e10vq
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
[Ö] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2010
or
[   ] 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
(KEYCORP LOGO)
     (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   879,154,033 Shares
     
(Title of class)   (Outstanding at April 30, 2010)

 


Table of Contents

KEYCORP
TABLE OF CONTENTS
         
PART I. FINANCIAL INFORMATION
   
 
   
Item 1.     Page Number
   
 
   
      5
   
 
   
      6
   
 
   
      7
   
 
   
      8
   
 
   
      9
   
 
   
      9
   
 
   
      12
   
 
   
      13
   
 
   
      17
   
 
   
      21
   
 
   
      22
   
 
   
      23
   
 
   
      26
   
 
   
      27
   
 
   
      29
   
 
   
      29
   
 
   
      30
   
 
   
      30
   
 
   
      34
   
 
   
      42
   
 
   
      51
   
 
   
      55

2


Table of Contents

         
Item 2.     56
   
 
   
      56
      56
      57
      58
      58
      59
      59
      60
      61
   
 
   
      61
      61
      67
   
 
   
      68
      69
      70
      71
   
 
   
      72
      72
      76
      77
      78
      78
      78
      78
      78
      79
      79
      80
      80
      80
      80
      80
   
 
   
      81
      81
      81
      81
      83
      83
      84
      84
      85
      86
      88
      88
      89
      90
      90
      90
      90
      91

3


Table of Contents

         
      91
      94
      95
      95
      96
      96
      96
      98
      98
      99
      99
      99
      99
      100
      100
      100
      100
      101
      101
      102
      102
      102
      103
      103
      104
      107
      110
   
 
   
Item 3.     111
   
 
   
Item 4.     111
   
 
   
PART II. OTHER INFORMATION
   
 
   
Item 1.     111
   
 
   
Item 1A.     111
   
 
   
Item 2.     112
   
 
   
Item 5.     113
   
 
   
      114
   
 
   
   
Exhibits
  115
 EX-10.1
 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
Throughout the Notes to Consolidated Financial Statements and Management’s Discussion &
Analysis of Financial Condition & Results of Operations, we use certain acronyms and abbreviations
which are defined in Note 1 (“Basis of Presentation”), which begins on page 9.

4


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
                         
    March 31,     December 31,     March 31,  
in millions, except share data   2010     2009     2009  
    (Unaudited)             (Unaudited)  
ASSETS
                       
Cash and due from banks
  $ 619     $ 471     $ 624  
Short-term investments
    4,345       1,743       2,917  
Trading account assets
    1,034       1,209       1,279  
Securities available for sale
    16,553       16,641       8,363  
Held-to-maturity securities (fair value: $22, $24 and $25)
    22       24       25  
Other investments
    1,525       1,488       1,464  
Loans, net of unearned income of $1,692, $1,770 and $2,142
    55,913       58,770       70,003  
Less: Allowance for loan losses
    2,425       2,534       2,016  
 
Net loans
    53,488       56,236       67,987  
Loans held for sale
    556       443       671  
Premises and equipment
    872       880       847  
Operating lease assets
    652       716       889  
Goodwill
    917       917       917  
Other intangible assets
    46       50       110  
Corporate-owned life insurance
    3,087       3,071       2,994  
Derivative assets
    1,063       1,094       1,707  
Accrued income and other assets (including $161 of consolidated LIHTC guaranteed funds VIEs, see Note 7) (a)
    4,150       4,096       2,615  
Discontinued assets (including $2,624 of consolidated education loan securitization trusts VIEs at fair value, see Note 7) (a)
    6,374       4,208       4,425  
 
Total assets
  $ 95,303     $ 93,287     $ 97,834  
 
                 
 
                       
LIABILITIES
                       
Deposits in domestic offices:
                       
NOW and money market deposit accounts
  $ 25,068     $ 24,341     $ 23,599  
Savings deposits
    1,873       1,807       1,795  
Certificates of deposit ($100,000 or more)
    10,188       10,954       13,250  
Other time deposits
    12,010       13,286       14,791  
 
Total interest-bearing
    49,139       50,388       53,435  
Noninterest-bearing
    15,364       14,415       11,641  
Deposits in foreign office ¾ interest-bearing
    646       768       801  
 
Total deposits
    65,149       65,571       65,877  
Federal funds purchased and securities sold under repurchase agreements
    1,927       1,742       1,565  
Bank notes and other short-term borrowings
    446       340       2,285  
Derivative liabilities
    1,103       1,012       927  
Accrued expense and other liabilities
    2,089       2,007       1,891  
Long-term debt
    11,177       11,558       14,978  
Discontinued liabilities (including $2,457 of consolidated education loan securitization trusts VIEs at fair value, see Note 7) (a)
    2,490       124       137  
 
Total liabilities
    84,381       82,354       87,660  
 
                       
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, 2,904,839 and 6,575,000 shares
    291       291       658  
Fixed-Rate Cumulative Perpetual Preferred Stock, Series B, $100,000 liquidation preference; authorized and issued 25,000 shares
    2,434       2,430       2,418  
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 946,348,435, 946,348,435 and 584,061,120 shares
    946       946       584  
Common stock warrant
    87       87       87  
Capital surplus
    3,724       3,734       2,464  
Retained earnings
    5,098       5,158       6,160  
Treasury stock, at cost (67,296,277, 67,813,492 and 85,487,810 shares)
    (1,958 )     (1,980 )     (2,500 )
Accumulated other comprehensive income (loss)
    19       (3 )     97  
 
Key shareholders’ equity
    10,641       10,663       9,968  
Noncontrolling interests
    281       270       206  
 
Total equity
    10,922       10,933       10,174  
 
Total liabilities and equity
  $ 95,303     $ 93,287     $ 97,834  
 
                 
 
                       
 
     
(a)
  Assets of the VIEs can only be used by the particular VIE and there is no recourse to Key with respect to the liabilities of the consolidated education loan securitization trusts VIEs.
     
See Notes to Consolidated Financial Statements (Unaudited).

5


Table of Contents

Consolidated Statements of Income (Unaudited)
                 
    Three months ended March 31,
dollars in millions, except per share amounts   2010     2009  
 
INTEREST INCOME
               
Loans
  $ 710     $ 840  
Loans held for sale
    4       8  
Securities available for sale
    150       100  
Held-to-maturity securities
    1       1  
Trading account assets
    11       13  
Short-term investments
    2       3  
Other investments
    14       12  
 
Total interest income
    892       977  
 
               
INTEREST EXPENSE
               
Deposits
    212       300  
Federal funds purchased and securities sold under repurchase agreements
    1       1  
Bank notes and other short-term borrowings
    3       6  
Long-term debt
    51       81  
 
Total interest expense
    267       388  
 
 
               
NET INTEREST INCOME
    625       589  
Provision for loan losses
    413       847  
 
Net interest income (expense) after provision for loan losses
    212       (258 )
 
               
NONINTEREST INCOME
               
Trust and investment services income
    114       110  
Service charges on deposit accounts
    76       82  
Operating lease income
    47       61  
Letter of credit and loan fees
    40       38  
Corporate-owned life insurance income
    28       27  
Net securities gains (losses) (a)
    3       (14 )
Electronic banking fees
    27       24  
Gains on leased equipment
    8       26  
Insurance income
    18       18  
Net gains (losses) from loan sales
    4       7  
Net gains (losses) from principal investing
    37       (72 )
Investment banking and capital markets income (loss)
    9       17  
Gain from sale/redemption of Visa Inc. shares
          105  
Other income
    39       49  
 
Total noninterest income
    450       478  
 
               
NONINTEREST EXPENSE
               
Personnel
    362       359  
Net occupancy
    66       66  
Operating lease expense
    39       50  
Computer processing
    47       47  
Professional fees
    38       34  
FDIC assessment
    37       30  
OREO expense, net
    32       6  
Equipment
    24       22  
Marketing
    13       14  
Provision (credit) for losses on lending-related commitments
    (2 )      
Intangible asset impairment
          196  
Other expense
    129       103  
 
Total noninterest expense
    785       927  
 
               
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    (123 )     (707 )
Income taxes
    (82 )     (238 )
 
INCOME (LOSS) FROM CONTINUING OPERATIONS
    (41 )     (469 )
Income (loss) from discontinued operations, net of taxes, of $2 and ($6) (see Note 16)
    2       (29 )
 
NET INCOME (LOSS)
    (39 )     (498 )
Less: Net income (loss) attributable to noncontrolling interests
    16       (10 )
 
NET INCOME (LOSS) ATTRIBUTABLE TO KEY
  $ (55 )   $ (488 )
 
           
 
               
Income (loss) from continuing operations attributable to Key common shareholders
  $ (98 )   $ (507 )
Net income (loss) attributable to Key common shareholders
    (96 )     (536 )
 
               
Per common share:
               
Income (loss) from continuing operations attributable to Key common shareholders
  $ (.11 )   $ (1.03 )
Income (loss) from discontinued operations, net of taxes
          (.06 )
Net income (loss) attributable to Key common shareholders
    (.11 )     (1.09 )
 
               
Per common share — assuming dilution:
               
Income (loss) from continuing operations attributable to Key common shareholders
  $ (.11 )   $ (1.03 )
Income (loss) from discontinued operations, net of taxes
          (.06 )
Net income (loss) attributable to Key common shareholders
    (.11 )     (1.09 )
 
               
Cash dividends declared per common share
    .01       .0625  
 
               
Weighted-average common shares outstanding (000)
    874,386       492,813  
Weighted-average common shares and potential common shares outstanding (000)
    874,386       492,813  
 
               
 
     
(a)
  For the three months ended March 31, 2010, we did not have impairment losses related to securities. (see Note 4)
     
See Notes to Consolidated Financial Statements (Unaudited).

6


Table of Contents

Consolidated Statements of Changes in Equity (Unaudited)
                                                                                         
    Key Shareholders’ Equity            
                                                                    Accumulated              
    Preferred Stock     Common Shares                     Common                     Treasury     Other              
    Outstanding     Outstanding     Preferred     Common     Stock     Capital     Retained     Stock,     Comprehensive     Noncontrolling     Comprehensive  
dollars in millions, except per share amounts   (000)     (000)     Stock     Shares     Warrant     Surplus     Earnings     at Cost     Income (Loss)     Interests     Income (Loss)  
 
BALANCE AT DECEMBER 31, 2008
    6,600       495,002     $ 3,072     $ 584     $ 87     $ 2,553     $ 6,727     $ (2,608 )   $ 65     $ 201          
Net income (loss)
                                                    (488 )                       (10 )   $ (498 )
Other comprehensive income (loss):
                                                                                       
Net unrealized gains (losses) on securities available for sale, net of income taxes of $26
                                                                    44               44  
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($5)
                                                                    (9 )             (9 )
Net contribution to noncontrolling interests
                                                                            15       15  
Foreign currency translation adjustments
                                                                    (9 )             (9 )
Net pension and postretirement benefit costs, net of income taxes
                                                                    6               6  
 
                                                                                   
Total comprehensive income (loss)
                                                                                  $ (451 )
 
                                                                                   
Deferred compensation
                                            3                                          
Cash dividends declared on common shares ($.0625 per share)
                                                    (31 )                                
Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)
                                                    (12 )                                
Cash dividends accrued on Cumulative Series B Preferred Stock (5% per annum)
                                                    (32 )                                
Amortization of discount on Series B Preferred Stock
                    4                               (4 )                                
Common shares reissued for stock options and other employee benefit plans
            3,571                               (92 )             108                          
 
BALANCE AT MARCH 31, 2009
    6,600       498,573     $ 3,076     $ 584     $ 87     $ 2,464     $ 6,160     $ (2,500 )   $ 97     $ 206          
 
                                                                   
 
                                                                                       
 
 
                                                                                       
BALANCE AT DECEMBER 31, 2009
    2,930       878,535     $ 2,721     $ 946     $ 87     $ 3,734     $ 5,158     $ (1,980 )   $ (3 )   $ 270          
Cumulative effect adjustment to beginning balance of Retained Earnings
                                                    45                             $ 45  
Net income (loss)
                                                    (55 )                     16       (39 )
Other comprehensive income (loss):
                                                                                       
Net unrealized gains (losses) on securities available for sale, net of income taxes of $31
                                                                    52               52  
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($18)
                                                                    (30 )             (30 )
Net distribution from noncontrolling interests
                                                                            (5 )     (5 )
Foreign currency translation adjustments
                                                                    (2 )             (2 )
Net pension and postretirement benefit costs, net of income taxes
                                                                    2               2  
 
                                                                                   
Total comprehensive income (loss)
                                                                                  $ 23  
 
                                                                                   
Deferred compensation
                                            (3 )                                        
Cash dividends declared on common shares ($.01 per share)
                                                    (9 )                                
Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)
                                                    (6 )                                
Cash dividends accrued on Cumulative Series B Preferred Stock (5% per annum)
                                                    (31 )                                
Amortization of discount on Series B Preferred Stock
                    4                               (4 )                                
Common shares reissued for stock options and other employee benefit plans
            517                               (7 )             22                          
         
BALANCE AT MARCH 31, 2010
    2,930       879,052     $ 2,725     $ 946     $ 87     $ 3,724     $ 5,098     $ (1,958 )   $ 19     $ 281          
 
                                                                   
 
                                                                                       
         
See Notes to Consolidated Financial Statements (Unaudited).

7


Table of Contents

Consolidated Statements of Cash Flows (Unaudited)
                 
    Three months ended March 31,  
in millions   2010     2009  
 
OPERATING ACTIVITIES
               
Net income (loss)
  $ (39 )   $ (498 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Provision for loan losses
    413       847  
Depreciation and amortization expense
    88       95  
Intangible assets impairment
          196  
Net losses (gains) from principal investing
    (37 )     72  
Net losses (gains) from loan sales
    (4 )     (7 )
Deferred income taxes
    (109 )     (176 )
Net securities losses (gains)
    (3 )     14  
Gain from sale/redemption of Visa Inc. shares
          (105 )
Gains on leased equipment
    (8 )     (26 )
Provision (credit) for losses on lending-related commitments
    (2 )      
Net decrease (increase) in loans held for sale excluding transfers from continuing operations
    14       (129 )
Net decrease (increase) in trading account assets
    175       1  
Other operating activities, net
    355       (352 )
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    843       (68 )
INVESTING ACTIVITIES
               
Proceeds from sale/redemption of Visa Inc. shares
          105  
Net decrease (increase) in short-term investments
    (2,602 )     2,304  
Purchases of securities available for sale
    (618 )     (502 )
Proceeds from sales of securities available for sale
    23       16  
Proceeds from prepayments and maturities of securities available for sale
    786       458  
Purchases of held-to-maturity securities
          (6 )
Proceeds from prepayments and maturities of held-to-maturity securities
    2       6  
Purchases of other investments
    (35 )     (48 )
Proceeds from sales of other investments
    22       3  
Proceeds from prepayments and maturities of other investments
    15       28  
Net decrease (increase) in loans, excluding acquisitions, sales and transfers
    2,108       2,468  
Proceeds from loan sales
    84       7  
Purchases of premises and equipment
    (21 )     (33 )
Proceeds from sales of premises and equipment
    1       1  
Proceeds from sales of other real estate owned
    35       5  
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    (200 )     4,812  
FINANCING ACTIVITIES
               
Net increase (decrease) in deposits
    (422 )     750  
Net increase (decrease) in short-term borrowings
    291       (6,184 )
Net proceeds from issuance of long-term debt
    9       445  
Payments on long-term debt
    (327 )     (300 )
Tax benefits over (under) recognized compensation cost for stock-based awards
          (1 )
Cash dividends paid
    (46 )     (75 )
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    (495 )     (5,365 )
 
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
    148       (621 )
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD
    471       1,245  
 
CASH AND DUE FROM BANKS AT END OF PERIOD
  $ 619     $ 624  
 
           
 
               
 
 
               
Additional disclosures relative to cash flows:
               
Interest paid
  $ 286     $ 972  
Income taxes paid (refunded)
    (154 )     (126 )
Noncash items:
               
Loans transferred to portfolio from held for sale
        $ 84  
Loans transferred to held for sale from portfolio
  $ 127        
Loans transferred to other real estate owned
    27       45  
 
               
 
See Notes to Consolidated Financial Statements (Unaudited).

8


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
As used in these Notes, references to “Key,” “we,” “our,” “us” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. KeyCorp refers solely to the parent holding company, and KeyBank refers to KeyCorp’s subsidiary, KeyBank National Association.
We have provided the following list of acronyms and abbreviations as a tool for the reader. The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as Management’s Discussion & Analysis of Financial Condition & Results of Operation.
           
           
 
AICPA: American Institute of Certified Public Accountants.
ALCO: Asset/Liability Management Committee.
A/LM: Asset/liability management.
AOCI: Accumulated other comprehensive income (loss).
Austin: Austin Capital Management, Ltd.
CAP: Capital Assistance Program of the U.S. Treasury.
CMO: Collateralized mortgage obligation.
Codification: FASB accounting standards codification.
Common Shares: Common Shares, $1 par value.
CPP: Capital Purchase Program of the U.S. Treasury.
CPR: Constant prepayment rate.
DIF: Deposit Insurance Fund.
EESA: Emergency Economic Stabilization Act of 2008.
EPS: Earnings per share.
ERM: Enterprise risk management.
EVE: Economic value of equity.
FASB: Financial Accounting Standards Board.
FDIC: Federal Deposit Insurance Corporation.
Federal Reserve: Board of Governors of the Federal Reserve System.
FHLMC: Federal Home Loan Mortgage Corporation.
FNMA: Federal National Mortgage Association.
GAAP: U.S. generally accepted accounting principles.
GNMA: Government National Mortgage Association.
Heartland: Heartland Payment Systems, Inc.
IRS: Internal Revenue Service.
ISDA: International Swaps and Derivatives Association.
KAHC: Key Affordable Housing Corporation.
LIBOR: London Interbank Offered Rate.
LIHTC: Low-income housing tax credit.
    LILO: Lease in, lease out transaction.
Moody’s: Moody’s Investors Service, Inc.
N/A: Not applicable.
NASDAQ: National Association of Securities Dealers Automated Quotation System.
N/M: Not meaningful.
NOW: Negotiable Order of Withdrawal.
NYSE: New York Stock Exchange.
OCI: Other comprehensive income (loss).
OREO: Other real estate owned.
OTTI: Other-than-temporary impairment.
QSPE: Qualifying special purpose entity.
PBO: Projected Benefit Obligation
S&P: Standard and Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc.
SCAP: Supervisory Capital Assessment Program administered by the Federal Reserve.
SEC: U.S. Securities & Exchange Commission.
Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A.
Series B Preferred Stock: KeyCorp’s Fixed-Rate Cumulative Perpetual Preferred Stock, Series B issued to the U.S. Treasury under the CPP.
SILO: Sale in, lease out transaction.
SPE: Special purpose entity.
TAG: Transaction Account Guarantee program of the FDIC.
TE: Taxable equivalent.
TLGP: Temporary Liquidity Guarantee Program of the FDIC.
U.S. Treasury: United States Department of the Treasury.
VAR: Value at risk.
VEBA: Voluntary Employee Benefit Association.
VIE: Variable interest entity.
XBRL: eXtensible Business Reporting Language.
 
           

9


Table of Contents

The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements include any voting rights entities in which we have a controlling financial interest. In accordance with the applicable accounting guidance for consolidations, we also consolidate a VIE if the following criteria are met: (i) we have a variable interest in the entity; (ii) have the power to direct activities of the VIE that most significantly impact the entity’s economic performance; and (iii) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., we are 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 7 (“Variable Interest Entities”) for information on our involvement with VIEs.
We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entity’s 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 we have a voting or economic interest of less than 20% generally are carried at cost. Investments held by our registered broker-dealer and investment company subsidiaries (primarily principal investments) are carried at fair value.
Effective January 1, 2010, we prospectively adopted new accounting guidance which changes the way we account for securitizations and SPEs by eliminating the concept of a QSPE and changing the requirements for derecognition of financial assets. In adopting this guidance, we had to analyze our existing QSPEs for possible consolidation. As a result, we consolidated our education loan securitization trusts thereby adding $2.8 billion in discontinued assets and liabilities to our balance sheet including $2.6 billion of loans. Prior to January 1, 2010, QSPEs, including securitization trusts, established under the applicable accounting guidance for transfers of financial assets were not consolidated. For additional information related to the consolidation of our education loan securitization trusts, see the section entitled “Accounting Standards Adopted in 2010” in this note and Note 16 (“Discontinued Operations”).
We believe 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 our 2009 Annual Report to Shareholders.
In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC. In compliance 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
In accordance with relevant accounting guidance, goodwill and certain other intangible assets are subject to impairment testing, which must be conducted at least annually. We perform goodwill impairment testing in the fourth quarter of each year. Our reporting units for purposes of this testing are our two business groups, Community Banking and National Banking. Due to uncertainty regarding the strength of the economic recovery, we continue to monitor the impairment indicators for goodwill and other intangible assets, and to evaluate the carrying amount of these assets as necessary.
Based on our review of impairment indicators during the first quarter of 2010, we determined that a further review of goodwill recorded in our Community Banking unit was necessary. This review indicated the

10


Table of Contents

estimated fair value of the Community Banking unit continued to exceed its carrying amount at March 31, 2010. No further impairment testing was required. There was no goodwill associated with our National Banking unit at March 31, 2010.
Offsetting Derivative Positions
In accordance with the applicable accounting guidance related to the offsetting of certain derivative contracts on the balance sheet, we take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 14.
Accounting Guidance Adopted in 2010
Transfers of financial assets. In June 2009, the FASB issued new accounting guidance which changes the way entities account for securitizations and SPEs by eliminating the concept of a QSPE and changing the requirements for derecognition of financial assets. This guidance, which also requires additional disclosures, was effective at the start of an entity’s first fiscal year beginning after November 15, 2009 (effective January 1, 2010, for us). Adoption of this guidance did not have a material effect on our financial condition or results of operations.
Consolidation of variable interest entities. In June 2009, the FASB issued new accounting guidance which, in addition to requiring additional disclosures, 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, the entity’s purpose and design, and the company’s ability to direct the activities that most significantly impact the entity’s economic performance. This guidance was effective at the start of a company’s first fiscal year beginning after November 15, 2009 (effective January 1, 2010, for us).
In conjunction with our prospective adoption of this guidance, we consolidated our education loan securitization trusts (classified as discontinued assets and liabilities), thereby adding $2.8 billion in assets and liabilities to our balance sheet of which $2.6 billion were loans.
In February 2010, the FASB deferred the application of this new guidance for certain investment entities and clarified other aspects of the guidance. Entities qualifying for this deferral will continue to apply the previously existing consolidation guidance.
Improving disclosures about fair value measurements. In January 2010, the FASB issued accounting guidance which requires new disclosures regarding certain aspects of an entity’s fair value disclosures and clarifies existing fair value disclosure requirements. The new disclosures and clarifications were effective for interim and annual reporting periods beginning after December 15, 2009 (effective January 1, 2010, for us), except for disclosures regarding purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for interim and annual periods beginning after December 15, 2010 (effective January 1, 2011, for us). Our policy is to recognize transfers between levels of the fair value hierarchy at the end of the reporting period. The required disclosures are provided in Note 15 (“Fair Value Measurements”).
Accounting Guidance Pending Adoption at March 31, 2010
Embedded credit derivatives. In March 2010, the FASB issued new accounting guidance that amends and clarifies how entities should evaluate credit derivatives embedded in beneficial interests in securitized financial assets. This accounting guidance eliminates the existing scope exception for most credit derivative features embedded in beneficial interests in securitized financial assets. This guidance will be effective the first day of the fiscal quarter beginning after June 15, 2010 (effective July 1, 2010, for us) with early adoption permitted. We have no financial instruments that would be subject to this accounting guidance.

11


Table of Contents

2. Earnings Per Common Share
Our basic and diluted earnings per common share are calculated as follows:
                 
    Three months ended March 31,  
dollars in millions, except per share amounts   2010     2009  
 
EARNINGS
               
Income (loss) from continuing operations
  $ (41 )   $ (469 )
Less: Net income (loss) attributable to noncontrolling interests
    16       (10 )
 
Income (loss) from continuing operations attributable to Key
    (57 )     (459 )
Less: Dividends on Series A Preferred Stock
    6       12  
Noncash deemed dividend — common shares exchanged for Series A Preferred Stock
           
Cash dividends on Series B Preferred Stock
    31       32  
Amortization of discount on Series B Preferred Stock
    4       4  
 
 
               
Income (loss) from continuing operations attributable to Key common shareholders
    (98 )     (507 )
 
               
Income (loss) from discontinued operations, net of taxes (a)
    2       (29 )
 
Net income (loss) attributable to Key common shareholders
  $ (96 )   $ (536 )
 
           
 
 
WEIGHTED-AVERAGE COMMON SHARES
               
Weighted-average common shares outstanding (000)
    874,386       492,813  
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000)
           
 
Weighted-average common shares and potential common shares outstanding (000)
    874,386       492,813  
 
           
 
               
 
EARNINGS PER COMMON SHARE
               
Income (loss) from continuing operations attributable to Key common shareholders
  $ (.11 )   $ (1.03 )
Income (loss) from discontinued operations, net of taxes (a)
          (.06 )
Net income (loss) attributable to Key common shareholders
    (.11 )     (1.09 )
 
               
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution
  $ (.11 )   $ (1.03 )
Income (loss) from discontinued operations, net of taxes (a)
          (.06 )
Net income (loss) attributable to Key common shareholders — assuming dilution
    (.11 )     (1.09 )
 
 
(a)   In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of these decisions, we have accounted for these businesses as discontinued operations. Included in the loss from discontinued operations for the three-month period ended March 31, 2009 is a $23 million after-tax, or $.05 per common share, charge for intangible assets impairment related to Austin.

12


Table of Contents

3. Line of Business Results
The specific lines of business that comprise each of the major business groups are described below. During the first quarter of 2010, we re-aligned our reporting structure for our business groups. Previously, Consumer Finance consisted mainly of portfolios which were identified as exit or run-off portfolios and were included in our National Banking segment. For all periods presented, we are reflecting the results of these exit portfolios in Other Segments. The automobile dealer floor plan business, previously included in Consumer Finance, has been re-aligned with the Commercial Banking line of business within the Community Banking segment. Our tuition processing business was moved from Consumer Finance to Global Treasury Management within Real Estate Capital and Corporate Banking Services. In addition, other previously identified exit portfolios included in the National Banking segment, including $309 million of homebuilder loans from the Real Estate Capital line of business and $2.685 billion of commercial leases from the Equipment Finance line of business, have been moved to Other Segments.
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 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. A variety of cash management services, including the processing of tuition payments for private schools, are provided through the Global Treasury Management unit.
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

13


Table of Contents

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.
Other Segments
Other Segments consist of Corporate Treasury, our Principal Investing unit and various exit portfolios which were previously included within the National Banking segment. These exit portfolios were moved to Other Segments during the first quarter of 2010.
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 on the following pages shows selected financial data for each major business group for the three-month periods ended March 31, 2010 and 2009. 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 we use to monitor and manage our financial performance. GAAP guides financial accounting, but there is no authoritative guidance for “management accounting” — the way we use our judgment and experience to make reporting decisions. Consequently, the line of business results we report 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 our 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.
 
   
¨   The 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 we use to estimate our 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 82 in our 2009 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 2.2%.
 
   
¨   Capital is assigned based on our assessment of economic risk factors (primarily credit, operating and market risk) directly attributable to each line.

14


Table of Contents

Developing and applying the methodologies that we use to allocate items among our 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 our organizational structure.
                                 
Three months ended March 31,   Community Banking     National Banking  
dollars in millions   2010     2009     2010     2009  
 
SUMMARY OF OPERATIONS
                               
Net interest income (TE)
  $ 412     $ 423     $ 197     $ 224  
Noninterest income
    187       189       179       199  
 
Total revenue (TE) (a)
    599       612       376       423  
Provision (credit) for loan losses
    142       141       161       511  
Depreciation and amortization expense
    9       11       27       32  
Other noninterest expense
    459       457       243       396   (c)
 
Income (loss) from continuing operations before income taxes (TE)
    (11 )     3       (55 )     (516
Allocated income taxes and TE adjustments
    (16 )     (9     (22 )     (121
 
Income (loss) from continuing operations
    5       12       (33 )     (395
Income (loss) from discontinued operations, net of taxes
                       
 
Net income (loss)
    5       12       (33 )     (395
Less: Net income (loss) attributable to noncontrolling interests
                      (1
 
Net income (loss) attributable to Key
  $ 5     $ 12     $ (33 )   $ (394
 
                       
 
                               
 
AVERAGE BALANCES (b)
                               
Loans and leases
  $ 27,769     $ 31,275     $ 22,440     $ 29,697  
Total assets (a)
    30,873       34,171       26,269       37,208  
Deposits
    51,459       51,655       12,398       11,945  
 
OTHER FINANCIAL DATA
                               
Net loan charge-offs (b)
  $ 116     $ 89     $ 251     $ 239  
Return on average allocated equity (b)
    .54   %     1.37  %     (3.89 ) %     (40.22 ) %
Return on average allocated equity
    .54       1.37       (3.89 )     (40.22 )
Average full-time equivalent employees (e)
    8,187       8,939       2,409       2,661  
 
                               
 
(a)   Substantially all revenue generated by our major business groups is derived from clients that reside in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software and goodwill held by our 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 $196 million ($164 million after tax) noncash charge for intangible assets impairment.
 
(d)   Reconciling Items for the first quarter of 2009 include a $105 million ($65 million after tax) gain from the sale of our remaining equity interest in Visa Inc.
 
(e)   The number of average full-time equivalent employees has not been adjusted for discontinued operations.

15


Table of Contents

                                                                 
Other Segments
 
 
  Total Segments
 
 
  Reconciling Items
 
 
  Key
 
 
2010         2009     2010     2009     2010     2009     2010     2009  
 
 
                                                                 
  $ 15    
 
  $ (44 )   $ 624     $ 603     $ 8     $ (8 )   $ 632     $ 595  
  81    
 
    5       447       393       3       85   (c)     450       478  
 
 
  96    
 
    (39 )     1,071       996       11       77       1,082       1,073  
  122    
 
    194       425       846       (12 )     1       413       847  
  11    
 
    18       47       61       41       40       88       101  
  28    
 
    38       730       891       (33 )     (65 )     697       826  
 
 
  (65 )  
 
    (289 )     (131 )     (802 )     15       101       (116 )     (701 )
  (35 )  
 
    (118 )     (73 )     (248 )     (2 )     16       (75 )     (232 )
 
 
  (30 )  
 
    (171 )     (58 )     (554 )     17       85       (41 )     (469 )
     
 
                      2       (29 )     2       (29 )
 
 
  (30 )  
 
    (171 )     (58 )     (554 )     19       56       (39 )     (498 )
  16    
 
    (9 )     16       (10 )                 16       (10 )
 
 
  $ (46 )  
 
  $ (162 )   $ (74 )   $ (544 )   $ 19     $ 56     $ (55 )   $ (488 )
 
   
 
                                         
       
 
                                                       
 
 
                                                                 
  $ 7,359    
 
  $ 10,600     $ 57,568     $ 71,572     $ 60     $ 40     $ 57,628     $ 71,612  
  29,334    
 
    27,378       86,476       98,757       2,218       567       88,694       99,324  
  1,644    
 
    1,794       65,501       65,394       (168 )     (148 )     65,333       65,246  
 
 
                                                                 
  $ 154    
 
  $ 131     $ 521     $ 459     $ 1     $ 1     $ 522     $ 460  
  N/M    
 
    N/M       (3.60 )  %     (24.83 )  %     N/M       N/M       (2.15 )  %     (17.98 )  %
  N/M    
 
    N/M       (3.60 )     (24.83 )     N/M       N/M       (2.08 )     (19.12 )
  43    
 
    108       10,639       11,708       5,133       5,760       15,772       17,468  
 
 
Supplementary information (Community Banking lines of business)
                                 
Three months ended March 31,   Regional Banking   Commercial Banking
 
dollars in millions   2010     2009     2010     2009  
 
 
Total revenue (TE)
  $ 490     $ 509     $ 109     $ 103  
Provision for loan losses
    115       68       27       73  
Noninterest expense
    422       411       46       57  
Net income (loss) attributable to Key
    (18 )     29       23       (17 )
Average loans and leases
    18,753       20,004       9,016       11,271  
Average loans held for sale
    80       116       1       3  
Average deposits
    46,197       47,784       5,262       3,871  
Net loan charge-offs
    96       52       20       37  
Net loan charge-offs to average loans
    2.08   %     1.05   %     .90   %     1.33     %
Nonperforming assets at year end
  $ 327     $ 205     $ 270     $ 294  
Return on average allocated equity
    (2.99 )%     5.22   %     7.29   %     (5.28 )     %
Average full-time equivalent employees
    7,836       8,565       351       374  
       
 
                                                       
 
 
Supplementary information (National Banking lines of business)
                                                 
    Real Estate Capital and                     Institutional and  
Three months ended March 31,   Corporate Banking Services     Equipment Finance     Capital Markets  
dollars in millions   2010        2009        2010        2009        2010        2009     
   
Total revenue (TE)
  $ 144        $ 185        $ 61        $ 66        $ 171        $ 172     
Provision for loan losses
    145          438          4          41          12          32     
Noninterest expense
    114          190          48          56          108          182     
Net income (loss) attributable to Key
    (72)         (320)         6          (19)         33          (55)    
Average loans and leases
    12,340          15,717          4,574          5,031          5,526          8,949     
Average loans held for sale
    115          206          1          8          124          268     
Average deposits
    9,817          10,163          6          9          2,575          1,773     
Net loan charge-offs
    207          173          18          22          26          44     
Net loan charge-offs to average loans
    6.80    %     4.46    %     1.60    %     1.77    %     1.91    %     1.99    %
Nonperforming assets at year end
  $ 1,067        $ 622        $ 111        $ 89        $ 107        $ 59     
Return on average allocated equity
    (14.08)   %     (56.11)   %     6.59    %     (16.94)   %     13.38    %     (18.51)    %
Average full-time equivalent employees
    1,074          1,160          605          688          730          813     
       
 
                                                       
   

16


Table of Contents

4. Securities
Securities available for sale. These are securities that we intend 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,” and realized gains and losses resulting from sales of securities using the specific identification method are included in “net securities gains (losses)” on the income statement. Unrealized losses on debt securities deemed to be “other-than-temporary” are included in “net securities gains (losses)” on the income statement or AOCI in accordance with the applicable accounting guidance related to the recognition of OTTI of debt securities.
“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 we have the intent and ability to hold until maturity. Debt securities are carried at cost and 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, capital securities and preferred equity securities.
The amortized cost, unrealized gains and losses, and approximate fair value of our 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.

17


Table of Contents

                                 
    March 31, 2010
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 8                 $ 8  
States and political subdivisions
    81     $ 2             83  
Collateralized mortgage obligations
    14,789       227     $ 32       14,984  
Other mortgage-backed securities
    1,270       85             1,355  
Other securities
    107       17       1       123  
 
Total securities available for sale
  $ 16,255     $ 331     $ 33     $ 16,553  
 
                       
 
                               
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 3                 $ 3  
Other securities
    19                   19  
 
Total held-to-maturity securities
  $ 22                 $ 22  
 
                       
 
                               
 
                                 
    December 31, 2009
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 8                 $ 8  
States and political subdivisions
    81     $ 2             83  
Collateralized mortgage obligations
    14,894       187     $ 75       15,006  
Other mortgage-backed securities
    1,351       77             1,428  
Other securities
    100       17       1       116  
 
Total securities available for sale
  $ 16,434     $ 283     $ 76     $ 16,641  
 
                       
 
                               
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 3                 $ 3  
Other securities
    21                   21  
 
Total held-to-maturity securities
  $ 24                 $ 24  
 
                       
 
                               
 
                                 
    March 31, 2009
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 10                 $ 10  
States and political subdivisions
    90     $ 1             91  
Collateralized mortgage obligations
    6,289       216             6,505  
Other mortgage-backed securities
    1,624       77             1,701  
Other securities
    61       2     $ 7       56  
 
Total securities available for sale
  $ 8,074     $ 296     $ 7     $ 8,363  
 
                       
 
                               
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 4                 $ 4  
Other securities
    21                   21  
 
Total held-to-maturity securities
  $ 25                 $ 25  
 
                       
 
                               
 

18


Table of Contents

The following table summarizes our securities available for sale that were in an unrealized loss position as of March 31, 2010, December 31, 2009, and March 31, 2009.
                                                 
    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  
 
MARCH 31, 2010
                                               
Securities available for sale:
                                               
Collateralized mortgage obligations
  $ 3,249     $ 32                 $ 3,249     $ 32  
Other securities
    8           $ 3     $ 1       11       1  
 
Total temporarily impaired securities
  $ 3,257     $ 32     $ 3     $ 1     $ 3,260     $ 33  
 
                                   
 
 
DECEMBER 31, 2009
                                               
Securities available for sale:
                                               
Collateralized mortgage obligations
  $ 4,988     $ 75                 $ 4,988     $ 75  
Other securities
    2           $ 4     $ 1       6       1  
 
Total temporarily impaired securities
  $ 4,990     $ 75     $ 4     $ 1     $ 4,994     $ 76  
 
                                   
 
 
MARCH 31, 2009
                                               
Securities available for sale:
                                               
Other securities
    27     $ 6       18       1       45       7  
 
Total temporarily impaired securities
  $ 27     $ 6     $ 18     $ 1     $ 45     $ 7  
 
                                   
 
 
Through March 31, 2010, we incurred $33 million of gross unrealized losses, $32 million of which relates to 12 fixed-rate collateralized mortgage obligations, that we invested in as part of an overall A/LM strategy. Since these securities have fixed interest rates, their fair value is sensitive to movements in market interest rates. These securities had a weighted-average maturity of 4.5 years at March 31, 2010.
The unrealized losses within each investment category are considered temporary since we expect to collect all contractually due amounts from these securities. Accordingly, these investments have been reduced to their fair value through OCI, not earnings.
We regularly assess our 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, our intent related to the individual securities, and the likelihood that we will have to sell these securities prior to expected recovery.
Debt securities identified to have OTTI are written down to their current fair value. For those debt securities that we intend to sell, or more-likely-than-not will be required to sell, prior to the expected recovery of the amortized cost, the entire impairment (i.e., the difference between amortized cost and the fair value) is recognized in earnings. For those debt securities that we do not intend to sell, or more-likely-than-not will not be required to sell, prior to expected recovery, the credit portion of OTTI is recognized in earnings, while the remaining OTTI is recognized in equity as a component of AOCI on the balance sheet. There were no impairments recognized in earnings or as a component of AOCI for the three months ended March 31, 2010.
As a result of adopting new consolidation guidance on January 1, 2010, we have consolidated our education loan securitization trusts and eliminated our residual interests in these trusts. Prior to our consolidation of these trusts, we accounted for the residual interests associated with these securitizations as debt securities which we regularly assessed for impairment. These residual interests will no longer be assessed for impairment. The consolidated assets and liabilities related to these trusts are included in “discontinued assets” and “discontinued liabilities” on the balance sheet as a result of our decision to exit the education lending business. For more information about this discontinued operation, see Note 16 (“Discontinued Operations”).

19


Table of Contents

Three months ended March 31, 2010
in millions        
 
Balance at December 31, 2009
  $ 8  
Impairment recognized in earnings
     
Elimination of residual interests (a)
    (8
 
Balance at March 31, 2010
     
 
     
 
 
(a)    With consolidation of education loan securitization trusts on January 1, 2010, residual interests were eliminated.
Realized gains and losses related to securities available for sale were as follows:
Three months ended March 31, 2010
in millions        
 
Realized gains
  $ 3  
Realized losses
     
 
Net securities gains (losses)
  $ 3   
 
     
 
 
At March 31, 2010, securities available for sale and held-to-maturity securities totaling $9.3 billion were pledged to secure securities sold under repurchase agreements, public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.
The following table shows securities by remaining maturity. Collateralized mortgage obligations and other mortgage-backed securities — both 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
March 31, 2010   Amortized     Fair     Amortized     Fair  
in millions   Cost     Value     Cost     Value  
 
Due in one year or less
  $ 679     $ 699     $ 3     $ 3  
Due after one through five years
    15,428       15,699       19       19  
Due after five through ten years
    127       133              
Due after ten years
    21       22              
 
Total
  $ 16,255     $ 16,553     $ 22     $ 22  
 
                       
 

20


Table of Contents

5. Loans and Loans Held for Sale
Our loans by category are summarized as follows:
                             
    March 31,     December 31,     March 31,      
in millions   2010     2009     2009      
 
Commercial, financial and agricultural
  $ 18,015     $ 19,248     $ 25,405      
Commercial real estate:
                           
Commercial mortgage
    10,467       10,457       12,057     (a)
Construction
    3,990     4,739       6,208     (a)
     
Total commercial real estate loans
    14,457       15,196       18,265      
Commercial lease financing
    6,964       7,460       8,553      
     
Total commercial loans
    39,436       41,904       52,223      
Real estate — residential mortgage
    1,812       1,796       1,759      
Home equity:
                           
Community Banking
    9,892       10,048       10,281      
Other
    795       838       1,007      
     
Total home equity loans
    10,687       10,886       11,288      
Consumer other — Community Banking
    1,141       1,181       1,215      
Consumer other:
                           
Marine
    2,636       2,787       3,256      
Other
    201       216       262      
     
Total consumer other
    2,837       3,003       3,518      
     
Total consumer loans
    16,477       16,866       17,780      
     
Total loans (b)
  $ 55,913     $ 58,770     $ 70,003      
 
                     
 
     
(a)   In March 2009, we 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 for projects that have reached a completed status.
 
(b)   Excludes loans in the amount of $6.0 billion, $3.5 billion and $3.7 billion at March 31, 2010, December 31, 2009 and March 31, 2009, respectively, related to the discontinued operations of the education lending business.
We use interest rate swaps, which modify the repricing characteristics of certain loans, to manage interest rate risk. For more information about such swaps, see Note 20 (“Derivatives and Hedging Activities”), which begins on page 122 of our 2009 Annual Report to Shareholders.
Our loans held for sale by category are summarized as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2010     2009     2009  
 
Commercial, financial and agricultural
  $ 25     $ 14     $ 24  
Real estate — commercial mortgage
    265       171       301  
Real estate — construction
    147       92       151  
Commercial lease financing
    27       27       10  
Real estate — residential mortgage
    92       139       183  
Automobile
                2  
 
Total loans held for sale (a)
  $ 556     $ 443     $ 671  
 
                 
 
 
(a)   Excludes loans in the amount of $246 million, $434 million and $453 million at March 31, 2010, December 31, 2009, and March 31, 2009, respectively, related to the discontinued operations of the education lending business.

21


Table of Contents

Changes in the allowance for loan losses are summarized as follows:
                 
    Three months ended March 31,  
in millions   2010     2009  
 
Balance at beginning of period
  $ 2,534     $ 1,629  
 
Charge-offs
    (557 )     (487 )
Recoveries
    35       27  
 
Net loans charged off
    (522 )     (460 )
Provision for loan losses from continuing operations
    413       847  
 
Balance at end of period
  $ 2,425     $ 2,016  
 
           
 
 
Changes in the liability for credit losses on lending-related commitments are summarized as follows:
                 
    Three months ended March 31,  
in millions   2010     2009  
 
Balance at beginning of period
  $ 121     $ 54  
Provision (credit) for losses on lending-related commitments
    (2 )      
 
Balance at end of period (a)
  $ 119     $ 54  
 
           
 
 
(a)   Included in “accrued expense and other liabilities” on the balance sheet.
6. Mortgage Servicing Assets
We originate and periodically sell commercial mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. A servicing asset is recorded if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market rate. Changes in the carrying amount of mortgage servicing assets are summarized as follows:
                 
      Three months ended March 31,  
in millions   2010     2009  
 
Balance at beginning of period
  $ 221     $ 242  
Servicing retained from loan sales
    1       1  
Purchases
           
Amortization
    (11 )     (15 )
 
Balance at end of period
  $ 211     $ 228  
 
           
 
Fair value at end of period
  $ 315     $ 384  
 
           
 
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 our mortgage servicing assets at March 31, 2010 and 2009, are:
¨   prepayment speed generally at an annual rate of 0.00% to 25.00%;
 
¨   expected credit losses at a static rate of 2.00% to 3.00%; and
 
¨   residual cash flows discount rate of 8.50% to 15.00%.

22


Table of Contents

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. At March 31, 2010, a 1.00% increase in the assumed default rate of commercial mortgage loans would cause a $6 million decrease in the fair value of our mortgage servicing assets.
Contractual fee income from servicing commercial mortgage loans totaled $18 million and $16 million for the three-month periods ended March 31, 2010 and 2009, respectively. We have 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.
Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets” on page 82 of our 2009 Annual Report to Shareholders and Note 16 (“Discontinued Operations”) under the heading “Education lending.”
Note 7. 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 power to direct the activities that most significantly impact the entity’s economic performance.
 
¨   The entity’s equity at risk holders do not have the obligation to absorb losses and the right to receive 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.
Our VIEs, including those consolidated and those in which we hold a significant interest, are summarized below. We define a “significant interest” in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIE’s expected losses or residual returns; however, we do not have the power to direct the activities that most significantly impact the entity’s economic performance.
                                         
  Consolidated VIEs   Unconsolidated VIEs
    Total     Total     Total     Total     Maximum  
in millions   Assets     Liabilities     Assets     Liabilities     Exposure to Loss  
 
March 31, 2010
                                       
LIHTC funds
  $ 161       N/A        $ 175              
Education loan securitization trusts
    2,624     $ 2,457       N/A       N/A       N/A  
LIHTC investments
    N/A       N/A       1,002           $       431  
 
 

23


Table of Contents

Our involvement with VIEs is described below.
Consolidated VIEs
LIHTC guaranteed funds. KAHC formed limited partnerships, known as funds, which 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. We also earned syndication fees from the funds and continue to earn asset management fees. The funds’ assets primarily are investments in LIHTC operating partnerships, which totaled $144 million at March 31, 2010. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations.
We have not formed new funds or added LIHTC partnerships since October 2003. However, we continue to act as asset manager and provide occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, we have determined that we are the primary beneficiary of these funds. We did not record any expenses related to this guarantee obligation during the first three months of 2010. Additional information on return guarantee agreements with LIHTC investors is presented in Note 13 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Guarantees.”
In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors’ share of the funds’ profits and losses. At March 31, 2010, we estimated the settlement value of these third-party interests to be between $95 million and $107 million, while the recorded value, including reserves, totaled $166 million. The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.
Education loan securitization trusts. In September 2009, we decided to exit the government-guaranteed education lending business. Therefore, we have accounted for this business as a discontinued operation. As part of our education lending business model, we would originate and securitize education loans. We, as the transferor, retained a portion of the risk in the form of a residual interest and also retained the right to service the securitized loans and receive servicing fees.
As a result of adopting the new consolidation accounting guidance issued by the FASB in June 2009, we have consolidated our ten outstanding education loan securitization trusts as of January 1, 2010. We were required to consolidate these trusts because we hold the residual interests and are the master servicer who has the power to direct the activities that most significantly impact the economic performance of these trusts. We elected to consolidate these trusts at fair value. The assets held by these trusts can only be used to settle the obligations or securities issued by the trusts. We cannot sell the assets or transfer the liabilities of the consolidated trusts. The security holders or beneficial interest holders do not have recourse to us. We do not have any liability recorded related to these trusts other than the securities issued by the trusts. We have not securitized any education loans since 2006. Additional information regarding these trusts is provided in Note 16 (“Discontinued Operations”) under the heading “Education lending.”

24


Table of Contents

Unconsolidated VIEs
LIHTC nonguaranteed funds. Although we hold significant interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary of those funds because we do not absorb the majority of the funds’ expected losses and do not have the power to direct activities that most significantly impact the economic performance of these entities. At March 31, 2010, assets of these unconsolidated nonguaranteed funds totaled $175 million. Our maximum exposure to loss in connection with these funds is minimal, and we do not have any liability recorded related to the funds. We have not formed nonguaranteed funds since October 2003.
LIHTC investments. Through the Community Banking business group, we have made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities of the partnerships that most significantly impact their economic performance and have the obligation to absorb expected losses and the right to receive benefits from the entity. At March 31, 2010, assets of these unconsolidated LIHTC operating partnerships totaled approximately $1.0 billion. At March 31, 2010, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $358 million plus $73 million of tax credits claimed but subject to recapture. We do not have any liability recorded related to these investments because we believe the likelihood of any loss in connection with these partnerships is remote. During the first three months of 2010, we did not obtain significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships.
We have 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 March 31, 2010. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. We have determined that we are not the primary beneficiary of these partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance and the obligation to absorb expected losses and right to receive residual returns from the entity. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 13 under the heading “Return guarantee agreement with LIHTC investors.”
Commercial and residential real estate investments and principal investments. Our 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 AICPA Audit and Accounting Guide, “Audits of Investment Companies.” We are not currently applying the accounting or disclosure provisions in the applicable accounting guidance for consolidations to these investments, which remain unconsolidated. The FASB has indefinitely deferred the effective date of this guidance for such nonregistered investment companies.

25


Table of Contents

8. Nonperforming Assets and Past Due Loans from Continuing Operations
Impaired loans totaled $1.8 billion at March 31, 2010, compared to $1.9 billion at December 31, 2009, and $1.5 billion at March 31, 2009. Impaired loans had an average balance of $1.8 billion for the first quarter of 2010 and $1.2 billion for the first quarter of 2009. At March 31, 2010, restructured loans (which are included in impaired loans) totaled $226 million while at December 31, 2009, restructured loans totaled $364 million. Although $23 million in restructured loans were added during the first three months of 2010, the decrease in restructured loans was primarily attributable to the transfer out of $96 million of troubled debt restructurings to performing status, and $65 million in payments and charge-offs. Restructured loans were nominal at March 31, 2009.
Our nonperforming assets and past due loans were as follows:
                         
  March 31,     December 31,     March 31,  
in millions   2010     2009     2009  
 
Impaired loans
  $ 1,791     $ 1,903     $ 1,469  
Other nonperforming loans
    274       284       266  
 
Total nonperforming loans
    2,065       2,187       1,735  
 
                       
Nonperforming loans held for sale
    195       116       72  
 
                       
Other real estate owned (“OREO”)
    175       191       147  
Allowance for OREO losses
    (45 )     (23 )     (4 )
 
OREO, net of allowance
    130       168       143  
Other nonperforming assets
    38       39       44  
 
Total nonperforming assets
  $ 2,428     $ 2,510     $ 1,994  
 
                 
 
 
                       
Impaired loans with a specifically allocated allowance
  $ 1,519     $ 1,645     $ 1,327  
Specifically allocated allowance for impaired loans
    307       300       233  
 
 
                       
Restructured loans included in nonaccrual loans (a)
  $ 213     $ 139        
Restructured loans with a specifically allocated allowance (b)
    162       256        
Specifically allocated allowance for restructured loans (c)
    37       44        
 
 
                       
Accruing loans past due 90 days or more
  $ 434     $ 331     $ 435  
Accruing loans past due 30 through 89 days
    639       933       1,313  
 
                       
 
(a)   Restructured loans (i.e. troubled debt restructurings) are those for which we, for reasons related to a borrower’s financial difficulties, have granted a concession to the borrower that we would not otherwise have considered. These concessions are made to improve the collectability of the loan and generally take the form of a reduction of the interest rate, extension of the maturity date or reduction in the principal balance.
 
(b)   Included in impaired loans with a specifically allocated allowance.
 
(c)   Included in specifically allocated allowance for impaired loans.
At March 31, 2010, we did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status.
We evaluate the collectability of our loans as described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 82 of our 2009 Annual Report to Shareholders.

26


Table of Contents

9. Capital Securities Issued by Unconsolidated Subsidiaries
We own the outstanding common stock of business trusts formed by us 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 federal tax advantages as debt. In 2005, the 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 were to take effect March 31, 2009. On March 17, 2009, in light of continued stress in the financial markets, the Federal Reserve delayed the effective date of these new limits until March 31, 2011. We believe the new rule will not have any material effect on our financial condition.
We unconditionally guarantee 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.     

27


Table of Contents

The capital securities, common stock and related debentures are summarized as follows:
                                         
                    Principal     Interest Rate     Maturity  
    Capital             Amount of     of Capital     of Capital  
    Securities,     Common     Debentures,     Securities and     Securities and  
dollars in millions Net of Discount  (a)   Stock     Net of Discount  (b)   Debentures  (c)   Debentures  
 
March 31, 2010
                                       
KeyCorp Capital I
  $ 156     $ 6     $ 158       .991   %     2028  
KeyCorp Capital II
    81       4       97       6.875       2029  
KeyCorp Capital III
    102       4       123       7.750       2029  
KeyCorp Capital V
    115       4       128       5.875       2033  
KeyCorp Capital VI
    55       2       60       6.125       2033  
KeyCorp Capital VII
    175       5       181       5.700       2035  
KeyCorp Capital VIII
    171             192       7.000       2066  
KeyCorp Capital IX
    331             348       6.750       2066  
KeyCorp Capital X
    575             589       8.000       2068  
Union State Capital I
    20       1       21       9.580       2027  
Union State Statutory II
    20             20       3.829       2031  
Union State Statutory IV
    10             10       3.051       2034  
 
Total
  $ 1,811     $ 26     $ 1,927       6.539   %      
 
                                 
 
                                       
 
December 31, 2009
  $ 1,872     $ 26     $ 1,906       6.577   %      
 
                                 
 
                                       
 
March 31, 2009
  $ 2,973     $ 40     $ 3,015       6.743   %      
 
                                 
 
                                       
 
(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. Certain capital securities include basis adjustments related to fair value hedges totaling $20 million at March 31, 2010, $81 million at December 31, 2009, and $390 million at March 31, 2009. See Note 14 (“Derivatives and Hedging Activities”) for an explanation of fair value hedges.
 
(b)   We have the right to redeem our 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 us. The principal amount of debentures includes adjustments related to hedging with financial instruments totaling $110 million at March 31, 2010, $89 million at December 31, 2009, and $392 million at March 31, 2009.
 
(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 total interest rates are weighted-average rates.

28


Table of Contents

10. Shareholders’ Equity
Cumulative effect adjustment (after-tax)
Effective January 1, 2010, we adopted new consolidation accounting guidance. As a result of adopting this new guidance, we consolidated our education loan securitization trusts (classified as discontinued assets and liabilities), thereby adding $2.8 billion in assets and liabilities to our balance sheet and recording a cumulative effect adjustment (after-tax) of $45 million to beginning retained earnings on January 1, 2010. Additional information regarding this new consolidation guidance and the consolidation of these education loan securitization trusts is provided in Note 1 (“Basis of Presentation”) and Note 16 (“Discontinued Operations”).
We did not undertake any new capital generating activities during the first three months of 2010. Note 15 (“Shareholders’ Equity”) on page 107 of our 2009 Annual Report to Shareholders provides information regarding our capital generating activities in 2009.
11. Employee Benefits
Pension Plans
Effective December 31, 2009, we amended our pension plans to freeze all benefit accruals. We will continue to credit participants’ account balances for interest until they receive their plan benefits. The plans were closed to new employees as of December 31, 2009.
The components of net pension cost for all funded and unfunded plans are as follows:
                 
      Three months ended March 31,  
in millions   2010     2009  
 
Service cost of benefits earned
        $ 12  
Interest cost on PBO
  $ 15       15  
Expected return on plan assets
    (18 )     (16 )
Amortization of losses
    9       10  
 
Net pension cost
  $ 6     $ 21  
 
           
 
               
 
Other Postretirement Benefit Plans
We sponsor 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. We also sponsor death benefit plans covering certain grandfathered employees. These plans are principally noncontributory. Separate VEBA trusts are used to fund the healthcare plan and one of the death benefit plans.
The components of net postretirement benefit cost for all funded and unfunded plans are as follows:
                 
      Three months ended March 31,  
in millions   2010     2009  
 
Interest cost on APBO
  $ 1     $ 1  
Expected return on plan assets
    (1 )     (1 )
 
Net postretirement (benefit) cost
           
 
           
 
               
 
The “Patient Protection and Affordable Care Act” and “Education Reconciliation Act of 2010,” which were signed into law on March 23, 2010 and March 30, 2010, respectively, changed the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least

29


Table of Contents

“actuarially equivalent” to the benefits under Medicare Part D. As a result of these laws, these subsidy payments become taxable in tax years beginning after December 31, 2012. The accounting guidance applicable to income taxes requires the impact of a change in tax law to be immediately recognized in the period that includes the enactment date. The changes to the tax law as a result of the “Patient Protection and Affordable Care Act” and “Education Reconciliation Act of 2010” did not impact us as we did not have a deferred tax asset recorded as a result of Medicare Part D subsidies received.
12. Income Taxes
Deferred Tax Asset
As of March 31, 2010, we had a net deferred tax asset of $651 million included in “accrued income and other assets” on the balance sheet; prior to September 30, 2009, we had been in a net deferred tax liability position. To determine the amount of deferred tax assets that are more likely than not to be realized, and therefore recorded, we conduct a quarterly assessment of all available evidence. This evidence includes, but is not limited to, taxable income in prior periods, projected future taxable income, and projected future reversals of deferred tax items. Based on these criteria, and in particular our projections for future taxable income, we currently believe that it is more likely than not that we will realize the net deferred tax asset in future periods.
Unrecognized Tax Benefits
As permitted under the applicable accounting guidance for income taxes, it is our policy to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
13. Commitments, Contingent Liabilities and Guarantees
Legal Proceedings
Taylor litigation. On August 11, 2008, a purported class action case was filed against KeyCorp, its directors and certain employees, 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 our 401(k) Savings Plan and allege that the defendants in the lawsuit breached fiduciary duties owed to them under 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. We strongly disagree with the allegations asserted against us in these actions, and intend to vigorously defend against them.
Madoff-related claims. In December 2008, Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers, 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 controlled. 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 ERISA. In the event we were to incur any liability for this matter, we believe it would be covered under the terms and conditions of our insurance policy, subject to a $25 million self-insurance deductible and usual policy exceptions.
In April 2009, we decided to wind down Austin’s operations and have determined that the related exit costs will not be material. Information regarding the Austin discontinued operations is included in Note 16 (“Discontinued Operations”).

30


Table of Contents

Data Treasury matter. In February 2006, an action styled DataTreasury Corporation v. Wells Fargo & Company, et al., was filed against KeyBank and numerous other financial institutions, as owners and users of Small Value Payments Company, LLC software, in the United States District Court for the Eastern District of Texas. The plaintiff alleges patent infringement and is seeking an unspecified amount of damages and treble damages. In January 2010, the Court entered an order establishing three trial dates due to the number of defendants involved in the action, including an October 2010 trial date for KeyBank and its trial phase codefendants. We strongly disagree with the allegations asserted against us, and have been vigorously defending against them. Management believes it has established appropriate reserves for the matter consistent with applicable accounting guidance.
Other litigation. In the ordinary course of business, we are subject to other legal actions that involve claims for substantial monetary relief. Based on information presently known to us, we do not believe there is any legal action to which we are a party, or involving any of our properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial condition.
Guarantees
We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at March 31, 2010. 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 84 of our 2009 Annual Report to Shareholders.
                 
  Maximum Potential        
March 31, 2010 Undiscounted     Liability  
in millions Future Payments     Recorded  
 
Financial guarantees:
               
Standby letters of credit
  $ 11,550     $ 74  
Recourse agreement with FNMA
    723       10  
Return guarantee agreement with LIHTC investors
    107       62  
Written put options (a)
    3,065       58  
Default guarantees
    79       3  
 
Total
  $ 15,524     $ 207  
 
           
 
               
 
(a)   The maximum potential undiscounted future payments represent notional amounts of derivatives qualifying as guarantees.
We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use 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 have determined that the payment/performance risk associated with each type of guarantee outstanding at March 31, 2010, is low.
Standby letters of credit. KeyBank issues standby letters of credit to address clients’ financing needs. These instruments obligate us 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 to the client; they bear interest (generally at variable rates) and pose the same credit risk to us as a loan. At March 31, 2010, our standby letters of credit had a remaining weighted-average life of 1.6 years, with remaining actual lives ranging from less than one year to as many as nine years.
Recourse agreement with FNMA. We participate as a lender in the FNMA Delegated Underwriting and Servicing program. FNMA delegates responsibility for originating, underwriting and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to FNMA. We maintain a reserve for such potential losses in an

31


Table of Contents

amount that we believe approximates the fair value of our liability. At March 31, 2010, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 6.1 years, and the unpaid principal balance outstanding of loans sold by us as a participant in this program was $2.3 billion. As shown in the preceding table, the maximum potential amount of undiscounted future payments that we could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at March 31, 2010. If we are required to make a payment, we would have an interest in the collateral underlying the related commercial mortgage loan. Therefore, any loss incurred could be offset by the amount of any recovery from the collateral.
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. Typically, KAHC provides these guaranteed returns by distributing tax credits and deductions associated with the specific properties. If KAHC defaults on its obligation to provide the guaranteed return, KeyBank is obligated to make any necessary payments to investors. No recourse or collateral is available to offset our guarantee obligation other than the underlying income stream from the properties and the residual value of the operating partnership interests.
As shown in the previous table, KAHC maintained a reserve in the amount of $62 million at March 31, 2010, which we believe 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.
These guarantees have expiration dates that extend through 2019, but there have been no new partnerships formed under this program since October 2003. Additional information regarding these partnerships is included in Note 7 (“Variable Interest Entities”).
Written put options. In the ordinary course of business, we “write” interest rate caps and floors for commercial loan clients that have variable and fixed rate loans, respectively, with us and wish to mitigate their exposure to changes in interest rates. At March 31, 2010, our written put options had an average life of 1.3 years. These instruments are considered to be guarantees as we are required to make payments to the counterparty (the commercial loan client) based on changes in an underlying variable that is related to an asset, a liability or an equity security held by the guaranteed party. We are obligated to pay the client if the applicable benchmark interest rate is above or below a specified level (known as the “strike rate”). These written put options are accounted for as derivatives at fair value, which are further discussed in Note 14 (“Derivatives and Hedging Activities”). We typically mitigate our potential future payments by entering into offsetting positions with third parties.
Written put options where the counterparty is a broker-dealer or bank are accounted for as derivatives at fair value, but are not considered guarantees as these counterparties do not typically hold the underlying instruments. In addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 14.
Default guarantees. Some lines of business participate in guarantees that obligate us to perform if the debtor (typically a client) fails to satisfy all of its payment obligations to third parties. We generally undertake these guarantees for one of two possible reasons: either the risk profile of the debtor should provide an investment return, or we are supporting our underlying investment. The terms of these default guarantees range from less than one year to as many as nine years; some default guarantees do not have a contractual end date. Although no collateral is held, we would receive a pro rata share should the third party collect some or all of the amounts due from the debtor.

32


Table of Contents

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 the applicable accounting guidance for guarantees, and from other relationships.
Liquidity facilities that support asset-backed commercial paper conduits. We provide liquidity facilities to several unconsolidated third-party commercial paper conduits. These facilities obligate us to provide funding in the event that a credit market disruption or other factors prevent the conduit from issuing commercial paper. The liquidity facilities, all of which expire by November 24, 2010, obligate us to provide aggregate funding of up to $253 million, with individual facilities ranging from $48 million to $85 million. The aggregate amount available to be drawn is based on the amount of current commitments to borrowers and totaled $195 million at March 31, 2010. We periodically evaluate our commitments to provide liquidity.
Indemnifications provided in the ordinary course of business. We provide certain indemnifications, primarily through representations and warranties in contracts that we execute 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. We maintain reserves, when appropriate, with respect to liability that reasonably could arise in connection with these indemnities.
Intercompany guarantees. KeyCorp and certain of our affiliates are parties to various guarantees that facilitate the ongoing business activities of other 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 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 allegedly involved the malicious collection of in-transit, unencrypted payment card data that Heartland was processing. Heartland’s 2008 Form 10-K filed with the SEC on March 10, 2009, (Heartland’s 2008 Form 10-K) reported that the major card brands, including Visa and MasterCard, asserted 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 alleged criminal breach of its credit card payment processing systems environment.
KeyBank has received letters from both Visa and MasterCard imposing fines, penalties or assessments related to the Intrusion. 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 them at this time. Accordingly, under applicable accounting rules, we have not established any reserve.
In Heartland’s Form 10-K filed with the SEC on March 10, 2010 (Heartland’s 2009 Form 10-K), Heartland disclosed that it had consummated the previously reported settlement among Heartland, Visa U.S.A. Inc., Visa International Service Association, and Visa Inc.,and the Sponsor Banks, including KeyBank and Heartland Bank. Heartland’s 2009 Form 10-K also disclosed that its total provision for the Intrusion during 2009 was $128.9 million.
For further information on Heartland and the Intrusion, see Heartland’s 2009 Form 10-K, Heartland’s 2008 Form 10-K Heartland’s Form 10-Q filed with the SEC on May 11, 2009, Heartland’s Form 8-K filed with the SEC on August 4, 2009, Heartland’s Form 10-Q filed with the SEC on August 7, 2009, Heartland’s Form 8-Ks filed with the SEC on August 4, 2009, November 3, 2009, January 8, 2010, February 4, 2010, February 18, 2010, and February 24, 2010.

33


Table of Contents

14. Derivatives and Hedging Activities
We are a party to various derivative instruments, mainly through our subsidiary, KeyBank. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. A derivative’s notional amount serves as the basis for the payment provision of the contract, and takes the form of units, such as shares or dollars. A derivative’s underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.
The primary derivatives that we use are interest rate swaps, caps, floors and futures; foreign exchange contracts; energy derivatives; credit derivatives; and equity derivatives. Generally, these instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in the loan portfolio, hedge against changes in foreign currency exchange rates, and meet client financing and hedging needs. Interest rate risk represents the possibility that the economic value of equity or net interest income will be adversely affected by fluctuations in interest rates. Credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Foreign exchange risk is the risk that an exchange rate will adversely affect the fair value of a financial instrument.
Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of bilateral collateral and master netting agreements. These bilateral collateral and master netting agreements allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. As a result, we 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 March 31, 2010, after taking into account the effects of bilateral collateral and master netting agreements, we had $238 million of derivative assets and $178 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 bilateral collateral and master netting agreements, and a reserve for potential future losses, we had derivative assets of $825 million and derivative liabilities of $925 million that were not designated as hedging instruments.
Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Basis of Presentation”) under the heading “Derivatives,” on page 83 of our 2009 Annual Report to Shareholders.
Derivatives Designated in Hedge Relationships
Changes in interest rates and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities may cause fluctuations in net interest income and the economic value of equity. To minimize the volatility of net interest income and the EVE, we manage exposure to interest rate risk in accordance with policy limits established by the Risk Management Committee of the Board of Directors. We utilize derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance for derivatives and hedging to minimize interest rate volatility. 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.
We designate certain “receive fixed/pay variable” interest rate swaps as fair value hedges. These swaps are used primarily to modify our exposure to interest rate risk. These contracts convert certain fixed-rate long-term debt into variable-rate obligations. As a result, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.

34


Table of Contents

Similarly, we designate 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 effect of interest rate decreases on future interest income. These contracts allow us to receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts. We also designate certain “pay fixed/receive variable” interest rate swaps as cash flow hedges. These swaps are used to convert certain floating-rate debt into fixed-rate debt.
We also use interest rate swaps to hedge the floating-rate debt that funds fixed-rate leases entered into by our 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.
The derivatives used for managing foreign currency exchange risk are cross currency swaps. We have several outstanding issuances of medium-term notes that are denominated in foreign currencies. 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 our 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 U.S. currency-denominated debt, which is designated as a fair value hedge of foreign currency exchange risk.
Derivatives Not Designated in Hedge Relationships
On occasion, we enter into interest rate swap contracts to manage economic risks but do not designate the instruments in hedge relationships. We did not have a significant amount in interest rate swap contracts entered into to manage economic risks at March 31, 2010.
Like other financial services institutions, we originate loans and extend credit, both of which expose us to credit risk. We actively manage our 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 our credit risk. Credit default swaps enable us to transfer to a third party a portion of the credit risk associated with a particular extension of credit, and to manage portfolio concentration and correlation risks. Occasionally, we also provide 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 we use these instruments for risk management purposes, they are not treated as hedging instruments as defined by the applicable accounting guidance for derivatives and hedging.
We also enter into derivative contracts to meet customer needs and for proprietary purposes that consist 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;
 
¨   interest rate swaps and foreign exchange contracts used for proprietary trading purposes;
 
¨   positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above; and
 
¨   foreign exchange forward contracts entered into to accommodate the needs of clients.
These contracts are not designated as part of hedge relationships.

35


Table of Contents

Fair Values, Volume of Activity and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of our derivative instruments on a gross basis as of March 31, 2010, December 31, 2009 and March 31, 2009. The volume of our derivative transaction activity during the first quarter of 2010 is represented by the change in the notional amounts of our gross derivatives by type from December 31, 2009 to March 31, 2010. The notional amounts are not affected by bilateral collateral and master netting agreements. Our derivative instruments are included in “derivative assets” or “derivative liabilities” on the balance sheet, as indicated in the following table:
                                                                         
    March 31, 2010   December 31, 2009   March 31, 2009
            Fair Value           Fair Value           Fair Value
    Notional     Derivative     Derivative     Notional     Derivative     Derivative     Notional     Derivative     Derivative  
in millions   Amount     Assets     Liabilities     Amount     Assets     Liabilities     Amount     Assets     Liabilities  
 
Derivatives designated as hedging instruments:
                                                                       
Interest rate
  $ 15,964     $ 487     $ 5     $ 18,259     $ 489     $ 9     $ 22,279     $ 876     $ 14  
Foreign exchange
    1,712       53       259       1,888       78       189       2,309       46       434  
 
Total
    17,676       540       264       20,147       567       198       24,588       922       448  
Derivatives not designated as hedging instruments:
                                                                       
Interest rate
    72,334       1,452       1,383       70,017       1,434       1,345       85,314       2,284       2,070  
Foreign exchange
    6,296       189       164       6,293       206       184       9,513       422       380  
Energy and commodity
    1,969       415       437       1,955       403       427       1,896       721       751  
Credit
    3,863       52       38       4,538       55       49       7,142       171       173  
Equity
    13       1       1       3       1       1       1       1        
 
Total
    84,475       2,109       2,023       82,806       2,099       2,006       103,866       3,599       3,374  
 
Netting adjustments (a)
    N/A       (1,586 )     (1,184 )     N/A       (1,572 )     (1,192 )     N/A       (2,814 )     (2,895 )
 
Total derivatives
  $ 102,151     $ 1,063     $ 1,103     $ 102,953     $ 1,094     $ 1,012     $ 128,454     $ 1,707     $ 927  
 
                                                     
 
                                                                       
 
 
(a)   Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance related to the offsetting of certain derivative contracts on the balance sheet. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related collateral.
Fair value hedges. Instruments designated as fair value hedges 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 recorded in “other income” on the income statement with no corresponding offset. During the three-month period ended March 31, 2010, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While some ineffectiveness is present in our hedging relationships, all of our fair value hedges remained “highly effective” as of March 31, 2010.

36


Table of Contents

The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the three-month periods ended March 31, 2010 and 2009, and where they are recorded on the income statement.
                                         
 
Three months ended March 31, 2010
            Net Gains                     Net Gains  
    Income Statement Location of     (Losses) on             Income Statement Location of     (Losses) on  
in millions   Net Gains (Losses) on Derivative     Derivative     Hedged Item   Net Gains (Losses) on Hedged Item     Hedged Item  
 
Interest rate
  Other income   $ 47     Long-term debt   Other income   $ (46)   (a)
Interest rate
  Interest expense – Long-term debt     59                          
Foreign exchange
  Other income     (108 )   Long-term debt   Other income     104   (a)
Foreign exchange
  Interest expense – Long-term debt     2     Long-term debt   Interest expense – Long-term debt     (4)   (b)
 
Total
                                $ 54  
 
                                   
 
                                       
 
                                         
 
Three months ended March 31, 2009
            Net Gains                     Net Gains  
    Income Statement Location of     (Losses) on             Income Statement Location of     (Losses) on  
in millions   Net Gains (Losses) on Derivative     Derivative     Hedged Item   Net Gains (Losses) on Hedged Item     Hedged Item  
 
Interest rate
  Other income   $ (84 )   Long-term debt   Other income   $ 97    (a)
Interest rate
  Interest expense – Long-term debt     53                          
Foreign exchange
  Other income     (67 )   Long-term debt   Other income     65    (a)
Foreign exchange
  Interest expense – Long-term debt     8     Long-term debt   Interest expense – Long-term debt     (20 )  (b)
 
Total
          $ (90 )                   $ 142  
 
                                   
 
                                       
 
(a)   Net gains (losses) 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. Instruments designated as cash flow hedges 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 initially recorded as a component of AOCI on the balance sheet and subsequently reclassified into income when the hedged transaction impacts earnings (e.g. when we pay variable-rate interest on debt, receive variable-rate interest on commercial loans or sell commercial real estate loans). The ineffective portion of cash flow hedging transactions is included in “other income” on the income statement. During the three-month period ended March 31, 2010, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While some ineffectiveness is present in our hedging relationships, all of our cash flow hedges remained “highly effective” as of March 31, 2010.
The following table summarizes the pre-tax net gains (losses) on our cash flow hedges for the three-month periods ended March 31, 2010 and 2009, and where they are recorded on the income statement. The table includes the effective portion of net gains (losses) recognized in 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) recognized directly in income, representing the amount of hedge ineffectiveness.

37


Table of Contents

                                         
    Three months ended March 31, 2010
                    Net Gains     Income Statement Location     Net Gains  
    Net Gains (Losses)             (Losses) Reclassified     of Net Gains (Losses)     (Losses) Recognized  
    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)     (Ineffective Portion)  
 
Interest rate
  $ 27     Interest income – Loans   $   77     Other income   $  
Interest rate
    (3 )   Interest expense – Long-term debt     (5 )   Other income      
Interest rate
        Net gains (losses) from loan securitizations and sales         Other income      
           
Total
  $ 24             $   72             $  
 
               
 
               
 
                                       
 
                                         
    Three months ended March 31, 2009
                    Net Gains     Income Statement Location     Net Gains  
    Net Gains (Losses)             (Losses) Reclassified     of Net Gains (Losses)     (Losses) Recognized  
    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)     (Ineffective Portion)  
 
Interest rate
  $ 64     Interest income – Loans   $   89     Other income   $ (1 )
Interest rate
    8     Interest expense – Long-term debt     (4 )   Other income     1  
Interest rate
    4     Net gains (losses) from loan securitizations and sales     5     Other income      
           
Total
  $ 76             $   90                
 
               
 
               
 
                                       
 
The after-tax change in AOCI resulting from cash flow hedges is as follows:
                                 
                    Reclassification        
    December 31,     2010     of Gains to     March 31,  
in millions   2009     Hedging Activity     Net Income     2010  
 
Accumulated other comprehensive income resulting from cash flow hedges
  $ 114     $ 15     $ (45 )   $ 84  
 
 
Considering the interest rates, yield curves and notional amounts as of March 31, 2010, we would expect to reclassify an estimated $29 million of net losses on derivative instruments from AOCI to income during the next twelve months. In addition, we expect to reclassify approximately $54 million of net gains related to terminated cash flow hedges from AOCI to income during the next 12 months. The maximum length of time over which forecasted transactions are hedged is eighteen years.
Nonhedging instruments. Our derivatives that are not designated as hedging instruments 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 (loss)” on the income statement.
The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the three-month periods ended March 31, 2010 and 2009, and where they are recorded on the income statement.
                 
    Three months ended March 31,  
in millions   2010   2009  
 
NET GAINS (LOSSES) (a)
               
Interest rate
  $ 3   $ 13  
Foreign exchange
    9     10  
Energy and commodity
    2     3  
Credit
    3     (19 )
     
Total net gains (losses)
  $ 17   $ 7  
 
 
 
 
 
 
 
               
 
(a)   Recorded in “investment banking and capital markets income (loss)” on the income statement.

38


Table of Contents

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. We use several means to mitigate and manage exposure to credit risk on derivative contracts. We generally enter into bilateral collateral and master netting agreements using standard forms published by ISDA. These agreements provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with ISDA and other related agreements. We generally hold collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises or GNMA. The collateral netted against derivative assets on the balance sheet totaled $406 million at March 31, 2010, $381 million at December 31, 2009, and $810 million at March 31, 2009. The collateral netted against derivative liabilities totaled $3 million at March 31, 2010, less than $1 million at December 31, 2009, and $892 million at March 31, 2009.
At March 31, 2010, the largest gross exposure to an individual counterparty was $223 million, which was secured with $21 million in collateral. Additionally, we had a derivative liability of $316 million with this counterparty, whereby we pledged $118 million in collateral. After taking into account the effects of a master netting agreement and collateral, we had a net exposure of $5 million.
The following table summarizes the fair value of our derivative assets by type. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.
                         
    March 31,     December 31,     March 31,  
in millions   2010     2009     2009  
 
Interest rate
  $ 1,156     $ 1,147     $ 1,985  
Foreign exchange
    155       178       180  
Energy and commodity
    138       131       331  
Credit
    20       19       20  
Equity
                1  
       
Derivative assets before collateral
    1,469       1,475       2,517  
Less: Related collateral
    406       381       810  
       
Total derivative assets
  $ 1,063     $ 1,094     $ 1,707  
 
                 
 
                       
 
We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.
We enter into transactions with broker-dealers and banks for various risk management purposes and proprietary trading purposes. These types of transactions generally are high dollar volume. We generally enter into bilateral collateral and master netting agreements with these counterparties. At March 31, 2010, after taking into account the effects of bilateral collateral and master netting agreements, we had gross exposure of $1.0 billion to broker-dealers and banks. We had net exposure of $254 million after the application of master netting agreements and collateral; our net exposure to broker-dealers and banks at March 31, 2010, was reduced to $52 million with the $202 million of additional collateral held in the form of securities.
We enter into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. We generally enter into master netting agreements with these counterparties. In addition, we mitigate our overall portfolio exposure and market risk by entering into offsetting positions with broker-dealers and other banks. Due to the smaller size and magnitude of the individual contracts with clients, collateral generally is not exchanged in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a default reserve (included in “derivative assets”) in the amount of $81 million at March 31,

39


Table of Contents

2010, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At March 31, 2010, after taking into account the effects of master netting agreements, we had gross exposure of $935 million to client counterparties. We had net exposure of $808 million on our derivatives with clients after the application of master netting agreements, collateral and the related reserve.
Credit Derivatives
We are both a buyer and seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations. We also sell credit derivatives, mainly index credit default swaps, to diversify the concentration risk within our loan portfolio.
The following table summarizes the fair value of our credit derivatives purchased and sold by type. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.
                                                                         
    March 31, 2010   December 31, 2009   March 31, 2009
in millions   Purchased     Sold     Net     Purchased     Sold     Net     Purchased     Sold     Net  
 
Single name credit default swaps
  $ 5     $ 3     $ 8     $ 5     $ (3 )   $ 2     $ 132     $ (103 )   $ 29  
Traded credit default swap indices
    1       2       3       2             2       30       (48 )     (18 )
Other
    4       (1 )     3       (1 )     4       3             (13 )     (13 )
                   
Total credit derivatives
  $ 10     $ 4     $ 14     $ 6     $ 1     $ 7     $ 162     $ (164 )   $ (2 )
 
                                                     
 
                                                                       
 
Single name credit default swaps are bilateral contracts whereby the seller agrees, for a premium, to provide protection against the credit risk of a reference entity in connection with a specific debt obligation. 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 published by ISDA. As the seller of a single name credit derivative, we would be required to pay the purchaser the difference between the 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 predefined credit event. For a single name credit derivative, the notional amount represents the maximum amount that a seller could be required to pay. In the event that physical settlement occurs and we receive our portion of the related debt obligation, we 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. We also may purchase offsetting credit derivatives for the same reference entity from third parties that will permit us to recover the amount we pay 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, we would be required to pay the purchaser if one or more of the entities in the index had a credit event. For a credit default swap index, the notional amount represents the maximum amount that a seller could be required to pay. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity.
The majority of transactions represented by the “other” category shown in the above table are risk participation agreements. In these transactions, the lead participant has a swap agreement with a customer. The lead participant (purchaser of protection) then enters into a risk participation agreement with a counterparty (seller of protection), under which the counterparty receives a fee to accept a portion of the lead participant’s credit risk. If the customer defaults on the swap contract, the counterparty to the risk participation agreement must reimburse the lead participant for the counterparty’s percentage of the positive fair value of the customer swap as of the default date. If the customer swap has a negative fair value, the counterparty has no reimbursement requirements. The notional amount represents the maximum amount that the seller could be required to pay. In the case of customer default, the seller is entitled to a pro rata share of the lead participant’s claims against the customer under the terms of the initial swap agreement between the lead participant and the customer.

40


Table of Contents

The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at March 31, 2010, December 31, 2009 and March 31, 2009. 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, 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 that we will have to make a payment under the credit derivative contracts.
                                                                         
    March 31, 2010     December 31, 2009     March 31, 2009  
            Average     Payment /             Average     Payment /             Average     Payment /  
    Notional     Term     Performance     Notional     Term     Performance     Notional     Term     Performance  
dollars in millions   Amount     (Years)     Risk     Amount     (Years)     Risk     Amount     (Years)     Risk  
   
Single name credit default swaps
  $ 1,114       2.41       5.29   %   $ 1,140       2.57       4.88   %     $1,537       1.72       8.09   %
Traded credit default swap indices
    394       4.29       7.49       733       2.71       13.29       1,706       .96       6.52  
Other
    46       2.25       6.98       44       1.94       5.41       59       1.50     Low   (a)
                     
Total credit derivatives sold
  $ 1,554                 $ 1,917                   $3,302              
 
                                                                   
 
                                                                       
   
(a)   At March 31, 2009, the other credit derivatives were not referenced to an entity’s debt obligation. We determined the payment/performance risk based on the probability that we could be required to pay the maximum amount under the credit derivatives. We have determined that the payment/performance risk associated with the other credit derivatives was low at March 31, 2009 (i.e., less than or equal to 30% probability of payment).
Credit Risk Contingent Features
We have entered into certain derivative contracts that require us to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to our long-term senior unsecured credit ratings with Moody’s and S&P. Collateral requirements are also based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties also have the right to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At March 31, 2010, 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. If there were a downgrade of our ratings, we could be required to post additional collateral under those ISDA Master Agreements where we are in a net liability position. As of March 31, 2010, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) held by KeyBank that were in a net liability position totaled $896 million, which includes $677 million in derivative assets and $1.573 billion in derivative liabilities. We had $875 million in cash and securities collateral posted to cover those positions as of March 31, 2010.
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 March 31, 2010, December 31, 2009 and March 31, 2009. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two or three ratings as of March 31, 2010, and take into account all collateral already posted. At March 31, 2010, KeyCorp did not have any derivatives in a net liability position that contained credit risk contingent features.

41


Table of Contents

                                                 
    March 31, 2010   December 31, 2009   March 31, 2009
in millions   Moody’s     S&P     Moody’s     S&P     Moody’s     S&P  
 
KeyBank’s long-term senior unsecured credit ratings
    A2       A-       A2       A-       A1       A  
             
One rating downgrade
  $ 27     $ 17     $ 34     $ 22           $ 25  
Two rating downgrades
    45       25       56       31     $ 25       44  
Three rating downgrades
    53       30       65       36       49       51  
 
If KeyBank’s ratings had been downgraded below investment grade as of March 31, 2010, payments of up to $71 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.
15. Fair Value Measurements
Fair Value Determination
As defined in the applicable accounting guidance for fair value measurements and disclosures, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. We have established and documented our process for determining the fair values of our 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, we determine the fair value of our 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 our judgment, assumptions and estimates related to credit quality, liquidity, interest rates and other relevant inputs.
Valuation adjustments, such as those pertaining to counterparty and our 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.
When we are unable to observe recent market transactions for identical or similar instruments, we make liquidity valuation adjustments to the fair value to reflect the uncertainty in the pricing and trading of the instrument. Liquidity valuation adjustments are 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.
We ensure that our fair value measurements are accurate and appropriate by relying upon 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.
We review any changes to valuation methodologies to ensure they are appropriate and justified, and refine valuation methodologies as more market-based data becomes available.

42


Table of Contents

Additional information regarding our accounting policies for the determination of fair value is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” on page 84 of our 2009 Annual Report to Shareholders.
Qualitative Disclosures of Valuation Techniques
Loans. Loans recorded as trading account assets are valued using an internal cash flow model because the market in which these assets typically trade is not active. The most significant inputs to our internal model are actual and projected financial results for the individual borrowers. Accordingly, these loans are classified as Level 3 assets. As of March 31, 2010, there was one loan that was actively traded. This loan was valued based on market spreads for identical assets and therefore classified as Level 2 since the fair value recorded is based on observable market data.
Securities (trading and available for sale). Securities are classified as Level 1 when quoted market prices are available in an active market for those identical securities. Level 1 instruments include exchange-traded equity securities. If quoted prices for identical securities are not available, we determine fair value using pricing models or quoted prices of similar securities. These instruments, classified as Level 2 assets, include municipal bonds; bonds backed by the U.S. government, corporate bonds, certain mortgage-backed securities, securities issued by the U.S. Treasury and certain agency and corporate collateralized mortgage obligations. 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, we use internal models based on certain assumptions to determine fair value. Such instruments, classified as Level 3 assets, include certain commercial mortgage-backed securities and certain commercial paper. Inputs for the Level 3 internal models include expected cash flows from the underlying loans, which take into account expected default and recovery percentages, market research, and discount rates commensurate with current market conditions.
Private equity and mezzanine investments. Private equity and mezzanine investments consist of investments in debt and equity securities through our Real Estate Capital line of business. They include direct investments made directly in a property, as well as indirect investments made in funds that include other investors for the purpose of investing in properties. There is not an active market in which to value these investments. The direct 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 the cost of build-out, future selling prices, current market outlook and operating performance of the particular investment. The indirect investments are valued using a methodology that is consistent with the new accounting guidance that allows us to use statements from the investment manager to calculate net asset value per share. A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the investee funds. Private equity and mezzanine investments are classified as Level 3 assets since our judgment impacts determination of fair value.
Within the private equity and mezzanine investments, we have investments in real estate private equity funds. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting. The following table presents the fair values of the funds and the unfunded commitments for the funds at March 31, 2010.

43


Table of Contents

                 
March 31, 2010           Unfunded  
in millions   Fair Value     Commitments  
 
INVESTMENT TYPE
               
Passive funds (a)
  $ 16     $ 6  
Co-managed funds (b)
    17       19  
     
Total
  $ 33     $ 25  
 
           
 
               
 
(a)   We invest in passive funds, which are multi-investor private equity funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. Some funds have no restrictions on sale, while others require investors to remain in the fund until maturity. The funds will be liquidated over a period of one to six years.
 
(b)   We are a manager or co-manager of these funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. In addition, we receive management fees. A sale or transfer of our interest in the funds can only occur through written consent of a majority of the fund’s investors. In one instance, the other co-manager of the fund must consent to the sale or transfer of our interest in the fund. The funds will mature over a period of four to seven years.
Principal investments. Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company), as well as indirect investments (investments made through funds that include other investors) in predominantly privately held companies and funds. When quoted prices are available in an active market for the identical investment, the quoted prices 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 for the identical investment, and we must rely upon other sources and inputs, such as market multiples; historical and forecast earnings before interest, taxation, depreciation and amortization; net debt levels; and investment risk ratings to perform the valuations of the direct investments. The indirect investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing and do not have readily determinable fair values. The indirect investments are valued using a methodology that is consistent with new accounting guidance that allows us to estimate fair value using net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the investee funds. These investments are classified as Level 3 assets since our assumptions impact the overall determination of fair value. The following table presents the fair values of the indirect funds and the unfunded commitments for the indirect funds at March 31, 2010.
                 
March 31, 2010           Unfunded  
in millions   Fair Value     Commitments  
 
INVESTMENT TYPE
               
Private equity funds (a)
  $ 502     $ 236  
Hedge funds (b)
    10        
   
Total
  $ 512     $ 236  
 
           
 
               
 
(a)   Consists of buyout, venture capital and fund of funds. These investments can never be redeemed with the investee funds. Instead, distributions are received through the liquidation of the underlying investments of the fund. These investments cannot be sold without the approval of the general partners of the investee funds. We estimate that the underlying investments of the funds will be liquidated over a period of one to ten years.
 
(b)   Consists of investee funds invested in long and short positions of “stressed and distressed” fixed income-oriented securities with the goal of producing attractive risk-adjusted returns. The investments can be redeemed quarterly with 45 days’ notice. However, the general partners may impose quarterly redemption limits that may delay receipt of requested redemptions.

44


Table of Contents

Derivatives. Exchange-traded derivatives are valued using quoted prices and, therefore, are classified as Level 1 instruments. However, only a few types of derivatives are exchange-traded, so the majority of our derivative positions are valued using internally developed models based on market convention that use observable market inputs, such as interest rate curves, yield curves, the LIBOR discount rates and curves, index pricing curves, foreign currency curves and volatility surfaces. These derivative contracts, which are classified as Level 2 instruments, include interest rate swaps, certain options, cross currency swaps and credit default swaps. In addition, we have a few customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models. Inputs to the models consist of available market data, such as bond spreads and asset values, as well as our 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. To reflect the actual exposure on our derivative contracts related to both counterparty and our own creditworthiness, we record a fair value adjustment in the form of a default reserve. The credit component is valued on a counterparty-by-counterparty basis based on the probability of default, and considers master netting and collateral agreements. The default reserve is considered to be a Level 3 input.
Other assets and liabilities. The value of our repurchase and reverse repurchase agreements, trade date receivables and payables, and short positions is driven by the valuation of the underlying securities. The underlying securities may include equity securities, which are valued using quoted market prices in an active market for identical securities, resulting in a Level 1 classification. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. Inputs include spreads, credit ratings and interest rates for the interest rate-driven products. Inputs include actual trade data for comparable assets, and bids and offers for the credit-driven products. Credit-driven securities include corporate bonds and mortgage-backed securities, while interest rate-driven securities include government bonds, U.S. Treasury bonds and other products backed by the U.S. government.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. These assets and liabilities are measured at fair value on a regular basis. The following table presents our assets and liabilities measured at fair value on a recurring basis.

45


Table of Contents

                                         
March 31, 2010                           Netting        
in millions   Level 1     Level 2     Level 3     Adjustments   (a)    Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                                       
Short term investments:
                                       
Securities purchased under resale agreements
        $ 382                 $ 382  
Trading account assets:
                                       
U.S. Treasury, agencies and corporations
          8                   8  
Other mortgage-backed securities
              $ 29             29  
Other securities
  $ 32       752       199             983  
           
Total trading account securities
    32       1,142       228             1,402  
Commercial loans
          2       11             13  
           
Total trading account assets
    32       1,144       239             1,415  
Securities available for sale:
                                       
U.S. Treasury, agencies and corporations
          8                   8  
States and political subdivisions
          83                   83  
Collateralized mortgage obligations
          14,984                   14,984  
Other mortgage-backed securities
          1,355                   1,355  
Other securities
    118       5                   123  
           
Total securities available for sale
    118       16,435                   16,553  
Other investments:
                                       
Principal investments
                                       
Direct
                534             534  
Indirect
                518             518  
         
Total principal investments
                1,052             1,052  
Equity and mezzanine investments
                                       
Direct
                32             32  
Indirect
                33             33  
           
Total equity and mezzanine investments
                65             65  
     
Total other investments
                1,117             1,117  
Derivative assets:
                                       
Interest rate
          1,859       80             1,939  
Foreign exchange
    120       122                   242  
Energy
          415                   415  
Credit
          41       11             52  
Equity
          1                   1  
 
Total derivative assets
    120       2,438       91     $ (1,586 )     1,063 (a) 
Accrued income and other assets
    5       59       3             67  
 
Total assets on a recurring basis at fair value
  $ 275     $ 20,076     $ 1,450     $ (1,586 )   $ 20,215  
 
                             
 
                                       
 
 
                                       
LIABILITIES MEASURED ON A RECURRING BASIS
                                       
Federal funds purchased and securities sold under repurchase agreements:
                                       
Securities sold under repurchase agreements
        $ 489                 $ 489  
Bank notes and other short-term borrowings:
                                       
Short positions
  $ 3       373                   376  
Derivative liabilities:
                                       
Interest rate
          1,388                   1,388  
Foreign exchange
    96       327                   423  
Energy
          437                   437  
Credit
          37     $ 1             38  
Equity
          1                   1  
     
Total derivative liabilities
    96       2,190       1     $ (1,184 )     1,103 (a) 
Accrued expense and other liabilities
          50                   50  
 
Total liabilities on a recurring basis at fair value
  $ 99     $ 3,102     $ 1     $ (1,184 )   $ 2,018  
 
                             
 
                                       
 
(a)   Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance related to the offsetting of certain derivative contracts on the balance sheet. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related collateral. Total derivative assets and liabilities include these netting adjustments.

46


Table of Contents

Changes in Level 3 Fair Value Measurements
The following table shows the change in the fair values of our Level 3 financial instruments for the three months ended March 31, 2010. We mitigate 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 our risk management activities.
                                                                                 
    Trading Account Assets     Other Investments             Derivative Instruments (a)  
    Other                                     Equity and     Accrued              
    Mortgage-                     Principal Investments     Mezzanine Investments     Income              
    Backed     Other     Commercial                                     and Other     Interest        
in millions   Securities     Securities     Loans     Direct     Indirect     Direct     Indirect     Assets     Rate     Credit  
 
Balance at December 31, 2009
  $ 29     $ 423     $ 19     $ 538     $ 497     $ 26     $ 31           $ 99     $ 9  
Gains (losses) included in earnings
       (b)        (b)        (b)     15    (c)     23    (c)     2    (c)     (2 )        (c)     (9 )   (b)     1   (b)
Purchases, sales, issuances and settlements
          (224 )     (8 )     (11 )     (2 )     (2 )     4     $ 3       (3 )      
Net transfers in (out) Level 3
                      (8 )           6                   (7 )      
                     
Balance at March 31, 2010
  $ 29     $ 199     $ 11     $ 534     $ 518     $ 32     $ 33     $ 3     $ 80     $ 10  
 
                                                           
 
                                                                               
 
 
                                                                               
Unrealized gains (losses) included in earnings
       (b)        (b)   $ (1)   (b)   $ 16   (c)   $ 19   (c)   $ 7   (c)   $ (2 )  (c)        (c)   $ (19 )   (b)       (b)
 
(a)   Amounts represent 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 (loss)” 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 “net gains (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 (loss)” on the income statement. Realized and unrealized gains and losses on investments included in accrued income and other assets are reported in “other income” on the income statement.
Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. The following table presents our assets measured at fair value on a nonrecurring basis at March 31, 2010.
                                 
March 31, 2010                        
in millions   Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A NONRECURRING BASIS
                               
Impaired loans
        $ 3     $ 596     $ 599  
Loans held for sale (a)
                54       54  
Operating lease assets
                       
Goodwill
                       
Other intangible assets
                       
Accrued income and other assets
          39       126       165  
         
Total assets on a nonrecurring basis at fair value
        $ 42     $ 776     $ 818  
 
                       
 
                               
 
(a)   During the first quarter of 2010, we transferred $21 million of commercial and consumer loans from held-for-sale status to the held-to-maturity portfolio at their current fair value.
We typically adjust the carrying amount of our 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 assets, 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. Current market conditions,

47


Table of Contents

including credit risk profiles and decreased real estate values, impacted the inputs used in our internal valuation analysis, resulting in write-downs of these assets.
Through a quarterly analysis of our commercial loan and lease portfolios held for sale, we 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 and leases totaled $54 million at March 31, 2010. Current market conditions, including credit risk profiles, liquidity and decreased real estate values, impacted the inputs used in our internal models and other valuation methodologies, resulting in write-downs of these assets.
The valuations of performing commercial mortgage and construction loans are conducted using internal models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury rates, interest rate curves and risk profiles, as well as our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, we have classified these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates and discount rates.
The valuations of nonperforming commercial mortgage and construction loans are based on current agreements to sell the loans or approved discounted payoffs. If a negotiated value is not available, third party appraisals, adjusted for current market conditions, are used. Since valuations are based on unobservable data, these loans have been classified as Level 3 assets.
The valuation of commercial finance and operating leases is performed using an internal model that relies on market data, such as swap rates and bond ratings, as well as our 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 assets. The inputs related to our assumptions include changes in the 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 assets.
On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of the goodwill and other intangible assets assigned to our Community Banking and National Banking units. We also perform an annual impairment test for goodwill. Fair value of our reporting units is determined using both an income approach (discounted cash flow method) and a market approach (using publicly traded company and recent transactions data), 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 relies on a significant number of unobservable inputs, we have classified these assets as Level 3. During the first quarter of 2009, we wrote off all of the goodwill that had been assigned to the National Banking unit. For additional information on the results of goodwill impairment testing, see Note 11 (“Goodwill and Other Intangible Assets”) on page 102 of our 2009 Annual Report to Shareholders and Note 1 (“Basis of Presentation”).
The fair value of other intangible assets is calculated using a cash flow approach. While the calculation to test for recoverability uses a number of assumptions that are based on current market conditions, the calculation is based primarily on unobservable assumptions; therefore the assets are classified as Level 3. The assumptions used are dependent on the type of intangible being valued and include such items as attrition rates, types of customers, revenue streams, prepayment rates, refinancing probabilities and credit defaults. There was no impairment of other intangible assets during the quarter ended March 31, 2010.
OREO and other repossessed properties are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Therefore, we have classified these assets as Level 3. OREO and other repossessed properties are classified as Level 2 if we receive binding purchase agreements to sell these properties. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2. Assets that are acquired through, or in lieu of, loan foreclosures are recorded as held

48


Table of Contents

for sale initially at the lower of the loan balance or fair value upon the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions may require the assets to be marked down further to a new cost basis.
Fair Value Disclosures of Financial Instruments
The carrying amount and fair value of our financial instruments at March 31, 2010 and December 31, 2009, are shown in the following table.
                                 
    March 31, 2010   December 31, 2009
    Carrying     Fair     Carrying     Fair  
in millions   Amount     Value     Amount     Value  
 
ASSETS
                               
Cash and short-term investments (a)
  $ 4,964     $ 4,964     $ 2,214     $ 2,214  
Trading account assets (e)
    1,034       1,034       1,209       1,209  
Securities available for sale (e)
    16,255       16,553       16,434       16,641  
Held-to-maturity securities (b)
    22       22       24       24  
Other investments (e)
    1,525       1,525       1,488       1,488  
Loans, net of allowance (c)
    53,488       47,317       56,236       49,136  
Loans held for sale (e)
    556       556       443       443  
Mortgage servicing assets (d)
    211       315       221       334  
Derivative assets (e)
    1,063       1,063       1,094       1,094  
 
LIABILITIES
                               
Deposits with no stated maturity (a)
  $ 42,305     $ 42,305     $ 40,563     $ 40,563  
Time deposits (d)
    22,844       23,620       25,008       25,908  
Short-term borrowings (a)
    2,373       2,373       2,082       2,082  
Long-term debt (d)
    11,177       10,797       11,558       10,761  
Derivative liabilities (e)
    1,103       1,103       1,012       1,012  
 
 
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 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. We review the valuations derived from the models for reasonableness to ensure they are consistent with the values placed on similar securities traded in the secondary markets.
 
(c)   The fair value of the loans is based on the present value of the expected cash flows. 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.
 
(d)   Fair values of servicing assets, time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.
 
(e)   Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the section entitled “Qualitative Disclosures of Valuation Techniques” and “Assets Measured at Fair Value on a Nonrecurring Basis” in this note.
The discontinued education lending business reflects both consolidated assets and liabilities from securitization trusts recorded at fair value as well as loans and loans held for sale reflected at carrying value with appropriate valuation reserves. Excluded from the table above are loans, net of allowance, loans at fair value, and loans held for sale related to the discontinued operations of the education lending business. Loans related to the discontinued operations of the education lending business included loans at carrying value, net of allowance, of $3.3 billion ($2.4 billion fair value) and $2.6 billion of loans recorded at fair value at March 31, 2010, and loans at carrying value, net of allowance, of $3.4 billion ($2.5 billion fair value) at December 31, 2009. Loans at fair value related to the consolidation of the education lending securitization trusts as of January 1, 2010. Liabilities, primarily securities, of the education lending securitization trusts of $2.5 billion at fair value have also been excluded from the above table. Additional information

49


Table of Contents

regarding the consolidation of these education lending securitization trusts is provided in Note 16 (“Discontinued Operations”). At March 31, 2010, and December 31, 2009, loans held for sale related to our discontinued education lending business had carrying amounts of $246 million and $434 million, respectively. Their fair values were identical to their carrying amounts.
Residential real estate mortgage loans with carrying amounts of $1.8 billion at March 31, 2010 and at December 31, 2009, are included in the amount shown for “Loans, net of allowance” in the above table.
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.
We use valuation methods based on exit market prices in accordance with the applicable accounting guidance for fair value measurements. We determine fair value based on assumptions pertaining to the factors a market participant would consider in valuing the asset. If we were to use different assumptions, the fair values shown in the preceding table could change significantly. Also, because the applicable accounting guidance for financial instruments 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 our company as a whole.

50


Table of Contents

16. Discontinued Operations
Education lending. In September 2009, we decided to exit the government-guaranteed education lending business and to focus on the growing demand from schools for integrated, simplified billing, payment and cash management solutions. As a result of this decision, we have accounted for this business as a discontinued operation.
The changes in fair value of the assets and liabilities of the education loan securitization trusts (discussed later in this note), and the interest income and expense from the loans and the securities of the trusts are all recorded as a component of “income (loss) from discontinued operations, net of taxes” on the income statement. These amounts are shown separately in the following table. Gains and losses attributable to changes in fair value are recorded as a component of noninterest income or expense. It is our policy to recognize interest income and expense related to the loans and securities separately from changes in fair value. These amounts are shown as a component of “Net interest income.” The components of “income (loss) from discontinued operations, net of taxes” for this business are as follows:
                 
    Three months ended March 31,  
     
in millions   2010     2009  
 
Net interest income
  $ 40     $ 25  
Provision for loan losses
    24       28  
 
Net interest income (expense) after provision for loan losses
    16       (3 )
Noninterest income
    (1 )     7  
Noninterest expense
    12       15  
 
Income (loss) before income taxes
    3       (11 )
Income taxes
    1       (4 )
 
Income (loss) from discontinued operations, net of taxes (a)
  $ 2     $ (7 )
 
           
 
               
 
(a)   Includes after-tax charges of $14 million and $19 million for the three-month periods ended March 31, 2010 and 2009, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.
The discontinued assets and liabilities of our education lending business included on the balance sheet are as follows:
                         
      March 31,       December 31,       March 31,  
in millions   2010     2009     2009  
 
Securities available for sale
  $     $ 182     $ 167  
Loans at fair value
    2,573              
Loans, net of unearned income of $1, $1 and $1
    3,449       3,523       3,700  
Less: Allowance for loan losses
    145       157       170  
 
Net loans
    5,877       3,366       3,530  
Loans held for sale
    246       434       453  
Accrued income and other assets
    217       192       252  
 
Total assets
  $ 6,340     $ 4,174     $ 4,402  
 
                 
 
                       
Noninterest-bearing deposits
  $ 30     $ 119     $ 119  
Derivative liabilities
                5  
Accrued expense and other liabilities
    53       4       7  
Securities at fair value
    2,406              
 
Total liabilities
  $ 2,489     $ 123     $ 131  
 
                 
 
                       
 

51


Table of Contents

As part of our education lending business model, we originated and securitized education loans. The process of securitization involves taking a pool of loans from our balance sheet and selling them to a bankruptcy remote QSPE, or trust. This trust then issues securities to investors in the capital market to raise funds to pay for the loans. The interest generated on the loans goes to pay holders of the securities issued. We, as the transferor, retain a portion of the risk in the form of a residual interest and also retain the right to service the securitized loans and receive servicing fees.
In June 2009, the FASB issued new consolidation accounting guidance which eliminated the scope exception for QSPEs and, as a result our education loan securitization trusts had to be analyzed under this new guidance. We determined that consolidation of our ten outstanding securitization trusts as of January 1, 2010 was required since we hold the residual interests and are the master servicer who has the power to direct the activities that most significantly impact the economic performance of these trusts.
The assets held by these trusts can only be used to settle the obligations or securities issued by the trusts. We cannot sell the assets or transfer the liabilities of the consolidated trusts. The security holders or beneficial interest holders do not have recourse to us. Our economic interest or risk of loss associated with these education loan securitization trusts is approximately $167 million as of March 31, 2010. As a result of our economic interest in the trusts, we record all income and expense (including fair value adjustments) through the “income (loss) from discontinued operations, net of tax” line item in our income statement.
We elected to consolidate these trusts at fair value upon our prospective adoption of this new consolidation guidance. Carrying the assets and liabilities of the trusts at fair value better depicts our economic interest in these trusts. A cumulative effect adjustment of approximately $45 million, which increased our beginning balance of retained earnings at January 1, 2010, was recorded upon the consolidation of these trusts. The amount of this cumulative effect adjustment was driven primarily by derecognizing the residual interests and servicing assets related to these trusts and the consolidation of the assets and liabilities at fair value.
At March 31, 2010, the primary economic assumptions used to measure the fair value of the assets and liabilities of the trusts are shown in the following table. The fair value of the assets and liabilities of the trusts is determined by present valuing the future expected cash flows which are affected by the following assumptions. We rely on unobservable inputs (Level 3) when determining the fair value of the assets and liabilities of the trusts due to the lack of observable market data.
         
March 31, 2010        
dollars in millions        
 
Weighted-average life (years)
    1.2 - 6.1    
 
 
       
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE)
    4.00% - 26.00   %
 
       
 
EXPECTED CREDIT LOSSES
    2.00% - 80.00   %
 
       
 
LIQUIDITY DISCOUNT RATE (ANNUAL RATE)
    14.00   %
 
       
 
EXPECTED DEFAULTS (STATIC RATE)
    3.75% - 40.00   %
 
       
 
The following table shows the consolidated trusts’ assets and liabilities at fair value and their related contractual values as of March 31, 2010. Loans held by the trusts with unpaid principal balances of $151 million were 90 days or more past due and $42 million were in nonaccrual status or $104 million and $29 million on a fair value basis, respectively, at March 31, 2010.

52


Table of Contents

                 
March 31, 2010   Contractual     Fair  
in millions   Amount     Value  
 
ASSETS
               
Loans
  $ 3,720     $ 2,573  
Other Assets
    51       51  
 
               
LIABILITIES
               
Securities
  $ 3,850     $ 2,406  
Other Liabilities
    51       51  
 
               
 
The following table presents the assets and liabilities of the trusts that were consolidated and are measured at fair value on a recurring basis.
                                 
March 31, 2010                        
in millions   Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                               
Loans
              $ 2,573     $ 2,573  
Other assets
                51       51  
 
Total assets on a recurring basis at fair value
              $ 2,624     $ 2,624  
 
                       
 
 
 
                               
LIABILITIES MEASURED ON A RECURRING BASIS
                               
Securities
              $ 2,406     $ 2,406  
Other liabilities
                51       51  
 
Total liabilities on a recurring basis at fair value
              $ 2,457     $ 2,457  
 
                       
 
 
The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts for the quarter ended March 31, 2010.
                                 
    Trust                    
    Student     Other     Trust     Other  
in millions   Loans     Assets     Securities     Liabilities  
 
Balance at January 1, 2010
  $ 2,639     $ 47     $ 2,521     $ 2  
Gains/Losses recognized in Earnings
    (6 )                  
Purchases, sales, issuances and settlements
    (60 )     4       (115 )     49  
 
Balance at March 31, 2010
  $ 2,573     $ 51     $ 2,406     $ 51  
 
                       
 
                               
 
Austin Capital Management, Ltd. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of this decision, we have accounted for this business as a discontinued operation.
The results of this discontinued business are included in “loss from discontinued operations, net of taxes” on the income statement. The components of “income (loss) from discontinued operations, net of taxes” for this business are as follows:
                 
    Three months ended March 31,  
     
in millions   2010     2009  
 
Noninterest income
  $ 3     $ 7  
Intangible assets impairment
          27  
Other noninterest expense
    2       4  
 
Income (loss) before income taxes
    1       (24 )
Income taxes
    1       (2 )
 
Income (loss) from discontinued operations, net of taxes
        $ (22 )
 
           
 
               
 

53


Table of Contents

The discontinued assets and liabilities of Austin included on the balance sheet are as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2010     2009     2009  
 
Cash and due from banks
  $ 31     $ 23     $ 13  
Other intangible assets
    1       1       2  
Accrued income and other assets
    2       10       8  
 
Total assets
  $ 34     $ 34     $ 23  
 
                 
 
                       
Accrued expense and other liabilities
  $ 1     $ 1     $ 6  
 
Total liabilities
  $ 1     $ 1     $ 6  
 
                 
 
                       
 
Combined discontinued operations. The combined results of the discontinued operations are as follows:
                 
    Three months ended March 31,  
     
in millions   2010     2009  
 
Net interest income
  $ 40     $ 25  
Provision for loan losses
    24       28  
 
Net interest income (expense) after provision for loan losses
    16       (3 )
Noninterest income
    2       14  
Intangible assets impairment
          27  
Noninterest expense
    14       19  
 
Income (loss) before income taxes
    4       (35 )
Income taxes
    2       (6 )
 
Income (loss) from discontinued operations, net of taxes (a)
  $ 2     $ (29 )
 
           
 
               
 
(a)   Includes after-tax charges of $14 million and $19 million for the three-month periods ended March 31, 2010 and 2009, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.
The combined assets and liabilities of the discontinued operations are as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2010     2009     2009  
 
Cash and due from banks
  $ 31     $ 23     $ 13  
Securities available for sale
          182       167  
Loans at fair value
    2,573              
Loans, net of unearned income of $1, $1 and $1
    3,449       3,523       3,700  
Less: Allowance for loan losses
    145       157       170  
 
Net loans
    5,877       3,366       3,530  
Loans held for sale
    246       434       453  
Other intangible assets
    1       1       2  
Accrued income and other assets
    219       202       260  
 
Total assets
  $ 6,374     $ 4,208     $ 4,425  
 
                 
 
                       
Noninterest-bearing deposits
  $ 30     $ 119     $ 119  
Derivative liabilities
                5  
Accrued expense and other liabilities
    54       5       13  
Securities at fair value
    2,406              
 
Total liabilities
  $ 2,490     $ 124     $ 137  
 
                 
 
                       
 

54


Table of Contents

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 March 31, 2010 and 2009, and the related condensed consolidated statements of income, changes in equity and cash flows for the three-month periods ended March 31, 2010 and 2009. 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, 2009, and the related consolidated statements of income, changes in equity and cash flows for the year then ended not presented herein, and in our report dated March 1, 2010, 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, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
(ERNET & YOUNG LLP LOGO)
Cleveland, Ohio
May 6, 2010

55


Table of Contents

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 first three months of 2010 and 2009. 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 in this report. The page locations of specific sections and notes that we refer to are presented in the table of contents.
Terminology
Throughout this discussion, references to “Key,” “we,” “our,” “us” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. “KeyCorp” refers solely to the parent holding company, and “KeyBank” refers to KeyCorp’s subsidiary bank, KeyBank National Association.
We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows.
¨   In September 2009, we decided to discontinue the education lending business. In April 2009, we decided to wind down the operations of Austin Capital Management, Ltd., a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of these decisions, we have accounted for these businesses as discontinued operations. We use the phrase continuing operations in this document to mean all of our businesses other than the education lending business and Austin.
 
¨   Our exit loan portfolios are distinct from our discontinued operations. These portfolios, which are in a run-off mode, stem from product lines we decided to cease because they no longer fit with our corporate strategy. These exit loan portfolios are included in Other Segments.
 
¨   We engage in capital markets activities primarily through business conducted by our National Banking group. These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients’ financing needs and for proprietary trading purposes), and conduct 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 capital. 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 described in the section entitled “Economic Overview” that begins on page 17 of our 2009 Annual Report to Shareholders, the regulators initiated an additional level of review of capital adequacy for the country’s nineteen largest banking institutions, including KeyCorp, during 2009. As part of this review, banking regulators reviewed a component of Tier 1 capital, known as Tier 1 common equity, to assess capital adequacy. 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.”
 
¨   During the first quarter of 2010, we re-aligned our reporting structure for our business groups. Previously, the Consumer Finance business group consisted mainly of portfolios which were identified as exit or run-off portfolios and were included in our National Banking segment. We are reflecting these exit portfolios in Other Segments. The automobile dealer floor plan business, previously included in Consumer Finance, has been re-aligned with the Commercial Banking line of business within the Community Banking segment. In addition, other previously identified exit portfolios included in the National Banking segment, including our homebuilder loans from the Real Estate Capital line of business and commercial leases from the Equipment Finance line of business, have been moved to Other Segments. For more detailed financial information pertaining to each business group and its respective lines of business, see Note 3 (“Line of Business Results”).
Additionally, our discussion contains acronyms and abbreviations. A comprehensive list of the acronyms and abbreviations used throughout this report is included in Note 1 (“Basis of Presentation”).

56


Table of Contents

Forward-looking Statements
From time to time, we have made or will make forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as “goal,” “objective,” “plan,” “expect,” “anticipate,” “intend,” “project,” “believe,” “estimate,” or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in our other documents filed or furnished with the SEC. In addition, we may make forward-looking statements orally to analysts, investors, representatives of the media and others.
Forward-looking statements are not historical facts and, by their nature, are subject to assumptions, risks and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ from those described in forward-looking statements include, but are not limited to:
¨   indications of an improving economy may prove to be premature;
 
¨   changes in local, regional and international business, economic or political conditions in the regions that we operate or have significant assets;
 
¨   our ability to effectively deal with an economic slowdown or other economic or market difficulty;
 
¨   adverse changes in credit quality trends;
 
¨   our ability to determine accurate values of certain assets and liabilities;
 
¨   credit ratings assigned to KeyCorp and KeyBank;
 
¨   adverse behaviors in securities, public debt, and capital markets, including changes in market liquidity and volatility;
 
¨   changes in investor sentiment, consumer spending or saving behavior;
 
¨   our ability to manage liquidity, including anticipating interest rate changes correctly;
 
¨   changes in trade, monetary and fiscal policies of various governmental bodies could affect the economic environment in which we operate;
 
¨   changes in foreign exchange rates;
 
¨   limitations on our ability to return capital to shareholders and potential dilution of our Common Shares as a result of the U.S. Treasury’s investment under the terms of the CPP;
 
¨   adequacy of our risk management program;
 
¨   increased competitive pressure due to consolidation;
 
¨   new or heightened legal standards and regulatory requirements, practices or expectations;
 
¨   our ability to timely and effectively implement our strategic initiatives;
 
¨   increases in FDIC premiums and fees;
 
¨   unanticipated adverse affects of acquisitions and dispositions of assets, business units or affiliates;
 
¨   our ability to attract and/or retain talented executives and employees;

57


Table of Contents

¨   operational or risk management failures due to technological or other factors;
 
¨   changes in accounting principles or in tax laws, rules and regulations;
 
¨   adverse judicial proceedings;
 
¨   occurrence of natural or man-made disasters or conflicts or terrorist attacks disrupting the economy or our ability to operate; and
 
¨   other risks and uncertainties summarized in Part 1, Item 1A: Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009.
Any forward-looking statements made by or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including our reports on Forms 8-K, 10-K and 10-Q and our 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
Our long-term financial goals are as follows:
¨   Continue to achieve a loan to core deposit ratio range of 90% to 100%.
 
¨   Return to a moderate risk profile by targeting a net charge-off ratio range of 40 to 50 basis points.
 
¨   Grow high quality and diverse revenue streams by targeting a net interest margin in excess of 3.50% and maintain noninterest income to total revenue of greater than 40%.
 
¨   Create positive operating leverage and complete Keyvolution run-rate savings goal of $300 million to $375 million by the end of 2012.
 
¨   Achieve a return on average assets in the range of 1.00% to 1.25%.
Economic overview
During the first quarter of 2010, economic activity continued to strengthen and signs emerged that the labor market was stabilizing. While employers were slow to add workers, U.S. payrolls did increase by 162,000 during the first quarter of 2010. This marked the first quarter the economy added jobs in over two years and was an improvement from the fourth quarter of 2009 when the economy eliminated 269,000 jobs. Prior to the fourth quarter of 2009, U. S. employment had been reduced by over 8 million jobs since the recession began in December 2007. The average unemployment rate for the first quarter of 2010 also improved, falling to 9.7% average from a 10.0% average during the fourth quarter of 2009. This compares to a 9.3% average rate for all of 2009 and a 10 year average rate of 5.7%.
Spending by U.S. businesses and consumers continued to improve. The modest recovery in the labor market and increases in consumer confidence levels supported a moderate expansion in household spending. Consumer spending rose at an average monthly rate of 0.5% for the first quarter of 2010 compared to an average monthly increase of 0.5% in the fourth quarter of 2009 and an average monthly increase of 0.3% for all of 2009. Prices for consumer goods and services increased a modest 2.3% in March 2010 from March 2009, compared to an annual increase of 2.7% in December 2009. Business spending also supported economic growth in the first quarter of 2010 as companies continued to rebuild inventory levels to better align them with increasing demand from consumers. Businesses also made investments in capital goods, including equipment and software. Factory production continued to show improvement and resource utilization levels continued to increase from their lows in mid-2009.
The extension and expansion of the homebuyer tax credit, offered as part of The Worker, Homeownership and Business Assistance Act of 2009, gave support to the housing market at the close of the first quarter of 2010. Housing in the fourth quarter of 2009 was supported by historically low

58


Table of Contents

mortgage rates and the initial availability of the first-time home buyer tax credit. Home buying activity slowed early in the first quarter of 2010 but improved in March 2010 as home buyers rushed to beat the extended tax credit’s end of April 2010 expiration. New home sales in March 2010 rose by 24% and existing home sales rose by 16% from March 2009. The increased level of home sales spurred home building activity and supported home prices. In March 2010, residential housing starts increased by 20% from the same month in 2009. Median prices in March 2010 for new and existing homes rose 4.3% and 0.4% respectively from the same month the prior year. Existing home prices continue to be impacted by near record-level foreclosures as an estimated one in every 352 U.S. homes was in some stage of foreclosure in March 2010. However, the growth in the number of foreclosures has slowed, rising 8% in March 2010 from one year ago, compared to the 46% annual increase reported in March 2009.
Citing continued weakness in the housing and labor markets, the Federal Reserve held the federal funds target rate near zero during the first quarter of 2010. However, in response to the improved functioning of the financial markets, the Federal Reserve ceased its purchases of agency debt and agency mortgage-backed securities and closed most of its emergency liquidity facilities. Benchmark interest rates remained volatile during the quarter as the markets alternated between growing economic optimism and the concerns underlying the Federal Reserve’s stated intentions to keep interest rates low for an ‘extended period.’ At the end of the quarter, bond markets increasingly focused on the historically large volumes of U.S. Treasury debt issuance and Treasury yields rose from their lows of the quarter. The benchmark two-year Treasury yield declined to .77% in February 2010 from 1.14% at December 31, 2009, before ending the first quarter 2010 at 1.02%. The ten-year Treasury yield, which began the quarter at 3.84%, declined to 3.56% in February 2010, before closing the quarter at 3.83%. As credit concerns continued to ease, credit spreads for banks’ and financial firms’ debt obligations continued to narrow.
FDIC Rulemaking Developments
On April 13, 2010, the FDIC Board of Directors approved an interim rule under the TLGP that extends the TAG program, which currently offers unlimited deposit insurance on noninterest bearing accounts through June 30, 2010. The FDIC’s interim rule published in the Federal Register on April 19, 2010 extends the TAG program from July 1, 2010 to December 31, 2010. KeyBank is currently a participant in the TAG program, but as of April 29, 2010, KeyBank elected not to participate in the TAG program extension which would mean that on and after June 30, 2010, KeyBank would no longer offer unlimited deposit insurance on noninterest bearing accounts.
The FDIC also announced on April 13, 2010 its Board of Directors’ approval of a Notice of Proposed Rulemaking on Assessments. The proposed revisions to the assessment system would be applicable to large institutions with assets of over $10 billion, such as KeyBank. According to the FDIC, the proposed revisions would better capture risk at the time an institution assumes the risk, better differentiate institutions during periods of good economic and banking conditions based on how they would fare during periods of stress or economic downturns, and would also take into account the losses that the FDIC may incur if an institution fails. The proposal was published in the Federal Register on May 3, 2010, and the comment period for the proposal expires on July 2, 2010. Further information on the TLGP-related developments is included in the “Capital” section under the heading “Temporary Liquidity Guarantee Program.”
Regulation E pursuant to the Electronic Fund Transfer Act of 1978
The Federal Reserve finalized rules regarding Regulation E, which is designed to protect consumers by prohibiting unfair practices and improving disclosures to consumers. Regulation E goes into effect July 1, 2010, and among other items, prohibits financial institutions from charging overdraft or insufficient funds fees to a customer without receiving consent from the customer to “opt-in” to the financial institutions overdraft services.
Once fully in effect, we anticipate these rules to reduce our deposit service charge income by approximately $50 million annually.

59


Table of Contents

Demographics
We have two major business groups: Community Banking and National Banking. The effect on our business of continued volatility and weakness in the housing market varies with the state of the economy in the regions in which these business groups operate.
The 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 internally defined geographic regions: Rocky Mountains and Northwest, Great Lakes, and Northeast. The 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 3.
Figure 1 shows the geographic diversity of our 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 March 31, 2010   Mountains and                          
dollars in millions   Northwest     Great Lakes     Northeast     Nonregion   (a) Total  
 
 
                                       
Average deposits (b)
  $ 14,040     $ 14,509     $ 13,387     $ 1,658     $ 43,594    
Percent of total
    32.2   %   33.3   %   30.7   %     3.8   %   100.0   %
 
                                       
Average commercial loans
  $ 5,812     $ 3,538     $ 2,711     $ 2,897     $ 14,958    
Percent of total
    38.9   %   23.7   %   18.0   %     19.4   %   100.0   %
 
                                       
Average home equity loans
  $ 4,413     $ 2,823     $ 2,592     $ 139     $ 9,967    
Percent of total
    44.3   %   28.3   %   26.0   %     1.4   %   100.0   %
 
                                       
 
(a)   Represents average deposits, commercial loan and home equity loan products centrally managed outside of our three Community Banking regions.
 
(b)   Excludes certificates of deposit of $100,000 or more and deposits in the foreign office.
Figure 17, which appears later in this report in the “Loans and loans held for sale” section, shows the diversity of our 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. Deteriorating market conditions in the residential properties segment of the commercial real estate construction portfolio, principally in Florida and southern California, caused nonperforming loans and net charge-offs to increase significantly since mid-2007. As previously reported we have ceased all new lending to homebuilders and we have reduced outstanding balances in the residential properties segment of the commercial real estate construction loan portfolio by $2.5 billion, or 72%, to $978 million. Additional information about loan sales is included in the “Credit risk management” section.
Deterioration in the commercial real estate portfolio continued into the first quarter of 2010 albeit at a slower pace than experienced in the fourth quarter of 2009. Deterioration was concentrated in the nonowner-occupied properties segment. Elevated vacancy rates, reduced cash flows and reduced real estate values that may have not yet bottomed continue to adversely affect commercial real estate on a national basis due to weak economic conditions. Delinquencies, nonperforming loans and charge-offs remain high but are declining from the fourth quarter of 2009 results.
Results for the National Banking group have also been affected adversely by increasing credit costs and volatility in the capital markets, which have led to declines in the market values of assets under management and the market values at which we record certain assets (primarily commercial real estate loans and securities held for sale or trading).
During the first quarter of 2009, we determined that the estimated fair value of the National Banking reporting unit was less than the carrying amount. As a result, we recorded an after-tax noncash accounting charge of $187 million. As a result of this charge and a similar after-tax charge of $420

60


Table of Contents

million recorded during the fourth quarter of 2008, we have written off all of the goodwill that had been assigned to our National Banking reporting unit.
Critical accounting policies and estimates
Our business is dynamic and complex. Consequently, we must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical: not only are they necessary to comply with GAAP, they also reflect our view of the appropriate way to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Significant Accounting Policies”) on page 79 of our 2009 Annual Report to Shareholders should be reviewed for a greater understanding of how we record and report our financial performance.
In our opinion, some accounting policies are more likely than others to have a critical effect on our financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance, or require us 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 prove to be inaccurate, or we may find it necessary to change them.
We rely 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 19 through 21 of our 2009 Annual Report to Shareholders.
At March 31, 2010, $20.2 billion, or 22%, of our 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 March 31, 2010, $2.0 billion, or 2%, of our 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 March 31, 2010, $818 million, or 1%, of our total assets were measured at fair value on a nonrecurring basis. Approximately 5% of these assets were classified as Level 1 or Level 2. At March 31, 2010, there were no liabilities measured at fair value on a nonrecurring basis.
In addition, with the consolidation of the education lending securitization trusts on January 1, 2010, we included fair value of assets and liabilities of $2.8 billion, respectively at March 31, 2010.
During the first three months of 2010, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates.
Highlights of Our Performance
Financial performance
For the first quarter of 2010, we announced a first quarter net loss from continuing operations attributable to Key common shareholders of $98 million, or $.11 per common share. These results compare to a net loss from continuing operations attributable to Key common shareholders of $507 million, or $1.03 per common share, for the first quarter of 2009. The first quarter of 2009 was negatively impacted by an $847 ($529 million after-tax) million loan loss provision and a $196 million ($164 million after-tax) intangible assets impairment charge.
A stronger net interest margin combined with a lower provision for loan losses and continued expense control resulted in a narrowing of our first-quarter loss when compared to both the fourth quarter of 2009 and the year ago quarter.
Net interest margin increased by 15 and 40 basis points from the fourth quarter 2009 and the year ago quarter, respectively, to 3.19% due to lower funding costs and improved yields on loans.

61


Table of Contents

Net charge-offs declined by $186 million, and nonperforming loans showed continued improvement, decreasing by $122 million from December 31, 2009, primarily attributable to continued stabilization in the commercial loan portfolio.
Our Tier 1 common equity and Tier 1 risk-based capital ratios remain strong at 7.51% and 12.92%, respectively, and have increased significantly from the first quarter of 2009.
We increased our allowance for loan losses by more than $409 million to $2.4 billion from the year ago quarter. At March 31, 2010, our allowance represented 4.34% of total loans compared to 2.88% at March 31, 2009 and 117% of nonperforming loans at the end of the first quarter of 2010 compared to 116% at the end of the year ago quarter. One of our primary areas of focus has been to reduce our exposure to the higher risk segments of our commercial real estate portfolio through loan restructuring, refinancing, discounted pay-offs and liquidations. Further information pertaining to our progress in reducing our commercial real estate exposure and our exit loan portfolio is presented in the section entitled “Credit risk management.”
Additionally, we made significant progress on strengthening our liquidity and funding positions. Our consolidated loan to deposit ratio was 93% for the first quarter 2010 compared to 115% for the first quarter of 2009. This improvement was accomplished by growing deposits, reducing our reliance on wholesale funding, exiting nonrelationship businesses and increasing the portion of our earning assets invested in highly liquid securities. During the first quarter of 2010, we originated approximately $5.3 billion in new or renewed lending commitments and our average domestic deposits grew by approximately $600 million, compared to the year ago quarter.
During the first quarter of 2010, we continued our investment in our Community Banking 14-state branch network by opening eight new branches, with an additional 32 branches slated to be opened during the remainder of 2010, and we have completed 160 branch renovations over the past two years. Further, during 2010, we increased our “business intensive” branches from 157 to 225. These branches are staffed to serve our small business clients. These investments enable our customers to utilize the full breadth of solutions, expertise, products and services we have to offer.
We continue to improve the efficiency and effectiveness of our organization. Over the past two years, we have reduced our staff by more than 2,600 average full-time equivalent employees and implemented ongoing initiatives that will better align our cost structure with our relationship-focused business strategies. We want to ensure that we have effective business models that are sustainable and flexible.
Finally, we remain steadfast in our actions of reducing risk exposure, concentrating on core relationship businesses, and maintaining strong capital, liquidity and reserve levels as we emerge from this extraordinary credit cycle as a strong, competitive company.
Figure 2 shows our continuing and discontinued operating results for the current, past and year-ago quarters. Our financial performance for each of the past five quarters is summarized in Figure 4.

62


Table of Contents

Figure 2. Results of Operations
                         
    Three months ended
dollars in millions, except per share amounts   3-31-10     12-31-09     3-31-09  
 
SUMMARY OF OPERATIONS
                       
 
Income (loss) from continuing operations attributable to Key
  $ (57 )   $ (217 )   $ (459 )
 
Income (loss) from discontinued operations, net of taxes (a)
    2       (7 )     (29 )
 
Net income (loss) attributable to Key
  $ (55 )   $ (224 )   $ (488 )
 
                 
 
                       
Income (loss) from continuing operations attributable to Key
  $ (57 )   $ (217 )   $ (459 )
 
                       
Less:  Dividends on Series A Preferred Stock
    6       5       12  
 
Cash dividends on Series B Preferred Stock
    31       31       32  
 
Amortization of discount on Series B Preferred Stock
    4       5       4  
 
Income (loss) from continuing operations attributable to Key common shareholders
    (98 )     (258 )     (507 )
 
Income (loss) from discontinued operations, net of taxes (a)
    2       (7 )     (29 )
 
Net income (loss) attributable to Key common shareholders
  $ (96 )   $ (265 )   $ (536 )
 
                 
 
                       
PER COMMON SHARE — ASSUMING DILUTION
                       
 
Income (loss) from continuing operations attributable to Key common shareholders
  $ (.11 )   $ (.30 )   $ (1.03 )
 
Income (loss) from discontinued operations, net of taxes (a)
          (.01 )     (.06 )
 
Net income (loss) attributable to Key common shareholders (b)
  $ (.11 )   $ (.30 )   $ (1.09 )
 
                 
 
                       
 
(a)   In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. We have accounted for these businesses as discontinued operations. Included in the loss from discontinued operations for the three-month period ended March 31, 2009, is a $23 million after- tax, or $.05 per common share, charge for intangible assets impairment related to Austin Capital Management.
 
(b)   Earnings per share may not foot due to rounding.
Significant items that make it difficult to compare our financial performance over the time periods presented are shown in Figure 3.
Figure 3. Significant Items Affecting the Comparability of Earnings
                                                                         
    Three months ended   Three months ended   Three months ended
    March 31, 2010   December 31, 2009   March 31, 2009
    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  
 
Credits related to IRS audits and leveraged lease tax litigation
                          $ 106     $ .12                      
 
Net gains (losses) from principal investing (a)
  $ 21     $ 13     $ .02     $ 44       28       .03     $ (63 )   $ (39 )   $ (.08 )  
Realized and unrealized gains (losses) on loan and securities portfolios held for sale or trading
    (11 )     (7 )     (.01 )     (92 )     (58 )     (.07 )                    
Provision for loan losses less (in excess of) net charge-offs
    109       68       .08       (48 )     (31 )     (.04 )     (387 )     (242 )     (.49 )  
(Provision) credit for losses on lending-related commitments
    2       1             (27 )     (17 )     (.02 )                    
Noncash charge for intangible assets impairment
                                        (196 )(b)     (164 ) (b)   (.33 ) (b)
Gain from sale/redemption of Visa Inc. shares
                                        105       65       .13    
 
                                                                       
 
(a)   Excludes principal investing results attributable to noncontrolling interests.
 
(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.

63


Table of Contents

Figure 4. Selected Financial Data
                                         
    2010   2009 Quarters
dollars in millions, except per share amounts   First     Fourth     Third     Second     First  
 
FOR THE PERIOD
                                         
Interest income
  $ 892     $ 933     $ 940     $ 945     $ 977  
Interest expense
    267       303       348       376       388    
Net interest income
    625       630       592       569       589  
Provision for loan losses
    413       756       733       823       847    
Noninterest income
    450       469       382       706       478  
Noninterest expense
    785       871       901       855       927    
Income (loss) from continuing operations before income taxes
    (123 )     (528 )     (660 )     (403 )     (707 )
Income (loss) from continuing operations attributable to Key
    (57 )     (217 )     (381 )     (230 )     (459 )  
Income (loss) from discontinued operations, net of taxes (a)
    2       (7 )     (16 )     4       (29 )
Net income (loss) attributable to Key
    (55 )     (224 )     (397 )     (226 )     (488 )  
 
                                       
Income (loss) from continuing operations attributable to Key common shareholders
    (98 )     (258 )     (422 )     (394 )     (507 )
Income (loss) from discontinued operations, net of taxes (a)
    2       (7 )     (16 )     4       (29 )  
Net income (loss) attributable to Key common shareholders
    (96 )     (265 )     (438 )     (390 )     (536 )
 
PER COMMON SHARE
                                         
Income (loss) from continuing operations attributable to Key common shareholders
  $ (.11 )   $ (.30 )   $ (.50 )   $ (.68 )   $ (1.03 )
Income (loss) from discontinued operations, net of taxes (a)
    ___       (.01 )     (.02 )     .01       (.06 )  
Net income (loss) attributable to Key common shareholders
    (.11 )     (.30 )     (.52 )     (.68 )     (1.09 )
 
                                       
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution
    (.11 )     (.30 )     (.50 )     (.68 )     (1.03 )  
Income (loss) from discontinued operations, net of taxes — assuming dilution (a)
    ___       (.01 )     (.02 )     .01       (.06 )
Net income (loss) attributable to Key common shareholders — assuming dilution
    (.11 )     (.30 )     (.52 )     (.68 )     (1.09 )  
 
                                       
Cash dividends paid
    .01       .01       .01       .01       .0625  
Book value at period end
    9.01       9.04       9.39       10.21       13.82    
Tangible book value at period end
    7.91       7.94       8.29       8.93       11.76  
Market price:
                                         
High
    8.19       6.85       7.07       9.82       9.35  
Low
    5.55       5.29       4.40       4.40       4.83    
Close
    7.75       5.55       6.50       5.24       7.87  
Weighted-average common shares outstanding (000)
    874,386       873,268       839,906       576,883       492,813    
Weighted-average common shares and potential common shares outstanding (000)
    874,386       873,268       839,906       576,883       492,813  
 
AT PERIOD END
                                         
Loans
  $ 55,913     $ 58,770     $ 62,193     $ 67,167     $ 70,003  
Earning assets
    79,948       80,318       84,173       85,649       84,722    
Total assets
    95,303       93,287       96,989       97,792       97,834  
Deposits
    65,149       65,571       67,259       67,780       65,877    
Long-term debt
    11,177       11,558       12,865       13,462       14,978  
Key common shareholders’ equity
    7,916       7,942       8,253       8,138       6,892    
Key shareholders’ equity
    10,641       10,663       10,970       10,851       9,968  
 
PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
                                         
Return on average total assets
    (.26 )   (.94 )   (1.62 )   (.96 )   (1.87 )
Return on average common equity
    (4.95 )     (12.60 )     (20.30 )     (15.54 )     (28.26 )  
Net interest margin (TE)
    3.19       3.04       2.80       2.70       2.79  
 
PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
                                         
Return on average total assets
    (.23 )   (.93 )   (1.62 )   (.90 )   (1.91 )
Return on average common equity
    (4.85 )     (12.94 )     (21.07 )     (15.32 )     (29.87 )  
Net interest margin (TE)
    3.13       3.00       2.79       2.67       2.77  
 
CAPITAL RATIOS AT PERIOD END
                                         
Key shareholders’ equity to assets
    11.17   %   11.43   %   11.31   %   11.10   %   10.19   %
Tangible Key shareholders’ equity to tangible assets
    10.26       10.50       10.41       10.16       9.23    
Tangible common equity to tangible assets
    7.37       7.56       7.58       7.35       6.06  
Tier 1 common equity
    7.51       7.50       7.64       7.36       5.62    
Tier 1 risk-based capital
    12.92       12.75       12.61       12.57       11.22  
Total risk-based capital
    17.07       16.95       16.65       16.67       15.18    
Leverage
    11.60       11.72       12.07       12.26       11.19  
 
TRUST AND BROKERAGE ASSETS
                                         
Assets under management
  $ 66,186     $ 66,939     $ 66,145     $ 63,382     $ 60,164  
Nonmanaged and brokerage assets
    19,201       27,190       25,883       23,261       21,786    
 
OTHER DATA
                                       
Average full-time-equivalent employees
    15,772       15,973       16,436       16,937       17,468    
Branches
    1,014       1,007       1,003       993       989  
 
(a)   In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers.

64


Table of Contents

Figure 5 presents certain earnings data and performance ratios, excluding (credits) charges related to intangible assets impairment and the tax treatment of certain leveraged lease financing transactions disallowed by the IRS. We believe that eliminating the effects of significant items that are generally nonrecurring assists in analyzing our results by presenting them on a more comparable basis.
During the fourth quarter of 2009, we recorded an after-tax credit of $80 million, or $.09 per common share, representing a final adjustment related to the resolution of certain lease financing tax issues. In the prior quarter, we recorded an after-tax charge of $28 million, or $.03 per common share, to write off intangible assets, other than goodwill, associated with actions taken to cease conducting business in certain equipment leasing markets. In the first quarter of 2009, we recorded an after-tax charge of $164 million, or $.33 per common share, for the impairment of intangible assets related to the National Banking reporting unit. We have now written off all of the goodwill that had been assigned to our National Banking reporting unit.
Figure 5 also shows certain financial measures related to “tangible common equity” and “Tier 1 common equity.” The tangible common equity ratio has been a focus of some investors. We believe this ratio may assist investors in analyzing our capital position without regard to 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 the composition of capital, the calculation of which is prescribed in federal banking regulations. Since the SCAP in early 2009, 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 noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 capital, this focus on Tier 1 common equity is consistent with existing capital adequacy guidelines.
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 our capital adequacy using tangible common equity and Tier 1 common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases. Figure 5 also reconciles the GAAP performance measures to the corresponding non-GAAP measures.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate 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.

65


Table of Contents

Figure 5. GAAP to Non-GAAP Reconciliations
                         
  Three months ended
 
dollars in millions, except per share amounts   3-31-10     12-31-09     3-31-09  
 
 
NET INCOME (LOSS)
                       
Net income (loss) attributable to Key (GAAP)
  $ (55 )   $ (224 )   $ (488 )
Charges (credits) related to intangible assets impairment, after tax
                164  
Charges (credits) related to leveraged lease tax litigation, after tax
          (80 )      
 
 
Net income (loss) attributable to Key, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)
  $ (55 )   $ (304 )   $ (324 )
 
                 
 
                       
Preferred dividends and amortization of discount on preferred stock
    41     $ 41     $ 48  
 
                       
Net income (loss) attributable to Key common shareholders (GAAP)
  $ (96 )   $ (265 )   $ (536 )
Net income (loss) attributable to Key common shareholders, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)
    (96 )     (345 )     (372 )
 
                       
PER COMMON SHARE
                       
Net income (loss) attributable to Key common shareholders — assuming dilution (GAAP)
  $ (.11 )   $ (.30 )   $ (1.09 )
Net income (loss) attributable to Key common shareholders, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation — assuming dilution (non-GAAP)
    (.11 )     (.39 )     (.76 )
 
                       
PERFORMANCE RATIOS FROM CONSOLIDATED OPERATIONS
                       
Return on average total assets: (a)
                       
Average total assets
  $ 95,578     $ 95,975     $ 103,815  
Return on average total assets (GAAP)
    (.23 )   %     (.93 )   %     (1.91 )   %
Return on average total assets, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)
    (.23 )     (1.26 )     (1.27 )
 
                       
Return on average common equity: (a)
                       
Average common equity
  $ 8,024     $ 8,125     $ 7,277  
Return on average common equity (GAAP)
    (4.85 )   %     (12.94 )   %     (29.87 )   %
Return on average common equity, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)
    (4.85 )     (16.85 )     (20.73 )
 
                       
TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS
                       
Key shareholders’ equity (GAAP)
  $ 10,641     $ 10,663     $ 9,968  
Less: Intangible assets
    963       967       1,029    (d)
Preferred Stock, Series B
    2,434       2,430       2,418  
Preferred Stock, Series A
    291       291       658  
 
 
Tangible common equity (non-GAAP)
  $ 6,953     $ 6,975     $ 5,863  
 
                 
 
 
 
 
                       
Total assets (GAAP)
  $ 95,303     $ 93,287     $ 97,834  
Less: Intangible assets
    963       967       1,029    (d)
 
 
Tangible assets (non-GAAP)
  $ 94,340     $ 92,320     $ 96,805  
 
                 
 
 
 
 
                       
Tangible common equity to tangible assets ratio (non-GAAP)
    7.37    %     7.56    %     6.06    %
 
                       
TIER 1 COMMON EQUITY
                       
Key shareholders’ equity (GAAP)
  $ 10,641     $ 10,663     $ 9,968  
Qualifying capital securities
    1,791       1,791       2,582  
Less: Goodwill
    917       917       917  
Accumulated other comprehensive income (loss) (b)
    (25 )     (48 )     111  
Other assets (c)
    767       632       184  
     
 
Total Tier 1 capital (regulatory)
    10,773       10,953       11,338  
Less: Qualifying capital securities
    1,791       1,791       2,582  
Preferred Stock, Series B
    2,434       2,430       2,418  
Preferred Stock, Series A
    291       291       658  
 
 
Total Tier 1 common equity (non-GAAP)
  $ 6,257     $ 6,441     $ 5,680  
 
                 
 
 
 
 
                       
Net risk-weighted assets (regulatory) (c)
  $ 83,362     $ 85,881     $ 101,077  
 
                       
Tier 1 common equity ratio (non-GAAP)
    7.51    %     7.50    %     5.62    %
 
                       
 
 
(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 our December 31, 2006, adoption and subsequent application of the applicable accounting guidance for defined benefit and other postretirement plans.
 
(c)   Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed deferred tax assets of $651 million at March 31, 2010, and $514 million at December 31, 2009, disallowed intangible assets (excluding goodwill), and deductible portions of nonfinancial equity investments.
 
(d)   Includes $2 million of other intangible assets classified as “discontinued assets” on the balance sheet.

66


Table of Contents

Strategic developments
We initiated the following actions during 2009 and 2010 to support our corporate strategy described in the “Introduction” section under the “Corporate Strategy” heading.
     
¨
  We established long-term benchmark metrics for success for our loan to deposit ratio, net charge-offs to average loans, net interest margin, noninterest income to total revenue ratio, return on average assets and our efficiency/expense control initiative during the first quarter of 2010.
 
   
¨
  During the first quarter of 2010 we have opened eight new branches and during 2009, we opened 38 new branches in eight markets, and we have completed renovations on 160 branches over the past two years.
 
   
¨
  During 2009, we settled all outstanding federal income tax issues with the IRS for the tax years 1997-2006, including all outstanding leveraged lease tax issues for all open tax years.
 
   
¨
  During the third quarter of 2009, we decided to exit the government-guaranteed education lending business, following earlier actions taken in the third quarter of 2008 to cease private student lending. As a result of this decision, we have accounted for the education lending business as a discontinued operation. Additionally, we ceased conducting business in both the commercial vehicle and office equipment leasing markets.
 
   
¨
  During the second quarter of 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of this decision, we have accounted for this business as a discontinued operation.

67


Table of Contents

Line of Business Results
This section summarizes the financial performance and related strategic developments of our two major business groups, Community Banking and National Banking. During the first quarter of 2010, we re-aligned our reporting structure for our business groups. Previously, Consumer Finance consisted mainly of portfolios which were identified as exit or run-off portfolios and were included in our National Banking segment. Effective for all periods presented, we are reflecting the results of these exit portfolios in Other Segments. The automobile dealer floor plan business, previously included in Consumer Finance, has been re-aligned with the Commercial Banking line of business within the Community Banking segment. In addition, other previously identified exit portfolios included in the National Banking segment, including $309 million of homebuilder loans from the Real Estate Capital line of business and $2.685 billion of commercial leases from the Equipment Finance line of business, have been moved to Other Segments. Note 3 (“Line of Business Results”) 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 our “taxable-equivalent revenue from continuing operations” and “income (loss) from continuing operations attributable to Key” for the three-month periods ended March 31, 2010 and 2009.
Figure 6. Major Business Groups — Taxable-Equivalent Revenue from Continuing
Operations and Income (Loss) from Continuing Operations Attributable to Key
                                 
    Three months ended March 31,   Change
 
dollars in millions   2010     2009      Amount      Percent      
 
 
REVENUE FROM CONTINUING OPERATIONS (TE)
                               
Community Banking
  $ 599     $ 612     $ (13 )     (2.1 )   %
National Banking (a)
    376       423       (47 )     (11.1 )
Other Segments
    96       (39 )     135       N/M  
 
 
Total Segments
    1,071       996       75       7.5  
Reconciling Items (b)
    11       77       (66 )     (85.7 )
 
 
 
                               
Total
  $ 1,082     $ 1,073     $ 9       .8    %
 
                         
 
                               
INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY
                               
Community Banking
  $ 5     $ 12     $ (7 )     (58.3 )   %
National Banking (a)
    (33 )     (394 )     361       91.6  
Other Segments
    (46 )     (162 )     116       71.6  
 
 
Total Segments
    (74 )     (544 )     470       86.4  
Reconciling Items (b)
    19       56       (37 )     (66.1 )
 
                               
 
 
Total
  $ (55 )   $ (488 )   $ 433       88.7    %
 
                         
 
 
 
(a)   National Banking’s results for the first quarter of 2009 include a $196 million ($164 million after tax) noncash charge for intangible assets impairment.
 
(b)   Reconciling Items for the first quarter of 2009 include a $105 million ($65 million after tax) gain from the sale of our remaining equity interest in Visa Inc.

68


Table of Contents

Community Banking summary of operations
As shown in Figure 7, Community Banking recorded net income attributable to Key of $5 million for the first quarter of 2010, compared to net income attributable to Key of $12 million for the year-ago quarter. Decreases in net interest income and noninterest income caused the decline.
Taxable-equivalent net interest income declined by $11 million, or 3%, from the first quarter of 2009, due to a reduction in average earning assets which declined by $4 billion or 11%, from the year-ago quarter. Average deposits declined slightly from the first quarter of 2009. The mix of deposits has changed reflecting strong growth in noninterest-bearing deposits and negotiable order of withdrawal (“NOW”) accounts, as higher-costing certificates of deposit originated in prior years mature and reprice to current market rates.
Noninterest income decreased by $2 million, or 1%, from the year-ago quarter, due to lower service charges on deposits and an increase in the reserve for credit losses from client derivatives. These factors were partially offset by higher income from trust and investment services, letter of credit fees and electronic banking fees. Assets under management have increased 29% from the same period one year ago.
The provision for loan losses increased slightly compared to the first quarter of 2009. Community Banking’s provision for loan losses for the first quarter of 2010 exceeded its net loan charge-offs by $26 million as consumer and business clients continue to experience lingering effects from the economic downturn and elevated unemployment levels.
Noninterest expense remained flat from the year-ago quarter. Lower personnel costs, marketing, office supplies and printing, and a reduction in the provision for losses on lending-related commitments were offset by increases in FDIC deposit insurance, occupancy cost, and various other expense categories.
Figure 7. Community Banking
                                 
    Three months ended March 31,   Change
 
dollars in millions   2010     2009     Amount      Percent      
 
 
SUMMARY OF OPERATIONS
                               
Net interest income (TE)
  $ 412     $ 423     $ (11 )     (2.6 )   %
Noninterest income
    187       189       (2 )     (1.1 )
 
 
Total revenue (TE)
    599       612       (13 )     (2.1 )
Provision for loan losses
    142       141       1       .7  
Noninterest expense
    468       468              
 
 
Income (loss) before income taxes (TE)
    (11 )     3       (14 )     N/M  
Allocated income taxes and TE adjustments
    (16 )     (9 )     (7 )     (77.8 )
 
 
 
                               
Net income (loss) attributable to Key
  $ 5     $ 12     $ (7 )     (58.3 )   %
 
                         
 
                               
AVERAGE BALANCES
                               
Loans and leases
  $ 27,769     $ 31,275     $ (3,506 )     (11.2 )   %
Total assets
    30,873       34,171       (3,298 )     (9.7 )
Deposits
    51,459       51,655       (196 )     (.4 )
 
                               
Assets under management at period end
  $ 18,248     $ 14,205     $ 4,043       28.5    %
 
 

69


Table of Contents

                                 
ADDITIONAL COMMUNITY BANKING DATA            
    Three months ended March 31,   Change
 
dollars in millions   2010     2009     Amount      Percent     
 
 
AVERAGE DEPOSITS OUTSTANDING
                               
NOW and money market deposit accounts
  $ 18,650     $ 17,376     $ 1,274       7.3    %
Savings deposits
    1,814       1,721       93       5.4  
Certificates of deposits ($100,000 or more)
    7,363       8,491       (1,128 )     (13.3 )
Other time deposits
    12,559       14,723       (2,164 )     (14.7 )
Deposits in foreign office
    502       714       (212 )     (29.7 )
Noninterest-bearing deposits
    10,571       8,630       1,941       22.5  
 
 
Total deposits
  $ 51,459     $ 51,655     $ (196 )     (.4 )   %
 
                         
 
                               
 
 
HOME EQUITY LOANS
                               
Average balance
  $ 9,967     $ 10,277                  
Weighted-average loan-to-value ratio (at date of origination)
    70    %     70    %