Edgar Filing: KEYCORP /NEW/

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From To

Commission File Number 1-11302

(Exact name of registrant as specified in its charter)


Ohio		34-6542451

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


127 Public Square, Cleveland, Ohio		44114-1306

(Address of principal executive offices)		(Zip Code)

(216) 689-6300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Shares with a par value of $1 each		878,544,699 Shares

(Title of class)		(Outstanding at August 7, 2009)

KEYCORP

TABLE OF CONTENTS


		Page Number
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets —June 30, 2009 (Unaudited), December 31, 2008, and June 30, 2008 (Unaudited)		3

	Consolidated Statements of Income (Unaudited) —Three and six months ended June 30, 2009 and 2008		4

	Consolidated Statements of Changes in Equity (Unaudited) —Six months ended June 30, 2009 and 2008		5

	Consolidated Statements of Cash Flows (Unaudited) —Six months ended June 30, 2009 and 2008		6

	Notes to Consolidated Financial Statements (Unaudited)		7

	Report of Independent Registered Public Accounting Firm		50

Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations		51

Item 3.	Quantitative and Qualitative Disclosure about Market Risk		109

Item 4.	Controls and Procedures		110

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		110

Item 1A.	Risk Factors		110

Item 4.	Submission of Matters to a Vote of Security Holders		114

Item 6.	Exhibits		115

	Signature		116

	Exhibits		117
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


	June 30,			December 31,			June 30,
in millions, except share data	2009			2008			2008

	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	723		$	1,257		$	1,912
Short-term investments		3,487			5,221			826
Trading account assets		771			1,280			1,483
Securities available for sale		12,174			8,437			8,312
Held-to-maturity securities (fair value: $25, $25 and $25)		25			25			25
Other investments		1,450			1,526			1,559
Loans, net of unearned income of $1,995, $2,345 and $2,532		70,803			76,504			75,855
Less: Allowance for loan losses		2,499			1,803			1,421

Net loans		68,304			74,701			74,434
Loans held for sale		909			1,027			1,833
Premises and equipment		858			840			748
Operating lease assets		842			990			1,089
Goodwill		917			1,138			1,598
Other intangible assets		106			128			146
Corporate-owned life insurance		3,016			2,970			2,917
Derivative assets		1,182			1,896			1,693
Accrued income and other assets		3,028			3,095			2,969

Total assets	$	97,792		$	104,531		$	101,544


LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	23,939		$	24,191		$	27,278
Savings deposits		1,795			1,712			1,809
Certificates of deposit ($100,000 or more)		13,486			11,991			8,699
Other time deposits		15,055			14,763			12,541

Total interest-bearing		54,275			52,657			50,327
Noninterest-bearing		12,977			11,485			10,561
Deposits in foreign office ¾ interest-bearing		632			1,118			3,508

Total deposits		67,884			65,260			64,396
Federal funds purchased and securities sold under repurchase agreements		1,530			1,557			2,088
Bank notes and other short-term borrowings		1,710			8,477			5,985
Derivative liabilities		530			1,038			637
Accrued expense and other liabilities		1,616			2,523			4,447
Long-term debt		13,462			14,995			15,106

Total liabilities		86,732			93,850			92,659

EQUITY
Preferred stock, $1 par value, authorized 25,000,000 shares:
7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 2,904,839, 6,575,000 and 6,500,000 shares		291			658			650
Fixed-Rate Cumulative Perpetual Preferred Stock, Series B, $100,000 liquidation preference; authorized and issued 25,000 shares		2,422			2,414			—
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 865,070,221, 584,061,120 and 576,995,163 shares		865			584			577
Common stock warrant		87			87			—
Capital surplus		3,292			2,553			2,544
Retained earnings		5,878			6,727			7,461
Treasury stock, at cost (67,824,373, 89,058,634 and 91,333,157 shares)		(1,984	)		(2,608	)		(2,675	)
Accumulated other comprehensive income		—			65			149

Key shareholders’ equity		10,851			10,480			8,706
Noncontrolling interests		209			201			179

Total equity		11,060			10,681			8,885

Total liabilities and equity	$	97,792		$	104,531		$	101,544

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended June 30,						Six months ended June 30,
dollars in millions, except per share amounts	2009			2008			2009			2008

INTEREST INCOME
Loans	$	857		$	717		$	1,740		$	1,840
Loans held for sale		9			20			21			107
Securities available for sale		99			111			207			220
Held-to-maturity securities		—			—			1			1
Trading account assets		13			10			26			23
Short-term investments		3			8			6			17
Other investments		13			14			25			26

Total interest income		994			880			2,026			2,234

INTEREST EXPENSE
Deposits		296			347			596			775
Federal funds purchased and securities sold under repurchase agreements		1			15			2			43
Bank notes and other short-term borrowings		4			27			10			66
Long-term debt		101			133			212			279

Total interest expense		402			522			820			1,163


NET INTEREST INCOME		592			358			1,206			1,071
Provision for loan losses		850			647			1,725			834

Net interest (expense) income after provision for loan losses		(258	)		(289	)		(519	)		237

NONINTEREST INCOME
Trust and investment services income		119			130			229			253
Service charges on deposit accounts		83			93			165			181
Operating lease income		59			68			120			137
Letter of credit and loan fees		45			51			83			88
Corporate-owned life insurance income		25			28			52			56
Electronic banking fees		27			27			51			51
Insurance income		16			20			34			35
Investment banking and capital markets income		17			80			35			88
Net securities gains (losses) ^(a)		125			(1	)		111			2
Net losses from principal investing		(6	)		(14	)		(78	)		(3	)
Net (losses) gains from loan securitizations and sales		(3	)		33			5			(68	)
Gain related to exchange of common shares for capital securities		95			—			95			—
Gain from sale/redemption of Visa Inc. shares		—			—			105			165
Other income		113			32			193			86

Total noninterest income		715			547			1,200			1,071

NONINTEREST EXPENSE
Personnel		377			402			738			809
Net occupancy		63			62			129			128
Operating lease expense		49			55			99			113
Computer processing		48			43			95			90
Professional fees		47			32			81			55
FDIC assessment		70			2			100			4
Equipment		25			23			47			47
Marketing		17			21			31			35
Intangible assets impairment		—			—			196			—
Other expense		174			137			296			225

Total noninterest expense		870			777			1,812			1,506


LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(413	)		(519	)		(1,131	)		(198	)
Income taxes		(180	)		610			(422	)		713

LOSS FROM CONTINUING OPERATIONS		(233	)		(1,129	)		(709	)		(911	)
Income (loss) from discontinued operations, net of taxes of ($4), $1, ($6) and $2, respectively (see Note 3)		10			2			(12	)		3

NET LOSS		(223	)		(1,127	)		(721	)		(908	)
Less: Net income (loss) attributable to noncontrolling interests		3			(1	)		(7	)		—

NET LOSS ATTRIBUTABLE TO KEY	$	(226	)	$	(1,126	)	$	(714	)	$	(908	)


Loss from continuing operations attributable to Key common shareholders	$	(400	)	$	(1,128	)	$	(914	)	$	(911	)
Net loss attributable to Key common shareholders		(390	)		(1,126	)		(926	)		(908	)

Per common share:
Loss from continuing operations attributable to Key common shareholders	$	(.69	)	$	(2.71	)	$	(1.71	)	$	(2.23	)
Income (loss) from discontinued operations, net of taxes		.02			—			(.02	)		.01
Net loss attributable to Key common shareholders		(.68	)		(2.70	)		(1.73	)		(2.23	)

Per common share — assuming dilution:
Loss from continuing operations attributable to Key common shareholders	$	(.69	)	$	(2.71	)	$	(1.71	)	$	(2.23	)
Income (loss) from discontinued operations, net of taxes		.02			—			(.02	)		.01
Net loss attributable to Key common shareholders		(.68	)		(2.70	)		(1.73	)		(2.23	)

Cash dividends declared per common share	$	.01		$	.375		$	.0725		$	.375

Weighted-average common shares outstanding (000)		576,883			416,629			535,080			407,875
Weighted-average common shares and potential common shares outstanding (000)		576,883			416,629			535,080			407,875


(a)		For the three months ended June 30, 2009, impairment losses totaled $7 million, of which $1 million was recognized in equity as a component of accumulated other comprehensive income on the balance sheet (see Note 5).

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Changes in Equity (Unaudited)


	Key Shareholders’ Equity
																						Accumulated
											Common								Treasury			Other
	Preferred Stock			Common Shares		Preferred			Common		Stock		Capital			Retained			Stock,			Comprehensive			Noncontrolling			Comprehensive
dollars in millions, except per share amounts	Outstanding (000)			Outstanding (000)		Stock			Shares		Warrant		Surplus			Earnings			at Cost			Income (Loss)			Interests			Income (Loss)

BALANCE AT DECEMBER 31, 2007		—			388,793		—			$ 492		—		$ 1,623			$ 8,522			$ (3,021	)		$ 130			$ 233
Net loss																	(908	)											$ (908	)
Other comprehensive income (loss):
Net unrealized gains on securities available for sale, net of income taxes of $10 ^(a)																							15						15
Net unrealized gains on derivative financial instruments, net of income taxes of $1																							1						1
Net distribution to noncontrolling interests																										(54	)		(54	)
Foreign currency translation adjustment																							(1	)					(1	)
Net pension and postretirement benefit costs, net of income taxes																							4						4

Total comprehensive loss																													$ (943	)

Deferred compensation														3			(3	)
Cash dividends declared on common shares ($.375 per share)																	(150	)
Preferred stock issued		6,500					$ 650							(20	)
Common shares issued					85,106					85				893
Common shares reissued:
Acquisition of U.S.B. Holding Co., Inc.					9,895									58						290
Stock options and other employee benefit plans					1,868									(13	)					56

BALANCE AT JUNE 30, 2008		6,500			485,662		$ 650			$ 577		—		$ 2,544			$ 7,461			$ (2,675	)		$ 149			$ 179




BALANCE AT DECEMBER 31, 2008		6,600			495,002		$ 3,072			$ 584		$ 87		$ 2,553			$ 6,727			$ (2,608	)		$ 65			$ 201
Net loss																	(714	)								(7	)		$ (721	)
Other comprehensive income (loss):
Net unrealized losses on securities available for sale, net of income taxes of ($23) ^(a)																							(38	)					(38	)
Net unrealized losses on derivative financial instruments, net of income taxes of ($37)																							(61	)					(61	)
Net contribution from noncontrolling interests																										15			15
Foreign currency translation adjustments																							21						21
Net pension and postretirement benefit costs, net of income taxes																							13						13

Total comprehensive loss																													$ (771	)

Deferred compensation														15
Cash dividends declared on common shares ($.0725 per share)																	(37	)
Cash dividends declared on Noncumulative Series A
Preferred Stock ($3.875 per share)																	(22	)
Cash dividends accrued on Cumulative Series B
Preferred Stock (5% per annum)																	(63	)
Amortization of discount on Series B Preferred Stock							8										(8	)
Common shares issued					205,439					206				781
Common shares exchanged for Series A Preferred Stock		(3,670	)		46,602		(367	)		29				(167	)		(5	)		508
Common shares exchanged for capital securities					46,338					46				196
Common shares reissued for stock options and other employee benefit plans					3,865									(86	)					116

BALANCE AT JUNE 30, 2009		2,930			797,246		$ 2,713			$ 865		$ 87		$ 3,292			$ 5,878			$ (1,984	)		—			$ 209


(a)		Net of reclassification adjustments.

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Six months ended June 30,
in millions	2009			2008

OPERATING ACTIVITIES
Net loss	$	(721	)	$	(908	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for loan losses		1,725			834
Intangible assets impairment		196			—
Depreciation and amortization expense		200			217
Net securities gains		(111	)		(2	)
Gain from sale/redemption of Visa Inc. shares		(105	)		(165	)
Gain related to exchange of common shares for capital securities		(95	)		—
Gains on leased equipment		(62	)		(15	)
Gain from sale of Key’s claim associated with the Lehman Brothers’ bankruptcy		(32	)		—
Net (gains) losses from loan securitizations and sales		(5	)		68
Net losses from principal investing		78			3
Provision for losses on LIHTC guaranteed funds		16			6
Provision (credit) for losses on lending-related commitments		11			(29	)
Liability to Visa		—			(64	)
Deferred income taxes		(413	)		(151	)
Net increase in loans held for sale		73			48
Net decrease in trading account assets		509			(427	)
Other operating activities, net		(676	)		384

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		588			(201	)
INVESTING ACTIVITIES
Proceeds from sale/redemption of Visa Inc. shares		105			165
Cash used in acquisitions, net of cash acquired		—			(157	)
Net decrease (increase) in short-term investments		1,734			(244	)
Purchases of securities available for sale		(8,031	)		(793	)
Proceeds from sales of securities available for sale		2,957			836
Proceeds from prepayments and maturities of securities available for sale		1,404			760
Purchases of held-to-maturity securities		(6	)		(2	)
Proceeds from prepayments and maturities of held-to-maturity securities		6			4
Purchases of other investments		(82	)		(306	)
Proceeds from sales of other investments		14			111
Proceeds from prepayments and maturities of other investments		41			71
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		4,902			(1,560	)
Purchases of loans		—			(18	)
Proceeds from loan securitizations and sales		80			221
Purchases of premises and equipment		(73	)		(87	)
Proceeds from sales of premises and equipment		2			1
Proceeds from sales of other real estate owned		12			13

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		3,065			(985	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits		2,622			(509	)
Net decrease in short-term borrowings		(6,794	)		(2,505	)
Net proceeds from issuance of long-term debt		456			3,900
Payments on long-term debt		(1,331	)		(910	)
Net proceeds from issuance of common shares and preferred stock		987			1,601
Net proceeds from reissuance of common shares		—			6
Tax benefits under recognized compensation cost for stock-based awards		(5	)		(1	)
Cash dividends paid		(122	)		(298	)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(4,187	)		1,284

NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS		(534	)		98
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		1,257			1,814

CASH AND DUE FROM BANKS AT END OF PERIOD	$	723		$	1,912




Additional disclosures relative to cash flows:
Interest paid	$	855		$	1,144
Income taxes (refunded) paid		(109	)		322
Noncash items:
Assets acquired		—		$	2,810
Liabilities assumed		—			2,648
Loans transferred to portfolio from held for sale	$	92			3,284
Loans transferred to held for sale from portfolio		47			429
Loans transferred to other real estate owned		91			23

See Notes to Consolidated Financial Statements (Unaudited).

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

The unaudited condensed consolidated interim financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

As used in these Notes:

¨		*KeyCorp* refers solely to the parent holding company;

¨		*KeyBank* refers to KeyCorp’s subsidiary bank, KeyBank National Association; and

¨		*Key* refers to the consolidated entity consisting of KeyCorp and its subsidiaries.

The consolidated financial statements include any voting rights entity in which Key has a controlling financial interest. In accordance with Financial Accounting Standards Board (“FASB”) Revised Interpretation No. 46, “Consolidation of Variable Interest Entities,” a variable interest entity (“VIE”) is consolidated if Key has a variable interest in the entity and is exposed to the majority of its expected losses and/or residual returns (i.e., Key is considered to be the primary beneficiary). Variable interests can include equity interests, subordinated debt, derivative contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments. See Note 8 (“Variable Interest Entities”), which begins on page 26, for information on Key’s involvement with VIEs.

Management uses the equity method to account for unconsolidated investments in voting rights entities or VIEs in which Key has significant influence over operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which Key has a voting or economic interest of less than 20% generally are carried at cost. Investments held by KeyCorp’s registered broker-dealer and investment company subsidiaries (primarily principal investments) are carried at fair value.

Qualifying special purpose entities (“SPEs”), including securitization trusts, established by Key under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are not consolidated. In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” This guidance will change the way entities account for securitizations and SPEs by eliminating the concept of a qualifying SPE, changing the requirements for derecognition of financial assets and requiring additional disclosures. Information on SFAS No. 140 is included in Note 7 (“Loan Securitizations and Mortgage Servicing Assets”), which begins on page 23. For additional information regarding SFAS No. 166, which is effective January 1, 2010, for Key, see the section entitled “Accounting Pronouncements Pending Adoption”
on page 11.

Management believes that the unaudited condensed consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. Some previously reported amounts have been reclassified to conform to current reporting practices.

The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in Key’s 2008 Annual Report to Shareholders.

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued on August 10, 2009. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.

Goodwill and Other Intangible Assets

Under SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and certain other intangible assets are subject to impairment testing, which must be conducted at least annually. Key performs the goodwill impairment testing in the fourth quarter of each year. Key’s reporting units for purposes of this testing are its major business segments, Community Banking and National Banking. Due to the ongoing uncertainty regarding market conditions, which may continue to negatively impact the performance of Key’s reporting units, management continues to monitor the impairment indicators for goodwill and other intangible assets and to evaluate the carrying amount of these assets, as necessary.

During the first quarter of 2009, a review of impairment indicators prompted management to review and evaluate the carrying amount of the goodwill and other intangible assets assigned to Key’s Community Banking and National Banking units. This review indicated that the estimated fair value of the Community Banking unit was greater than its carrying amount, while the estimated fair value of the National Banking unit was less than its carrying amount, reflecting continued weakness in the financial markets and requiring additional impairment testing. Based on the results of additional impairment testing for the National Banking unit, Key recorded an after-tax noncash accounting charge of $187 million, or $.38 per common share, during the first quarter of 2009. Key’s regulatory and tangible capital ratios were not affected by this adjustment. As a result of this charge, Key has now written off all of the goodwill that had been assigned to the National Banking unit.

In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a discontinued operation. Of the $187 million impairment charge recorded during the first quarter of 2009, $23 million, or $.05 per common share, is related to the discontinued operation, and thus has been reclassified to “income (loss) from discontinued operations, net of taxes” on the income statement. See Note 3 (“Acquisition and Divestiture”) on page 12 for additional information regarding the Austin Capital Management discontinued operations.

During the second quarter of 2009, based on a review of impairment indicators, management determined that a further review of goodwill and other intangible assets for Key’s Community Banking unit was necessary. This further review indicated that the estimated fair value of the Community Banking unit was greater than its carrying amount at June 30, 2009; therefore, no further impairment testing was required. A review of other intangible assets in the National Banking unit did not identify any impairment of these assets.

Other-than-Temporary Impairments

During the second quarter of 2009, Key adopted Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-than-Temporary Impairments,” which provides new guidance on the recognition and presentation of other-than-temporary impairments (“OTTI”) of debt securities, and requires additional disclosures for both debt and equity securities. In accordance with the guidance, if the amortized cost of a debt security held by Key is greater than its fair value and Key intends to sell it, or more-likely-than-not will be required to sell it, before the expected recovery of the amortized cost, then the entire impairment is recognized in earnings. If Key has no intent to sell the security, or it is more-likely-than-not that Key will not be required to sell it, before expected recovery, then the credit portion of the impairment is recognized in earnings, while the remaining portion attributable to liquidity, interest rate changes, etc. is recognized in equity as a component of “accumulated other comprehensive income” (“AOCI”) on the balance sheet. The credit portion is equal to the difference between the cash flows expected to be collected and the amortized cost basis of the debt security. Additional information regarding this Staff Position is provided in this note under the heading “Accounting Pronouncements Adopted in 2009” and in Note 5 (“Securities”), which begins on page 18.

Noncontrolling Interests

Key’s Principal Investing unit and the Real Estate Capital and Corporate Banking Services line of business have noncontrolling (minority) interests that are accounted for in accordance with SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51.” Key reports noncontrolling interests in subsidiaries as a component of equity on the consolidated balance sheets. “Net loss” on the consolidated statements of income includes the revenues, expenses, gains and losses pertaining to both Key and the noncontrolling interests. The portion of net results attributable to the noncontrolling interests is disclosed separately on the face of Key’s income statements to arrive at the “net loss attributable to Key.”

Offsetting Derivative Positions

In accordance with FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation 39,” and Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” Key takes into account the impact of master netting agreements that allow Key to settle all derivative contracts held with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 15 (“Derivatives and Hedging Activities”), which begins on page 37.

Accounting Pronouncements Adopted in 2009

Business combinations. In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” The new pronouncement requires the acquiring entity in a business combination to recognize only the assets acquired and liabilities assumed in a transaction (e.g., acquisition costs must be expensed when incurred), establishes the fair value at the date of acquisition as the initial measurement for all assets acquired and liabilities assumed, and requires expanded disclosures. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited.

Noncontrolling interests. In December 2007, the FASB issued SFAS No. 160, which requires all entities to report noncontrolling interests in subsidiaries as a component of equity and sets forth other presentation and disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Additional information regarding this guidance is provided in this note under the heading “Noncontrolling Interests.” Adoption of this guidance did not have a material effect on Key’s financial condition or results of operations.

Accounting for transfers of financial assets and repurchase financing transactions. In February 2008, the FASB issued Staff Position No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This Staff Position provides guidance on accounting for a transfer of a financial asset and a repurchase financing, and presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing shall be evaluated separately. Staff Position No. FAS 140-3 is effective for fiscal years beginning after November 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Adoption of this guidance did not have a material effect on Key’s financial condition or results of operations.

Disclosures about derivative instruments and hedging activities. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts, and gains and losses on derivative instruments, and disclosures about credit risk contingent features in derivative agreements. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008 (effective January 1, 2009, for Key). The required disclosures are provided in Note 15.

Determination of the useful life of intangible assets. In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This Staff Position is effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Adoption of this guidance did not have a material effect on Key’s financial condition or results of operations.

Accounting for convertible debt instruments. In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This guidance requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This Staff Position is effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Key has not issued and does not have any convertible debt instruments outstanding that are subject to the accounting guidance in this Staff Position. Therefore, adoption of this guidance did not have an effect on Key’s financial condition or results of operations.

Recognition and presentation of other-than-temporary impairments. In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, which provides new guidance on the recognition and presentation of OTTI of debt securities, and requires additional disclosures for both debt and equity securities. This guidance is effective for interim and annual periods ending after June 15, 2009 (effective June 30, 2009, for Key) with early adoption permitted. Additional information regarding this guidance is provided in this note under the heading “Other-than-Temporary Impairments” on page 8 and in Note 5.

Interim disclosures about fair value of financial instruments. In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This guidance amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosures about the fair value of financial instruments in interim financial statements of publicly traded companies. This Staff Position is effective for interim and annual periods ending after June 15, 2009 (effective June 30, 2009, for Key) with early adoption permitted. The required disclosures are provided in Note 16 (“Fair Value Measurements”), which begins on page 44.

Determining fair value when volume and level of activity have significantly decreased and identifying transactions that are not orderly. In April 2009, the FASB issued Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This Staff Position provides additional guidance for: (i) estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased, and (ii) identifying circumstances that indicate that a transaction is not orderly. This guidance emphasizes that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions (i.e., not a forced liquidation or distressed sale). Staff Position No. FAS 157-4 is effective for interim and annual periods ending after June 15, 2009 (effective June 30, 2009, for Key) with early adoption permitted. Adoption of this accounting guidance did not have a material effect on Key’s financial condition or results of operations.

Subsequent events. In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which provides authoritative accounting literature for a topic that was previously addressed only in the auditing literature. This accounting guidance is similar to the guidance in the auditing literature with some exceptions that will not result in significant changes in practice. SFAS No. 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009 (effective June 30, 2009, for Key). In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued on August 10, 2009.

Accounting Pronouncements Pending Adoption

Employers’ disclosures about postretirement benefit plan assets. In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This guidance will require additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan, including fair values of each major asset category and the levels within the fair value hierarchy as set forth in SFAS No. 157. This Staff Position will be effective for fiscal years ending after December 15, 2009 (effective December 31, 2009, for Key).

FASB accounting standards codification. In June 2009, the FASB issued accounting guidance that establishes the FASB Accounting Standards Codification as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”). As of the effective date, all existing accounting standard documents will be superseded, and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification was launched on July 1, 2009, and will be effective for interim and annual periods ending after September 15, 2009 (effective September 30, 2009, for Key).

Transfers of financial assets. In June 2009, the FASB issued SFAS No. 166, which will change the way entities account for securitizations and SPEs by eliminating the concept of a qualifying SPE, changing the requirements for derecognition of financial assets and requiring additional disclosures. This guidance will be effective at the start of an entity’s first fiscal year beginning after November 15, 2009 (effective January 1, 2010, for Key). Management is currently evaluating the impact this guidance may have on Key’s financial condition or results of operations.

Consolidation of variable interest entities. In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” In addition to requiring additional disclosures, this guidance changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design, and its ability to direct the activities that most significantly impact the entity’s economic performance. SFAS No. 167 will be effective at the start of a company’s first fiscal year beginning after November 15, 2009 (effective January 1, 2010, for Key). Management is currently evaluating the impact this guidance may have on Key’s financial condition or results of operations.

2. Earnings Per Common Share

Key’s basic and diluted earnings per common share are calculated as follows:


	Three months ended June 30,						Six months ended June 30,
dollars in millions, except per share amounts	2009			2008			2009			2008

EARNINGS
Loss from continuing operations	$	(233	)	$	(1,129	)	$	(709	)	$	(911	)
Less: Net income (loss) attributable to noncontrolling interests		3			(1	)		(7	)		—

Loss from continuing operations attributable to Key		(236	)		(1,128	)		(702	)		(911	)
Less: Dividends on Series A Preferred Stock		15			—			27			—
Noncash deemed dividend — common shares exchanged for Series A Preferred Stock		114			—			114			—
Cash dividends on Series B Preferred Stock		31			—			63			—
Amortization of discount on Series B Preferred Stock		4			—			8			—

Loss from continuing operations attributable to Key common shareholders		(400	)		(1,128	)		(914	)		(911	)
Income (loss) from discontinued operations, net of taxes ^(a)		10			2			(12	)		3

Net loss attributable to Key common shareholders	$	(390	)	$	(1,126	)	$	(926	)	$	(908	)



WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		576,883			416,629			535,080			407,875
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000)		—			—			—			—

Weighted-average common shares and potential common shares outstanding (000)		576,883			416,629			535,080			407,875



EARNINGS PER COMMON SHARE
Loss from continuing operations attributable to Key common shareholders	$	(.69	)	$	(2.71	)	$	(1.71	)	$	(2.23	)
Income (loss) from discontinued operations, net of taxes ^(a)		.02			—			(.02	)		.01
Net loss attributable to Key common shareholders		(.68	)		(2.70	)		(1.73	)		(2.23	)

Loss from continuing operations attributable to Key common shareholders — assuming dilution	$	(.69	)	$	(2.71	)	$	(1.71	)	$	(2.23	)
Income (loss) from discontinued operations, net of taxes ^(a)		.02			—			(.02	)		.01
Net loss attributable to Key common shareholders — assuming dilution		(.68	)		(2.70	)		(1.73	)		(2.23	)


(a)		In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a discontinued operation. The loss from discontinued operations for the first quarter of 2009 was attributable to a $23 million after tax, or $.05 per common share, charge for intangible assets impairment.

3. Acquisition and Divestiture

Acquisition and divestiture activity entered into by Key during 2008 and the first six months of 2009 is summarized below.

Acquisition

U.S.B. Holding Co., Inc. On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding company for Union State Bank, a 31-branch state-chartered commercial bank headquartered in Orangeburg, New York. U.S.B. Holding Co. had assets of $2.8 billion and deposits of $1.8 billion at the date of acquisition. Under the terms of the agreement, Key exchanged 9,895,000 KeyCorp common shares, with a value of $348 million, and $194 million in cash for all of the outstanding shares of U.S.B. Holding Co. In connection with the acquisition, Key recorded goodwill of approximately $350 million in the Community Banking reporting unit. The acquisition expanded Key’s presence in markets both within and contiguous to its current operations in the Hudson Valley.

Divestiture

Austin Capital Management, Ltd. In April 2009, Key made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary of KeyCorp that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a discontinued operation.

The results of this discontinued business are presented on one line as “income (loss) from discontinued operations, net of taxes” in the Consolidated Statements of Income on page 4. The components of income (loss) from discontinued operations, net of taxes are as follows:


	Three months ended June 30,				Six months ended June 30,
in millions	2009		2008		2009			2008

Income (loss), net of taxes of ($4), $1, ($6) and $2, respectively	$	10	$	2	$	(35	)	$	3
Intangible assets impairment, net of taxes of $4		—		—		(23	)		—

Income (loss) from discontinued operations, net of taxes	$	10	$	2	$	(12	)	$	3

The discontinued assets and liabilities of Austin Capital Management, Ltd. included in the Consolidated Balance Sheets on page 3 are as follows:


	June 30,			December 31,			June 30,
in millions		2009			2008			2008

Cash and due from banks		$	17		$	12		$	14
Goodwill			—			25			17
Other intangible assets			2			12			13
Accrued income and other assets			7			7			8

Total assets		$	26		$	56		$	52


Accrued expense and other liabilities		$	3		$	18		$	9

Total liabilities		$	3		$	18		$	9

4. Line of Business Results

Community Banking

Regional Banking provides individuals with branch-based deposit and investment products, personal finance services, and loans, including residential mortgages, home equity and various types of installment loans. This line of business also provides small businesses with deposit, investment and credit products, and business advisory services.

Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related needs.

Commercial Banking provides midsize businesses with products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives and foreign exchange.

National Banking

Real Estate Capital and Corporate Banking Services consists of two business units, Real Estate Capital and Corporate Banking Services.

Real Estate Capital is a national business that provides construction and interim lending, permanent debt placements and servicing, equity and investment banking, and other commercial banking products and services to developers, brokers and owner-investors. This unit deals primarily with nonowner-occupied properties (i.e., generally properties in which at least 50% of the debt service is provided by rental income from nonaffiliated third parties). Real Estate Capital emphasizes providing clients with finance solutions through access to the capital markets.

Corporate Banking Services provides cash management, interest rate derivatives, and foreign exchange products and services to clients served by both the Community Banking and National Banking groups. Through its Public Sector and Financial Institutions businesses, Corporate Banking Services also provides a full array of commercial banking products and services to government and not-for-profit entities, and to community banks.

Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients. Lease financing receivables and related revenues are assigned to other lines of business (primarily Institutional and Capital Markets, and Commercial Banking) if those businesses are principally responsible for maintaining the relationship with the client.

Institutional and Capital Markets, through its KeyBanc Capital Markets unit, provides commercial lending, treasury management, investment banking, derivatives, foreign exchange, equity and debt underwriting and trading, and syndicated finance products and services to large corporations and middle-market companies.

Through its Victory Capital Management unit, Institutional and Capital Markets also manages or offers advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals. These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.

Consumer Finance provides government-guaranteed education loans to students and their parents, and processes tuition payments for private schools. Through its Commercial Floor Plan Lending unit, this line of business also finances inventory for automobile dealers. In October 2008, Consumer Finance exited retail and floor plan lending for marine and recreational vehicle products and began to limit new education loans to those backed by government guarantee. This line of business continues to service existing loans in these portfolios and to honor existing education loan commitments. These actions are consistent with Key’s strategy of de-emphasizing nonrelationship or out-of-footprint businesses.

Other Segments

Other Segments consist of Corporate Treasury and Key’s Principal Investing unit.

Reconciling Items

Total assets included under “Reconciling Items” primarily represent the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling Items also includes intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations.

The table that spans pages 15 and 16 shows selected financial data for each major business group for the three- and six-month periods ended June 30, 2009 and 2008. This table is accompanied by supplementary information for each of the lines of business that make up these groups. The information was derived from the internal financial reporting system that management uses to monitor and manage Key’s financial performance. GAAP guides financial accounting, but there is no authoritative guidance for “management accounting” — the way management uses its judgment and experience to make reporting decisions. Consequently, the line of business results Key reports may not be comparable with line of business results presented by other companies.

The selected financial data are based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with Key’s policies:

¨		Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment and/or repricing characteristics. The net effect of this funds transfer pricing is charged to the lines of business based on the total loan and deposit balances of each line.

¨		Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent to which each line actually uses the services.

¨		Key’s consolidated provision for loan losses is allocated among the lines of business primarily based on their actual net charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that management uses to estimate Key’s consolidated allowance for loan losses. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 79 of Key’s 2008 Annual Report to Shareholders.

¨		Income taxes are allocated based on the statutory federal income tax rate of 35% (adjusted for tax-exempt interest income, income from corporate-owned life insurance and tax credits associated with investments in low-income housing projects) and a blended state income tax rate (net of the federal income tax benefit) of 2.5%.

¨		Capital is assigned based on management’s assessment of economic risk factors (primarily credit, operating and market risk) directly attributable to each line.

Developing and applying the methodologies that management uses to allocate items among Key’s lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect accounting enhancements, changes in the risk profile of a particular business or changes in Key’s organizational structure.


Three months ended June 30,	Community Banking						National Banking
dollars in millions	2009			2008			2009			2008

SUMMARY OF OPERATIONS
Net interest income (expense) (TE)	$	397		$	433		$	282		$	(471	) ^(c)
Noninterest income		195			221			265			338

Total revenue (TE) ^(a)		592			654			547			(133	)
Provision for loan losses		187			44			662			609
Depreciation and amortization expense		37			36			62			71
Other noninterest expense		460			409			296			264

(Loss) income from continuing operations before income taxes (TE)		(92	)		165			(473	)		(1,077	)
Allocated income taxes and TE adjustments		(35	)		62			(178	)		(403	)

(Loss) income from continuing operations		(57	)		103			(295	)		(674	)
Income from discontinued operations, net of taxes		—			—			10			2

Net (loss) income		(57	)		103			(285	)		(672	)
Less: Net (loss) income attributable to noncontrolling interests		—			—			(1	)		—

Net (loss) income attributable to Key	$	(57	)	$	103		$	(284	)	$	(672	)



AVERAGE BALANCES
Loans and leases	$	28,237		$	28,470		$	43,943		$	47,872
Total assets ^(a)		31,183			31,414			50,998			56,316
Deposits		52,689			49,944			13,260			12,287

OTHER FINANCIAL DATA
Net loan charge-offs	$	87		$	38		$	452		$	486
Return on average allocated equity ^(b)		(6.81	)%		13.28	%		(21.41	)%		(51.37	)%
Return on average allocated equity		(6.81	)		13.28			(20.68	)		(51.22	)
Average full-time equivalent employees		8,656			8,783			2,899			3,582


Six months ended June 30,	Community Banking						National Banking
dollars in millions	2009			2008			2009			2008

SUMMARY OF OPERATIONS
Net interest income (expense) (TE)	$	807		$	855		$	572		$	(131	) ^(c)
Noninterest income		384			428			508			433

Total revenue (TE) ^(a)		1,191			1,283			1,080			302
Provision for loan losses		268			62			1,452			778
Depreciation and amortization expense		74			74			126			143
Other noninterest expense		893			797			737	^(c)		496

(Loss) income from continuing operations before income taxes (TE)		(44	)		350			(1,235	)		(1,115	)
Allocated income taxes and TE adjustments		(17	)		131			(389	)		(418	)

(Loss) income from continuing operations		(27	)		219			(846	)		(697	)
Loss (income) from discontinued operations, net of taxes		—			—			(12	)		3

Net (loss) income		(27	)		219			(858	)		(694	)
Less: Net loss attributable to noncontrolling interests		—			—			(3	)		—

Net (loss) income attributable to Key	$	(27	)	$	219		$	(855	)	$	(694	)



AVERAGE BALANCES
Loans and leases	$	28,587		$	28,278		$	45,064		$	46,017
Total assets ^(a)		31,564			31,215			52,888			56,260
Deposits		52,128			49,860			12,740			12,082

OTHER FINANCIAL DATA
Net loan charge-offs	$	141		$	68		$	890		$	577
Return on average allocated equity ^(b)		(1.64	)%		14.51	%		(31.03	)%		(27.41	)%
Return on average allocated equity		(1.64	)		14.51			(31.47	)		(27.30	)
Average full-time equivalent employees		8,771			8,748			2,958			3,659


(a)		Substantially all revenue generated by Key’s major business groups is derived from clients with residency in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software and goodwill held by Key’s major business groups are located in the United States.

(b)		From continuing operations.

(c)		National Banking’s results for the first quarter of 2009 include a noncash charge for goodwill and other intangible assets impairment of $196 million ($164 million after tax). During the second quarter of 2008, National Banking’s taxable-equivalent net interest income and net results were reduced by $838 million and $536 million, respectively, as a result of its involvement with certain leveraged lease financing transactions that were challenged by the Internal Revenue Service (“IRS”). National Banking’s taxable-equivalent net interest income and net results were reduced by $34 million and $21 million, respectively, during the first quarter of 2008 as a result of its involvement with these leveraged lease financing transactions.


Other Segments						Total Segments						Reconciling Items						Key
2009			2008			2009			2008			2009			2008			2009			2008


$	(48	)	$	(32	)	$	631		$	(70	)	$	(33	)	$	(30	)	$	598		$	(100	)
	231	^(d)		1			691			560			24	^(e)		(13	) ^(e)		715			547

	183			(31	)		1,322			490			(9	)		(43	)		1,313			447
	—			—			849			653			1			(6	)		850			647
	—			—			99			107			—			—			99			107
	13			9			769			682			2			(12	)		771			670

	170			(40	)		(395	)		(952	)		(12	)		(25	)		(407	)		(977	)
	54			(25	)		(159	)		(366	)		(15	)		518	^(e)		(174	)		152

	116			(15	)		(236	)		(586	)		3			(543	)		(233	)		(1,129	)
	—			—			10			2			—			—			10			2

	116			(15	)		(226	)		(584	)		3			(543	)		(223	)		(1,127	)
	4			(1	)		3			(1	)		—			—			3			(1	)

$	112		$	(14	)	$	(229	)	$	(583	)	$	3		$	(543	)	$	(226	)	$	(1,126	)




$	148		$	177		$	72,328		$	76,519		$	53		$	133		$	72,381		$	76,652
	18,099			14,098			100,280			101,828			578			1,462			100,858			103,290
	1,931			3,092			67,880			65,323			(399	)		(191	)		67,481			65,132


	—			—		$	539		$	524			—			—		$	539		$	524
	N/M			N/M			(10.32	)%		(26.62	)%		N/M			N/M			(9.28	)%		(52.65	)%
	N/M			N/M			(9.88	)		(26.53	)		N/M			N/M			(8.89	)		(52.56	)
	41			43			11,596			12,408			5,341			5,756			16,937			18,164


Other Segments						Total Segments						Reconciling Items						Key
2009			2008			2009			2008			2009			2008			2009			2008


$	(94	)	$	(60	)	$	1,285		$	664		$	(67	)	$	(60	)	$	1,218		$	604
	198	^(d)		56			1,090			917			110	^(e)		154	^(e)		1,200			1,071

	104			(4	)		2,375			1,581			43			94			2,418			1,675
	—			—			1,720			840			5			(6	)		1,725			834
	—			—			200			217			—			—			200			217
	23			20			1,653			1,313			(41	)		(24	)		1,612			1,289

	81			(24	)		(1,198	)		(789	)		79			124			(1,119	)		(665	)
	10			(31	)		(396	)		(318	)		(14	)		564	^(e)		(410	)		246

	71			7			(802	)		(471	)		93			(440	)		(709	)		(911	)
	—			—			(12	)		3			—			—			(12	)		3

	71			7			(814	)		(468	)		93			(440	)		(721	)		(908	)
	(4	)		—			(7	)		—			—			—			(7	)		—

$	75		$	7		$	(807	)	$	(468	)	$	93		$	(440	)	$	(714	)	$	(908	)




$	152		$	207		$	73,803		$	74,502		$	44		$	168		$	73,847		$	74,670
	17,337			14,260			101,789			101,735			539			1,588			102,328			103,323
	1,841			3,947			66,709			65,889			(271	)		(180	)		66,438			65,709


	—			—		$	1,031		$	645			—			—		$	1,031		$	645
	N/M			N/M			(17.37	)%		(11.03	)%		N/M			N/M			(13.78	)%		(21.47	)%
	N/M			N/M			(17.63	)		(10.96	)		N/M			N/M			(14.01	)		(21.40	)
	41			43			11,770			12,450			5,431			5,845			17,201			18,295


(d)		Other Segments’ results for the second quarter of 2009 include net gains of $125 million ($78 million after tax) in connection with the repositioning of the securities portfolio and a $95 million ($59 million after tax) gain related to the exchange of Key common shares for capital securities.

(e)		Reconciling Items for the second quarter of 2009 include a $32 million ($20 million after tax) gain from the sale of Key’s claim associated with the Lehman Brothers’ bankruptcy. For the first quarter of 2009, Reconciling Items include a $105 million ($65 million after tax) gain from the sale of Key’s remaining equity interest in Visa Inc. Reconciling Items for the second quarter of 2008 include a $475 million charge to income taxes for the interest cost associated with the previously disclosed leveraged lease tax litigation. For the first quarter of 2008, Reconciling Items include a $165 million ($103 million after tax) gain from the partial redemption of Key’s equity interest in Visa Inc. and a $17 million charge to income taxes for the interest cost associated with the increase to Key’s tax reserves for certain leveraged lease transactions.

TE	= Taxable Equivalent, N/M = Not Meaningful

Supplementary information (Community Banking lines of business)


Three months ended June 30,	Regional Banking						Commercial Banking
dollars in millions	2009			2008			2009			2008

Total revenue (TE)	$	502		$	552		$	90		$	102
Provision for loan losses		165			25			22			19
Noninterest expense		447			397			50			48
Net (loss) income attributable to Key		(68	)		81			11			22
Average loans and leases		19,746			19,626			8,491			8,844
Average deposits		48,716			46,253			3,973			3,691
Net loan charge-offs		73			33			14			5
Net loan charge-offs to average loans		1.48	%		.68	%		.66	%		.23	%
Nonperforming assets at period end	$	245		$	157		$	135		$	61
Return on average allocated equity		(11.71	)%		14.62	%		4.29	%		9.92	%
Average full-time equivalent employees		8,339			8,453			317			330


Six months ended June 30,	Regional Banking						Commercial Banking
dollars in millions	2009			2008			2009			2008

Total revenue (TE)	$	1,009		$	1,080		$	182		$	203
Provision for loan losses		234			35			34			27
Noninterest expense		865			780			102			91
Net (loss) income attributable to Key		(56	)		166			29			53
Average loans and leases		19,875			19,595			8,712			8,683
Average deposits		48,253			46,222			3,875			3,638
Net loan charge-offs		126			62			15			6
Net loan charge-offs to average loans		1.28	%		.64	%		.35	%		.14	%
Nonperforming assets at period end	$	245		$	157		$	135		$	61
Return on average allocated equity		(4.90	)%		15.47	%		5.80	%		12.15	%
Average full-time equivalent employees		8,452			8,417			319			331

Supplementary information (National Banking lines of business)


	Real Estate Capital and												Institutional and
Three months ended June 30,	Corporate Banking Services						Equipment Finance						Capital Markets						Consumer Finance
dollars in millions	2009			2008			2009			2008			2009			2008			2009			2008

Total revenue (TE)	$	183		$	236		$	101		$	(696	)	$	185		$	223		$	78		$	104
Provision for loan losses		462			366			72			36			37			36			91			171
Noninterest expense		106			70			88			90			120			124			44			51
(Loss) income from continuing operations attributable to Key		(239	)		(125	)		(37	)		(514	)		18			39			(36	)		(74	)
Net (loss) income attributable to Key		(239	)		(125	)		(37	)		(514	)		28			41			(36	)		(74	)
Average loans and leases		15,873			17,086			8,769			10,326			8,388			7,898			10,913			12,562
Average loans held for sale		231			616			40			51			193			494			446			121
Average deposits		10,582			10,460			17			21			2,332			1,384			329			422
Net loan charge-offs		274			376			46			28			11			5			121			77
Net loan charge-offs to average loans		6.92	%		8.85	%		2.10	%		1.09	%		.53	%		.25	%		4.45	%		2.47	%
Nonperforming assets at period end	$	1,460		$	779		$	270		$	105		$	88		$	26		$	331		$	82
Return on average allocated equity ^(a)		(35.84	)%		(23.04	)%		(23.71	)%		(225.69	)%		6.33	%		12.52	%		(13.53	)%		(32.14	)%
Return on average allocated equity		(35.84	)		(23.04	)		(23.74	)		(225.69	)		9.85			13.16			(13.53	)		(32.14	)
Average full-time equivalent employees ^(b)		982			1,228			732			867			869			930			316			557


	Real Estate Capital and												Institutional and
Six months ended June 30,	Corporate Banking Services						Equipment Finance						Capital Markets						Consumer Finance
dollars in millions	2009			2008			2009			2008			2009			2008			2009			2008

Total revenue (TE)	$	358		$	319		$	202		$	(602	)	$	355		$	377		$	165		$	208
Provision for loan losses		932			410			149			60			69			53			302			255
Noninterest expense		221			131			173			185			323			224			146			99
(Loss) income from continuing operations attributable to Key		(508	)		(139	)		(75	)		(529	)		(61	)		62			(199	)		(91	)
Net (loss) income attributable to Key		(508	)		(139	)		(75	)		(529	)		(73	)		65			(199	)		(91	)
Average loans and leases		16,218			16,791			8,929			10,461			8,667			7,765			11,250			11,000
Average loans held for sale		250			803			34			41			230			525			480			1,738
Average deposits		10,286			10,122			17			17			2,054			1,422			383			521
Net loan charge-offs		491			413			91			52			56			7			252			105
Net loan charge-offs to average loans		6.11	%		4.95	%		2.06	%		1.00	%		1.30	%		.18	%		4.52	%		1.92	%
Nonperforming assets at period end	$	1,460		$	779		$	270		$	105		$	88		$	26		$	331		$	82
Return on average allocated equity ^(a)		(40.06	)%		(13.70	)%		(22.64	)%		(115.38	)%		(10.42	)%		10.13	%		(37.40	)%		(19.91	)%
Return on average allocated equity		(40.06	)		(13.70	)		(22.64	)		(115.38	)		(12.46	)		10.62			(37.40	)		(19.91	)
Average full-time equivalent employees ^(b)		1,003			1,230			736			876			891			934			328			619


(a)		From continuing operations.

(b)		The number of average full-time employees has not been adjusted for discontinued operations.

TE		= Taxable Equivalent

5. Securities

Securities available for sale. These are securities that Key intends to hold for an indefinite period of time but that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. Securities available for sale are reported at fair value. Unrealized gains and losses (net of income taxes) deemed temporary are recorded in equity as a component of AOCI on the balance sheet. Unrealized losses on equity securities deemed to be “other-than-temporary” are included in “net securities gains (losses)” on the income statement, as are actual gains and losses resulting from the sales of securities using the specific identification method.

When Key retains an interest in loans it securitizes, it bears risk that the loans will be prepaid (which would reduce expected interest income) or not be paid at all. Key accounts for these retained interests as debt securities and classifies them as available for sale. Unrealized losses on debt securities deemed to be “other-than-temporary” are included in “net securities gains (loss)” or AOCI in accordance with Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” as further described on page 20 of this note.

“Other securities” held in the available-for-sale portfolio are primarily marketable equity securities that are traded on a public exchange such as the NYSE or NASDAQ.

Held-to-maturity securities. These are debt securities that Key has the intent and ability to hold until maturity. Debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. This method produces a constant rate of return on the adjusted carrying amount.

“Other securities” held in the held-to-maturity portfolio consist of foreign bonds, trust preferred securities and preferred equity securities.

The amortized cost, unrealized gains and losses, and approximate fair value of Key’s securities available for sale and held-to-maturity securities are presented in the following tables. Gross unrealized gains and losses represent the difference between the amortized cost and the fair value of securities on the balance sheet as of the dates indicated. Accordingly, the amount of these gains and losses may change in the future as market conditions change.


	June 30, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value

SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	1,710		—		—	$	1,710
States and political subdivisions		85	$	1		—		86
Collateralized mortgage obligations		8,462		99	$	38		8,523
Other mortgage-backed securities		1,525		74		—		1,599
Retained interests in securitizations		167		19		—		186
Other securities		66		6		2		70

Total securities available for sale	$	12,015	$	199	$	40	$	12,174

HELD-TO-MATURITY SECURITIES
States and political subdivisions	$	4		—		—	$	4
Other securities		21		—		—		21

Total held-to-maturity securities	$	25		—		—	$	25


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value

SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	9	$	1		—	$	10
States and political subdivisions		90		1		—		91
Collateralized mortgage obligations		6,380		148	$	5		6,523
Other mortgage-backed securities		1,505		63		1		1,567
Retained interests in securitizations		162		29		—		191
Other securities		71		1		17		55

Total securities available for sale	$	8,217	$	243	$	23	$	8,437

HELD-TO-MATURITY SECURITIES
States and political subdivisions	$	4		—		—	$	4
Other securities		21		—		—		21

Total held-to-maturity securities	$	25		—		—	$	25


	June 30, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value

SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	18		—		—	$	18
States and political subdivisions		92		—	$	1		91
Collateralized mortgage obligations		6,309	$	69		28		6,350
Other mortgage-backed securities		1,583		10		9		1,584
Retained interests in securitizations		153		34		—		187
Other securities		82		6		6		82

Total securities available for sale	$	8,237	$	119	$	44	$	8,312

HELD-TO-MATURITY SECURITIES
States and political subdivisions	$	8		—		—	$	8
Other securities		17		—		—		17

Total held-to-maturity securities	$	25		—		—	$	25

The following table summarizes Key’s securities available for sale that were in an unrealized loss position as of June 30, 2009, December 31, 2008, and June 30, 2008.


	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
in millions	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

JUNE 30, 2009
Securities available for sale:
U.S. Treasury, agencies and corporations	$	3		—		—		—	$	3		—
States and political subdivisions		4		—	$	2		—		6		—
Collateralized mortgage obligations		1,660	$	38		—		—		1,660	$	38
Other mortgage-backed securities		86		—		11		—		97		—
Other securities		10		1		2	$	1		12		2

Total temporarily impaired securities	$	1,763	$	39	$	15	$	1	$	1,778	$	40

DECEMBER 31, 2008
Securities available for sale:
States and political subdivisions	$	18		—	$	1		—	$	19		—
Collateralized mortgage obligations		107		—		360	$	5		467	$	5
Other mortgage-backed securities		3		—		15		1		18		1
Other securities		40	$	13		5		4		45		17

Total temporarily impaired securities	$	168	$	13	$	381	$	10	$	549	$	23

JUNE 30, 2008
Securities available for sale:
U.S. Treasury, agencies and corporations	$	8		—		—		—	$	8		—
States and political subdivisions		69	$	1	$	1		—		70	$	1
Collateralized mortgage obligations		1,142		17		400	$	11		1,542		28
Other mortgage-backed securities		653		7		42		2		695		9
Other securities		44		6		1		—		45		6

Total temporarily impaired securities	$	1,916	$	31	$	444	$	13	$	2,360	$	44

Of the $40 million of gross unrealized losses at June 30, 2009, $38 million relates to fixed-rate collateralized mortgage obligations, which Key invests in as part of an overall asset/liability management strategy. Since these instruments have fixed interest rates, their fair value is sensitive to movements in market interest rates. During the first half of 2009, interest rates generally increased, so the fair value of these 15 instruments, which had a weighted-average maturity of 3.9 years at June 30, 2009, decreased below their amortized cost.

The unrealized losses within each investment category are considered temporary since Key has the intent to hold the securities until they mature or recover in value, and it is likely that Key will be able to hold these securities through the expected recovery period. Accordingly, these investments have not been reduced to their fair value.

Management regularly assesses Key’s securities portfolio for OTTI. The assessments are based on the nature of the securities, underlying collateral, the financial condition of the issuer, the extent and duration of the loss, Key’s intent related to the securities and the likelihood that Key will be able to hold these securities through the expected recovery period.

Debt securities identified by management to have OTTI are written down to their current fair value. For those debt securities that Key intends to sell, or more-likely-than-not will be required to sell, prior to expected recovery, the entire impairment (i.e., difference between amortized cost and the fair value) is recognized in earnings. For those debt securities that Key does not intend to sell, or it is more-likely-than-not that Key will not be required to sell, prior to expected recovery, the credit portion of OTTI is recognized in earnings, while the remaining amount is recognized in equity as a component of AOCI on the balance sheet.

The following table shows the OTTI losses recognized by Key during the second quarter of 2009:


Three months ended June 30, 2009
in millions

Total OTTI losses recognized on debt securities which Key does not intend to sell or more-likely-than-not will not be required to sell	$	5
Less: Portion of OTTI losses recognized in AOCI, pre-tax		1

Net OTTI losses recognized in earnings for debt securities which Key does not intend to sell or more-likely-than-not will not be required to sell		4
OTTI losses on equity securities recognized in earnings		2

Total OTTI losses recognized in earnings	$	6

The following table shows changes in the cumulative credit portion of impairments on debt securities held by Key. All credit-related impairments on debt securities relate to Key’s education loan securitization residual interests.


Three months ended June 30, 2009
in millions

Balance at April 1, 2009	$	2
Impairment recognized in earnings		4

Balance at June 30, 2009	$	6

Realized gains and losses related to securities available for sale were as follows:


Six months ended June 30, 2009
in millions

Realized gains	$	128
Realized losses		17

Net securities gains	$	111

At June 30, 2009, securities available for sale and held-to-maturity securities totaling $7.1 billion were pledged to secure public and trust deposits, securities sold under repurchase agreements, and for other purposes required or permitted by law.

The following table shows securities by remaining maturity. Collateralized mortgage obligations, other mortgage-backed securities and retained interests in securitizations — all of which are included in the securities available-for-sale portfolio — are presented based on their expected average lives. The remaining securities, including all of those in the held-to-maturity portfolio, are presented based on their remaining contractual maturity. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.


	Securities				Held-to-Maturity
	Available for Sale				Securities
June 30, 2009	Amortized		Fair		Amortized		Fair
in millions	Cost		Value		Cost		Value

Due in one year or less	$	2,112	$	2,123	$	5	$	5
Due after one through five years		9,308		9,448		20		20
Due after five through ten years		567		574		—		—
Due after ten years		28		29		—		—

Total	$	12,015	$	12,174	$	25	$	25

6. Loans and Loans Held for Sale

Key’s loans by category are summarized as follows:


	June 30,			December 31,		June 30,
in millions	2009			2008		2008

Commercial, financial and agricultural	$	23,542		$	27,260	$	25,929
Commercial real estate:
Commercial mortgage		11,761	^(a)		10,819		10,737
Construction		6,119	^(a)		7,717		7,849

Total commercial real estate loans		17,880			18,536		18,586
Commercial lease financing		8,263			9,039		9,610

Total commercial loans		49,685			54,835		54,125
Real estate — residential mortgage		1,753			1,908		1,928
Home equity:
Community Banking		10,256			10,124		9,851
National Banking		934			1,051		1,153

Total home equity loans		11,190			11,175		11,004
Consumer other — Community Banking		1,199			1,233		1,261
Consumer other — National Banking:
Marine		3,095			3,401		3,634
Education		3,636			3,669		3,584
Other		245			283		319

Total consumer other — National Banking		6,976			7,353		7,537

Total consumer loans		21,118			21,669		21,730

Total loans	$	70,803		$	76,504	$	75,855


(a)		In late March 2009, Key transferred $1.5 billion of loans from the construction portfolio to the commercial mortgage portfolio in accordance with regulatory guidelines pertaining to the classification of loans that have reached a completed status.

Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing characteristics of certain loans. For more information about such swaps, see Note 15 (“Derivatives and Hedging Activities”), which begins on page 37.

Key’s loans held for sale by category are summarized as follows:


	June 30,		December 31,		June 30,
in millions	2009		2008		2008

Commercial, financial and agricultural	$	51	$	102	$	212
Real estate — commercial mortgage		288		273		994
Real estate — construction		146		164		398
Commercial lease financing		30		7		42
Real estate — residential mortgage		245		77		79
Education		148		401		103
Automobile		1		3		5

Total loans held for sale	$	909	$	1,027	$	1,833

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


	Three months ended June 30,						Six months ended June 30,
in millions	2009			2008			2009			2008

Balance at beginning of period	$	2,186		$	1,298		$	1,803		$	1,200

Charge-offs		(578	)		(554	)		(1,098	)		(702	)
Recoveries		39			30			67			57

Net loans charged off		(539	)		(524	)		(1,031	)		(645	)
Provision for loan losses		850			647			1,725			834
Allowance related to loans acquired, net		—			—			—			32
Foreign currency translation adjustment		2			—			2			—

Balance at end of period	$	2,499		$	1,421		$	2,499		$	1,421

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	2009		2008			2009		2008

Balance at beginning of period	$	54	$	53		$	54	$	80
Provision (credit) for losses on lending-related commitments		11		(2	)		11		(29	)

Balance at end of period ^(a)	$	65	$	51		$	65	$	51


(a)		Included in “accrued expense and other liabilities” on the consolidated balance sheet.

7. Loan Securitizations and Mortgage Servicing Assets

Retained Interests in Loan Securitizations

A securitization involves the sale of a pool of loan receivables to investors through either a public or private issuance (generally by a qualifying SPE) of asset-backed securities. Generally, the assets are transferred to a trust that sells interests in the form of certificates of ownership. In previous years, Key sold education loans in securitizations; however, Key has not securitized any education loans since 2006 due to unfavorable market conditions.

When Key sells loans in securitizations, Key records a gain or loss when the net sale proceeds and residual interests, if any, differ from the loans’ allocated carrying amount. Gains or losses resulting from securitizations are recorded as one component of “net (losses) gains from loan securitizations and sales” on the income statement.

A servicing asset is recorded if Key purchases or retains the right to service securitized loans, and receives servicing fees that exceed the going market rate. Key generally retains an interest in securitized loans in the form of an interest-only strip, residual asset, servicing asset or security. Key’s mortgage servicing assets are discussed under the heading “Mortgage Servicing Assets” on page 25. All other retained interests are accounted for as debt securities and classified as securities available for sale.

In accordance with Revised Interpretation No. 46, “Consolidation of Variable Interest Entities,” qualifying SPEs, including securitization trusts, established by Key under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are exempt from consolidation. In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” This guidance will change the way entities account for securitizations and SPEs. Information related to Revised Interpretation No. 46 is included in Note 1 (“Basis of Presentation”), which begins on page 7. For additional information regarding SFAS No. 166, which is effective January 1, 2010, for Key, see Note 1 under the heading “Accounting Pronouncements Pending Adoption”
on page 11.

Management uses certain assumptions and estimates to determine the fair value to be allocated to retained interests at the date of transfer and at subsequent measurement dates. Primary economic assumptions used to measure the fair value of Key’s retained interests in education loans and the sensitivity of the current fair value of residual cash flows to immediate adverse changes in those assumptions at June 30, 2009, are as follows:


dollars in millions

Fair value of retained interests	$	187
Weighted-average life (years)		.8 - 6.6


PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE)		4.00% - 26.00	%
Impact on fair value of 1% CPR adverse change	$	(5	)
Impact on fair value of 10% CPR adverse change		(54	)


EXPECTED CREDIT LOSSES (STATIC RATE)		2.00% - 80.00	%
Impact on fair value of 5% adverse change	$	(5	)
Impact on fair value of 10% adverse change		(24	)


RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL RATE)		8.50% - 14.00	%
Impact on fair value of 2% adverse change	$	(30	)
Impact on fair value of 5% adverse change		(49	)


EXPECTED STATIC DEFAULT (STATIC RATE)		3.75% - 33.00	%
Impact on fair value of 1% adverse change	$	(9	)
Impact on fair value of 10% adverse change		(115	)


VARIABLE RETURNS TO TRANSFEREES			(a)

These sensitivities are hypothetical and should be relied upon with caution. Sensitivity analysis is based on the nature of the asset, the seasoning (i.e., age and payment history) of the portfolio and historical results. Changes in fair value based on a 1% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may cause changes in another. For example, increases in market interest rates may result in lower prepayments and increased credit losses, which might magnify or counteract the sensitivities.


(a)		Forward London Interbank Offered Rate (“LIBOR”) plus contractual spread over LIBOR ranging from .00% to 1.30%.

CPR		= Constant Prepayment Rate

The fair value measurement of Key’s mortgage servicing assets is described under the heading “Mortgage Servicing Assets” on page 25. Management conducts a quarterly review of the fair values of its other retained interests. The historical performance of each retained interest and the assumptions used to project future cash flows are reviewed, assumptions are revised and present values of cash flows are recalculated, as appropriate.

The present values of cash flows represent the fair value of the retained interests. If the fair value of a retained interest exceeds its carrying amount, the increase in fair value is recorded in equity as a component of AOCI on the balance sheet. Conversely, if the carrying amount of a retained interest exceeds its fair value, impairment is indicated. If Key intends to sell the retained interest, or more-likely-than-not will be required to sell it, before the expected recovery of the amortized cost, then the entire impairment is recognized in earnings. If Key does not have the intent to sell it, or it is more-likely-than-not that Key will not be required to sell it, before expected recovery, then the credit portion of the impairment is recognized in earnings, while the remaining portion is recognized in AOCI.

The table below shows the relationship between the education loans Key manages and those held in the loan portfolio. Managed loans include those held in portfolio and those securitized and sold, but still serviced by Key. Related delinquencies and net credit losses are also presented.


					Net Credit Losses
June 30, 2009	Loan		Loans Past Due		For the Six
in millions	Principal		60 days or More		Months Ended

Education loans managed	$	7,820	$	253	$	123
Less: Loans securitized		4,036		156		54
Loans held for sale or securitization		148		6		—

Loans held in portfolio	$	3,636	$	91	$	69

Mortgage Servicing Assets

Key originates and periodically sells commercial mortgage loans but continues to service those loans for the buyers. Key also may purchase the right to service commercial mortgage loans for other lenders. Changes in the carrying amount of mortgage servicing assets are summarized as follows:


	Six months ended June 30,
in millions	2009			2008

Balance at beginning of period	$	242		$	313
Servicing retained from loan sales		4			9
Purchases		15			3
Amortization		(27	)		(53	)

Balance at end of period	$	234		$	272

Fair value at end of period	$	403		$	426

The fair value of mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. Primary economic assumptions used to measure the fair value of Key’s mortgage servicing assets at June 30, 2009 and 2008, are:

¨		prepayment speed generally at an annual rate of 0.00% to 25.00%;

¨		expected credit losses at a static rate of 2.00%; and

¨		residual cash flows discount rate of 8.50% to 15.00%.

Changes in these assumptions could cause the fair value of mortgage servicing assets to change in the future. The volume of loans serviced and expected credit losses are critical to the valuation of servicing assets. A 1.00% increase in the assumed default rate of commercial mortgage loans at June 30, 2009, would cause a $9 million decrease in the fair value of Key’s mortgage servicing assets.

Contractual fee income from servicing commercial mortgage loans totaled $34 million and $32 million for the six-month periods ended June 30, 2009 and 2008, respectively. Key has elected to remeasure servicing assets using the amortization method. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of servicing assets for each period, as shown in the preceding table, is recorded as a reduction to fee income. Both the contractual fee income and the amortization are recorded in “other income” on the income statement.

Servicing assets are evaluated quarterly for possible impairment. This process involves classifying the assets based on the types of loans serviced and their associated interest rates, and determining the fair value of each class. If the evaluation indicates that the carrying amount of the servicing assets exceeds their fair value, the carrying amount is reduced through a charge to income in the amount of such excess. For the six-month periods ended June 30, 2009 and 2008, no servicing asset impairment occurred.

8. Variable Interest Entities

A VIE is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:

¨		The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.

¨		The entity’s investors lack the authority to make decisions about the activities of the entity through voting rights or similar rights, and do not have the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual returns.

¨		The voting rights of some investors are not proportional to their economic interest in the entity, and substantially all of the entity’s activities involve or are conducted on behalf of investors with disproportionately few voting rights.

Key’s VIEs, including those consolidated and those in which Key holds a significant interest, are summarized below. Key defines a “significant interest” in a VIE as a subordinated interest that exposes Key to a significant portion, but not the majority, of the VIE’s expected losses or residual returns.


	Consolidated VIEs		Unconsolidated VIEs
June 30, 2009	Total		Total		Total		Maximum
in millions	Assets		Assets		Liabilities		Exposure to Loss

Low-income housing tax credit (“LIHTC”) funds	$	217	$	202		—		—
LIHTC investments		N/A		919		—	$	411


N/A		= Not Applicable

Key’s involvement with VIEs is described below.

Consolidated VIEs

LIHTC guaranteed funds. Key Affordable Housing Corporation (“KAHC”) formed limited partnerships (“funds”) that invested in LIHTC operating partnerships. Interests in these funds were offered in syndication to qualified investors who paid a fee to KAHC for a guaranteed return. Key also earned syndication fees from these funds and continues to earn asset management fees. The funds’ assets primarily are investments in LIHTC operating partnerships, which totaled $207 million at June 30, 2009. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations. Key has not formed new funds or added LIHTC partnerships since October 2003. However, Key continues to act as asset manager and provides occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, management has determined that Key is the primary beneficiary of these funds. Key recorded expenses of $16 million related to this guarantee obligation during the first six months of 2009. Additional information on return guarantee agreements with LIHTC investors is presented in Note 14 (“Contingent Liabilities and Guarantees”) under the heading “Guarantees” on page 34.

The partnership agreement for each guaranteed fund requires the fund to be dissolved by a certain date. In accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” the third-party interests associated with these funds are considered mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. The FASB has indefinitely deferred the measurement and recognition provisions of SFAS No. 150 for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as Key’s LIHTC guaranteed funds. Key adjusts the financial statements each period for the third-party investors’ share of the funds’ profits and losses. At June 30, 2009, the settlement value of these third-party interests was estimated to be between $153 million and $167 million, while the recorded value, including reserves, totaled $222 million.

Unconsolidated VIEs

LIHTC nonguaranteed funds. Although Key holds significant interests in certain nonguaranteed funds that Key formed and funded, management has determined that Key is not the primary beneficiary of those funds because Key does not absorb the majority of the expected losses of the funds. At June 30, 2009, assets of these unconsolidated nonguaranteed funds totaled $202 million. Key’s maximum exposure to loss in connection with these funds is minimal, and Key does not have any liability recorded related to the funds. Management elected to cease forming these funds in October 2003.

LIHTC investments. Through the Community Banking business group, Key has made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, Key is allocated tax credits and deductions associated with the underlying properties. Management has determined that Key is not the primary beneficiary of these investments because the general partners are more closely associated with the business activities of these partnerships. At June 30, 2009, assets of these unconsolidated LIHTC operating partnerships totaled approximately $919 million. Key’s maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $339 million at June 30, 2009, plus $72 million of tax credits claimed but subject to recapture. Key does not have any liability recorded related to these investments because Key believes the likelihood of any loss in connection with these partnerships is remote. During the first six months of 2009, Key did not obtain significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships.

Key has additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. Total assets of these operating partnerships were approximately $1.3 billion at June 30, 2009. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. Management has determined that Key is not the primary beneficiary of these partnerships because the general partners are more closely associated with the business activities of these partnerships. Information regarding Key’s exposure to loss in connection with these guaranteed funds is included in Note 14 under the heading “Return guarantee agreement with LIHTC investors” on page 35.

Commercial and residential real estate investments and principal investments. Key’s Principal Investing unit and the Real Estate Capital and Corporate Banking Services line of business make equity and mezzanine investments, some of which are in VIEs. These investments are held by nonregistered investment companies subject to the provisions of the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide, “Audits of Investment Companies.” Key is not currently applying the accounting or disclosure provisions of Revised Interpretation No. 46 to these investments, which remain unconsolidated; the FASB deferred the effective date of Revised Interpretation No. 46 for such nonregistered investment companies until the AICPA clarifies the scope of the Audit Guide.

9. Nonperforming Assets and Past Due Loans

Impaired loans totaled $1.9 billion at June 30, 2009, compared to $985 million at December 31, 2008, and $628 million at June 30, 2008. Impaired loans had an average balance of $1.7 billion for the second quarter of 2009 and $733 million for the second quarter of 2008.

Key’s nonperforming assets and past due loans were as follows:


	June 30,			December 31,			June 30,
in millions	2009			2008			2008

Impaired loans	$	1,915		$	985		$	628
Other nonaccrual loans		273			240			186

Total nonperforming loans		2,188			1,225			814

Nonperforming loans held for sale		145			90			342

Other real estate owned (“OREO”)		182			110			26
Allowance for OREO losses		(11	)		(3	)		(2	)

OREO, net of allowance		171			107			24
Other nonperforming assets^(a)		47			42			30

Total nonperforming assets	$	2,551		$	1,464		$	1,210

Impaired loans with a specifically allocated allowance	$	1,731		$	876		$	564
Specifically allocated allowance for impaired loans		393			178			166

Accruing loans past due 90 days or more	$	581		$	433		$	367
Accruing loans past due 30 through 89 days		1,169			1,314			852


(a)		Primarily investments held by the Private Equity unit within Key’s Real Estate Capital and Corporate Banking Services line of business.

At June 30, 2009, Key did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status.

Management evaluates the collectability of Key’s loans as described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 79 of Key’s 2008 Annual Report to Shareholders.

10. Capital Securities Issued by Unconsolidated Subsidiaries

KeyCorp owns the outstanding common stock of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities. The trusts used the proceeds from the issuance of their capital securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts’ only assets; the interest payments from the debentures finance the distributions paid on the capital securities.

The capital securities provide an attractive source of funds: they constitute Tier 1 capital for regulatory reporting purposes, but have the same tax advantages as debt for federal income tax purposes. During the first quarter of 2005, the Board of Governors of the Federal Reserve (“Federal Reserve”) adopted a rule that allows bank holding companies to continue to treat capital securities as Tier 1 capital, but imposed stricter quantitative limits that would have taken effect March 31, 2009. On March 17, 2009, in light of continued stress in the financial markets, the Federal Reserve Board delayed the effective date of these new limits until March 31, 2011. Management believes the new rule will not have any material effect on Key’s financial condition.

KeyCorp unconditionally guarantees the following payments or distributions on behalf of the trusts:

¨		required distributions on the capital securities;

¨		the redemption price when a capital security is redeemed; and

¨		the amounts due if a trust is liquidated or terminated.

On June 3, 2009, KeyCorp commenced an offer to exchange KeyCorp’s common shares, $1 par value, for any and all institutional capital securities issued by the KeyCorp Capital I, KeyCorp Capital II, KeyCorp Capital III and KeyCorp Capital VII trusts. The institutional exchange offer, which expired on June 30, 2009, is a component of KeyCorp’s comprehensive capital plan, which was submitted to the Federal Reserve Bank of Cleveland on June 1, 2009, following the May 7, 2009, announcement of the results of the forward-looking capital assessment, or “stress test,” conducted pursuant to the Supervisory Capital Assessment Program (“SCAP”) initiated by the United States Department of the Treasury (“U.S. Treasury”) and the federal banking regulators. As previously disclosed, KeyCorp’s regulators determined that KeyCorp needed to increase its Tier 1 common equity by $1.8 billion in order to satisfy the requirements of the SCAP.

In an effort to further enhance its Tier 1 common equity, on July 8, 2009, KeyCorp commenced a separate offer to exchange KeyCorp’s common shares, $1 par value, for any and all retail capital securities issued by the KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VIII, KeyCorp Capital IX and KeyCorp Capital X trusts. On July 22, 2009, KeyCorp amended its retail exchange offer, which expired on August 4, 2009, to reduce the maximum aggregate liquidation preference amount that would be accepted from $1.740 billion to $500 million.

For further information related to the status of these exchange offers and other capital-generating activities, see Note 11 (“Shareholders’ Equity”), which begins on page 31. Additional information regarding the SCAP assessment is included in the “Capital” section under the heading “Financial Stability Plan” on page 93.

The capital securities, common stock and related debentures are summarized as follows:

Principal

Interest Rate

Maturity

Capital

Amount of

of Capital

Securities,

Common

Debentures,

Securities and

dollars in millions

Net of Discount

^(a)

Stock

Net of Discount

^(b)

Debentures

^(c)

Debentures

June 30, 2009

KeyCorp Capital I

156

158

1.948

2028

KeyCorp Capital II

101

100

6.875

2029

KeyCorp Capital III

136

127

7.750

2029

KeyCorp Capital V

175

194

5.875

2033

KeyCorp Capital VI

6.125

2033

KeyCorp Capital VII

173

187

5.700

2035

KeyCorp Capital VIII

271

—

278

7.000

2066

KeyCorp Capital IX

534

—

531

6.750

2066

KeyCorp Capital X

778

—

775

8.000

2068

Union State Capital I

9.580

2027

Union State Statutory II

4.619

2031

Union State Statutory IV

—

3.931

2034

Total

2,449

2,485

6.769

—

December 31, 2008

3,042

3,084

6.931

—

June 30, 2008

2,622

2,675

6.814

—


(a)		The capital securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of capital securities carries an interest rate identical to that of the related debenture. Included in certain capital securities at June 30, 2009, December 31, 2008, and June 30, 2008, are basis adjustments of $158 million, $459 million and $39 million, respectively, related to fair value hedges. See Note 15 (“Derivatives and Hedging Activities”), which begins on page 37, for an explanation of fair value hedges.

(b)		KeyCorp has the right to redeem its debentures: (i) in whole or in part, on or after July 1, 2008 (for debentures owned by KeyCorp Capital I); March 18, 1999 (for debentures owned by KeyCorp Capital II); July 16, 1999 (for debentures owned by KeyCorp Capital III); July 21, 2008 (for debentures owned by KeyCorp Capital V); December 15, 2008 (for debentures owned by KeyCorp Capital VI); June 15, 2010 (for debentures owned by KeyCorp Capital VII); June 15, 2011 (for debentures owned by KeyCorp Capital VIII); December 15, 2011 (for debentures owned by KeyCorp Capital IX); March 15, 2013 (for debentures owned by KeyCorp Capital X); February 1, 2007 (for debentures owned by Union State Capital I); July 31, 2006 (for debentures owned by Union State Statutory II); and April 7, 2009 (for debentures owned by Union State Statutory IV); and (ii) in whole at any time within 90 days after and during the continuation of a “tax event,” an “investment company event” or a “capital treatment event” (as defined in the applicable indenture). If the debentures purchased by KeyCorp Capital I, KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VII, KeyCorp Capital VIII, KeyCorp Capital IX, KeyCorp Capital X or Union State Statutory IV are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (a) the principal amount, plus any accrued but unpaid interest or (b) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points (25 basis points for KeyCorp Capital III), plus any accrued but unpaid interest. If the debentures purchased by Union State Capital I are redeemed before they mature, the redemption price will be 104.31% of the principal amount, plus any accrued but unpaid interest. If the debentures purchased by Union State Statutory II are redeemed before they mature, the redemption price will be 104.50% of the principal amount, plus any accrued but unpaid interest. When debentures are redeemed in response to tax or capital treatment events, the redemption price generally is slightly more favorable to KeyCorp. Included in the principal amount of debentures at June 30, 2009, December 31, 2008, and June 30, 2008, are adjustments related to hedging with financial instruments totaling $165 million, $461 million and $52 million, respectively.

(c)		The interest rates for KeyCorp Capital II, KeyCorp Capital III, KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VII, KeyCorp Capital VIII, KeyCorp Capital IX, KeyCorp Capital X and Union State Capital I are fixed. KeyCorp Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis points that reprices quarterly. Union State Statutory II has a floating interest rate equal to three-month LIBOR plus 358 basis points that reprices quarterly. Union State Statutory IV has a floating interest rate equal to three-month LIBOR plus 280 basis points that reprices quarterly. The rates shown as the totals at June 30, 2009, December 31, 2008, and June 30, 2008, are weighted-average rates.

11. Shareholders’ Equity

Preferred Stock Private Exchanges

During April and May 2009, KeyCorp entered into agreements with certain institutional shareholders who had contacted KeyCorp to exchange KeyCorp’s 7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A (“Series A Preferred Stock”) held by the institutional shareholders for KeyCorp’s common shares, $1 par value. In the aggregate, KeyCorp exchanged 17,369,926 common shares, or 3.25% of the issued and outstanding KeyCorp common shares at May 18, 2009, the date on which the last of the exchange transactions settled, for 1,539,700 shares of the Series A Preferred Stock. The exchanges were conducted in reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act of 1933, as amended, for securities exchanged by the issuer and an existing security holder where no commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange. KeyCorp utilized treasury shares to complete the transactions.

Supervisory Capital Assessment Program and KeyCorp’s Capital-Generating Activities

To implement the U.S. Treasury Capital Assistance Program (“CAP”), the Federal Reserve, the Federal Reserve Banks, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency commenced a review of the capital of the nineteen largest U.S. banking institutions. This review, referred to as the SCAP, involved a forward-looking capital assessment, or “stress test,” of all domestic bank holding companies with risk-weighted assets of more than $100 billion, including KeyCorp, at December 31, 2008. As announced on May 7, 2009, under the SCAP assessment, KeyCorp’s regulators determined that it needed to generate $1.8 billion in additional Tier 1 common equity or contingent common equity (i.e., mandatorily convertible preferred shares). Information regarding the CAP and KeyCorp’s final SCAP assessment is included in the “Capital” section under the heading “Financial Stability Plan” on page 93.

Pursuant to the requirements of the SCAP assessment, KeyCorp submitted a comprehensive capital plan to the Federal Reserve Bank of Cleveland on June 1, 2009, describing KeyCorp’s action plan for raising the required amount of additional Tier 1 common equity from nongovernmental sources. In conjunction with its action plan, during the second quarter of 2009, KeyCorp completed various transactions to generate the additional capital, as discussed below.

Common stock offering. On May 11, 2009, KeyCorp launched a public “at-the-market” offering of up to $750 million in aggregate gross proceeds of its common shares, $1 par value. KeyCorp subsequently increased the aggregate gross sales price of the common shares to be issued to $1.0 billion on June 2, 2009, and on the same date, announced that it had successfully issued all $1.0 billion in additional common shares. In conjunction with the common stock offering, KeyCorp issued 205,438,975 common shares at an average price of $4.87 per share.

Series A Preferred Stock public exchange offer. On June 3, 2009, KeyCorp launched an offer to exchange KeyCorp’s common shares, $1 par value, for any and all outstanding shares of KeyCorp’s Series A Preferred Stock. In connection with the Series A Preferred Stock exchange offer, which expired on June 30, 2009, KeyCorp issued 29,232,025 common shares, or 3.67% of the issued and outstanding KeyCorp common shares at June 30, 2009, for 2,130,461 shares of the outstanding Series A Preferred Stock, representing $213 million aggregate liquidation preference. The exchange ratio for this exchange offer was 13.7210 common shares per share of Series A Preferred Stock.

Institutional capital securities exchange offer. On June 3, 2009, KeyCorp launched a separate offer to exchange KeyCorp’s common shares, $1 par value, for any and all institutional capital securities issued by the KeyCorp Capital I, KeyCorp Capital II, KeyCorp Capital III and KeyCorp Capital VII trusts. In connection with the institutional capital securities exchange offer, which expired on June 30, 2009, KeyCorp issued 46,338,101 common shares, or 5.81% of the issued and outstanding KeyCorp common shares at June 30, 2009, for $294 million aggregate liquidation preference of the outstanding capital securities in the aforementioned trusts. The exchange ratios for this exchange offer, which ranged from

132.5732 to 160.9818 common shares per $1,000 liquidation preference of capital securities, were based on the timing of each investor’s tender offer and the trust from which the capital securities were tendered.

In the aggregate, the Series A Preferred Stock and the institutional capital securities exchange offers generated $544 million of additional Tier 1 common equity. Both exchanges were conducted in reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act of 1933, as amended.

On July 1, 2009, KeyCorp announced that it believes that it has now complied with the requirements of the SCAP assessment, having generated total Tier 1 common equity in excess of $1.8 billion. KeyCorp raised: (i) $1.5 billion of capital through the three transactions discussed above, (ii) $149 million of capital through other exchanges of Series A Preferred Stock, (iii) $125 million of capital through the sale of certain securities, and (iv) approximately $70 million of capital through the reduction of Key’s dividend and interest obligations on the exchanged securities through the SCAP assessment period, which ends on December 31, 2010. Successful completion of these transactions has strengthened KeyCorp’s capital framework, having improved KeyCorp’s Tier 1 common equity ratio, which will benefit Key should economic conditions worsen.

In an effort to further enhance its Tier 1 common equity, on July 8, 2009, KeyCorp commenced a separate, SEC-registered offer to exchange KeyCorp’s common shares, $1 par value, for any and all retail capital securities issued by the KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VIII, KeyCorp Capital IX and KeyCorp Capital X trusts. As of July 21, 2009, holders of approximately $534 million aggregate liquidation preference of capital securities had indicated that they would be tendering securities in the retail capital securities exchange offer, subject to applicable withdrawal rights. As a result of the success of this exchange offer, management announced on July 22, 2009, that it would limit the total aggregate liquidation preference of capital securities that it will accept in this exchange offer to $500 million. In connection with this exchange offer, which expired on August 4, 2009, KeyCorp issued 81,278,214 common shares, or 9.25% of the issued and outstanding KeyCorp common shares at August 4, 2009. The exchange ratios for this exchange offer, which ranged from 3.8289 to 4.1518 common shares per $25 liquidation preference of capital securities, were based on the timing of each investor’s tender offer and the trust from which the capital securities were tendered. The retail capital securities exchange offer generated approximately $505 million of additional
Tier 1 common equity.

12. Employee Benefits

Pension Plans

The components of net pension cost for all funded and unfunded plans are as follows:


	Three months ended June 30,						Six months ended June 30,
in millions	2009			2008			2009			2008

Service cost of benefits earned	$	13		$	13		$	25		$	26
Interest cost on projected benefit obligation		14			16			29			32
Expected return on plan assets		(16	)		(24	)		(32	)		(47	)
Amortization of prior service cost		—			1			—			1
Amortization of losses		11			3			21			6

Net pension cost	$	22		$	9		$	43		$	18

Other Postretirement Benefit Plans

Key sponsors a contributory postretirement healthcare plan that covers substantially all active and retired employees hired before 2001 who meet certain eligibility criteria. Retirees’ contributions are adjusted annually to reflect certain cost-sharing provisions and benefit limitations. Key also sponsors life insurance plans covering certain grandfathered employees. These plans are principally noncontributory. Separate Voluntary Employee Beneficiary Association trusts are used to fund the healthcare plan and one of the life insurance plans.

The components of net postretirement benefit cost for all funded and unfunded plans are as follows:


	Three months ended June 30,						Six months ended June 30,
in millions	2009			2008			2009			2008

Service cost of benefits earned		—			$ 1			—			$ 1
Interest cost on accumulated postretirement benefit obligation		$ 1			1			$ 2			2
Expected return on plan assets		—			(1	)		(1	)		(2	)
Amortization of unrecognized:
Prior service benefit		(1	)		(1	)		(1	)		(1	)
Cumulative net gain		—			(1	)		—			(1	)

Net postretirement benefit income		—			$ (1	)		—			$ (1	)

13. Income Taxes

Lease Financing Transactions

During the second quarter of 2009, Key and the IRS resolved all outstanding federal income tax issues for tax years 1997-2003, including all outstanding lease in, lease out (“LILO”) and sale in, sale out (“SILO”) tax issues for all open tax years through the execution of closing agreements in the first and second quarter. Key and the IRS are currently completing the final tax calculations for the tax years 1997-2003 and the IRS is continuing its audits of Key’s 2004-2006 tax years. Key has deposited $2.0 billion with the IRS to cover the anticipated amount of taxes and associated interest cost due to the IRS for all tax years affected by the LILO/SILO tax settlement.

During 2009, Key will amend its state tax returns to reflect the impact of the settlement on prior years’ state tax liabilities. While the settlement with the IRS provides a waiver of federal tax penalties, management anticipates that certain statutory penalties under state tax laws will be imposed on Key. Although Key intends to vigorously defend its position against the imposition of any such penalties, Key accrued an additional $1 million of potential state tax penalties during the second quarter of 2009, and has a total of $32 million accrued for potential penalties in accordance with current accounting guidance.

Pursuant to FASB Staff Position No. 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” management updated its assessment of the timing of the tax payments associated with the LILO/SILO settlement during both the second and first quarters of 2009. As a result, Key recognized a $4 million ($2 million after tax) increase to earnings during the second quarter and a $5 million ($3 million after tax) increase during the first quarter.

Unrecognized Tax Benefits

As permitted under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” it is Key’s policy to recognize interest and penalties related to unrecognized tax benefits in income tax expense.

14. Contingent Liabilities and Guarantees

Legal Proceedings

Tax disputes. The information pertaining to lease financing transactions presented in Note 13 (“Income Taxes”) is incorporated herein by reference.

Taylor litigation. On August 11, 2008, a purported class action case was filed against KeyCorp, its directors and certain employees (collectively, the “Key parties”), captioned Taylor v. KeyCorp et al., in the United States District Court for the Northern District of Ohio. On September 16, 2008, a second and related case was filed in the same district court, captioned Wildes v. KeyCorp et al. The plaintiffs in these cases seek to represent a class of all participants in Key’s 401(k) Savings Plan and allege that the Key parties breached fiduciary duties owed to them under the Employee Retirement Income Security Act (“ERISA”). On January 7, 2009, the Court consolidated the Taylor and Wildes lawsuits into a single action. Plaintiffs have since filed their consolidated complaint, which continues to name certain employees as defendants but no longer names any outside directors. Key strongly disagrees with the allegations contained in the complaints and the consolidated complaint, and intends to vigorously defend against them.

Madoff-related claims. In December 2008, Austin Capital Management, Ltd. (“Austin”), an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base, determined that its funds had suffered investment losses of up to approximately $186 million resulting from the crimes perpetrated by Bernard L. Madoff and entities that he controls. The investment losses borne by Austin’s clients stem from investments that Austin made in certain Madoff-advised “hedge” funds. Several lawsuits, including putative class actions and direct actions, and one arbitration proceeding were filed against Austin seeking to recover losses incurred as a result of Madoff’s crimes. The lawsuits and arbitration proceeding allege various claims, including negligence, fraud, breach of fiduciary duties and violations of federal securities laws and the ERISA. In the event Key were to incur any liability for this matter, Key believes such liability would be covered under the terms and conditions of its insurance policy, subject to a $25 million self-insurance deductible and usual policy exceptions.

In April 2009, management made the decision to curtail Austin’s operations and expects that the related charges will not be material. Information regarding the Austin discontinued operations is included in Note 3 (“Acquisition and Divestiture”), on page 12.

Other litigation. In the ordinary course of business, Key is subject to other legal actions that involve claims for substantial monetary relief. Based on information presently known to management, management does not believe there is any legal action to which KeyCorp or any of its subsidiaries is a party, or involving any of their properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on Key’s financial condition.

Guarantees

Key is a guarantor in various agreements with third parties. The following table shows the types of guarantees that Key had outstanding at June 30, 2009. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Guarantees” on page 82 of Key’s 2008 Annual Report to Shareholders.


	Maximum Potential
June 30, 2009	Undiscounted		Liability
in millions	Future Payments		Recorded

Financial guarantees:
Standby letters of credit		$13,093		$100
Recourse agreement with FNMA		706		6
Return guarantee agreement with LIHTC investors		213		62
Written interest rate caps^(a)		188		31
Default guarantees		51		2

Total		$14,251		$201

(a)

As of June 30, 2009, the weighted-average interest rate on written interest rate caps was .6%, and the weighted-average strike rate was 5.0%. Maximum potential undiscounted future payments were calculated assuming a 10% interest rate.

Management determines the payment/performance risk associated with each type of guarantee described below based on the probability that Key could be required to make the maximum potential undiscounted future payments shown in the preceding table. Management uses a scale of low (0-30% probability of payment), moderate (31-70% probability of payment) or high (71-100% probability of payment) to assess the payment/performance risk, and has determined that the payment/performance risk associated with each type of guarantee outstanding at June 30, 2009, is low.

Standby letters of credit. Many of Key’s lines of business issue standby letters of credit to address clients’ financing needs. These instruments obligate Key to pay a specified third party when a client fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated as loans; they bear interest (generally at variable rates) and pose the same credit risk to Key as a loan. At June 30, 2009, Key’s standby letters of credit had a remaining weighted-average life of approximately 1.9 years, with remaining actual lives ranging from less than one year to as many as nine years.

Recourse agreement with Federal National Mortgage Association. KeyBank participates as a lender in the Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing program. As a condition to FNMA’s delegation of responsibility for originating, underwriting and servicing mortgages, KeyBank has agreed to assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan KeyBank sells to FNMA. Accordingly, KeyBank maintains a reserve for such potential losses in an amount estimated by management to approximate the fair value of KeyBank’s liability. At June 30, 2009, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 6.8 years, and the unpaid principal balance outstanding of loans sold by KeyBank as a participant in this program was approximately $2.2 billion. As shown in the table on page 34, the maximum potential amount of undiscounted future payments that KeyBank could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at June 30, 2009. If KeyBank is required to make a payment, it would have an interest in the collateral underlying the related commercial mortgage loan.

Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal low income housing tax credits under Section 42 of the Internal Revenue Code. In certain partnerships, investors paid a fee to KAHC for a guaranteed return that is based on the financial performance of the property and the property’s confirmed LIHTC status throughout a fifteen-year compliance period. If KAHC defaults on its obligation to provide the guaranteed return, Key is obligated to make any necessary payments to investors. These guarantees have expiration dates that extend through 2019, but there have been no new partnerships under this program since October 2003. Additional information regarding these partnerships is included in Note 8 (“Variable Interest Entities”), which begins on page 26.

No recourse or collateral is available to offset Key’s guarantee obligation other than the underlying income stream from the properties. Any guaranteed returns that are not met through distribution of tax credits and deductions associated with the specific properties from the partnerships remain Key’s obligation.

As shown in the table on page 34, KAHC maintained a reserve in the amount of $62 million at June 30, 2009, which management believes will be sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss reflected in the table represents undiscounted future payments due to investors for the return on and of their investments.

Written interest rate caps. In the ordinary course of business, Key “writes” interest rate caps for commercial loan clients that have variable rate loans with Key and wish to limit their exposure to interest rate increases. At June 30, 2009, outstanding caps had a weighted-average life of approximately 1.6 years.

Key is obligated to pay the client if the applicable benchmark interest rate exceeds a specified level (known as the “strike rate”). These instruments are accounted for as derivatives. Key typically mitigates its potential future payments by entering into offsetting positions with third parties.

Default guarantees. Some lines of business participate in guarantees that obligate Key to perform if the debtor fails to satisfy all of its payment obligations to third parties. Key generally undertakes these guarantees in instances where the risk profile of the debtor should provide an investment return or to support its underlying investment. The terms of these default guarantees range from less than one year to as many as thirteen years, while some default guarantees do not have a contractual end date. Although no collateral is held, Key would receive a pro rata share should the third party collect some or all of the amounts due from the debtor.

Other Off-Balance Sheet Risk

Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” and from other relationships.

Liquidity facilities that support asset-backed commercial paper conduits. Key provides liquidity facilities to several unconsolidated third-party commercial paper conduits. These facilities obligate Key to provide funding if there is a credit market disruption or there are other factors that would preclude the issuance of commercial paper by the conduits. The liquidity facilities, all of which expire by November 10, 2010, obligate Key to provide aggregate funding of up to $728 million, with individual facilities ranging from $37 million to $100 million. The aggregate amount available to be drawn is based on the amount of current commitments to borrowers and totaled $547 million at June 30, 2009. At that date, $111 million had been drawn under these committed facilities. Management periodically evaluates Key’s commitments to provide liquidity.

Indemnifications provided in the ordinary course of business. Key provides certain indemnifications, primarily through representations and warranties in contracts that are entered into in the ordinary course of business in connection with loan sales and other ongoing activities, as well as in connection with purchases and sales of businesses. Key maintains reserves, when appropriate, with respect to liability that reasonably could arise in connection with these indemnities.

Intercompany guarantees. KeyCorp and certain Key affiliates are parties to various guarantees that facilitate the ongoing business activities of other Key affiliates. These business activities encompass debt issuance, certain lease and insurance obligations, the purchase or issuance of investments and securities, and certain leasing transactions involving clients.

Heartland Payment Systems Matter. Under an agreement between KeyBank and Heartland Payment Systems, Inc. (“Heartland”), Heartland utilizes KeyBank’s membership in the Visa and MasterCard networks to register as an Independent Sales Organization for Visa and a Member Service Provider with MasterCard to provide merchant payment processing services for Visa and MasterCard transactions. On January 20, 2009, Heartland publicly announced its discovery of an alleged criminal breach of its credit card payment processing systems environment (the “Intrusion”) that reportedly occurred during 2008 and is alleged to have involved the malicious collection of in-transit, unencrypted payment card data that was being processed by Heartland.

In Heartland’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2009 (“Heartland’s 2008 Form 10-K”), Heartland reported that it expects the major card brands, including Visa and MasterCard, to assert claims seeking to impose fines, penalties, and/or other assessments against Heartland and/or certain card brand members, such as KeyBank, as a result of the alleged potential breach of the respective card brand rules and regulations and the Intrusion. Heartland also indicated that it is likely that the overall costs associated with the Intrusion will be material to it, and that it may need to seek financing in order to pay such costs. In Heartland’s Form 8-K filed with the Securities and Exchange Commission on August 4, 2009 (“Earnings Release”), Heartland reported that it expensed a total of $19.4 million and $32.0 million for the three and six months ended June 30, 2009, respectively, related to the Intrusion. Heartland also indicated that $22.1 million of such charges relate to fines imposed by the card brands in April 2009 against the company and its sponsor banks and a settlement offer made by Heartland to resolve certain of the claims asserted against it. Heartland’s Earnings Release also reported the accrual of a $14.4 million reserve in connection with the settlement offer. Heartland further reported that the ultimate cost of resolving the claims that are the subject of the settlement offer may substantially exceed the amount that Heartland has accrued. Furthermore, even if the claims that are the subject of the settlement offer are resolved, Heartland indicated that most of the claims asserted against Heartland would still remain unresolved. Heartland continues to report that it is likely that the overall costs associated with the Intrusion will be material to it, and that they could have a material adverse effect on the results of its operations and financial condition.

KeyBank has received letters from both Visa and MasterCard assessing fines, penalties or assessments related to the Intrusion. KeyBank is in the process of pursuing appeals of such fines, penalties or assessments. Visa and MasterCard (as well as Heartland and KeyBank) are each still investigating the matter, and they may revise their respective assessments. Under its agreement with Heartland, KeyBank has certain rights of indemnification from Heartland for costs assessed against it by Visa and MasterCard and other associated costs, and KeyBank has notified Heartland of its indemnification rights. In the event that Heartland is unable to fulfill its indemnification obligations to KeyBank, the charges (net of any

indemnification) could be significant, although it is not possible to quantify at this time. Accordingly, under applicable accounting rules, KeyBank has not established any reserve. For further information on Heartland and the Intrusion, please review Heartland’s 2008 Form 10-K, Heartland’s Form 10-Q filed with the Securities and Exchange Commission on May 11, 2009, and Heartland’s Earnings Release.

15. Derivatives and Hedging Activities

Key, mainly through its subsidiary bank, KeyBank, is party to various derivative instruments that are used for interest rate risk management, credit risk management and trading purposes. Derivative instruments are contracts between two or more parties that have a notional amount and underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract.

The primary derivatives that Key uses are interest rate swaps, caps, floors and futures, foreign exchange contracts, energy derivatives, credit derivatives and equity derivatives. Generally, these instruments help Key manage exposure to interest rate risk, mitigate the credit risk inherent in the loan portfolio, and meet client financing and hedging needs. Interest rate risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in interest rates. Credit risk is defined as the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms.

Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of master netting agreements. These master netting agreements allow Key to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable. As a result, Key could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities.

At June 30, 2009, after taking into account the effects of bilateral collateral and master netting agreements, Key had $250 million of derivative assets and $107 million of derivative liabilities that relate to contracts entered into for hedging purposes. As of the same date, after taking into account the effects of such agreements, and a reserve for potential future losses, Key had derivative assets of $932 million and derivative liabilities of $423 million that were not designated as hedging instruments.

Interest Rate Risk Management

Fluctuations in net interest income and the economic value of equity may result from changes in interest rates, and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. To minimize the volatility of net interest income and the economic value of equity, Key manages exposure to interest rate risk in accordance with guidelines established by the Asset/Liability Management Committee. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities. These instruments are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.

Key has designated certain “receive fixed/pay variable” interest rate swaps as fair value hedges, primarily to modify its exposure to interest rate risk. These contracts convert certain fixed-rate long-term debt into variable-rate obligations. As a result, Key receives fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the underlying notional amounts.

Additionally, Key has designated certain “receive fixed/pay variable” interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse impact from interest rate decreases on future interest income. These contracts allow Key to receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the underlying notional amounts. Similarly, Key has designated certain “pay

fixed/receive variable” interest rate swaps as cash flow hedges to convert certain floating-rate debt into fixed-rate debt.

Key also uses interest rate swaps to hedge the floating-rate debt that funds fixed-rate leases entered into by Key’s Equipment Finance line of business. These swaps are designated as cash flow hedges to mitigate the interest rate mismatch between the fixed-rate lease cash flows and the floating-rate payments on the debt.

Key has used “pay fixed/receive variable” interest rate swaps as cash flow hedges to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans. These swaps protected against a possible short-term decline in the value of the loans that could result from changes in interest rates between the time they were originated and the time they were sold. During the first quarter of 2009, these hedges were terminated. Therefore, Key did not have any of these hedges outstanding at March 31 or June 30, 2009.

Foreign Currency Exchange Risk Management

The derivatives used for managing foreign currency exchange risk are cross currency swaps. Key has several outstanding issues of medium-term notes that are denominated in a foreign currency. The notes are subject to translation risk, which represents the possibility that changes in the fair value of the foreign-denominated debt will occur based on movement of the underlying foreign currency spot rate. It is Key’s practice to hedge against potential fair value changes caused by changes in foreign currency exchange rates and interest rates. The hedge converts the notes to a variable-rate functional currency-denominated debt, which is designated as a fair value hedge of foreign currency exchange risk.

Credit Risk Management

Like other financial services institutions, Key originates loans and extends credit, both of which expose Key to credit risk. Key actively manages its overall loan portfolio, and the associated credit risk, in a manner consistent with asset quality objectives. This process entails the use of credit derivatives ¾ primarily credit default swaps ¾ to mitigate Key’s credit risk. Credit default swaps enable Key to transfer a portion of the credit risk associated with a particular extension of credit to a third party, and to manage portfolio concentration and correlation risks. Occasionally, Key also provides credit protection to other lenders through the sale of credit default swaps. In most instances, this objective is accomplished through the use of an investment-grade diversified dealer-traded basket of credit default swaps. These transactions may generate fee income, and diversify and reduce overall portfolio credit risk volatility. Although Key uses these instruments for risk management purposes, they are not treated as hedging instruments as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

Trading Portfolio

Key’s trading portfolio consists of the following instruments:

	¨		interest rate swap, cap, floor and futures contracts entered into generally to accommodate the needs of commercial loan clients;

	¨		energy swap and options contracts entered into to accommodate the needs of clients;

	¨		foreign exchange forward contracts entered into to accommodate the needs of clients;

	¨		positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above; and

	¨		interest rate swaps, foreign exchange forward contracts and credit default swaps used for proprietary trading purposes.

Key does not apply hedge accounting to any of these contracts.

Fair Values, Volume of Activity and Gain/Loss Information Related to Derivative Instruments

The following table summarizes the fair values of Key’s derivative instruments on a gross basis as of March 31 and June 30, 2009, and the volume of Key’s derivative transaction activity during the second quarter of 2009. The volume of activity is represented by the change from March 31, 2009, to June 30, 2009, in the notional amounts of Key’s gross derivatives by type. The notional amounts are not affected by bilateral collateral and master netting agreements. Key’s derivative instruments are recorded in “derivative assets” or “derivative liabilities” on the balance sheet, as indicated in the table below.


	June 30, 2009								March 31, 2009
			Fair Value								Fair Value
	Notional		Derivative			Derivative			Notional		Derivative			Derivative
in millions	Amount		Assets			Liabilities			Amount		Assets			Liabilities

Derivatives designated as hedging instruments:
Interest rate	$	23,234	$	561		$	14		$	22,279	$	876		$	14
Foreign exchange		2,550		68			324			2,309		46			434

Total		25,784		629			338			24,588		922			448
Derivatives not designated as hedging instruments:
Interest rate		78,564		1,664			1,525			85,314		2,284			2,075
Foreign exchange		7,317		222			193			9,513		422			380
Energy and commodity		2,155		533			562			1,896		721			751
Credit		7,012		94			99			7,142		171			173
Equity		—		—			—			1		1			—

Total		95,048		2,513			2,379			103,866		3,599			3,379

Netting adjustments ^(a)		N/A		(1,960	)		(2,187	)		N/A		(2,814	)		(2,895	)

Total derivatives	$	120,832	$	1,182		$	530		$	128,454	$	1,707		$	932


(a)		Netting adjustments represent the amounts recorded to convert Key’s derivative assets and liabilities from a gross basis to a net basis in accordance with Key’s January 1, 2008, adoption of FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” and FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation 39.” The net basis takes into account the impact of master netting agreements that allow Key to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral.

N/A = Not Applicable

Fair value hedges. These hedging instruments are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. The effective portion of a change in the fair value of a hedging instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change in the fair value of such a hedging instrument is recognized in “other income” on the income statement with no corresponding offset. During the six-month period ended June 30, 2009, Key did not exclude any portion of hedging instruments from the assessment of hedge effectiveness. While some ineffectiveness is present in Key’s hedging relationships, all of Key’s fair value hedges remained “highly effective” during the second quarter.

The following table summarizes the pre-tax net gains (losses) on Key’s fair value hedges during the six-month period ended June 30, 2009, and where they are recorded on the income statement.

Net Gains

Six months ended June 30, 2009

Income Statement Location

(Losses)

Income Statement Location

(Losses)

in millions

of Net Gains (Losses) on Derivative

on Derivative

Hedged Item

of Net Gains (Losses) on Hedged Item

on Hedged Item

Interest rate

Other income

$(437

)

Long-term debt

Other income

$439

^(a)

Interest rate

Interest expense — Long-term debt

112

Foreign exchange

Other income

Long-term debt

Other income

(69

) ^(a)

Foreign exchange

Interest expense — Long-term debt

Long-term debt

Interest expense — Long-term debt

(31

) ^(b)

Total

$(247

)

$339


(a)		Net gains on hedged items represent the change in fair value caused by fluctuations in interest rates.

(b)		Net losses on hedged items represent the change in fair value caused by fluctuations in foreign currency exchange rates.

Cash flow hedges. These hedging instruments are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. The effective portion of a gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet. The amounts are reclassified into earnings in the same period in which the hedged transaction impacts earnings, such as when Key pays variable-rate interest on debt, receives variable-rate interest on commercial loans or sells commercial real estate loans. The ineffective portion of cash flow hedging transactions is included in “other income” on the

income statement. During the six-month period ended June 30, 2009, Key did not exclude any portion of its hedging instruments from the assessment of hedge effectiveness. While some ineffectiveness is present in Key’s hedging relationships, all of Key’s cash flow hedges remained “highly effective” during the first half of 2009.

The following table summarizes the pre-tax net gains (losses) on Key’s cash flow hedges during the six-month period ended June 30, 2009, and where they are recorded on the income statement. The table includes the effective portion of net gains (losses) recognized in “other comprehensive income (loss)” (“OCI”) during the period, the effective portion of net gains (losses) reclassified from OCI into income during the current period, and the portion of net gains (losses) recorded directly in income, representing the amount of hedge ineffectiveness.

Income Statement

Net Gains

Location

Net Gains

Net Gains (Losses)

(Losses) Reclassified

of Net Gains (Losses)

(Losses) Recognized

Six months ended June 30, 2009

Recognized in OCI

Income Statement Location of Net Gains (Losses)

From OCI Into Income

Recognized in Income

in Income

in millions

(Effective Portion)

Reclassified From OCI Into Income (Effective Portion)

(Effective Portion)

(Ineffective Portion)

Interest rate

102

Interest income — Loans

233

Other income

)

Interest rate

Interest expense — Long-term debt

)

Other income

Interest rate

Net (losses) gains from loan securitizations and sales

Other income

—

Total

131

229

—

The after-tax change in AOCI resulting from cash flow hedges is as follows:

Reclassification

December 31,

2009

of Gains to

June 30,

in millions

2008

Hedging Activity

Net Income

2009

Accumulated other comprehensive income resulting from cash flow hedges

238

(143

)

177

Given the interest rates, yield curves and notional amounts as of June 30, 2009, management would expect to reclassify an estimated $37 million of net losses on derivative instruments from AOCI to earnings during the next twelve months. The maximum length of time over which forecasted transactions are hedged is nineteen years.

Nonhedging instruments. Key’s derivatives that are not used in hedging relationships are recorded at fair value in “derivative assets” and “derivative liabilities” on the balance sheet. Adjustments to the fair values of these instruments, as well as any premium paid or received, are included in “investment banking and capital markets income” on the income statement.

The following table summarizes the pre-tax net gains (losses) on Key’s derivative instruments that are not used in hedging relationships for the six-month period ended June 30, 2009, and where they are recorded on the income statement.


Six months ended June 30, 2009	Net Gains
in millions	(Losses)		^(a)

Interest rate	$	15
Foreign exchange		31
Energy and commodity		4
Credit		(23	)
Equity ^(b)		—

Total	$	27


(a)		Recorded in investment banking and capital markets income on the income statement.

(b)		Key enters into equity contracts to accommodate the needs of clients and offsets these positions with third parties. Key did not enter into any new equity contracts during the six months ended June 30, 2009.

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive replacement value of the contracts. Key uses several means to mitigate and manage exposure to credit risk on derivative contracts. Key generally enters into bilateral collateral and master netting agreements using standard forms published by the International Swaps and Derivatives Association (“ISDA”). These agreements provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, management monitors credit risk exposure to the counterparty on each contract to determine appropriate limits on Key’s total credit exposure across all product types. Management reviews Key’s collateral positions on a daily basis and exchanges collateral with its counterparties in accordance with ISDA and other related agreements. Key generally holds collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises or the Government National Mortgage Association. The cash collateral netted against derivative assets on the balance sheet totaled $533 million at June 30, 2009, $974 million at December 31, 2008, and $196 million at June 30, 2008. The cash collateral netted against derivative liabilities totaled $759 million at June 30, 2009, $586 million at December 31, 2008, and $531 million at June 30, 2008.

At June 30, 2009, the largest gross exposure to an individual counterparty was $308 million, which was secured with $37 million in collateral. Additionally, Key had a derivative liability of $348 million with this counterparty whereby Key pledged $95 million in collateral. After taking into account the effects of a master netting agreement and collateral, Key had a net exposure of $18 million.

The following table summarizes the fair value of Key’s derivative assets by type. These assets represent Key’s gross exposure to potential loss after taking into account the effects of master netting agreements and other means used to mitigate risk.


	June 30,		December 31,		June 30,
in millions	2009		2008		2008

Interest rate	$	1,365	$	2,333	$	693
Foreign exchange		141		279		245
Energy and commodity		183		214		889
Credit		26		42		37
Equity		—		2		25

Derivative assets before cash collateral		1,715		2,870		1,889
Less: Related cash collateral		533		974		196

Total derivative assets	$	1,182	$	1,896	$	1,693

Key enters into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, Key manages counterparty credit exposure and credit risk in a different manner for each group.

Key enters into transactions with broker-dealers and banks for purposes of asset/liability management, risk management and proprietary trading purposes. These types of transactions generally are high dollar volume. Key generally enters into bilateral collateral and master netting agreements with these counterparties. At June 30, 2009, after taking into account the effects of master netting agreements, Key had gross exposure of $1.3 billion to broker-dealers and banks. Key had net exposure of $246 million after the application of master netting agreements and cash collateral. Key’s net exposure to broker-dealers and banks at June 30, 2009, was reduced to $72 million by $174 million of additional collateral held in the form of securities.

Additionally, Key enters into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. Key generally enters into master netting agreements with these counterparties. In addition, Key mitigates its overall portfolio exposure and market risk by entering into offsetting positions with other banks. Due to the smaller size and magnitude of the individual contracts with clients, collateral is generally not exchanged on these derivative transactions. In order to address the risk of default associated with the uncollateralized contracts, Key has established a reserve (included in “derivative assets”) in the amount of $52 million at June 30, 2009, which management

estimates to be the potential future losses on amounts due from client counterparties in the event of default. At June 30, 2009, after taking into account the effects of master netting agreements, Key had gross exposure of $1.1 billion to these counterparties. Key had net exposure of $937 million on its derivatives with clients after the application of master netting agreements, cash collateral and the related reserve.

Credit Derivatives

Key is both a buyer and seller of credit protection through the credit derivative market. Key purchases credit derivatives to manage the credit risk associated with specific commercial lending obligations. Key also sells credit derivatives, mainly index credit default swaps, to diversify the concentration risk within its loan portfolio. In addition, Key has entered into derivatives for proprietary trading purposes.

The following table summarizes the fair value of Key’s credit derivatives purchased and sold by type as of June 30, 2009, and December 31, 2008. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.


	June 30, 2009								December 31, 2008
in millions	Purchased		Sold			Net			Purchased		Sold			Net

Single name credit default swaps	$	60	$	(36	)	$	24		$	155	$	(104	)	$	51
Traded credit default swap indices		11		(18	)		(7	)		34		(47	)		(13	)
Other		—		(11	)		(11	)		—		(8	)		(8	)

Total credit derivatives	$	71	$	(65	)	$	6		$	189	$	(159	)	$	30

Single name credit default swaps are bilateral contracts between a buyer and seller, whereby protection against the credit risk of a reference entity is sold. The protected credit risk is related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or restructuring of obligations specified in the credit derivative contract using standard documentation terms governed by the ISDA. The credit default swap contract will reference a specific debt obligation of the reference entity. As the seller of a single name credit derivative, Key would be required to pay the purchaser the difference between par value and the market price of the debt obligation (cash settlement) or receive the specified referenced asset in exchange for payment of the par value (physical settlement) if the underlying reference entity experiences a certain, predefined credit event. For a single name credit derivative, the notional amount represents the maximum amount that a seller could be required to pay under the credit derivative. In the event that physical settlement occurs and Key receives its portion of the related debt obligation, Key will join other creditors in the liquidation process, which may result in the recovery of a portion of the amount paid under the credit default swap contract. Key also may purchase offsetting credit derivatives for the same reference entity from third parties that will permit Key to recover the amount it pays should a credit event occur.

A traded credit default swap index represents a position on a basket or portfolio of reference entities. As a seller of protection on a credit default swap index, Key would be required to pay the purchaser if one or more of the entities in the index has a credit event. For a credit default swap index, the notional amount represents the maximum amount that a seller could be required to pay under the credit derivative. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity.

The following table provides information on the types of credit derivatives sold by Key and held on the balance sheet at June 30, 2009, and December 31, 2008. This table includes derivatives sold both to diversify Key’s credit exposure and for proprietary trading purposes. The payment/performance risk assessment is based on the default probabilities for the underlying reference entities’ debt obligations using the credit ratings matrix provided by Moody’s Investors Service, Inc. (“Moody’s”), specifically Moody’s “Idealized” Cumulative Default Rates, except as noted. The payment/performance risk shown in the table represents a weighted-average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are directly correlated to the probability of Key having to make a payment under the credit derivative contracts.

June 30, 2009

December 31, 2008

Average

Payment /

Average

Payment /

Notional

Term

Performance

Notional

Term

Performance

dollars in millions

Amount

(Years)

Risk

Amount

(Years)

Risk

Single name credit default swaps

1,548

2.38

5.16

1,476

2.44

4.75

Traded credit default swap indices

1,703

1.74

6.59

1,759

1.51

4.67

Other

1.50

Low

^(a)

1.50

Low

^(a)

Total credit derivatives sold

3,301

—

3,294

—


(a)		The other credit derivatives are not referenced to an entity’s debt obligation. Management determined the payment/performance risk based on the probability that Key could be required to pay the maximum amount under the credit derivatives. Key has determined that the payment/performance risk associated with the other credit derivatives is low (i.e., less than or equal to 30% probability of payment).

Credit Risk Contingent Features

Key has entered into certain derivative contracts that require Key to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is generally based on thresholds related to Key’s long-term senior unsecured credit ratings with Moody’s and Standard and Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc. (“S&P”). The collateral to be posted is also based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that Key has signed with the counterparties. In a limited number of instances, counterparties also have the right to terminate their ISDA Master Agreements with Key if Key’s ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At June 30, 2009, KeyBank’s ratings with Moody’s and S&P were “A2” and “A-,” respectively, and KeyCorp’s ratings with Moody’s and S&P were “Baa1” and “BBB+,” respectively. Upon a downgrade of Key’s ratings, Key could be required to post additional collateral under those ISDA Master Agreements where Key is in a net liability position. As of June 30, 2009, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on Key’s ratings) that were in a net liability position totaled $935 million, which includes $759 million in derivative assets and $1.7 billion in derivative liabilities. Key had $975 million in cash and securities collateral posted to cover those positions as of June 30, 2009.

The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of June 30, 2009. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two or three ratings as of June 30, 2009, and take into account all collateral already posted. At June 30, 2009, KeyCorp did not have any derivatives in a net liability position that contained credit risk contingent features.


June 30, 2009
in millions	Moody’s		S&P

KeyBank’s long-term senior unsecured credit ratings		A2		A-

One rating downgrade	$	33	$	26
Two rating downgrades		59		39
Three rating downgrades		72		45

If KeyBank’s ratings had been downgraded below investment-grade as of June 30, 2009, payments of up to $80 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. To be downgraded below investment-grade, KeyBank’s long-term senior unsecured credit rating would need to be downgraded five ratings by Moody’s and four ratings by S&P. At the time of filing of this report on August 10, 2009, KeyCorp’s and KeyBank’s ratings at June 30, 2009, remained unchanged.

16. Fair Value Measurements

Fair Value Determination

As defined in SFAS No. 157, “Fair Value Measurements,” fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in Key’s principal market. Key has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of Key’s assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions and estimates related to credit quality, liquidity, interest rates and other relevant inputs.

Valuation adjustments, such as those pertaining to counterparty and Key’s own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing is not indicative of the counterparty’s credit quality. Most classes of derivative contracts are valued using internally developed models based on market-standard derivative pricing conventions, which rely primarily on observable market inputs, such as interest rate yield curves and volatilities. Market convention implies a credit rating of “AA” equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. In determining the fair value of derivatives, management considers the impact of master netting and cash collateral exchange agreements and, when appropriate, establishes a default reserve to reflect the credit quality of the counterparty.

Liquidity valuation adjustments are made when management is unable to observe recent market transactions for identical or similar instruments. Management adjusts the fair value to reflect the uncertainty in the pricing and trading of the instrument. Liquidity valuation adjustments are made based on the following factors:

¨		the amount of time since the last relevant valuation;

¨		whether there is an actual trade or relevant external quote available at the measurement date; and

¨		volatility associated with the primary pricing components.

Key ensures that fair value measurements are accurate and appropriate through its various controls, including:

¨		an independent review and approval of valuation models;

¨		a detailed review of profit and loss conducted on a regular basis; and

¨		a validation of valuation model components against benchmark data and similar products, where possible.

Management reviews any changes to valuation methodologies to ensure they are appropriate and justified, and refines valuation methodologies as more market-based data becomes available.

Fair Value Hierarchy

SFAS No. 157 establishes a three-level valuation hierarchy for determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy, from highest ranking to lowest, are as follows:

¨		*Level 1*. Quoted prices in active markets for identical assets or liabilities.

¨		*Level 2*. Either: (i) quoted market prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

Level 3. Unobservable inputs.

The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the overall fair value measurement.

Qualitative Disclosures of Valuation Techniques

Loans. Loans recorded as trading account assets are valued based on market spreads for identical or similar assets. Generally, these loans are classified as Level 2 since the fair value recorded is based on observable market data. Key corroborates these inputs periodically through a pricing service, which obtains data about actual transactions in the marketplace for identical or similar assets. However, at June 30, 2009, Key valued the loans using an internal cash flow model because market data was not readily available for these loans. The most significant inputs to Key’s internal model are actual and projected financial results for the individual borrowers. Accordingly, these loans were classified as Level 3 at June 30, 2009.

Securities (trading and available for sale). Securities are classified as Level 1 where quoted market prices are available in an active market. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury and exchange-traded equity securities. In the absence of availability of quoted prices, management determines fair value using pricing models or quoted prices of similar securities. These instruments include municipal bonds and certain agency collateralized mortgage obligations, and are classified as Level 2. Inputs to the pricing models include actual trade data (i.e., spreads, credit ratings and interest rates) for comparable assets, spread tables, matrices, high-grade scales, option-adjusted spreads and standard inputs, such as yields, broker/dealer quotes, bids and offers. Where there is limited activity in the market for a particular instrument, management uses internal models based on certain assumptions to determine fair value. Such instruments include certain mortgage-backed securities and certain commercial paper, and are classified as Level 3. Inputs for the Level 3 internal models include expected cash flows from the underlying loans, which takes into account expected default and recovery percentages, and discount rates commensurate with current market conditions.

Private equity and mezzanine investments. Valuations of private equity and mezzanine investments held primarily within Key’s Real Estate Capital and Corporate Banking Services line of business are based primarily on management’s judgment because of the lack of readily determinable fair values, inherent illiquidity and the long-term nature of these assets. These investments are initially valued based upon the transaction price. The carrying amount is then adjusted based upon the estimated future cash flows associated with the investments. Inputs used in determining future cash flows include, but are not limited to, the cost of build-out, future selling prices, current market outlook and operating performance of the particular investment. Private equity and mezzanine investments are classified as Level 3.

Principal investments. Principal investments made by Key Principal Partners, LLC, an affiliate of Key, include direct investments (investments made in a particular company), as well as indirect investments (investments made through funds that include other investors). These investments include both equity securities and those made in privately held companies. When quoted prices are available in an active market, which is the case for most equity securities, they are used in the valuation process and the related investments are classified as Level 1 assets. However, in most cases, quoted market prices are not available, and management must rely upon other sources and inputs, such as statements from the investment manager, price/earnings ratios and multiples of earnings before interest, tax, depreciation and amortization, to perform the asset valuations. These investments are classified as Level 3 assets since management’s assumptions impact the overall determination of fair value.

Derivatives. Exchange-traded derivatives are valued using quoted prices and, therefore, are classified as Level 1. However, only a few types of derivatives are exchange-traded, so the majority of Key’s derivative positions are valued using internally-developed models based on market convention that uses observable market inputs, such as interest rate curves, yield curves, the LIBOR discount rates and curves, index pricing curves, foreign currency curves and volatility curves. These derivative contracts are classified as Level 2 and include interest rate swaps, options and credit default swaps. In addition, Key has a few

customized derivative instruments that are classified as Level 3. These derivative positions are valued using internally developed models. Inputs to the models consist of market available data such as bond spreads and property values, as well as management assumptions such as loss probabilities and proxy prices. Market convention implies a credit rating of “AA” equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. In order to reflect the actual exposure on Key’s derivative contracts related to both counterparty and Key’s own creditworthiness, management records a fair value adjustment in the form of a reserve. The credit component is valued on a counterparty-by-counterparty basis, and considers master netting agreements and collateral.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). The following table shows Key’s assets and liabilities measured at fair value on a recurring basis at June 30, 2009.


June 30, 2009							Netting
in millions	Level 1		Level 2		Level 3		Adjustments		^(a)	Total

ASSETS MEASURED ON A RECURRING BASIS
Short term investments		—	$	254		—		—		$	254
Trading account assets:
US Treasury, agencies and corporations	$	21		—		—		—			21
Other mortgage-backed securities		—		—	$	66		—			66
Other securities		37		594		24		—			655

Total trading account securities		58		594		90		—			742
Other trading account assets		—		—		29		—			29

Total trading account assets		58		594		119		—			771
Securities available for sale
US Treasury, agencies and corporations		—		1,710		—		—			1,710
States and political subdivisions		—		86		—		—			86
Collateralized mortgage obligations		—		8,523		—		—			8,523
Other mortgage-backed securities		—		1,599		—		—			1,599
Other securities		57		12		—		—			69

Total securities available for sale		57		11,930		—		—			11,987
Other investments		—		3		1,073		—			1,076
Derivative assets		—		3,051		91	$	(1,960	)		1,182
Accrued income and other assets		3		85		—		—			88

Total assets on a recurring basis at fair value	$	118	$	15,917	$	1,283	$	(1,960	)	$	15,358



LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements		—	$	361		—		—		$	361
Bank notes and other short-term borrowings	$	53		317		—		—			370
Derivative liabilities		164		2,532	$	21	$	(2,187	)		530

Total liabilities on a recurring basis at fair value	$	217	$	3,210	$	21	$	(2,187	)	$	1,261


(a)		Netting adjustments represent the amounts recorded to convert Key’s derivative assets and liabilities from a gross basis to a net basis in accordance with Key’s January 1, 2008, adoption of FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” and FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation 39.” The net basis takes into account the impact of master netting agreements that allow Key to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral.

Changes in Level 3 Fair Value Measurements

The following table shows the change in the fair values of Key’s Level 3 financial instruments for the six months ended June 30, 2009. An instrument is classified as Level 3 if unobservable inputs are significant relative to the overall fair value measurement of the instrument. In addition to unobservable inputs, Level 3 instruments also may have inputs that are observable within the market. Management mitigates the credit risk, interest rate risk and risk of loss related to many of these Level 3 instruments through the use of securities and derivative positions classified as Level 1 or Level 2. Level 1 or Level 2 instruments are not included in the following table. Therefore, the gains or losses shown do not include the impact of Key’s risk management activities.


	Trading Account Assets
	Other						Other
	Mortgage-						Trading
	Backed			Other			Account			Other			Derivative
in millions	Securities			Securities			Assets			Investments			Instruments		^(a)

Balance at December 31, 2008	$	67		$	758		$	31		$	1,134		$	15
(Losses) gains:
Included in earnings		(1)	^(b)		(1)	^(b)		—			(96	) ^(c)		(13	) ^(b)
Included in other comprehensive income (loss)		—			(733	)		—			—			—
Purchases, sales, issuances and settlements		—						(2	)		35			(1	)
Net transfers into Level 3		—			—			—			—			69

Balance at June 30, 2009	$	66		$	24		$	29		$	1,073		$	70


Unrealized losses included in earnings	$	(1	) ^(b)	$	(1	) ^(b)		—		$	(93	) ^(c)	$	(2	) ^(b)


(a)		Amount represents Level 3 derivative assets less Level 3 derivative liabilities.

(b)		Realized and unrealized gains and losses on trading account assets and derivative instruments are reported in “investment banking and capital markets income” on the income statement.

(c)		Other investments consist of principal investments, and private equity and mezzanine investments. Realized and unrealized gains and losses on principal investments are reported in “losses from principal investments” on the income statement. Realized and unrealized gains and losses on private equity and mezzanine investments are reported in “investment banking and capital markets income” on the income statement.

Assets Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of applying other accounting pronouncements that require assets or liabilities to be assessed for impairment, or recorded at the lower of cost or fair value. The following table presents Key’s assets measured at fair value on a nonrecurring basis at June 30, 2009.


June 30, 2009
in millions	Level 1		Level 2		Level 3		Total

ASSETS MEASURED ON A NONRECURRING BASIS
Securities available for sale — Retained interests in securitizations		—		—	$	19	$	19
Impaired loans		—	$	20		735		755
Loans held for sale		—		36		247		283
Goodwill and other intangible assets		—		—		—		—
Accrued income and other assets		—		9		63		72

Total assets on a nonrecurring basis at fair value		—	$	65	$	1,064	$	1,129

Management typically adjusts the carrying amount of Key’s impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows, the fair value of the underlying collateral or the loan’s observable market price. Cash flow analysis considers internally- developed inputs such as discount rates, default rates, costs of foreclosure and changes in real estate values. The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations and assessments provided by third party appraisers. Impaired loans with a specifically allocated allowance based on cash flow analysis or the underlying collateral are classified as Level 3, while those with a specifically allocated allowance based on an observable market price that reflects recent sale transactions for similar loans and collateral are classified as Level 2.

Through a quarterly analysis of Key’s commercial loan portfolios held for sale, management determined that certain adjustments were necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. After adjustments, these loans totaled $283 million at June 30, 2009. The valuations of commercial mortgage and construction loans are performed using internal models that rely on market data from sales or nonbinding bids of similar assets, including credit spreads, treasury rates, interest rate curves and risk profiles, as well as management’s own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, Key has classified these loans as Level 3. The inputs related to management’s assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates and discount rates. Key’s loans held for sale, which are measured at fair value on a nonrecurring basis, include the remaining $65 million of commercial

real estate loans transferred from the loan portfolio to held-for-sale status in June 2008. The fair value of these loans was measured using inputs such as letters of intent, where available, or third-party appraisals. The valuation of commercial leases is performed using an internal model that relies on market data, such as swap rates and bond ratings, as well as management’s own assumptions about the exit market for the leases and details about the individual leases in the portfolio. These leases have been classified as Level 3. The inputs related to management’s assumptions include changes in value of leased items and internal credit ratings. In addition, commercial leases may be valued using nonbinding bids when they are available and current. The leases valued under this methodology are classified as Level 2. Additionally, during the first half of 2009, Key transferred $86 million of commercial loans from held for sale to the loan portfolio at their current fair value.

During the first quarter of 2009, a review of impairment indicators prompted management to review and evaluate the carrying amount of the goodwill and other intangible assets assigned to Key’s Community Banking and National Banking reporting units. Fair value of Key’s reporting units is determined using both a discounted cash flow method (income approach) and a historical publicly traded company method (market approach), which are weighted equally. Inputs used include market-available data, such as industry, historical and expected growth rates and peer valuations, as well as internally-driven inputs, such as forecasted earnings and market participant insights. Since this valuation uses a significant number of unobservable inputs, Key has classified these assets as Level 3. The first quarter 2009 review indicated that the estimated fair value of the Community Banking unit was greater than its carrying amount, while the estimated fair value of the National Banking unit was less than its carrying amount, reflecting continued weakness in the financial markets and requiring additional impairment testing. Based on the results of additional impairment testing for the National Banking unit, Key recorded an after-tax noncash accounting charge of $187 million, or $.38 per common share, during the first quarter of 2009. Consequently, Key has now written off all of the goodwill that had been assigned to the National Banking unit.

During the second quarter of 2009, based on a review of impairment indicators, management determined that a further review of goodwill and other intangible assets for Key’s Community Banking unit was necessary. This further review indicated that the estimated fair value of the Community Banking unit was greater than its carrying amount at June 30, 2009; therefore, no further impairment testing was required. The goodwill assigned to the Community Banking unit is recorded at cost on Key’s balance sheet and, therefore, not included in the preceding table. A review of other intangible assets in the National Banking unit did not identify any impairment of these assets as of June 30, 2009.

Other real estate owned and other repossessed properties are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Therefore, Key has classified these assets as Level 3. Assets that are acquired through, or in lieu of, loan foreclosures are recorded as held for sale initially at the lower of the loan balance or fair value upon the date of foreclosure. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. These adjusted assets, which totaled $58 million at June 30, 2009, are considered to be nonrecurring items in the fair value hierarchy.

Education lending-related servicing rights and residual interests are valued using a discounted cash flow analysis with internally-developed inputs such as discount rates, prepayment rates and default rates. Therefore, Key has classified these assets as Level 3. Current market conditions, including lower prepayments, interest rates and expected recovery rates, have impacted Key’s modeling assumptions and consequently resulted in write-downs of these assets. Education lending-related servicing rights are included in “accrued income and other assets” and education lending-related residual interests are included in the “retained interests in securitizations” component of “securities available for sale” in the preceding table.

Fair Value Disclosures of Financial Instruments

Effective June 30, 2009, Key adopted Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This guidance amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosures about the fair value of financial instruments in interim financial statements of publicly traded companies. The carrying amount and fair value of Key’s financial instruments at June 30, 2009, and December 31, 2008, are shown in the following table.


	June 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
in millions	Amount		Value		Amount		Value

ASSETS
Cash and short-term investments ^(a)	$	4,210	$	4,210	$	6,478	$	6,478
Trading account assets ^(b)		771		771		1,280		1,280
Securities available for sale ^(b)		12,015		12,174		8,217		8,437
Held-to-maturity securities ^(c)		25		25		25		25
Other investments ^(d)		1,450		1,450		1,526		1,526
Loans, net of allowance ^(e)		68,304		59,672		74,701		65,860
Loans held for sale ^(e)		909		909		1,027		1,027
Servicing assets ^(f)		255		439		265		452
Derivative assets ^(g)		1,182		1,182		1,896		1,896

LIABILITIES
Deposits with no stated maturity ^(a)	$	38,711	$	38,711	$	37,388	$	37,388
Time deposits ^(f)		29,173		30,072		27,872		28,528
Short-term borrowings ^(a)		3,240		3,240		10,034		10,034
Long-term debt ^(f)		13,462		11,786		14,995		12,859
Derivative liabilities^(g)		530		530		1,038		1,038

Valuation Methods and Assumptions

(a)

Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles.

(b)

Fair values of trading securities and securities available for sale are determined based on quoted prices when available in an active market. If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities or discounted cash flows. Where there is limited activity in the market for a particular instrument, management must make assumptions to determine fair value.

(c)

Fair values of held-to-maturity securities are determined through the use of models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities and certain prepayment assumptions. The valuations derived from the models are reviewed by management for reasonableness to ensure they are consistent with the values placed on similar securities traded in the secondary markets.

(d)

Fair values of most instruments categorized as other investments are determined by considering the issuer’s recent financial performance and future potential, the values of companies in comparable businesses, the risks associated with the particular business or investment type, current market conditions, the nature and duration of resale restrictions, the issuer’s payment history, management’s knowledge of the industry and other relevant factors.

(e)

The fair value of the loans is based on the present value of the expected cash flows from the loans. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount was applied to certain loans using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value. In some cases, as with loans held for sale, fair values are determined based on nonbinding quotes, when available.

(f)

Fair values of servicing assets, time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.

(g)

Information pertaining to Key’s methodology for measuring the fair values of derivative assets and liabilities is included in Note 15 (“Derivatives and Hedging Activities”), which begins on page 37.

Residential real estate mortgage loans with carrying amounts of $1.8 billion at June 30, 2009, and $1.9 billion at December 31, 2008, are included in the amount shown for “Loans, net of allowance.”

For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values.

Management uses valuation methods based on exit market prices in accordance with SFAS No. 157. In certain instances, management determines fair value based on assumptions pertaining to the factors a market participant would consider in valuing the asset. If management were to use different assumptions, the fair values shown in the preceding table could change significantly. Also, because SFAS No. 107, as amended, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of Key as a whole.

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
KeyCorp

We have reviewed the condensed consolidated balance sheets of KeyCorp and subsidiaries (“Key”) as of June 30, 2009 and 2008, and the related condensed consolidated statements of income, changes in equity and cash flows for the three- and six-month periods ended June 30, 2009 and 2008. These financial statements are the responsibility of Key’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Key as of December 31, 2008, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended not presented herein, and in our report dated February 25, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Cleveland, Ohio
August 10, 2009

Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations

Introduction

This section generally reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year-to-date periods ended June 30, 2009 and 2008. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes that appear on pages 3 through 49. A description of Key’s business is included under the heading “Description of Business” on page 16 of Key’s 2008 Annual Report to Shareholders.

Terminology

This report contains some shortened names and industry-specific terms. We want to explain some of these terms at the outset so you can better understand the discussion that follows.

¨		*KeyCorp* refers solely to the parent holding company.

¨		*KeyBank* refers to KeyCorp’s subsidiary bank, KeyBank National Association.

¨		*Key* refers to the consolidated entity consisting of KeyCorp and its subsidiaries.

¨		In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a *discontinued operation. We use the phrase continuing operations* in this document to mean all of Key’s business other than Austin.

¨		Key engages in *capital markets activities* primarily through business conducted by the National Banking group. These activities encompass a variety of products and services. Among other things, Key trades securities as a dealer, enters into derivative contracts (both to accommodate clients’ financing needs and for proprietary trading purposes), and conducts transactions in foreign currencies (both to accommodate clients’ needs and to benefit from fluctuations in exchange rates).

¨		For regulatory purposes, capital is divided into two classes. Federal regulations prescribe that at least one-half of a bank or bank holding company’s *total risk-based capital* must qualify as *Tier 1. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. As a result of the Supervisory Capital Assessment Program (“SCAP”), the banking regulators began supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity*. While not codified, analysts and banking regulators have assessed Key’s capital adequacy using the Tier 1 common equity measure. You will find a more detailed explanation of total capital, Tier 1 capital and Tier 1 common equity and how they are calculated in the section entitled “Capital,” which begins on page 87.

Forward-looking statements

This report and other reports filed by Key under the Securities Exchange Act of 1934, as amended, or registration statements filed by Key under the Securities Act of 1933, as amended, contain statements that are considered “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about Key’s long-term goals, financial condition, results of operations, earnings, levels of net loan charge-offs and nonperforming assets, interest rate exposure and profitability. These statements usually can be identified by the use of forward-looking language such as “goal,” “ objective,” “plan,” “will likely result,” “expects,” “plans,” “anticipates,” “intends,” “projects,” “believes,” “estimates” or other similar words, expressions or conditional verbs such as “will,” “would,” “could” and “should.”

Forward-looking statements express management’s current expectations, forecasts of future events or long-term goals and, by their nature, are subject to assumptions, risks and uncertainties. Although management believes that the expectations, forecasts and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including the following factors:

¨		Although management believes Key has fulfilled the requirement to generate $1.8 billion of additional Tier 1 common equity pursuant to the United States government’s SCAP, a component of the United States Department of the Treasury’s (the “U.S. Treasury”) Capital Assistance Program (“CAP”), there can be no assurance that the regulators, including the U.S. Treasury and the Board of Governors of the Federal Reserve (“Federal Reserve”), will not require Key to generate additional capital, including Tier 1 common equity, in the future. Future capital raising and augmentation efforts may be dilutive to KeyCorp common shareholders and reduce the market price of KeyCorp’s common shares.

¨		The credit ratings of KeyCorp and KeyBank are essential to maintaining liquidity. Further downgrades from the major credit ratings agencies could mean that Key’s debt ratings fall below investment-grade, which, in turn, could have an adverse effect on access to liquidity sources, cost of funds, access to investors, and collateral or funding requirements.

¨		Unprecedented volatility in the stock markets, public debt markets and other capital markets, including continued disruption in the fixed income markets, has affected and could continue to affect Key’s ability to raise capital or other funding for liquidity and business purposes, as well as revenue from client-based underwriting, investment banking and other capital markets-driven businesses.

¨		Interest rates could change more quickly or more significantly than management expects, which may have an adverse effect on Key’s financial results.

¨		Trade, monetary and fiscal policies of various governmental bodies may affect the economic environment in which Key operates, as well as its financial condition and results of operations.

¨		Changes in foreign exchange rates, equity markets, and the financial soundness of bond insurers, sureties and even other unrelated financial companies have the potential to affect current market values of financial instruments which, in turn, could have a material adverse effect on Key.

¨		Asset price deterioration has had (and may continue to have) a negative effect on the valuation of many of the asset categories represented on Key’s balance sheet.

¨		The Emergency Economic Stabilization Act of 2008 (“EESA”), the American Recovery and Reinvestment Act of 2009, the Financial Stability Plan (“FSP”) announced on February 10, 2009, by the Secretary of the U.S. Treasury, in coordination with other financial institution regulators, and other initiatives undertaken by the U.S. government may not have the intended effect on the financial markets; the current extreme volatility and limited credit availability may persist. If these actions fail to help stabilize the financial markets and the current financial market and economic conditions continue or deteriorate further, Key’s business, financial condition, results of operations, access to credit and the market price of KeyCorp’s common shares could all suffer a material decline.

¨		The terms of the Capital Purchase Program (“CPP”), pursuant to which KeyCorp issued Fixed-Rate Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Stock”) and a warrant to purchase common shares of KeyCorp to the U.S. Treasury, may limit KeyCorp’s ability to return capital to shareholders and could be dilutive to KeyCorp common shares. If KeyCorp is unable to redeem such Series B Preferred Stock within five years, the dividend rate will increase substantially. In addition, redemption of the warrant could prove to be difficult or costly.

¨		Key’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.

¨		The problems in the housing markets, including issues related to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and related conditions in the financial markets, or other issues, such as the price volatility of oil or other commodities, could cause general economic conditions to deteriorate further. In addition, these problems may inflict further damage on the local economies or industries in which Key has significant operations or assets, and, among other things, may materially impact credit quality in existing portfolios and/or Key’s ability to generate loans in the future.

¨		Increases in interest rates or further weakening economic conditions could constrain borrowers’ ability to repay outstanding loans or diminish the value of the collateral securing those loans. Additionally, Key’s allowance for loan losses may be insufficient if the estimates and judgments management used to establish the allowance prove to be inaccurate.

¨		Key may face increased competitive pressure due to the recent consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies.

¨		Key may become subject to new or heightened legal standards and regulatory requirements, practices or expectations, which may impede its profitability or affect Key’s financial condition, including new regulations and programs imposed in connection with the Troubled Asset Relief Program (“TARP”) provisions of the EESA, such as the FSP and the CPP, being implemented and administered by the U.S. Treasury in coordination with other federal regulatory agencies, further laws enacted by the U.S. Congress in an effort to strengthen the fundamentals of the economy, or other regulations promulgated by federal regulators to mitigate the systemic risk presented by the current financial crisis, such as the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary Liquidity Guarantee Program (“TLGP”).

¨		It could take Key longer than anticipated to implement strategic initiatives, including those designed to grow revenue or manage expenses; Key may be unable to implement certain initiatives; or the initiatives Key employs may be unsuccessful.

¨		Increases in deposit insurance premiums imposed on KeyBank due to the FDIC’s restoration plan for the Deposit Insurance Fund established on October 7, 2008, and continued difficulties experienced by financial institutions may have an adverse effect on Key’s results of operations.

¨		Acquisitions and dispositions of assets, business units or affiliates could adversely affect Key in ways that management has not anticipated.

¨		Key is subject to voluminous and complex rules, regulations and guidelines imposed by a number of government authorities; regulatory requirements appear to be expanding in the current environment. Implementing and monitoring compliance with these requirements is a significant task, and failure to effectively do so may result in penalties or related costs that could have an adverse effect on Key’s results of operations.

¨		Key may have difficulty attracting and/or retaining key executives and/or relationship managers at compensation levels necessary to maintain a competitive market position.

¨		Key may experience operational or risk management failures due to technological or other factors.

¨		Changes in accounting principles or in tax laws, rules and regulations could have an adverse effect on Key’s financial results or capital.

¨		Key may become subject to new legal obligations or liabilities, or the unfavorable resolution of pending litigation may have an adverse effect on Key’s financial results or capital.

¨		Terrorist activities or military actions could disrupt the economy and the general business climate, which may have an adverse effect on Key’s financial results or condition and that of its borrowers.

¨		Key has leasing offices and clients throughout the world. Economic and political uncertainties resulting from terrorist attacks, military actions or other events that affect countries in which Key operates may have an adverse effect on those leasing clients and their ability to make timely payments.

Forward-looking statements are not historical facts but instead represent only management’s current expectations and forecasts regarding future events, many of which, by their nature, are inherently uncertain and outside of Key’s control. The factors discussed above are not intended to be a complete summary of all risks and uncertainties that may affect Key’s business, the financial services industry and financial markets. Though management strives to monitor and mitigate risk, management cannot anticipate all potential economic, operational and financial developments that may have an adverse impact on Key’s operations and financial results. Forward-looking statements speak only as of the date they are made, and Key does not undertake any obligation to revise any forward-looking statement to reflect subsequent events.

Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in Key’s Securities and Exchange Commission (“SEC”) filings, including this and Key’s other reports on Forms 8-K, 10-K and 10-Q and Key’s registration statements under the Securities Act of 1933, as amended, all of which are accessible on the SEC’s website at www.sec.gov.

Long-term goals

Key’s long-term financial goal is to achieve a return on average common equity at or above the respective median of its peer group. The strategy for achieving this goal is described under the heading “Corporate strategy” on page 18 of Key’s 2008 Annual Report to Shareholders.

Economic overview

During the second quarter of 2009, the United States economy showed signs of moderate improvement after experiencing the worst two consecutive quarters of contraction in more than 50 years. Consumers were constrained by further job losses in the second quarter, although the pace of job losses slowed as the quarter progressed. During the current quarter, 1.3 million Americans lost their jobs compared to 2.1 million in the first quarter of 2009. The unemployment rate reached 9.5%, its highest level in 26 years. The average unemployment rate rose to 9.3%, substantially higher than the average rate of 8.1% for the first quarter of 2009 and the average rate of 5.8% for all of 2008. Since the recession began in December 2007, 6.4 million jobs have been lost.

Even in the face of continued job losses, consumers began to show more confidence as spending continued to show modest improvement. Spending rose at an average monthly rate of .1% for the quarter, compared to an average monthly increase of .4% in the first quarter of 2009 and an average monthly decline of .1% for all of 2008. The continuation of price discounts offered by retailers fueled the demand for products and services. Consumer prices in June 2009 fell 1.4% from June 2008, compared to an annual increase of 5% in June 2008 compared to June 2007. While businesses continued to reduce headcount and fixed investment, they were also successful in reducing inventory levels to better align with sales, thereby creating the potential for future increases in orders.

Housing continued to drag on consumer wealth, confidence and spending levels; however, real estate prices began to show some signs of stabilization during the second quarter. Historically low mortgage rates, the slowed pace of foreclosures and perceived values by home buyers spurred activity in the housing market. Foreclosures increased by 33% in June 2009 from one year ago, which compares favorably to the 46% annual increase reported in March 2009. Existing homes sales rose by 7% and new home sales rose by 16% over the second quarter of 2008. While median prices in June 2009 for new and existing homes continued to decline year-over-year, prices rose on a linked-quarter basis. The median price of existing and new homes rose by 7% and 1%, respectively, from March 2009. Home building activity in June 2009 declined by 46% from the same month in 2008, but improved modestly from the first quarter, rising more than 12%.

The Federal Reserve held the federal funds target rate near zero during the second quarter of 2009 as the downside risks to the economy remained elevated. In general, other market interest rates increased for much of the quarter before declining slightly off their highs during the final days of the quarter. Much of the rise in interest rates was due to increased near-term economic optimism and heightened fears of future inflation, both sentiments that gradually faded by quarter-end. The benchmark two-year Treasury yield began the quarter at .80% and increased to 1.40% before settling at 1.11% on June 30, 2009. The ten-year Treasury yield, which began the quarter at 2.67%, reached 3.95% before closing the quarter at 3.54%. As credit concerns continued to ease, short-term interbank lending rates decreased by 60 basis points, and credit spreads for banks and financial firms narrowed dramatically during the quarter.

Supervisory Capital Assessment Program

During the second quarter of 2009, the major U.S. banking organizations, including Key, were able to generate a substantial amount of additional capital. A significant portion of such capital was generated to strengthen the capitalization of the major U.S. banking organizations and to satisfy any applicable capital buffer requirements of the SCAP, implemented as a component of the CAP, which is part of the U.S. government’s FSP announced in February 2009.

To implement the CAP, the Federal Reserve, the Federal Reserve Banks, the FDIC and the Office of the Comptroller of the Currency commenced a review, referred to as SCAP, of the capital of the nineteen largest U.S. banking institutions. As announced on May 7, 2009, the regulators determined that ten of these institutions needed to generate an additional capital buffer of approximately $75 billion, in the aggregate, within six months. Through the first half of July, these ten financial institutions have generated, in the aggregate, in excess of $75 billion of Tier 1 common equity towards fulfillment of the SCAP requirements. Approximately $57 billion of such capital was generated through equity offerings and exchange offers. Additionally, during this same period, the other nine SCAP participants, which were not required to raise any additional capital buffer, raised approximately $21 billion of capital from equity offerings.

Further information regarding the capital generated by KeyCorp is included in the “Capital” section under the heading “Financial Stability Plan” on page 93.

Demographics

The extent to which Key’s business has been affected by continued volatility and weakness in the housing market is directly related to the state of the economy in the regions in which its two major business groups, Community Banking and National Banking, operate.

Key’s Community Banking group serves consumers and small to mid-sized businesses by offering a variety of deposit, investment, lending and wealth management products and services. These products and services are provided through a 14-state branch network organized into three geographic regions defined by management: Rocky Mountains and Northwest, Great Lakes, and Northeast. Key’s National Banking group includes those corporate and consumer business units that operate nationally, within and beyond our 14-state branch network, as well as internationally. The specific products and services offered by the Community and National Banking groups are described in Note 4 (“Line of Business Results”), which begins on page 13.

Figure 1 shows the geographic diversity of the Community Banking group’s average core deposits, commercial loans and home equity loans.

Figure 1. Community Banking Geographic Diversity


	Geographic Region
	Rocky
Three months ended June 30, 2009	Mountains and
dollars in millions	Northwest			Great Lakes			Northeast			Nonregion		^(a)	Total

Average core deposits	$	13,726		$	14,454		$	13,380		$	1,607		$	43,167
Percent of total		31.8	%		33.5	%		31.0	%		3.7	%		100.0	%

Average commercial loans	$	6,392		$	4,203		$	3,249		$	1,300		$	15,144
Percent of total		42.2	%		27.8	%		21.4	%		8.6	%		100.0	%

Average home equity loans	$	4,539		$	2,937		$	2,666		$	145		$	10,287
Percent of total		44.1	%		28.6	%		25.9	%		1.4	%		100.0	%


(a)		Represents core deposit, commercial loan and home equity loan products centrally managed outside of the three Community Banking regions.

Figure 18 on page 79 shows the diversity of Key’s commercial real estate lending business based on industry type and location. The homebuilder loan portfolio within the National Banking group has been adversely affected by the downturn in the U.S. housing market. The deteriorating market conditions in the residential properties segment of Key’s commercial real estate construction portfolio, principally in Florida and southern California, have caused Key to experience a significant increase in the levels of nonperforming loans and net charge-offs since mid-2007. Management has taken aggressive steps to reduce Key’s exposure in this segment of the loan portfolio. As previously reported, during the fourth quarter of 2007, Key announced its decision to cease conducting business with nonrelationship homebuilders outside of its 14-state Community Banking footprint. During the second quarter of 2008, Key initiated a process to further reduce exposure through the sale of certain loans. As a result of these actions, Key has reduced the outstanding balances in the residential properties segment of the commercial real estate loan portfolio by $1.8 billion, or 51%, since December 31, 2007. Additional information about the loan sales is included in the “Credit risk management” section, which begins on page 102.

Results for the National Banking group have also been affected adversely by increasing credit costs and volatility in the capital markets, leading to declines in the market values of assets under management and the market values at which Key records certain assets (primarily commercial real estate loans and securities held for sale or trading).

Additionally, during the first quarter of 2009 management determined that the estimated fair value of the National Banking reporting unit was less than the carrying amount, reflecting the impact of continued weakness in the financial markets. As a result, Key recorded an after-tax noncash accounting charge of $187 million, of which $23 million relates to the discontinued operations of Austin Capital Management, Ltd. As a result of this charge and a similar after-tax charge of $420 million recorded during the fourth quarter of 2008, Key has now written off all of the goodwill that had been assigned to its National Banking reporting unit.

Critical accounting policies and estimates

Key’s business is dynamic and complex. Consequently, management must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical; not only are they necessary to comply with U.S. generally accepted accounting principles (“GAAP”), they also reflect management’s view of the appropriate way to record and report Key’s overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Significant Accounting Policies”), which begins on page 77 of Key’s 2008 Annual Report to Shareholders, should be reviewed for a greater understanding of how Key’s financial performance is recorded and reported.

In management’s opinion, some accounting policies are more likely than others to have a significant effect on Key’s financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance, or require management to exercise judgment and to make assumptions and estimates that affect amounts reported in the financial statements. Because these assumptions and estimates are based on current circumstances, they may change over time or prove to be inaccurate.

Management relies heavily on the use of judgment, assumptions and estimates to make a number of core decisions, including accounting for the allowance for loan losses; contingent liabilities, guarantees and income taxes; derivatives and related hedging activities; and assets and liabilities that involve valuation methodologies. A brief discussion of each of these areas appears on pages 20 through 23 of Key’s 2008 Annual Report to Shareholders. Information about Key’s review of goodwill and other intangible assets for impairment as of March 31 and June 30, 2009, is included in Note 1 (“Basis of Presentation”) under the heading “Goodwill and Other Intangible Assets” on page 8.

Effective January 1, 2008, Key adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In the absence of quoted market prices, management determines the fair value of Key’s assets and liabilities using internally developed models, which are based on management’s judgment, assumptions and estimates regarding credit quality, liquidity, interest rates and other relevant inputs. Key’s adoption of this accounting guidance and the process used to determine fair values are more fully described in Note 1 under the heading “Fair Value Measurements” on page 82 of Key’s 2008 Annual Report to Shareholders and in Note 20 (“Fair Value Measurements”), which begins on page 118 of that report.

At June 30, 2009, $15.4 billion, or 16%, of Key’s total assets were measured at fair value on a recurring basis. Approximately 93% of these assets were classified as Level 1 or Level 2 within the fair value hierarchy. At June 30, 2009, $1.3 billion, or 1%, of Key’s total liabilities were measured at fair value on a recurring basis. Substantially all of these liabilities were classified as Level 1 or Level 2.

At June 30, 2009, $1.1 billion, or 1%, of Key’s total assets were measured at fair value on a nonrecurring basis. Approximately 6% of these assets were classified as Level 1 or Level 2. At June 30, 2009, there were no liabilities measured at fair value on a nonrecurring basis.

During the first six months of 2009, management did not significantly alter the manner in which it applied Key’s critical accounting policies or developed related assumptions and estimates.

Highlights of Key’s Performance

Financial performance

For the second quarter of 2009, the net loss from continuing operations attributable to Key was $236 million, or $.69 per common share. Per share results for the current quarter are after preferred stock dividends of $164 million, or $.28 per common share. These dividends include a noncash deemed dividend of $114 million related to the exchange of Key common shares for Key’s Noncumulative Perpetual Convertible Preferred Stock, Series A (“Series A Preferred Stock”) as part of the company’s efforts to raise an additional $1.8 billion of Tier 1 common equity, and a cash dividend payment of $31 million made to the U.S. Treasury under the CPP. Results for the current quarter compare to a net loss from continuing operations of $1.128 billion, or $2.71 per common share, for the second quarter of 2008.

The loss for the current quarter is largely the result of an increase in the provision for loan losses. During the second quarter of 2009, Key continued to build its loan loss reserves by taking an $850 million provision for loan losses, which exceeded net charge-offs by $311 million. As of the end of the quarter, Key’s allowance for loan losses was $2.5 billion, or 3.53% of total loans, up from $1.4 billion, or 1.87% one year ago. The loss for the year-ago quarter was largely attributable to a $1.011 billion after-tax charge recorded as a result of an adverse federal tax court ruling that impacted Key’s accounting for certain lease financing transactions.

For the first six months of 2009, the net loss from continuing operations attributable to Key was $702 million, or $1.71 per common share, compared to a net loss from continuing operations of $911 million, or $2.23 per common share, for the same period last year. Per share results for the first half of 2009 are after preferred stock dividends of $212 million, or $.40 per common share.

Key’s results continue to reflect the weak economic environment and the aggressive steps the company has taken to address credit quality, strengthen its capital position and control costs as Key manages through this difficult credit cycle.

During the second quarter of 2009, Key successfully raised more than $1.8 billion in new Tier 1 common equity as required by the SCAP. The additional capital will serve as a “buffer” in the event the U.S. economy worsens considerably through 2010. Throughout the current financial crisis, Key’s capital ratios have remained in excess of the “well-capitalized” levels established by the federal regulators. At June 30, 2009, Key had a Tier 1 risk-based capital ratio of 12.57% and a Tier 1 common equity ratio of 7.36%. In July 2009, KeyCorp commenced an additional offer to exchange common shares for retail capital securities that expired on August 4, 2009. In connection with the retail capital securities exchange offer, KeyCorp accepted the maximum of $500 million aggregate liquidation preference of retail capital securities and issued 81,278,214 common shares. Further information regarding the actions taken by Key to generate additional capital is included in the “Capital” section under the heading “Financial Stability Plan” on page 93.

Key’s fortified capital position will also enable Key to support its clients’ borrowing needs while carefully managing the associated risk, and to benefit from other business opportunities when the economy recovers. During the first six months of 2009, Key originated approximately $16 billion in new or renewed loans and commitments to consumers and businesses.

In conjunction with Key’s efforts to improve its competitive position, late last year management initiated a process known as “Keyvolution,” a corporate-wide initiative designed to build a consistently superior experience for clients, simplify processes, improve speed to market and enhance Key’s ability to seize growth and profit opportunities. Through this initiative, Key expects to achieve annualized cost savings of $300 million to $375 million by 2012. Over the past fifteen months, Key has been addressing certain noncore businesses, such as retail marine and private student lending activities. Management has also deployed new teller platform technology throughout the company. These and other efforts have resulted in a reduction in Key’s employee workforce of approximately 8%, or 1,500 positions, over the fifteen month period. Compared to the year-ago quarter, personnel costs are down 6%.

Additionally, Key has continued to build upon its relationship-based, client-focused business model. Key’s Community Banking business continues to benefit from these efforts as evidenced by a $2.7 billion, or 5%, increase in deposits compared to the second quarter of 2008. In addition, Key is continuing to work down the loan portfolios that have been identified for exit to improve its risk-adjusted returns, although progress has been slower than anticipated due to general weakness in the economy and restricted liquidity. Additional information pertaining to Key’s exit loan portfolio and the progress made in reducing total residential property exposure in commercial real estate is presented in the section entitled “Credit risk management,” which begins on page 102.

Figure 2 shows Key’s continuing and discontinued operating results for comparative quarters and for the six-month periods ended June 30, 2009 and 2008.

Figure 2. Results of Operations


	Three months ended									Six months ended
in millions, except per share amounts	6-30-09			3-31-09			6-30-08			6-30-09			6-30-08

SUMMARY OF OPERATIONS
Loss from continuing operations attributable to Key	$	(236	)	$	(466	)	$	(1,128	)	$	(702	)	$	(911	)
Income (loss) from discontinued operations, net of taxes ^(a)		10			(22	)		2			(12	)		3

Net loss attributable to Key	$	(226	)	$	(488	)	$	(1,126	)	$	(714	)	$	(908	)


Loss from continuing operations attributable to Key	$	(236	)	$	(466	)	$	(1,128	)	$	(702	)	$	(911	)
Less: Dividends on Series A Preferred Stock		15			12			—			27			—
Noncash deemed dividend — common shares exchanged for Series A Preferred Stock		114			—			—			114			—
Cash dividends on Series B Preferred Stock		31			32			—			63			—
Amortization of discount on Series B Preferred Stock		4			4			—			8			—

Loss from continuing operations attributable to Key common shareholders		(400	)		(514	)		(1,128	)		(914	)		(911	)
Income (loss) from discontinued operations, net of taxes ^(a)		10			(22	)		2			(12	)		3

Net loss attributable to Key common shareholders	$	(390	)	$	(536	)	$	(1,126	)	$	(926	)	$	(908	)


PER COMMON SHARE — ASSUMING DILUTION
Loss from continuing operations attributable to Key common shareholders	$	(.69	)	$	(1.04	)	$	(2.71	)	$	(1.71	)	$	(2.23	)
Income (loss) from discontinued operations, net of taxes ^(a)		.02			(.04	)		—			(.02	)		.01

Net loss attributable to Key common shareholders	$	(.68	) ^(b)	$	(1.09	) ^(b)	$	(2.70	) ^(b)	$	(1.73	)	$	(2.23	) ^(b)


(a)		In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a discontinued operation. The loss from discontinued operations for the first quarter of 2009 was attributable to a $23 million after tax, or $.05 per common share, charge for intangible assets impairment.

(b)		Earning per share may not foot due to rounding.

Shown in Figure 3 below are significant items that affect the comparability of Key’s financial performance for the quarterly and year-to-date periods ended June 30, 2009 and 2008. Events leading to the recognition of these items, as well as other factors that contributed to the changes in Key’s revenue and expense components, are reviewed in detail throughout the remainder of the Management’s Discussion & Analysis section.

Figure 3. Significant Items Affecting the Comparability of Earnings


	Three months ended									Three months ended									Six months ended											Six months ended
	June 30, 2009									June 30, 2008									June 30, 2009											June 30, 2008
	Pre-tax			After-tax			Impact			Pre-tax			After-tax			Impact			Pre-tax				After-tax				Impact			Pre-tax			After-tax			Impact
in millions, except per share amounts	Amount			Amount			on EPS			Amount			Amount			on EPS			Amount				Amount				on EPS			Amount			Amount			on EPS

Provision for loan losses in excess of net charge-offs	$	(311	)	$	(195	)	$	(.34	)	$	(123	)	$	(77	)	$	(.18	)	$	(694	)		$	(434	)		$	(.81	)	$	(189	)	$	(119	)	$	(.29	)
Noncash deemed dividend — common shares exchanged for Series A Preferred Stock		—			—			(.20	) ^(a)		—			—			—			—				—				(.21	) ^(a)		—			—			—
FDIC special assessment		(44	)		(27	)		(.05	)		—			—			—			(44	)			(27	)			(.05	)		—			—			—
Realized and unrealized (losses) gains on loan and securities portfolios held for sale or trading		(20	)		(13	)		(.02	)		62			39			.09			(18	)			(12	)			(.02	)		(66	)		(41	)		(.10	)
Severance and other exit costs		(14	)		(9	)		(.02	)		(8	)		(5	)		(.01	)		(22	)			(14	)			(.03	)		(14	)		(9	)		(.02	)
Net losses from principal investing		(6	)		(4	)		(.01	)		(14	)		(8	)		(.02	)		(78	)			(49	)			(.09	)		(3	)		(1	)		—
Net gains from repositioning of securities portfolio		125			78			.13			—			—			—			125				78				.15			—			—			—
Gain related to exchange of common shares for capital securities		95			59			.10			—			—			—			95				59				.11			—			—			—
Gain from sale of Key’s claim associated with the Lehman Brothers’ bankruptcy		32			20			.03			—			—			—			32				20				.04			—			—			—
Noncash charge for intangible assets impairment		—			—			—			—			—			—			(196	) ^(b	⁾		(164	) ^(b	⁾		(.31	)		—			—			—
Gain from sale/redemption of Visa Inc. shares		—			—			—			—			—			—			105				65				.12			165			103			.25
Charges related to leveraged lease tax litigation		—			—			—			(359	)		(1,011	)		(2.43	)		—				—				—			(362	)		(1,049	)		(2.57	)


(a)		The deemed dividend related to the exchange of Key common shares for Series A Preferred Stock is subtracted from earnings to derive the numerator used in the calculation of per share results; it is not recorded as a reduction to equity.

(b)		Excludes a $27 million ($23 million after tax, or $.05 per common share) charge for intangible assets impairment related to the discontinued operations of Austin Capital Management, Ltd.

EPS = Earnings per common share

Key’s financial performance for each of the past five quarters and for the six-month periods ended June 30, 2009 and 2008, is summarized in Figure 4.

Figure 4. Selected Financial Data


	2009						2008									Six months ended June 30,
dollars in millions, except per share amounts	Second			First			Fourth			Third			Second			2009			2008

FOR THE PERIOD
Interest income	$	994		$	1,032		$	1,163		$	1,232		$	880		$	2,026		$	2,234
Interest expense		402			418			524			533			522			820			1,163
Net interest income		592			614			639			699			358	^(a)		1,206			1,071	^(a)
Provision for loan losses		850			875			594			407			647			1,725			834
Noninterest income		715			485			388			390			547			1,200			1,071
Noninterest expense		870			942			1,297			756			777			1,812			1,506
Loss from continuing operations before income taxes		(413	)		(718	)		(864	)		(74	)		(519	)		(1,131	)		(198	)
Loss from continuing operations attributable to Key		(236	)		(466	)		(525	)		(38	)		(1,128	)		(702	)		(911	)
Income (loss) from discontinued operations, net of taxes ^(b)		10			(22	)		1			2			2			(12	)		3
Net loss attributable to Key		(226	)		(488	) ^(a)		(524	)		(36	)		(1,126	) ^(a)		(714	) ^(a)		(908	) ^(a)

Loss from continuing operations attributable to Key common shareholders		(400	)		(514	)		(555	)		(50	)		(1,128	)		(914	)		(911	)
Income (loss) from discontinued operations, net of taxes ^(b)		10			(22	)		1			2			2			(12	)		3
Net loss attributable to Key common shareholders		(390	)		(536)	^(a)		(554	)		(48	)		(1,126	) ^(a)		(926	) ^(a)		(908	) ^(a)

PER COMMON SHARE
Loss from continuing operations attributable to Key common shareholders	$	(.69	)	$	(1.04	)	$	(1.13	)	$	(.10	)	$	(2.71	)	$	(1.71	)	$	(2.23	)
Income (loss) from discontinued operations, net of taxes ^(b)		.02			(.04	)		—			—			—			(.02	)		.01
Net loss attributable to Key common shareholders		(.68	)		(1.09	)		(1.13	)		(.10	)		(2.70	)		(1.73	)		(2.23	)

Loss from continuing operations attributable to Key common shareholders — assuming dilution		(.69	)		(1.04	)		(1.13	)		(.10	)		(2.71	)		(1.71	)		(2.23	)
Income (loss) from discontinued operations, net of taxes — assuming dilution^(b)		.02			(.04	)		—			—			—			(.02	)		.01
Net loss attributable to Key common shareholders — assuming dilution		(.68	)		(1.09	) ^(a)		(1.13	)		(.10	)		(2.70	) ^(a)		(1.73)	^(a)		(2.23	) ^(a)

Cash dividends paid		.01			.0625			.0625			.1875			.375			.0725			.75
Book value at period end		10.21			13.82			14.97			16.16			16.59			10.21			16.59
Tangible book value at period end		8.92			11.76			12.41			12.66			13.00			8.92			13.00
Market price:
High		9.82			9.35			15.20			15.25			26.12			9.82			27.23
Low		4.40			4.83			4.99			7.93			10.00			4.40			10.00
Close		5.24			7.87			8.52			11.94			10.98			5.24			10.98
Weighted-average common shares outstanding (000)		576,883			492,813			492,311			491,179			416,629			535,080			407,875
Weighted-average common shares and potential common shares outstanding (000)		576,883			492,813			492,311			491,179			416,629			535,080			407,875

AT PERIOD END
Loans	$	70,803		$	73,703		$	76,504		$	76,705		$	75,855		$	70,803		$	75,855
Earning assets		89,619			89,042			94,020			90,257			89,893			89,619			89,893
Total assets		97,792			97,834			104,531			101,290			101,544			97,792			101,544
Deposits		67,884			65,996			65,260			64,678			64,396			67,884			64,396
Long-term debt		13,462			14,978			14,995			15,597			15,106			13,462			15,106
Key common shareholders’ equity		8,138			6,892			7,408			7,993			8,056			8,138			8,056
Key shareholders’ equity		10,851			9,968			10,480			8,651			8,706			10,851			8,706

PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets		(.94	)%		(1.82	)%		(1.94	)%		(.15	)%		(4.39	)%		(1.38	)%		(1.77	)%
Return on average common equity		(15.87	)		(28.65	)		(27.70	)		(2.46	)		(53.44	)		(22.25	)		(21.64	)
Net interest margin (taxable equivalent)		2.67			2.77			2.76			3.13			(.44	)		2.72			1.35

PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets		(.90	)%		(1.91	)% ^(a)		(1.93	)%		(.14	)%		(4.38	)% ^(a)		(1.41	)% ^(a)		(1.77	)% ^(a)
Return on average common equity		(15.32	)		(29.87	) ^(a)		(27.65	)		(2.36	)		(53.35	) ^(a)		(22.58	) ^(a)		(21.57	) ^(a)
Net interest margin (taxable equivalent)		2.67			2.77			2.76			3.13			(.44	) ^(a)		2.72	^(a)		1.35	^(a)

CAPITAL RATIOS AT PERIOD END
Key shareholders’ equity to assets		11.10	%		10.19	%		10.03	%		8.54	%		8.57	%		11.10	%		8.57	%
Tangible Key shareholders’ equity to tangible assets		10.16			9.23			8.92			6.95			6.98			10.16			6.98
Tangible common equity to tangible assets		7.35			6.06			5.95			6.29			6.32			7.35			6.32
Tier 1 common equity		7.36			5.62			5.62			5.58			5.60			7.36			5.60
Tier 1 risk-based capital		12.57			11.22			10.92			8.55			8.53			12.57			8.53
Total risk-based capital		16.67			15.18			14.82			12.40			12.41			16.67			12.41
Leverage		12.26			11.19			11.05			9.28			9.34			12.26			9.34

TRUST AND BROKERAGE ASSETS
Assets under management	$	63,382		$	60,164		$	64,717		$	76,676		$	80,998		$	63,382		$	80,998
Nonmanaged and brokerage assets		23,261			21,786			22,728			27,187			29,905			23,261			29,905

OTHER DATA
Average full-time-equivalent employees		16,937			17,468			17,697			18,098			18,164			17,201			18,295
Branches		993			989			986			986			985			993			985


(a)		See Figure 5 on pages 62 and 63, which presents certain earnings data and performance ratios, excluding charges related to goodwill and other intangible assets impairment, and the tax treatment of certain leveraged lease financing transactions disallowed by the IRS. Figure 5 reconciles certain GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

(b)		In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a discontinued operation.

Figure 5 presents certain earnings data and performance ratios, excluding charges related to intangible assets impairment and the tax treatment of certain leveraged lease financing transactions disallowed by the Internal Revenue Service (“IRS”). Management believes that eliminating the effects of significant items that are generally nonrecurring facilitates the analysis of results by presenting them on a more comparable basis.

As shown in Figure 5, during the first quarter of 2009, Key recorded an after-tax charge of $164 million, or $.33 per common share, for the impairment of goodwill and other intangible assets related to the National Banking reporting unit. Key has now written off all of the goodwill that had been assigned to its National Banking reporting unit. During the second quarter of 2008, Key recorded an after-tax charge of $1.011 billion, or $2.43 per common share, as a result of an adverse federal court decision regarding Key’s tax treatment of a leveraged sale-leaseback transaction. In the first quarter of 2008, Key increased its tax reserves for certain lease in, lease out transactions and recalculated its lease income in accordance with prescribed accounting standards, resulting in after-tax charges of $38 million, or $.10 per diluted common share.

The figure also shows the computations of certain financial measures related to “tangible common equity” and “Tier 1 common equity.” The tangible common equity ratio has become a focus of some investors and management believes that this ratio may assist investors in analyzing Key’s capital position absent the effects of intangible assets and preferred stock. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and composition of capital, the calculation of which is prescribed in federal banking regulations. As a result of the SCAP, the Federal Reserve has focused its assessment of capital adequacy on a component of Tier 1 capital, known as Tier 1 common equity. Because the Federal Reserve has long indicated that voting common shareholders’ equity (essentially Tier 1 capital less preferred stock, qualifying capital securities and minority interests in subsidiaries) generally should be the dominant element in Tier 1 capital, such a focus is consistent with existing capital adequacy guidelines and does not imply a new or ongoing capital standard. Because Tier 1 common equity is neither formally defined by GAAP nor prescribed in amount by federal banking regulations, this measure is considered to be a non-GAAP financial measure. Since analysts and banking regulators may assess Key’s capital adequacy using tangible common equity and Tier 1 common equity, management believes it is useful to provide investors the ability to assess Key’s capital adequacy on these same bases. The figure also reconciles the GAAP performance measures to the corresponding non-GAAP measures. Additional detail regarding Key’s regulatory capital position at June 30, 2009, December 31, 2008, and June 30, 2008, is presented in Figure 26 on page 91.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, Key has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components and to ensure that Key’s performance is properly reflected to facilitate period-to-period comparisons. Although these non-GAAP financial measures are frequently used by investors in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

Figure 5. GAAP to Non-GAAP Reconciliations


	Three months ended									Six months ended
dollars in millions, except per share amounts	6-30-09			3-31-09			6-30-08			6-30-09			6-30-08

NET (LOSS) INCOME
Net loss attributable to Key (GAAP)	$	(226	)	$	(488	)	$	(1,126	)	$	(714	)	$	(908	)
Charges related to intangible assets impairment, after tax		—			164			—			164			—
Charges related to leveraged lease tax litigation, after tax		—			—			1,011			—			1,049

Net (loss) income attributable to Key, excluding charges related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)	$	(226	)	$	(324	)	$	(115	)	$	(550	)	$	141


Noncash deemed dividend — common shares exchanged for Series A Preferred Stock	$	114			—			—		$	114			—
Other preferred dividends and amortization of discount on preferred stock		50		$	48			—			98			—

Net loss attributable to Key common shareholders (GAAP)	$	(390	)	$	(536	)	$	(1,126	)	$	(926	)	$	(908	)
Net (loss) income attributable to Key common shareholders, excluding charges related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)		(390	)		(372	)		(115	)		(762	)		141

PER COMMON SHARE
Net loss attributable to Key common shareholders — assuming dilution (GAAP)	$	(.68	)	$	(1.09	)	$	(2.70	)	$	(1.73	)	$	(2.23	)
Net (loss) income attributable to Key common shareholders, excluding charges related to intangible assets impairment and leveraged lease tax litigation — assuming dilution (non-GAAP)		(.68	)		(.76	)		(.28	)		(1.42	)		.34

PERFORMANCE RATIOS FROM CONSOLIDATED OPERATIONS
Return on average total assets:^(a)
Average total assets	$	100,858		$	103,815		$	103,290		$	102,328		$	103,323
Return on average total assets (GAAP)		(.90	)%		(1.91	)%		(4.38	)%		(1.41	)%		(1.77	)%
Return on average total assets, excluding charges related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)		(.90	)		(1.27	)		(.45	)		(1.08	)		.27

Return on average common equity:^(a)
Average common equity	$	7,227		$	7,277		$	8,489		$	7,252		$	8,467
Return on average common equity (GAAP)		(15.32	)%		(29.87	)%		(53.35	)%		(22.58	)%		(21.57	)%
Return on average common equity, excluding charges related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)		(15.32	)		(20.73	)		(5.45	)		(18.02	)		3.35

NET INTEREST INCOME AND MARGIN
Net interest income:
Net interest income (GAAP)	$	592		$	614		$	358		$	1,206		$	1,071
Charges related to leveraged lease tax litigation, pre-tax		—			—			359			—			362

Net interest income, excluding charges related to leveraged lease tax litigation (non-GAAP)	$	592		$	614		$	717		$	1,206		$	1,433


Net interest income/margin (TE):
Net interest income (expense) (TE) (as reported)	$	598		$	620		$	(100	)	$	1,218		$	604
Charges related to leveraged lease tax litigation, pre-tax (TE)		—			—			838			—			872

Net interest income, excluding charges related to leveraged lease tax litigation (TE) (adjusted basis)	$	598		$	620		$	738		$	1,218		$	1,476


Net interest margin (TE) (as reported) ^(a)		2.67	%		2.77	%		(.44	)%		2.72	%		1.35	%
Impact of charges related to leveraged lease tax litigation, pre-tax (TE) ^(a)		—			—			3.76			—			1.95

Net interest margin, excluding charges related to leveraged lease tax litigation (TE) (adjusted basis) ^(a)		2.67	%		2.77	%		3.32	%		2.72	%		3.30	%

Figure 5. GAAP to Non-GAAP Reconciliations (Continued)


	Three months ended
dollars in millions, except per share amounts	6-30-09			3-31-09			6-30-08

TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS AT PERIOD END
Key shareholders’ equity (GAAP)	$	10,851		$	9,968		$	8,706
Less: Intangible assets		1,023			1,029			1,744
Preferred Stock, Series B		2,422			2,418			—
Preferred Stock, Series A		291			658			650

Tangible common equity (non-GAAP)	$	7,115		$	5,863		$	6,312



Total assets (GAAP)	$	97,792		$	97,834		$	101,544
Less: Intangible assets		1,023			1,029			1,744

Tangible assets (non-GAAP)	$	96,769		$	96,805		$	99,800



Tangible common equity to tangible assets ratio (non-GAAP)		7.35	%		6.06	%		6.32	%


TIER 1 COMMON EQUITY AT PERIOD END
Key shareholders’ equity (GAAP)	$	10,851		$	9,968		$	8,706
Qualifying capital securities		2,290			2,582			2,582
Less: Goodwill		917			917			1,598
Accumulated other comprehensive (loss) income ^(b)		(20	)		111			79
Other assets ^(c)		172			184			221

Total Tier 1 capital (regulatory)		12,072			11,338			9,390
Less: Qualifying capital securities		2,290			2,582			2,582
Preferred Stock, Series B		2,422			2,418			—
Preferred Stock, Series A		291			658			650

Total Tier 1 common equity (non-GAAP)	$	7,069		$	5,680		$	6,158



Net risk-weighted assets (regulatory) ^(c)	$	96,006		$	101,077		$	110,027

Tier 1 common equity ratio (non-GAAP)		7.36	%		5.62	%		5.60	%


(a)		Income statement amount has been annualized in calculation of percentage.

(b)		Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the adoption or subsequent application of the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

(c)		Other assets deducted from Tier 1 capital and net risk-weighted assets consist of intangible assets (excluding goodwill) recorded after February 19, 1992, and deductible portions of nonfinancial equity investments.

TE = Taxable Equivalent, GAAP = U.S. generally accepted accounting principles

Strategic developments

Management initiated the following actions during 2008 and 2009 to support Key’s corporate strategy described under the heading “Corporate Strategy” on page 18 of Key’s 2008 Annual Report to Shareholders.

¨		During the second quarter of 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a discontinued operation.

¨		During the fourth quarter of 2008, management initiated a process known as “Keyvolution,” a corporate-wide initiative designed to build a consistently superior experience for clients, simplify processes, improve speed to market and enhance Key’s ability to seize growth and profit opportunities. Through this initiative, Key expects to achieve annualized cost savings of $300 million to $375 million by 2012.

¨		During the third quarter of 2008, Key decided to exit retail and floor-plan lending for marine and recreational vehicle products, and to limit new education loans to those backed by government guarantee. Key also determined that it will cease lending to homebuilders within its 14-state Community Banking footprint. This came after Key began to reduce its business with nonrelationship homebuilders outside that footprint in December 2007.

¨		On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding company for Union State Bank, a 31-branch state-chartered commercial bank headquartered in Orangeburg, New York. The acquisition doubles Key’s branch presence in the attractive Lower Hudson Valley area.

Line of Business Results

This section summarizes the financial performance and related strategic developments of Key’s two major business groups, Community Banking and National Banking. To better understand this discussion, see Note 4 (“Line of Business Results”), which begins on page 13. Note 4 describes the products and services offered by each of these business groups, provides more detailed financial information pertaining to the groups and their respective lines of business, and explains “Other Segments” and “Reconciling Items.”

Figure 6 summarizes the contribution made by each major business group to Key’s taxable-equivalent revenue from continuing operations and (loss) income from continuing operations attributable to Key for the three- and six-month periods ended June 30, 2009 and 2008.

Figure 6. Major Business Groups — Taxable-Equivalent Revenue from Continuing Operations and (Loss)
Income from Continuing Operations Attributable to Key


	Three months ended June 30,						Change						Six months ended June 30,						Change
dollars in millions	2009			2008			Amount			Percent			2009			2008			Amount			Percent

REVENUE FROM CONTINUING OPERATIONS (TE)
Community Banking	$	592		$	654		$	(62	)		(9.5	)%	$	1,191		$	1,283		$	(92	)		(7.2	)%
National Banking^(a)		547			(133	)		680			N/M			1,080			302			778			257.6
Other Segments^(b)		183			(31	)		214			N/M			104			(4	)		108			N/M

Total Segments		1,322			490			832			169.8			2,375			1,581			794			50.2
Reconciling Items ^(c)		(9	)		(43	)		34			79.1			43			94			(51	)		(54.3	)

Total	$	1,313		$	447		$	866			193.7	%	$	2,418		$	1,675		$	743			44.4	%


(LOSS) INCOME FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY
Community Banking	$	(57	)	$	103		$	(160	)		N/M		$	(27	)	$	219		$	(246	)		N/M
National Banking^(a)		(294	)		(674	)		380			56.4	%		(843	)		(697	)		(146	)		(20.9	)%
Other Segments^(b)		112			(14	)		126			N/M			75			7			68			971.4

Total Segments		(239	)		(585	)		346			59.1			(795	)		(471	)		(324	)		(68.8	)
Reconciling Items ^(c)		3			(543	)		546			N/M			93			(440	)		533			N/M

Total	$	(236	)	$	(1,128	)	$	892			79.1	%	$	(702	)	$	(911	)	$	209			22.9	%


(a)		National Banking’s results for the first quarter of 2009 include a noncash charge for goodwill and other intangible assets impairment of $196 million ($164 million after tax). During the second quarter of 2008, National Banking’s taxable-equivalent net interest income and net results were reduced by $838 million and $536 million, respectively, as a result of its involvement with certain leveraged lease financing transactions which were challenged by the IRS. National Banking’s taxable-equivalent net interest income and net results were reduced by $34 million and $21 million, respectively, during the first quarter of 2008 as a result of its involvement with these leveraged lease financing transactions.

(b)		Other Segments’ results for the second quarter of 2009 include net gains of $125 million ($78 million after tax) in connection with the repositioning of the securities portfolio and a $95 million ($59 million after tax) gain related to the exchange of Key common shares for capital securities.

(c)		Reconciling Items for the second quarter of 2009 include a $32 million ($20 million after tax) gain from the sale of Key’s claim associated with the Lehman Brothers’ bankruptcy. For the first quarter of 2009, Reconciling Items include a $105 million ($65 million after tax) gain from the sale of Key’s remaining equity interest in Visa Inc. Reconciling Items for the second quarter of 2008 include a $475 million charge to income taxes for the interest cost associated with the previously disclosed leveraged lease tax litigation. For the first quarter of 2008, Reconciling Items include a $165 million ($103 million after tax) gain from the partial redemption of Key’s equity interest in Visa Inc. and a $17 million charge to income taxes for the interest cost associated with the increase to Key’s tax reserves for certain leveraged lease transactions.

TE = Taxable Equivalent, N/M = Not Meaningful

Community Banking summary of operations

As shown in Figure 7, Community Banking recorded a net loss attributable to Key of $57 million for the second quarter of 2009, compared to net income attributable to Key of $103 million for the year-ago quarter. Increases in the provision for loan losses and FDIC expense, coupled with decreases in net interest income and noninterest income, caused the decline.

Taxable-equivalent net interest income declined by $36 million, or 8%, from the second quarter of 2008, due primarily to tighter loan spreads and a slight decline in the volume of average earning assets. While average deposits increased by $2.7 billion, or 5%, the composition and value of deposits have been impacted by the declining interest rate environment. Growth was centered in noninterest-bearing deposits and a shift from money market deposit accounts into higher-yielding certificates of deposit, reflecting consumer preferences.

Noninterest income decreased by $26 million, or 12%, from the year-ago quarter, largely from declines in service charges on deposit accounts, trust and investment services income, and branch-based investment income, coupled with an increase in the reserve for credit losses from derivatives. The reductions in service charges on deposit accounts and trust and investment services income are the results of changing client behavior and lower levels of assets under management resulting from declining market conditions, respectively. These reductions were partially offset by higher mortgage loan sale gains.

The provision for loan losses rose by $143 million compared to the second quarter of 2008, reflecting a $49 million increase in net loan charge-offs, primarily from the commercial and home equity loan portfolios. Community Banking’s provision for loan losses for the second quarter of 2009 exceeded its net loan charge-offs by $100 million as the company continued to build reserves, in light of the challenging credit conditions brought on by a weak economy.

Noninterest expense grew by $52 million, or 12%, from the year-ago quarter, as a result of a $52 million increase in the FDIC deposit insurance assessment. The higher assessment is a result of the across-the-board increase in the assessment rate that took effect during the first quarter of 2009 and the special assessment imposed during the second quarter of 2009. A decline in personnel expense, due primarily to a decrease in incentive compensation accruals and a reduction in the number of average full-time equivalent employees, was offset by increases in various other components of noninterest expense.

Figure 7. Community Banking


	Three months ended June 30,					Change						Six months ended June 30,					Change
dollars in millions	2009			2008		Amount			Percent			2009			2008		Amount			Percent

SUMMARY OF OPERATIONS
Net interest income (TE)	$	397		$	433	$	(36	)		(8.3	)%	$	807		$	855	$	(48	)		(5.6	)%
Noninterest income		195			221		(26	)		(11.8	)		384			428		(44	)		(10.3	)

Total revenue (TE)		592			654		(62	)		(9.5	)		1,191			1,283		(92	)		(7.2	)
Provision for loan losses		187			44		143			325.0			268			62		206			332.3
Noninterest expense		497			445		52			11.7			967			871		96			11.0

(Loss) income before income taxes (TE)		(92	)		165		(257	)		N/M			(44	)		350		(394	)		N/M
Allocated income taxes and TE adjustments		(35	)		62		(97	)		N/M			(17	)		131		(148	)		N/M

Net (loss) income attributable to Key	$	(57	)	$	103	$	(160	)		N/M		$	(27	)	$	219	$	(246	)		N/M