Edgar Filing: KEYCORP /NEW/

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q


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

For the Quarterly Period Ended June 30, 2010


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

For the Transition Period From To

Commission File Number 1-11302

(Exact name of registrant as specified in its charter)


Ohio		34-6542451

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


127 Public Square, Cleveland, Ohio		44114-1306

(Address of principal executive offices)		(Zip Code)

(216) 689-3000

(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	Smaller reporting company o
		(Do not check if a smaller reporting company)

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		880,282,505 Shares

(Title of class)		(Outstanding at July 30, 2010)

KEYCORP

TABLE OF CONTENTS


	Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets — June 30, 2010 (Unaudited), December 31, 2009, and June 30, 2009 (Unaudited)		5

Consolidated Statements of Income (Unaudited) — Three and six months ended June 30, 2010 and 2009		6

Consolidated Statements of Changes in Equity (Unaudited) — Three and six months ended June 30, 2010 and 2009		7

Consolidated Statements of Cash Flows (Unaudited) — Six months ended June 30, 2010 and 2009		8

Notes to Consolidated Financial Statements (Unaudited)		9

Note 1. Basis of Presentation		9

Note 2. Earnings Per Common Share		12

Note 3. Line of Business Results		13

Note 4. Securities		18

Note 5. Loans and Loans Held for Sale		22

Note 6. Mortgage Servicing Assets		23

Note 7. Variable Interest Entities		24

Note 8. Nonperforming Assets and Past Due Loans from Continuing Operations		27

Note 9. Capital Securities Issued by Unconsolidated Subsidiaries		28

Note 10. Shareholders’ Equity		30

Note 11. Employee Benefits		30

Note 12. Income Taxes		31

Note 13. Commitments, Contingent Liabilities and Guarantees		31

Note 14. Derivatives and Hedging Activities		36

Note 15. Fair Value Measurements		44

Note 16. Discontinued Operations		55

Report of Independent Registered Public Accounting Firm		59
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


	Page Number
Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations		60

Introduction		60
Terminology		60
Forward-looking statements		61
Long-term goals		62
Strategic developments		63
Economic overview		64
Regulatory Reform Developments		64
Interchange Fees		65
Regulation E pursuant to the Electronic Fund Transfer Act of 1978		66
Demographics		66
Critical accounting policies and estimates		67

Highlights of Our Financial Performance		68

Line of Business Results		73
Community Banking summary of operations		74
National Banking summary of operations		75
Other Segments		76

Results of Operations		77
Net interest income		77
Noninterest income		81
Trust and investment services income		82
Service charges on deposit accounts		83
Operating lease income		83
Net gains (losses) from loan sales		83
Net gains (losses) from principal investing		83
Investment banking and capital markets income (loss)		83
Noninterest expense		84
Personnel		85
Intangible assets impairment		85
Operating lease expense		85
Professional fees		85
Corporate-wide efficiency initiative		86
Income taxes		86

Financial Condition		87
Loans and loans held for sale		87
Commercial loan portfolio		87
*Commercial real estate loans*		87
*Commercial lease financing*		89
Consumer loan portfolio		90
Loans held for sale		90
Loan sales		91
Securities		93
Securities available for sale		93
Held-to-maturity securities		94
Other investments		95
Deposits and other sources of funds		95
Capital		97
Adoption of new accounting guidance		97
Dividends		97
Common shares outstanding		97
Capital availability and management		98
Capital adequacy		98


	Page Number
The Dodd-Frank Act’s Reform of Deposit Insurance		102
Risk Management		103
Overview		103
Market risk management		104
Interest rate risk management		104
*Net interest income simulation analysis*		104
*Economic value of equity modeling*		106
*Management of interest rate exposure*		106
Derivatives not designated in hedge relationships		107
Liquidity risk management		107
Governance structure		107
Sources of liquidity		107
Factors affecting liquidity		108
Managing liquidity risk		108
Long-term liquidity strategy		108
Our liquidity position and recent activity		108
Liquidity for KeyCorp		109
Liquidity programs		109
Liquidity and credit ratings		110
Credit risk management		111
Credit policy, approval and evaluation		111
Watch and criticized assets		111
Allowance for loan losses		112
Net loan charge-offs		113
Nonperforming assets		115
Operational risk management		118

Item 3. Quantitative and Qualitative Disclosure about Market Risk		119

Item 4. Controls and Procedures		119

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		119

Item 1A. Risk Factors		119

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		123

Item 5. Other Information		124

Item 6. Exhibits		124

Signature		125

Exhibits		126

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


	June 30,			December 31,			June 30,
in millions, except share data	2010			2009			2009
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	591		$	471		$	706
Short-term investments		1,984			1,743			3,487
Trading account assets		1,014			1,209			771
Securities available for sale		19,773			16,641			11,988
Held-to-maturity securities (fair value: $19, $24 and $25)		19			24			25
Other investments		1,415			1,488			1,450
Loans, net of unearned income of $1,641, $1,770 and $1,994		53,334			58,770			67,167
Less: Allowance for loan losses		2,219			2,534			2,339

Net loans		51,115			56,236			64,828
Loans held for sale		699			443			761
Premises and equipment		872			880			858
Operating lease assets		589			716			842
Goodwill		917			917			917
Other intangible assets		42			50			104
Corporate-owned life insurance		3,109			3,071			3,016
Derivative assets		1,153			1,094			1,182
Accrued income and other assets (including $134 of consolidated LIHTC guaranteed funds VIEs, see Note 7) ^(a)		4,061			4,096			2,775
Discontinued assets (including $3,285 of consolidated education loan securitization trusts VIEs at fair value, see Note 7) ^(a)		6,814			4,208			4,082

Total assets	$	94,167		$	93,287		$	97,792


LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	25,526		$	24,341		$	23,939
Savings deposits		1,883			1,807			1,795
Certificates of deposit ($100,000 or more)		8,476			10,954			13,486
Other time deposits		10,430			13,286			15,055

Total interest-bearing		46,315			50,388			54,275
Noninterest-bearing		15,226			14,415			12,873
Deposits in foreign office — interest-bearing		834			768			632

Total deposits		62,375			65,571			67,780
Federal funds purchased and securities sold under repurchase agreements		2,836			1,742			1,530
Bank notes and other short-term borrowings		819			340			1,710
Derivative liabilities		1,321			1,012			528
Accrued expense and other liabilities		2,154			2,007			1,600
Long-term debt		10,451			11,558			13,462
Discontinued liabilities (including $3,135 of consolidated education loan securitization trusts VIEs at fair value, see Note 7) ^(a)		3,139			124			122

Total liabilities		83,095			82,354			86,732

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 2,904,839 shares		291			291			291
Fixed-Rate Cumulative Perpetual Preferred Stock, Series B, $100,000 liquidation preference; authorized and issued 25,000 shares		2,438			2,430			2,422
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 946,348,435, 946,348,435 and 865,070,221 shares		946			946			865
Common stock warrant		87			87			87
Capital surplus		3,701			3,734			3,292
Retained earnings		5,118			5,158			5,878
Treasury stock, at cost (65,833,721, 67,813,492 and 67,824,373 shares)		(1,914	)		(1,980	)		(1,984	)
Accumulated other comprehensive income (loss)		153			(3	)		—

Key shareholders’ equity		10,820			10,663			10,851
Noncontrolling interests		252			270			209

Total equity		11,072			10,933			11,060

Total liabilities and equity	$	94,167		$	93,287		$	97,792


(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).

Consolidated Statements of Income (Unaudited)


	Three months ended June 30,						Six months ended June 30,
dollars in millions, except per share amounts	2010			2009			2010			2009

INTEREST INCOME
Loans	$	677		$	819		$	1,387		$	1,659
Loans held for sale		5			8			9			16
Securities available for sale		154			89			304			189
Held-to-maturity securities		—			—			1			1
Trading account assets		10			13			21			26
Short-term investments		2			3			4			6
Other investments		13			13			27			25

Total interest income		861			945			1,753			1,922

INTEREST EXPENSE
Deposits		188			296			400			596
Federal funds purchased and securities sold under repurchase agreements		2			1			3			2
Bank notes and other short-term borrowings		4			4			7			10
Long-term debt		50			75			101			156

Total interest expense		244			376			511			764


NET INTEREST INCOME		617			569			1,242			1,158
Provision for loan losses		228			823			641			1,670

Net interest income (expense) after provision for loan losses		389			(254	)		601			(512	)

NONINTEREST INCOME
Trust and investment services income		112			119			226			229
Service charges on deposit accounts		80			83			156			165
Operating lease income		43			59			90			120
Letter of credit and loan fees		42			44			82			82
Corporate-owned life insurance income		28			25			56			52
Net securities gains (losses) ^(a)		(2	)		125			1			111
Electronic banking fees		29			27			56			51
Gains on leased equipment		2			36			10			62
Insurance income		19			16			37			34
Net gains (losses) from loan sales		25			(3	)		29			4
Net gains (losses) from principal investing		17			(6	)		54			(78	)
Investment banking and capital markets income (loss)		31			14			40			31
Gain from sale/redemption of Visa Inc. shares		—			—			—			105
Gain related to exchange of common shares for capital securities		—			95			—			95
Other income		66			72			105			121

Total noninterest income		492			706			942			1,184

NONINTEREST EXPENSE
Personnel		385			375			747			734
Net occupancy		64			63			130			129
Operating lease expense		35			49			74			99
Computer processing		47			48			94			95
Professional fees		41			46			79			80
FDIC assessment		33			70			70			100
OREO expense, net		22			15			54			21
Equipment		26			25			50			47
Marketing		16			17			29			31
Provision (credit) for losses on lending-related commitments		(10	)		11			(12	)		11
Intangible asset impairment		—			—			—			196
Other expense		110			136			239			239

Total noninterest expense		769			855			1,554			1,782
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		112			(403	)		(11	)		(1,110	)
Income taxes		11			(176	)		(71	)		(414	)

INCOME (LOSS) FROM CONTINUING OPERATIONS		101			(227	)		60			(696	)
Income (loss) from discontinued operations, net of taxes, of ($17), ($8), ($15) and ($14) (see Note 16)		(27	)		4			(25	)		(25	)

NET INCOME (LOSS)		74			(223	)		35			(721	)
Less: Net income (loss) attributable to noncontrolling interests		4			3			20			(7	)

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	70		$	(226	)	$	15		$	(714	)


Income (loss) from continuing operations attributable to Key common shareholders	$	56		$	(394	)	$	(42	)	$	(901	)
Net income (loss) attributable to Key common shareholders		29			(390	)		(67	)		(926	)

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.06		$	(.68	)	$	(.05	)	$	(1.68	)
Income (loss) from discontinued operations, net of taxes		(.03	)		.01			(.03	)		(.05	)
Net income (loss) attributable to Key common shareholders		.03			(.68	)		(.08	)		(1.73	)

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.06		$	(.68	)	$	(.05	)	$	(1.68	)
Income (loss) from discontinued operations, net of taxes		(.03	)		.01			(.03	)		(.05	)
Net income (loss) attributable to Key common shareholders		.03			(.68	)		(.08	)		(1.73	)

Cash dividends declared per common share	$	.01		$	.01		$	.02		$	.0725

Weighted-average common shares outstanding (000)		874,664			576,883			874,526			535,080
Weighted-average common shares and potential common shares outstanding (000)		874,664			576,883			874,526			535,080


(a)		For the three months ended June 30, 2010, Key had $4 million in impairment losses related to securities, which were recognized in earnings. For the three months ended June 30, 2009, impairment losses totaled $7 million, of which $1 million was recognized in equity as a component of AOCI. (see Note 4)

See Notes to Consolidated Financial Statements (Unaudited).

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)																	(714	)								(7	)	$	(721	)
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($23)																							(38	)					(38	)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($37)																							(61	)					(61	)
Net contribution to noncontrolling interests																										15			15
Foreign currency translation adjustments																							21						21
Net pension and postretirement benefit costs, net of income taxes																							13						13

Total comprehensive income (loss)																												$	(771	)

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

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


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)																	15									20			35
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $136																							230						230
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($39)																							(66	)					(66	)
Net distribution from noncontrolling interests																										(38	)		(38	)
Foreign currency translation adjustments																							(19	)					(19	)
Net pension and postretirement benefit costs, net of income taxes																							11						11

Total comprehensive income (loss)																												$	198

Deferred compensation														9
Cash dividends declared on common shares ($.02 per share)																	(18	)
Cash dividends declared on Noncumulative Series A
Preferred Stock ($3.875 per share)																	(12	)
Cash dividends accrued on Cumulative Series B
Preferred Stock (5% per annum)																	(62	)
Amortization of discount on Series B Preferred Stock							8										(8	)
Common shares reissued for stock options and other employee benefit plans					1,980									(42	)					66

BALANCE AT JUNE 30, 2010		2,930			880,515	$	2,729		$	946	$	87	$	3,701		$	5,118		$	(1,914	)	$	153		$	252

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Six months ended June 30,
in millions	2010			2009
OPERATING ACTIVITIES
Net income (loss)	$	35		$	(721	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for loan losses		641			1,670
Depreciation and amortization expense		173			201
Intangible assets impairment		—			196
Net losses (gains) from principal investing		(54	)		78
Net losses (gains) from loan sales		(29	)		(4	)
Deferred income taxes		(66	)		(413	)
Net securities losses (gains)		(1	)		(111	)
Gain from sale/redemption of Visa Inc. shares		—			(105	)
Gain related to exchange of common shares for capital securities		—			(95	)
Gains on leased equipment		(10	)		(62	)
Gain from sale of Key’s claim associated with the Lehman		—			(32	)
Provision for losses on LIHTC guaranteed funds		—			16
Provision (credit) for losses on lending-related commitments		(12	)		11
Net decrease (increase) in loans held for sale excluding transfers from continuing operations		(48	)		(180	)
Net decrease (increase) in trading account assets		195			509
Other operating activities, net		729			(84	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		1,553			874
INVESTING ACTIVITIES
Proceeds from sale/redemption of Visa Inc. shares		—			105
Net decrease (increase) in short-term investments		(241	)		1,734
Purchases of securities available for sale		(4,453	)		(8,031	)
Proceeds from sales of securities available for sale		32			2,957
Proceeds from prepayments and maturities of securities available for sale		1,676			1,404
Purchases of held-to-maturity securities		(2	)		(6	)
Proceeds from prepayments and maturities of held-to-maturity securities		4			6
Purchases of other investments		(60	)		(82	)
Proceeds from sales of other investments		88			14
Proceeds from prepayments and maturities of other investments		53			41
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		3,882			4,581
Proceeds from loan sales		293			80
Purchases of premises and equipment		(54	)		(73	)
Proceeds from sales of premises and equipment		1			2
Proceeds from sales of other real estate owned		79			12

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		1,298			2,744
FINANCING ACTIVITIES
Net increase (decrease) in deposits		(3,196	)		2,653
Net increase (decrease) in short-term borrowings		1,573			(6,794	)
Net proceeds from issuance of long-term debt		18			455
Payments on long-term debt		(1,034	)		(1,331	)
Net proceeds from issuance of common shares and preferred stock		—			987
Tax benefits over (under) recognized compensation cost for stock-based awards		—			(5	)
Cash dividends paid		(92	)		(122	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(2,731	)		(4,157	)

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		120			(539	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		471			1,245

CASH AND DUE FROM BANKS AT END OF PERIOD	$	591		$	706


Additional disclosures relative to cash flows:
Interest paid	$	528		$	799
Income taxes paid (refunded)		(157	)		(109	)
Noncash items:
Loans transferred to portfolio from held for sale		—		$	92
Loans transferred to held for sale from portfolio	$	208			47
Loans transferred to other real estate owned		99			91

See Notes to Consolidated Financial Statements (Unaudited).

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. CMO: Collateralized mortgage obligation. Common Shares: Common Shares, $1 par value. CPP: Capital Purchase Program of the U.S. Treasury. DIF: Deposit Insurance Fund. Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act 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. TARP: Troubled Assets Relief Program 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.

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 we have: (i) a variable interest in the entity; (ii) 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 and second quarters of 2010, we determined that further reviews of goodwill recorded in our Community Banking unit were necessary. These reviews indicated the estimated fair value of the Community Banking unit continued to exceed its carrying amount

at both June 30, 2010 and March 31, 2010. No further impairment testing was required. There was no goodwill associated with our National Banking unit at either June 30, 2010 or 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 (“Derivatives and Hedging Activities”).

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 on January 1, 2010, 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 June 30, 2010

Credit quality disclosures. In July 2010, the FASB issued new accounting guidance which requires additional disclosures about the credit quality of financing receivables (i.e. loans) and the allowance for credit losses. Most of these additional disclosures will be required for interim and annual reporting periods ending on or after December 15, 2010 (effective December 31, 2010, for us). Specific items regarding activity that occurred before the issuance of this accounting guidance, such as the allowance rollforward and modification disclosures, will be required for periods beginning after December 15, 2010 (January 1, 2011, for us).

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.

2. Earnings Per Common Share

Our basic and diluted earnings per common share are calculated as follows:


	Three months ended June 30,						Six months ended June 30,
dollars in millions, except per share amounts	2010			2009			2010			2009

EARNINGS
Income (loss) from continuing operations	$	101		$	(227	)	$	60		$	(696	)
Less: Net income (loss) attributable to noncontrolling interests		4			3			20			(7	)

Income (loss) from continuing operations attributable to Key		97			(230	)		40			(689	)
Less: Dividends on Series A Preferred Stock		6			15			12			27
Noncash deemed dividend — common shares exchanged for Series A Preferred Stock		—			114			—			114
Cash dividends on Series B Preferred Stock		31			31			62			63
Amortization of discount on Series B Preferred Stock		4			4			8			8

Income (loss) from continuing operations attributable to Key common shareholders		56			(394	)		(42	)		(901	)
Income (loss) from discontinued operations, net of taxes ^(a)		(27	)		4			(25	)		(25	)

Net income (loss) attributable to Key common shareholders	$	29		$	(390	)	$	(67	)	$	(926	)


WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		874,664			576,883			874,526			535,080
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000)		—			—			—			—

Weighted-average common shares and potential common shares outstanding (000)		874,664			576,883			874,526			535,080


EARNINGS PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.06		$	(.68	)	$	(.05	)	$	(1.68	)
Income (loss) from discontinued operations, net of taxes ^(a)		(.03	)		.01			(.03	)		(.05	)
Net income (loss) attributable to Key common shareholders		.03			(.68	)		(.08	)		(1.73	)

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.06		$	(.68	)	$	(.05	)	$	(1.68	)
Income (loss) from discontinued operations, net of taxes ^(a)		(.03	)		.01			(.03	)		(.05	)
Net income (loss) attributable to Key common shareholders — assuming dilution		.03			(.68	)		(.08	)		(1.73	)


(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. The loss from discontinued operations for the six-month period ended June 30, 2010, was primarily attributable to fair value adjustments related to the education lending securitization trusts. Included in the loss from discontinued operations for the six-month period ended June 30, 2009, is a charge for intangible assets impairment related to Austin.

3. Line of Business Results

The specific lines of business that comprise each of the major business groups (operating segments) are described below. During the first quarter of 2010, we re-aligned our reporting structure for our business groups. Prior to 2010, 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 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

underwriting and trading, and syndicated finance products and services to large corporations and middle-market companies.

Institutional and Capital Markets, through its Victory Capital Management unit, 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- and six- month periods ended June 30, 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.

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 June 30,	Community Banking						National Banking
dollars in millions	2010			2009			2010			2009

SUMMARY OF OPERATIONS
Net interest income (TE)	$	408		$	437		$	199		$	234
Noninterest income		199			193			210			211

Total revenue (TE) ^(a)		607			630			409			445
Provision (credit) for loan losses		121			199			99			494
Depreciation and amortization expense		9			11			25			31
Other noninterest expense		446			485			234			261

Income (loss) from continuing operations before income taxes (TE)		31			(65	)		51			(341	)
Allocated income taxes and TE adjustments		(1	)		(35	)		18			(129	)

Income (loss) from continuing operations		32			(30	)		33			(212	)
Income (loss) from discontinued operations, net of taxes		—			—			—			—

Net income (loss)		32			(30	)		33			(212	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			—			(1	)

Net income (loss) attributable to Key	$	32		$	(30	)	$	33		$	(211	)


AVERAGE BALANCES ^(b)
Loans and leases	$	27,218		$	30,305		$	20,948		$	28,586
Total assets ^(a)		30,292			33,162			24,781			34,798
Deposits		50,421			52,786			12,474			13,019

OTHER FINANCIAL DATA
Net loan charge-offs ^(b)	$	148		$	114		$	173		$	252
Return on average allocated equity ^(b)		3.46	%		(3.30	) %		3.92	%		(21.47	) %
Return on average allocated equity		3.46			(3.30	)		3.92			(21.47	)
Average full-time equivalent employees ^(e)		8,246			8,709			2,327			2,545


Six months ended June 30,	Community Banking						National Banking
dollars in millions	2010			2009			2010			2009

SUMMARY OF OPERATIONS
Net interest income (TE)	$	821		$	859		$	396		$	456
Noninterest income		386			381			389			410

Total revenue (TE) ^(a)		1,207			1,240			785			866
Provision (credit) for loan losses		263			340			260			1,005
Depreciation and amortization expense		18			22			51			63
Other noninterest expense		904			941			479			657	^(c)

Income (loss) from continuing operations before income taxes (TE)		22			(63	)		(5	)		(859	)
Allocated income taxes and TE adjustments		(16	)		(44	)		(5	)		(251	)

Income (loss) from continuing operations		38			(19	)		—			(608	)
Income (loss) from discontinued operations, net of taxes		—			—			—			—

Net income (loss)		38			(19	)		—			(608	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			—			(3	)

Net income (loss) attributable to Key	$	38		$	(19	)		—		$	(605	)


AVERAGE BALANCES ^(b)
Loans and leases	$	27,492		$	30,787		$	21,690		$	29,141
Total assets ^(a)		30,581			33,664			25,521			35,999
Deposits		50,937			52,223			12,445			12,496

OTHER FINANCIAL DATA
Net loan charge-offs ^(b)	$	264		$	203		$	424		$	492
Return on average allocated equity ^(b)		2.06	%		(1.06	) %		—			(30.83	) %
Return on average allocated equity		2.06			(1.06	)		—			(30.83	)
Average full-time equivalent employees ^(e)		8,217			8,823			2,348			2,583


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

(d)		Reconciling Items for the second quarter of 2009 include a $32 million ($20 million after tax) gain from the sale of Key’s claim associated with the Lehman Brothers’ bankruptcy.

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


Other Segments					Total Segments						Reconciling Items						Key
2010		2009			2010			2009			2010			2009			2010			2009


$	9	$	(91	)	$	616		$	580		$	7		$	(5	)	$	623		$	575
	77		278	^(c)		486			682			6			24	^(d)		492			706

	86		187			1,102			1,262			13			19			1,115			1,281
	7		131			227			824			1			(1	)		228			823
	10		18			44			60			41			40			85			100
	33		34			713			780			(29	)		(25	)		684			755

	36		4			118			(402	)		—			5			118			(397	)
	3		(8	)		20			(172	)		(3	)		2			17			(170	)

	33		12			98			(230	)		3			3			101			(227	)
	—		—			—			—			(27	)		4			(27	)		4

	33		12			98			(230	)		(24	)		7			74			(223	)
	4		4			4			3			—			—			4			3

$	29	$	8		$	94		$	(233	)	$	(24	)	$	7		$	70		$	(226	)



$	6,738	$	9,765		$	54,904		$	68,656		$	49		$	54		$	54,953		$	68,710
	30,583		27,920			85,656			95,880			2,188			608			87,844			96,488
	1,574		1,974			64,469			67,779			(60	)		(416	)		64,409			67,363


$	115	$	136		$	436		$	502		$	(1	)		—		$	435		$	502
	N/M		N/M			4.60	%		(10.50	) %		N/M			N/M			3.65	%		(9.04	) %
	N/M		N/M			4.60			(10.50	)		N/M			N/M			2.64			(8.89	)
	40		87			10,613			11,341			5,052			5,596			15,665			16,937


Other Segments						Total Segments						Reconciling Items						Key
2010			2009			2010			2009			2010			2009			2010			2009


$	25		$	(132	)	$	1,242		$	1,183		$	13		$	(13	)	$	1,255		$	1,170
	157			282	^(c)		932			1,073			10			111	^(d)		942			1,184

	182			150			2,174			2,256			23			98			2,197			2,354
	128			324			651			1,669			(10	)		1			641			1,670
	21			36			90			121			83			80			173			201
	63			73			1,446			1,671			(65	)		(90	)		1,381			1,581

	(30	)		(283	)		(13	)		(1,205	)		15			107			2			(1,098	)
	(31	)		(126	)		(52	)		(421	)		(6	)		19			(58	)		(402	)

	1			(157	)		39			(784	)		21			88			60			(696	)
	—			—			—			—			(25	)		(25	)		(25	)		(25	)

	1			(157	)		39			(784	)		(4	)		63			35			(721	)
	20			(4	)		20			(7	)		—			—			20			(7	)

$	(19	)	$	(153	)	$	19		$	(777	)	$	(4	)	$	63		$	15		$	(714	)



$	7,047		$	10,180		$	56,229		$	70,108		$	53		$	45		$	56,282		$	70,153
	29,962			27,651			86,064			97,314			2,219			584			88,283			97,898
	1,609			1,884			64,991			66,603			(109	)		(293	)		64,882			66,310


$	269		$	267		$	957		$	962			—			—		$	957		$	962
	N/M			N/M			.46	%		(17.62	) %		N/M			N/M			.75	%		(13.52	) %
	N/M			N/M			.46			(17.62	)		N/M			N/M			.28			(14.01	)
	41			97			10,606			11,503			5,112			5,698			15,718			17,201

Supplementary information (Community Banking lines of business)


Three months ended June 30,	Regional Banking						Commercial Banking
dollars in millions	2010			2009			2010			2009

Total revenue (TE)	$	494		$	527		$	113		$	103
Provision for loan losses		57			166			64			33
Noninterest expense		409			439			46			57
Net income (loss) attributable to Key		30			(38	)		2			8
Average loans and leases		18,405			19,745			8,813			10,560
Average loans held for sale		69			168			1			1
Average deposits		45,234			48,717			5,187			4,069
Net loan charge-offs		82			72			66			42
Net loan charge-offs to average loans		1.79	%		1.46	%		3.00	%		1.60	%
Nonperforming assets at period end	$	339		$	245		$	222		$	267
Return on average allocated equity		4.90	%		(6.60	) %		.64	%		2.39	%
Average full-time equivalent employees		7,891			8,339			355			370


Six months ended June 30,	Regional Banking						Commercial Banking
dollars in millions	2010			2009			2010			2009

Total revenue (TE)	$	985		$	1,034		$	222		$	206
Provision for loan losses		172			234			91			106
Noninterest expense		830			849			92			114
Net income (loss) attributable to Key		14			(10	)		24			(9	)
Average loans and leases		18,578			19,874			8,914			10,913
Average loans held for sale		75			142			1			2
Average deposits		45,713			48,253			5,224			3,970
Net loan charge-offs		179			125			85			78
Net loan charge-offs to average loans		1.94	%		1.27	%		1.92	%		1.44	%
Nonperforming assets at period end	$	339		$	245		$	222		$	267
Return on average allocated equity		1.15	%		(.88	) %		3.82	%		(1.37	) %
Average full-time equivalent employees		7,864			8,451			353			372

Supplementary information (National Banking lines of business)


	Real Estate Capital and												Institutional and
Three months ended June 30,	Corporate Banking Services						Equipment Finance						Capital Markets
dollars in millions	2010			2009			2010			2009			2010			2009

Total revenue (TE)	$	176		$	191		$	61		$	65		$	172		$	189
Provision for loan losses		77			414			10			42			12			38
Noninterest expense		106			113			49			60			104			119
Net income (loss) attributable to Key		(4	)		(209	)		1			(23	)		36			21
Average loans and leases		11,465			15,145			4,478			5,051			5,005			8,390
Average loans held for sale		194			182			16			18			171			193
Average deposits		9,811			10,678			5			9			2,658			2,332
Net loan charge-offs		142			212			18			29			13			11
Net loan charge-offs to average loans		4.97	%		5.61	%		1.61	%		2.30	%		1.04	%		.53	%
Nonperforming assets at period end	$	867		$	1,023		$	106		$	105		$	116		$	89
Return on average allocated equity		(.78	) %		(34.43	) %		1.14	%		(25.07	) %		14.92	%		7.40	%
Average full-time equivalent employees		1,052			1,125			549			637			726			783


	Real Estate Capital and												Institutional and
Six months ended June 30,	Corporate Banking Services						Equipment Finance						Capital Markets
dollars in millions	2010			2009			2010			2009			2010			2009

Total revenue (TE)	$	320		$	374		$	122		$	130		$	343		$	362
Provision for loan losses		222			852			14			83			24			70
Noninterest expense		221			304			96			113			213			303
Net income (loss) attributable to Key		(76	)		(530	)		7			(41	)		69			(34	)
Average loans and leases		11,900			15,432			4,525			5,041			5,265			8,668
Average loans held for sale		154			194			9			13			148			230
Average deposits		9,823			10,433			5			9			2,617			2,054
Net loan charge-offs		349			385			36			50			39			57
Net loan charge-offs to average loans		5.91	%		5.03	%		1.60	%		2.00	%		1.49	%		1.33	%
Nonperforming assets at period end	$	867		$	1,023		$	106		$	105		$	116		$	89
Return on average allocated equity		(7.42	) %		(45.00	) %		3.92	%		(20.12	) %		14.13	%		(5.86	) %
Average full-time equivalent employees		1,065			1,146			556			639			727			798

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.


	June 30, 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		75	$	3		—		78
Collateralized mortgage obligations		17,817		473		—		18,290
Other mortgage-backed securities		1,187		96		—		1,283
Other securities		106		11	$	3		114

Total securities available for sale	$	19,193	$	583	$	3	$	19,773


HELD-TO-MATURITY SECURITIES
States and political subdivisions	$	3		—		—	$	3
Other securities		16		—		—		16

Total held-to-maturity securities	$	19		—		—	$	19


	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


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

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

Total securities available for sale	$	11,848	$	180	$	40	$	11,988



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

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

The following table summarizes our securities available for sale that were in an unrealized loss position as of June 30, 2010, December 31, 2009, and June 30, 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

JUNE 30, 2010
Securities available for sale:
Other securities	$	18	$	2	$	3	$	1	$	21	$	3

Total temporarily impaired securities	$	18	$	2	$	3	$	1	$	21	$	3


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


JUNE 30, 2009
Securities available for sale:
Collateralized mortgage obligations	$	1,660	$	38		—		—	$	1,660	$	38
Other securities		10		1	$	2	$	1		12		2

Total temporarily impaired securities	$	1,670	$	39	$	2	$	1	$	1,672	$	40

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. As shown in the following table, there was $4 million in impairment losses recognized in earnings for the three months ended June 30, 2010.


Three months ended June 30, 2010
in millions

Balance at March 31, 2010		—
Impairment recognized in earnings	$	4

Balance at June 30, 2010	$	4

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”).

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


Six months ended June 30, 2010
in millions

Realized gains	$	5
Realized losses		4

Net securities gains (losses)	$	1

At June 30, 2010, securities available for sale and held-to-maturity securities totaling $12.1 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
June 30, 2010	Amortized		Fair		Amortized		Fair
in millions	Cost		Value		Cost		Value

Due in one year or less	$	679	$	698	$	2	$	2
Due after one through five years		18,371		18,924		17		17
Due after five through ten years		126		133		—		—
Due after ten years		17		18		—		—

Total	$	19,193	$	19,773	$	19	$	19

5. Loans and Loans Held for Sale

Our loans by category are summarized as follows:


	June 30,		December 31,		June 30,
in millions	2010		2009		2009

Commercial, financial and agricultural	$	17,113	$	19,248	$	23,542
Commercial real estate:
Commercial mortgage		9,971		10,457		11,761
Construction		3,430		4,739		6,119

Total commercial real estate loans		13,401		15,196		17,880
Commercial lease financing		6,620		7,460		8,263

Total commercial loans		37,134		41,904		49,685
Real estate — residential mortgage		1,846		1,796		1,753
Home equity:
Community Banking		9,775		10,048		10,250
Other		753		838		940

Total home equity loans		10,528		10,886		11,190
Consumer other — Community Banking		1,147		1,181		1,199
Consumer other:
Marine		2,491		2,787		3,095
Other		188		216		245

Total consumer other		2,679		3,003		3,340

Total consumer loans		16,200		16,866		17,482

Total loans ^(a)	$	53,334	$	58,770	$	67,167


(a)		Excludes loans in the amount of $6.6 billion, $3.5 billion and $3.6 billion at June 30, 2010, December 31, 2009 and June 30, 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:


	June 30,			December 31,			June 30,
in millions	2010			2009			2009

Commercial, financial and agricultural	$	255		$	14		$	51
Real estate — commercial mortgage		235			171			288
Real estate — construction		112			92			146
Commercial lease financing		16			27			30
Real estate — residential mortgage		81			139			245
Automobile		—			—			1

Total loans held for sale ^(a)	$	699	^(b)	$	443	^(b)	$	761


(a)		Excludes loans in the amount of $92 million, $434 million and $148 million at June 30, 2010, December 31, 2009, and June 30, 2009, respectively, related to the discontinued operations of the education lending business.

(b)		The beginning balance at December 31, 2009 of $443 million increased by new originations in the amount of $1.321 billion and net transfers from held to maturity in the amount of $174 million, and decreased by loan sales of $1.200 billion, transfers to OREO/valuation adjustments of $17 million and loan payments of $22 million, for an ending balance of $699 million at June 30, 2010.

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


	Three months ended June 30,						Six months ended June 30,
in millions	2010			2009			2010			2009

Balance at beginning of period	$	2,425		$	2,016		$	2,534		$	1,629

Charge-offs		(492	)		(540	)		(1,049	)		(1,027	)
Recoveries		57			38			92			65

Net loans charged off		(435	)		(502	)		(957	)		(962	)
Provision for loan losses from continuing operations		228			823			641			1,670
Foreign currency translation adjustment		1			2			1			2

Balance at end of period	$	2,219		$	2,339		$	2,219		$	2,339

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


	Three months ended June 30,					Six months ended June 30,
in millions	2010			2009		2010			2009

Balance at beginning of period	$	119		$	54	$	121		$	54
Provision (credit) for losses on lending-related commitments		(10	)		11		(12	)		11

Balance at end of period ^(a)	$	109		$	65	$	109		$	65


(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:


	Six months ended June 30,
in millions	2010			2009

Balance at beginning of period	$	221		$	242
Servicing retained from loan sales		3			4
Purchases		7			15
Amortization		(22	)		(27	)

Balance at end of period	$	209		$	234


Fair value at end of period	$	307		$	403

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 June 30, 2010 and 2009, are:

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

w		expected credit losses at a static rate of 2.00% to 3.00%; and

w		residual cash flows discount rate of 7.00% to 15.00%.

Changes in these assumptions could cause the fair value of mortgage servicing assets to change in the future. The volume of loans serviced and expected credit losses are critical to the valuation of servicing assets. At June 30, 2010, a 1.00% increase in the assumed default rate of commercial mortgage loans would cause a $9 million decrease in the fair value of our mortgage servicing assets.

Contractual fee income from servicing commercial mortgage loans totaled $37 million and $34 million for the six-month periods ended June 30, 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.”

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:

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

w		The entity’s investors lack the power to direct the activities that most significantly impact the entity’s economic performance.

w		The entity’s equity at risk holders do not have the obligation to absorb losses and the right to receive residual returns.

w		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

Maximum

in millions

Assets

Liabilities

Assets

Liabilities

Exposure to Loss

June 30, 2010

LIHTC funds

134

N/A

175

—

Education loan securitization trusts

3,285

3,135

N/A

LIHTC investments

N/A

963

—

451

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 $118 million at June 30, 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 recorded additional expenses of approximately $2 million related to this guarantee obligation during the first six 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 June 30, 2010, we estimated the settlement value of these third-party interests to be between $83 million and $93 million, while the recorded value, including reserves, totaled $143 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.”

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 June 30, 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 June 30, 2010, assets of these unconsolidated LIHTC operating partnerships totaled approximately $963 million. At June 30, 2010, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $373 million plus $78 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 six 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 June 30, 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.

8. Nonperforming Assets and Past Due Loans from Continuing Operations

Impaired loans totaled $1.4 billion at June 30, 2010, compared to $1.9 billion at December 31, 2009, and $1.9 billion at June 30, 2009. Impaired loans had an average balance of $1.6 billion for the second quarter of 2010 and $1.7 billion for the second quarter of 2009. At June 30, 2010, restructured loans (which are included in impaired loans) totaled $213 million while at December 31, 2009, restructured loans totaled $364 million. Although $76 million in restructured loans were added during the first six months of 2010, the decrease in restructured loans was primarily attributable to the transfer out of $207 million of troubled debt restructurings to performing status, and $83 million in payments and charge-offs. Restructured loans were nominal at June 30, 2009.

Our nonperforming assets and past due loans were as follows:


	June 30,			December 31,			June 30,
in millions	2010			2009			2009

Impaired loans	$	1,435		$	1,903		$	1,912
Other nonperforming loans		268			284			273

Total nonperforming loans		1,703			2,187			2,185

Nonperforming loans held for sale		221			116			145

Other real estate owned (“OREO”)		200			191			182
Allowance for OREO losses		(64	)		(23	)		(11	)

OREO, net of allowance		136			168			171
Other nonperforming assets		26			39			47

Total nonperforming assets	$	2,086		$	2,510		$	2,548


Impaired loans with a specifically allocated allowance	$	1,099		$	1,645		$	1,731
Specifically allocated allowance for impaired loans		157			300			393

Restructured loans included in nonaccrual loans ^(a)	$	167		$	139			—
Restructured loans with a specifically allocated allowance ^(b)		65			256			—
Specifically allocated allowance for restructured loans ^(c)		15			44			—

Accruing loans past due 90 days or more	$	240		$	331		$	552
Accruing loans past due 30 through 89 days		610			933			1,081


(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 June 30, 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.

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.

We unconditionally guarantee the following payments or distributions on behalf of the trusts:

w		required distributions on the capital securities;

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

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

Our capital securities have historically provided an attractive source of funds: they currently 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 this new rule will not have any material effect on our financial condition.

The enactment of the Dodd-Frank Act changes the regulatory capital standards that apply to bank holding companies by phasing-out the treatment of capital securities and cumulative preferred securities (excluding TARP CPP preferred stock issued to the United States or its agencies or instrumentalities before October 4, 2010) as Tier 1 eligible capital. This three year phase-out period, which commences January 1, 2013, and it will ultimately result in our capital securities being treated only as Tier 2 capital. These changes in effect apply the same leverage and risk-based capital requirements that apply to depository institutions to bank holding companies, savings and loan companies, and non-bank financial companies identified as systemically important. The Federal Reserve has 180 days from the enactment of the Dodd-Frank Act to issue its regulations in this area. We anticipate that the Federal Reserve’s rulemaking on this matter should provide additional clarity to the regulatory capital guidelines applicable to bank holding companies such as Key.

As of June 30, 2010, the capital securities issued by the KeyCorp and Union State Bank capital trusts represent $1.8 billion or 14% of our Tier 1 capital.

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

Principal

Interest Rate

Maturity

Capital

Amount of

of Capital

Securities,

Common

Debentures,

Securities and

dollars in millions

Net of Discount

^(a)

Stock

Net of Discount

^(b)

Debentures

^(c)

Debentures

June 30, 2010

KeyCorp Capital I

156

158

1.031

2028

KeyCorp Capital II

106

6.875

2029

KeyCorp Capital III

102

136

7.750

2029

KeyCorp Capital V

115

128

5.875

2033

KeyCorp Capital VI

6.125

2033

KeyCorp Capital VII

164

177

5.700

2035

KeyCorp Capital VIII

171

—

210

7.000

2066

KeyCorp Capital IX

331

—

359

6.750

2066

KeyCorp Capital X

570

—

616

8.000

2068

Union State Capital I

9.580

2027

Union State Statutory II

—

3.918

2031

Union State Statutory IV

—

3.103

2034

Total

1,795

2,001

6.546

—

Total

December 31, 2009

1,872

1,906

6.577

—

Total

June 30, 2009

2,449

2,485

6.769

—

Total


(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 $4 million at June 30, 2010, $81 million at December 31, 2009, and $158 million at June 30, 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,” a “capital treatment event”, with respect to KeyCorp Capital V, VI, VII, VIII, IX and X only an “investment company event” with respect to KeyCorp Capital X only a “rating agency event” (as each is 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, Union State Capital I 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 or 50 basis points in the case of redemption upon either a tax event or a capital treatment event for KeyCorp Capital III), plus any accrued but unpaid interest. If the debentures purchased by Union State Statutory II are redeemed before July 31, 2011, the redemption price will be 101.50% 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 for KeyCorp Capital II and KeyCorp Capital III generally is slightly more favorable to us. The principal amount of debentures includes adjustments related to hedging with financial instruments totaling $184 million at June 30, 2010, $89 million at December 31, 2009, and $165 million at June 30, 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.

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 six 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 June 30,						Six months ended June 30,
in millions	2010			2009			2010			2009

Service cost of benefits earned		—		$	13			—		$	25
Interest cost on PBO	$	15			14		$	30			29
Expected return on plan assets		(18	)		(16	)		(36	)		(32	)
Amortization of losses		9			11			18			21

Net pension cost	$	6		$	22		$	12		$	43

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 a death benefit plan covering certain grandfathered employees; the plan is noncontributory. Separate VEBA trusts are used to fund the healthcare plan and the death benefit plan.

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


	Three months ended June 30,						Six months ended June 30,
in millions	2010			2009			2010			2009

Interest cost on APBO	$	1		$	1		$	2		$	2
Expected return on plan assets		(1	)		—			(2	)		(1	)
Amortization of unrecognized prior service benefit		(1	)		(1	)		(1	)		(1	)

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

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 “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

Income Tax Provision

In accordance with current accounting guidance, the principal method established for computing the provision for income taxes in interim periods requires us to make our best estimate of the effective tax rate expected to be applicable for the full year. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes. This method has been used to determine the provision, or in our case the benefit, for income taxes for the quarters ended March 31, 2010 and June 30, 2009.

However, the accounting guidance allows for an alternative method to computing the effective tax rate and, thus the interim provision for income taxes, when a taxpayer is unable to calculate a reliable estimate of the effective tax rate for the entire year. Due to the current economic environment, we have concluded that the alternative method is more reliable in determining the provision for income taxes for the second quarter of 2010. The provision for the current quarter is calculated by applying the statutory federal income tax rate to the quarter’s consolidated operating income before taxes after modifications for non-taxable items recognized in the quarter which include income from corporate-owned life insurance and tax credits related to investments in low income housing projects and then adding state taxes.

Deferred Tax Asset

As of June 30, 2010, we had a net deferred tax asset from continuing operations of $594 million compared to a net deferred tax asset from continuing operations of $577 million as of December 31, 2009 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

Shareholder derivative matter. On July 6, 2010, certain current and former directors and executive officers of KeyCorp were named as defendants in James T. King, Jr. v. Henry L. Meyer III, et al., a shareholder derivative lawsuit filed in the Cuyahoga County Court of Common Pleas. The complaint alleges that the KeyCorp defendants violated their fiduciary duties, including their duties of candor, good faith and loyalty, and are liable for corporate waste and unjust enrichment in connection with 2009 executive compensation decisions.

The complaint seeks unspecified compensatory damages from the KeyCorp defendants, various forms of equitable and/or injunctive relief, and attorneys’ and other professional fees and costs. KeyCorp was also named as a nominal defendant in the lawsuit, but no damages are being sought from it.

KeyCorp’s Board of Directors has appointed a special committee of non-management directors to assess its executive compensation practices and to investigate the allegations made in the complaint. This committee has retained an independent law firm to assist in its investigation.

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”).

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 June 30, 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
June 30, 2010	Undiscounted		Liability
in millions	Future Payments		Recorded

Financial guarantees:
Standby letters of credit	$	10,793	$	67
Recourse agreement with FNMA		707		12
Return guarantee agreement with LIHTC investors		93		62
Written put options^(a)		2,867		60
Default guarantees		24		3

Total	$	14,484	$	204


(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 June 30, 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 June 30, 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 ten 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 amount that we believe approximates the fair value of our liability. At June 30, 2010, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 5.9 years, and the unpaid principal balance outstanding of loans sold by us as a participant in this program was $2.2 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 June 30, 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 June 30, 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 June 30, 2010, our written put options had an average life of 1.2 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.

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. At June 30, 2010, we had one liquidity facility remaining, which will expire by May, 2011, obligating us to provide aggregate funding of up to $51 million. The aggregate amount available to be drawn is based on the amount of current commitments to borrowers and totaled $23 million at June 30, 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.

In Heartland’s Form 8-K filed with the SEC on May 19, 2010, Heartland disclosed that it had entered into a settlement agreement with MasterCard International Incorporated to resolve potential claims and other disputes among Heartland, the Acquiring Banks, including KeyBank and Heartland Bank, on the one hand and MasterCard and certain MasterCard Issuers, on the other hand, with respect to potential rights of MasterCard issuers and potential associated claims by MasterCard and MasterCard Issuers related to the Intrusion. The maximum potential aggregate amounts payable to the MasterCard Issuers pursuant to the Settlement Agreement will not exceed $41.4 million, including MasterCard’s credit of $6.6 million of the non-compliance assessment towards the settlement amounts. The Settlement Agreement contains mutual releases between Heartland and the Acquiring Bank, on the one hand, and MasterCard and the MasterCard Issuers who accept the recovery offers, on the other hand, of claims relating to the Intrusion. Consummation of the settlement is subject to several events and a termination period. At March 31, 2010, Heartland carried a $42.8 million reserve for the Intrusion (before adjustment for taxes).

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, August 7, 2009, and May 7, 2010, Heartland’s Form 8-K filed with the SEC on August 4, 2009, November 3, 2009, January 8, 2010, February 4, 2010, February 18, 2010, February 24, 2010, and May 19, 2010.

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 June 30, 2010, after taking into account the effects of bilateral collateral and master netting agreements, we had $283 million of derivative assets and $244 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 $872 million and derivative liabilities of $1.1 billion that were not designated as hedging instruments.

The recently enacted Dodd-Frank Act may limit the types of derivatives activities conducted by KeyBank and other insured depository institutions. As a result, it is possible that our continued use of one or more of the types of derivatives noted above could be affected.

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 Enterprise Risk Management Committee. 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.

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 June 30, 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:

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

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

w		interest rate swaps and foreign exchange contracts used for proprietary trading purposes;

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

w		foreign exchange forward contracts entered into to accommodate the needs of clients.

These contracts are not designated as part of hedge relationships.

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 June 30, 2010, December 31, 2009 and June 30, 2009. The volume of our derivative transaction activity during the first half of 2010 is represented by the change in the notional amounts of our gross derivatives by type from December 31, 2009 to June 30, 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:


	June 30, 2010								December 31, 2009								June 30, 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	$	14,168	$	601		$	4		$	18,259	$	489		$	9		$	23,234	$	561		$	14
Foreign exchange		1,383		14			334			1,888		78			189			2,550		68			324

Total		15,551		615			338			20,147		567			198			25,784		629			338
Derivatives not designated as hedging instruments:
Interest rate		65,173		1,624			1,611			70,017		1,434			1,345			78,564		1,664			1,523
Foreign exchange		7,617		183			163			6,293		206			184			7,317		222			193
Energy and commodity		2,031		344			364			1,955		403			427			2,155		533			562
Credit		3,640		47			37			4,538		55			49			7,012		94			99
Equity		18		1			1			3		1			1			—		—			—

Total		78,479		2,199			2,176			82,806		2,099			2,006			95,048		2,513			2,377

Netting adjustments ^(a)		N/A		(1,661	)		(1,193	)		N/A		(1,572	)		(1,192	)		N/A		(1,960	)		(2,187	)

Total derivatives	$	94,030	$	1,153		$	1,321		$	102,953	$	1,094		$	1,012		$	120,832	$	1,182		$	528
Total


(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 six-month period ended June 30, 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 June 30, 2010.

The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the six-month periods ended June 30, 2010 and 2009, and where they are recorded on the income statement.

Six months ended June 30, 2010

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

184

Long-term debt

Other income

(176)

^(a)

Interest rate

Interest expense – Long-term debt

109

Foreign exchange

Other income

(264

)

Long-term debt

Other income

258

^(a)

Foreign exchange

Interest expense – Long-term debt

Long-term debt

Interest expense – Long-term debt

(7)

^(b)

Total

Six months ended June 30, 2009

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

(437

)

Long-term debt

Other income

439

^(a)

Interest rate

Interest expense – Long-term debt

112

Foreign exchange

Other income

Long-term debt

Other income

(69

) ^(a)

Foreign exchange

Interest expense – Long-term debt

Long-term debt

Interest expense – Long-term debt

(31

) ^(b)

Total

(247

)

339


(a)		Net gains (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 six-month period ended June 30, 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 June 30, 2010.

The following table summarizes the pre-tax net gains (losses) on our cash flow hedges for the six-month periods ended June 30, 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.

Six months ended June 30, 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)

Interest rate

Interest income – Loans

134

Other income

—

Interest rate

(22

)

Interest expense – Long-term debt

(10

)

Other income

—

Interest rate

—

Net gains (losses) from loan securitizations and sales

—

Other income

—

Total

124

—

Total

Six months ended June 30, 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)

Interest rate

102

Interest income – Loans

233

Other income

)

Interest rate

Interest expense – Long-term debt

)

Other income

Interest rate

Net gains (losses) from loan securitizations and sales

Other income

—

Total

131

229

—

Total

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


					Reclassification
	December 31,		2010		of Gains to			June 30,
in millions	2009		Hedging Activity		Net Income			2010

Accumulated other comprehensive income resulting from cash flow hedges	$	114	$	13	$	(79	)	$	48

Considering the interest rates, yield curves and notional amounts as of June 30, 2010, we would expect to reclassify an estimated $16 million of net losses on derivative instruments from AOCI to income during the next twelve months. In addition, we expect to reclassify approximately $32 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 18 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 six-month periods ended June 30, 2010 and 2009, and where they are recorded on the income statement.


	Six months ended June 30,
in millions	2010			2009

NET GAINS (LOSSES) ^(a)
Interest rate	$	7		$	15
Foreign exchange		20			31
Energy and commodity		4			4
Credit		(9	)		(23	)

Total net gains (losses)	$	22		$	27


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

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 $469 million at June 30, 2010, $381 million at December 31, 2009, and $533 million at June 30, 2009. The collateral netted against derivative liabilities totaled $2 million at June 30, 2010, less than $1 million at December 31, 2009, and $759 million at June 30, 2009.

The following table summarizes our largest exposure to an individual counterparty at the dates indicated.


	June 30,		December 31,		June 30,
in millions	2010		2009		2009

Largest gross exposure to an individual counterparty	$	219	$	217	$	308
Collateral posted by this counterparty		33		21		37
Derivative liability with this counterparty		320		331		348
Collateral pledged to this counterparty		154		164		95
Net exposure after netting adjustments and collateral		20		29		18

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.


	June 30,		December 31,		June 30,
in millions	2010		2009		2009

Interest rate	$	1,436	$	1,147	$	1,365
Foreign exchange		94		178		141
Energy and commodity		74		131		183
Credit		19		19		26
Equity		1		—		—

Derivative assets before collateral		1,624		1,475		1,715
Less: Related collateral		469		381		533

Total derivative assets	$	1,155	$	1,094	$	1,182

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 June 30, 2010, after taking into account the effects of bilateral collateral and master netting agreements, we had gross exposure of $1.1 billion to broker-dealers and banks. We had net exposure of $314 million after the application of master netting agreements and collateral; our net exposure to broker-dealers and banks at June 30, 2010, was reduced to $84 million with the $230 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 $80 million at June 30, 2010, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At June 30, 2009 and December 31, 2009 the default reserve was $52 million and $59 million, respectively. At June 30, 2010, after taking into account the effects of master netting agreements, we had gross exposure of $958 million to client counterparties. We had net exposure of $841 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.


	June 30, 2010								December 31, 2009								June 30, 2009
in millions	Purchased		Sold			Net			Purchased			Sold			Net		Purchased		Sold			Net

Single name credit default swaps	$	12	$	(4	)	$	8		$	5		$	(3	)	$	2	$	60	$	(36	)	$	24
Traded credit default swap indices		1		(2	)		(1	)		2			—			2		11		(18	)		(7	)
Total credit derivatives Other		5		(2	)		3			(1	)		4			3		—		(11	)		(11	)

Total credit derivatives	$	18	$	(8	)	$	10		$	6		$	1		$	7	$	71	$	(65	)	$	6

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.

The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at June 30, 2010, December 31, 2009 and June 30, 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.


	June 30, 2010							December 31, 2009							June 30, 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	$	1,102		2.45		4.10	%	$	1,140		2.57		4.88	%	$	1,548		2.38		5.16	%
Traded credit default swap indices		344		4.00		8.08			733		2.71		13.29			1,703		1.74		6.59
Other		46		3.09		7.70			44		1.94		5.41			50		1.50	Low		^(a)

Total credit derivatives sold	$	1,492		—		—		$	1,917		—		—		$	3,301		—		—


(a)		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 (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 June 30, 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 June 30, 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 $1.1 billion, which includes $745 million in derivative assets and $1.9 billion in derivative liabilities. We had $1.1 billion in cash and securities collateral posted to cover those positions as of June 30, 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 June 30, 2010, December 31, 2009 and June 30, 2009. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two or three ratings as of June 30, 2010, and take into account all collateral already posted. At June 30, 2010, KeyCorp did not have any derivatives in a net liability position that contained credit risk contingent features.


	June 30, 2010				December 31, 2009				June 30, 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-		A2		A-

One rating downgrade	$	28	$	22	$	34	$	22	$	33	$	26
Two rating downgrades		51		25		56		31		59		39
Three rating downgrades		59		30		65		36		72		45

If KeyBank’s ratings had been downgraded below investment grade as of June 30, 2010, payments of up to $81 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.

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 June 30, 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 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 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 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 value of the funds and related unfunded commitments at June 30, 2010:


June 30, 2010			Unfunded
in millions	Fair Value		Commitments

INVESTMENT TYPE
Passive funds ^(a)	$	17	$	5
Co-managed funds ^(b)		14		19

Total	$	31	$	24


(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 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 value of the indirect funds and related unfunded commitments at June 30, 2010:


June 30, 2010			Unfunded
in millions	Fair Value		Commitments

INVESTMENT TYPE
Private equity funds ^(a)	$	514	$	227
Hedge funds ^(b)		10		—

Total	$	524	$	227


(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.

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 tables present our assets and liabilities measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009.


June 30, 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		—	$	416		—		—		$	416
Trading account assets:
U.S. Treasury, agencies and corporations		—		7		—		—			7
Other mortgage-backed securities		—		—	$	4		—			4
Other securities	$	59		910		24		—			993

Total trading account securities		59		917		28		—			1,004
Commercial loans		—		2		9		—			11

Total trading account assets		59		919		37		—			1,015
Securities available for sale:
U.S. Treasury, agencies and corporations		—		8		—		—			8
States and political subdivisions		—		78		—		—			78
Collateralized mortgage obligations		—		18,290		—		—			18,290
Other mortgage-backed securities		—		1,283		—		—			1,283
Other securities		109		5		—		—			114

Total securities available for sale		109		19,664		—		—			19,773
Other investments:
Principal investments:
Direct		—		—		419		—			419
Indirect		—		—		530		—			530

Total principal investments		—		—		949		—			949
Equity and mezzanine investments:
Direct		—		—		24		—			24
Indirect		—		—		31		—			31

Total equity and mezzanine investments		—		—		55		—			55

Total other investments		—		—		1,004		—			1,004
Derivative assets:
Interest rate		—		2,138		87		—			2,225
Foreign exchange		119		78		—		—			197
Energy		—		345		—		—			345
Credit		—		36		11		—			47
Equity		—		1		—		—			1

Total derivative assets		119		2,598		98	$	(1,662	)		1,153	^(a)
Accrued income and other assets		5		71		3		—			79

Total assets on a recurring basis at fair value	$	292	$	23,668	$	1,142	$	(1,662	)	$	23,440


LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements:
Securities sold under repurchase agreements		—	$	583		—		—		$	583
Bank notes and other short-term borrowings:
Short positions	$	8		497		—		—			505
Derivative liabilities:
Interest rate		—		1,615		—		—			1,615
Foreign exchange		103		394		—		—			497
Energy		—		364		—		—			364
Credit		—		36	$	1		—			37
Equity		—		1		—		—			1

Total derivative liabilities		103		2,410		1	$	(1,193	)		1,321	^(a)
Accrued expense and other liabilities		—		125		—		—			125

Total liabilities on a recurring basis at fair value	$	111	$	3,615	$	1	$	(1,193	)	$	2,534


(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.


December 31, 2009								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		—	$	285			—		—		$	285
Trading account assets:
U.S. Treasury, agencies and corporations		—		10			—		—			10
Other mortgage-backed securities		—		—		$	29		—			29
Other securities	$	100		624			423		—			1,147

Total trading account securities		100		634			452		—			1,186
Commercial loans		—		4			19		—			23

Total trading account assets		100		638			471		—			1,209
Securities available for sale:
U.S. Treasury, agencies and corporations		—		8			—		—			8
States and political subdivisions		—		83			—		—			83
Collateralized mortgage obligations		—		15,006			—		—			15,006
Other mortgage-backed securities		—		1,428			—		—			1,428
Other securities		102		14			—		—			116

Total securities available for sale		102		16,539			—		—			16,641
Other investments:
Principal investments:
Direct		—		—			538		—			538
Indirect		—		—			497		—			497

Total principal investments		—		—			1,035		—			1,035
Equity and mezzanine investments:
Direct		—		—			26		—			26
Indirect		—		—			31		—			31

Total equity and mezzanine investments		—		—			57		—			57

Total other investments		—		—			1,092		—			1,092
Derivative assets:
Interest rate		—		1,927			100		—			2,027
Foreign exchange		140		140			—		—			280
Energy		—		403			—		—			403
Credit		—		(54	)		10		—			(44	)
Equity		—		—			—		—			—

Total derivative assets		140		2,416			110	$	(1,572	)		1,094	^(a)
Accrued income and other assets		8		38			—		—			46

Total assets on a recurring basis at fair value	$	350	$	19,916		$	1,673	$	(1,572	)	$	20,367



LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements:
Securities sold under repurchase agreements		—	$	449			—		—		$	449
Bank notes and other short-term borrowings:
Short positions	$	1		276			—		—			277
Derivative liabilities:
Interest rate		—		1,357			—		—			1,357
Foreign exchange		123		248			—		—			371
Energy		—		426			—		—			426
Credit		—		48		$	2		—			50
Equity		—		—			—		—			—

Total derivative liabilities		123		2,079			2	$	(1,192	)		1,012	^(a)
Accrued expense and other liabilities		—		21			—		—			21

Total liabilities on a recurring basis at fair value	$	124	$	2,825		$	2	$	(1,192	)	$	1,759


(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.

Changes in Level 3 Fair Value Measurements

The following tables show the change in the fair values of our Level 3 financial instruments for the three and six months ended June 30, 2010 and 2009. 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 tables. 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																					Accrued
	Mortgage-															Equity and						Income
	Backed			Other			Commercial			Principal Investments						Mezzanine Investments						and Other			Interest			Energy and
in millions	Securities			Securities			Loans			Direct			Indirect			Direct			Indirect			Assets			Rate			Commodity			Credit

Balance at December 31, 2009	$	29		$	423		$	19		$	538		$	497		$	26		$	31			—		$	99			—		$	9
Gains (losses) included in earnings		3	^(b)		—	^(b)		(1	) ^(b)		18	^(c)		36	^(c)		5	^(c)		(4	) ^(c)		—	^(c)		—	^(b)		—	^(b)		1	^(b)
Purchases, sales, issuances and settlements		(29	)		(399	)		(9	)		(129	)		(3	)		(13	)		4		$	3			(4	)		—			—
Net transfers into (out of) Level 3		1			—			—			(8	)		—			6			—			—			(8	)		—			—

Balance at June 30, 2010	$	4		$	24		$	9		$	419		$	530		$	24		$	31		$	3		$	87			—		$	10



Unrealized gains (losses) included in earnings	$	2	^(b)		—	^(b)	$	(1	) ^(b)	$	2	^(c)	$	32	^(c)	$	41	^(c)	$	(4	) ^(c)		—	^(c)		—	^(b)		—	^(b)		—	^(b)


Balance at March 31, 2010	$	29		$	199		$	11		$	534		$	518		$	32		$	33		$	3		$	80			—		$	10
Gains (losses) included in earnings		3	^(b)		—	^(b)		(1	) ^(b)		3	^(c)		13	^(c)		3	^(c)		(2	) ^(c)		—	^(c)		9	^(b)		—	^(b)		—	^(b)
Purchases, sales, issuances and settlements		(29	)		(175	)		(1	)		(118	)		(1	)		(11	)		—			—			(1	)		—			—
Net transfers into (out of) Level 3		1			—			—			—			—			—			—			—			(1	)		—			—

Balance at June 30, 2010	$	4		$	24		$	9		$	419		$	530		$	24		$	31		$	3		$	87			—		$	10



Unrealized gains (losses) included in earnings	$	2	^(b)		—	^(b)		—	^(b)	$	(14)	^(c)	$	13	^(c)	$	34	^(c)	$	(2)	^(c)		—	^(c)		—	^(b)		—	^(b)		—	^(b)


Balance at December 31, 2008	$	67		$	758		$	31		$	479		$	505		$	103		$	47			—			15			—		$	—
Gains (losses) included in earnings		(1)	^(b)		(1)	^(b)		—	^(b)		(23	) ^(c)		(58	) ^(c)		(6	) ^(c)		(9	) ^(c)		—	^(c)		—	^(b)		—	^(b)		(13	) ^(b)
Purchases, sales, issuances and settlements		—			(733	)		(2	)		15			9			8			3			—			—			—			—
Net transfers into (out of) Level 3		—			—			—			—			—			—			—			—			67			1			—

Balance at June 30, 2009	$	66		$	24		$	29		$	471		$	456		$	105		$	41			—		$	82		$	1		$	(13	)



Unrealized gains (losses) included in earnings	$	(1	) ^(b)		(1	) ^(b)		—	^(b)	$	(24	) ^(c)	$	(54	) ^(c)	$	(6	) ^(c)	$	(9	) ^(c)		—	^(c)		—	^(b)		—	^(b)		—	^(b)


Balance at March 31, 2009	$	67		$	673		$	30		$	467		$	460		$	103		$	44			—			—			—			(3	)
Gains (losses) included in earnings		(1	) ^(b)		—	^(b)		—	^(b)		—	^(c)		(6	) ^(c)		(4	) ^(c)		(4	) ^(c)		—	^(c)		—	^(b)		—	^(b)		(10	) ^(b)
Purchases, sales, issuances and settlements		—			(649	)		(1	)		4			2			6			1			—			—			—			—
Net transfers into (out of) Level 3		—			—			—			—			—			—			—			—			82			1			—

Balance at June 30, 2009	$	66		$	24		$	29		$	471		$	456		$	105		$	41			—		$	82		$	1		$	(13	)



Unrealized gains (losses) included in earnings	$	(1)	^(b)		—	^(b)		—	^(b)	$	(1	) ^(c)	$	(5	) ^(c)	$	(4	) ^(c)	$	(4	) ^(c)		—	^(c)		—	^(b)		—	^(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)		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 tables present our assets measured at fair value on a nonrecurring basis at June 30, 2010 and December 31, 2009.


	June 30, 2010								December 31, 2009
in millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	402	$	402		—	$	3	$	679	$	682
Loans held for sale ^(a)		—		—		33		33		—		—		85		85
Other investments		—		—		1		1		—		—		—		—
Operating lease assets		—		—		—		—		—		—		9		9
Goodwill		—		—		—		—		—		—		—		—
Other intangible assets		—		—		—		—		—		—		—		—
Accrued income and other assets		—	$	51		119		170		—		36		118		154

Total assets on a nonrecurring basis at fair value		—	$	51	$	555	$	606		—	$	39	$	891	$	930


(a)		During the first half of 2010, we transferred $43 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. Appraisals of collateral dependent impaired loans are performed or reaffirmed at least annually. Appraisals may occur more frequently if the most recent appraisal does not accurately reflect the current market, the debtor is seriously delinquent or chronically past due or there has been material deterioration in the performance of the project or condition of the property type. Adjustments to outdated appraisals that result in an appraisal value less than the carrying value of a collateral dependent impaired loan are reflected in the allowance for loan losses. 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, 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 $33 million at June 30, 2010 and $85 million at December 31, 2009. 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. For additional information on the results of recent 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 June 30, 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 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 June 30, 2010 and December 31, 2009 are shown in the following table:


	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
in millions	Amount		Value		Amount		Value

ASSETS
Cash and short-term investments ^(a)	$	2,575	$	2,575	$	2,214	$	2,214
Trading account assets ^(e)		1,014		1,014		1,209		1,209
Securities available for sale ^(e)		19,193		19,773		16,434		16,641
Held-to-maturity securities ^(b)		19		19		24		24
Other investments ^(e)		1,415		1,415		1,488		1,488
Loans, net of allowance ^(c)		51,115		47,322		56,236		49,136
Loans held for sale ^(e)		699		699		443		443
Mortgage servicing assets ^(d)		209		307		221		334
Derivative assets ^(e)		1,153		1,153		1,094		1,094
LIABILITIES
Deposits with no stated maturity ^(a)	$	42,635	$	42,635	$	40,563	$	40,563
Time deposits ^(d)		19,740		20,392		25,008		25,908
Short-term borrowings ^(a)		3,655		3,655		2,082		2,082
Long-term debt ^(d)		10,451		10,271		11,558		10,761
Derivative liabilities^(e)		1,321		1,321		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 consists of assets and liabilities (recorded at fair value) from the securitization trusts, which were consolidated as of January 1, 2010 in accordance with new consolidation accounting guidance, as well as loans and loans held for sale outside the trusts (recorded at carrying value with appropriate valuation reserves). All of these loans were excluded from the table above as follows: loans at carrying value, net of allowance, of $3.2 billion ($2.4 billion fair value) and $3.4 billion ($2.5 billion fair value) at June 30, 2010 and December 31, 2009, respectively; loans held for sale of $92 million and $434 million at June 30, 2010 and December 31, 2009, respectively; and loans at fair value of $3.2 billion at June 30, 2010. As discussed above, loans at fair value were not consolidated until January 1, 2010. Securities issued by the education lending securitization trusts, which are the primary liabilities of the trusts, totaling $3.1 billion at fair value have also been excluded from the above table at June 30, 2010. Additional information regarding the consolidation of the education lending securitization trusts is provided in Note 16 (“Discontinued Operations”). The fair values of loans held for sale were identical to their carrying amounts.

Residential real estate mortgage loans with carrying amounts of $1.8 billion at June 30, 2010 and December 31, 2009 are included in “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. During the second quarter of 2010, our fair value assumptions improved primarily due to more liquidity in the markets particularly related to loans. A substantial portion of the fair value adjustment is related to liquidity. 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.

16. Discontinued Operations

Education lending. In September 2009, we decided to exit the government-guaranteed education lending business. 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 June 30,						Six months ended June 30,
in millions	2010			2009			2010			2009

Net interest income	$	39		$	23		$	79		$	48
Provision for loan losses		14			27			38			55

Net interest income (expense) after provision for loan losses		25			(4	)		41			(7	)
Noninterest income		(55	)		9			(56	)		16
Noninterest expense		13			15			25			30

Income (loss) before income taxes		(43	)		(10	)		(40	)		(21	)
Income taxes		(16	)		(4	)		(15	)		(8	)

Income (loss) from discontinued operations, net of taxes ^(a)	$	(27	)	$	(6	)	$	(25	)	$	(13	)


(a)		Includes after-tax charges of $15 million and $16 million for the three-month periods ended June 30, 2010 and 2009, respectively, and $30 million and $35 million for the six-month periods ended June 30, 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:


	June 30,		December 31,		June 30,
in millions	2010		2009		2009

Securities available for sale		—	$	182	$	186
Loans at fair value	$	3,223		—		—
Loans, net of unearned income of $1, $1 and $1		3,371		3,523		3,636
Less: Allowance for loan losses		128		157		160

Net loans		6,466		3,366		3,476
Loans held for sale		92		434		148
Accrued income and other assets		223		192		246

Total assets	$	6,781	$	4,174	$	4,056


Noninterest-bearing deposits		—	$	119	$	104
Derivative liabilities		—		—		2
Accrued expense and other liabilities		46		4		13
Securities at fair value		3,092		—		—

Total liabilities	$	3,138	$	123	$	119

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 loans in the consolidated trusts are comprised of both private and government-guaranteed loans. 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 $150 million as of June 30, 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 June 30, 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.


June 30, 2010
dollars in millions

Weighted-average life (years)	1.4 - 6.0

PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE)	4.00% - 26.00	%

EXPECTED CREDIT LOSSES	2.00% - 80.00	%

LOAN DISCOUNT RATES (ANNUAL RATE)	3.63% - 8.16	%

SECURITY DISCOUNT RATES (ANNUAL RATE)	3.30% - 7.70	%

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 June 30, 2010. Loans held by the trusts with unpaid principal balances of $48 million were 90 days or more past due and $34 million were in nonaccrual status or $43 million and $31 million on a fair value basis, respectively, at June 30, 2010.


June 30, 2010	Contractual		Fair
in millions	Amount		Value

ASSETS
Loans	$	3,610	$	3,223
Other Assets		63		63

LIABILITIES
Securities	$	3,731	$	3,092
Other Liabilities		44		44

The following table presents the assets and liabilities of the trusts that were consolidated and are measured at fair value on a recurring basis.


June 30, 2010
in millions	Level 1		Level 2		Level 3		Total

ASSETS MEASURED ON A RECURRING BASIS
Loans		—		—	$	3,223	$	3,223
Other assets		—		—		63		63

Total assets on a recurring basis at fair value		—		—	$	3,286	$	3,286



LIABILITIES MEASURED ON A RECURRING BASIS
Securities		—		—	$	3,092	$	3,092
Other liabilities		—		—		44		44

Total liabilities on a recurring basis at fair value		—		—	$	3,136	$	3,136

The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts for the quarter ended June 30, 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 ^(a)		785			—		848			—
Purchases, sales, issuances and settlements		(201	)		16		(277	)		42

Balance at June 30, 2010	$	3,223		$	63	$	3,092		$	44


(a)		Gains/Losses on the Trust Student Loans and Trust Securities were driven primarily by fair value adjustments.

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 June 30,						Six months ended June 30,
in millions	2010			2009			2010		2009

Noninterest income	$	1		$	7		$	4	$	14
Intangible assets impairment		—			—			—		27
Other noninterest expense		2			1			4		5

Income (loss) before income taxes		(1	)		6			—		(18	)
Income taxes		(1	)		(4	)		—		(6	)

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

The discontinued assets and liabilities of Austin included on the balance sheet are as follows:


	June 30,		December 31,		June 30,
in millions	2010		2009		2009

Cash and due from banks	$	32	$	23	$	17
Other intangible assets		1		1		2
Accrued income and other assets		—		10		7

Total assets	$	33	$	34	$	26


Accrued expense and other liabilities	$	1	$	1	$	3

Total liabilities	$	1	$	1	$	3

Combined discontinued operations. The combined results of the discontinued operations are as follows:


	Three months ended June 30,						Six months ended June 30,
in millions	2010			2009			2010			2009

Net interest income	$	39		$	23		$	79		$	48
Provision for loan losses		14			27			38			55

Net interest income (expense) after provision for loan losses		25			(4	)		41			(7	)
Noninterest income		(54	)		16			(52	)		30
Intangible assets impairment		—			—			—			27
Noninterest expense		15			16			29			35

Income (loss) before income taxes		(44	)		(4	)		(40	)		(39	)
Income taxes		(17	)		(8	)		(15	)		(14	)

Income (loss) from discontinued operations, net of taxes ^(a)	$	(27	)	$	4		$	(25	)	$	(25	)


(a)		Includes after-tax charges of $15 million and $16 million for the three-month periods ended June 30, 2010 and 2009, respectively, and $30 million and $35 million for the six-month periods ended June 30, 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:


	June 30,		December 31,		June 30,
in millions	2010		2009		2009

Cash and due from banks	$	32	$	23	$	17
Securities available for sale		—		182		186
Loans at fair value		3,223		—		—
Loans, net of unearned income of $1, $1 and $1		3,371		3,523		3,636
Less: Allowance for loan losses		128		157		160

Net loans		6,466		3,366		3,476
Loans held for sale		92		434		148
Other intangible assets		1		1		2
Accrued income and other assets		223		202		253

Total assets	$	6,814	$	4,208	$	4,082


Noninterest-bearing deposits		—	$	119	$	104
Derivative liabilities		—		—		2
Accrued expense and other liabilities		47		5		16
Securities at fair value		3,092		—		—

Total liabilities	$	3,139	$	124	$	122

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
KeyCorp

We have reviewed the condensed consolidated balance sheets of KeyCorp and subsidiaries (“Key”) as of June 30, 2010 and 2009, and the related condensed consolidated statements of income, changes in equity and cash flows for the three-month periods ended June 30, 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.

Cleveland, Ohio
August 6, 2010

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

Introduction

This section generally reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year to date periods ended June 30, 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 capital adequacy review, banking regulators evaluated a component of Tier 1 capital, known as Tier 1 common equity*. For a detailed explanation of total capital, Tier 1 capital and Tier 1 common equity, and how they are calculated see 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, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 (“Basis of Presentation”).

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;

♦		the Dodd-Frank Act may subject us to a variety of new and more stringent legal and regulatory requirements;

♦		changes in local, regional and international business, economic or political conditions in the regions that we operate or have significant assets;

♦		changes in trade, monetary and fiscal policies of various governmental bodies and central banks could affect the economic environment in which we operate;

♦		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;

♦		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 us 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 and at www.Key.com/IR.

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%.

Figure 1 shows the evaluation of our long-term goals for the second quarter of 2010.

Figure 1. Quarterly evaluation of our goals

Goal

Key Metrics (a)

2Q10

Targets

Action Plans

Core funded

Loan to deposit ratio ^{(b) (c)}

93%

90-100%

Improve risk profile of loan portfolio

Improve mix and grow deposit base

Returning to a moderate risk profile

NCOs to average loans

3.18%

.40-.50%

Focus on relationship clients

Exit noncore portfolios

Limit concentrations

Focus on risk-adjusted returns

Growing high quality, diverse revenue streams

Net Interest Margin

3.17%

>3.50%

Improve funding mix

Focus on risk-adjusted returns

Noninterest income/total revenue

44.10%

>40%

Leverage Key’s total client solutions and cross-selling capabilities

Creating positive operating leverage

Keyvolution cost savings

$197 million
implemented

$300-$375
million

Improve efficiency and effectiveness

Leverage technology

Change cost base to more variable from fixed

Executing our strategies

Return on average assets

.44%

1.00-1.25%

Execute our client insight-driven relationship model

Improved funding mix with lower cost core deposits

Keyvolution savings


(a)		Calculated from continuing operations, unless otherwise noted.

(b)		Loans and loans held for sale (excluding securitized loans) to deposits (excluding foreign branches).

(c)		Calculated from consolidated operations.

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 on page 16 of our 2009 annual report.

♦		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 (Keyvolution) during the first quarter of 2010.

♦		During the first six months of 2010, we have opened 18 new branches, and we expect to open an additional 22 branches during the remainder of 2010. During 2009, we opened 38 new branches in eight markets, and we have completed renovations on 192 branches over the past two and a half 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.

Economic overview

During the second quarter of 2010, concerns emerged that the pace of the U.S. economic recovery was slowing. A reluctance by employers to add employees to payrolls, slowing of growth in housing and consumer spending, and the European sovereign debt crisis each cast doubt on the sustainability of economic growth and the recovery. U.S. payrolls increased by 524,000 during the second quarter of 2010 compared to a 261,000 increase in the first quarter of 2010; however, a large part of this improvement was due to temporary government census hiring. Private payrolls did increase by 323,000 compared to a 236,000 increase the prior quarter. Prior to 2010, over 8 million Americans had lost their jobs during the recession that began in December 2007. The average unemployment rate for the second quarter of 2010 remained at the first quarter average of 9.7%. This compares to a 9.3% average rate for all of 2009 and a 10 year average rate of 5.8%.

U.S. household spending slowed during the second quarter of 2010. The average monthly rate of consumer spending was unchanged for the second quarter of 2010 compared to an average monthly increase of 0.4% in the first quarter of 2010 and an average monthly increase of 0.3% for all of 2009. Measures of inflation continued to remain under control as prices for consumer goods and services increased a modest 1.1% in June 2010 from June 2009, compared to an annual increase of 2.3% in March 2010 and a 2.7% increase for all of 2009.

The homebuyer tax credit, offered as part of “The Worker, Homeownership and Business Assistance Act of 2009,” contributed to an improvement in the housing