UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended June 30, 2008

or

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

For the Transition Period From                      To                     

Commission File Number 1-11302

Ohio		34-6542451
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
127 Public Square, Cleveland, Ohio		44114-1306
(Address of principal executive offices)		(Zip Code)

(216) 689-6300

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 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		494,657,020 Shares
(Title of class)		(Outstanding at July 31, 2008)

 

 

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
						Page Number
Item 1.				Financial Statements
				Consolidated Balance Sheets ¾ June 30, 2008 (Unaudited), December 31, 2007, and June 30, 2007 (Unaudited)			3
				Consolidated Statements of Income (Unaudited) ¾ Three and six months ended June 30, 2008 and 2007			4
				Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) ¾ Six months ended June 30, 2008 and 2007			5
				Consolidated Statements of Cash Flows (Unaudited) ¾ Six months ended June 30, 2008 and 2007			6
				Notes to Consolidated Financial Statements (Unaudited)			7
				Report of Independent Registered Public Accounting Firm			39
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			40
Item 3.				Quantitative and Qualitative Disclosure about Market Risk			88
Item 4.				Controls and Procedures			88
PART II. OTHER INFORMATION
Item 1.				Legal Proceedings			88
Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds			88
Item 4.				Submission of Matters to a Vote of Security Holders			88
Item 5.				Other Information			89
Item 6.				Exhibits			90
				Signature			91
				Exhibits			92
EX-3.1
EX-3.2
EX-10
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets

		June 30,				December 31,				June 30,
dollars in millions		2008				2007				2007
		(Unaudited)								(Unaudited)
ASSETS
Cash and due from banks		$	1,912			$	1,814			$	1,818
Short-term investments			826				516				471
Trading account assets			1,483				1,056				994
Securities available for sale			8,312				7,860				7,819
Held-to-maturity securities (fair value: $25, $28 and $37)			25				28				37
Other investments			1,559				1,538				1,602
Loans, net of unearned income of $2,532 $2,202 and $2,146			75,855				70,823				66,692
Less: Allowance for loan losses			1,421				1,200				945
Net loans			74,434				69,623				65,747
Loans held for sale			1,833				4,736				4,546
Premises and equipment			748				681				600
Operating lease assets			1,089				1,128				1,110
Goodwill			1,598				1,252				1,202
Other intangible assets			146				123				110
Corporate-owned life insurance			2,917				2,872				2,822
Derivative assets			1,693				879				374
Accrued income and other assets			2,969				4,122				3,715
Total assets		$	101,544			$	98,228			$	92,967
LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts		$	27,278			$	27,635			$	23,315
Savings deposits			1,809				1,513				1,613
Certificates of deposit ($100,000 or more)			8,699				6,982				6,197
Other time deposits			12,541				11,615				11,832
Total interest-bearing			50,327				47,745				42,957
Noninterest-bearing			10,561				11,028				14,199
Deposits in foreign office ¾ interest-bearing			3,508				4,326				3,443
Total deposits			64,396				63,099				60,599
Federal funds purchased and securities sold under repurchase agreements			2,088				3,927				4,362
Bank notes and other short-term borrowings			5,985				5,861				2,476
Derivative liabilities			637				252				248
Accrued expense and other liabilities			4,626				5,386				5,000
Long-term debt			15,106				11,957				12,581
Total liabilities			92,838				90,482				85,266
SHAREHOLDERS’ EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares, none issued			—				—				—
7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A, $1 par value, $100 liquidation preference; authorized 7,475,000 shares, issued 6,500,000 shares			650				—				—
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 576,995,163, 491,888,780 and 491,888,780 shares			577				492				492
Capital surplus			2,544				1,623				1,652
Retained earnings			7,461				8,522				8,720
Treasury stock, at cost (91,333,157, 103,095,907 and 102,527,008 shares)			(2,675	)			(3,021	)			(2,994	)
Accumulated other comprehensive income (loss)			149				130				(169	)
Total shareholders’ equity			8,706				7,746				7,701
Total liabilities and shareholders’ equity		$	101,544			$	98,228			$	92,967

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
dollars in millions, except per share amounts		2008				2007				2008				2007
INTEREST INCOME
Loans		$	717			$	1,176			$	1,840			$	2,337
Loans held for sale			20				82				107				157
Securities available for sale			111				106				220				206
Held-to-maturity securities			—				—				1				1
Trading account assets			10				7				23				14
Short-term investments			8				9				17				20
Other investments			14				15				26				28
Total interest income			880				1,395				2,234				2,763
INTEREST EXPENSE
Deposits			347				447				775				880
Federal funds purchased and securities sold under repurchase agreements			15				59				43				108
Bank notes and other short-term borrowings			27				18				66				29
Long-term debt			133				185				279				381
Total interest expense			522				709				1,163				1,398
NET INTEREST INCOME			358				686				1,071				1,365
Provision for loan losses			647				53				834				97
Net interest (loss) income after provision for loan losses			(289	)			633				237				1,268
NONINTEREST INCOME
Trust and investment services income			138				115				267				240
Service charges on deposit accounts			93				84				181				159
Investment banking and capital markets income			80				52				88				96
Operating lease income			68				66				137				130
Letter of credit and loan fees			51				45				88				83
Corporate-owned life insurance income			28				32				56				57
Electronic banking fees			27				25				51				49
Net gains (losses) from loan securitizations and sales			33				33				(68	)			42
Net securities (losses) gains			(1	)			2				2				(45	)
Net (losses) gains from principal investing			(14	)			90				(5	)			119
Gain from redemption of Visa Inc. shares			—				—				165				—
Gain from sale of McDonald Investments branch network			—				—				—				171
Other income			52				105				121				202
Total noninterest income			555				649				1,083				1,303
NONINTEREST EXPENSE
Personnel			404				411				813				839
Net occupancy			62				59				128				122
Computer processing			43				49				90				100
Operating lease expense			55				55				113				107
Professional fees			33				26				56				52
Equipment			23				24				47				49
Marketing			21				20				35				39
Other expense			140				171				231				291
Total noninterest expense			781				815				1,513				1,599
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			(515	)			467				(193	)			972
Income taxes			611				130				715				277
(LOSS) INCOME FROM CONTINUING OPERATIONS			(1,126	)			337				(908	)			695
Loss from discontinued operations, net of taxes of $2 and $7, respectively (see Note 3)			—				(3	)			—				(11	)
NET (LOSS) INCOME		$	(1,126	)		$	334			$	(908	)		$	684
Net (loss) income applicable to common shares		$	(1,126	)		$	334			$	(908	)		$	684
Per common share:
(Loss) income from continuing operations		$	(2.70	)		$	.86			$	(2.23	)		$	1.76
Net (loss) income			(2.70	)			.85				(2.23	)			1.73
Per common share — assuming dilution:
(Loss) income from continuing operations		$	(2.70	)		$	.85			$	(2.23	)		$	1.74
Net (loss) income			(2.70	)			.84				(2.23	)			1.71
Cash dividends declared per common share		$	.375			$	.365			$	.375			$	.73
Weighted-average common shares outstanding (000)			416,629				392,045				407,875				394,944
Weighted-average common shares and potential common shares outstanding (000)			416,629				396,918				407,875				400,180

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

																														Accumulated
																										Treasury				Other
		Preferred Stock				Common Shares				Preferred				Common				Capital				Retained				Stock,				Comprehensive				Comprehensive
dollars in millions, except per share amounts		Outstanding (000)				Outstanding (000)				Stock				Shares				Surplus				Earnings				at Cost				Income (Loss)				Income (Loss)
BALANCE AT DECEMBER 31, 2006			—				399,153				—			$	492			$	1,602			$	8,377			$	(2,584	)		$	(184	)
Cumulative effect of adopting FSP 13-2, net of income taxes of ($2)																							(52	)
Cumulative effect of adopting FIN 48, net of income taxes of ($1)																							(1	)
BALANCE AT JANUARY 1, 2007																							8,324
Net income																							684											$	684
Other comprehensive income:
Net unrealized losses on securities available for sale, net of income taxes of ($12) a																															(19	)			(19	)
Net unrealized gains on derivative financial instruments, net of income taxes of $6																															10				10
Foreign currency translation adjustments																															14				14
Net pension and postretirement benefit costs, net of income taxes																															10				10
Total comprehensive income																																		$	699
Deferred compensation																			27				(2	)
Cash dividends declared on common shares ($.73 per share)																							(286	)
Common shares reissued for stock options and other employee benefit plans							4,209												23								117
Common shares repurchased							(14,000	)																			(527	)
BALANCE AT JUNE 30, 2007			—				389,362				—			$	492			$	1,652			$	8,720			$	(2,994	)		$	(169	)
BALANCE AT DECEMBER 31, 2007			—				388,793				—			$	492			$	1,623			$	8,522			$	(3,021	)		$	130
Net loss																							(908	)										$	(908	)
Other comprehensive loss:
Net unrealized gains on securities available for sale, net of income taxes of $10 a																															15				15
Net unrealized gains on derivative financial instruments, net of income taxes of $1																															1				1
Foreign currency translation adjustments																															(1	)			(1	)
Net pension and postretirement benefit costs, net of income taxes																															4				4
Total comprehensive loss																																		$	(889	)
Deferred compensation																			3				(3	)
Cash dividends declared on common shares ($.375 per share)																							(150	)
Preferred stock issued			6,500							$	650								(20	)
Common shares issued							85,106								85				893
Common shares reissued:
Acquisition of U.S.B. Holding Co., Inc.							9,895												58								290
Stock options and other employee benefit plans							1,868												(13	)							56
BALANCE AT JUNE 30, 2008			6,500				485,662			$	650			$	577			$	2,544			$	7,461			$	(2,675	)		$	149

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)

		Six months ended
		June 30,
in millions		2008				2007
OPERATING ACTIVITIES
Net (loss) income		$	(908	)		$	684
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Provision for loan losses			834				97
Depreciation and amortization expense			217				209
Litigation reserve			—				42
Net securities losses (gains)			(2	)			45
Liability to Visa			(64	)			—
Gain from redemption of Visa Inc. shares			(165	)			—
Gain from sale of McDonald Investments branch network			—				(171	)
Gain related to MasterCard Incorporated shares			—				(40	)
Gain from settlement of automobile residual value insurance litigation			—				(26	)
Net losses (gains) from principal investing			5				(119	)
Net losses (gains) from loan securitizations and sales			68				(42	)
Loss from sale of discontinued operations			—				2
Proceeds from settlement of automobile residual value insurance litigation			—				279
Deferred income taxes			(151	)			(56	)
Net decrease (increase) in loans held for sale from continuing operations			48				(909	)
Net increase in trading account assets			(427	)			(82	)
Other operating activities, net			371				(343	)
NET CASH USED IN OPERATING ACTIVITIES			(174	)			(430	)
INVESTING ACTIVITIES
Proceeds from redemption of Visa Inc. shares			165				—
Proceeds from sale of McDonald Investments branch network, net of retention payments			—				199
Proceeds from sale of MasterCard Incorporated shares			—				40
Cash used in acquisitions, net of cash acquired			(184	)			—
Net increase in short-term investments			(244	)			(143	)
Purchases of securities available for sale			(793	)			(3,955	)
Proceeds from sales of securities available for sale			836				2,449
Proceeds from prepayments and maturities of securities available for sale			760				1,443
Purchases of held-to-maturity securities			(2	)			—
Proceeds from prepayments and maturities of held-to-maturity securities			4				4
Purchases of other investments			(306	)			(363	)
Proceeds from sales of other investments			111				213
Proceeds from prepayments and maturities of other investments			71				64
Net increase in loans, excluding acquisitions, sales and transfers			(1,560	)			(1,309	)
Purchases of loans			(18	)			(56	)
Proceeds from loan securitizations and sales			221				287
Purchases of premises and equipment			(87	)			(58	)
Proceeds from sales of premises and equipment			1				1
Proceeds from sales of other real estate owned			13				45
NET CASH USED IN INVESTING ACTIVITIES			(1,012	)			(1,139	)
FINANCING ACTIVITIES
Net (decrease) increase in deposits			(509	)			1,480
Net (decrease) increase in short-term borrowings			(2,505	)			2,158
Net proceeds from issuance of long-term debt			3,900				39
Payments on long-term debt			(910	)			(1,845	)
Purchases of treasury shares			—				(527	)
Net proceeds from issuance of common shares and preferred stock			1,601				—
Net proceeds from reissuance of common shares			6				93
Tax benefits (under) over recognized compensation cost for stock-based awards			(1	)			11
Cash dividends paid			(298	)			(286	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,284				1,123
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS			98				(446	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD			1,814				2,264
CASH AND DUE FROM BANKS AT END OF PERIOD		$	1,912			$	1,818
Additional disclosures relative to cash flows:
Interest paid		$	1,144			$	1,416
Income taxes paid			322				135
Noncash items:
Assets acquired		$	2,810				—
Liabilities assumed			2,648				—
Loans transferred to portfolio from held for sale			3,284				—
Loans transferred to held for sale from portfolio			429				—
Loans transferred to other real estate owned			23			$	20

See Notes to Consolidated Financial Statements (Unaudited)

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

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

As used in these notes:

¨		KeyCorp refers solely to the parent holding company.
¨		KeyBank refers to KeyCorp’s subsidiary bank, KeyBank National Association.
¨		Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries.

The consolidated financial statements include any voting rights entity in which Key has a controlling financial interest. In accordance with Financial Accounting Standards Board (“FASB”) Revised Interpretation No. 46, “Consolidation of Variable Interest Entities,” a variable interest entity (“VIE”) is consolidated if Key has a variable interest in the entity and is exposed to the majority of its expected losses and/or residual returns (i.e., Key is considered to be the primary beneficiary). Variable interests can include equity interests, subordinated debt, derivative contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments. See Note 8 (“Variable Interest Entities”) on page 23 for information on Key’s involvement with VIEs.

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

Qualifying special purpose entities, including securitization trusts, established by Key under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are not consolidated. Information on SFAS No. 140 is included in Note 1 (“Summary of Significant Accounting Policies”) of Key’s 2007 Annual Report to Shareholders under the heading “Loan Securitizations” on page 67.

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

The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in Key’s 2007 Annual Report to Shareholders.

Goodwill and Other Intangible Assets

Under SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and certain intangible assets are subject to impairment testing, which must be conducted at least annually. Key typically performs this required testing in the fourth quarter of each year, or more frequently if events or circumstances indicate possible impairment. Key’s reporting units for purposes of this testing are its major business segments: Community Banking and National Banking.

The first step in impairment testing is to determine the fair value of each reporting unit. If the carrying amount of a reporting unit exceeds its fair value, goodwill impairment may be indicated. In such a case, Key would estimate a purchase price for the reporting unit (representing the unit’s fair value) and then compare that hypothetical purchase price to the fair value of the unit’s net assets (excluding goodwill). Any excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. An impairment loss would be recognized as a charge to earnings to the extent the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill.

Key’s results for the second quarter of 2008 were adversely affected by after-tax charges of $1.011 billion, resulting from a previously announced adverse federal court decision on the tax treatment of a Service Contract Lease transaction, and a substantial increase to the provision for loan losses. As a result of these charges, management tested Key’s goodwill for impairment as of June 30, 2008, and determined that no impairment existed at that date.

Two primary assumptions are used in determining the fair value of Key’s reporting units: Key’s revenue growth rate and the future weighted-average cost of capital. Assuming that these assumptions remain unchanged, an incremental after-tax charge exceeding approximately $700 million within the National Banking reporting unit would likely require additional impairment testing steps since the carrying amount of this unit would then exceed its fair value.

Derivatives

Effective January 1, 2008, Key adopted the accounting guidance in FASB Staff Position FIN 39-1, “Amendment of FASB Interpretation 39,” and as a result, also adopted the provisions of Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts.” As a result of adopting this guidance, Key changed its accounting policy pertaining to the recognition of derivative assets and liabilities to take into account the impact of master netting agreements that allow Key to settle all derivative contracts held with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Additional information regarding Key’s adoption of this accounting guidance is provided in Note 14 (“Derivatives and Hedging Activities”), which begins on page 31, and under the heading “Accounting Pronouncements Adopted in 2008” on page 9 of this note.

Fair Value Measurements

Effective January 1, 2008, Key adopted SFAS No. 157, “Fair Value Measurements,” for all applicable financial and nonfinancial assets and liabilities. This accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances.

As defined in SFAS No. 157, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value.

Key values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability).

In measuring the fair value of an asset, Key assumes the highest and best use of the asset by a market participant to maximize the value of the asset, and does not consider the intended use of the asset.

When measuring the fair value of a liability, Key assumes that the nonperformance risk associated with the liability is the same before and after the transfer. Nonperformance risk is the risk that an obligation will not be satisfied and encompasses not only Key’s own credit risk (i.e., the risk that Key will fail to meet its obligation). but also other risks such as settlement risk. Key considers the effect of its own credit risk on the fair value for any period in which fair value is measured.

There are three acceptable valuation techniques that can be used to measure fair value: the market approach, the income approach and the cost approach. Selection of the appropriate technique for valuing a particular asset or liability takes into consideration the exit market, the nature of the asset or liability being valued, and how a market participant would value the same asset or liability. Ultimately, determination of the appropriate valuation method requires significant judgment, and sufficient knowledge and expertise are required to apply the valuation techniques.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of Key.

Unobservable inputs are assumptions based on Key’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Key considers an input to be significant if it drives 10% or more of the total fair value of a particular asset or liability.

Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date.

Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses.

Additional information regarding fair value measurements and Key’s adoption of SFAS No. 157 is provided in Note 15 (“Fair Value Measurements”), which begins on page 34, and under the heading “Accounting Pronouncements Adopted in 2008” below.

Accounting Pronouncements Adopted in 2008

Fair value measurements. In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008, for Key). In February 2008, the FASB

issued Staff Position FAS 157-2, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. However, early adoption of SFAS No. 157 for nonfinancial assets and liabilities within the scope of the new guidance is permitted. Key’s January 1, 2008, adoption of SFAS No. 157 for all financial and nonfinancial assets and liabilities did not have a material effect on Key’s financial condition or results of operations. Additional information regarding fair value measurements and Key’s adoption of this accounting guidance is provided in Note 15 and under the heading “Fair Value Measurements” on page 8 of this note.

Fair value option for financial assets and financial liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This guidance provides an option to selectively report financial assets and liabilities at fair value, and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008, for Key). Key has elected to not apply this fair value option to any of its existing assets or liabilities. However, Key may apply this guidance to assets or liabilities in the future as permitted under SFAS No. 159.

Offsetting of amounts related to certain contracts. In April 2007, the FASB issued Staff Position FIN 39-1, which supplements Interpretation No. 39 by allowing reporting entities to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash (a payable) arising from derivative instruments with the same counterparty. Interpretation No. 39 allowed reporting entities to offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. Key did not previously adopt the provisions of Interpretation No. 39 that were permitted but not required. The accounting guidance in Staff Position FIN 39-1 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008, for Key). Key has elected to adopt the accounting guidance in Staff Position FIN 39-1, and as a result, also adopted the provisions of Interpretation No. 39. The adoption of this accounting guidance did not have a material effect on Key’s financial condition or results of operations. Additional information regarding Key’s adoption of this accounting guidance is provided in Note 14 and under the heading “Derivatives” on page 8 of this note.

Accounting Pronouncements Pending Adoption at June 30, 2008

Employers’ accounting for defined benefit pension and other postretirement plans. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Except for the measurement requirement, Key adopted this accounting guidance as of December 31, 2006. Additional information regarding the adoption of SFAS No. 158 is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Accounting Pronouncements Pending Adoption at December 31, 2007” on page 71 of Key’s 2007 Annual Report to Shareholders. The requirement to measure plan assets and benefit obligations as of the end of an employer’s fiscal year is effective for years ending after December 15, 2008 (December 31, 2008, for Key). Adoption of this guidance is not expected to have a material effect on Key’s financial condition or results of operations.

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

Noncontrolling interests. In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51.” The new pronouncement requires all entities to report noncontrolling (minority) interests in subsidiaries as a component of shareholders’ equity. SFAS No. 160 will be effective for fiscal years beginning after December 15, 2008 (January 1, 2009, for Key). Early adoption is prohibited. Management is evaluating the potential effect this guidance may have on Key’s financial condition and results of operations.

Accounting for transfers of financial assets and repurchase financing transactions. In February 2008, the FASB issued Staff Position FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This Staff Position provides guidance on accounting for a transfer of a financial asset and a repurchase financing, and presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing shall be evaluated separately under SFAS No. 140. Staff Position FAS 140-3 will be effective for fiscal years beginning after November 15, 2008 (January 1, 2009, for Key), and for interim periods within those fiscal years. Early adoption is prohibited. Management is evaluating the potential effect this guidance may have on Key’s financial condition and results of operations.

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

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

Hierarchy of generally accepted accounting principles. In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This guidance identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. generally accepted accounting principles. SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Adoption of this accounting guidance is not expected to have a material effect on Key’s financial condition or results of operations.

Accounting for convertible debt instruments. In May 2008, the FASB issued Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including Partial Cash Settlement).” This guidance requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This Staff Position is effective for fiscal years beginning after December 15, 2008 (January 1, 2009, for Key), and for interim periods within those fiscal years. Early adoption is prohibited. Key has not issued and does not have any convertible debt instruments outstanding that are subject to the accounting guidance in this Staff Position. Therefore, adoption of this accounting guidance is not expected to have a material effect on Key’s financial condition or results of operations.

2. Earnings Per Common Share

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

		Three months ended								Six months ended
		June 30,								June 30,
dollars in millions, except per share amounts		2008				2007				2008				2007
EARNINGS
(Loss) income from continuing operations		$	(1,126	)		$	337			$	(908	)		$	695
Loss from discontinued operations, net of taxes			—				(3	)			—				(11	)
Net (loss) income		$	(1,126	)		$	334			$	(908	)		$	684
Net (loss) income applicable to common shares		$	(1,126	)		$	334			$	(908	)		$	684
WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)			416,629				392,045				407,875				394,944
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000)			—				4,873				—				5,236
Weighted-average common shares and potential common shares outstanding (000)			416,629				396,918				407,875				400,180
EARNINGS PER COMMON SHARE
(Loss) income from continuing operations		$	(2.70	)		$	.86			$	(2.23	)		$	1.76
Loss from discontinued operations			—				(.01	)			—				(.03	)
Net (loss) income			(2.70	)			.85				(2.23	)			1.73
(Loss) income from continuing operations — assuming dilution		$	(2.70	)		$	.85			$	(2.23	)		$	1.74
Loss from discontinued operations — assuming dilution			—				(.01	)			—				(.03	)
Net (loss) income — assuming dilution			(2.70	)			.84				(2.23	)			1.71

3. Acquisitions and Divestitures

Acquisitions and divestitures completed by Key during 2007 and the first six months of 2008 are summarized below.

Acquisitions

U.S.B. Holding Co., Inc.

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

Tuition Management Systems, Inc.

On October 1, 2007, Key acquired Tuition Management Systems, Inc., one of the nation’s largest providers of outsourced tuition planning, billing, counseling and payment services. Headquartered in Warwick, Rhode Island, Tuition Management Systems serves more than 700 colleges, universities, elementary and secondary educational institutions. The terms of the transaction were not material.

Divestitures

Champion Mortgage

On February 28, 2007, Key sold the Champion Mortgage loan origination platform to an affiliate of Fortress Investment Group LLC, a global alternative investment and asset management firm, for cash proceeds of $.5 million.

On November 29, 2006, Key sold the subprime mortgage loan portfolio held by the Champion Mortgage finance business to a wholly owned subsidiary of HSBC Finance Corporation for cash proceeds of $2.5 billion. The loan portfolio totaled $2.5 billion at the date of sale.

Key has applied discontinued operations accounting to the Champion Mortgage finance business. The results of this discontinued business are presented on one line as “loss from discontinued operations, net of taxes” in the Consolidated Statements of Income on page 4. The components of loss from discontinued operations are as follows:

		Three months				Six months
		ended June 30,				ended June 30,
in millions		2007				2007
Loss, net of taxes of ($1) and ($3), respectively a		$	(2	)		$	(6	)
Loss on disposal, net of taxes of ($1)			—				(1	)
Disposal transaction costs, net of taxes of ($1) and ($3), respectively			(1	)			(4	)
Loss from discontinued operations		$	(3	)		$	(11	)

 

The discontinued assets and liabilities of Champion Mortgage included in the Consolidated Balance Sheets on page 3 are as follows:

		December 31,				June 30,
in millions		2007				2007
Loans		$	8			$	9
Accrued income and other assets			—				2
Total assets		$	8			$	11
Accrued expense and other liabilities		$	10			$	14
Total liabilities		$	10			$	14

McDonald Investments branch network

On February 9, 2007, McDonald Investments Inc., a wholly owned subsidiary of KeyCorp, sold its branch network, which included approximately 570 financial advisors and field support staff, and certain fixed assets to UBS Financial Services Inc., a subsidiary of UBS AG. Key received cash proceeds of $219 million and recorded a gain of $171 million ($107 million after tax, $.26 per diluted common share) in connection with the sale. Key retained McDonald Investments’ corporate and institutional businesses, including Institutional Equities and Equity Research, Debt Capital Markets and Investment Banking. In addition, KeyBank continues to operate the Wealth Management, Trust and Private Banking businesses. On April 16, 2007, Key renamed the registered broker/dealer through which its corporate and institutional investment banking and securities businesses operate to KeyBanc Capital Markets Inc.

4. Line of Business Results

Community Banking

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

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

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

National Banking

Real Estate Capital and Corporate Banking Services consists of two business units. Real Estate Capital 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). Particular emphasis has been placed on 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 throughout the Community Banking and National Banking groups. Through its Public Sector and Financial Institutions businesses, Corporate Banking Services provides a full array of commercial banking products and services to government and not-for-profit entities, and to community banks.

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

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

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

Consumer Finance offers loans to consumers on a direct basis and an indirect basis through dealers. It also provides federal and private education loans to students and their parents, and processes tuition payments for private schools. Through its Commercial Floor Plan Lending unit, Consumer Finance finances inventory for automobile, recreation and marine dealers.

Other Segments

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

Reconciling Items

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

The table that spans pages 16 and 17 shows selected financial data for each major business group for the three- and six-month periods ended June 30, 2008 and 2007. This table is accompanied by supplementary information for each of the lines of business that make up these groups. The information was derived from the internal financial reporting system that management uses to monitor and manage Key’s financial performance. U.S. generally accepted accounting principles (“GAAP”) guide financial accounting, but there is no authoritative guidance for “management accounting”— the way management uses its judgment and experience to make reporting decisions. Consequently, the line of business results Key reports may not be comparable with line of business results presented by other companies.

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

¨		Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment and/or repricing characteristics. The net effect of this funds transfer pricing is charged to the lines of business based on the total loan and deposit balances of each line.
¨		Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent to which each line actually uses the services.
¨		Key’s consolidated provision for loan losses is allocated among the lines of business primarily based on their actual net charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that management uses to estimate Key’s consolidated allowance for loan losses. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 67 of Key’s 2007 Annual Report to Shareholders.
¨		Income taxes are allocated based on the statutory federal income tax rate of 35% (adjusted for tax-exempt interest income, income from corporate-owned life insurance, and tax credits associated with investments in low-income housing projects) and a blended state income tax rate (net of the federal income tax benefit) of 2.5%.
¨		Capital is assigned based on management’s assessment of economic risk factors (primarily credit, operating and market risk) directly attributable to each line.

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

Effective January 1, 2008, Key moved the Public Sector, Bank Capital Markets and Global Treasury Management units from the Institutional and Capital Markets line of business to the Real Estate Capital and Corporate Banking Services (previously known as Real Estate Capital) line of business within the National Banking group.

Three months ended June 30,		Community Banking								National Banking
dollars in millions		2008				2007				2008				2007
SUMMARY OF OPERATIONS
Net interest income (loss) (TE)		$	437			$	417			$	(472	) d		$	339
Noninterest income			222				214				346				273
Total revenue (TE) a			659				631				(126	)			612
Provision for loan losses			44				21				609				32
Depreciation and amortization expense			34				33				73				71
Other noninterest expense			415				413				264				259
Income (loss) from continuing operations before income taxes (TE)			166				164				(1,072	)			250
Allocated income taxes and TE adjustments			62				62				(402	)			93
Income (loss) from continuing operations			104				102				(670	)			157
Loss from discontinued operations, net of taxes			—				—				—				(3	)
Net income (loss)		$	104			$	102			$	(670	)		$	154
Percent of consolidated income from continuing operations			N/M				30	%			N/M				47	%
Percent of total segments income from continuing operations			N/M				32				N/M				50
AVERAGE BALANCES b
Loans and leases		$	28,478			$	26,574			$	47,876			$	39,325
Total assets a			31,385				29,346				56,242				49,585
Deposits			49,948				46,126				12,289				12,082
OTHER FINANCIAL DATA
Net loan charge-offs		$	38			$	26			$	486			$	27
Return on average allocated equity b			13.68	%			16.57.	%			(51.60	)%			15.12	%
Return on average allocated equity			13.68				16.57				(51.60	)			14.83
Average full-time equivalent employees			8,785				9,026				3,603				3,856

Six months ended June 30,		Community Banking								National Banking
dollars in millions		2008				2007				2008				2007
SUMMARY OF OPERATIONS
Net interest income (loss) (TE)		$	860			$	836			$	(133	) d		$	675
Noninterest income			428				602	c			447				532	d
Total revenue (TE) a			1,288				1,438				314				1,207
Provision for loan losses			62				35				778				62
Depreciation and amortization expense			69				69				148				140
Other noninterest expense			807				843				498				506
Income (loss) from continuing operations before income taxes (TE)			350				491				(1,110	)			499
Allocated income taxes and TE adjustments			131				184				(416	)			187
Income (loss) from continuing operations			219				307				(694	)			312
Loss from discontinued operations, net of taxes			—				—				—				(11	)
Net income (loss)		$	219			$	307			$	(694	)		$	301
Percent of consolidated income from continuing operations			N/M				44	%			N/M				45	%
Percent of total segments income from continuing operations			N/M				46				N/M				47
AVERAGE BALANCES b
Loans and leases		$	28,303			$	26,514			$	46,013			$	39,085
Total assets a			31,227				29,317				56,230				49,003
Deposits			49,857				46,322				12,088				11,691
OTHER FINANCIAL DATA
Net loan charge-offs		$	68			$	45			$	577			$	52
Return on average allocated equity b			14.57	%			25.08	%			(27.53	)%			15.30	%
Return on average allocated equity			14.57				25.08				(27.53	)			14.76
Average full-time equivalent employees			8,750				9,242				3,680				4,070

(a)		Substantially all revenue generated by Key’s major business groups is derived from clients with residency in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software and goodwill held by Key’s major business groups are located in the United States.
(b)		From continuing operations.
(c)		Community Banking’s results for the first quarter of 2007 include a $171 million ($107 million after tax) gain from the February 9, 2007, sale of the McDonald Investments branch network. See Note 3 (“Acquisitions and Divestitures”), which begins on page 12, for more information pertaining to this transaction.
(d)		During the second quarter of 2008, National Banking’s taxable-equivalent net interest income and net income were reduced by $838 million and $536 million, respectively, as a result of an adverse federal court decision on the tax treatment of a Service Contract Lease transaction. During the prior quarter, National Banking increased its tax reserves for certain lease in, lease out transactions and recalculated its lease income in accordance with prescribed accounting standards. These actions reduced National Banking’s taxable-equivalent revenue by $34 million and its net income by $21 million in the first quarter. National Banking’s results for the first quarter of 2007 include a $26 million ($17 million after tax) gain from the settlement of the residual value insurance litigation.
(e)		Other Segments’ results for the second quarter of 2007 include a $26 million ($16 million after tax) charge for litigation. This charge and the litigation referred to in note (f) below comprise the $42 million charge recorded in connection with the Honsador litigation disclosed in Note 13 (“Contingent Liabilities and Guarantees”), which begins on page 29. Results for the first quarter of 2007 include a $49 million ($31 million after tax) loss from the repositioning of the securities portfolio.

Other Segments								Total Segments								Reconciling Items								Key
2008				2007				2008				2007				2008				2007				2008				2007
$	(31	)		$	(20	)		$	(66	)		$	736			$	(34	)		$	(30	)		$	(100	)		$	706
	—				121				568				608				(13	)			41	f			555				649
	(31	)			101				502				1,344				(47	)			11				455				1,355
	—				—				653				53				(6	)			—				647				53
	—				—				107				104				—				—				107				104
	8				33	e			687				705				(13	)			6	f			674				711
	(39	)			68				(945	)			482				(28	)			5				(973	)			487
	(26	)			13				(366	)			168				519	f			(18	)			153				150
	(13	)			55				(579	)			314				(547	)			23				(1,126	)			337
	—				—				—				(3	)			—				—				—				(3	)
$	(13	)		$	55			$	(579	)		$	311			$	(547	)		$	23			$	(1,126	)		$	334
	N/M				16	%			N/M				93	%			N/M				7	%			N/M				100	%
	N/M				18				N/M				100				N/A				N/A				N/A				N/A
$	177			$	266			$	76,531			$	66,165			$	121			$	150			$	76,652			$	66,315
	14,098				12,387				101,725				91,318				1,565				2,094				103,290				93,412
	3,092				2,361				65,329				60,569				(197	)			(172	)			65,132				60,397
	—				—			$	524			$	53				—				—			$	524			$	53
	N/M				N/M				(26.45	)%			17.71	%			N/M				N/M				(52.56	)%			17.66	%
	N/M				N/M				(26.45	)			17.54				N/M				N/M				(52.56	)			17.50
	43				43				12,431				12,925				5,733				5,963				18,164				18,888