financing		5,051		22		8		7		18		55		5,106

Total commercial loans	$	33,944	$	109	$	61	$	90	$	399	$	659	$	34,603


Real estate — residential mortgage	$	1,895	$	24	$	10	$	9	$	78	$	121	$	2,016
Home equity:
Key Community Bank		9,361		56		26		17		141		240		9,601
Other		445		10		4		3		17		34		479

Total home equity loans		9,806		66		30		20		158		274		10,080
Consumer other — Key Community Bank		1,237		13		4		7		2		26		1,263
Consumer other:
Marine		1,478		31		10		4		19		64		1,542
Other		95		2		2		1		1		6		101

Total consumer other		1,573		33		12		5		20		70		1,643

Total consumer loans	$	14,511	$	136	$	56	$	41	$	258	$	491	$	15,002


Total loans	$	48,455	$	245	$	117	$	131	$	657	$	1,150	$	49,605

The prevalent risk characteristic for both commercial and consumer loans is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the assigned loan risk rating grades for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios. This risk rating stratification assists in the determination of the ALLL. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically reevaluated thereafter.

Most extensions of credit are subject to loan grading or scoring. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector, and our view of industry risk within the context of the general economic outlook. Types of exposure, transaction structure, and collateral, including credit risk mitigants, affect the expected recovery assessment.

Credit quality indicators for loans are updated on an ongoing basis. Bond rating classifications are indicative of the credit quality of our commercial loan portfolios and are determined by converting our internally assigned risk rating grades to bond rating categories. Payment activity and the regulatory classifications of pass and substandard are indicators of the credit quality of our consumer loan portfolios.

Credit quality indicators for our commercial and consumer loan portfolios, excluding $19 million of PCI loans at June 30, 2013, based on bond rating, regulatory classification and payment activity as of June 30, 2013, and 2012 are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category ^(a)


June 30, in millions

	Commercial, financial and agricultural				RE — Commercial				RE — Construction				Commercial Lease				Total
RATING ^{(b) (c)}	2013		2012		2013		2012		2013		2012		2013		2012		2013		2012

AAA — AA	$	275	$	165	$	1		—	$	1	$	1	$	485	$	605	$	762	$	771
A		618		680		74	$	64		1		1		1,011		992		1,704		1,737
BBB — BB		21,355		18,182		6,600		5,925		871		791		3,046		3,179		31,872		28,077
B		560		868		364		553		23		58		145		197		1,092		1,676
CCC — C		907		1,021		433		867		164		321		87		133		1,591		2,342

Total	$	23,715	$	20,916	$	7,472	$	7,409	$	1,060	$	1,172	$	4,774	$	5,106	$	37,021	$	34,603

(a)	Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.

(b)	Our bond rating to internal loan grade conversion system is as follows: AAA - AA = 1, A = 2, BBB - BB = 3 - 13, B = 14 - 16, and CCC - C = 17 - 20.

(c)	Our internal loan grade to regulatory-defined classification is as follows: Pass = 1-16, Special Mention = 17, Substandard = 18, Doubtful = 19, and Loss = 20.

Consumer Credit Exposure

Credit Risk Profile by Regulatory Classifications ^{(a) (b)}


June 30, in millions

	Residential — Prime
GRADE	2013		2012

Pass	$	12,374	$	11,831
Substandard		333		265

Total	$	12,707	$	12,096

Credit Risk Profile Based on Payment Activity ^{(a) (b)}


June 30,	Consumer — Key Community Bank				Credit cards				Consumer — Marine				Consumer — Other				Total
in millions	2013		2012		2013		2012		2013		2012		2013		2012		2013		2012

Performing	$	1,421	$	1,261	$	690		—	$	1,130	$	1,523	$	68	$	100	$	3,309	$	2,884
Nonperforming		3		2		11		—		30		19		1		1		45		22

Total	$	1,424	$	1,263	$	701		—	$	1,160	$	1,542	$	69	$	101	$	3,354	$	2,906

(a)	Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.

(b)

Our past due payment activity to regulatory classification conversion is as follows: pass = less than 90 days; and substandard = 90 days and greater plus nonperforming loans. Beginning in the second quarter of 2012, any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure or for which the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan in accordance with regulatory guidance issued in January 2012.

We determine the appropriate level of the ALLL on at least a quarterly basis. The methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” on page 120 of our 2012 Form 10-K. We apply expected loss rates to existing loans with similar risk characteristics as noted in the credit quality indicator table above and exercise judgment to assess the impact of factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets.

For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance greater than $2.5 million, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of impairment by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loan’s observable market price. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at June 30, 2013, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

Although quantitative modeling factors such as default probability and expected recovery rates are constantly changing as the financial strength of the borrower and overall economic conditions change, there have been no changes to the accounting policies or methodology we used to estimate the ALLL.

Commercial loans generally are charged off in full or charged down to the fair value of the underlying collateral when the borrower’s payment is 180 days past due. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due. Credit card loans are charged off when payments are 180 days past due. All other consumer loans are charged off when payments are 120 days past due.

At June 30, 2013, the ALLL was $876 million, or 1.65% of loans, compared to $888 million, or 1.79% of loans, at June 30, 2012. At June 30, 2013, the ALLL was 134.36% of nonperforming loans, compared to 135.16% at June 30, 2012.

A summary of the allowance for loan and lease losses for the periods indicated is presented in the table below:


	Three months ended June 30,				Six months ended June 30,
in millions	2013		2012		2013		2012

Balance at beginning of period — continuing operations	$	893	$	944	$	888	$	1,004
Charge-offs		(74)		(131)		(164)		(263)
Recoveries		29		54		70		85

Net loans and leases charged off		(45)		(77)		(94)		(178)
Provision for loan and lease losses from continuing operations		28		21		83		63
Foreign currency translation adjustment		—		—		(1)		(1)

Balance at end of period — continuing operations	$	876	$	888	$	876	$	888

The changes in the ALLL by loan category for the periods indicated are as follows:


in millions	December 31, 2012		Provision			Charge-offs		Recoveries		June 30, 2013

Commercial, financial and agricultural	$	327	$	35		$	(29)	$	19	$	352
Real estate — commercial mortgage		198		(10)			(16)		10		182
Real estate — construction		41		(13)			(2)		8		34
Commercial lease financing		55		6			(8)		8		61

Total commercial loans		621		18			(55)		45		629
Real estate — residential mortgage		30		13			(10)		—		33
Home equity:
Key Community Bank		105		19			(36)		6		94
Other		25		—			(12)		3		16

Total home equity loans		130		19			(48)		9		110
Consumer other — Key Community Bank		38		7			(16)		4		33
Credit cards		26		21			(16)		2		33
Consumer other:
Marine		39		4			(17)		9		35
Other		4		—			(2)		1		3

Total consumer other:		43		4			(19)		10		38

Total consumer loans		267		64			(109)		25		247

Total ALLL — continuing operations		888		82	^(a)		(164)		70		876
Discontinued operations		55		5			(28)		9		41

Total ALLL — including discontinued operations	$	943	$	87		$	(192)	$	79	$	917

(a)	Includes $1 million of foreign currency translation adjustment.


in millions	December 31, 2011		Provision			Charge-offs		Recoveries		June 30, 2012

Commercial, financial and agricultural	$	334	$	(12)		$	(49)	$	31	$	304
Real estate — commercial mortgage		272		8			(46)		16		250
Real estate — construction		63		6			(16)		2		55
Commercial lease financing		78		—			(20)		10		68

Total commercial loans		747		2			(131)		59		677
Real estate — residential mortgage		37		—			(13)		2		26
Home equity:
Key Community Bank		103		21			(48)		4		80
Other		29		9			(17)		3		24

Total home equity loans		132		30			(65)		7		104
Consumer other — Key Community Bank		41		10			(20)		3		34
Consumer other:
Marine		46		15			(30)		13		44
Other		1		5			(4)		1		3

Total consumer other:		47		20			(34)		14		47

Total consumer loans		257		60			(132)		26		211

Total ALLL — continuing operations		1,004		62	^(a)		(263)		85		888
Discontinued operations		104		6			(39)		8		79

Total ALLL — including discontinued operations	$	1,108	$	68		$	(302)	$	93	$	967

(a)	Includes $1 million of foreign currency translation adjustment.

Our ALLL decreased by $12 million, or 1%, since the second quarter of 2012. This contraction was associated with the improvement in credit quality of our loan portfolios, which has trended more favorably over the past four quarters. The quality of new loan originations and decreasing NPLs and net charge-offs has resulted in a reduction in our general allowance. Our general allowance encompasses the application of expected loss rates to our existing loans with similar risk characteristics, an assessment of factors such as changes in economic conditions and changes in credit policies or underwriting standards. Our delinquency trends showed continued improvement during 2012 and into 2013. We attribute this improvement to a moderate level of loan growth, more favorable conditions in the capital markets, improvement in client income statements, and continued run off in our exit loan portfolio.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $464 million, with a corresponding allowance of $34 million at June 30, 2013. Loans outstanding collectively evaluated for impairment totaled $52.6 billion, with a corresponding allowance of $842 million at June 30, 2013. At June 30, 2013, PCI loans evaluated for impairment totaled $19 million, with a corresponding allowance of less than $1 million. There was no provision for loan and lease losses on these PCI loans during the quarter ended June 30, 2013.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of June 30, 2013, follows:


	Allowance						Outstanding
June 30, 2013 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired

Commercial, financial and agricultural	$	6	$	346		—	$	23,715		$	111	$	23,604		—
Commercial real estate:
Commercial mortgage		2		180		—		7,474			93		7,379	$	2

Construction		—		34		—		1,060			52		1,008		—

Total commercial real estate loans		2		214		—		8,534			145		8,387		2
Commercial lease financing		—		61		—		4,774			—		4,774		—

Total commercial loans		8		621		—		37,023			256		36,765		2
Real estate — residential mortgage		5		28		—		2,176			35		2,126		15
Home equity:
Key Community Bank		9		85		—		10,173			99		10,072		2
Other		1		15		—		375			13		362		—

Total home equity loans		10		100		—		10,548			112		10,434		2
Consumer other — Key Community Bank		—		33		—		1,424			3		1,421		—
Credit cards		—		33		—		701			4		697		—
Consumer other:
Marine		10		25		—		1,160			53		1,107		—
Other		1		2		—		69			1		68		—

Total consumer other		11		27		—		1,229			54		1,175		—

Total consumer loans		26		221		—		16,078			208		15,853		17

Total ALLL — continuing operations		34		842		—		53,101			464		52,618		19
Discontinued operations		2		39		—		4,992	^(a)		8		4,984		—

Total ALLL — including discontinued operations	$	36	$	881		—	$	58,093		$	472	$	57,602	$	19

(a)	Amount includes $2.5 billion of loans carried at fair value that are excluded from ALLL consideration.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of December 31, 2012, follows:


	Allowance						Outstanding
December 31, 2012 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired

Commercial, financial and agricultural	$	12	$	314		—	$	23,242		$	65	$	23,176	$	1
Commercial real estate:
Commercial mortgage		1		198		—		7,720			96		7,621		3

Construction		—		41		—		1,003			48		955		—

Total commercial real estate loans		1		239		—		8,723			144		8,576		3
Commercial lease financing		—		55		—		4,915			—		4,915		—

Total commercial loans		13		608		—		36,880			209		36,667		4
Real estate — residential mortgage		1		29	$	1		2,174			38		2,120		16
Home equity:
Key Community Bank		11		94		—		9,816			87		9,726		3
Other		1		24		—		423			12		411		—

Total home equity loans		12		118		—		10,239			99		10,137		3
Consumer other — Key Community Bank		2		36		—		1,349			2		1,347		—
Credit cards		—		26		—		729			2		727		—
Consumer other:
Marine		7		32		—		1,358			60		1,298		—
Other		—		3		—		93			1		92		—

Total consumer other		7		35		—		1,451			61		1,390		—

Total consumer loans		22		244		1		15,942			202		15,721		19

Total ALLL — continuing operations		35		852		1		52,822			411		52,388		23
Discontinued operations		—		55		—		5,201	^(a)		3		5,198		—

Total ALLL — including discontinued operations	$	35	$	907	$	1	$	58,023		$	414	$	57,586	$	23

(a)	Amount includes $2.5 billion of loans carried at fair value that are excluded from ALLL consideration.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of June 30, 2012, follows:


	Allowance^(a)				Outstanding^(a)
June 30, 2012 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment

Commercial, financial and agricultural	$	12	$	292	$	20,916		$	102	$	20,814
Commercial real estate:
Commercial mortgage		15		235		7,409			168		7,241
Construction		3		52		1,172			55		1,117

Total commercial real estate loans		18		287		8,581			223		8,358
Commercial lease financing		—		68		5,106			—		5,106

Total commercial loans		30		647		34,603			325		34,278
Real estate — residential mortgage		2		24		2,016			17		1,999
Home equity:
Key Community Bank		3		77		9,601			11		9,590
Other		1		23		479			6		473

Total home equity loans		4		100		10,080			17		10,063
Consumer other — Key Community Bank		1		33		1,263			2		1,261
Consumer other:
Marine		11		33		1,542			50		1,492
Other		—		3		101			—		101

Total consumer other		11		36		1,643			50		1,593

Total consumer loans		18		193		15,002			86		14,916

Total ALLL — continuing operations		48		840		49,605			411		49,194
Discontinued operations		—		79		5,483	^(b)		—		5,483

Total ALLL — including discontinued operations	$	48	$	919	$	55,088		$	411	$	54,677

(a)	There were no PCI loans at June 30, 2012.

(b)	Amount includes $2.8 billion of loans carried at fair value that are excluded from ALLL considerations.

The liability for credit losses inherent in lending-related unfunded commitments, such as letters of credit and unfunded loan commitments, is included in “accrued expense and other liabilities” on the balance sheet. We establish the amount of this reserve by considering both historical trends and current market conditions quarterly, or more often if deemed necessary. Our liability for credit losses on lending-related commitments has decreased by $14 million since the second quarter of 2012 to $37 million at June 30, 2013. When combined with our ALLL, our total allowance for credit losses represented 1.72% of loans at June 30, 2013, compared to 1.89% at June 30, 2012.

Changes in the liability for credit losses on unfunded lending-related commitments are summarized as follows:


	Three months ended June 30,				Six months ended June 30,
in millions	2013		2012		2013		2012

Balance at beginning of period	$	32	$	45	$	29	$	45
Provision (credit) for losses on lending-related commitments		5		6		8		6

Balance at end of period	$	37	$	51	$	37	$	51