6. Asset Quality

We assess the credit quality of the loan portfolio by monitoring net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by management.

Credit Quality Indicators

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 loan risk rating grades assigned for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios.

Most extensions of credit are subject to loan grading or scoring. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically re-evaluated thereafter. 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 in the context of the general economic outlook. Types of exposure, transaction structure, and collateral, including credit risk mitigants, affect the expected recovery assessment.

Commercial Credit Exposure — Excluding PCI

Credit Risk Profile by Creditworthiness Category ^{(a), (b)}



December 31,
in millions	Commercial and industrial				RE — Commercial				RE — Construction				Commercial Lease				Total
RATING	2017		2016		2017		2016		2017		2016		2017		2016		2017		2016
Pass	$	39,833	$	37,845	$	13,328	$	14,308	$	1,894	$	2,287	$	4,730	$	4,632	$	59,785	$	59,072
Criticized (Accruing)	1,790		1,514		482		455		38		30		90		45		2,400		2,044
Criticized (Nonaccruing)	153		297		30		26		2		2		6		8		191		333
Total	$	41,776	$	39,656	$	13,840	$	14,789	$	1,934	$	2,319	$	4,826	$	4,685	$	62,376	$	61,449


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


(b)	The term criticized refers to those loans that are internally classified by Key as special mention or worse, which are asset quality categories defined by regulatory authorities. These assets have an elevated level of risk and may have a high probability of default or total loss. Pass rated refers to all loans not classified as criticized.

Consumer Credit Exposure — Excluding PCI

Non-PCI Loans by Refreshed FICO Score ^(a)



December 31,
in millions	Residential — Prime				Consumer direct loans				Credit cards				Consumer indirect loans				Total
FICO SCORE	2017		2016		2017		2016		2017		2016		2017		2016		2017		2016
750 and above	$	10,226	$	9,818	$	519	$	498	$	477	$	453	$	1,472	$	1,266	$	12,694	$	12,035
660 to 749	5,181		5,266		690		661		508		525		1,184		1,195		7,563		7,647
Less than 660	1,519		1,617		225		194		121		132		529		543		2,394		2,486
No Score	208		1,122		356		428		—		1		76		5		640		1,556
Total	$	17,134	$	17,823	$	1,790	$	1,781	$	1,106	$	1,111	$	3,261	$	3,009	$	23,291	$	23,724


(a)	Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay their debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the above table at the dates indicated.

Commercial Credit Exposure — PCI

Credit Risk Profile by Creditworthiness Category ^{(a), (b)}



December 31,
in millions	Commercial and industrial				RE — Commercial				RE — Construction				Commercial Lease		Total
RATING	2017		2016		2017		2016		2017		2016		2017	2016	2017		2016
Pass	$	41	$	12	$	153	$	139	$	26	$	21	—	—	$	220	$	172
Criticized	42		100		95		183		—		5		—	—	137		288
Total	$	83	$	112	$	248	$	322	$	26	$	26	—	—	$	357	$	460


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


(b)	The term criticized refers to those loans that are internally classified by Key as special mention or worse, which are asset quality categories defined by regulatory authorities. These assets have an elevated level of risk and may have a high probability of default or total loss. Pass rated refers to all loans not classified as criticized.

Consumer Credit Exposure — PCI

PCI Loans by Refreshed FICO Score ^(a)



December 31,
in millions	Residential — Prime				Consumer direct loans				Credit cards		Consumer indirect loans		Total
FICO SCORE	2017		2016		2017		2016		2017	2016	2017	2016	2017		2016
750 and above	$	149	$	133	—		—		—	—	—	—	$	149	$	133
660 to 749	117		127		$	2	$	2	—	—	—	—	119		129
Less than 660	105		133		2		4		—	—	—	—	107		137
No Score	6		5		—		1		—	—	—	—	6		6
Total	$	377	$	398	$	4	$	7	—	—	—	—	$	381	$	405


(a)	Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay their debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the above table at the dates indicated.

Nonperforming and Past Due Loans

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.”

The following aging analysis of current and past due loans as of December 31, 2017, and December 31, 2016, provides further information regarding Key’s credit exposure.

Aging Analysis of Loan Portfolio ^(a)



December 31, 2017	Current		30-59 Days Past Due ^(b)		60-89 Days Past Due ^(b)		90 and Greater Days Past Due ^(b)		Non-performing Loans		Total Past Due and Non-performing Loans		Purchased Credit Impaired		Total Loans ^{(c), (d)}
in millions	Current		30-59 Days Past Due ^(b)		60-89 Days Past Due ^(b)		90 and Greater Days Past Due ^(b)		Non-performing Loans		Total Past Due and Non-performing Loans		Purchased Credit Impaired		Total Loans ^{(c), (d)}
LOAN TYPE
Commercial and industrial	$	41,444	$	111	$	34	$	34	$	153	$	332	$	83	$	41,859
Commercial real estate:
Commercial mortgage	13,750		26		13		21		30		90		248		14,088
Construction	1,919		4		9		—		2		15		26		1,960
Total commercial real estate loans	15,669		30		22		21		32		105		274		16,048
Commercial lease financing	4,791		23		4		2		6		35		—		4,826
Total commercial loans	$	61,904	$	164	$	60	$	57	$	191	$	472	$	357	$	62,733
Real estate — residential mortgage	$	5,043	$	16	$	7	$	4	$	58	$	85	$	355	$	5,483
Home equity loans	11,721		32		15		9		229		285		22		12,028
Consumer direct loans	1,768		9		4		5		4		22		4		1,794
Credit cards	1,081		7		5		11		2		25		—		1,106
Consumer indirect loans	3,199		33		7		3		19		62		—		3,261
Total consumer loans	$	22,812	$	97	$	38	$	32	$	312	$	479	$	381	$	23,672
Total loans	$	84,716	$	261	$	98	$	89	$	503	$	951	$	738	$	86,405


(a)	Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment 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.


(b)	Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to collect principal or interest in full based on the original contractual terms), as we are currently accreting income over the remaining term of the loans.


(c)	Net of unearned income, net deferred loan fees and costs, and unamortized discounts and premiums.


(d)	Future accretable yield related to purchased credit impaired loans is not included in the analysis of the loan portfolio.



December 31, 2016	Current		30-59 Days Past Due ^(b)		60-89 Days Past Due ^(b)		90 and Greater Days Past Due ^(b)		Non-performing Loans		Total Past Due and Non-performing Loans		Purchased Credit Impaired		Total Loans ^{(c), (d)}
in millions	Current		30-59 Days Past Due ^(b)		60-89 Days Past Due ^(b)		90 and Greater Days Past Due ^(b)		Non-performing Loans		Total Past Due and Non-performing Loans		Purchased Credit Impaired		Total Loans ^{(c), (d)}
LOAN TYPE
Commercial and industrial	$	39,242	$	58	$	28	$	31	$	297	$	414	$	112	$	39,768
Commercial real estate:
Commercial mortgage	14,655		93		9		6		26		134		322		15,111
Construction	2,314		—		—		2		3		5		26		2,345
Total commercial real estate loans	16,969		93		9		8		29		139		348		17,456
Commercial lease financing	4,641		28		3		5		8		44		—		4,685
Total commercial loans	$	60,852	$	179	$	40	$	44	$	334	$	597	$	460	$	61,909
Real estate — residential mortgage	$	5,098	$	17	$	5	$	3	$	56	$	81	$	368	$	5,547
Home equity loans	12,327		49		29		16		223		317		30		12,674
Consumer direct loans	1,705		44		15		11		6		76		7		1,788
Credit cards	1,082		9		6		12		2		29		—		1,111
Consumer indirect loans	2,993		7		4		1		4		16		—		3,009
Total consumer loans	$	23,205	$	126	$	59	$	43	$	291	$	519	$	405	$	24,129
Total loans	$	84,057	$	305	$	99	$	87	$	625	$	1,116	$	865	$	86,038


(a)	Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment 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.


(b)	Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to collect principal or interest in full based on the original contractual terms), as we are currently accreting income over the remaining term of the loans.


(c)	Net of unearned income, net deferred loan fees and costs, and unamortized discounts and premiums.


(d)	Future accretable yield related to purchased credit impaired loans is not included in the analysis of the loan portfolio.

At December 31, 2017, the approximate carrying amount of our commercial nonperforming loans outstanding represented 71% of their original contractual amount owed, total nonperforming loans outstanding represented 80% of their original contractual amount owed, and nonperforming assets in total were carried at 80% of their original contractual amount owed.

Nonperforming loans reduced expected interest income by $25 million, $26 million, and $16 million for each of the twelve months ended December 31, 2017, December 31, 2016, and December 31, 2015, respectively.

Impaired Loans

The following tables set forth a further breakdown of individually impaired loans for the periods indicated are as follows:



December 31, 2017	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance ^(c)
in millions
With no related allowance recorded:
Commercial and industrial	$	126	$	153	—
Commercial real estate:
Commercial mortgage	12		18		—
Construction	—		—		—
Total commercial real estate loans	12		18		—
Total commercial loans	138		171		—
Real estate — residential mortgage	17		17		—
Home equity loans	56		56		—
Consumer indirect loans	2		2		—
Total consumer loans	75		75		—
Total loans with no related allowance recorded	213		246		—
With an allowance recorded:
Commercial and industrial	10		28		$	6
Commercial real estate:
Commercial mortgage	—		—		—
Total commercial real estate loans	—		—		—
Total commercial loans	10		28		6
Real estate — residential mortgage	32		32		5
Home equity loans	61		61		9
Consumer direct loans	4		4		—
Credit cards	2		2		—
Consumer indirect loans	32		32		3
Total consumer loans	131		131		17
Total loans with an allowance recorded	141		159		23
Total	$	354	$	405	$	23


(a)	The Recorded Investment 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.


(c)	See Note 1 (“Summary of Significant Accounting Policies”) under the heading “Impaired Loans” for a description of the specific allowance methodology.



December 31, 2016	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance ^(c)
in millions
With no related allowance recorded:
Commercial and industrial	$	222	$	301	—
Commercial real estate:
Commercial mortgage	2		3		—
Total commercial real estate loans	2		3		—
Total commercial loans	224		304		—
Real estate — residential mortgage	20		20		—
Home equity loans	61		61		—
Consumer indirect loans	1		1		—
Total consumer loans	82		82		—
Total loans with no related allowance recorded	306		386		—

With an allowance recorded:
Commercial and industrial	62		73		$	17
Commercial real estate:
Commercial mortgage	4		4		—
Total commercial real estate loans	4		4		—
Total commercial loans	66		77		17
Real estate — residential mortgage	31		31		2
Home equity loans	64		64		18
Consumer direct loans	2		3		—
Credit cards	3		3		—
Consumer indirect loans	29		29		1
Total consumer loans	129		130		21
Total loans with an allowance recorded	195		207		38
Total	$	501	$	593	$	38


(a)	The Recorded Investment 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.


(c)	See Note 1 (“Summary of Significant Accounting Policies”) under the heading “Impaired Loans” for a description of the specific allowance methodology.

The following table sets forth a further breakdown of average individually impaired loans reported by Key:



Average Recorded Investment ^(a)	Twelve Months Ended December 31,
in millions	2017		2016		2015
Commercial and industrial	$	210	$	176	$	56
Commercial real estate:
Commercial mortgage	9		8		15
Construction	—		3		7
Total commercial real estate loans	9		11		22
Total commercial loans	219		187		78
Real estate — residential mortgage	50		53		55
Home equity loans	121		125		122
Consumer direct loans	3		3		4
Credit cards	3		3		4
Consumer indirect loans	32		34		42
Total consumer loans	209		218		227
Total	$	428	$	405	$	305


(a)	The Recorded Investment 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.

For the twelve months ended December 31, 2017, December 31, 2016, and December 31, 2015, interest income recognized on the outstanding balances of accruing impaired loans totaled $9 million, $10 million, and $6 million, respectively.

TDRs

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession without commensurate financial, structural, or legal consideration. Acquired loans that were previously modified by First Niagara in a TDR are no longer classified as TDRs at the Acquisition Date. An acquired loan may only be classified as a TDR if a modification meeting the above TDR criteria is performed after the Acquisition Date. PCI loans cannot be classified as TDRs. All commercial and consumer loan TDRs, regardless of size, are individually evaluated for impairment to determine the probable loss content and are assigned a specific loan allowance. This designation has the effect of moving the loan from the general reserve methodology (i.e., collectively evaluated) to the specific reserve methodology (i.e., individually evaluated) and may impact the ALLL through a charge-off or increased loan loss provision. These components affect the ultimate allowance level.

As TDRs are individually evaluated for impairment under the specific reserve methodology, subsequent defaults do not generally have a significant additional impact on the ALLL. Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $2 million and $14 million at December 31, 2017, and December 31, 2016, respectively.

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 the borrower’s financial needs. The commercial TDR other concession category includes modification of loan terms, covenants, or conditions. The consumer TDR other concession category primarily includes those borrowers’ debts that are discharged through Chapter 7 bankruptcy and have not been formally re-affirmed. At December 31, 2017, and December 31, 2016, the recorded investment of consumer residential mortgage loans in the process of foreclosure was approximately $142 million and $141 million, respectively. At December 31, 2017, and December 31, 2016, we had $31 million and $51 million, respectively, of OREO which included the carrying value of foreclosed residential real estate of approximately $26 million and $29 million, respectively.

The following table shows the period-end post-modification outstanding recorded investment by concession type for our commercial and consumer accruing and nonaccruing TDRs added during the periods indicated:



	Twelve Months Ended December 31,
in millions	2017		2016		2015
Commercial loans:
Interest rate reduction	—		—		—
Forgiveness of principal	—		—		$	22
Extension of maturity date	$	12	—		21
Payment or covenant modification/deferment	46		$	19	—
Bankruptcy plan modification	31		18		—
Total	$	89	$	37	$	43
Consumer loans:
Interest rate reduction	$	13	$	10	$	19
Forgiveness of principal	—		3		4
Other	28		21		17
Total	$	41	$	34	$	40
Total commercial and consumer TDRs	$	130	$	71	$	83

The following table summarizes the change in the post-modification outstanding recorded investment of our accruing and nonaccruing TDRs during the periods indicated:



Year ended December 31,
in millions	2017			2016
Balance at beginning of the period	$	280		$	280
Additions	165			107
Payments	(111		)	(68		)
Charge-offs	(17		)	(39		)
Balance at end of period ^(a)	$	317		$	280

A further breakdown of TDRs included in nonperforming loans by loan category for the periods indicated are as follows:



December 31, 2017	Number of Loans	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
dollars in millions
LOAN TYPE
Nonperforming:
Commercial and industrial	20	$	109	$	86
Commercial real estate:
Real estate — commercial mortgage	8	16		12
Total commercial real estate loans	8	16		12
Total commercial loans	28	125		98
Real estate — residential mortgage	308	18		18
Home equity loans	1,025	64		57
Consumer direct loans	114	2		2
Credit cards	322	2		1
Consumer indirect loans	825	16		13
Total consumer loans	2,594	102		91
Total nonperforming TDRs	2,622	227		189
Prior-year accruing: ^(a)
Commercial and industrial	4	30		13
Total commercial loans	4	30		13
Real estate — residential mortgage	484	31		31
Home equity loans	1,276	75		59
Consumer direct loans	48	3		2
Credit cards	430	1		1
Consumer indirect loans	320	31		22
Total consumer loans	2,558	141		115
Total prior-year accruing TDRs	2,562	171		128
Total TDRs	5,184	$	398	$	317


(a)	All TDRs that were restructured prior to January 1, 2017, and are fully accruing.



December 31, 2016	Number of Loans	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
dollars in millions
LOAN TYPE
Nonperforming:
Commercial and industrial	18	$	91	$	50
Commercial real estate:
Real estate — commercial mortgage	7	2		1
Total commercial real estate loans	7	2		1
Total commercial loans	25	93		51
Real estate — residential mortgage	264	16		16
Home equity loans	1,199	77		69
Consumer direct loans	32	1		—
Credit cards	336	2		2
Consumer indirect loans	124	4		3
Total consumer loans	1,955	100		90
Total nonperforming TDRs	1,980	193		141
Prior-year accruing: ^(a)
Commercial and industrial	5	30		16
Total commercial loans	5	30		16
Real estate — residential mortgage	477	35		35
Home equity loans	1,231	70		57
Consumer direct loans	35	2		2
Credit cards	410	3		1
Consumer indirect loans	377	56		28
Total consumer loans	2,530	166		123
Total prior-year accruing TDRs	2,535	196		139
Total TDRs	4,515	$	389	$	280


(a)	All TDRs that were restructured prior to January 1, 2016, and are fully accruing.

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. During the year ended December 31, 2017, there were no commercial loan TDRs and 147 consumer loan TDRs with a combined recorded investment of $4 million that experienced payment defaults after modifications resulting in TDR status during 2016. During the year ended December 31, 2016, there were no commercial loan TDRs and 187 consumer loan TDRs with a combined recorded investment of $9 million that experienced payment defaults after modifications resulting in TDR status during 2015. During the year ended December 31, 2015, there were two commercial loan TDRs with a combined recorded investment of $1 million, and 269 consumer loan TDRs with a combined recorded investment of $12 million that experienced payment defaults after modifications resulting in TDR status during 2014.

ALLL and Liability for Credit Losses on Unfunded Lending-Related Commitments

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.”

The ALLL on the acquired non-impaired loan portfolio is estimated using the same methodology as the originated portfolio, however, the estimated ALLL is compared to the remaining accretable yield to determine if an ALLL must be recorded. For PCI loans, Key estimates cash flows expected to be collected quarterly. Decreases in expected cash flows are recognized as impairment through a provision for loan and lease losses and an increase in the ALLL. There was $3 million of provision for loan and lease losses on these PCI loans during the year ended December 31, 2017. There was $11 million of provision for loan and lease losses on these PCI loans during the year ended December 31, 2016.

The ALLL at December 31, 2017, represents our best estimate of the incurred credit losses inherent in the loan portfolio at that date. A summary of the changes in the ALLL for the periods indicated is presented in the table below:



December 31, in millions	2017			2016			2015
Balance at beginning of period — continuing operations	$	858		$	796		$	794

Charge-offs	(302		)	(261		)	(203		)
Recoveries	94			56			61
Net loans and leases charged off	(208		)	(205		)	(142		)

Provision for loan and lease losses from continuing operations	227			267			145
Foreign currency translation adjustment	—			—			(1		)
Balance at end of period — continuing operations	$	877		$	858		$	796

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



in millions	December 31, 2016		Provision				Charge-offs			Recoveries		December 31, 2017
Commercial and industrial	$	508	$	114			$	(133	)	$	40	$	529
Real estate — commercial mortgage	144		(2		)		(11		)	2		133
Real estate — construction	22		9				(2		)	1		30
Commercial lease financing	42		9				(14		)	6		43
Total commercial loans	716		130				(160		)	49		735
Real estate — residential mortgage	17		(11		)		(3		)	4		7
Home equity loans	54		4				(30		)	15		43
Consumer direct loans	24		32				(34		)	6		28
Credit cards	38		45				(44		)	5		44
Consumer indirect loans	9		27				(31		)	15		20
Total consumer loans	142		97				(142		)	45		142
Total ALLL — continuing operations	858		227			^(a)	(302		)	94		877
Discontinued operations	24		10				(26		)	8		16
Total ALLL — including discontinued operations	$	882	$	237			$	(328	)	$	102	$	893


(a)	Excludes a provision for losses on lending-related commitments of $2 million.



in millions	December 31, 2015		Provision			Charge-offs			Recoveries		December 31, 2016
Commercial and industrial	$	450	$	165		$	(118	)	$	11	$	508
Real estate — commercial mortgage	134		6			(5		)	9		144
Real estate — construction	25		4			(9		)	2		22
Commercial lease financing	47		4			(12		)	3		42
Total commercial loans	656		179			(144		)	25		716
Real estate — residential mortgage	18		2			(4		)	1		17
Home equity loans	57		13			(30		)	14		54
Consumer direct loans	20		26			(27		)	5		24
Credit cards	32		37			(35		)	4		38
Consumer indirect loans	13		10			(21		)	7		9
Total consumer loans	140		88			(117		)	31		142
Total ALLL — continuing operations	796		267		^(a)	(261		)	56		858
Discontinued operations	28		13			(28		)	11		24
Total ALLL — including discontinued operations	$	824	$	280		$	(289	)	$	67	$	882


(a)	Excludes a credit for losses on lending-related commitments of $1 million.



in millions	December 31, 2014		Provision				Charge-offs			Recoveries		December 31, 2015
Commercial and industrial	$	391	$	120			$	(77	)	$	16	$	450
Real estate — commercial mortgage	148		(16		)		(4		)	6		134
Real estate — construction	28		(3		)		(1		)	1		25
Commercial lease financing	56		(5		)		(11		)	7		47
Total commercial loans	623		96				(93		)	30		656
Real estate — residential mortgage	23		(2		)		(6		)	3		18
Home equity loans	71		7				(32		)	11		57
Consumer direct loans	22		16				(24		)	6		20
Credit cards	33		27				(30		)	2		32
Consumer indirect loans	22		—				(18		)	9		13
Total consumer loans	171		48				(110		)	31		140
Total ALLL — continuing operations	794		144			^(a)	(203		)	61		796
Discontinued operations	29		21				(35		)	13		28
Total ALLL — including discontinued operations	$	823	$	165			$	(238	)	$	74	$	824


(a)	Includes a $1 million foreign currency translation adjustment. Excludes a provision for losses on lending-related commitments of $21 million.

A breakdown of the individual and collective ALLL and the corresponding loan balances for the periods indicated are as follows:



	Allowance						Outstanding
December 31, 2017	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
in millions
Commercial and industrial	$	6	$	520	$	3	$	41,859		$	136	$	41,640		$	83
Commercial real estate:
Commercial mortgage	—		131		2		14,088			12		13,828			248
Construction	—		30		—		1,960			—		1,934			26
Total commercial real estate loans	—		161		2		16,048			12		15,762			274
Commercial lease financing	—		43		—		4,826			—		4,826			—
Total commercial loans	6		724		5		62,733			148		62,228			357
Real estate — residential mortgage	5		2		—		5,483			49		5,079			355
Home equity loans	9		33		1		12,028			117		11,889			22
Consumer direct loans	—		28		—		1,794			4		1,786			4
Credit cards	—		44		—		1,106			2		1,104			—
Consumer indirect loans	3		17		—		3,261			34		3,227			—
Total consumer loans	17		124		1		23,672			206		23,085			381
Total ALLL — continuing operations	23		848		6		86,405			354		85,313			738
Discontinued operations	3		13		—		1,314		^(a)	21		1,293		^(a)	—
Total ALLL — including discontinued operations	$	26	$	861	$	6	$	87,719		$	375	$	86,606		$	738


(a)	Amount includes $2 million of loans carried at fair value that are excluded from ALLL consideration.



	Allowance						Outstanding
December 31, 2016	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
in millions
Commercial and industrial	$	17	$	486	$	5	$	39,768		$	284	$	39,372		$	112
Commercial real estate:
Commercial mortgage	—		144		—		15,111			5		14,784			322
Construction	—		22		—		2,345			—		2,319			26
Total commercial real estate loans	—		166		—		17,456			5		17,103			348
Commercial lease financing	—		42		—		4,685			—		4,685			—
Total commercial loans	17		694		5		61,909			289		61,160			460
Real estate — residential mortgage	2		15		—		5,547			51		5,128			368
Home equity loans	17		37		—		12,674			125		12,519			30
Consumer direct loans	—		24		—		1,788			3		1,778			7
Credit cards	—		38		—		1,111			3		1,108			—
Consumer indirect loans	1		8		—		3,009			30		2,979			—
Total consumer loans	20		122		—		24,129			212		23,512			405
Total ALLL — continuing operations	37		816		5		86,038			501		84,672			865
Discontinued operations	2		22		—		1,565		^(a)	22		1,543		^(a)	—
Total ALLL — including discontinued operations	$	39	$	838	$	5	$	87,603		$	523	$	86,215		$	865


(a)	Amount includes $3 million of loans carried at fair value that are excluded from ALLL consideration.

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.

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



Year ended December 31, in millions	2017		2016			2015
Balance at beginning of period	$	55	$	56		$	35
Provision (credit) for losses on lending-related commitments	2		(1		)	21
Balance at end of period	$	57	$	55		$	56

PCI Loans

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. Several factors were considered when evaluating whether a loan was considered a PCI loan, including the delinquency status of the loan, updated borrower credit status, geographic information, and updated LTV. In accordance with ASC 310-30, excluded from the purchased impaired loans were leases, revolving credit arrangements, and loans held for sale. Auto, boat and RV loans were also excluded from purchased impaired loans due to Key’s inability to develop a reasonable estimate of the timing and magnitude of cash flows related to these loans.

We estimated the fair value of loans acquired from First Niagara by utilizing the discounted cash flow method within the income approach. See Note 2 (“Business Combination”) for further discussion over the fair value methodology. There was no carryover of First Niagara’s allowance for loan losses associated with the loans we acquired.

The excess of a PCI loan's contractually required payments over the amount of its undiscounted cash flows expected to be collected is referred to as the nonaccretable difference. The nonaccretable difference, which is not accreted into income, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the PCI loan. The excess of cash flows expected to be collected over the carrying amount of the PCI loans is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the PCI loans or pools using the level yield method.

Over the life of PCI loans, Key evaluates the remaining contractual required payments receivable and estimates cash flows expected to be collected. Contractually required payments receivable may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on PCI loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the Acquisition Date. Increases in expected cash flows of PCI loans subsequent to acquisition are recognized prospectively through adjustment of the yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for loan and lease losses and an increase in the ALLL.

The difference between the fair value of a non-impaired acquired loan and contractual amounts due at the Acquisition Date is accreted into income over the estimated life of the loan. Contractually required payments represent the total undiscounted amount of all uncollected principal and interest payments.

The following table presents the PCI loans receivable balance at the First Niagara Acquisition Date:



August 1, 2016	PCI
in millions	PCI
Contractual required payments receivable	$	1,434
Nonaccretable difference	173
Expected cash flows	1,261
Accretable yield	172
Fair Value	$	1,089

At the First Niagara Acquisition Date, the contractual required payments receivable on the purchased non-impaired loans totaled $22.5 billion, with an estimated corresponding fair value of $22.0 billion. The estimated cash flows not expected to be collected at the Acquisition Date were $500 million. These amounts do not include loans held for sale and the loans that were divested as part of the 18 branches that were sold on September 9, 2016.

We have PCI loans from two separate acquisitions, one in 2012 and one during the third quarter of 2016. At the 2012 acquisition date, the estimated gross contractual amount receivable of all PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) were $11 million, and the accretable amount was approximately $5 million. The following table presents the rollforward of the accretable yield and the beginning and ending outstanding unpaid principal balance and carrying amount of PCI loans for the for the periods indicated are as follows:

PCI Loans



	Twelve Months Ended December 31,
	2017							2016
in millions	Accretable Yield			Carrying Amount		Outstanding Unpaid Principal Balance		Accretable Yield			Carrying Amount		Outstanding Unpaid Principal Balance
Balance at beginning of period	$	197		$	865	$	1,002	$	5		$	11	$	17
Additions	(32		)					205
Accretion	(44		)					(29		)
Net reclassifications from non-accretable to accretable	15							35
Payments received, net	(4		)					(19		)
Disposals	(1		)					—
Balance at end of period	$	131		$	738	$	803	$	197		$	865	$	1,002