Edgar Filing: KEYCORP /NEW/

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q


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

For the Quarterly Period Ended September 30, 2010


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

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

Yes o No þ

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


	Common Shares with a par value of $1 each		880,471,286 Shares
	(Title of class)		(Outstanding at October 29, 2010)

KEYCORP

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	Page Number

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

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

Consolidated Statements of Changes in Equity (Unaudited) — Nine months ended September 30, 2010 and 2009		7

Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 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		26

Note 9. Capital Securities Issued by Unconsolidated Subsidiaries		27

Note 10. Shareholders’ Equity		29

Note 11. Employee Benefits		29

Note 12. Income Taxes		30

Note 13. Commitments, Contingent Liabilities and Guarantees		30

Note 14. Derivatives and Hedging Activities		35

Note 15. Fair Value Measurements		42

Note 16. Discontinued Operations		52

Report of Independent Registered Public Accounting Firm		56
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


Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations			57

Introduction			57
Terminology			57
Forward-looking statements			57
Long-term goals			59
Strategic developments			60
Economic overview			60
Regulatory Reform Developments			61
Interchange Fees			61
Regulation E pursuant to the Electronic Fund Transfer Act of 1978			61
Demographics			61
Critical accounting policies and estimates			62
Highlights of Our Financial Performance			63

Line of Business Results			68
Community Banking summary of operations			68
National Banking summary of operations			69
Other Segments			70

Results of Operations			71
Net interest income			71
Noninterest income			75
Trust and investment services income			76
Service charges on deposit accounts			77
Operating lease income			77
Net gains (losses) from loan sales			77
Net gains (losses) from principal investing			77
Investment banking and capital markets income (loss)			77
Noninterest expense			78
Personnel			79
Intangible assets impairment			79
Operating lease expense			79
Professional fees			79
Corporate-wide efficiency initiative (Keyvolution)			80
Income taxes			80

Financial Condition			80
Loans and loans held for sale			80
Commercial loan portfolio			81
*Commercial real estate loans*			81
*Commercial lease financing*			82
Commercial loan modification and restructuring			82
*Extensions*			84
*Guarantors*			84
Consumer loan portfolio			85
Loans held for sale			85
Loan sales			85
Securities			86
Securities available for sale			86
Held-to-maturity securities			88
Other investments			89
Deposits and other sources of funds			89
Capital			89
Adoption of new accounting guidance			90
Dividends			90
Common shares outstanding			90
Capital availability and management			90
Capital adequacy			91


Revisions to the International Regulatory Framework for Banks (Basel III)			92
The Dodd-Frank Act’s Reform of Deposit Insurance			93
Deposit Insurance Assessment			94
Risk Management			95
Overview			95
Market risk management			95
Interest rate risk management			95
*Net interest income simulation analysis*			96
*Economic value of equity modeling*			97
*Management of interest rate exposure*			98
Derivatives not designated in hedge relationships			98
Liquidity risk management			98
Long-term liquidity strategy			98
Governance structure			98
Sources of liquidity			99
Factors affecting liquidity			99
Managing liquidity risk			99
Our liquidity position and recent activity			100
Liquidity for KeyCorp			100
Liquidity programs			100
Liquidity and credit ratings			101
Credit risk management			101
Credit policy, approval and evaluation			101
Watch and criticized assets			103
Allowance for loan losses			103
Net loan charge-offs			104
Nonperforming assets			107
Operational risk management			109

Item 3. Quantitative and Qualitative Disclosure about Market Risk			110

Item 4. Controls and Procedures			110

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			110

Item 1A. Risk Factors			110

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			111

Item 6. Exhibits			111

Signature			112

Exhibits			113

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


	September 30,			December 31,			September 30,

in millions, except per share data	2010			2009			2009
	(Unaudited)						(Unaudited)

ASSETS

Cash and due from banks	$	823		$	471		$	725

Short-term investments		1,871			1,743			2,986

Trading account assets		1,155			1,209			1,406

Securities available for sale		21,241			16,641			15,413

Held-to-maturity securities (fair value: $18, $24, and $24)		18			24			24

Other investments		1,405			1,488			1,448

Loans, net of unearned income of $1,587, $1,770, and $1,843		51,354			58,770			62,193

Less: Allowance for loan losses		1,957			2,534			2,485


Net loans		49,397			56,236			59,708

Loans held for sale		637			443			703

Premises and equipment		888			880			863

Operating lease assets		563			716			775

Goodwill		917			917			917

Other intangible assets		39			50			54

Corporate-owned life insurance		3,145			3,071			3,041

Derivative assets		1,258			1,094			1,285

Accrued income and other assets (including $121 of consolidated LIHTC guaranteed funds VIEs, see Note 7)^(a)		3,936			4,096			3,463

Discontinued assets (including $3,291 of consolidated education loan securitization trusts VIEs at fair value, see Note 7)^(a)		6,750			4,208			4,178


Total assets	$	94,043		$	93,287		$	96,989


LIABILITIES

Deposits in domestic offices:

NOW and money market deposit accounts	$	26,350		$	24,341		$	24,635

Savings deposits		1,856			1,807			1,783

Certificates of deposit ($100,000 or more)		6,850			10,954			12,216

Other time deposits		9,014			13,286			14,211

Total interest-bearing		44,070			50,388			52,845

Noninterest-bearing		16,275			14,415			13,631

Deposits in foreign office — interest-bearing		1,073			768			783


Total deposits		61,418			65,571			67,259

Federal funds purchased and securities sold under repurchase agreements		2,793			1,742			1,664

Bank notes and other short-term borrowings		685			340			471

Derivative liabilities		1,330			1,012			1,185

Accrued expense and other liabilities		1,862			2,007			2,236

Long-term debt		11,443			11,558			12,865

Discontinued liabilities (including $3,122 of consolidated education loan securitization trusts VIEs at fair value, see Note 7)^(a)		3,124			124			121


Total liabilities		82,655			82,354			85,801

EQUITY

Preferred stock, $1 par value, authorized 25,000,000 shares:

7.75% 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		2,442			2,430			2,426

Common shares, $1 par value; authorized 1,400,000,000 shares; issued 946,348,435, 946,348,435 and 946,348,435 shares		946			946			946

Common stock warrant		87			87			87

Capital surplus		3,710			3,734			3,726

Retained earnings		5,287			5,158			5,431

Treasury stock, at cost (66,020,414, 67,813,492 and 67,789,166 shares)		(1,914	)		(1,980	)		(1,983	)

Accumulated other comprehensive income (loss)		285			(3	)		46


Key shareholders’ equity		11,134			10,663			10,970

Noncontrolling interests		254			270			218


Total equity		11,388			10,933			11,188


Total liabilities and equity	$	94,043		$	93,287		$	96,989


(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						Nine months ended
	September 30,						September 30,
dollars in millions, except per share amounts	2010			2009			2010			2009

INTEREST INCOME
Loans	$	649		$	786		$	2,036		$	2,445
Loans held for sale		4			7			13			23
Securities available for sale		170			121			474			310
Held-to-maturity securities		1			1			2			2
Trading account assets		8			9			29			35
Short-term investments		1			3			5			9
Other investments		11			13			38			38

Total interest income		844			940			2,597			2,862

INTEREST EXPENSE
Deposits		147			277			547			873
Federal funds purchased and securities sold under repurchase agreements		1			2			4			4
Bank notes and other short-term borrowings		4			3			11			13
Long-term debt		52			66			153			222

Total interest expense		204			348			715			1,112


NET INTEREST INCOME		640			592			1,882			1,750
Provision for loan losses		94			733			735			2,403

Net interest income (expense) after provision for loan losses		546			(141	)		1,147			(653	)

NONINTEREST INCOME
Trust and investment services income		110			113			336			342
Service charges on deposit accounts		75			83			231			248
Operating lease income		41			55			131			175
Letter of credit and loan fees		61			46			143			128
Corporate-owned life insurance income		39			26			95			78
Net securities gains (losses)^(a)		1			1			2			112
Electronic banking fees		30			27			86			78
Gains on leased equipment		4			22			14			84
Insurance income		15			18			52			52
Net gains (losses) from loan sales		18			—			47			4
Net gains (losses) from principal investing		18			(6	)		72			(84	)
Investment banking and capital markets income (loss)		42			(26	)		82			5
Gain from sale/redemption of Visa Inc. shares		—			—			—			105
Gain related to exchange of common shares for capital securities		—			(17	)		—			78
Other income		32			40			137			161

Total noninterest income		486			382			1,428			1,566

NONINTEREST EXPENSE
Personnel		359			380			1,106			1,114
Net occupancy		70			63			200			192
Operating lease expense		40			46			114			145
Computer processing		46			48			140			143
Professional fees		41			41			120			121
FDIC assessment		27			40			97			140
OREO expense, net		4			51			58			72
Equipment		24			24			74			71
Marketing		21			19			50			50
Provision (credit) for losses on lending-related commitments		(10	)		29			(22	)		40
Intangible asset impairment		—			45			—			241
Other expense		114			115			353			354

Total noninterest expense		736			901			2,290			2,683

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		296			(660	)		285			(1,770	)
Income taxes		85			(274	)		14			(688	)

INCOME (LOSS) FROM CONTINUING OPERATIONS		211			(386	)		271			(1,082	)
Income (loss) from discontinued operations, net of taxes, of $10, ($10), ($5) and ($24) (see Note 16)		15			(16	)		(10	)		(41	)

NET INCOME (LOSS)		226			(402	)		261			(1,123	)
Less: Net income (loss) attributable to noncontrolling interests		7			(5	)		27			(12	)

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	219		$	(397	)	$	234		$	(1,111	)



Income (loss) from continuing operations attributable to Key common shareholders	$	163		$	(422	)	$	121		$	(1,323	)
Net income (loss) attributable to Key common shareholders		178			(438	)		111			(1,364	)

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.19		$	(.50	)	$	.14		$	(2.07	)
Income (loss) from discontinued operations, net of taxes		.02			(.02	)		(.01	)		(.06	)
Net income (loss) attributable to Key common shareholders		.20			(.52	)		.13			(2.14	)

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.19		$	(.50	)	$	.14		$	(2.07	)
Income (loss) from discontinued operations, net of taxes		.02			(.02	)		(.01	)		(.06	)
Net income (loss) attributable to Key common shareholders		.20			(.52	)		.13			(2.14	)

Cash dividends declared per common share	$	.01		$	.01		$	.03		$	.0825

Weighted-average common shares outstanding (000)		874,433			839,906			874,495			637,805
Weighted-average common shares and potential common shares outstanding (000)		874,433			839,906			874,495			637,805


(a)		For the three months ended September 30, 2010, Key did not have impairment losses related to securities recognized in earnings. For the three months ended September 30, 2009, impairment losses totaled $4 million, of which $2 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 Shares			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)																		(1,111	)								(12	)	$	(1,123	)

Other comprehensive income (loss):

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($10)																								17						17

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($54)																								(90	)					(90	)

Net unrealized gains (losses) on common investments held in employee welfare benefits trust, net of income taxes																								1						1

Net contribution to noncontrolling interests																											29			29

Foreign currency translation adjustments																								34						34

Net pension and postretirement benefit costs, net of income taxes																								19						19


Total comprehensive income (loss)																													$	(1,113	)


Deferred compensation															12

Cash dividends declared on common shares ($.0825 per share)																		(46	)

Cash dividends declared on Noncumulative Series A

Preferred Stock ($5.8125 per share)																		(28	)

Cash dividends accrued on Cumulative Series B

Preferred Stock (5% per annum)																		(94	)

Amortization of discount on Series B Preferred Stock								12										(12	)

Common shares issued						205,439					205				781

Common shares exchanged for Series A Preferred Stock			(3,670	)		46,602		(367	)		29				(167	)		(5	)		508

Common shares exchanged for capital securities						127,616					128				634

Common shares reissued for stock options and other employee benefit plans						3,900									(87	)					117


BALANCE AT SEPTEMBER 30, 2009			2,930			878,559	$	2,717		$	946	$	87	$	3,726		$	5,431		$	(1,983	)	$	46		$	218




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)																		234									27			261

Other comprehensive income (loss):

Net unrealized gains (losses) on securities available for sale, net of income taxes of $214																								361						361

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($49)																								(82	)					(82	)

Net distribution from noncontrolling interests																											(43	)		(43	)

Foreign currency translation adjustments																								(8	)					(8	)

Net pension and postretirement benefit costs, net of income taxes																								17						17


Total comprehensive income (loss)																													$	551


Deferred compensation															11

Cash dividends declared on common shares ($.03 per share)																		(27	)

Cash dividends declared on Noncumulative Series A

Preferred Stock ($5.8125 per share)																		(17	)

Cash dividends accrued on Cumulative Series B

Preferred Stock (5% per annum)																		(94	)

Amortization of discount on Series B Preferred Stock								12										(12	)

Common shares reissued for stock options and other employee benefit plans						1,793									(35	)					66


BALANCE AT SEPTEMBER 30, 2010			2,930			880,328	$	2,733		$	946	$	87	$	3,710		$	5,287		$	(1,914	)	$	285		$	254

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Nine months ended

	September 30,


in millions	2010			2009

OPERATING ACTIVITIES

Net income (loss)	$	261		$	(1,123	)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Provision for loan losses		735			2,403

Depreciation and amortization expense		254			297

Intangible assets impairment		—			241

Net losses (gains) from principal investing		(72	)		84

Net losses (gains) from loan sales		(47	)		(4	)

Deferred income taxes		16			(775	)

Net securities losses (gains)		(2	)		(112	)

Gain from sale/redemption of Visa Inc. shares		—			(105	)

Gain related to exchange of common shares for capital securities		—			(78	)

Gains on leased equipment		(14	)		(84	)

Gain from sale of Key’s claim associated with the Lehman		—			(32	)

Provision for losses on LIHTC Guaranteed funds		—			17

Provision (credit) for losses on lending-related commitments		(22	)		40

Provision for customer derivative losses		28			34

Net decrease (increase) in loans held for sale excluding transfers from continuing operations		176			46

Net decrease (increase) in trading account assets		54			(126	)

Other operating activities, net		602			744


NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		1,969			1,467

INVESTING ACTIVITIES

Proceeds from sale/redemption of Visa inc. shares		—			105

Net decrease (increase) in short-term investments		(128	)		2,235

Purchases of securities available for sale		(6,993	)		(13,574	)

Proceeds from sales of securities available for sale		61			3,616

Proceeds from prepayments and maturities of securities available for sale		2,918			2,963

Purchases of held-to-maturity securities		(2	)		(6	)

Proceeds from prepayments and maturities of held-to-maturity securities		5			7

Purchases of other investments		(106	)		(117	)

Proceeds from sales of other investments		131			28

Proceeds from prepayments and maturities of other investments		87			50

Net decrease (increase) in loans, excluding acquisitions, sales and transfers		5,107			8,629

Proceeds from loan sales		431			184

Purchases of premises and equipment		(102	)		(128	)

Proceeds from sales of premises and equipment		1			13

Proceeds from sales of other real estate owned		143			59


NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		1,553			4,064

FINANCING ACTIVITIES

Net increase (decrease) in deposits		(4,153	)		2,132

Net increase (decrease) in short-term borrowings		1,396			(7,899	)

Net proceeds from issuance of long-term debt		776			486

Payments on long-term debt		(1,051	)		(1,584	)

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		(138	)		(168	)


NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(3,170	)		(6,051	)


NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		352			(520	)

CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		471			1,245


CASH AND DUE FROM BANKS AT END OF PERIOD	$	823		$	725




Additional disclosures relative to cash flows:

Interest paid	$	680		$	1,188

Income taxes paid (refunded)		(159	)		(165	)

Noncash items:

Loans transferred to portfolio from held for sale		—		$	117

Loans transferred to held for sale from portfolio	$	370			240

Loans transferred to other real estate owned		195			165

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 Operations.



AICPA: American Institute of Certified Public Accountants.		N/M: Not meaningful.
ALCO: Asset/Liability Management Committee.		NOW: Negotiable Order of Withdrawal.
A/LM: Asset/liability management.		NYSE: New York Stock Exchange.
AOCI: Accumulated other comprehensive income (loss).		OCI: Other comprehensive income (loss).
Austin: Austin Capital Management, Ltd.		OREO: Other real estate owned.
BCBS: Basel Committee on Banking Supervision.		OTTI: Other-than-temporary impairment.
CMO: Collateralized mortgage obligation.		QSPE: Qualifying special purpose entity.
Common Shares: Common Shares, $1 par value.		PBO: Projected Benefit Obligation.
CPP: Capital Purchase Program of the U.S. Treasury.		S&P: Standard and Poor’s Ratings Services, a Division of The
DIF: Deposit Insurance Fund.		McGraw-Hill Companies, Inc.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.		SCAP: Supervisory Capital Assessment Program administered by the Federal Reserve.
ERM: Enterprise risk management.		SEC: U.S. Securities & Exchange Commission.
EVE: Economic value of equity.		Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
FASB: Financial Accounting Standards Board.		Perpetual Convertible Preferred Stock, Series A.
FDIC: Federal Deposit Insurance Corporation.		Series B Preferred Stock: KeyCorp’s Fixed-Rate Cumulative
Federal Reserve: Board of Governors of the Federal Reserve System.		Perpetual Preferred Stock, Series B issued to the U.S. Treasury under the CPP.
FHLMC: Federal Home Loan Mortgage Corporation.		SILO: Sale in, lease out transaction.
FNMA: Federal National Mortgage Association.		SPE: Special purpose entity.
GAAP: U.S. generally accepted accounting principles.		TAG: Transaction Account Guarantee program of the FDIC.
GNMA: Government National Mortgage Association.		TARP: Troubled Asset Relief Program.
Heartland: Heartland Payment Systems, Inc.		TDR: Troubled debt restructuring.
IRS: Internal Revenue Service.		TE: Taxable equivalent.
ISDA: International Swaps and Derivatives Association.		TLGP: Temporary Liquidity Guarantee Program of the FDIC.
KAHC: Key Affordable Housing Corporation.		U.S. Treasury: United States Department of the Treasury.
LIBOR: London Interbank Offered Rate.		VAR: Value at risk.
LIHTC: Low-income housing tax credit.		VEBA: Voluntary Employee Benefit Association.
LILO: Lease in, lease out transaction.		VIE: Variable interest entity.
Moody’s: Moody’s Investors Service, Inc.		XBRL: eXtensible Business Reporting Language.
N/A: Not applicable.
NASDAQ: National Association of Securities Dealers Automated Quotation System.

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 of which $2.6 billion were 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 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 guidance, 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 quarterly review of impairment indicators during the first nine months 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 September 30, 2010, June 30, 2010 and March 31, 2010. No further impairment testing was required. There was no goodwill associated with our National Banking unit at September 30, 2010, 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”).

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 was 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.

Accounting Guidance Pending Adoption at September 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).

2. Earnings Per Common Share

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


	Three months ended					Nine months ended

	September 30,					September 30,

dollars in millions, except per share amounts	2010		2009			2010			2009


EARNINGS

Income (loss) from continuing operations	$	211	$	(386	)	$	271		$	(1,082	)

Less: Net income (loss) attributable to noncontrolling interests		7		(5	)		27			(12	)


Income (loss) from continuing operations attributable to Key		204		(381	)		244			(1,070	)

Less: Dividends on Series A Preferred Stock		6		7			17			34

Noncash deemed dividend — common shares exchanged for Series A Preferred Stock		—		—			—			114

Cash dividends on Series B Preferred Stock		31		31			94			94

Amortization of discount on Series B Preferred Stock		4		3			12			11


Income (loss) from continuing operations attributable to Key common shareholders		163		(422	)		121			(1,323	)

Income (loss) from discontinued operations, net of taxes ^(a)		15		(16	)		(10	)		(41	)

Net income (loss) attributable to Key common shareholders	$	178	$	(438	)	$	111		$	(1,364	)



WEIGHTED-AVERAGE COMMON SHARES

Weighted-average common shares outstanding (000)		874,433		839,906			874,495			637,805

Effect of dilutive convertible preferred stock, common stock options and other stock awards (000)		—		—			—			—

Weighted-average common shares and potential common shares outstanding (000)		874,433		839,906			874,495			637,805



EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.19	$	(.50	)	$	.14		$	(2.07	)

Income (loss) from discontinued operations, net of taxes ^(a)		.02		(.02	)		(.01	)		(.06	)

Net income (loss) attributable to Key common shareholders		.20		(.52	)		.13			(2.14	)

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.19	$	(.50	)	$	.14		$	(2.07	)

Income (loss) from discontinued operations, net of taxes ^(a)		.02		(.02	)		(.01	)		(.06	)

Net income (loss) attributable to Key common shareholders — assuming dilution		.20		(.52	)		.13			(2.14	)

(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 nine-month period ended September 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 nine-month period ended September 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 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 nine-month periods ended September 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.

¨		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 September 30,	Community Banking						National Banking


dollars in millions	2010			2009			2010				2009


SUMMARY OF OPERATIONS

Net interest income (TE)	$	404		$	435		$	201			$	217

Noninterest income		197			195			229				164


Total revenue (TE) ^(a)		601			630			430				381

Provision (credit) for loan losses		75			160			(25	)			439

Depreciation and amortization expense		9			10			25				75

Other noninterest expense		449			478			224				250		^(c)


Income (loss) from continuing operations before income taxes (TE)		68			(18	)		206				(383	)
Allocated income taxes and TE adjustments		11			(18	)		76				(146	)


Income (loss) from continuing operations		57			—			130				(237	)

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


Net income (loss)		57			—			130				(237	)

Less: Net income (loss) attributable to noncontrolling interests		—			—			—				(1	)

Net income (loss) attributable to Key	$	57		$	—		$	130			$	(236	)




AVERAGE BALANCES ^(b)

Loans and leases	$	26,779		$	29,126		$	19,534			$	26,716

Total assets ^(a)		30,004			31,956			23,765				31,856

Deposits		48,703			53,068			11,779				13,305


OTHER FINANCIAL DATA

Net loan charge-offs ^(b)	$	129		$	103		$	122			$	357

Return on average allocated equity ^(b)		6.26	%		—			16.65		%		(24.06)		%

Return on average allocated equity		6.26			—			16.65				(24.06	)

Average full-time equivalent employees ^(e)		8,306			8,472			2,353				2,473


Nine months ended September 30,	Community Banking								National Banking


dollars in millions	2010				2009				2010			2009


SUMMARY OF OPERATIONS

Net interest income (TE)	$	1,224			$	1,293			$	597		$	672

Noninterest income		584				576				617			574


Total revenue (TE) ^(a)		1,808				1,869				1,214			1,246

Provision (credit) for loan losses		339				501				235			1,444

Depreciation and amortization expense		27				32				76			138

Other noninterest expense		1,345				1,413				698			913		^(c)


Income (loss) from continuing operations before income taxes (TE)		97				(77	)			205			(1,249	)

Allocated income taxes and TE adjustments		(3	)			(61	)			73			(399	)


Income (loss) from continuing operations		100				(16	)			132			(850	)

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


Net income (loss)		100				(16	)			132			(850	)

Less: Net income (loss) attributable to noncontrolling interests		—				—				—			(5	)

Net income (loss) attributable to Key	$	100			$	(16	)		$	132		$	(845	)




AVERAGE BALANCES ^(b)

Loans and leases	$	27,252			$	30,228			$	20,963		$	28,324

Total assets ^(a)		30,387				33,088				24,929			34,603

Deposits		50,184				52,508				12,221			12,768


OTHER FINANCIAL DATA

Net loan charge-offs ^(b)	$	393			$	307			$	547		$	848

Return on average allocated equity ^(b)		3.64		%		(.59	)	%		5.33	%		(28.70)		%

Return on average allocated equity		3.64				(.59	)			5.33			(28.70	)

Average full-time equivalent employees ^(e)		8,247				8,705				2,350			2,546


Other Segments							Total Segments						Reconciling Items							Key


2010				2009				2010			2009			2010			2009				2010			2009




$	37			$	(49	)	$	642		$	603			$	5		$	(4	)		$	647		$	599

	66				26	^(d)		492			385				(6	)		(3	)			486			382


	103				(23	)		1,134			988				(1	)		(7	)			1,133			981

	44				136			94			735				—			(2	)			94			733

	8				16			42			101				39			(5	)			81			96

	33				86			706			814				(51	)		(9	)			655			805


	18				(261	)		292			(662	)			11			9				303			(653	)

	(8	)			(107	)		79			(271	)			13			4				92			(267	)


	26				(154	)		213			(391	)			(2	)		5				211			(386	)

	—				—			—			—				15			(16	)			15			(16	)


	26				(154	)		213			(391	)			13			(11	)			226			(402	)

	7				(4	)		7			(5	)			—			—				7			(5	)


$	19			$	(150	)	$	206		$	(386	)		$	13		$	(11	)		$	219		$	(397	)




$	6,213			$	8,935		$	52,526		$	64,777			$	40		$	53			$	52,566		$	64,830

	30,880				28,854			84,649			92,666				2,078			464				86,727			93,130

	1,449				1,833			61,931			68,206				(73	)		(174	)			61,858			68,032



$	105			$	127		$	356		$	587			$	1			—			$	357		$	587

	7.54		%		(46.31	) %		10.60	%		(17.40	)	%		(.24	) %		.92		%		7.36	%		(13.79	)	%

	7.54				(46.31	)		10.60			(17.40	)			1.57			(2.02	)			7.90			(14.37	)

	37				66			10,696			11,011				4,888			5,425				15,584			16,436


Other Segments							Total Segments							Reconciling Items								Key


2010				2009				2010			2009				2010				2009				2010				2009




$	61			$	(179	)		$	1,882		$	1,786			$	20			$	(17	)		$	1,902			$	1,769

	224				308	^(d)			1,425			1,458				3				108				1,428				1,566


	285				129				3,307			3,244				23				91				3,330				3,335

	172				460				746			2,405				(11	)			(2	)			735				2,403

	29				52				132			222				122				75				254				297

	98				159				2,141			2,485				(105	)			(99	)			2,036				2,386


	(14	)			(542	)			288			(1,868	)			17				117				305				(1,751	)

	(40	)			(233	)			30			(693	)			4				24				34				(669	)


	26				(309	)			258			(1,175	)			13				93				271				(1,082	)

	—				—				—			—				(10	)			(41	)			(10	)			(41	)


	26				(309	)			258			(1,175	)			3				52				261				(1,123	)

	27				(7	)			27			(12	)			—				—				27				(12	)


$	(1	)		$	(302	)		$	231		$	(1,163	)		$	3			$	52			$	234			$	(1,111	)





$	6,766			$	9,760			$	54,981		$	68,312			$	49			$	47			$	55,030			$	68,359

	30,271				28,056				85,587			95,747				2,171				544				87,758				96,291

	1,555				1,867				63,960			67,143				(97	)			(253	)			63,863				66,890



$	374			$	394			$	1,314		$	1,549				—				—			$	1,314			$	1,549

	(.12)		%		(30.66	)	%		3.82	%		(17.54	)	%		.64		%		7.57		%		3.02		%		(13.62	)	%

	(.12	)			(30.66	)			3.82			(17.54	)			.15				4.23				2.90				(14.14	)

	40				87				10,637			11,338				5,036				5,605				15,673				16,943

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

(b)		From continuing operations.

(c)		National Banking’s results for the third quarter of 2009 include a $45 million ($28 million after-tax) write-off of intangible assets, other than goodwill, resulting from actions taken by us during the third quarter to cease lending in certain equipment leasing markets.

(d)		Other Segments’ results for the third quarter of 2009 include a $17 million ($11 million after-tax) loss related to the exchange of common shares for capital securities.

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

Supplementary information (Community Banking lines of business)


Three months ended September 30,	Regional Banking						Commercial Banking


dollars in millions	2010			2009			2010			2009


Total revenue (TE)	$	483		$	527		$	118		$	103

Provision for loan losses		105			93			(30	)		67

Noninterest expense		415			430			43			58

Net income (loss) attributable to Key		(9	)		14			66			(14	)

Average loans and leases		18,079			19,347			8,700			9,779

Average loans held for sale		63			193			24			1
Average deposits		43,348			48,551			5,355			4,517

Net loan charge-offs		89			78			40			25
Net loan charge-offs to average loans		1.95	%		1.60	%		1.82	%		1.01		%

Nonperforming assets at period end	$	350		$	289		$	217		$	270

Return on average allocated equity		(1.47	) %		2.40	%		22.04	%		(4.24	)	%

Average full-time equivalent employees		7,953			8,120			353			352



Nine months ended September 30,	Regional Banking						Commercial Banking


dollars in millions	2010			2009			2010			2009


Total revenue (TE)	$	1,468		$	1,561		$	340		$	308

Provision for loan losses		278			328			61			173

Noninterest expense		1,241			1,278			131			167

Net income (loss) attributable to Key		7			4			93			(20	)

Average loans and leases		18,410			19,697			8,842			10,531

Average loans held for sale		71			159			8			2

Average deposits		44,916			48,353			5,268			4,155

Net loan charge-offs		268			203			125			104

Net loan charge-offs to average loans		1.95	%		1.38	%		1.89	%		1.32		%

Nonperforming assets at period end	$	350		$	289		$	217		$	270

Return on average allocated equity		.38	%		0.23	%		10.03	%		(2.03	)	%

Average full-time equivalent employees		7,894			8,340			353			365



Supplementary information (National Banking lines of business)

	Real Estate Capital and													Institutional and
Three months ended September 30,	Corporate Banking Services						Equipment Finance								Capital Markets


dollars in millions	2010			2009			2010			2009				2010			2009


Total revenue (TE)	$	175		$	135		$	63		$	59			$	192		$	187

Provision for loan losses		22			336			(12	)		75				(35	)		28

Noninterest expense		99			100			53			85				97			140

Net income (loss) attributable to Key		33			(186	)		14			(63	)			83			13

Average loans and leases		10,300			14,322			4,515			5,010				4,719			7,384

Average loans held for sale		202			201			2			20				176			147

Average deposits		9,360			10,848			5			6				2,414			2,451

Net loan charge-offs		103			276			25			30				(6	)		51

Net loan charge-offs to average loans		3.97	%		7.65	%		2.20	%		2.38		%		(.50	) %		2.74		%

Nonperforming assets at period end	$	719		$	1,184		$	86		$	118			$	81		$	208

Return on average allocated equity		6.93	%		(30.95	) %		16.73	%		(64.25	)	%		37.63	%		4.61		%

Average full-time equivalent employees		1,039			1,110			536			619				778			744



	Real Estate Capital and													Institutional and
Nine months ended September 30,	Corporate Banking Services						Equipment Finance								Capital Markets


dollars in millions	2010			2009			2010			2009				2010			2009


Total revenue (TE)	$	495		$	508		$	185		$	189			$	534		$	549

Provision for loan losses		244			1,188			1			158				(10	)		98

Noninterest expense		322			410			147			199				305			442

Net income (loss) attributable to Key		(45	)		(719	)		23			(105	)			154			(21	)

Average loans and leases		11,361			15,058			4,522			5,031				5,080			8,235

Average loans held for sale		170			196			6			15				158			203

Average deposits		9,667			10,573			5			8				2,549			2,187

Net loan charge-offs		452			661			61			81				34			106

Net loan charge-offs to average loans		5.32	%		5.87	%		1.80	%		2.15		%		.89	%		1.72		%

Nonperforming assets at period end	$	719		$	1,184		$	86		$	118			$	81		$	208

Return on average allocated equity		(2.99	) %		(40.44	) %		8.69	%		(34.58	)	%		21.70	%		(2.43	)	%

Average full-time equivalent employees		1,056			1,134			549			632				745			780

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.


		September 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			73	$	4		—		77
Collateralized mortgage obligations			19,197		689		—		19,886
Other mortgage-backed securities			1,097		84		—		1,181
Other securities			76		14	$	1		89

Total securities available for sale	$		20,451	$	791	$	1	$	21,241




HELD-TO-MATURITY SECURITIES
States and political subdivisions	$		2		—		—	$	2
Other securities			16		—		—		16

Total held-to-maturity securities	$		18		—		—	$	18


		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


		September 30, 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			83	$	4		—		87
Collateralized mortgage obligations			13,551		178	$	48		13,681
Other mortgage-backed securities			1,432		93		—		1,525
Other securities			99		14		1		112

Total securities available for sale	$		15,173	$	289	$	49	$	15,413




HELD-TO-MATURITY SECURITIES
States and political subdivisions	$		3		—		—	$	3
Other securities			21		—		—		21

Total held-to-maturity securities	$		24		—		—	$	24

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


SEPTEMBER 30, 2010
Securities available for sale:
Collateralized mortgage obligations	$	399		—		—		—	$	399		—
Other securities		3		—	$	2	$	1		5	$	1

Total temporarily impaired securities	$	402		—	$	2	$	1	$	404	$	1





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





SEPTEMBER 30, 2009
Securities available for sale:
Collateralized mortgage obligations	$	5,537	$	48		—		—	$	5,537	$	48
Other securities		1		—	$	5	$	1		6		1

Total temporarily impaired securities	$	5,538	$	48	$	5	$	1	$	5,543	$	49

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, we did not have any impairment losses recognized in earnings for the three months ended September 30, 2010.


Three months ended September 30, 2010

in millions

Balance at June 30, 2010	$	4
Impairment recognized in earnings		—

Balance at September 30, 2010	$	4

As a result of adopting new consolidation guidance on January 1, 2010, we have consolidated our education loan securitization trusts. In consolidating these trusts, we have eliminated from our balance sheet the residual interests that we continue to retain in these securitization 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:


Nine months ended September 30, 2010

in millions

Realized gains	$	7

Realized losses		5


Net securities gains (losses)	$	2

At September 30, 2010, securities available for sale and held-to-maturity securities totaling $11 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
September 30, 2010		Amortized	Fair			Amortized	Fair
in millions	Cost		Value		Cost		Value


Due in one year or less	$	695	$	711	$	2	$	2

Due after one through five years		19,642		20,408		16		16

Due after five through ten years		100		107		—		—

Due after ten years		14		15		—		—


Total	$	20,451	$	21,241	$	18	$	18

5. Loans and Loans Held for Sale

Our loans by category are summarized as follows:


	September 30,		December 31,		September 30,

in millions	2010		2009		2009


Commercial, financial and agricultural	$	16,451	$	19,248	$	20,600

Commercial real estate:

Commercial mortgage		9,673		10,457		11,169

Construction		2,731		4,739		5,473


Total commercial real estate loans		12,404		15,196		16,642

Commercial lease financing		6,583		7,460		7,787


Total commercial loans		35,438		41,904		45,029

Real estate — residential mortgage		1,853		1,796		1,763

Home equity:

Community Banking		9,655		10,048		10,154

Other		707		838		884


Total home equity loans		10,362		10,886		11,038

Consumer other — Community Banking		1,174		1,181		1,189

Consumer other:

Marine		2,355		2,787		2,943

Other		172		216		231


Total consumer other		2,527		3,003		3,174


Total consumer loans		15,916		16,866		17,164


Total loans ^(a)	$	51,354	$	58,770	$	62,193


(a)		Excludes loans in the amount of $6.6 billion, $3.5 billion and $3.6 billion at September 30, 2010, December 31, 2009 and September 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 14 (“Derivatives and Hedging Activities”).

Our loans held for sale by category are summarized as follows:


	September 30,			December 31,			September 30,

in millions	2010			2009			2009


Commercial, financial and agricultural	$	128		$	14		$	128

Real estate — commercial mortgage		327			171			302

Real estate — construction		77			92			133

Commercial lease financing		13			27			29

Real estate — residential mortgage		92			139			110

Automobile		—			—			1

Total loans held for sale ^(a)	$	637	^(b)	$	443	^(b)	$	703


(a)		Excludes loans in the amount of $15 million, $434 million and $341 million at September 30, 2010, December 31, 2009, and September 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 $2.005 billion and net transfers from held to maturity in the amount of $376 million, and decreased by loan sales of $2.035 billion, transfers to OREO/valuation adjustments of $81 million and loan payments of $71 million, for an ending balance of $637 million at September 30, 2010.

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


	Three months ended						Nine months ended

	September 30,						September 30,

in millions	2010			2009			2010			2009


Balance at beginning of period	$	2,219		$	2,339		$	2,534		$	1,629

Charge-offs		(430	)		(619	)		(1,479	)		(1,646	)

Recoveries		73			32			165			97


Net loans charged off		(357	)		(587	)		(1,314	)		(1,549	)

Provision for loan losses from continuing operations		94			733			735			2,403

Foreign currency translation adjustment		1			—			2			2


Balance at end of period	$	1,957		$	2,485		$	1,957		$	2,485

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


	Three months ended					Nine months ended

	September 30,					September 30,

in millions	2010			2009		2010			2009


Balance at beginning of period	$	109		$	65	$	121		$	54

Provision (credit) for losses on lending-related commitments		(10	)		29		(22	)		40

Balance at end of period ^(a)	$	99		$	94	$	99		$	94


(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:


	Nine months ended

	September 30,

in millions	2010			2009


Balance at beginning of period	$	221		$	242

Servicing retained from loan sales		5			7

Purchases		10			15

Amortization		(33	)		(38	)

Balance at end of period	$	203		$	226




Fair value at end of period	$	295		$	353

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 September 30, 2010 and 2009, are:

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

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

¨		residual cash flows discount rate of 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 September 30, 2010, a 1.00% increase in the assumed default rate of commercial mortgage loans would cause a $7 million decrease in the fair value of our mortgage servicing assets.

Contractual fee income from servicing commercial mortgage loans totaled $54 million and $52 million for the nine-month periods ended September 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.

On November 1, 2010, Moody’s announced the downgrade of ratings of ten large U.S. regional banks, including KeyBank, previously identified as benefiting from systemic support. KeyBank’s short-term borrowings, senior long-term debt and subordinated debt ratings received a one notch downgrade from P-1 to P-2, A2 to A3, and A3 to Baa1, respectively. This ratings downgrade could impact the ability of KeyBank to hold certain escrow deposit balances related to commercial mortgage securitizations serviced by Key and rated by Moody’s. The new ratings have breached minimum ratings thresholds established by Moody’s in connection with the securitizations that Key services. In the event Key is unable to obtain a waiver of the ratings requirements from Moody’s, it could be required, among other remedies, to evaluate alternative investments for these escrow deposit balances which are in the range of $1.50 to $1.85 billion. This may also trigger an impairment of our mortgage servicing assets.

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:

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

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

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

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

Our VIEs, including those consolidated and those in which we hold a significant interest, are summarized below. We define a “significant interest” in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIE’s expected losses or residual returns; however, we do not have the power to direct the activities that most significantly impact the entity’s economic performance.

Consolidated VIEs

Unconsolidated VIEs

Total

Maximum

in millions

Assets

Liabilities

Assets

Liabilities

Exposure to Loss

September 30, 2010

LIHTC funds

121

N/A

148

—

Education loan securitization trusts

3,291

3,122

N/A

LIHTC investments

N/A

960

—

456

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 $105 million at September 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 nine 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 September 30, 2010, we estimated the settlement value of these third-party interests to be between $71 million and $79 million, while the recorded value, including reserves, totaled $133 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 September 30, 2010, assets of these unconsolidated nonguaranteed funds totaled $148 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 September 30, 2010, assets of these unconsolidated LIHTC operating partnerships totaled approximately $960 million. At September 30, 2010, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $375 million plus $81 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 nine 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 September 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 $1.1 billion at September 30, 2010, compared to $1.9 billion at December 31, 2009, and $2 billion at September 30, 2009. Impaired loans had an average balance of $1.4 billion and $2 billion for the nine months ended September 30, 2010 and 2009. At September 30, 2010, total restructured loans (accrual and nonaccrual loans that are included in impaired loans) totaled $360 million while at December 31, 2009, total restructured loans totaled $364 million. Although $136 million in restructured loans were added during the first nine months of 2010, the overall decrease in restructured loans was primarily attributable to $140 million in payments and charge-offs.

Our nonperforming assets and past due loans were as follows:


	September 30,			December 31,			September 30,

in millions	2010			2009			2009


Impaired loans	$	1,120		$	1,903		$	2,013

Other nonperforming loans		252			284			277

Total nonperforming loans		1,372			2,187			2,290

Nonperforming loans held for sale		230			116			304

Other real estate owned (“OREO”)		221			191			187

Allowance for OREO losses		(58	)		(23	)		(40	)

OREO, net of allowance		163			168			147

Other nonperforming assets		36			39			58

Total nonperforming assets	$	1,801		$	2,510		$	2,799




Impaired loans with a specifically allocated allowance	$	840		$	1,645		$	1,787

Specifically allocated allowance for impaired loans		135			300			390


Restructured loans included in nonperforming loans ^(a)	$	228		$	364		$	65

Restructured loans with a specifically allocated allowance ^(b)		35			256			58

Specifically allocated allowance for restructured loans ^(c)		6			44			15


Accruing loans past due 90 days or more	$	152		$	331		$	375

Accruing loans past due 30 through 89 days		662			933			1,071


(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 September 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:

♦		required distributions on the capital securities;

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

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

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 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, 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 nonbank 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 September 30, 2010, the capital securities issued by the KeyCorp and Union State Bank capital trusts represent $1.8 billion or 16% 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

September 30, 2010

KeyCorp Capital I

156

159

1.273

2028

KeyCorp Capital II

111

6.875

2029

KeyCorp Capital III

102

142

7.750

2029

KeyCorp Capital V

115

128

5.875

2033

KeyCorp Capital VI

6.125

2033

KeyCorp Capital VII

165

178

5.700

2035

KeyCorp Capital VIII ^(d)

171

—

220

7.000

2066

KeyCorp Capital IX ^(d)

331

—

363

6.750

2066

KeyCorp Capital X ^(d)

575

—

632

8.000

2068

Union State Capital I

9.580

2027

Union State Statutory II

—

4.046

2031

Union State Statutory IV

—

3.326

2034

Total

1,801

2,044

6.572

—

December 31, 2009

1,872

1,906

6.577

—

September 30, 2009

1,938

1,969

6.589

—


(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 $10 million at September 30, 2010, $81 million at December 31, 2009, and $147 million at September 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,” and 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 $227 million at September 30, 2010, $89 million at December 31, 2009, and $152 million at September 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.

(d)		In connection with each of these issuances of trust preferred securities, KeyCorp entered into a replacement capital covenant (“RCC”). Should KeyCorp redeem or purchase these securities or related subordinated debentures, absent receipt of consent from the holders of the “Covered Debt” or certain limited exceptions, KeyCorp would need to comply with the applicable RCC. For further information on the applicable RCCs and the Covered Debt, see page 10 of our Form 10-K for the fiscal year ended December 31, 2009.

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 nine 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.

We changed our pension plan assumptions as a result of freezing the pension plans. We recognized a $12 million credit in net pension cost below for the three-month period ended September 30, 2010, primarily as a result of this change.

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


	Three months ended						Nine months ended

	September 30,						September 30,

in millions	2010			2009			2010			2009


Service cost of benefits earned		—		$	12			—		$	37

Interest cost on PBO	$	15			14		$	45			43

Expected return on plan assets		(18	)		(17	)		(54	)		(49	)

Amortization of losses		(9	)		10			9			31

Net pension cost	$	(12	)	$	19		$	—		$	62

During the third quarter of 2010, we made a discretionary contribution of $58 million to our primary qualified cash balance pension plan.

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						Nine months ended

	September 30,						September 30,

in millions	2010			2009			2010			2009


Interest cost on APBO	$	1		$	1		$	3		$	3

Expected return on plan assets		(1	)		(1	)		(3	)		(2	)

Amortization of unrecognized prior service benefit		—			—			(1	)		(1	)

Net postretirement (benefit) cost	$	—		$	—		$	(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 the applicable 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, June 30, 2010, and September 30, 2010.

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 third 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.

The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 28.7% for the third quarter of 2010, 9.6% for the second quarter of 2010, and 41.4% for the third quarter of 2009.

The effective tax rates for both the current and prior quarters of 2010 are substantially below our combined federal and state statutory tax rate of 37.2%, due primarily to income from investments in tax-advantaged assets such as corporate-owned life insurance, and credits associated with investments in low-income housing projects. The effective tax rate for the third quarter of 2009 is higher than our statutory tax rate. This increase is mainly due to pre-tax book losses for the quarter creating a tax benefit, which is further increased for the tax impact from the investments in tax-advantaged assets.

Deferred Tax Asset

As of September 30, 2010, we had a net deferred tax asset from continuing operations of $393 million compared to $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., et al., 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.

In August 2010, three additional shareholder derivative actions were filed in the United States District Court for the Northern District of Ohio styled: Irving Lassoff, et al., v. KeyCorp, et al.; Warren Monday, et al., v. KeyCorp, et al.; and William Kaplan, et al.,v. KeyCorp, et al. These actions assert similar causes of action and seek similar remedies from certain current and former directors and executive officers of KeyCorp. KeyCorp has also been named as a nominal defendant in each of these lawsuits. Lassoff asserts an additional cause of action based upon an alleged violation of section 14(a) of the Exchange Act of 1934, as amended, asserting that our proxy statement contained alleged materially false and misleading statements. Monday and Kaplan each assert additional allegations and a cause of action for violation of section 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder relating to the propriety of leveraged leasing transactions Key entered into, our disclosures and accounting for such transactions, and that such transactions created unnecessary risk incentives resulting in excessive compensation being paid. Plaintiffs in Kaplan and Monday seek relief from the individual defendants, on behalf of KeyCorp, including an award of restitution and disgorgement of profits, benefits and compensation; return of executive compensation based upon allegedly materially inaccurate financial statements; reasonable fees and expenses; and an order directing KeyCorp to reform its corporate governance procedures.

KeyCorp’s Board of Directors has appointed two special committees of nonmanagement directors to assess its executive compensation practices and to investigate the allegations made in these matters. These committees have retained an independent law firm to assist in their 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’ consolidated complaint continues to name certain employees as defendants but no longer names any outside directors. Following briefing and argument on our motion to dismiss for, among other things, failure to make a demand on the board of directors, the Court dismissed Taylor on August 12, 2010. On September 12, 2010, Plaintiffs filed a Notice of Appeal. We filed a notice of Cross-Appeal on September 23, 2010. Following the Court’s dismissal of Taylor, two cases with similar allegations and causes of action were filed on September 21, 2010 in the same district court; these actions are styled Anthony Lobasso, et al,v. KeyCorp, et al., and Thomas J. Metyk, et al., v. KeyCorp, et al. 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. The parties have agreed to hold the arbitration proceeding in abeyance while Austin’s operations are wound down. 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”).

DataTreasury 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. On September 28, 2010, we entered into a settlement agreement with the plaintiff to resolve the claims asserted against KeyBank. On September 30, 2010, the matter concluded by agreed order of dismissal with prejudice by the parties. The settlement terms were not material.

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 September 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

September 30, 2010	Undiscounted		Liability

in millions	Future Payments		Recorded


Financial guarantees:

Standby letters of credit	$	10,723	$	60

Recourse agreement with FNMA		728		13

Return guarantee agreement with LIHTC investors		79		62

Written put options ^(a)		2,917		53

Default guarantees		34		3

Total	$	14,481	$	191


(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 September 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 September 30, 2010, our standby letters of credit had a remaining weighted-average life of 1.7 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 September 30, 2010, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 5.8 years, and the unpaid principal balance outstanding of loans sold by us as a participant in this program was $2.3 billion. As shown in the preceding table, the maximum potential amount of undiscounted future payments that we could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at September 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 September 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 September 30, 2010, our written put options had an average life of 1.1 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. At September 30, 2010, we had one liquidity facility remaining outstanding with an unconsolidated third-party commercial paper conduit. This liquidity facility, which will expire by May 15, 2013, obligates us to provide aggregate funding of up to $51 million in the event that a credit market disruption or other factors prevent the conduit from issuing commercial paper. The aggregate amount available to be drawn is based on the amount of current commitments to borrowers and totaled $23 million at September 30, 2010. We periodically evaluate our commitment 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 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 Heartland’s Form 10-K filed with the SEC on March 10, 2010 (“Heartland’s 2009 Form 10-K”), Heartland disclosed that it had consummated the previously reported settlement among Heartland, Visa U.S.A. Inc., Visa International Service Association, and Visa Inc., and the Sponsor Banks, including KeyBank and Heartland Bank. Heartland has also consummated the previously reported settlement with MasterCard and certain MasterCard issuers. Certain claims for those issuers that did not opt-in to the aforementioned settlements remain pending in the litigation before the United States District Court for the Southern District of Texas. The amounts alleged in damages against KeyBank for such matters are not significant and are subject to indemnification by Heartland.

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, May 19, 2010, and September 1, 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 EVE 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 September 30, 2010, after taking into account the effects of bilateral collateral and master netting agreements, we had $305 million of derivative assets and $136 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 $953 million and derivative liabilities of $1.2 billion that were not designated as hedging instruments.

The enactment of the 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 in the future.

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 EVE. 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 ERM 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 consolidated exposure to changes in interest rates. 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 September 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. This objective is accomplished primarily through the use of an investment-grade diversified dealer-traded basket of credit default swaps. These transactions may generate fee income, and diversify and reduce overall portfolio credit risk volatility. Although we use these instruments for risk management purposes, they are not treated as hedging instruments as defined by the applicable accounting guidance for derivatives and hedging.

We also enter into derivative contracts to meet customer needs and for proprietary purposes that consist of the following instruments:

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

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

¨		interest rate derivatives and foreign exchange contracts used for proprietary trading purposes;

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

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

These contracts are not designated as part of hedge relationships.

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


		September 30, 2010								December 31, 2009								September 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	$	14,126	$	654		$	14		$	18,259	$	489		$	9		$	20,443	$	600		$	8

Foreign exchange		1,523		56			219			1,888		78			189			2,664		87			233

Total		15,649		710			233			20,147		567			198			23,107		687			241

Derivatives not designated as hedging instruments:

Interest rate		58,415		1,746			1,754			70,017		1,434			1,345			70,985		1,749			1,635

Foreign exchange		5,835		244			228			6,293		206			184			6,241		229			201

Energy and commodity		1,980		365			384			1,955		403			427			2,175		445			471

Credit		3,549		43			44			4,538		55			49			4,847		62			54

Equity		19		1			1			3		1			1			—		—			—

Total		69,798		2,399			2,411			82,806		2,099			2,006			84,248		2,485			2,361



Netting adjustments ^(a)		N/A		(1,851	)		(1,314	)		N/A		(1,572	)		(1,192	)		N/A		(1,887	)		(1,417	)

Total derivatives	$	85,447	$	1,258		$	1,330		$	102,953	$	1,094		$	1,012		$	107,355	$	1,285		$	1,185


(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 nine-month period ended September 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 September 30, 2010.

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

Nine months ended September 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

272

Long-term debt

Other income

(270

)

^(a)

Interest rate

Interest expense – Long-term debt

160

Foreign exchange

Other income

(112

)

Long-term debt

Other income

102

^(a)

Foreign exchange

Interest expense – Long-term debt

Long-term debt

Interest expense – Long-term debt

(10

)

^(b)

Total

325

(178

)

Nine months ended September 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

(392

)

Long-term debt

Other income

390

^(a)

Interest rate

Interest expense – Long-term debt

170

Foreign exchange

Other income

176

Long-term debt

Other income

(183

)

^(a)

Foreign exchange

Interest expense – Long-term debt

Long-term debt

Interest expense – Long-term debt

(39

)

^(b)

Total

(31

)

168


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

(b)		Net gains (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

nine-month period ended September 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 September 30, 2010.

The following table summarizes the pre-tax net gains (losses) on our cash flow hedges for the nine-month periods ended September 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.

Nine months ended September 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

170

Other income

—

Interest rate

(33

)

Interest expense – Long-term debt

(13

)

Other income

—

Interest rate

—

Net gains (losses) from loan securitizations and sales

—

Other income

—

Total

157

—

Nine months ended September 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

167

Interest income – Loans

340

Other income

)

Interest rate

Interest expense – Long-term debt

(14

)

Other income

Interest rate

Net gains (losses) from loan securitizations and sales

Other income

—

Total

187

331

—

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


					Reclassification

	December 31,		2010		of Gains to			September 30,

in millions	2009		Hedging Activity		Net Income			2010


AOCI resulting from cash flow hedges	$	114	$	16	$	(99	)	$	31

Considering the interest rates, yield curves and notional amounts as of September 30, 2010, we would expect to reclassify an estimated $9 million of net losses on derivative instruments from AOCI to income during the next twelve months. In addition, we expect to reclassify approximately $24 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 nine-month periods ended September 30, 2010 and 2009, and where they are recorded on the income statement.


	Nine months ended September 30,

in millions	2010			2009


NET GAINS (LOSSES) ^(a)

Interest rate	$	12		$	18

Foreign exchange		32			38

Energy and commodity		4			5

Credit		(21	)		(33	)

Total net gains (losses)	$	27		$	28

(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 $538 million at September 30, 2010, $381 million at December 31, 2009, and $485 million at September 30, 2009. The collateral netted against derivative liabilities totaled less than $1 million at September 30, 2010, and at December 31, 2009, and $14 million at September 30, 2009.

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


	September 30,		December 31,		September 30,

in millions	2010		2009		2009


Largest gross exposure (derivative asset) to an individual counterparty	$	241	$	217	$	296

Collateral posted by this counterparty		46		21		29

Derivative liability with this counterparty		338		331		366

Collateral pledged to this counterparty		143		164		99

Net exposure after netting adjustments and collateral		2		29		—

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.


	September 30,		December 31,		September 30,

in millions	2010		2009		2009


Interest rate	$	1,549	$	1,147	$	1,445

Foreign exchange		157		178		193

Energy and commodity		72		131		110

Credit		17		19		22

Equity		1		—		—


Derivative assets before collateral		1,796		1,475		1,770

Less: Related collateral		538		381		485

Total derivative assets	$	1,258	$	1,094	$	1,285

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 September 30, 2010, after taking into account the effects of bilateral collateral and master netting agreements, we had gross exposure of $1.3 billion to broker-dealers and banks. We had net exposure of $350 million after the application of master netting agreements and collateral; our net exposure to broker-dealers and banks at September 30, 2010, was reduced to $87 million with $263 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, U.S. Treasuries, Eurodollar futures and other derivative contracts. 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 $79 million at September 30, 2010, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At September 30, 2009 and December 31, 2009 the default reserve was $64 million and $59 million, respectively. At September 30, 2010, after taking into account the effects of master netting agreements, we had gross exposure of $1 billion to client counterparties. We had net exposure of $908 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.


	September 30, 2010							December 31, 2009								September 30, 2009

in millions	Purchased		Sold			Net		Purchased			Sold			Net		Purchased		Sold			Net


Single name credit default swaps	$	6	$	2		$	8	$	5		$	(3	)	$	2	$	9	$	(2	)	$	7

Traded credit default swap indices		1		(1	)		—		2			—			2		—		1			1

Other		4		(1	)		3		(1	)		4			3		—		(1	)		(1	)

Total credit derivatives	$	11		—		$	11	$	6		$	1		$	7	$	9	$	(2	)	$	7

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 September 30, 2010, December 31, 2009 and September 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.


	September 30, 2010							December 31, 2009							September 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	$	1,033		2.43		2.85	%	$	1,140		2.57		4.88	%	$	1,251		2.56		5.05	%

Traded credit default swap indices		399		4.00		6.78			733		2.71		13.29			926		3.00		6.97

Other		48		2.90	Low				44		1.94		5.41			25		1.00	Low		^(a)

Total credit derivatives sold	$	1,480		—		—		$	1,917		—		—		$	2,202		—		—

(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 September 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 September 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 $821 million in derivative assets and $1.9 billion in derivative liabilities. We had $1 billion in cash and securities collateral posted to cover those positions as of September 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 September 30, 2010, December 31, 2009 and September 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 September 30, 2010, and take into account all collateral already posted. At September 30, 2010, KeyCorp did not have any derivatives in a net liability position that contained credit risk contingent features.


	September 30, 2010				December 31, 2009				September 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	$	29	$	19	$	34	$	22	$	34	$	32

Two rating downgrades		48		27		56		31		61		43

Three rating downgrades		55		32		65		36		72		44

If KeyBank’s ratings had been downgraded below investment grade as of September 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.

On November 1, 2010, Moody’s downgraded KeyBank’s credit rating from A2 to A3. As indicated in the table above, had we been rated A3 as of September 30, 2010, KeyBank would have been required to post $29 million of additional collateral under certain ISDA Master Agreements where we were in a net liability position.

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 September 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.

Investments in real estate private equity funds are included within private equity and mezzanine investments. 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 September 30, 2010:


September 30, 2010			Unfunded
in millions	Fair Value		Commitments

INVESTMENT TYPE
Passive funds ^(a)	$	17	$	5
Co-managed funds ^(b)		13		19

Total	$	30	$	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 September 30, 2010:


September 30, 2010			Unfunded
in millions	Fair Value		Commitments

INVESTMENT TYPE
Private equity funds ^(a)	$	519	$	210
Hedge funds ^(b)		9		—

Total	$	528	$	210

(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 September 30, 2010 and December 31, 2009.


September 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		—	$	574		—		—			$	574
Trading account assets:
U.S. Treasury, agencies and corporations		—		28		—		—				28
Other mortgage-backed securities		—		—	$	2		—				2
Other securities	$	32		1,057		24		—				1,113

Total trading account securities		32		1,085		26		—				1,143
Commercial loans		—		12		—		—				12

Total trading account assets		32		1,097		26		—				1,155
Securities available for sale:
U.S. Treasury, agencies and corporations		—		8		—		—				8
States and political subdivisions		—		77		—		—				77
Collateralized mortgage obligations		—		19,886		—		—				19,886
Other mortgage-backed securities		—		1,181		—		—				1,181
Other securities		84		5		—		—				89

Total securities available for sale		84		21,157		—		—				21,241
Other investments:
Principal investments:
Direct		4		—		412		—				416
Indirect		—		—		529		—				529

Total principal investments		4		—		941		—				945
Equity and mezzanine investments:
Direct		—		—		21		—				21
Indirect		—		—		30		—				30

Total equity and mezzanine investments		—		—		51		—				51

Total other investments		4		—		992		—				996
Derivative assets:
Interest rate		—		2,302		98		—				2,400
Foreign exchange		169		131		—		—				300
Energy		—		362		3		—				365
Credit		—		33		10		—				43
Equity		—		1		—		—				1

Total derivative assets		169		2,829		111	$	(1,851	)			1,258
Accrued income and other assets		—		68		—		—				68

Total assets on a recurring basis at fair value	$	289	$	25,725	$	1,129	$	(1,851	)		$	25,292



LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements:
Securities sold under repurchase agreements		—	$	700		—		—			$	700
Bank notes and other short-term borrowings:
Short positions	$	15		606		—		—				621
Derivative liabilities:
Interest rate		—		1,768		—		—				1,768
Foreign exchange		158		289		—		—				447
Energy		—		384		—		—				384
Credit		—		32	$	12		—				44
Equity		—		1		—		—				1

Total derivative liabilities		158		2,474		12	$	(1,314	)			1,330
Accrued expense and other liabilities		—		49		—		—				49

Total liabilities on a recurring basis at fair value	$	173	$	3,829	$	12	$	(1,314	)		$	2,700

(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