Asset Quality

6 Months Ended

Jun. 30, 2023

Credit Loss [Abstract]

Asset Quality

4. Asset Quality

ALLL

We estimate 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" beginning on page 107 of our 2022 Form 10-K.

The ALLL at June 30, 2023, represents our current estimate of lifetime credit losses inherent in the loan portfolio at that date. The changes in the ALLL by loan category for the periods indicated are as follows:

Three months ended June 30, 2023:

Dollars in millions	March 31, 2023		Provision			Charge-offs		Recoveries		June 30, 2023
Commercial and Industrial	$	605	$	21		$	(42)	$	15	$	599
Commercial real estate:
Real estate — commercial mortgage	218		105			(9)		1		315
Real estate — construction	28		11			—		—		39
Total commercial real estate loans	246		116			(9)		1		354
Commercial lease financing	33		(1)			(1)		2		33
Total commercial loans	884		136			(52)		18		986
Real estate — residential mortgage	212		(12)			(1)		1		200
Home equity loans	96		1			(2)		1		96
Consumer direct loans	116		18			(11)		2		125
Credit cards	71		8			(9)		2		72
Consumer indirect loans	1		1			(1)		—		1
Total consumer loans	496		16			(24)		6		494
Total ALLL — continuing operations	1,380		152		(a)	(76)		24		1,480
Discontinued operations	19		—			(2)		1		18
Total ALLL — including discontinued operations	$	1,399	$	152		$	(78)	$	25	$	1,498

(a)Excludes a provision for losses on lending-related commitments of $15 million.

Three months ended June 30, 2022:

Dollars in millions	March 31, 2022		Provision			Charge-offs		Recoveries		June 30, 2022
Commercial and Industrial	$	489	$	45		$	(39)	$	8	$	503
Commercial real estate:
Real estate — commercial mortgage	172		(14)			(3)		1		156
Real estate — construction	25		(5)			—		1		21
Total commercial real estate loans	197		(19)			(3)		2		177
Commercial lease financing	31		(3)			—		1		29
Total commercial loans	717		23			(42)		11		709
Real estate — residential mortgage	108		11			2		1		122
Home equity loans	104		(10)			—		1		95
Consumer direct loans	111		10			(10)		1		112
Credit cards	63		3			(8)		1		59
Consumer indirect loans	2		1			(1)		—		2
Total consumer loans	388		15			(17)		4		390
Total ALLL — continuing operations	1,105		38		(a)	(59)		15		1,099
Discontinued operations	27		(3)			(1)		1		24
Total ALLL — including discontinued operations	$	1,132	$	35		$	(60)	$	16	$	1,123

(a)Excludes a provision for losses on lending-related commitments of $7 million.

Six months ended June 30, 2023:

in millions	December 31, 2022		Provision			Charge-offs		Recoveries		June 30, 2023
Commercial and Industrial	$	601	$	52		$	(77)	$	23	$	599
Commercial real estate:
Real estate — commercial mortgage	203		125			(14)		1		315
Real estate — construction	28		11			—		—		39
Total commercial real estate loans	231		136			(14)		1		354
Commercial lease financing	32		(2)			—		3		33
Total commercial loans	864		186			(91)		27		986
Real estate — residential mortgage	196		3			(1)		2		200
Home equity loans	98		(1)			(3)		2		96
Consumer direct loans	111		32			(22)		4		125
Credit cards	66		21			(18)		3		72
Consumer indirect loans	2		(1)			(1)		1		1
Total consumer loans	473		54			(45)		12		494
Total ALLL — continuing operations	1,337		240		(a)	(136)		39		1,480
Discontinued operations	21		(1)			(3)		1		18
Total ALLL — including discontinued operations	$	1,358	$	239		$	(139)	$	40	$	1,498

(a)Excludes a provision for losses on lending-related commitments of $66 million.

Six months ended June 30, 2022:

Dollars in millions	December 31, 2021		Provision			Charge-offs		Recoveries		June 30, 2022
Commercial and Industrial	$	445	$	108		$	(69)	$	19	$	503
Commercial real estate:
Real estate — commercial mortgage	182		(21)			(7)		2		156
Real estate — construction	29		(9)			—		1		21
Total commercial real estate loans	211		(30)			(7)		3		177
Commercial lease financing	32		(2)			(2)		1		29
Total commercial loans	688		76			(78)		23		709
Real estate — residential mortgage	95		23			3		1		122
Home equity loans	110		(16)			(1)		2		95
Consumer direct loans	105		21			(17)		3		112
Credit cards	61		10			(15)		3		59
Consumer indirect loans	2		1			(2)		1		2
Total consumer loans	373		39			(32)		10		390
Total ALLL — continuing operations	1,061		115		(a)	(110)		33		1,099
Discontinued operations	28		(2)			(3)		1		24
Total ALLL — including discontinued operations	$	1,089	$	113		$	(113)	$	34	$	1,123

(a)Excludes a provision for losses on lending-related commitments of $13 million.

As described in Note 1 ("Summary of Significant Accounting Policies"), under the heading “Allowance for Loan and Lease Losses” beginning on page 107 of our 2022 Form 10-K, we estimate the ALLL using relevant available information, from internal and external sources, relating to past events, current economic and portfolio conditions, and reasonable and supportable forecasts. In our estimation of expected credit losses, we use a two year reasonable and supportable period across all products. Following this two year period in which supportable forecasts can be generated, for all modeled loan portfolios, we revert expected credit losses to a level that is consistent with our historical information by reverting the macroeconomic variables (model inputs) to their long run average. We revert to historical loss rates for less complex estimation methods for smaller portfolios. A 20-year fixed length look back period is used to calculate the long run average of the macroeconomic variables. A four quarter reversion period is used where the macroeconomic variables linearly revert to their long run average following the two year reasonable and supportable period.

We develop our reasonable and supportable forecasts using relevant data including, but not limited to, changes in economic output, unemployment rates, property values, and other factors associated with the credit losses on financial assets. Some macroeconomic variables apply to all portfolio segments, while others are more portfolio specific. The following table discloses key macroeconomic variables for each loan portfolio.

Segment	Portfolio	Key Macroeconomic Variables (a)
Commercial	Commercial and industrial	BBB corporate bond rate (spread), fixed investment, business bankruptcies, GDP, industrial production, and unemployment rate, Producer Price Index
	Commercial real estate	Property & real estate price indices, unemployment rate, business bankruptcies, GDP, SOFR
	Commercial lease financing	BBB corporate bond rate (spread), GDP, and unemployment rate
Consumer	Real estate — residential mortgage	GDP, home price index, unemployment rate, and 30 year mortgage rate
	Home equity	Home price index, unemployment rate, and 30 year mortgage rate
	Consumer direct	Unemployment rate and U.S. household income
	Consumer indirect	Unemployment rate
	Credit cards	Unemployment rate and U.S. household income
	Discontinued operations	Unemployment rate

(a)Variables include all transformations and interactions with other risk drivers. Additionally, variables may have varying impacts at different points in the economic cycle.

In addition to macroeconomic drivers, portfolio attributes such as remaining term, outstanding balance, risk ratings, utilization, FICO, LTV, and delinquency also drive ALLL changes. Our ALLL models were designed to capture the correlation between economic and portfolio changes. As such, evaluating shifts in individual portfolio attributes and macroeconomic variables in isolation may not be indicative of past or future performance.

Economic Outlook

As of June 30, 2023, economic uncertainty was elevated due to cooling, but still high, inflationary pressures and rising interest rates. Unemployment rates are still expected to remain at relatively low levels, but job growth is moderating. Inflation, in the United States, is starting to ease as the restrictive monetary policy and higher interest rates are making an impact. Commercial real estate values are under pressure, with office being the most vulnerable market. We utilized the Moody’s May 2023 Consensus forecast as our baseline forecast to estimate our expected credit losses as of June 30, 2023. We determined such forecast to be a reasonable view of the outlook for the economy given all available information at quarter end.

The baseline scenario reflects slow economic growth over the next two years in markets in which we operate. U.S. GDP is expected to grow at an annual rate of approximately 1.3% and 0.9% for 2023 and 2024, respectively. The national unemployment rate forecast is expected to reach 4.2% by the fourth quarter of 2023. The U.S. Consumer Price Index annualized rate is forecasted at 4% and 2.5% for 2023 and 2024, respectively. The national home price index is expected to decline approximately 6% over 2023, while the commercial real estate price index is forecasted to drop approximately 5% in 2023 and 9% over 2024.

As a result of the current economic uncertainty, our future loss estimates may vary considerably from our June 30, 2023 assumptions.

Commercial Loan Portfolio

The ALLL from continuing operations for the commercial segment increased by $102 million, or 11.5%, from March 31, 2023. The overall increase in the commercial allowance is driven by changes in the economic outlook and portfolio activity.

The reserves levels are reflective of low economic growth expectations in 2023, primarily related to the high inflation and elevated interest rate environment. The reserve increase from prior quarter is concentrated in the commercial real estate portfolio, reflecting economic deterioration largely within the office sector. Reserve levels also reflect changes in portfolio factors, including the impact of current economic conditions on risk ratings.

Consumer Loan Portfolio

The ALLL from continuing operations for the consumer segment decreased by $2 million, or 0.4%, from March 31, 2023. The overall stability in the consumer allowance is driven by improvement in the economic forecast, offset by credit quality normalization post-pandemic.

Current reserve levels reflect favorable changes economic outlook quarter-over-quarter for the home price environment. Improvement in the unemployment outlook also impacted reserves for all consumer segments.

Credit Risk Profile

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 refreshed FICO score assigned for the consumer loan portfolios. The internal risk grades assigned to loans follow our definitions of Pass and Criticized, which are consistent with published definitions of regulatory risk classifications. Loans with a pass rating represent those loans not classified on our rating scale for credits, as minimal credit risk has been identified. Criticized loans are those loans that either have a potential weakness deserving management's close attention or have a well-defined weakness that may put full collection of contractual cash flows at risk. 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 its debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the tables below at the dates indicated.

All 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

Credit Risk Profile by Creditworthiness Category and Vintage (a)

As of June 30, 2023	Term Loans												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis
	Amortized Cost Basis by Origination Year and Internal Risk Rating
Dollars in millions	2023		2022		2021		2020		2019		Prior						Total
Commercial and Industrial
Risk Rating:
Pass	$	3,242	$	10,905	$	7,306	$	3,039	$	2,367	$	4,060	$	26,548	$	152	$	57,619
Criticized (Accruing)	31		222		436		176		114		396		857		20		2,252
Criticized (Nonaccruing)	4		34		5		3		34		23		85		—		188
Total commercial and industrial	3,277		11,161		7,747		3,218		2,515		4,479		27,490		172		60,059
Current period gross write-offs	—		—		5		4		1		7		25		—		42
Real estate — commercial mortgage
Risk Rating:
Pass	719		4,249		3,460		842		1,656		2,934		1,031		68		14,959
Criticized (Accruing)	3		373		186		26		135		211		90		—		1,024
Criticized (Nonaccruing)	—		—		1		21		1		12		30		—		65
Total real estate — commercial mortgage	722		4,622		3,647		889		1,792		3,157		1,151		68		16,048
Current period gross write-offs	—		—		—		1		—		8		—		—		9
Real estate — construction
Risk Rating:
Pass	61		876		988		315		203		89		11		6		2,549
Criticized (Accruing)	—		5		23		17		—		50		—		2		97
Criticized (Nonaccruing)	—		—		—		—		—		—		—		—		—
Total real estate — construction	61		881		1,011		332		203		139		11		8		2,646
Current period gross write-offs	—		—		—		—		—		—		—		—		—
Commercial lease financing
Risk Rating:
Pass	287		973		668		436		390		956		—		—		3,710
Criticized (Accruing)	22		35		4		9		8		12		—		—		90
Criticized (Nonaccruing)	—		—		—		—		—		1		—		—		1
Total commercial lease financing	309		1,008		672		445		398		969				—		3,801
Current period gross write-offs	—		—		—		—		—		1		—		—		1
Total commercial loans	$	4,369	$	17,672	$	13,077	$	4,884	$	4,908	$	8,744	$	28,652	$	248	$	82,554
Total commercial loan current period gross write-offs	$	—	$	—	$	5	$	5	$	1	$	16	$	25	$	—	$	52

As of December 31, 2022	Term Loans												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis
	Amortized Cost Basis by Origination Year and Internal Risk Rating
Dollars in millions	2022		2021		2020		2019		2018		Prior						Total
Commercial and Industrial
Risk Rating:
Pass	$	11,580	$	8,636	$	3,540	$	2,839	$	1,787	$	3,307	$	25,565	$	138	$	57,392
Criticized (Accruing)	40		357		131		160		227		205		936		25		2,081
Criticized (Nonaccruing)	34		2		5		4		22		20		87		—		174
Total commercial and industrial	11,654		8,995		3,676		3,003		2,036		3,532		26,588		163		59,647
Real estate — commercial mortgage
Risk Rating:
Pass	4,786		3,817		992		1,853		788		2,578		1,068		67		15,949
Criticized (Accruing)	6		13		20		48		73		175		47		—		382
Criticized (Nonaccruing)	—		—		1		1		1		15		3		—		21
Total real estate — commercial mortgage	4,792		3,830		1,013		1,902		862		2,768		1,118		67		16,352
Real estate — construction
Risk Rating:
Pass	698		895		445		262		107		48		1		—		2,456
Criticized (Accruing)	5		1		5		32		25		4		—		2		74
Criticized (Nonaccruing)	—		—		—		—		—		—		—		—		—
Total real estate — construction	703		896		450		294		132		52		1		2		2,530
Commercial lease financing
Risk Rating:
Pass	1,039		743		509		467		174		947		—		—		3,879
Criticized (Accruing)	15		1		9		12		9		10		—		—		56
Criticized (Nonaccruing)	—		—		—		—		—		1		—		—		1
Total commercial lease financing	1,054		744		518		479		183		958		—		—		3,936
Total commercial loans	$	18,203	$	14,465	$	5,657	$	5,678	$	3,213	$	7,310	$	27,707	$	232	$	82,465

(a)Accrued interest of $365 million and $314 million as of June 30, 2023, and December 31, 2022, respectively, presented in Other Assets on the Consolidated Balance Sheets, was excluded from the amortized cost basis disclosed in these tables.

Consumer Credit Exposure

Credit Risk Profile by FICO Score and Vintage (a)

As of June 30, 2023	Term Loans												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis
	Amortized Cost Basis by Origination Year and FICO Score
Dollars in millions	2023		2022		2021		2020		2019		Prior						Total
Real estate — residential mortgage
FICO Score:
750 and above	$	621	$	6,003	$	8,037	$	2,517	$	611	$	979	$	—	$	—	$	18,768
660 to 749	188		885		830		239		100		271		—		—		2,513
Less than 660	7		55		37		17		16		134		—		—		266
No Score	1		65		1		1		—		21		1		—		90
Total real estate — residential mortgage	817		7,008		8,905		2,774		727		1,405		1		—		21,637
Current period gross write-offs	—		—		—		—		—		1		—		—		1
Home equity loans
FICO Score:
750 and above	—		108		1,436		542		146		486		2,135		373		5,226
660 to 749	11		73		255		172		71		189		916		121		1,808
Less than 660	1		10		30		24		18		82		291		32		488
No Score	1		—		—		—		—		2		4		—		7
Total home equity loans	13		191		1,721		738		235		759		3,346		526		7,529
Current period gross write-offs	1		—		—		—		—		—		—		1		2
Consumer direct loans
FICO Score:
750 and above	143		1,264		1,549		741		314		118		98		—		4,227
660 to 749	127		418		376		191		99		60		199		—		1,470
Less than 660	13		61		61		31		17		13		55		—		251
No Score	20		45		20		16		11		19		178		—		309
Total consumer direct loans	303		1,788		2,006		979		441		210		530		—		6,257
Current period gross write-offs	—		3		3		1		1		—		3		—		11
Credit cards
FICO Score:
750 and above	—		—		—		—		—		—		499		—		499
660 to 749	—		—		—		—		—		—		400		—		400
Less than 660	—		—		—		—		—		—		101		—		101
No Score	—		—		—		—		—		—		1		—		1
Total credit cards	—		—		—		—		—		—		1,001		—		1,001
Current period gross write-offs	—		—		—		—		—		—		9		—		9
Consumer indirect loans
FICO Score:
750 and above	—		1		—		—		—		16		—		—		17
660 to 749	—		—		—		—		—		12		—		—		12
Less than 660	—		—		—		—		—		4		—		—		4
No Score	—		—		—		—		—		—		—		—		—
Total consumer indirect loans	—		1		—		—		—		32		—		—		33
Current period gross write-offs	—		—		—		—		—		1		—		—		1
Total consumer loans	$	1,133	$	8,988	$	12,632	$	4,491	$	1,403	$	2,406	$	4,878	$	526	$	36,457
Total consumer loan current period gross write-offs	$	1	$	3	$	3	$	1	$	1	$	2	$	12	$	1	$	24

As of December 31, 2022	Term Loans												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis
	Amortized Cost Basis by Origination Year and FICO Score
Dollars in millions	2022		2021		2020		2019		2018		Prior						Total
Real estate — residential mortgage
FICO Score:
750 and above	$	5,205	$	8,702	$	2,584	$	636	$	64	$	978	$	—	$	—	$	18,169
660 to 749	1,286		919		282		106		28		260		—		—		2,881
Less than 660	41		42		17		14		15		130		—		—		259
No Score	62		1		1		1		1		25		1		—		92
Total real estate — residential mortgage	6,594		9,664		2,884		757		108		1,393		1		—		21,401
Home equity loans
FICO Score:
750 and above	146		1,044		736		207		74		617		2,238		398		5,460
660 to 749	83		291		194		79		32		187		974		126		1,966
Less than 660	11		31		25		17		10		81		300		37		512
No Score	7		—		—		—		—		2		4		—		13
Total home equity loans	247		1,366		955		303		116		887		3,516		561		7,951
Consumer direct loans
FICO Score:
750 and above	1,291		1,632		811		351		45		97		102		—		4,329
660 to 749	526		434		229		120		26		41		206		—		1,582
Less than 660	58		63		32		23		7		9		57		—		249
No Score	59		32		22		11		9		22		193		—		348
Total consumer direct loans	1,934		2,161		1,094		505		87		169		558		—		6,508
Credit cards
FICO Score:
750 and above	—		—		—		—		—		—		524		—		524
660 to 749	—		—		—		—		—		—		402		—		402
Less than 660	—		—		—		—		—		—		99		—		99
No Score	—		—		—		—		—		—		1		—		1
Total credit cards	—		—		—		—		—		—		1,026		—		1,026
Consumer indirect loans
FICO Score:
750 and above	—		2		—		—		—		19		—		—		21
660 to 749	—		—		—		—		—		15		—		—		15
Less than 660	—		—		—		—		—		7		—		—		7
No Score	—		—		—		—		—		—		—		—		—
Total consumer indirect loans	—		2		—		—		—		41		—		—		43
Total consumer loans	$	8,775	$	13,193	$	4,933	$	1,565	$	311	$	2,490	$	5,101	$	561	$	36,929

(a)Accrued interest of $135 million and $103 million as of June 30, 2023, and December 31, 2022, respectively, presented in Other Assets on the Consolidated Balance Sheets, was excluded from the amortized cost basis disclosed in this table.

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” beginning on page 106 of our 2022 Form 10-K.

The following aging analysis of past due and current loans as of June 30, 2023, and December 31, 2022, provides further information regarding Key’s credit exposure.

Aging Analysis of Loan Portfolio(a)

As of June 30, 2023	Current (b)		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 (b)		Total Loans (c)
Dollars in millions
LOAN TYPE
Commercial and industrial	$	59,794	$	17	$	19	$	41	$	188	$	265	$	60,059
Commercial real estate:
Commercial mortgage	15,964		7		2		10		65		84		16,048
Construction	2,646		—		—		—		—		—		2,646
Total commercial real estate loans	18,610		7		2		10		65		84		18,694
Commercial lease financing	3,778		22		—		—		1		23		3,801
Total commercial loans	$	82,182	$	46	$	21	$	51	$	254	$	372	$	82,554
Real estate — residential mortgage	$	21,553	$	6	$	5	$	—	$	73	$	84	$	21,637
Home equity loans	7,395		24		7		6		97		134		7,529
Consumer direct loans	6,227		11		9		7		3		30		6,257
Credit cards	979		6		4		9		3		22		1,001
Consumer indirect loans	32		—		—		—		1		1		33
Total consumer loans	$	36,186	$	47	$	25	$	22	$	177	$	271	$	36,457
Total loans	$	118,368	$	93	$	46	$	73	$	431	$	643	$	119,011

(a)Amounts in table represent amortized cost and exclude loans held for sale.

(b)Accrued interest of $500 million presented in “Accrued income and other assets” on the Consolidated Balance Sheets is excluded from the amortized cost basis disclosed in this table.

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

As of December 31, 2022	Current (b)		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 (b)		Total Loans (c)
Dollars in millions
LOAN TYPE
Commercial and industrial	$	59,366	$	43	$	33	$	31	$	174	$	281	$	59,647
Commercial real estate:
Commercial mortgage	16,305		16		2		8		21		47		16,352
Construction	2,530		—		—		—		—		—		2,530
Total commercial real estate loans	18,835		16		2		8		21		47		18,882
Commercial lease financing	3,928		3		1		3		1		8		3,936
Total commercial loans	$	82,129	$	62	$	36	$	42	$	196	$	336	$	82,465
Real estate — residential mortgage	$	21,307	$	13	$	3	$	1	$	77	$	94	$	21,401
Home equity loans	7,804		27		8		5		107		147		7,951
Consumer direct loans	6,478		15		7		5		3		30		6,508
Credit cards	1,007		5		4		7		3		19		1,026
Consumer indirect loans	42		—		—		—		1		1		43
Total consumer loans	$	36,638	$	60	$	22	$	18	$	191	$	291	$	36,929
Total loans	$	118,767	$	122	$	58	$	60	$	387	$	627	$	119,394

(a)Amounts in table represent amortized cost and exclude loans held for sale.

(b)Accrued interest of $417 million presented in “Accrued income and other assets” on the Consolidated Balance Sheets is excluded from the amortized cost basis disclosed in this table.

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

At June 30, 2023, the approximate carrying amount of our commercial nonperforming loans outstanding represented 60% of their original contractual amount owed, total nonperforming loans outstanding represented 70% of their original contractual amount owed, and nonperforming assets in total were carried at 75% of their original contractual amount owed.

Nonperforming loans reduced expected interest income by $8 million and $16 million for the three and six months ended June 30, 2023, respectively, and $4 million and $9 million for the three and six months ended June 30, 2022, respectively.

The amortized cost basis of nonperforming loans on nonaccrual status for which there is no related allowance for credit losses was $226 million at June 30, 2023.

Collateral-dependent Financial Assets

We classify financial assets as collateral-dependent when our borrower is experiencing financial difficulty, and we expect repayment to be provided substantially through the operation or sale of the collateral. Our commercial loans have collateral that includes cash, accounts receivable, inventory, commercial machinery, commercial properties,

commercial real estate construction projects, enterprise value, and stock or ownership interests in the borrowing entity. When appropriate we also consider the enterprise value of the borrower as a repayment source for collateral-dependent loans. Our consumer loans have collateral that includes residential real estate, automobiles, boats, and RVs.

At June 30, 2023 and June 30, 2022, the recorded investment of consumer residential mortgage loans in the process of foreclosure was approximately $94 million and $155 million, respectively.

There were no significant changes in the extent to which collateral secures our collateral-dependent financial assets during the three months ended June 30, 2023.

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

Effective January 1, 2023 Key adopted the provision of ASU 2022-02, which eliminated the accounting for TDRs while expanding loan modification and vintage disclosure requirements. As part of our loss mitigation activities, we may agree to modify the contractual terms of a loan to a borrower experiencing financial difficulty. 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. Such modifications may include an extension of maturity date, interest rate reduction, an other than insignificant payment delay, other modifications, or some combination thereof. Many factors can go into what is considered an other than insignificant payment delay such as the significance of the restricted payment amount relative to the normal loan payment or the relative significance of the delay to the original loan terms. Generally, Key considers any delay in payment of greater than 90 days in the last 12 months to be significant. The ALLL for loans modified for borrowers experiencing financial difficulty is determined based on Key’s ALLL policy as described within Note 1 (“Basis of Presentation and Accounting Policies”).

Modifications for Borrowers Experiencing Financial Difficulty

The Bank’s strategy in working with commercial borrowers is to allow them time to improve their financial position through loan modification. Commercial borrowers that are rated substandard or worse in accordance with the regulatory definition, or that cannot otherwise restructure at market terms and conditions, are considered to be experiencing financial difficulty. A modification of a loan is subject to the normal underwriting standards and processes for other similar credit extensions, both new and existing. The modified loan is evaluated to determine if it is a new loan or a continuation of the prior loan.

Consumer loans in which a borrower requires a modification as a result of negative changes to their financial condition or to avoid default, generally indicate the borrower is experiencing financial difficulty. The primary modifications made to consumer loans are amortization, maturity date and interest rate changes. Consumer borrowers identified as experiencing financial difficulty are generally unable to refinance their loans through the Company’s normal origination channel or through other independent sources.

The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of loan and type of concession granted. The table does not include those modifications that only resulted in an insignificant payment delay. The table does not include consumer loans that are still within a trial modification period. Trial modifications may be done for consumer borrowers where a trial payment plan period is offered in advance of a permanent loan modification. As of June 30, 2023, there were 93 loans totaling $10 million in a trial modification period.

Commitments outstanding to lend additional funds to borrowers experiencing financial difficulty whose loans were modified were $38 million at June 30, 2023.

As of June 30, 2023	Interest Rate Reduction		Term Extension		Other		Combination		Total
Dollars in millions	Amortized Cost Basis		Amortized Cost Basis		Amortized Cost Basis		Amortized Cost Basis		Amortized Cost Basis		% of Total Loan Type
LOAN TYPE
Commercial and Industrial	$	—	$	144	$	19	$	5	$	168	0.28	%
Commercial real estate:
Commercial mortgage	—		7		—		—		7		0.04
Construction	—		—		—		—		—		—
Total commercial real estate loans	—		7		—		—		7		0.04
Commercial lease financing	—		—		—		—		—		—
Total commercial loans	$	—	$	151	$	19	$	5	$	175	0.21	%
Real estate — residential mortgage	—		—		1		5		6		0.03
Home equity loans	1		—		1		3		5		0.07
Consumer direct loans	—		1		—		1		2		0.03
Credit cards	—		—		—		2		2		0.20
Consumer indirect loans	—		—		—		—		—		—
Total consumer loans	1		1		2		11		15		0.04
Total loans	$	1	$	152	$	21	$	16	$	190	0.16	%

Combination modifications consist primarily of loans modified with both an interest rate reduction and a term extension.

Financial Effects of Modifications to Borrowers Experiencing Financial Difficulty

The following table summarizes the financial impacts of loan modifications made to specific loans during the three and six months ended June 30, 2023.

Three months ended June 30, 2023	Weighted-average Interest Rate Reduction		Weighted-average Term Extension (in years)
LOAN TYPE
Commercial and Industrial	(2.02)	%	0.17
Commercial mortgage	—	%	0.09
Real estate — residential mortgage	(2.15)	%	6.11
Home equity loans	(4.16)	%	6.78
Consumer direct loans	(4.54)	%	0.66
Credit cards	(9.36)	%	0.25
Consumer indirect loans	(0.66)	%	0.38

Six months ended June 30, 2023	Weighted-average Interest Rate Reduction		Weighted-average Term Extension (in years)
LOAN TYPE
Commercial and Industrial	(3.85)	%	0.31
Commercial mortgage	—	%	1.01
Real estate — residential mortgage	(2.06)	%	6.36
Home equity loans	(4.26)	%	6.65
Consumer direct loans	(4.05)	%	0.72
Credit cards	(12.82)	%	0.50
Consumer indirect loans	(0.66)	%	0.42

Amortized Cost Basis of Modified Loans That Subsequently Defaulted

As of June 30, 2023, there were $7 million of Commercial and Industrial loans that were modified for borrowers experiencing financial difficulty that received term extension modifications and subsequently defaulted during the period.

Key closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified for borrowers experiencing financial difficulty since the adoption of ASU 2022-02 on January 1, 2023.

As of June 30, 2023	Current		30-89 Days Past Due		90 and Greater Days Past Due		Total
Dollars in millions
LOAN TYPE
Commercial and Industrial	$	156	$	5	$	7	$	168
Commercial real estate
Commercial mortgage	7		—		—		7
Construction	—		—		—		—
Total commercial real estate loans	163		5		7		175
Commercial lease financing	—		—		—		—
Total commercial loans	163		5		7		175
Real estate — residential mortgage	5		—		1		6
Home equity loans	5		—		—		5
Consumer direct loans	2		—		—		2
Credit cards	2		—		—		2
Consumer indirect loans	—		—		—		—
Total consumer loans	$	14	$	—	$	1	$	15
Total loans	$	177	$	5	$	8	$	190

Liability for Credit Losses on Off Balance Sheet Exposures

The liability for credit losses on off balance sheet exposure is included in “accrued expense and other liabilities” on the balance sheet. This includes credit risk for recourse associated with loans sold under the Fannie Mae Delegated Underwriting and Servicing program and credit losses inherent in unfunded lending-related commitments, such as letters of credit and unfunded loan commitments, and certain financial guarantees.

Changes in the liability for credit losses on off balance sheet exposures are summarized as follows:

	Three months ended June 30,				Six months ended June 30,
Dollars in millions	2023		2022		2023		2022
Balance at beginning of period	$	276	$	166	$	225	$	160
Provision (credit) for losses on off balance sheet exposures	15		7		66		13
Balance at end of period	$	291	$	173	$	291	$	173

TDR Disclosures Prior to the Adoption of ASU 2022-02

Prior to our adoption of ASU 2022-02, we accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR. On January 1, 2023, we adopted ASU 2022-02, which eliminated TDR accounting prospectively for all modifications occurring on or after January 1, 2023. See Note 1 (“Summary of Significant Accounting Policies”) in our 2022 Form 10-K for more information on TDR accounting and disclosure requirements and Note 1 (“Summary of Significant Accounting Policies”) under the heading “Basis of Presentation” in this report for more information on our adoption of ASU 2022-02.

Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs were $1 million at June 30, 2022.

The consumer TDR other concession category in the table below primarily includes those borrowers’ debts that are discharged through Chapter 7 bankruptcy and have not been formally re-affirmed.

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

	Three Months Ended June 30,		Six Months Ended June 30,
Dollars in millions	2022		2022
Commercial loans:
Extension of Maturity Date	$	—	$	—
Payment or Covenant Modification/Deferment	—		1
Bankruptcy Plan Modification	—		—
Increase in new commitment or new money	—		—
Total	$	—	$	1
Consumer loans:
Interest rate reduction	$	3	$	4
Other	6		15
Total	$	9	$	19
Total TDRs	$	9	$	20

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

	Three Months Ended June 30,		Six Months Ended June 30,
Dollars in millions	2022		2022
Balance at beginning of the period	$	219	$	220
Additions	11		22
Payments	(12)		(24)
Charge-offs	(2)		(2)
Balance at end of period	$	216	$	216

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

	June 30, 2022
	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
Dollars in millions
LOAN TYPE
Nonperforming:
Commercial and industrial	$	40	$	25	$	12
Commercial real estate:
Commercial mortgage	3		50		23
Total commercial real estate loans	3		50		23
Total commercial loans	43		75		35
Real estate — residential mortgage	224		27		25
Home equity loans	486		32		29
Consumer direct loans	172		2		2
Credit cards	345		2		2
Consumer indirect loans	20		2		1
Total consumer loans	1,247		65		59
Total nonperforming TDRs	1,290		140		94
Prior-year accruing:(a)
Commercial and industrial	11		—		—
Commercial real estate
Commercial mortgage	1		—		—
Total commercial real estate loans	1		—		—
Total commercial loans	12		—		—
Real estate — residential mortgage	457		42		35
Home equity loans	1,612		99		76
Consumer direct loans	253		4		3
Credit cards	607		4		2
Consumer indirect loans	113		12		6
Total consumer loans	3,042		161		122
Total prior-year accruing TDRs	3,054		161		122
Total TDRs	$	4,344	$	301	$	216

(a)All TDRs that were restructured prior to January 1, 2022 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 three months ended June 30, 2022, there was one commercial loan TDR and 52 consumer loan TDRs with a combined recorded investment of $2 million that experienced payment defaults after modifications resulting in TDR status during 2021.

During the six months ended June 30, 2022, there were five commercial loan TDRs and 90 consumer loan TDRs with a combined recorded investment of $10 million that experienced payment defaults after modifications resulting in TDR status during 2021.