Asset Quality

6 Months Ended

Jun. 30, 2011

Asset Quality [Abstract]

Asset Quality

4. Asset Quality

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

Our nonperforming assets and past due loans were as follows:

	June 30,		December 31,		June 30,
in millions	2011		2010		2010
Total nonperforming loans	$	842	$	1,068	$	1,703
Nonperforming loans held for sale		42		106		221
OREO		52		129		136
Other nonperforming assets		14		35		26
Total nonperforming assets	$	950	$	1,338	$	2,086
Impaired loans	$	706	$	881	$	1,435
Impaired loans with a specifically allocated allowance		488		621		1,099
Specifically allocated allowance for impaired loans		46		58		157
Restructured loans included in nonperforming loans(a)	$	144	$	202	$	167
Restructured loans with a specifically allocated allowance (b)		19		57		65
Specifically allocated allowance for restructured loans (c)		5		18		15
Accruing loans past due 90 days or more	$	118	$	239	$	240
Accruing loans past due 30 through 89 days		465		476		610

(a)	Restructured loans (i.e., troubled debt restructurings) are those for which we, for reasons related to a borrower’s financial difficulties, grant a concession that we would not otherwise have considered. To improve the collectability of the loan, typical concessions include reducing the interest rate, extending the maturity date or reducing the principal balance.
(b)	Included in impaired loans with a specifically allocated allowance.
(c)	Included in specifically allocated allowance for impaired loans.

Impaired loans totaled $706 million at June 30, 2011, compared to $881 million at December 31, 2010, and $1.4 billion at June 30, 2010. Impaired loans had an average balance of $718 million for the second quarter of 2011 and $1.6 billion for the second quarter of 2010.

Of total impaired loans, $488 million was reviewed to determine if a specifically allocated allowance was required at June 30, 2011 in accordance with our $2.5 million threshold for such loans. As a result, $166 million of these loans had $46 million of specifically allocated allowance and $322 million had a zero specific allocation. Also, $218 million of impaired loans under the $2.5 million threshold were allocated an allowance of $81 million at June 30, 2011, for a total of $384 million of loans with an allowance of $127 million at June 30, 2011, as shown in the following table.

At June 30, 2011, aggregate restructured loans (accrual, nonaccrual, and held-for-sale loans) totaled $252 million while at December 31, 2010 total restructured loans totaled $297 million. Although we added $87 million in restructured loans during the first six months ended June 30, 2011, the overall decrease in restructured loans was primarily attributable to $132 million in payments and charge-offs.

A further breakdown of impaired loans by loan category as of June 30, 2011 follows:

June 30, 2011
			Unpaid				Average
	Recorded		Principal		Related		Recorded
in millions	Investment		Balance		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	233	$	116		—	$	205
Commercial real estate:
Commercial mortgage		241		123		—		269
Construction		257		83		—		333
Total commercial real estate loans		498		206		—		602
Commercial lease financing		—		—		—		—
Total commercial loans		731		322		—		807
Real estate — residential mortgage		—		—		—		—
Home equity:
Key Community Bank		2		—		—		2
Other		—		—		—		—
Total home equity loans		2		—		—		2
Total loans with no related allowance recorded		733		322		—		809
With an allowance recorded:
Commercial, financial and agricultural		147		79	$	32		212
Commercial real estate:
Commercial mortgage		215		145		49		202
Construction		116		56		22		100
Total commercial real estate loans		331		201		71		302
Commercial lease financing		38		25		12		40
Total commercial loans		516		305		115		554
Real estate — residential mortgage		45		33		4		47
Home equity:
Key Community Bank		22		22		7		21
Other		—		—		—		—
Total Home Equity Loans		22		22		7		21
Consumer other — Key Community Bank		25		24		1		25
Total loans with an allowance recorded		608		384		127		647
Total	$	1,341	$	706	$	127	$	1,456

Our policies for our commercial and consumer loan portfolios for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans and resuming accrual of interest are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Impaired and Other Nonaccrual Loans” on page 102 of our 2010 Annual Report on Form 10-K.

At June 30, 2011, approximately $46 billion, or 97% of our total loans are current. Total past due loans of $1.4 billion represent approximately 3% of total loans.

The following aging analysis as of June 30, 2011 of past due and current loans provides an alternative view of Key’s credit exposure.

June 30, 2011
			30 -59		60-89		Greater		Non
			Days Past		Days Past		Than 90		Accrual		Total Past
in millions	Current		Due		Due		Days		(NPL)		Due		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	16,599	$	35	$	17	$	19	$	213	$	284	$	16,883
Commercial real estate:
Commercial mortgage		7,743		34		51		11		230		326		8,069
Construction		1,437		11		24		28		131		194		1,631
Total commercial real estate loans		9,180		45		75		39		361		520		9,700
Commercial lease financing		5,983		20		40		21		41		122		6,105
Total commercial loans	$	31,762	$	100	$	132	$	79	$	615	$	926	$	32,688
Real estate — residential mortgage	$	1,713	$	24	$	14	$	8	$	79	$	125	$	1,838
Home equity:
Key Community Bank		9,216		66		32		16		101		215		9,431
Other		559		13		7		5		11		36		595
Total home equity loans		9,775		79		39		21		112		251		10,026
Consumer other — Key Community Bank		1,129		14		4		7		3		28		1,157
Consumer other:
Marine		1,898		42		14		3		32		91		1,989
Other		138		2		1		—		1		4		142
Total consumer other		2,036		44		15		3		33		95		2,131
Total consumer loans	$	14,653	$	161	$	72	$	39	$	227	$	499	$	15,152
Total loans	$	46,415	$	261	$	204	$	118	$	842	$	1,425	$	47,840

At June 30, 2011, the approximate carrying amount of our commercial nonperforming loans outstanding represented 57% of their original contractual amount, and total nonperforming loans outstanding represented 64% of their original contractual amount owed and nonperforming assets in total were carried at 60% of their original contractual amount.

At June 30, 2011, our twenty largest nonperforming loans totaled $276 million, representing 33% of total loans on nonperforming status from continuing operations as compared to $306 million in nonperforming loans representing 29% of total loans at December 31, 2010 and $441 million in nonperforming loans representing 25% of total loans on nonperforming status at June 30, 2010.

The risk characteristic prevalent to 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 allowance for loan and lease losses. 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 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, special mention and substandard, are indicators of the credit quality of our consumer loan portfolios.

Credit quality indicators for our commercial and consumer loan portfolios based on bond rating, regulatory classification and payment activity as of June 30, 2011 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)	2011		2010		2011		2010		2011		2010		2011		2010		2011		2010
AAA — AA	$	100	$	96	$	2	$	2		3		—	$	655	$	625	$	760	$	723
A		671		820		63		23	$	1	$	7		1,245		1,184		1,980		2,034
BBB — BB		13,546		11,655		5,553		6,336		747		1,116		3,590		3,878		23,436		22,985
B		955		1,418		941		1,236		262		768		343		564		2,501		3,986
CCC — C		1,611		3,124		1,510		2,374		618		1,539		272		369		4,011		7,406
Total	$	16,883	$	17,113	$	8,069	$	9,971	$	1,631	$	3,430	$	6,105	$	6,620	$	32,688	$	37,134

(a)	Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the interim period ending June 30, 2011.
(b)	Our bond rating to loan grade conversion system is as follows: AAA - AA = 1, A = 2, BBB - BB = 3 - 13, B = 14 - 16, and CCC - C = 17 - 20.

Consumer Credit Exposure
Credit Risk Profile by Regulatory Classifications ^(a)

June 30,
in millions
	Residential — Prime
GRADE	2011		2010
Pass	$	11,644	$	12,122
Special Mention		—		—
Substandard		220		252
Total	$	11,864	$	12,374

Credit Risk Profile Based on Payment Activity ^(a)

	Consumer — Key
	Community Bank				Consumer — Marine				Consumer — Other				Total
	2011		2010		2011		2010		2011		2010		2011		2010
Performing	$	1,154	$	1,142	$	1,957	$	2,450	$	141	$	186	$	3,252	$	3,778
Nonperforming		3		5		32		41		1		2		36		48
Total	$	1,157	$	1,147	$	1,989	$	2,491	$	142	$	188	$	3,288	$	3,826

(a) Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the interim period ending June 30, 2011.

We use the following three-step process to estimate the appropriate level of the allowance for loan and lease losses on at least a quarterly basis: (1) we apply historical loss rates to existing loans with similar risk characteristics as noted in the credit quality indicator table above; (2) we 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; and, (3) for all TDRs, regardless of size, as well as impaired 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 carrying amount 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. Additional information is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” on page 102 of our 2010 Annual Report on Form 10-K. The allowance for loan and lease losses at June 30, 2011, represents our best estimate of the losses inherent in the loan portfolio at that date.

While 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 allowance for loan and lease losses.

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. Our charge-off policy for most consumer loans is similar but takes effect when payments are 120 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.

At June 30, 2011, the allowance for loan and lease losses was $1.2 billion, or 2.57% of loans compared to $1.6 billion, or 3.20% of loans, at December 31, 2010, and $2.2 billion or 4.16% of loans at June 30, 2010. At June 30, 2011, the allowance for loan and lease losses was 146.08% of nonperforming loans compared to 130.30% at June 30, 2010.

Changes in the allowance for loan and lease losses are summarized as follows:

	Three months ended June 30,						Six months ended June 30,
in millions	2011			2010			2011			2010
Balance at beginning of period — continuing operations	$	1,372		$	2,425		$	1,604		$	2,534
Charge-offs		(177	)		(492	)		(409	)		(1,049	)
Recoveries		43			57			82			92
Net loans charged off		(134	)		(435	)		(327	)		(957	)
Provision for loan and lease losses from continuing operations		(8	)		228			(48	)		641
Foreign currency translation adjustment		—			1			1			1
Balance at end of period — continuing operations	$	1,230		$	2,219		$	1,230		$	2,219

The changes in the ALLL by loan category from December 31, 2010 are as follows:

	December 31,									June 30,
in millions	2010		Provision			Charge-offs		Recoveries		2011
Commercial, financial and agricultural	$	485	$	(22	)	$	93	$	25	$	395
Real estate — commercial mortgage		416		(18	)		62		7		343
Real estate — construction		145		15			62		8		106
Commercial lease financing		175		(53	)		26		11		107
Total commercial loans		1,221		(78	)		243		51		951
Real estate — residential mortgage		49		7			17		2		41
Home equity:
Key Community Bank		120		30			53		2		99
Other		57		4			26		2		37
Total home equity loans		177		34			79		4		136
Consumer other — Key Community Bank		57		9			23		4		47
Consumer other:
Marine		89		(14	)		42		19		52
Other		11		(5	)		5		2		3
Total consumer other:		100		(19	)		47		21		55
Total consumer loans		383		31			166		31		279
Total ALLL — continuing operations		1,604		(47	)(a)		409		82		1,230
Discontinued operations		114		62			73		6		109
Total ALLL — including discontinued operations	$	1,718	$	15		$	482	$	88	$	1,339

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

Our allowance for loan and lease losses decreased by $989 million, or 45%, since the second quarter of 2010. This contraction was associated with the improvement in credit quality of our loan portfolios, which has trended more favorably the past four quarters. Our asset quality metrics showed continued improvement and therefore has resulted in favorable risk rating migration and a reduction in our general allowance. Our general allowance encompasses the application of historical loss rates to our existing loans with similar risk characteristics and an assessment of factors such as changes in economic conditions and changes in credit policies or underwriting standards. Our delinquency trends improved throughout most of 2010 and into 2011. We attribute this improvement to a more moderate level of economic activity, 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 $488 million, which had a corresponding allowance of $46 million at June 30, 2011. Loans outstanding collectively evaluated for impairment totaled $47 billion, with a corresponding allowance of $1.2 billion at June 30, 2011.

A breakdown of the individual and collective allowance for loan and lease losses and the corresponding loan balances as of June 30, 2011 follows:

	Allowance(a)				Outstanding(a)
	Individually		Collectively				Individually		Collectively
June 30, 2011	Evaluated for		Evaluated for				Evaluated for		Evaluated for
in millions	Impairment		Impairment		Loans		Impairment		Impairment
Commercial, financial and agricultural	$	14	$	381	$	16,883	$	157	$	16,726
Commercial real estate:
Commercial mortgage		21		322		8,069		213		7,856
Construction		11		95		1,631		116		1,515
Total commercial real estate loans		32		417		9,700		329		9,371
Commercial lease financing		—		107		6,105		—		6,105
Total commercial loans		46		905		32,688		486		32,202
Real estate — residential mortgage		—		41		1,838		—		1,838
Home equity:
Key Community Bank		—		99		9,431		2		9,429
Other		—		37		595		—		595
Total home equity loans		—		136		10,026		2		10,024
Consumer other — Key Community Bank		—		47		1,157		—		1,157
Consumer other:
Marine		—		52		1,989		—		1,989
Other		—		3		142		—		142
Total consumer other		—		55		2,131		—		2,131
Total consumer loans		—		279		15,152		2		15,150
Total ALLL — continuing operations		46		1,184		47,840		488		47,352
Discontinued operations		—		109		6,261		—		6,261
Total ALLL — including discontinued operations	$	46	$	1,293	$	54,101	$	488	$	53,613

(a) There were no loans acquired with deteriorated credit quality at June 30, 2011.

The liability for credit losses inherent in lending-related 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 since the second quarter of 2010 by $52 million to $57 million at June 30, 2011. When combined with our allowance for loan and lease losses, our total allowance for credit losses represented 2.69% of loans at June 30, 2011, compared to 4.36% at June 30, 2010.

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

	Three months ended June 30,						Six months ended June 30,
in millions	2011			2010			2011			2010
Balance at beginning of period	$	69		$	119		$	73		$	121
Provision (credit) for losses on lending-related commitments		(12	)		(10	)		(16	)		(12	)
Balance at end of period	$	57		$	109		$	57		$	109

At June 30, 2011, we did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status. The amount by which loans and loans held for sale, which were classified as nonperforming, reduced expected interest income was $5 million for the six months ended June 30, 2011 and $22 million for the year ended December 31, 2010.